INVESTMENT ADVISER
Legg Mason Fund Adviser, Inc. REPORT TO SHAREHOLDERS
Baltimore, MD FOR THE QUARTER ENDED
DECEMBER 31, 1995
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr., President
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
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, DC
INDEPENDENT ACCOUNTANTS PUTTING YOUR FUTURE FIRST
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 logo] PRINTED ON RECYCLED PAPER
LMF-002 [Legg Mason Funds logo]
<PAGE>
TO OUR SHAREHOLDERS,
The quarter ended December 31, 1995 was another positive one for
the Value Trust. Total return (share appreciation plus reinvested
dividends) was 4.6%. Net asset value per share rose from $24.64 to
$25.19. The latter figure is after payment in December of a long-term
capital gain distribution of $.36 per share, a short-term capital gain
distribution of $.12 per share and an ordinary income dividend of
$.032 per share.
For all of 1995, the Trust's total return was a strong 40.8%,
comparing favorably to returns of 22.3% and 37.5% on the Value Line
index of 1700 stocks and Standard & Poor's 500 stock composite index,
two widely followed stock market barometers.
On a long-term basis, the Value Trust has produced attractive
results for shareholders in most years, averaging a 17.5% annual
compounded return over the 13 1/2 years since it was founded in 1982:
<TABLE>
<CAPTION>
Total Return
<S> <C>
1982 +40.9%
1983 +42.7
1984 +12.8
1985 +31.9
1986 +9.5
1987 -7.4
1988 +25.8
1989 +20.2
1990 -17.0
1991 +34.7
1992 +11.4
1993 +11.3
1994 +1.4
1995 +40.8
</TABLE>
Despite periodic stock market declines, we are optimistic that
investment in a diversified portfolio of well selected value stocks
will continue to produce attractive LONG-TERM results for Trust
shareholders. Beginning on page 3, Bill Miller, the Trust's portfolio
manager, comments on the investment outlook.
You should be aware that, under Internal Revenue Service
regulations, short-term capital gain distributions on mutual fund
shares are treated as ordinary income dividends for tax purposes.
Therefore, the Trust's $.12 per share short-term capital gain
distribution mentioned above is included with ordinary income
dividends on your 1995 tax reporting statement.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
February 5, 1996
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON VALUE TRUST, INC.
TOTAL RETURN FOR ONE, FIVE, TEN YEARS AND LIFE OF FUND, AS OF DECEMBER 31, 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 December 31, 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 +40.76% +22.31% +37.53%
Five Years +138.40 +94.83 +115.27
Ten Years +203.38 +106.48 +299.64
Life of Class(dagger) +807.42 +296.78 +759.99
Navigator Class:
One Year +42.18% +22.31% +37.53%
Life of Class(double dagger) +44.45 +23.90 +39.58
</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 +40.76% +22.31% +37.53%
Five Years +18.98 +14.27 +16.57
Ten Years +11.74 +7.52 +14.86
Life of Class(dagger) +17.45 +10.58 +17.00
Navigator Class:
One Year +42.18% +22.31% +37.53%
Life of Class(double dagger) +40.35 +21.84 +35.98
</TABLE>
(dagger) Primary Class inception -- April 16, 1982.
