LM INSTITUTIONAL FUND ADVISORS II, INC.
LM Value Institutional Portfolio
Brandywine Small Cap Value Portfolio
Semi-Annual Report
September 30, 1998
<PAGE>
[LM INSTITUTIONAL ADVISORS LOGO HERE]
November 30, 1998
Dear Shareholder:
We are pleased to provide you with the financial statements for the LM
Institutional Fund Advisors II portfolios for the periods ending September 30,
1998.
Attached are brief narratives from the Portfolio Managers of the LM Value
Institutional and Brandywine Small Cap Value Portfolios detailing key
developments as they pertain to your investment.
If you have any questions, please do not hesitate to contact us at
1-888-425-6432. We look forward to hearing from you.
Sincerely,
/s/ Joseph L. Orlando
_____________________
Joseph L. Orlando
President
<PAGE>
PORTFOLIO MANAGER COMMENTARY
LM Value Institutional Portfolio
Dear Shareholder:
Welcome to LM Value Institutional. Since this is our first letter to you, we
thought it might be helpful to discuss our investment approach. Our philosophy
is grounded in the search for undervalued businesses that we believe trade at
significant discounts to what they are worth. Our approach is fundamentally
based, value driven and long-term oriented. Our objective is to build a
portfolio of stocks purchased at large discounts to the economic value of the
underlying businesses. Price and value are often poorly correlated over the
short term, so whether a stock or industry is acting well or badly in the market
is of interest only insofar as we may be able to improve returns for fund owners
by selling when price moves well above value, and buying when the market is
unduly pessimistic. Our results can and do differ from those of the market and
shareholders should be prepared for results that may lag or exceed those of the
indices in no predictable fashion quarter to quarter.
We do not construct our portfolio with an eye to the S&P's industry groupings,
and do not try to guess the next economic number or the next story on the tape.
We do not try to anticipate the vicissitudes of investor psychology or the
timing of the next correction or rally. We have learned over the years that
predicting the market is futile; understanding it is challenging enough. Our
charge is to beat our benchmark, the S&P 500 Index. Although this may sound
simple, it has been very difficult for anyone to consistently achieve over time.
Comment on Current Market Conditions
"I do not claim that all market behavior is a rational response
to changes in the real world. But most of it must be."
Alan Greenspan, September 4, 1998
At the end of July, the S&P 500 was up 17.71%. Since then, the stock market
suffered its worst quarter of the decade as the S&P fell 9.95%, the Dow 11.97%,
general equity funds 15.02%, and Lipper growth funds 13.44%.
The obvious question is what changed since the end of July, and what do we make
of it?
The post morta on the quarter usually cite the crisis in Russia and its default
on its debt as the precipitating event that shocked investors, raised their
sensitivity to risk, and generated fears that the financial crisis that had been
confined to Asia was spreading and may not be containable. Fed Chairman
Greenspan gave credence to these concerns with his "oasis of prosperity" speech,
noting that the U.S. was unlikely to remain unaffected by the financial storms
sweeping the globe.
2
<PAGE>
PORTFOLIO MANAGER COMMENTARY - CONTINUED
LM Value Institutional Portfolio
In mid-September, government officials appeared to be preparing to attempt to
contain the crisis before it reached Latin America. Treasury Secretary Rubin
said it was vital to our national interests that countries such as Brazil (whose
GDP is half the total in Latin America), which have followed International
Monetary Fund prescriptions, not have their progress derailed by forces outside
their control. The administration signaled it was developing a financial aid
package to assist Brazil, reinforcing the determination to try to isolate the
contagion outside this hemisphere. Then Long-Term Capital Management happened.
Long-Term Capital, as you may have read, is a large hedge fund run by an
all-star cast that includes two Nobel prize winning economists, a former Vice
Chairman of the Fed, and several of the most accomplished traders in the
financial community. As a result of substantial losses in the month of August,
it had burned through most of its capital and needed additional equity or credit
to prevent collapse. It was reported that its trading positions exceeded $100
billion, almost all of which were supported by debt. To put this in perspective,
in the Latin debt crisis of the l980's, Chase Manhattan Bank had total exposure
to all of Latin America of $26 billion, an amount sufficient to induce fears of
collapse among investors.
In an extraordinary series of events, the Fed persuaded Long-Term's major
creditors to advance an additional $3.5 billion of credit in exchange for 90%
ownership and effective oversight of the firm. Long-Term's principals earlier
rejected an offer led by investor Warren Buffett that would have transferred the
firm's assets to Buffett in exchange for under $300 million of equity and
another $3 billion or so of credit, along with contributions from AIG and
Goldman Sachs. The rescue was cobbled together quickly due to the collective
fears of the creditors and the Fed that the collapse of Long-Term might have
destabilized financial markets as billions of dollars of assets were liquidated
under duress.
