Investment Adviser
Legg Mason Fund Adviser, Inc. Report to Shareholders
Baltimore, MD For the Quarter Ended
December 31, 1996
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore
Charles F. Haugh The
Arnold L. Lehman Legg Mason
Dr. Jill E. McGovern Value
T. A. Rodgers Trust,(R) Inc.
Edward A. Taber, III Primary Class
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 o 539 o 0000
[recycled logo] Printed on Recycled Paper [Legg Mason Funds Logo]
LMF-002
1/97
<PAGE>
To Our Shareholders,
The quarter and year ended December 31, 1996 were very positive for Value
Trust shareholders.
In the quarter, the Trust's total return (share appreciation plus
reinvested dividends) was 14.5%, well ahead of the 6% and 8.3% returns on the
Value Line index of 1700 stocks and Standard & Poor's 500 stock composite index,
two widely followed stock market barometers. Net asset value per share rose from
$29.71 to $32.99. The latter figure is after payment in December of a long-term
capital gain distribution of $.90 per share, a short-term capital gain
distribution of $.07 per share, and an ordinary income dividend of $.023 per
share.
For all of 1996, the Trust's total return was 38.4%, comparing very
favorably to returns of 16.2% and 23% on the Value Line and Standard & Poor's
indices.
On a long-term basis, the Value Trust has produced attractive results for
shareholders in most years, averaging an 18.8% annual compounded return over the
14 l/2 years since it was founded in April of 1982:
Total Return Total Return
- --------------------------------------------------------------------------------
1982 +40.9% 1990 -17.0%
1983 +42.7% 1991 +34.7%
1984 +12.8% 1992 +11.4%
1985 +31.9% 1993 +11.3%
1986 +9.5% 1994 +1.4%
1987 -7.4% 1995 +40.8%
1988 +25.8% 1996 +38.4%
1989 +20.2%
Despite large and sustained recent gains, the stock market remains
cyclical, and periodic market declines--some severe--are likely to occur in the
future, as they have in the past. However, we continue to be optimistic that
investment in a diversified portfolio of well selected value stocks will 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 $.07 per
share short-term capital gain distribution mentioned above is included with
ordinary income dividends on your 1996 tax reporting statement.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
January 31, 1997
<PAGE>
Performance Information
Legg Mason Value Trust, Inc.
Total Return for One, Five, Ten Years and Life of Fund, as of
December 31, 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 December 31, 1996 were as follows:
Cumulative Total Return
- --------------------------------------------------------------------------------
Legg Mason Value Line S&P
Value Trust Index Stock Index
- --------------------------------------------------------------------------------
Primary Class:
One Year +38.43% +16.24% +22.96%
Five Years +144.95 +72.30 +103.05
Ten Years +283.71 +120.85 +314.95
Life of Class(dagger) +1,156.17 +354.48 +957.71
Navigator Class:
One Year +39.82% +16.24% +22.96%
Life of Class(dagger)(dagger) +101.97 +31.40 +60.16
Average Annual Total Return
- --------------------------------------------------------------------------------
Legg Mason Value Line S&P
Value Trust Index Stock Index
- --------------------------------------------------------------------------------
Primary Class:
One Year +38.43% +16.24% +22.96%
Five Years +19.62 +11.50 +15.22
Ten Years +14.39 +8.25 +15.29
Life of Class(dagger) +18.77 +10.84 +17.39
Navigator Class:
One Year +39.82% +16.24% +22.96%
Life of Class(dagger)(dagger) +40.03 +14.01 +28.70
- --------------------------------------------------------------------------------
(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)
[Graph appears here--see plot points 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 3/31/96 9/30/96 12/31/96
<S> <C> <C> <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 82,356 92,875 106,755
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 97,226 109,666 125,617
through reinvestment of
income dividends
</TABLE>
2
<PAGE>
Portfolio Manager's Comments
"What surprises can we expect in 1997?"
Jan Hopkins
CNN
Your fund had an excellent year in 1996. Our portfolio generated a return
of 38.43%, handily beating the major stock and mutual fund benchmarks.