(double dagger) 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 appears here -- plot points listed below)
<TABLE>
<CAPTION>
4/16/82 3/31/83 3/31/84 3/31/85 3/31/86 3/31/87 3/31/88
<S> <C> <C> <C> <C> <C> <C> <C>
Value of original shares 10,000 16,160 18,870 23,583 32,556 35,503 32,268
purchased plus shares
acquired through reinvest-
ment of capital gain
distributions
Value of shares acquired 10,000 16,400 19,425 24,682 34,510 37,924 34,729
through reinvestment of
income dividends
</TABLE>
<TABLE>
<CAPTION>
3/31/89 3/31/90 3/31/91 3/31/92 3/31/93 3/31/94 3/31/95 12/31/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Value of original shares 37,650 39,891 37,701 44,210 50,184 52,789 57,817 76,863
purchased plus shares
acquired through reinvest-
ment of capital gain
distributions
Value of shares acquired 41,109 44,290 43,014 51,414 59,003 62,337 68,427 90,742
through reinvestment of
income dividends
</TABLE>
2
<PAGE>
PORTFOLIO MANAGER'S COMMENTS
Your fund had an excellent year in 1995, rising 40.8%. Our results exceeded
those of the S&P 500, the Dow, and all of the major equity fund indices. The
details are:
<TABLE>
<CAPTION>
Lipper
Value S&P Dow Growth
Trust 500 Jones Funds
<S> <C> <C> <C> <C>
4th quarter 4.61% 6.02% 7.50% 2.36%
1995 40.76% 37.53% 36.94% 30.79%
</TABLE>
Last year was an exceptional year for stocks as all of the key drivers to
equity prices were positive. Interest rates fell sharply at the long end, and
the Federal Reserve Board began to lower short-term rates over the summer.
Corporate profits rose strongly as the economy exhibited solid growth with
modest inflation.
It is often difficult for actively managed funds to outperform strongly
trending markets. Last year most growth funds significantly underperformed, the
result of staying too long with cyclicals and technology, the year's early
leaders, and being underexposed to financials, which were among the best
performers.
We have long held a major position in financials, believing them to be
severely undervalued in an environment of low inflation and moderate growth.
Although most investors recognize that inflation is unlikely to be a problem,
that nominal GDP growth will tend to be 5% or less, that bank balance sheets are
strong and financial stock valuations low, they persist in the fruitless
endeavor of trying to time interest rate swings or changes in the momentum of
earnings, or margins, or loss reserves. We have elected to ignore the temporary
swings of sentiment and have concentrated on these companies' long-term value, a
stance which has proven quite rewarding since financial stocks bottomed in 1990.
After their strong performance in 1995, financials came under selling
pressure in the first few weeks of 1996 by investors (more accurately, by
short-term traders and speculators) as long rates backed up to over 6%. This
selling has slowed considerably since CITICORP announced earnings above
expectations, raised its dividend 50%, and authorized an expanded stock
repurchase program. The results announced by CITICORP, CHASE MANHATTAN, and
CHEMICAL BANK stand in stark contrast to the disappointing earnings of Motorola,
Intel, and Wal Mart, all favorites of the growth and momentum crowd.
Earnings disappointments in these big, visible growth stocks provide an
early line on 1996. Last year the key question was interest rates; we knew
earnings were going to be okay. If rates could come down in 1995, stocks were
likely to go up. This year the issue is earnings, or more generally, the
strength of the economy.
The consensus is that the economy is slowing, that the direction of interest
rates remains lower, and that corporate earnings are likely to be up in the 5-8%
range. Growth is generally estimated to be 2-2.5% for 1996. This would lead to
stocks providing a total return of about 9-10%, or roughly in line with their
long-term historical average. This was our thinking as well, up until a few
weeks ago.
We now believe that the consensus estimates for economic growth and
corporate profits are too high. In the fourth quarter the GDP may have expanded
less than 1%, providing little momentum as we enter the new year. The continuing
budget stalemate in Washington means that government purchases are getting off
to a slow start, and companies are already beginning to issue profits warnings
due to weak government business. The powerful winter storms that swept the East
Coast in January disrupted business activity generally and retail sales in
particular. Finally, we are hearing from companies that business is at best
sluggish, and pricing power non-existent.
It looks now as if the economy may only expand at 1-1.5% this year, and that
corporate earnings could disappoint the optimists. In this kind of environment,
short-term interest rates are likely to move sharply lower and long-term rates
modestly lower. We think that short-term interest rates could be about 4% by
year end, with long rates between 5.25% and 5.75%. If we are wrong, we think it
will be because rates are even lower. Inflation should remain quite subdued.