These events stunned and panicked the markets. The crisis that was going to be
contained before it infected Brazil suddenly showed up in Greenwich. It was as
if the Center for Disease Control was preparing to dispatch a team to Africa to
contain the ebola virus and the virus showed up in New York. Risk managers in
banks and brokerage firms began asking clients for additional collateral as the
fear of loss replaced the desire for profit. A small 25 basis point(1) decrease
in short-term rates by the Fed was deemed insignificant by markets as investors
engaged in a mad scramble for safety and liquidity.
The crescendo was reached on October 8th when the panic to dump stocks resulted
in 920 new lows on the New York Stock Exchange. Yields on T-bills fell the next
day over 20 basis points, a remarkable flight to quality. As is usually the case
in financial markets, when investors en masse frantically desire a particular
asset class, the opportunities typically lie elsewhere.
- -------------------
(1) 100 basis points is 1%.
3
<PAGE>
PORTFOLIO MANAGER COMMENTARY - CONTINUED
LM Value Institutional Portfolio
Just as markets failed to appreciate the effect of the Fed's raising rates a
year and a half ago, we think they underestimate the impact of the modest easing
already experienced. The genesis of the current crisis was that 25 basis point
increase in interest rates, which occurred when inflation was 2.7%. By the end
of l997, inflation had fallen to 1.4%. Real interest rates thus rose by over 150
basis points in less than nine months. That increase in real rates in the
world's reserve currency led to a shift in risk preference by investors that
gathered momentum as the year progressed, culminating in the panic seen in the
third quarter.
Beginning shortly after the Fed raised rates last year, investors systematically
began preferring quality and liquidity at the margin. (All important activity in
complex adaptive systems begins at the margin.) They first sold Thai baht for
dollars until the Thai government ran out of dollars and the currency peg blew
apart. This situation was repeated in Korea with the won, in Malaysia with the
ringgit, and so on. Investors not only sold emerging market currencies against
the dollar, they also sold developed country currencies. They sold riskier small
stocks in favor of safer big stocks. By this spring, they began to sell the
bottom 450 stocks in the S&P 500 in favor of the top 50, whose performance
accounted for all the index's gain. In April, investors began selling stocks for
bonds, then as summer wore on, high yield bonds for investment grade, then
investment grade and mortgage-backed for Treasuries. In the final scramble in
early October, long- and intermediate-term Treasuries were sold for T-bills.
It was in this frantic atmosphere that the Fed cut rates. As happened last year
with the increase, no one thought it was significant. But at the locus of last
year's crisis, Asia, things were beginning to improve. Korea and Thailand had
the best performing markets in the world in the third quarter. Both countries
have begun to lower rates and their currencies are beginning to strengthen.
Japan has begun to implement serious banking reform, and its currency is sharply
higher against the dollar. Closer to home, our yield curve has begun to steepen,
a sign of decreasing pressure at the margin on the economy. Fixed income spreads
have begun to narrow. In the nascent recovery in stocks in the past week, small
stocks have outperformed large ones. Risk preferences are beginning to shift
again.
In every case, at the margin investors are slowly demanding lower risk premia.
We think this is evidence the crisis is abating and that the risks of investing
in equities are now lower than they have been in some time. This is not the
majority view.
Lost on those now searching for safety and liquidity is the signal given by
Warren Buffett. The world's most successful investor, who turned his allowance
money into $30 billion, and who has for years preached the virtues of safety and
liquidity, decided in late September to opt for illiquidity and leverage by
bidding for Long-Term Capital's portfolio. Buffett has built his fortune in part
by aggressively investing in assets when their prices are depressed due to real
but overly discounted problems. In the bear market of 1974, when inflation and
interest rates were rising, the Middle East was in turmoil, and politics was
convulsed by Watergate, he aggressively bought stocks at the lowest prices in a
generation. Earlier this year, he made a foray into the silver market when most
investors had given up on ever making money in precious metals.
4
<PAGE>
PORTFOLIO MANAGER COMMENTARY - CONTINUED
LM Value Institutional Portfolio
We agree with Buffett that significant opportunity exists in capital markets as
a result of investors' sudden rediscovery of risk. The best opportunities are
probably where the devastation has been greatest: in convergence trades in fixed
income markets (betting that spreads between various types of instruments such
as emerging markets debt and Treasuries will narrow), and in equities in small-
and mid-sized stocks, REITs, and financials. Although the opportunities are
greatest in areas we are not able to invest in, the market's decline in the
third quarter created plenty in our venue. Since your fund started when the
market turmoil was greatest, we were able to invest your initial capital quite
advantageously.
