INVESTMENT ADVISER REPORT TO SHAREHOLDERS
Legg Mason Fund Adviser, Inc. FOR THE SIX MONTHS ENDED
Baltimore, MD SEPTEMBER 30, 1995
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr.
Richard G. Gilmore THE
Charles F. Haugh LEGG MASON
Arnold L. Lehman VALUE
Dr. Jill E. McGovern TRUST, INC.
T. A. Rodgers PRIMARY CLASS
Edward A. Taber, III
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA PUTTING YOUR FUTURE FIRST
COUNSEL (Legg Mason Funds Logo)
Kirkpatrick & Lockhart
Washington, DC
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS
PRECEDED OR ACCOMPANIED BY A PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(RECYCLED PAPER LOGO) PRINTED ON RECYCLED PAPER
LMF-002
<PAGE>
TO OUR SHAREHOLDERS,
The Value Trust's net asset value per share rose from $22.28 to
$24.64 during the quarter ended September 30, 1995. Assuming
reinvestment of the $.04 per share income dividend paid in August, the
Trust's total return (appreciation plus reinvested dividends) during
the quarter was 10.7%. Total returns on the Value Line index of 1700
stocks and Standard & Poor's 500 stock composite index were 7.1% and
7.9% during the same period. In the nine months through September 30,
the Value Trust's total return was 34.6%, compared to returns of 21.5%
and 29.7% on the Value Line and Standard & Poor's indices.
Page 2 of this report contains information on the Trust's
long-term investment results. You will note that $10,000 invested in
the Trust at its inception in April, 1982 would have grown to $86,742
by September 30, 1995, producing an average annual return of 17.4%
over the 13 1/2-year period. $10,000 invested in common stocks
included in the Value Line and Standard & Poor's indices would have
grown to $39,562 and $81,141, respectively, over that same period. All
figures assume reinvestment of dividends and other distributions.
Beginning on page 3, Bill Miller, the Trust's portfolio manager,
discusses the investment outlook.
Your Board of Directors has approved an income dividend of $.05
per share, payable on November 1 to shareholders of record on October
27. Most shareholders will receive this dividend in the form of
additional shares credited to their accounts.
Sincerely,
(John F. Curley, Jr. sig here)
John F. Curley, Jr.
President
November 3, 1995
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON VALUE TRUST, INC.
TOTAL RETURN FOR ONE, FIVE, TEN YEARS AND LIFE OF FUND, AS OF SEPTEMBER 30, 1995
The returns shown are based on historical results and are not intended
to indicate future performance. The investment return and principal value
of an investment in the fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Average
annual returns tend to smooth out variations in the fund's return, so they
differ from actual year-to-year results. For comparison purposes, the
fund's total return is compared with total returns of the Value Line
Geometric Average, an index of approximately 1,700 stocks ("Value Line
Index"), and Standard & Poor's 500 Stock Composite Index ("S&P Stock
Index"), two unmanaged indexes of widely held common stocks. No adjustment
has been made for any income taxes payable by shareholders.
The fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees and shareholder servicing expenses are determined
separately for each class and the Navigator Class does not incur Rule
12b-1 distribution fees.
Total returns as of September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Cumulative Total Return
Legg Mason
Value Value Line S&P
Trust Index Stock Index
<S> <C> <C> <C>
Primary Class:
One Year +33.16% +17.87% +29.71%
Five Years +140.91 +101.33 +121.15
Ten Years +230.59 +135.26 +341.71
Life of Class+ +767.42 +295.62 +711.41
Navigator Class:
Life of Class++ +37.80% +31.19% +31.69%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
Legg Mason
Value Value Line S&P
Trust Index Stock Index
<S> <C> <C> <C>
Primary Class:
One Year +33.16% +17.87% +29.71%
Five Years +19.23 +15.02 +17.20
Ten Years +12.70 +8.93 +16.02
Life of
Class+ +17.41 +10.76 +16.83
</TABLE>
+ Primary Class inception -- April 16, 1982.