Comparative data are as follows:
Value Growth S&P Dow
Trust Funds+ 500 Jones
- --------------------------------------------------------------------------------
3 months 14.54% 5.14% 8.33% 10.22%
1 year 38.43% 19.24% 22.96% 28.91%
Our results were driven by our large, long-standing position in financial
stocks, exceptional returns from our technology holdings, and the lack of any
disasters in the portfolio. If you can avoid big losers, your investment returns
are usually going to be satisfactory. To have a year like we had in 1996, you
also need a lot of luck. The market went from panic to exuberance in technology
during the year, and we benefitted from both emotional extremes.
Dell Computer, which we bought in February at about $14 is now trading
above $60. Seagate Technology has doubled in the past 6 months. IBM, which we
added to both last January and again in the summer sell-off, is up almost 100%
in the past year. Our financials were led by MBNA, Chase, Citicorp, BankAmerica,
Bank of Boston, and Zions, which rose on average over 60%.
Over the past two years, the Value Trust is up over 94% in what has been an
exceptional, and unlikely to be repeated, period for stocks. We started the fund
in early 1982 just before this long bull market began. Along the way there have
been the inevitable panics, corrections, and a recession-induced bear market in
1990. Our strategy has been consistent: to look for quality companies with
excellent management selling at bargain price.
After almost 15 years during which the S&P 500 has averaged 17.39% per year
(our return is over 100 basis points better, with 100 basis points = 1%), the
obvious bargains are rare and the benefits of low inflation, steady growth, and
high
+As measured by Lipper Analytical Services, Inc.
corporate profitability have been well reflected in today's level of stock
prices.
The S&P 500 sells at about 17x 1997 estimated earnings, a level we regard
as fair in an extended expansion that has seen earnings grow almost 20% per year
on average. Although bargains are hard to come by, we believe our portfolio
offers good value and should provide acceptable returns going forward.
Despite their strong performance last year, banks, for example, still offer
solid investment opportunities, in our opinion. They have earnings growth rates
faster than the market, dividend yields higher than the market, dividend growth
rates greater than the market, they are generating excess capital and are using
that capital to enhance shareholder value by repurchasing their shares. Their
balance sheets are the healthiest they have ever been, returns on equity are
well above the market's average ROE, and asset quality is excellent. Yet they
still trade at 40% discounts to the market. We believe banks in general are
about 25% undervalued.
We are often asked what we think of the market, the question recently
seeming to take on greater urgency with the strong returns of the past few
years. Many people appear to have firm opinions about what is in store for 1997,
a position we find surprising since no one is vouchsafed privileged access to
what the future holds. There appears to be general agreement that stock prices
are elevated, with even Fed Chairman Alan Greenspan wondering whether
"irrational exuberance" may be affecting asset prices.
The price level of any freely functioning market or of any stock is the
price at which buyers and sellers are evenly balanced. At any level of stock
prices, you will find bulls and bears, though the decibel count may differ
according to the emotional state of the protagonists.
The short-term direction of stock prices is unknowable, a "random walk" as
the professors like to say, but the long-term direction is clear: higher. People
always seem surprised when the stock market is at an all time high and they
often fear a correction or worse. But GDP is at an all time high, corporate
profits are at an all time high, inflation has never been lower in the 6th year
of an expansion, monetary policy is stable,
3
<PAGE>
the deficit continues to decline and is the smallest relative to our economy of
any industrial nation. The surprise would be if the market was not at an all
time high.
We will not rehash the arguments of the bears, except to note that this
year the most commonly cited reasons for pessimism are based on numerology:
years ending in 7 have historically been bad years, and years that are prime
numbers have been really bad (such as 1907, 1929, 1937, and 1987). Moreover,
after two great years in a row, the market usually suffers, having fallen
two-thirds of the time after cumulative gains of 60% or more.
Those who are often bearish seem to us to suffer from simultanagnosia, a
disorder in which one can pick out parts and features of some situation, but
where one is unable to organize them into a coherent or meaningful whole. The
long range picture does not provide much support to the pessimists.
Since 1870, real (i.e., after inflation) returns in the stock market have
averaged 6.6% per year. Over the past 70 years, real returns have been over 7%
per year, and since 1982 they have been over 12% per year. We are six years into
an expansion that shows no signs of ending, but in which profits growth is
decelerating.
Corporate profits growth was 15% in 1995, over 10% last year, and should be
between 5-10% this year. Over long periods of time, stock prices track profits
growth adjusted for changes in the price earnings multiple. The P/E multiple is
driven by interest rates, which in turn are a function of inflation.
