<PAGE>
INVESTMENT ADVISER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr.
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
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
(recycle logo) PRINTED ON RECYCLED PAPER
LMF-002
REPORT TO SHAREHOLDERS
FOR THE QUARTER ENDED
JUNE 30, 1995
THE
LEGG MASON
VALUE
TRUST, INC.
PRIMARY CLASS
PUTTING YOUR FUTURE FIRST
(Legg Mason logo)
<PAGE>
TO OUR SHAREHOLDERS,
The quarter ended June 30, 1995 was a very positive one for the
Value Trust. Total return (share appreciation plus reinvested capital
gain distributions and dividends) was 14.5%, comparing favorably to
gains of 9.5% and 7.2% in Standard & Poor's 500 stock composite index
and the Value Line index of 1,700 stocks, two widely-followed stock
market barometers. Net asset value per share rose from $20.21 to
$22.28. The latter figure is after payment in May of an ordinary
income dividend of $.05 per share, a short-term capital gain
distribution of $.21 per share, and a long-term capital gain
distribution of $.55 per share. In the six months through June 30, the
Value Trust's total return was 21.5%, compared to returns of 20.2% and
13.5% on the Standard & Poor and Value Line indices.
Beginning on page 3, Bill Miller, the Trust's portfolio manager,
discusses the Trust's holdings and the investment outlook.
More than 3,700 shareholders invest regularly in Trust shares on a
dollar cost averaging basis through a program we call Future First.
Most do so by authorizing automatic monthly transfers of $50 or more
from their bank checking accounts or Legg Mason money market fund.
Dollar cost averaging is a convenient and sensible way to invest which
encourages continued purchases during market downswings when the best
values are available. Your Legg Mason Investment Executive will be
happy to help you establish a Future First dollar cost averaging
account should you wish to do so.
The Board of Directors has approved an income dividend of $.04 per
share, payable on August 2, 1995 to shareholders of record on July 28.
Most shareholders will receive this distribution in the form of
additional shares credited to their accounts.
Sincerely,
(signature)
John F. Curley, Jr.
President
July 26, 1995
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON VALUE TRUST, INC.
TOTAL RETURN FOR ONE, FIVE, TEN YEARS AND LIFE OF FUND, AS OF JUNE 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 June 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 +27.59% +16.03% +26.03%
Five Years +71.25 +46.17 +76.76
Ten Years +192.78 +109.34 +292.46
Life of Class(|) +683.31 +267.29 +650.91
Navigator Class:
Life of
Class(||) +24.05% +14.95% +21.87%
</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 +27.59% +16.03% +26.03%
Five Years +11.36 +7.89 +12.10
Ten Years +11.34 +7.67 +14.65
Life of
Class(|) +16.86 +10.35 +16.48
</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)
<TABLE>
<CAPTION>
4/16/82 3/31/83 3/31/84 3/31/85 3/31/86 3/31/87 3/31/88 3/31/89 3/31/90 3/31/91 3/31/92 3/91/93 3/31/94 3/31/95 6/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Value of
original
shares
purchased
plus
shares
acquired
through
reinvestment
of capital
gain distri-
butions $10,000 $16,160 $18,870 $23,583 $32,556 $35,503 $32,268 $37,650 $39,891 $37,701 $44,210 $50,184 $52,789 $57,817 $66,456
Value of
shares
acquired
through
reinvestment
of income
dividends $10,000 $16,400 $19,425 $24,682 $34,510 $37,924 $34,729 $41,109 $44,290 $43,014 $51,414 $59,003 $62,337 $68,427 $78,331
</TABLE>
2
<PAGE>
PORTFOLIO MANAGER'S COMMENTS
Your fund had an excellent quarter and six months, advancing 14.47% in the
quarter and 21.51% year to date. Our results exceeded those of the major stock
market indices, and of the average growth fund. The comparable data results are
shown below:
<TABLE>
<CAPTION>
Lipper
Value S&P Dow Growth
Trust 500 Jones Funds
<S> <C> <C> <C> <C>
3 months 14.47% 9.53% 10.28% 9.34%
6 months 21.51% 20.19% 20.42% 17.47%
</TABLE>
Most stock fund investors have had good results this year, with the best
returns being earned by funds that specialize in science and technology. High
technology stocks, along with financials, have led the market; the former
because of spectacular earnings and the latter because of falling interest
rates.
Our results are noteworthy because we have managed (so far) to outperform
the indices. Although the indices are challenging benchmarks, and manage to beat
most actively managed funds over long periods, this year they have proven
particularly tough, beating 90% of all managers. A closer look at the
composition of this half's results helps in understanding why most investors,
even in funds that focus on S&P 500 names, lagged the index.