++ Navigator Class inception -- December 1, 1994.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
MADE ON APRIL 16, 1982 (INCEPTION OF THE VALUE TRUST
PRIMARY CLASS)
[GRAPH HERE]
<TABLE>
<CAPTION>
9/30/95 3/31/95 3/31/94 3/31/93 3/31/92 3/31/91 3/31/90 3/31/89 3/31/88 3/31/87
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Value of original shares
purchased plus shares
acquired through reinvestment
of capital gain distributions 73,466 57,817 52,789 50,184 44,210 37,701 39,891 37,650 32,268 35,503
Value of shares acquired
through reinvestment of
income dividends 86,742 68,427 62,337 59,003 51,414 43,014 44,290 41,109 34,729 37,924
</TABLE>
Graph Table (Continued)
<TABLE>
<CAPTION>
3/31/86 3/31/85 3/31/84 3/31/83 4/16/82
<S> <C> <C> <C> <C> <C>
Value of original shares
purchased plus shares
acquired through reinvestment
of capital gain distributions 32,556 23,583 18,870 16,160 10,000
Value of shares acquired
through reinvestment of
income dividends 34,510 24,682 19,425 16,400 10,000
</TABLE>
2
<PAGE>
PORTFOLIO MANAGER'S COMMENTS
Your fund continued its strong results in the calendar quarter ending
September 30, rising 10.74%. We again beat all the relevant stock market
indices, as well as the average returns of general equity funds and the average
returns of growth stock funds for the past three months. Our returns also exceed
all of these benchmarks for the year to date, the past twelve months, and the
past five years.
Our year-to-date returns of 34.56% are, of course, unsustainable over any
substantial period of time. Stocks move in jerky, unpredictable bursts. We are
now enjoying one of those pleasant periods when financial assets are marked up
in price due to the confluence of reasonable valuations, falling interest rates,
and rising profits. Last year, sharply rising interest rates led to big losses
in bonds and modest losses in stocks despite rising earnings.
We squeaked by with a small gain in 1994 and are fully participating in this
year's rally due to our large holdings in financials -- banks, insurance
companies, and the so-called government-sponsored enterprises (GSE's), Fannie
Mae and Freddie Mac. IBM has also been a big winner, as was LOTUS, bought by IBM
earlier this year. Just as important, we have avoided a lot of the market's
landmines. The only conspicuous area of disappointment has been Mexico, which
has continued to languish.
Financials and technology have been the market's leaders this year. Both
groups are especially sensitive to interest rates and earnings trends,
financials because changes in interest rates can directly affect earnings,
changing the companies' cost of money and what they can charge for it.
Technology stocks have soared because this year's powerful earnings growth has
surprised most market participants. The market has marked these stocks up twice:
once due to earnings, and then again by placing a high multiple on those
earnings as interest rates have fallen. Technology stocks, unlike financials,
are usually thought of as growth stocks, and growth is accorded a high multiple
in periods of low inflation.
The fourth quarter is starting out with the usual year-end cross currents.
Last year people dumped stocks in the last three months of the year, as they
often are wont to do. That set up a wonderful buying opportunity. The early line
on this quarter involves investors selling financials after third quarter
earnings to lock in the gains those stocks have achieved and dumping anything
with disappointing results or a murky outlook. We are also seeing a pause in the
bond rally as the budget debate in Washington heats up. Those political battles
may cause some market volatility, but the direction of budget policy is clear.
There is bi-partisan consensus for a balanced budget, and we believe the odds
now favor the achievement of that goal. The path to budget balance will not be
smooth, but as the deficit continues to decline financial assets should benefit
accordingly.
Technology stocks are bouncing all over the place as investors try
to figure out if product supply will rise to meet demand next year,
leading to pricing pressures and earnings disappointments. We think the
answer is yes and have only moderate exposure to technology. We remain
quite enthusiastic about financials, though, and intend to ride out
the near-term turbulence in that group. Major banks such as CITICORP,
CHASE, and BANKAMERICA, are still too cheap at single-digit multiples
and high-teens returns on equity. The just announced hostile takeover
offer for First Interstate by Wells Fargo may lead to more hostile
deals, and should lead to higher valuations on all bank stocks. The pace
of consolidation, already brisk, may even accelerate over the next
twelve months.
