Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
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, LLP
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
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111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
[Recycled Logo] Printed on Recycled Paper
LMF-002
Report to Shareholders
For the Quarter Ended
June 30, 1996
The
Legg Mason
Value
Trust,(R) Inc.
Primary Class
Putting Your Future First
[Legg Mason Funds Logo]
FUNDS
<PAGE>
To Our Shareholders,
In the three months ended June 30, 1996, the Value Trust's net asset value
per share rose from $26.99 to $27.34. The latter figure is after payment in May
of an ordinary income dividend of $0.065 per share, a short-term capital gain
distribution of $0.037 per share, and a long-term capital gain distribution of
$0.523 per share. Assuming reinvestment of the dividend and gain distributions,
the Trust's total return (appreciation in share value plus the dividend and gain
distributions) in the quarter was 3.6%, compared to total returns of 4.5% and
3.4% on Standard & Poor's 500 stock composite index and the Value Line index of
1,700 stocks. In the six months through June 30, the Trust's total return was
11.1%, compared to returns of 10.1% and 8.4% on the Standard & Poor's and Value
Line indices.
Beginning on page 3, Bill Miller, the Trust's portfolio manager, discusses
the Trust's holdings and the investment outlook.
Many 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
or Legg Mason accounts. Dollar cost averaging is a convenient and sensible way
to invest which encourages continued purchases during market downswings when the
best values are available. Of course, it does not ensure a profit nor protect
against declines in the value of your investment. 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 $0.042 per share,
payable on August 8, 1996 to shareholders of record on August 5. Most
shareholders will receive this distribution in the form of additional shares
credited to their accounts.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
July 31, 1996
<PAGE>
Performance Information
Legg Mason Value Trust, Inc.
Total Return for One, Five, Ten Years and Life of Fund, as of
June 30, 1996
The returns shown on this page 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, 1996 were as follows:
Cumulative Total Return
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Legg Mason Value Line S&P
Value Trust Index Stock Index
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Primary Class:
One Year +28.64% +16.85% +26.00%
Five Years +132.37 +73.97 +107.38
Ten Years +186.07 +92.68 +263.93
Life of Class(dagger) +907.67 +339.28 +843.10
Navigator Class:
One Year +30.00% +16.85% +26.00%
Life of Class(dagger)(dagger) +61.27 +34.32 +53.59
Average Annual Total Return
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Legg Mason Value Line S&P
Value Trust Index Stock Index
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Primary Class:
One Year +28.64% +16.85% +26.00%
Five Years +18.37 +11.71 +15.70
Ten Years +11.08 +6.78 +13.79
Life of Class(dagger) +17.66 +10.98 +17.11
Navigator Class:
One Year +30.00% +16.85% +26.00%
Life of Class(dagger)(dagger) +35.23 +20.49 +31.13
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(dagger) Primary Class inception -- April 16, 1982
(dagger)(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)
Legg Mason Value Trust, Inc.
[Graph appears here--plot point values follow]
Value of Original Shares
Value of Shares Purchased Plus Shares
Acquired Through Acquired Through
Reinvestment of Income Reinvestment of Capital Gain
04/16/82 10,000.00 10,000.00
03/31/83 16,400.97 16,160.00
03/31/84 19,425.44 18,870.50
03/31/85 24,682.58 23,582.98
03/31/86 34,509.73 32,555.48
03/31/87 37,924.30 35,503.58
03/31/88 34,729.33 32,267.83
03/31/89 41,109.15 37,650.23
03/31/90 44,289.55 39,890.82
03/31/91 43,013.79 37,701.34
03/31/92 51,413.83 44,210.32
03/31/93 59,003.27 50,183.93
03/31/94 62,337.34 52,789.39
03/31/95 68,426.55 57,816.96
03/31/96 97,226.16 82,355.78
06/30/96 100,766.76 85,466.45
2
<PAGE>
Portfolio Manager's Comments
Your fund rose 3.64% in the second quarter, bringing our six month increase
to 11.05%. The quarter's return slightly trailed the increase in the S&P 500,
which advanced 4.49%, and the average growth fund which rose 4.45%, as measured
by Lipper Analytical Services, Inc. Our year-to-date advance remains ahead of
both benchmarks.
The second quarter saw what may be the high water mark in speculation for
this cycle. Strong money flows into aggressive growth funds fueled the advance
of many small, speculative companies, whose valuations often reached
breathtaking levels. At the same time, interest rates continued to rise during
the quarter, and moved past 7% for the 30-year Treasury bond.