The disinflationary trend of the past 15 years is well recognized. Core CPI
inflation was 2.6% last year and should be about the same this year. It is
unlikely we are due for much more multiple expansion unless interest rates fall
from current levels.
This means the central tendency of stock prices in 1997 should be
moderately (5-10%) higher, with perhaps above average volatility as the bulls
and bears square off over the next economic number or the next news item on the
tape. If the Fed bumps interest rates higher to constrain inflation, we are
likely to see a moderately strong sell-off, or if long rates rise much above
present levels the market is also likely to come under some pressure.
The overall picture seems to be that it makes sense to have diminished
expectations relative both to the absolute and comparative returns recently
achieved. We remain confident, though, that we will continue to generate
acceptable returns and we are committed to working diligently on your behalf.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
January 31, 1997
DJIA 6813.09
4
<PAGE>
Legg Mason Value Trust, Inc.
Selected Portfolio Performance
Biggest gainers for the 4th quarter 1996*
- --------------------------------------------------------------------------------
1. Seagate Technology, Inc. +41.4%
2. Dell Computer Corporation +36.7%
3. RJR Nabisco Holdings Corp. +30.8%
4. Nokia Corporation ADS +30.2%
5. MCI Communications Corporation +27.6%
6. RJR Nabisco Holdings Corp. Series C +25.6%
7. Phillip Morris Companies, Inc. +25.5%
8. Lloyds TSB Group plc +24.8%
9. Standard Federal Bancorporation +24.3%
10. BankAmerica Corporation +21.5%
* Securities held for the entire quarter.
Biggest laggers for the 4th quarter 1996*
- --------------------------------------------------------------------------------
1. MGM Grand, Inc. -17.5%
2. Amgen Inc. -13.9%
3. Humana Inc. -5.6%
4. Circus Circus Enterprises, Inc. -2.8%
5. U.S. Treasury Note 8.125% 2-15-98 -0.2%
6. Telefonos de Mexico S.A. ADR +2.7%
7. PepsiCo, Inc. +3.5%
8. The Kroger Co. +3.9%
9. Republic of Argentina
Floating Rate Bond 6.625% 3-31-05 +3.9%
10. Federal National Mortgage Association +6.8%
Portfolio Changes
Securities Added
- --------------------------------------------------------------------------------
America Online, Inc.
Foundation Health Corporation
Securities Sold
- --------------------------------------------------------------------------------
Nike, Inc.
5
<PAGE>
Portfolio of Investments
Legg Mason Value Trust, Inc.
December 31, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
- --------------------------------------------------------------------------------
Common Stocks and Equity Interests -- 91.0%
Automotive -- 5.5%
Chrysler Corporation 1,600 $ 52,800
General Motors Corporation 1,050 58,537
- --------------------------------------------------------------------------------
111,337
- --------------------------------------------------------------------------------
Banking -- 20.7%
Bank of Boston Corporation 850 54,612
BankAmerica Corporation 400 39,900
Citicorp 800 82,400
Fleet Financial Group, Inc. 669 33,374
Lloyds TSB Group plc 7,716 56,971
Provident Bankshares Corporation 362 14,103
The Chase Manhattan Corporation 1,175 104,869
Zions Bancorporation 351 36,473
- --------------------------------------------------------------------------------
422,702
- --------------------------------------------------------------------------------
Computer Services and Systems -- 14.6%
America Online, Inc. 1,000 33,250(A)
Dell Computer Corporation 1,850 98,281(A)
International Business Machines
Corporation 650 98,150
Seagate Technology, Inc. 1,750 69,125(A)
- --------------------------------------------------------------------------------
298,806
- --------------------------------------------------------------------------------
Electrical Equipment -- 1.7%
Philips Electronics N.V. 850 34,000
- --------------------------------------------------------------------------------
Entertainment -- 5.0%
Circus Circus Enterprises, Inc. 2,400 82,500(A)
MGM Grand, Inc. 550 19,181(A)
- --------------------------------------------------------------------------------
101,681
- --------------------------------------------------------------------------------
Finance -- 14.5%
Federal Home Loan Mortgage
Corporation 500 55,063
Federal National Mortgage
Association 3,200 119,200
MBNA Corporation 1,887 78,304
The Bear Stearns Companies Inc. 1,575 43,903
- --------------------------------------------------------------------------------
296,470
- --------------------------------------------------------------------------------