We think the economy next year will look a lot like this year, only more
subdued. Corporate profits should again be up, but only by 5% or so. The big
move in long-term interest rates from over 8% last November to the current 6.4%
is behind us. In 1996, we think long rates will be banded somewhere between
5.75% and perhaps 6.5%. We believe the major positive next year will be lower
short-term rates. Over the past 60 years inflation has averaged 3.1%. It is now
2.5% and the Federal Reserve Board seems to believe it will remain under 3% next
year. The average T-bill rate that has historically persisted in a 3% inflation
environment is 3.7%. Because the Fed has adopted an especially vigilant attitude
toward any increase in inflation, we think short-term yields are unlikely to
drop as low as 3.7%, but twelve months from now T-bills under 5% look likely.
If we are right about the economic environment, stocks next year should
again do well, but
3
<PAGE>
probably not as well as this year. They should beat bonds and cash and remain
the best performing asset class. We believe dividend growth will accelerate over
the next few years, averaging about 7%, much higher than the long-term average
of just over 5%. This strong dividend growth should help to underpin the market.
High returns on assets and the lack of new high return projects, coupled with
the current low dividend payout ratios, will spur companies to look for
something to do with their excess cash. Share buybacks, acquisitions, and
dividend growth should be common features of the investment landscape over the
next year or so.
There were no new positions initiated or eliminated in the fund last
quarter. Most funds seem to engage in hyperfrenetic asset shuffling in an
attempt to guess which stocks or groups will do best in the near term. We prefer
to make long-term investments, which minimizes taxable gains and enables us to
more carefully evaluate and monitor the companies in the portfolio.
As we have noted many times in the past, the near-term direction of the
market is unknowable, and the long-term direction is clear: higher. After a move
such as we have had this year, prudence would indicate reduced near-term
expectations. A decline may come at any time. We believe it would be a mistake,
though, to deviate from, or alter, a long-term investment program because of
near-term concerns, even if those concerns prove justified.
The new biography of Warren Buffett by Roger Lowenstein shows how even
market sages can let near-term concerns affect long-term decisions. When Buffett
was in his twenties he solicited the advice of Benjamin Graham, the father of
securities analysis and a legendary investor, about his intention to pursue a
career in investing. This was in the early 1950s. The market had moved up
sharply in the previous few years, and Graham advised Buffett to wait until the
market declined substantially before embarking on his life's work. Buffett has
remarked that this was about the worst advice he ever got, since the 1950s and
60s were a marvelous period that saw only brief declines in stock prices.
Happily, Buffett ignored the advice and is now worth about $14 billion.
The 1950s and 1960s were a period similar to what we are in today: one of
low inflation, peace, rising productivity, and slow but steady economic growth.
Long-term investing, despite the inevitable setbacks, proved rewarding then and
is doing so now. We expect that to continue.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
November 3, 1995
DJIA 4825.57
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<S> <C> <C>
Biggest gainers for the 3rd quarter 1995*
1. Nike Incorporated +32.3%
2. The Chase Manhattan Corporation +30.1%
3. Chemical Banking Corporation +28.8%
4. Bank of Boston Corporation +27.0%
5. The Kroger Co. +27.0%
6. Sears, Roebuck and Co. +25.4%
7. Amgen Inc. +24.0%
8. MBNA Corporation +23.3%
9. Zions Bancorporation +22.5%
10. Citicorp +22.2%
</TABLE>
<TABLE>
<S> <C> <C>
Biggest laggers for the 3rd quarter 1995*
1. Coltec Industries Inc. -30.4%
2. Apple Computer, Inc. -19.8%
3. Salomon Inc. -4.7%
4. International Business Machines
Corporation -1.7%
5. Storage Technology Corporation -0.5%
6. United States Treasury Note
8.125% 2-15-98 -0.4%
7. duPont (E.I.) de Nemours 0.0%
General Motors Corporation 0.0%
Grupo Financiero Serfin S.A.
de C.V. ADR 0.0%
10. Federal Home Loan Mortgage Corporation +0.5%
</TABLE>
* SECURITIES HELD FOR THE ENTIRE QUARTER. NO POSITIONS WERE DELETED AND NO NEW
POSITIONS WERE ADDED DURING THE QUARTER.
4
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON VALUE TRUST, INC.
SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS -- 92.3%
Automotive -- 5.3%
Chrysler Corporation 800 $ 42,400
General Motors Corporation 575 26,953
69,353
Banking -- 20.1%
Bank of Boston Corporation 800 38,100
BankAmerica Corporation 400 23,950
Chemical Banking Corporation 525 31,959
Citicorp 800 56,600
Grupo Financiero Serfin S.A. de
C.V. ADR 669 3,094A
Lloyds Bank P.L.C. 2,645 28,875
Provident Bankshares Corporation 344 10,332
The Chase Manhattan Corporation 625 38,203
Zions Bancorporation 550 33,688
264,801
Broadcast Media -- 1.2%
Capital Cities/ABC, Inc. 130 15,291
Chemicals -- 1.2%
duPont (E.I.) de Nemours 225 15,469
Computer Services and Systems -- 7.7%
Apple Computer, Inc. 950 35,387
Digital Equipment Corporation 300 13,688A
International Business Machines
Corporation 425 40,109
Storage Technology Corporation 500 12,250A
101,434
Electrical Equipment -- 2.1%
Philips Electronics N.V. 575 28,031
Finance -- 16.4%
Federal Home Loan Mortgage
Corporation 500 34,562
Federal National Mortgage
Association 800 82,800
MBNA Corporation 1,258 52,360
Salomon Inc. 500 19,125
The Bear Stearns Companies Inc. 1,261 27,113
215,960
Food, Beverage and Tobacco -- 6.2%
PepsiCo, Inc. 425 21,675
Philip Morris Companies Inc. 450 37,575
RJR Nabisco Holdings Corp. 670 21,691
80,941
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Food Merchandising -- 3.1%
The Kroger Co. 1,200 $ 40,950A
Footwear -- 5.4%
Nike Incorporated 300 33,338
Reebok International Ltd. 1,080 37,118
70,456
Hospital Management -- 1.5%
Columbia/HCA Healthcare
Corporation 415 20,170
Insurance -- 6.2%
Allstate Corporation 185 6,559
AMBAC Inc. 383 16,852
Humana Inc. 750 15,094A
MBIA, Inc. 255 17,977
Orion Capital Corporation 575 25,516
81,998
Manufacturing -- 3.0%
Danaher Corporation 1,200 39,300
Multi-Industry -- 0.8%
Coltec Industries Inc. 825 9,900A
Pharmaceuticals -- 4.7%
Amgen Inc. 770 38,404A
Warner-Lambert Company 250 23,812
62,216
Retail Sales -- 0.6%
Sears, Roebuck and Co. 200 7,375
Savings and Loan -- 3.4%
Standard Federal Bancorporation 1,150 44,850
Telecommunications -- 3.4%
MCI Communications Corporation 700 18,244
Telefonos de Mexico S.A. ADR 850 26,987
45,231
Total Common Stocks and Equity
Interests
(Identified Cost -- $663,373) 1,213,726
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK
-- 0.7%
<CAPTION>
<S> <C> <C>
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost -- $9,003) 1,385 9,349
</TABLE>
5
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON VALUE TRUST, INC.
<TABLE>
<S> <C> <C>
Principal
(Amounts in Thousands) Amount Value
SOVEREIGN OBLIGATIONS -- 3.8%
Argentina Floating Rate Bonds
6.8125%B 3-31-05 $60,000 $ 37,200
Argentina Par Bonds
5.00%C 3-31-23 25,000 12,141
Total Sovereign Obligations
(Identified Cost -- $37,669) 49,341
U.S. GOVERNMENT OBLIGATION -- N.M.
United States Treasury Note
8.125% 2-15-98
(Identified Cost -- $228) 230 241
REPURCHASE AGREEMENTS -- 3.0%
Morgan Stanley & Co. Incorporated
6.25% dated 9-29-95, to be
repurchased at $38,954 on
10-2-95 (Collateral: $39,506
Federal National Mortgage
Association Mortgage-backed
securities, 7% due 4-1-08,
value $39,758) 38,934 38,934
Prudential Securities, Inc.
6.25% dated 9-29-95, to be
repurchased at $1,001 on
10-2-95 (Collateral: $1,018
Federal Home Loan Mortgage
Corporation Mortgage-backed
securities,
7.5% due 10-1-24, value $1,030) 1,000 1,000
Total Repurchase Agreements
(Identified Cost -- $39,934) 39,934
Total Investments -- 99.8%
(Identified Cost -- $750,207) 1,312,591
Other Assets Less Liabilities -- 0.2% 2,942
NET ASSETS -- 100.0% $1,315,533
</TABLE>
<TABLE>
<S> <C> <C>
(Amounts in Thousands)
Net Assets Consisting of:
Accumulated paid-in capital
applicable to:
51,535 Primary shares
outstanding $ 681,170
1,859 Navigator shares
outstanding 35,510
Undistributed net investment
income 2,103
Undistributed net realized gain
on investments 34,366
Unrealized appreciation of
investments 562,384
NET ASSETS $1,315,533
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $24.64
NAVIGATOR CLASS $24.71
</TABLE>
A NON-INCOME PRODUCING.