We believe the worst is over in capital markets and that the present situation
favors long-term value investing. The macroeconomic environment of low
inflation, declining interest rates, and moderate growth is positive for
equities. Federal Reserve policy is now engaged in preventing or short-
circuiting a credit crunch, and Fed officials have made clear their willingness
to further lower short-term interest rates to preserve the economic expansion.
Stock prices have already recovered from the panic selling in the third quarter.
We are quite optimistic about the long-term opportunities available in equities
and welcome you as a shareholder.
Sincerely,
/s/ Bill Miller
________________
Bill Miller, CFA
President
Legg Mason Fund Adviser
November 10, 1998
5
<PAGE>
PORTFOLIO MANAGER COMMENTARY
Brandywine Small Cap Value Portfolio
Dear Shareholder:
Brandywine commenced investment of the Small Cap Value Portfolio as of August
17, 1998. August is traditionally a slow and quiet month for the markets with
many investors taking advantage of the last days of summer. However, August 1998
will be remembered for its triple calamity: Presidential admission of
improprieties, U.S. military strikes in Africa and a crisis situation with the
Russian ruble. These events, following on the heels of Asian economic meltdowns,
precipitated at least a significant pause in the long-term bull market. For the
first time in many quarters, the large cap stocks joined small caps in the
downward market movement. Even the supposedly "safe" large growth companies
fell, which often leads the way in a retreating market. For the month, the
Russell 2000 fell 19.4% while the S&P 500 was off 14.5%.
The Portfolio declined by 15.2%(2) from inception to month end. The Russell 2000
declined 17.7% and the Russell 2000 Value declined 14.5% in that same time
frame. Value investing was defensive within the small cap market as the
Portfolio fell less than small caps overall, as represented by the Russell 2000.
September markets provided some relief from the downward trend. Even though
there was little good news on either the global or domestic economic outlook,
stocks rebounded from their deep declines of the last few months to generally
move higher in the U.S. Small caps did better than large caps for the month, as
the Russell 2000 rose 7.8% compared to a 6.4% gain for the S&P 500. The growth
portion of the small cap market rebounded the strongest: the Russell 2000 Growth
Index was up 10.1% while the Russell 2000 Value benchmark rose 5.6%.
The Small Cap Portfolio, however, lost 1.7% in the month. Although the
Portfolio's stocks have extremely attractive valuations and we were fully
invested, the Portfolio lagged the Russell small cap benchmarks during the
September rally. The two sectors that had the greatest impact on the trailing
performance were the financial stocks and the cyclical stocks, such as steels,
chemicals, textiles, and manufacturing. In the financials in the Portfolio, we
have significantly reduced our bank and savings and loan holdings as many of the
stocks reached our sell targets--they no longer offered low valuations. These
stocks were strong performers in the month, so our underweighted position hurt
the Small Cap Portfolio. In the cyclical area, these stocks were weaker than the
rest of the small cap market given investors' concerns about a deteriorating
U.S. economy. However, because of the very attractive valuation levels that
currently exist for these stocks, we had a greater weighting than either the
Russell 2000 or the Russell 2000 Value indices. The one sector that did help the
Portfolio versus the benchmarks was in the consumer non-durable area.
- -------------------
(2) Total return measures investment performance in terms of appreciation or
depreciation in net asset value per share plus dividends and any capital gains
distributions. It assumes that dividends and distributions were reinvested at
the time they were paid.
6
<PAGE>
PORTFOLIO MANAGER COMMENTARY - CONTINUED
Brandywine Small Cap Value Portfolio
Market Outlook
The economy and the stock market have entered a period of increased volatility.
Investors are concerned that worldwide economic problems will, through the twin
channels of reduced export demand and falling U.S. consumer confidence, finally
lower domestic corporate earnings. Brandywine's small cap value investment
strategy has consistently provided downside protection versus the rest of the
small cap market in such turbulent times.
Looking ahead, we remain optimistic about the performance opportunity available
from our Small Cap Value Portfolio. Compared to large cap, small cap value
stocks are now significantly cheaper than in 1990, which was the beginning of
the last strong small cap performance cycle. In addition, our research shows
that after previous periods when small caps lagged large caps for five years,
over the next five years, small cap returns dominated the rest of the market.