With profits under pressure, the heavy lifting in the stock market will have
to come from interest rates. If the Federal Reserve is too cautious about
reducing rates, stocks could have a moderate correction if earnings fears begin
to become more widespread. In general, though, we think the
3
<PAGE>
environment for financial assets looks fine. We believe stocks will again
outperform bonds and cash.
The equity environment will also be affected by what promises to be a lively
election year. Despite the rancorous debate about budget policy, the direction
of Federal expenditures as a percentage of GDP is clear: lower. The government
is 25% of GDP and has a huge impact on the economy and markets. What goes on in
Washington matters. Perhaps the most interesting early development this election
year is the surprising strength of Steve Forbes in the Republican Presidential
field. His advocacy of a 17% flat tax to replace the current income tax system
is producing a healthy debate on how the government ought to satisfy its revenue
needs.
The Forbes flat tax is one of several dramatic alternatives to the tax code
currently floating around. Whatever its ultimate merits, it would be a major
positive to capital markets, since it exempts the returns from savings and
investment from taxation at the individual level (they would still be taxed at
the corporate level). This raises the after-tax return on investment and, other
things equal, would sharply boost investment and the stock market, while
lowering interest rates. If the Forbes message catches on, 1996 could be a
surprisingly strong year for the markets.
We made only a few changes in the portfolio in the past quarter. They are
listed elsewhere in this report. The fund remains tightly focused, holding only
about 40 stocks, considerably fewer than other funds our size. This permits us
to concentrate our research efforts. Right now our attention is directed to the
much-battered technology sector, which we believe is a developing value theme.
We increased our holdings in IBM a few weeks ago when the price dipped into the
80s, and we have initiated a position in NOKIA, a producer of cellular phones,
whose stock has plunged from over 70 to the mid 30s. We think the company now
represents solid value at around 10x earnings.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
February 5, 1996
DJIA 5407.59
4
<PAGE>
LEGG MASON VALUE TRUST, INC.
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
Biggest gainers for the 4th quarter 1995*
<C> <S> <C>
1. Digital Equipment Corporation +40.5%
2. Humana Inc. +36.0%
3. Zions Bancorporation +31.0%
4. Lloyds TSB Group plc +27.3%
5. Nike Incorporated +25.3%
6. Federal Home Loan Mortgage Corporation +20.8%
7. Federal National Mortgage Association +19.9%
8. Amgen Inc. +19.0%
9. Republic of Argentina Par Bonds
5.00% 3-31-23 +17.5%
10. Republic of Argentina Floating Rate
Bonds
6.8125% 3-31-05 +14.8%
</TABLE>
* SECURITIES HELD FOR THE ENTIRE QUARTER.
<TABLE>
<CAPTION>
Biggest laggers for the 4th quarter 1995*
<C> <S> <C>
1. Philips Electronics N.V. -26.4%
2. Reebok International Ltd. -17.8%
3. Apple Computer, Inc. -14.4%
4. MBNA Corporation -11.4%
5. The Bear Stearns Companies Inc. -7.6%
6. RJR Nabisco Holdings Corp.
Series C Depositary Shares -5.6%
7. Citicorp -4.9%
8. RJR Nabisco Holdings Corp. -4.6%
9. Chemical Banking Corporation -3.5%
10. Coltec Industries Inc. -3.1%
</TABLE>
PORTFOLIO CHANGES
Securities Added
Fleet Financial Group, Inc.
Grupo Financiero Bancomer S.A. de C.V. ADS
Nokia AB ADR
Securities Sold
Allstate Corporation
Grupo Financiero Serfin S.A. de C.V. ADR
Orion Capital Corporation
Salomon Inc.
Storage Technology Corporation
5
<PAGE>
PORTFOLIO OF INVESTMENTS
LEGG MASON VALUE TRUST, INC.