At the end of June, the results for bond and stock investors differed
dramatically. Those who bought long-term Treasuries at about 6% in January had
lost almost 10% of their money in six months, while equity investors were up by
about the same amount. The more venturesome small stock investors had average
returns in their mutual funds of over 15%. Bond and stock returns usually don't
diverge for very long. By the end of the second quarter the valuation gap
between stocks and bonds had widened such that we believed--and still
believe--that to be bullish on stocks you have to be bullish on bonds. In this
kind of environment, the best stocks should be those that look like bonds:
banks, insurance companies, credit card companies, thrifts. We are loaded with
these. Despite the fund's strong performance in the first half, our financial
stocks have turned in only a so-so performance. We think they are very
attractively valued and will perform well in the second half.
The current situation is roughly the opposite of that prevailing at the
beginning of the year when bonds yielded under 6%. Then stocks were attractively
priced relative to bonds. But the sharp divergence in their performance has
changed all that, and the market has already begun to exact its toll on overly
complacent or enthusiastic stock investors. In just the first few weeks of the
third quarter, a swift correction has engulfed the stock market. The major stock
indices are down more than 8%, while the frothier over the counter market is off
over 15% from highs reached just recently. On most days when the stock market
has declined, which at this writing is most of them since the 114 point drop on
July 5, the bond market has rallied. This has begun to redress the valuation
imbalance, but has not yet rectified it.
The correction was kicked off by a jobs report which indicated continuing
strong demand for labor at a time of already low unemployment. More disturbing
to the market, real wages grew at the fastest rate in thirty years, which
rekindled fears of higher inflation. Although bonds fell sharply the day of the
report , they have rallied steadily since, indicating that 7% yields have
already discounted some upward movement in inflation.
Whatever the portent of the employment report, its effect on economists and
investors was immediate. The economic seers raised their forecasts for second
quarter growth to 4% or more and also increased their estimates of third quarter
growth from an average of 2-2.5% to 3-3.5%. At its present size, the economy
will generate an extra $60 billion of output in the next 90 days, if those
forecasts can be believed. A strong consensus has also emerged that the Federal
Reserve Board will raise rates at its August meeting, if not before.
Labor cost inflation is more problematic than the commodity price increases
that led to inflation fears earlier this year. Labor costs make up about
two-thirds of the cost of production. The supply of labor is relatively fixed
and when demand for labor passes a point called the non-accelerating inflation
rate of unemployment (abbreviated as NAIRU), theory says that labor costs may
fuel higher inflation as companies bid for other companies' workers.
Stock investors may be hurt in at least two different ways if wage
inflation takes hold. First, since pricing power is minimal, wage increases
cannot easily be passed along to customers. This raises concerns about profit
margins (and profits) getting squeezed. Pressure on profits means pressure on
stock prices, other things equal. Second, the Fed is known to be especially
sensitive to wage inflation, since it is difficult to halt once started. They
are much more likely to aggressively raise interest rates at signs of wage
inflation than if only commodity prices are rising. Rising interest rates hurt
stocks directly at these relative valuation levels, and also increase the
chances of recession, another bad outcome if you own stocks (but not
high-quality bonds).
We do not believe the recent uptick in real wages signals the beginning of
a rise in core infla-
3
<PAGE>
tion. Real wages can (and should) rise when worker productivity rises.
In the first quarter, productivity shot ahead at more than a 4% rate, leading
to a fall in unit labor costs. It should be no surprise that after five years
of economic expansion, real wages would move upward with continued
productivity growth. It may be that rising wage growth is signalling continued
gains in productivity, not increased inflation. Whatever the cost pressures,
if monetary policy does not accommodate them through more rapid money growth,
then inflation will not be able to take hold. We think rising wage growth
heralds solid productivity growth, especially when one views it in the
context of the other factors of production.
Core producer price index (PPI) numbers show a twelve month rate of growth
of 1.6%, but a three and six month growth rate of only 1%. Total PPIgrowth has
been inflated by the commodity surge of a few months ago, which has now abated.
Reported PPIdata are beginning to move to the recent core rate of 1%. Consumer
prices have historically averaged about .5% above the core rate, so this
indicator is pointing toward inflation of under 2%. With commodity prices
falling, core PPIfalling, and most cyclical stocks--which are barometers of
economic strength--falling, there is little evidence of inflation pressure
outside the wage data. That makes it unlikely, in our view, that wage increases
alone will fuel higher inflation.
It is the prospect of wage inflation that sent stock investors into a
panic. In a classic turn of phrase, one rattled analyst, observing the selling
frenzy, said, "we are watching the lemmings fly out the window."