Finally, past small cap recoveries show that investors do not have to wait until
the economy turns up before small caps offer attractive returns. In past
economic downturns, small caps provided strong absolute and relative returns
while the economy was still in the latter stages of decline. While we are not
sure that we have or will enter an economic slowdown, this research indicates
that a small cap upsurge can come sooner than today's dire economic concerns
might indicate.
Sincerely,
/s/ Henry F. Otto /s/ Steven M. Tonkovich
_________________ _______________________
Henry F. Otto Steven M. Tonkovich
Managing Director Managing Director
Brandywine Asset Management Brandywine Asset Management
November 20, 1998
7
<PAGE>
STATEMENT OF NET ASSETS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
September 30,1998
(Unaudited)
<TABLE>
<CAPTION>
% OF
NET ASSETS SHARES / PAR VALUE
- ----------------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS AND EQUITY INTERESTS 28.2%
Banking 7.8%
BankAmerica Corporation 700 $42,087
BankBoston Corporation 2,000 66,000
Chase Manhattan Corporation 2,600 112,450
Citicorp 1,000 92,937
Fleet Financial Group, Inc. 600 44,062
--------------
357,536
Computer Services and Systems 5.2%
Compaq Computer Corporation 2,000 63,250(A)
Dell Computer Corporation 1,400 92,050(A)
Storage Technology Corporation 3,400 86,487(A)
--------------
241,787
Finance 2.3%
Fannie Mae 1,000 64,250
MBNA Corporation 1,500 42,938
--------------
107,188
Food, Beverage and Tobacco 1.5%
Philip Morris Companies, Inc. 1,500 69,094
Health Care 0.9%
Foundation Health Systems, Inc. 4,200 39,375
Insurance 1.8%
Conseco, Inc. 1,400 42,788
General Re Corporation 200 40,600
--------------
83,388
Media 3.9%
America Online, Inc. 1,600 178,000(A)
Real Estate 1.3%
Starwood Hotels & Resorts 2,000 61,000
</TABLE>
8
<PAGE>
STATEMENT OF NET ASSETS - CONTINUED
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
September 30,1998
(Unaudited)
<TABLE>
<CAPTION>
% OF
NET ASSETS SHARES / PAR VALUE
- ----------------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS AND EQUITY INTERESTS
Retail Sales 0.9%
Toys "R" Us, Inc. 2,500 $40,469(A)
Savings and Loan 1.1%
Washington Mutual, Inc. 1,500 50,625
Telecommunications 1.5%
MCI WorldCom, Inc. 1,400 68,425
TOTAL COMMON STOCKS AND
EQUITY INTERESTS (IDENTIFIED COST $1,373,434) 1,296,887
----------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS 77.9%
Freddie Mac Discount Notes, 5.1% 10/1/98
(Identified Cost $3,580,000) $3,580,000 3,580,000
----------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(IDENTIFIED COST $4,953,434) 106.1% 4,876,887
OTHER ASSETS LESS LIABILITIES (6.1%) (278,954)
--------------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to
467,086 shares outstanding $4,670,865
Undistributed net investment income 3,615
Unrealized appreciation/(depreciation) of investments (76,547)
-------------
NET ASSETS 100.0% $4,597,933
==============
NET ASSET VALUE PER SHARE $9.84
==============
- ---------------------------------------------------------------------------------------------
</TABLE>
(A) Non-income producing.
See Notes to Financial Statements
9
<PAGE>
STATEMENT OF OPERATIONS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
For the Period
September 22, 1998(A)
to September 30, 1998
---------------------
(Unaudited)
<S><C>
INVESTMENT INCOME:
Dividends $30
Interest 4,845
-----------------
Total investment income 4,875
EXPENSES:
Management fee 1,008
Other expenses 840
-----------------
1,848
Less fees waived (588)
-----------------
Total expenses, net of waivers 1,260
-----------------
NET INVESTMENT INCOME 3,615
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Unrealized appreciation/(depreciation) of investments (76,547)
-----------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (76,547)
-----------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($72,932)
=================
- ----------------------------------------------------------------------------------------
</TABLE>
(A) Commencement of operations.
See Notes to Financial Statements
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
- -------------------------------------------------------------------------------
For the Period
September 22, 1998(A)
to September 30, 1998
---------------------
(Unaudited)
CHANGE IN NET ASSETS:
Net investment income/(loss) $3,615
Decrease in unrealized appreciation of investments (76,547)
-----------------
Decrease in net assets resulting from operations (72,932)
Increase in net assets from
Fund share transactions 4,655,865
-----------------
Increase in net assets 4,582,933
NET ASSETS:
Beginning of period 15,000
-----------------
End of period (including undistributed
net investment income of $3,615) $4,597,933
=================
- -------------------------------------------------------------------------------
(A) Commencement of operations.