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS -- 90.9%
Automotive -- 5.5%
Chrysler Corporation 800 $ 44,300
General Motors Corporation 600 31,725
76,025
Banking -- 22.0%
Bank of Boston Corporation 850 39,312
BankAmerica Corporation 400 25,900
Chemical Banking Corporation 525 30,844
Citicorp 800 53,800
Fleet Financial Group, Inc. 669 27,268
Grupo Financiero Bancomer S.A. de
C.V. ADS 525 2,953
Lloyds TSB Group plc 7,151 36,761
Provident Bankshares Corporation 344 10,160
The Chase Manhattan Corporation 625 37,891
Zions Bancorporation 503 40,382
305,271
Broadcast Media -- 1.2%
Capital Cities/ABC, Inc. 130 16,039
Chemicals -- 1.5%
duPont (E.I.) de Nemours 300 20,962
Computer Services and Systems -- 6.2%
Apple Computer, Inc. 644 20,527
Digital Equipment Corporation 300 19,238A
International Business Machines
Corporation 500 45,875
85,640
Electrical Equipment -- 1.7%
Philips Electronics N.V. 650 23,319
Finance -- 15.7%
Federal Home Loan Mortgage
Corporation 500 41,750
Federal National Mortgage
Association 800 99,300
MBNA Corporation 1,258 46,385
The Bear Stearns Companies Inc. 1,500 29,813
217,248
Food, Beverage and Tobacco -- 6.1%
PepsiCo, Inc. 425 23,747
Philip Morris Companies Inc. 450 40,725
RJR Nabisco Holdings Corp. 670 20,686
85,158
Food Merchandising -- 3.2%
The Kroger Co. 1,200 $ 45,000A
Footwear -- 5.9%
Nike Incorporated 600 41,775
Reebok International Ltd. 1,405 39,686
81,461
Hospital Management -- 1.5%
Columbia/HCA Healthcare
Corporation 415 21,051
Insurance -- 4.1%
AMBAC Inc. 383 17,953
Humana Inc. 750 20,531A
MBIA, Inc. 255 19,125
57,609
Manufacturing -- 2.7%
Danaher Corporation 1,200 38,100
Multi-Industry -- 0.7%
Coltec Industries Inc. 825 9,591A
Pharmaceuticals -- 3.5%
Amgen Inc. 400 23,750A
Warner-Lambert Company 250 24,281
48,031
Retail Sales -- 0.6%
Sears, Roebuck and Co. 200 7,800
Savings and Loan -- 3.3%
Standard Federal Bancorporation 1,150 45,281
Telecommunications -- 5.5%
MCI Communications Corporation 700 18,287
Nokia AB ADR 450 17,494
Telefonos de Mexico S.A. ADR 1,283 40,880
76,661
Total Common Stocks and Equity
Interests
(Identified Cost -- $670,488) 1,260,247
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK -- 0.6%
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost -- $9,003) 1,385 8,829
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
SOVEREIGN OBLIGATIONS -- 4.1%
Republic of Argentina
Floating Rate Bonds
6.8125%B 3-31-05 $60,000 $ 42,712
Par Bonds
5.00%C 3-31-23 25,000 14,266
Total Sovereign Obligations
(Identified Cost -- $37,669) 56,978
U.S. GOVERNMENT OBLIGATION -- N.M.
United States Treasury Note
8.125% 2-15-98
(Identified Cost -- $228) 230 243
REPURCHASE AGREEMENT -- 4.4%
Morgan Stanley & Co. Incorporated
5.9% dated 12-29-95, to be
repurchased at $60,365 on
1-2-96 (Collateral: Federal
National Mortgage Association
Mortgage-backed securities,
$46,114 9% due 5-1-25 and
$12,740 6.5% due 9-1-24, value
$61,581)
(Identified Cost -- $60,325) 60,325 60,325
Total Investments -- 100.0%
(Identified Cost -- $777,713) 1,386,622
Other Assets Less Liabilities -- N.M. 416
NET ASSETS -- 100.0% $1,387,038
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $25.19
NAVIGATOR CLASS $25.21
</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 DECEMBER 31,
1995.
C COUPON INCREASES 0.25% ANNUALLY UNTIL MARCH 31, 1999, THEREAFTER
REMAINS FIXED AT 6.0% UNTIL MATURITY.
N.M. NOT MEANINGFUL
7