Food, Beverage and Tobacco-- 5.5%
PepsiCo, Inc. 850 24,863
Philip Morris Companies Inc. 475 53,497
RJR Nabisco Holdings Corp. 988 33,595
- --------------------------------------------------------------------------------
111,955
(Amounts in Thousands) Shares Value
- --------------------------------------------------------------------------------
Food Merchandising -- 2.7%
The Kroger Co. 1,200 $ 55,800(A)
- --------------------------------------------------------------------------------
Footwear -- 1.1%
Reebok International Ltd. 527 22,117
- --------------------------------------------------------------------------------
Health Care-- 1.3%
Foundation Health Corporation 601 19,069(A)
Humana Inc. 359 6,858(A)
- --------------------------------------------------------------------------------
25,927
- --------------------------------------------------------------------------------
Hospital Management-- 1.2%
Columbia/HCA Healthcare
Corporation 622 25,355
- --------------------------------------------------------------------------------
Insurance -- 2.5%
AMBAC Inc. 383 25,421
MBIA, Inc. 255 25,819
- --------------------------------------------------------------------------------
51,240
- --------------------------------------------------------------------------------
Manufacturing -- 2.7%
Danaher Corporation 1,200 55,950
- --------------------------------------------------------------------------------
Multi-Industry -- 0.9%
Coltec Industries Inc. 967 18,245(A)
- --------------------------------------------------------------------------------
Pharmaceuticals -- 2.6%
Amgen Inc. 400 21,750(A)
Warner-Lambert Company 425 31,875
- --------------------------------------------------------------------------------
53,625
- --------------------------------------------------------------------------------
Savings and Loan -- 3.1%
Standard Federal Bancorporation 1,100 62,563
- --------------------------------------------------------------------------------
Telecommunications -- 5.4%
MCI Communications Corporation 800 26,150
Nokia Corporation ADS 700 40,338
Telefonos de Mexico S.A. ADR 1,325 43,725
- --------------------------------------------------------------------------------
110,213
- --------------------------------------------------------------------------------
Total Common Stocks and Equity
Interests
(Identified Cost-- $836,464) 1,857,986
- --------------------------------------------------------------------------------
Preferred Shares -- 0.5%
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost-- $9,003) 1,385 9,349
- --------------------------------------------------------------------------------
6
<PAGE>
Principal
(Amounts in Thousands) Amount Value
- --------------------------------------------------------------------------------
Sovereign Obligations -- 3.3%
Republic of Argentina
Floating Rate Bonds
6.625%(B) 3-31-05 $ 58,806 $ 51,271
Par Bonds
5.250%(C) 3-31-23 25,000 15,938
- --------------------------------------------------------------------------------
Total Sovereign Obligations
(Identified Cost-- $37,191) 67,209
- --------------------------------------------------------------------------------
U.S. Government Obligation -- N.M.
United States Treasury Note
8.125% 2-15-98
(Identified Cost-- $228) 230 236
- --------------------------------------------------------------------------------
Repurchase Agreement -- 5.2%
Prudential Securities, Inc.
7.15% dated 12-31-96, to be
repurchased at $107,015 on
1-2-97 (Collateral: $119,639
Federal Home Loan Mortgage
Corp. Mortgage-backed securities,
7%-8% due 12-1-10 to 12-1-25,
value $98,071, and $12,769
Federal National Mortgage
Association Mortgage-backed
securities 6% due 7-1-24,
value $11,289) 106,973 106,973
- --------------------------------------------------------------------------------
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(Identified Cost -- $989,860) $2,041,753
Other Assets Less Liabilities -- N.M. (425)
- --------------------------------------------------------------------------------
Net assets-- 100.0% $2,041,328
- --------------------------------------------------------------------------------
Net asset value per share:
Primary Class $32.99
- --------------------------------------------------------------------------------
Navigator Class $33.08
- --------------------------------------------------------------------------------
(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
31,1996.
(C) Coupon increases 0.25% annually until April 1, 1999, thereafter remains
fixed at 6.0% until maturity.
N.M. Not meaningful
7