See Notes to Financial Statements
11
<PAGE>
FINANCIAL HIGHLIGHTS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
Contained below is per share operating data for a share of common stock
outstanding, total investment return, ratios to average net assets and other
supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
September 22, 1998(A)
to
September 30, 1998
-----------------------
(Unaudited)
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00
----------------
Net investment income(B) 0.01
Net realized and unrealized gain/(loss) on investments (0.17)
----------------
Total from investment operations (0.16)
----------------
Net asset value, end of period $9.84
================
Total return (1.60)%(C)
RATIOS / SUPPLEMENTAL DATA:
Ratios to average net assets
Expenses(B) 0.75%(D)
Net investment income(B) 2.15%(D)
Portfolio turnover rate --
Net assets, end of period $4,597,933
- -----------------------------------------------------------------------------------------------
</TABLE>
(A) Commencement of operations.
(B) Net of fees waived by LMIA pursuant to a voluntary expense limitation of
0.75% until July 31, 1999. If no fees had been waived by LMIA, the
annualized ratio of expenses to average daily net assets for the period
would have been 1.10%.
(C) Not annualized
(D) Annualized
See Notes to Financial Statements
12
<PAGE>
STATEMENT OF NET ASSETS
LM Insitiutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
% OF
NET ASSETS SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS AND EQUITY INTERESTS 98.3%
Aerospace/Defense 0.6%
Aviall, Inc. 1,000 $10,437(A)
Apparel 3.1%
Brylane Inc. 400 6,400(A)
Nine West Group, Inc. 1,800 17,212(A)
Oxford Industries, Inc. 400 12,300
The Dress Barn, Inc. 600 7,275(A)
The Finish Line, Inc. 600 5,587(A)
The Gymboree Corporation 600 4,500(A)
------------
53,274
Automotive 1.5%
Aftermarket Technology Corp. 1,000 11,000(A)
The Standard Products Company 800 14,000
------------
25,000
Chemicals 7.8%
A. Schulman, Inc. 1,700 24,013
Ethyl Corporation 4,200 16,800
Georgia Gulf Corporation 1,600 25,000
M. A. Hanna Company 2,500 28,125
The General Chemical Group Inc. 1,000 18,875
Wellman, Inc. 1,600 20,400
------------
133,213
Commercial/Industrial Services 7.1%
CDI Corp. 500 11,375(A)
Fleming Companies, Inc. 1,900 23,275
Hughes Supply, Inc. 600 17,100
Input/Output, Inc. 1,100 8,731(A)
Oceaneering International, Inc. 1,100 15,675(A)
Olsten Corporation 1,000 5,687
Wallace Computer Services, Inc. 2,200 39,463
------------
121,306
Computer Services and Systems 1.2%
Structural Dynamics Research Corporation 1,800 20,250(A)
</TABLE>
13
<PAGE>
STATEMENT OF NET ASSETS - CONTINUED
LM Insitiutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
% OF
NET ASSETS SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS AND EQUITY INTERESTS
Construction and Building Materials 1.7%
Lone Star Industries, Inc. 500 $29,875
Electrical Equipment and Electronics 5.5%
Belden Inc. 1,300 17,469
CompuCom Systems, Inc. 2,300 9,200(A)
InaCom Corp. 800 15,100(A)
MagneTek, Inc. 1,600 17,500(A)
Pioneer-Standard Electronics, Inc. 1,600 10,100
Sawtek, Inc. 1,100 15,537(A)
UCAR International, Inc. 500 9,000(A)
------------
93,906
Entertainment and Leisure 2.6%
Arctic Cat, Inc. 2,100 18,769
Boyd Gaming Corporation 1,000 3,625(A)
Grand Casinos, Inc. 2,100 16,669(A)
Midway Games Inc. 500 5,844(A)
------------
44,907
Financial Services 2.9%
Advanta Corp. 1,900 24,463
BankAtlantic Bancorp, Inc. 1,800 12,937
IMC Mortgage Company 1,500 2,953(A)
Interpool, Inc. 700 8,269
Southern Pacific Funding Corporation 1,000 562(A)
------------
49,184
Food, Beverage and Tobacco 3.3%
Consolidated Cigar Holdings Inc. 1,500 14,906(A)
DIMON, Incorporated 2,200 23,238
Herbalife International, Inc. 1,500 13,875
M&F Worldwide Corp. 500 4,969(A)