Within the S&P 500, 12% of all the stocks are down in 1995, and 60% of the
companies in the index underperformed the index. Only four stocks in the index
outperformed every month this year. Even the average stock in the index couldn't
keep up with the index; if you had put an equal amount in each S&P 500 company
at the beginning of the year, you would have underperformed the index!
Our results were driven by financials, where we have long had a significant
commitment. Our holdings in this group did not help us last year when rates were
rising, but they have moved sharply higher this year as both short and long
rates have fallen. The S&P financial sector has risen 23.7% this year. The
operating results of banks, for example, have not been significantly affected by
the interest rate fluctuations of the past 18 months. Investors, though, persist
in buying and selling these companies using simple-minded formulas that would
fit on a bumper sticker (e.g., Rates up? Sell banks). As long as this continues,
it will create opportunities for us.
We have not had much exposure to the super-hot technology sector, where
emotion and psychology interact with the results of the companies to produce a
lot of excitement. The semiconductor index on the Philadelphia exchange was up
about 100% in the first half. In the S&P 500, three of the top five performers
this year were tech stocks -- Micron Technology +149%, Applied Material +105%,
and Intel +98%. Microsoft, the cult company for which no valuation seems too
high, was "only" up 47%. Our largest technology holding was and is IBM, which is
up 30% this year. We were also helped by Lotus, up 56% due to its being acquired
by IBM.
The technology frenzy that has erupted this year is, like many enthusiasms,
soundly based. Technology is transforming society as the computer moves from a
business tool to a home appliance, and as the effects and implications of BEING
DIGITAL, as Nicholas Negroponte's new book has it, come to be instantiated. On
July 17 and 18, though, the market's fever for technology finally broke, and the
NASDAQ composite, which is heavily weighted with technology -- Intel and
Microsoft are 28% of the index -- fell over 5% in just two trading sessions. We
don't know if this is the beginning of a bear market in tech stocks, but we do
believe it is the beginning of more realism in the evaluation of those stocks.
At its peak of $109 a few weeks ago, Microsoft had a market value of almost
$70 billion, over 12x its revenues for this fiscal year and 35x next year's
expected earnings. The market believed it was worth more than IBM, valued now at
about $60 billion, whose after tax earnings this year will exceed Microsoft's
total sales. IBM's sales this year will be over $70 billion, versus about $6
billion for Microsoft, and it is generating excess cash of around $400 million
per month. IBM this year will generate more excess cash from its business than
Microsoft had business last year: $4.8 billion of excess cash this year for IBM
versus Microsoft's revenue last year of $4.6 billion. Even Microsoft's chief
financial officer said he was "mystified" at the company's valuation, and called
it "unbelievable." These comments were as shocking to hi-tech
3
<PAGE>
investors as hearing the truth about the tooth fairy would be to a 6 year old.
Many investors are mystified by the stock market's 20% rise in only six
months, and find it hard to believe a bear market (or worse) is not imminent.
The last time the market rose this fast was in the first six months of 1987.
Many market commentators advise caution, and the popular press appears full of
articles on how to protect your assets, how to hedge your portfolio with
options, and so forth.
Our view echoes something Warren Buffett once said: the market may look
expensive, but it's not as expensive as it looks. Some of the traditional market
measures are in ranges that previously led to below average returns, most
prominently dividend yields. The S&P 500 yields about 2.5%, near the low end of
its historic range. But with inflation also at about 2.5%, the real yield is
zero, which is not demanding by historic standards. With payout ratios well
below traditional levels, balance sheets solid, and cash generation strong,
dividend growth should average at least 7% for several years. If inflation stays
at today's level, which we expect, that would put the real return on stocks at
7% per year, right in line with the long-term average.
Price/earnings ratios on the Dow are only about 13x earnings, again about
the long-term average. Even though stocks are up 20% in only six months, their
average annual return from January 1, 1990 through June 30, 1995 has been 12%,
good but certainly not frothy.
The stock market almost always goes up; it rises about two thirds of the
time, measured yearly or even monthly. People seem surprised when the market is
at a new high, and worry that it may fall. But the surprise should be when it is
not at a high. GDP is at an all-time high, as are corporate profits, and both
usually rise. The stock market tracks those economic variables, adjusted for
changes in inflation and interest rates.