The change in investor psychology occasioned by a little selling is always
fascinating to behold. The major stock indices are off by 8%. In the past 30
years, half the days the market has been open it has been trading at 5% or more
from the peak. Over the past 95 years, there have been 54 corrections of 10% or
more, the most recent occurring intraday on July 16. For long-term investors,
sell-offs provide an opportunity. For speculators, they provide a lesson.
We think, though, that it will be tough for stocks to beat bonds in the
second half. Valuation and trend are in bonds' favor. With inflation running at
3%--or less--bond yields in the 7% range provide real returns well above
historical norms. The trend in many sensitive inflation indicators, such as
gold, oil, and industrial commodities prices, has been down from peaks reached a
few months ago. A more subtle feature of the favorable bond outlook is the trend
in the economy's growth rate. Even those economists who just raised their growth
rate for this quarter believe the second quarter will be the peak in economic
momentum. Bond prices tend to be coincident indicators of economic momentum.
Prices often rise as the economy slows, as happened in the second half of last
year, and fall when economic growth is accelerating, as in the first half of
this year.
We agree with the consensus (for a change) that economic growth will
decelerate in the second half of this year. If so, that would tend to underpin
bond prices. We disagree, though, that the Fed will be forced to raise rates in
August. On that point, we are agnostic, except to note that when the Fed voted
to hold policy steady at its last meeting on July 3, the vote was unanimous.
Inflation worries were then largely absent.
Since the stock market has so quickly swung from enthusiasm to despair, we
think if the Fed does not raise rates in August a nice rally may ensue. Perhaps
perversely, the worse the market acts from now to then may play a role in the
Fed's decision. At the July meeting, they noted that a market correction may
provide clues about the economy's prospects. The worse stocks act, the more the
Fed will think the economy is cooling off without the need for a rate hike.
We mention all this macroeconomic stuff not because we try to predict the
economy or the market. We don't. We do try to understand the economic forces
operating at any given time and what the valuation of various asset classes is
implying about the future.
Our stock selection, though, is one by one, valuation driven, and long-term
oriented. Quarterly transactions remain at a low level. We have reduced our Nike
position significantly. The company is terrific, we have big gains in it over
the past few years, but it is no longer a bargain at 25x earnings. This is now
one for the growth and momentum crowd.
We took a moderate position in MGM Grand, a company whose controlling
shareholder--Kirk Kerkorian--and management we have long admired. MGM is
embarked on a significant expan-
4
<PAGE>
sion both in Las Vegas and in Atlantic City. We think cash flow, earnings,
and the stock could double in the next five years, with minimal long-term risk.
A significant portion of our research time is being dedicated to
technology, a sector that has been through a spectacular decline in the past
nine months. Many stocks are down 60 or 70% from their peaks. Two of the group's
bellwethers, Motorola and Hewlett Packard, reported poor results and suffered
sharp falls in their stock prices a few weeks ago. The best companies are
usually the last to decline, and we think bargains have begun to appear in this
group.
The best bargain we already own is IBM, which we think is absurdly
underpriced in the low $90 range. IBM will probably also report weak results for
the just-ended quarter, but we are quite optimistic about its prospects. At 8x
earnings and 4x cash flow, not much has to go right for it to do quite well for
us.
We have also begun to build a position in Seagate Technology, the leading
producer of disk drives for computers. The disk drive industry, while fiercely
competitive, has consolidated from 55 manufacturers in 1989 to 12 at the end of
June to 11 today. Hewlett Packard announced they were dropping out of the
business when they announced their earnings. We think Seagate can earn $6.00 in
the next twelve months, and earn double that amount in four years. At under 7x
earnings, down over 25 points from its high, it looks like a bargain.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
July 31, 1996
DJIA 5528.91
Selected Portfolio Performance
Biggest gainers for the 2nd quarter 1996*
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1.Dell Computer Corporation +51.9%
2.Nike, Inc. +26.5%
3.Circus Circus Enterprises, Inc. +21.9%
4.Reebok International Ltd. +21.7%
5.Philip Morris Companies Inc. +18.5%
6.Danaher Corporation +17.6%
7.Coltec Industries Inc. +17.5%
8.PepsiCo, Inc. +11.9%
9.Republic of Argentina
Floating Rate Bonds
6.3125% 3-31-05 +8.3%
AMBAC Inc. +8.3%
* Securities held for the entire quarter.
Portfolio Changes
Securities Added
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MGM Grand, Inc.
Biggest laggers for the 2nd quarter 1996*
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1. Humana Inc. -28.9%
2. Digital Equipment Corporation -18.4%
3. MCI Communications
Corporation -15.3%
4. International Business Machines
Corporation -10.9%
5. Philips Electronics N.V. -10.3%
6. Standard Federal Bancorporation -9.4%
7. Columbia/HCA Healthcare
Corporation -7.6%
8. Amgen Inc. -7.1%
9. duPont (E.I.) de Nemours -4.7%
10. The Bear Stearns Companies Inc. -4.5%
Securities Sold
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Chemical Banking Corporation
The Walt Disney Company
5
<PAGE>
Portfolio of Investments
Legg Mason Value Trust, Inc.