------------
56,988
Gas/Pipeline 6.1%
Marine Drilling Companies, Inc. 1,300 14,950(A)
Offshore Logistics, Inc. 1,100 13,888(A)
Pride International, Inc. 2,500 20,000(A)
</TABLE>
14
<PAGE>
STATEMENT OF NET ASSETS - CONTINUED
LM Insitiutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
% OF
NET ASSETS SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS AND EQUITY INTERESTS
Gas/Pipeline (continued)
SEACOR Smit Inc. 700 $29,050(A)
Tuboscope Inc. 2,300 26,737(A)
------------
104,625
Health Care 1.7%
Genesis Health Ventures, Inc. 1,800 22,050(A)
NovaCare, Inc. 700 2,144(A)
Sun Healthcare Group, Inc. 700 4,550(A)
------------
28,744
Industrial 5.7%
Cincinnati Milacron Inc. 2,000 30,875
Flowserve Corporation 900 18,225
Regal-Beloit Corporation 1,000 22,250
Watts Industries, Inc. 1,400 25,200
------------
96,550
Insurance 9.9%
Acceptance Insurance Companies Inc. 1,100 22,894(A)
Foremost Corporation of America 1,400 25,638
Frontier Insurance Group, Inc. 1,900 25,175
MMI Companies, Inc. 900 16,144
Nymagic, Inc. 500 12,688
Selective Insurance Group, Inc. 1,500 28,688
UICI 2,300 37,950(A)
------------
169,177
Metals and Mining 11.8%
Armco Inc. 8,100 40,500(A)
Citation Corporation 900 8,550(A)
Cleveland-Cliffs Inc. 600 23,400
Commercial Metals Company 400 9,200
Hexcel Corporation 1,800 19,350(A)
Intermet Corporation 1,300 16,494
Kaiser Aluminum Corporation 4,000 24,500(A)
MAXXAM Inc. 400 21,850(A)
National Steel Corporation 2,200 15,400
Titanium Metals Corporation 1,600 22,600
------------
201,844
</TABLE>
15
<PAGE>
STATEMENT OF NET ASSETS - CONTINUED
LM Insitiutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
% OF
NET ASSETS SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS AND EQUITY INTERESTS
Miscellaneous Manufacturing 2.2%
AGCO Corporation 4,700 $31,138
Exide Corporation 500 5,750
------------
36,888
Process Industries 5.0%
P.H. Glatfelter Company 1,000 13,063
Rock-Tenn Company 1,700 18,806
Silgan Holdings Inc. 1,000 23,750(A)
The Dexter Corporation 1,200 29,400
------------
85,019
Restaurants 1.5%
Landry's Seafood Restaurants, Inc. 1,500 10,125(A)
Lone Star Steakhouse & Saloon, Inc. 2,000 15,250(A)
------------
25,375
Retail 1.4%
Global DirectMail Corp 1,900 23,869(A)
Technology 0.8%
BancTec, Inc. 1,000 14,250(A)
Telecommunications 1.0%
CellStar Corporation 1,400 6,038(A)
General Semiconductor, Inc. 1,800 10,800(A)
------------
16,838
Textiles 2.9%
Burlington Industries, Inc. 3,100 29,450(A)
Guilford Mills, Inc. 1,300 19,337
------------
48,787
Transportation 5.4%
Arnold Industries, Inc. 1,900 27,312
Consolidated Freightways Corporation 1,200 9,900(A)
Roadway Express, Inc. 1,000 11,000
USFreightways Corporation 1,300 25,837
Yellow Corporation 1,400 18,900(A)
------------
92,949
</TABLE>
16
<PAGE>
STATEMENT OF NET ASSETS - CONTINUED
LM Insitiutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
% OF
NET ASSETS SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS AND EQUITY INTERESTS
Utilities 5.6%
Calpine Corporation 1,000 $20,250(A)
El Paso Electric Company 3,000 29,062(A)
Public Service Company of New Mexico 2,100 46,593
------------
95,905
TOTAL COMMON STOCKS AND
EQUITY INTERESTS (IDENTIFIED COST - $1,988,443) 1,679,160
----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST $1,988,443) 98.3% $1,679,160
OTHER ASSETS LESS LIABILITIES 1.7% 29,795
------------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to:
201,500 shares outstanding $2,015,000
Undistributed net investment income 3,238
Unrealized depreciation of investments (309,283)
------------
NET ASSETS 100.0% $1,708,955
============
NET ASSET VALUE PER SHARE $8.48
============
- -----------------------------------------------------------------------------------------------
</TABLE>
(A) Non-income producing.