B THE RATE OF INTEREST EARNED IS TIED TO THE LONDON INTERBANK OFFERED
RATE (LIBOR) AND THE COUPON RATE SHOWN IS THE RATE AS OF SEPTEMBER 30,
1995.
C COUPON INCREASES 0.25% ANNUALLY UNTIL MARCH 31, 1999, THEREAFTER
REMAINS FIXED AT 6.0% UNTIL MATURITY.
N.M. NOT MEANINGFUL.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON VALUE TRUST, INC.
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $137) $ 11,479
Interest 3,359
Total investment income $ 14,838
EXPENSES:
Investment advisory fee 4,451
Distribution and service fees 5,395
Transfer agent and shareholder servicing expense 413
Custodian fee 107
Reports to shareholders 92
Legal and audit fees 43
Registration fees 20
Directors' fees 9
Other expenses 29
10,559
Less expenses reimbursed (41)
Total expenses, net of reimbursement 10,518
NET INVESTMENT INCOME 4,320
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments 34,522
Increase in unrealized appreciation of investments 237,535
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 272,057
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 276,377
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON VALUE TRUST, INC.
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
(Amounts in Thousands) September 30, 1995 March 31, 1995
(Unaudited)
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 4,320 $ 5,162
Net realized gain on investments 34,522 38,687
Increase in unrealized appreciation of investments 237,535 47,164
Increase in net assets resulting from operations 276,377 91,013
Net equalization debits -- (313)
Distributions to shareholders from:
Net investment income:
Primary Class (4,504) (2,527)
Navigator Class (383) (18)
Net realized gain on investments:
Primary Class (37,362) (1,999)
Navigator Class (1,363) --
Change in net assets from Fund share transactions:
Primary Class 58,717 (9,509)
Navigator Class 1,207 33,779
Increase in net assets 292,689 110,426
NET ASSETS:
Beginning of period 1,022,844 912,418
End of period (including undistributed net investment income of $2,103
and $2,670, respectively) $1,315,533 $1,022,844
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL HIGHLIGHTS (dagger)
LEGG MASON VALUE TRUST, INC.
Contained below is per share operating performance 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>
Navigator Class Primary Class
For the Six For the Six
Months Ended Months Ended For the Years Ended March 31,
Sept. 30, 1995 Sept. 30, 1995 1995 1994 1993 1992 1991
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $20.27 $20.21 $18.50 $17.81 $15.69 $13.38 $14.19
Net investment income 0.23 0.10 0.10 0.08 0.18 0.25 0.32
Net realized and unrealized
gain (loss) on investments 5.18 5.18 1.70 0.92 2.12 2.34 (0.74)
Total from investment
operations 5.41 5.28 1.80 1.00 2.30 2.59 (0.42)
Distributions to shareholders
from:
Net investment income (0.21) (0.09) (0.05) (0.11) (0.18) (0.28) (0.36)
Net realized gain on
investments (0.76) (0.76) (0.04) (0.20) -- -- (0.03)
Total distributions (0.97) (0.85) (0.09) (0.31) (0.18) (0.28) (0.39)
Net asset value, end of
period $24.71 $24.64 $20.21 $18.50 $17.81 $15.69 $13.38
Total return 27.47%B 26.77%B 9.77% 5.65% 14.76% 19.53% (2.88)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.80%A 1.82%A 1.81% 1.82% 1.86% 1.90% 1.90%
Net investment income 1.7%A 0.7%A 0.5% 0.5% 1.1% 1.7% 2.5%
Portfolio turnover rate 15.8%A 15.8%A 20.1% 25.5% 21.8% 39.4% 38.8%
Net assets, end of period (in
thousands) $45,931 $ 1,269,602 $986,325 $912,418 $878,394 $745,833 $690,053
</TABLE>
(dagger) ALL SHARE AND PER SHARE FIGURES REFLECT THE 2-FOR-1 STOCK SPLIT
EFFECTIVE JULY 29, 1991.