Bear markets do not just appear mysteriously when the real economy is doing
well. Persistently poor periods in the market -- more than the usual 5-7%
correction -- arrive when things go wrong in the world. Last year stocks were
flat because interest rates rose dramatically due to Fed tightening and fears of
inflation. The last bad market, in 1990, was a year of recession, war in the
Middle East, and skyrocketing energy prices. The Crash culminated a 40-day bear
market caused by relentless Fed tightening coupled with price/earnings ratios
50% higher than today and long-term interest rates 300 basis points higher than
now. The 1981-82 bear market was due to recession, Fed tightening, a third world
debt crisis, and mid-teens interest rates. The worst bear market since the
depression, 1973-74, occurred when we were in recession, had an oil embargo,
double-digit interest rates for the first time and a constitutional crisis
culminating in the President's resignation.
Bear markets begin when four conditions come together: earnings peaking,
inflation rising, interest rates rising, and stocks being overvalued. What
Federal Reserve Chairman Greenspan calls the most probable of several credible
scenarios has profits rising and inflation falling next year. The Fed has
recently moved to lower rates, and most measures of stock valuations are at
long-term averages. None of the typical preconditions of poor markets are in
evidence.
The market, though, does not rise the way the balance in your money fund
does: steadily, inexorably, linearly. Those returns are algorithmic. A formula
is applied to a fixed quantity to generate a new quantity. Markets are what the
professors call complex adaptive systems. They process information and react to
it. Those reactions are part of the new information that generates a continuous
recursive feedback loop between market participants and the external
environment. Markets exhibit what is known as sensitive dependence on initial
conditions. In plainer English, you can't tell what's going to happen with
certainty, it's just too complex. A researcher in this area, when asked to
explain more simply how complex adaptive systems work so a client could
understand it, replied, "I can't explain it simply. It is the nature of complex
things to be complex."
Does the break in tech stocks presage a broader market decline? Does the
recent bond market decline, which was even sharper than the fall in the NASDAQ
index, mean the rise in financials is over? If the market were algorithmic you
could tell, if you could figure out the algorithm, which is what all those
technicians, strategists, and quants are trying to do.
4
<PAGE>
The market may not be predictable, but it is bettable. As someone once said,
"the race may not always be to the swift, nor the contest to the strong, but
that's the way to bet." In the past, when the market had a first half where the
returns have been as robust as this one, the second half usually has been down.
That outcome thus would not be unusual if it were to recur. It would also not be
terribly unnerving, though undoubtedly the press and pundits would do their best
to make it so.
It should not be surprising that we are agnostic about the near-term
direction of the market, believing it not only unpredictable but probably
random. We do believe that the long-term outlook for financial assets is
unusually favorable, and that low inflation, and moderate, persistent growth
will continue to reward the patient shareholder.
Portfolio changes were modest in the quarter. Lotus was acquired by IBM. We
swapped our Burlington Northern into GENERAL MOTORS, picking up more earnings
and free cash flow per dollar of stock price. We also bought DUPONT, which has
been steadily reducing the capital intensity of its businesses, raising its
returns on assets, and increasingly operating the company for the shareholder.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
July 26, 1995
DJIA 4707.06
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<C> <S> <C>
Biggest gainers for the 2nd quarter 1995*
1. Citicorp +36.2%
2. Zions Bancorporation +32.5%
3. The Chase Manhattan Corporation +31.9%
4. Apple Computer, Inc. +31.7%
5. Storage Technology Corporation +28.8%
6. Bank of Boston Corporation +26.1%
7. Philips Electronics N.V. +25.3%
8. Chemical Banking Corporation +25.2%
9. Standard Federal Bancorporation +25.1%
10. Capital Cities/ABC, Inc. +22.4%
</TABLE>
<TABLE>
<C> <S> <C>
Biggest laggers for the 2nd quarter 1995*
1. Humana Inc. -31.2%
2. RJR Nabisco Holdings Corp. -5.1%
3. Reebok International Ltd. -4.6%
4. RJR Nabisco Holdings Corp.
preferred equity redemption cumulative
stock
Series C Depositary Shares -3.9%
5. Grupo Financiero Serfin S.A. de C.V. ADR -2.6%
6. AMBAC Inc. -1.2%
7. Lloyds Bank P.L.C. -1.0%
8. Coltec Industries Inc. 0.0%
9. Columbia/HCA Healthcare Corporation +0.6%
10. The Kroger Co. +1.9%
</TABLE>
PORTFOLIO CHANGES
Securities Added
General Motors Corporation
duPont (E.I.) de Nemours
Securities Sold
Burlington Northern Inc.
Lotus Development Corporation
* SECURITIES HELD FOR THE ENTIRE QUARTER.
5
<PAGE>
PORTFOLIO OF INVESTMENTS
LEGG MASON VALUE TRUST, INC.
JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
COMMON STOCKS AND EQUITY INTERESTS -- 89.5%
<S> <C> <C>
Automotive -- 4.6%
Chrysler Corporation 800 $ 38,300
General Motors Corporation 330 15,469
53,769
Banking -- 18.5%
Bank of Boston Corporation 800 30,000
BankAmerica Corporation 400 21,050
Chemical Banking Corporation 525 24,806
Citicorp 800 46,300
Grupo Financiero Serfin S.A. de
C.V. ADR 669 3,094A
Lloyds Bank P.L.C. 2,613 25,908
Provident Bankshares Corporation 344 9,084
The Chase Manhattan Corporation 625 29,375
Zions Bancorporation 550 27,500
217,117
Broadcast Media -- 1.8%
Capital Cities/ABC, Inc. 200 21,600
Chemicals -- 0.6%
duPont (E.I.) de Nemours 105 7,219
Computer Services and Systems -- 7.6%
Apple Computer, Inc. 625 29,024
Digital Equipment Corporation 300 12,225A
International Business Machines
Corporation 400 38,400
Storage Technology Corporation 404 9,958A
89,607
Electrical Equipment -- 2.1%
Philips Electronics N.V. 575 24,581
Finance -- 16.8%
Federal Home Loan Mortgage
Corporation 500 34,375
Federal National Mortgage
Association 800 75,500
MBNA Corporation 1,258 42,454
Salomon Inc. 440 17,655
The Bear Stearns Companies Inc. 1,261 26,955
196,939
Food, Beverage and Tobacco -- 6.0%
PepsiCo, Inc. 425 19,391
Philip Morris Companies Inc. 450 33,469
RJR Nabisco Holdings Corp. 620 17,282
70,142
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Food Merchandising -- 2.7%
The Kroger Co. 1,200 $ 32,250A
Footwear -- 4.6%
Nike Incorporated 300 25,200
Reebok International Ltd. 845 28,730
53,930
Hospital Management -- 1.5%
Columbia/HCA Healthcare
Corporation 415 17,940
Insurance -- 5.8%
AMBAC Inc. 383 15,368
Humana Inc. 750 13,219A
MBIA, Inc. 255 16,957
Orion Capital Corporation 575 22,425
67,969
Manufacturing -- 3.1%
Danaher Corporation 1,200 36,300
Multi-Industry -- 1.2%
Coltec Industries Inc. 825 14,231A
Pharmaceuticals -- 4.8%
Amgen Inc. 430 34,588A
Warner-Lambert Company 250 21,594
56,182
Retail Sales -- 1.0%
Sears, Roebuck and Co. 200 11,975
Savings and Loan -- 3.3%
Standard Federal Bancorporation 1,150 38,669
Telecommunications -- 3.5%
MCI Communications Corporation 700 15,400
Telefonos de Mexico S.A. ADR 850 25,181
40,581
Total Common Stocks and Equity
Interests
(Identified Cost -- $617,407) 1,051,001
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK -- 0.7%
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost -- $9,003) 1,385 8,483
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
SOVEREIGN OBLIGATIONS -- 4.1%
<S> <C> <C>
Argentina Floating Rate Bonds
7.3125%B 3-31-05 $ 60,000 $ 36,788
Argentina Par Bonds
5.00%C 3-31-23 25,000 11,922
Total Sovereign Obligations
(Identified Cost -- $37,669) 48,710
U.S. GOVERNMENT OBLIGATION -- N.M.
United States Treasury Note
8.125% 2-15-98
(Identified Cost -- $228) 230 242
REPURCHASE AGREEMENTS -- 3.3%
Morgan Stanley & Co.,
Incorporated
6.10% dated 6-30-95, to be
repurchased at $34,029 on
7-5-95 (Collateral: $22,597
Federal National Mortgage
Association Mortgage-backed
securities, 6.0% due 12-01-00
and $13,059 Federal National
Mortgage Association
Mortgage-backed securities,
5.5% due 1-1-09, total value
$34,734) 34,000 34,000
State Street Bank and Trust
Company, N.A.
4.75% dated 6-30-95, to be
repurchased at $4,722 on 7-3-95
(Collateral: $4,420 U.S.
Treasury Bonds, 7.25% due
5-15-16, value $4,722) 4,720 4,720
Total Repurchase Agreements
(Identified Cost -- $38,720) 38,720
Total Investments -- 97.6%
(Identified Cost -- $703,027) 1,147,156
Other Assets Less Liabilities -- 2.4% 27,715
NET ASSETS -- 100.0% $1,174,871
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $22.28
NAVIGATOR CLASS $22.34
</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 JUNE 30, 1995.
C COUPON INCREASES 0.25% ANNUALLY UNTIL MARCH 31, 1999, THEREAFTER
REMAINS FIXED AT 6.0% UNTIL MATURITY.
N.M. NOT MEANINGFUL
7