See Notes to Financial Statements
17
<PAGE>
STATEMENT OF OPERATIONS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
For the Period
August 17, 1998(A)
to September 30, 1998
--------------------------
(Unaudited)
<S><C>
INVESTMENT INCOME:
Dividends $2,976
Interest 2,053
-----------------
Total investment income 5,029
EXPENSES:
Management fee 1,369
Other expenses 527
-----------------
1,896
Less fees waived (105)
-----------------
Total expenses, net of waivers 1,791
-----------------
NET INVESTMENT INCOME 3,238
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Unrealized appreciation/(depreciation) of investments (309,283)
-----------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (309,283)
-----------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($306,045)
=================
- ---------------------------------------------------------------------------------------------
</TABLE>
(A) Commencement of operations.
See Notes to Financial Statements
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
For the Period
August 17, 1998(A)
to September 30, 1998
--------------------------
(Unaudited)
<S><C>
CHANGE IN NET ASSETS:
Net investment income/(loss) $3,238
Decrease in unrealized appreciation of investments
and currency transactions (309,283)
-----------------
Decrease in net assets resulting from operations (306,045)
Increase in net assets from
Fund share transactions 2,000,000
-----------------
Increase in net assets 1,693,955
NET ASSETS:
Beginning of period 15,000
-----------------
End of period (including undistributed
net investment income of $3,238) $1,708,955
=================
- ----------------------------------------------------------------------------------------------
</TABLE>
(A) Commencement of operations.
See Notes to Financial Statements
19
<PAGE>
FINANCIAL HIGHLIGHTS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
Contained below is per share operating data for a share of common stock
outstanding, total investment return, ratios to average net assets and other
supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
For the Period
August 17, 1998(A)
to September 30, 1998
-----------------
(Unaudited)
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00
-----------------
Net investment income (B) 0.02
Net realized and unrealized gain/(loss) on investments (1.54)
-----------------
Total from investment operations (1.52)
-----------------
Net asset value, end of period $8.48
=================
Total return (15.20)%(C)
RATIOS / SUPPLEMENTAL DATA:
Ratios to average net assets
Expenses (B) 0.85%(D)
Net investment income (B) 1.54%(D)
Portfolio turnover rate --
Net assets, end of period $1,708,955
- -----------------------------------------------------------------------------------------------
</TABLE>
(A) Commencement of operations.
(B) Net of fees waived by LMIA pursuant to a voluntary expense limitation of
0.85% until July 31, 1999. If no fees had been waived by LMIA, the
annualized ratio of expenses to average daily net assets for the period
would have been 0.90%.
(C) Not annualized
(D) Annualized
See Notes to Financial Statements
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LM Institutional Fund Advisors II, Inc.
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
LM Institutional Fund Advisors II, Inc. ("Corporation"), consisting of the LM
Value Institutional Portfolio ("Value Institutional") and the Brandywine Small
Cap Value Portfolio ("Brandywine Small Cap") (each a "Portfolio"), is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company.
Each Portfolio consists of two classes of shares: Institutional Class, offered
since September 22, 1998 for Value Institutional and since August 17, 1998 for
Brandywine Small Cap, and Financial Intermediary Class, which has not commenced
operations. The income and expenses for each Portfolio are allocated
proportionately to the two classes of shares based on daily net assets, except
for Rule 12b-1 distribution fees, which are charged only on Financial
Intermediary Class shares, and transfer agent and shareholder servicing
expenses, which are determined separately for each class.
SECURITY VALUATION
Securities traded on national securities exchanges are valued at the last quoted
sales price. Over-the-counter securities and listed securities, for which no
sales price is available, are valued at the mean between the latest bid and
asked prices. Securities for which market quotations are not readily available
are valued at fair value as determined by management and approved in good faith
by the Board of Directors. Fixed income securities with 60 days or less
remaining to maturity are valued using the amortized cost method, which
approximates current market value.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS
Dividend and interest income and expenses are recorded on an accrual basis. Net
investment income for dividend purposes consists of dividends and interest
earned, less expenses.
Dividends from net investment income and distributions from capital gains are
recorded on the ex-dividend date. Dividends from net investment income, if
available, will be paid quarterly for Value Institutional and annually for
Brandywine Small Cap. Distributions from net capital gains, if available, will
be made annually for both Value Institutional and Brandywine Small Cap.
Additional distributions will be made when necessary.
INVESTMENT TRANSACTIONS
Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified cost basis for both
financial reporting and federal income tax purposes. At September 30, 1998,
$278,653 was payable for securities purchased but not yet received for Value
Institutional, and there were no pending trades for Brandywine Small Cap.
REPURCHASE AGREEMENTS
All repurchase agreements are fully collateralized by obligations issued by the
U.S. Government or its agencies and such collateral is in the possession of the
Portfolios' custodian. The value of such collateral includes accrued interest.