A ANNUALIZED.
B NOT ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON VALUE TRUST, INC.
(Amounts in Thousands) (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Value Trust, Inc. ("Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end, diversified
investment company.
The Fund consists of two classes of shares: Primary Class, offered
since 1982, and Navigator Class, offered to certain institutional
investors since December 1, 1994. Expenses of the Fund are allocated
proportionately to the two classes of shares except for 12b-1 distribution
fees, which are charged only on Primary 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. Short-term securities are valued
at cost which, when combined with accrued interest receivable,
approximates current value.
Dividends and Distributions to Shareholders
Net investment income for dividend purposes consists of dividends and
interest earned, less expenses. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Net capital gain distributions
are declared and paid after the end of the tax year in which the gains are
realized.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis. At September 30, 1995, $360 was payable for investments purchased
but not yet received.
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 Fund's 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.
Federal Income Taxes
No provision for federal income or excise taxes is
required since the Fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income to its share-
holders.
Equalization
In prior years, the Fund followed the practice of equalization by
which a portion of proceeds from sales and cost of redemptions of Fund
shares is credited or charged to undistributed net investment income. In
the current fiscal year ending March 31, 1996, the Fund discontinued the
practice of equalization, resulting in a reclassification from
undistributed net investment income of $15,241 to accumulated paid-in
capital.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the six months ended September 30, 1995
(excluding short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $ 132,166
Proceeds from sales 89,360
</TABLE>
At September 30, 1995, the cost of securities for federal income tax
purposes was $750,207. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$584,496 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $22,112.
10
<PAGE>
(Amounts in Thousands)
3. FUND SHARE TRANSACTIONS:
At September 30, 1995, there were 100,000 shares authorized at $.001
par value for all classes of the Fund. On December 1, 1994, when the
Navigator Class became effective, 1,828 shares held in Legg Mason Profit
Sharing Plan accounts, with a value of $34,288, were transferred from
Primary Class to Navigator Class. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
For the
Six Months Ended For the
September 30, Year Ended
1995 March 31, 1995
Primary Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 6,361 $143,008 15,630 $293,717
Reinvestment of
distributions 1,950 41,342 240 4,423
Repurchased (5,587) (125,633) (16,377) (307,649)
Net change 2,724 $ 58,717 (507) $ (9,509)
</TABLE>
<TABLE>
<CAPTION>
For the
Six Months Ended December 1, 1994 (dagger)
September 30, to
1995 March 31, 1995
Navigator Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 132 $ 3,039 1,896 $35,606
Reinvestment of
distributions 82 1,746 1 18
Repurchased (157) (3,578) (95) (1,845)
Net increase 57 $ 1,207 1,802 $33,779
</TABLE>
(dagger) COMMENCEMENT OF NAVIGATOR CLASS.
4. TRANSACTIONS WITH AFFILIATES:
The Fund has an investment advisory and management agreement with Legg
Mason Fund Adviser, Inc. ("Adviser"), a corporate affiliate of Legg Mason
Wood Walker, Incorporated ("Legg Mason"), a member of the New York Stock
Exchange and the distributor for the Fund. Under this agreement, the
Adviser provides the Fund with investment advisory, management and
administrative services for which the Fund pays a fee at an annual rate of
1% of average daily net assets of the Fund for the first $100 million of
average daily net assets, 0.75% of assets between $100 million and $1
billion and 0.65% of assets in excess of $1 billion, calculated daily and
payable monthly. At September 30, 1995, $756 was due to the Adviser. The
agreement with the Adviser provides that an expense reimbursement be made
to the Fund for audit fees and compensation of the Fund's independent
directors.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.70% and an annual service fee of 0.25% of the
Primary Class' average daily net assets, calculated daily and payable
monthly. At September 30, 1995, $970 was due to the distributor. Legg
Mason also has an agreement with the Fund's transfer agent to assist with
certain of its duties. For this assistance, Legg Mason was paid $111 by
the transfer agent for the six months ended September 30, 1995. No
brokerage commissions were paid to Legg Mason or its affiliates during the
six months ended September 30, 1995.
11