June 30, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
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Common Stocks and Equity Interests -- 91.8%
Automotive -- 5.2%
Chrysler Corporation 800 $ 49,600
General Motors Corporation 600 31,425
81,025
Banking -- 21.6%
Bank of Boston Corporation 850 42,075
BankAmerica Corporation 400 30,300
Citicorp 800 66,100
Fleet Financial Group, Inc. 669 29,108
Lloyds TSB Group plc 7,623 37,295
Provident Bankshares Corporation 362 11,933
The Chase Manhattan Corporation 1,175 82,984
Zions Bancorporation 503 36,608
336,403
Chemicals -- 1.5%
duPont (E.I.) de Nemours 300 23,738
Computer Services and Systems-- 6.9%
Dell Computer Corporation 925 47,059(A)
Digital Equipment Corporation 135 6,075(A)
International Business Machines
Corporation 550 54,450
107,584
Electrical Equipment -- 1.4%
Philips Electronics N.V. 675 22,022
Entertainment -- 3.9%
Circus Circus Enterprises, Inc. 1,125 46,125(A)
MGM Grand, Inc. 370 14,754(A)
60,879
Finance -- 15.5%
Federal Home Loan Mortgage
Corporation 500 42,750
Federal National Mortgage
Association 3,200 107,200
MBNA Corporation 1,887 53,775
The Bear Stearns Companies Inc. 1,575 37,209
240,934
Food, Beverage and Tobacco-- 6.3%
PepsiCo, Inc. 850 30,069
Philip Morris Companies Inc. 450 46,800
RJR Nabisco Holdings Corp. 670 20,770
97,639
(Amounts in Thousands) Shares Value
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Food Merchandising -- 3.0%
The Kroger Co. 1,200 $ 47,400(A)
Footwear -- 6.0%
Nike, Inc. 485 49,834
Reebok International Ltd. 1,279 42,996
92,830
Health Care-- 2.3%
Columbia/HCA Healthcare
Corporation 415 22,140
Humana Inc. 750 13,406(A)
35,546
Insurance -- 2.6%
AMBAC Inc. 383 19,964
MBIA, Inc. 255 19,858
39,822
Manufacturing -- 3.3%
Danaher Corporation 1,200 52,200
Multi-Industry -- 0.9%
Coltec Industries Inc. 967 13,774(A)
Pharmaceuticals -- 3.0%
Amgen Inc. 400 21,600(A)
Warner-Lambert Company 450 24,750
46,350
Savings and Loan -- 3.0%
Standard Federal Bancorporation 1,200 46,200
Telecommunications -- 5.4%
MCI Communications Corporation 700 17,938
Nokia Corporation ADS 650 24,050
Telefonos de Mexico S.A. ADR 1,283 42,964
84,952
Total Common Stocks and Equity
Interests
(Identified Cost-- $716,357) 1,429,298
Preferred Equity Redemption Cumulative Stock -- 0.6%
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost-- $9,003) 1,385 9,003
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<PAGE>
Principal
(Amounts in Thousands) Amount Value
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Sovereign Obligations -- 3.9%
Republic of Argentina
Floating Rate Bonds
6.3125%(B) 3-31-05 $59,400 $ 46,406
Par Bonds
5.25%(C) 3-31-23 25,000 13,734
Total Sovereign Obligations
(Identified Cost-- $37,429) 60,140
U.S. Government Obligation -- N.M.
United States Treasury Note
8.125% 2-15-98
(Identified Cost-- $228) 230 237
Repurchase Agreement -- 4.2%
Prudential Securities, Inc.
5.48% dated 6-28-96, to be
repurchased at $65,781 on
7-1-96 (Collateral: Federal
National Mortgage Association
Mortgage-backed securities,
$26,882 6.5% due 4-1-09 and
$42,693 7.0% due 6-1-14,
value $67,685)
(Identified Cost-- $65,751) 65,751 65,751
Total Investments -- 100.5%
(Identified Cost -- $828,768) 1,564,429
Other Assets Less Liabilities -- (0.5%) (7,126)
Net assets-- 100.0% $1,557,303
Net asset value per share:
Primary Class $27.34
Navigator Class $27.44
(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,
1996.
(C) Coupon increases 0.25% annually until April 1, 1999, thereafter remains
fixed at 6.0% until maturity.
N.M. Not meaningful
7