Risks arise from the possible delay in recovery or potential loss of rights in
the collateral should the issuer of the repurchase agreement fail financially.
The Portfolios' investment advisers, acting under the supervision of their Board
of Directors, review the value of the collateral and the creditworthiness of
those banks and dealers with which the Portfolios' enter into repurchase
agreements to evaluate potential risks.
FEDERAL INCOME TAXES
No provision for federal income or excise taxes is required since the Portfolios
intend to qualify as regulated investment companies and distribute all of their
taxable income to their shareholders.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
acounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
2. INVESTMENT TRANSACTIONS
For the six months ended September 30, 1998, investment transactions (excluding
short-term investments) were as follows:
Purchases Proceeds from Sales
- -------------------------------------------------------------
Value Institutional $1,373,434 $--
Brandywine Small Cap 1,988,443 --
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
LM Institutional Fund Advisors II, Inc.
(Unaudited)
At September 30, 1998, cost, aggregate gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income tax
purposes for each Portfolio were as follows:
Cost Appreciation (Depreciation) Net
------------------------------------------------------
Value Institutional $1,373,434 $1,575 $(78,122) $(76,547)
Brandywine Small Cap 1,988,443 25,482 (334,765) (309,283)
3. TRANSACTIONS WITH AFFILIATES
Each Portfolio has a management agreement with LM Institutional Advisors, Inc.
("Manager"). Pursuant to their respective agreements, the Manager provides the
Portfolios with management and administrative services for which each Portfolio
pays a fee, computed daily and payable monthly at an annual rate of 0.60% and
0.65% of the average daily net assets of Value Institutional and Brandywine
Small Cap, respectively.
The Manager has agreed to waive its fees in any month to the extent a
Portfolio's expenses during that month (exclusive of taxes, interest, brokerage
and extraordinary expenses) exceed annual rates of that Portfolio's average
daily net assets as follows: 0.75% for Value Institutional and 0.85% for
Brandywine Small Cap, until July 31, 1999. For the period ended September 30,
1998, management fees of $588 and $105 were waived for Value Institutional and
Brandywine Small Cap, respectively; and $420 and $1,264 were due to the Manager
by Value Institutional and Brandywine Small Cap, respectively.
Legg Mason Fund Adviser, Inc. ("LMFA") serves as investment adviser to Value
Institutional. LMFA is responsible for the actual investment activity of the
Portfolio. The Manager pays LMFA a fee for its services at an annual rate equal
to 0.55% of the Portfolio's average daily net assets.
Brandywine Asset Management, Inc. ("Brandywine") serves as investment adviser to
Brandywine Small Cap. Brandywine is responsible for the actual investment
activity of the Portfolio. The Manager pays Brandywine a fee for its services
at an annual rate equal to 0.60% of the Portfolio's average daily net assets.
Legg Mason Wood Walker, Incorporated ("LMWW"), a member of the New York Stock
Exchange, serves as distributor of the Portfolios. LMWW will receive from each
Portfolio an annual distribution fee of 0.25% of the average daily net assets of
the Financial Intermediary Class of each Portfolio, computed daily and payable
monthly.
No brokerage commissions were paid to LMWW or its affiliates during the period
ended September 30, 1998.
LMFA, Brandywine, LMWW and the Manager are wholly owned subsidiaries of Legg
Mason, Inc.
4. FUND SHARE TRANSACTIONS
At September 30, 1998, there were seven billion shares authorized at $0.001 par
value for all portfolios of the Corporation. Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
-------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Value Institutional
Institutional Class
Period ended
September 30, 1998(A) 465,586 $4,655,865 -- $-- -- $-- 465,586 $4,655,865
Brandywine Small Cap
Institutional Class
Period ended
September 30, 1998(B) 200,000 $2,000,000 -- $-- -- $-- 200,000 $2,000,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) For the period September 22, 1998 (commencement of operations) to September
30, 1998.
(B) For the period August 17, 1998 (commencement of operations) to September 30,
1998.
22
<PAGE>
LM INSTITUTIONAL FUND ADVISORS II, INC.
Investment Manager
LM Institutional Advisors, Inc.
P.O. Box 17635
Baltimore, Maryland 21297-1635
1-888-425-6432
Investment Advisers
Legg Mason Fund Adviser, Inc.
100 Light Street
Baltimore, Maryland 21202
Brandywine Asset Management, Inc.
Three Christina Centre, Suite 1200
201 North Walnut Street
Wilmington, Delaware 19801
This report is not to be distributed unless preceded or accompanied by a
prospectus.
