Investment Adviser
Legg Mason Fund Adviser, Inc. Annual Report
Baltimore, MD March 31, 1997
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore
Charles F. Haugh Legg Mason
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
Transfer and Shareholder Servicing Agent
Boston Financial Data Services Value Trust, Inc.
Boston, MA
Special Investment
Custodian Trust, Inc.
State Street Bank & Trust Company
Boston, MA Total Return Trust, Inc.
Counsel
Kirkpatrick & Lockhart LLP Putting Your Future First
Washington, DC
Independent Accountants
Coopers & Lybrand L.L.P. [Legg Mason Logo]
Baltimore, MD FUNDS
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
5/97
<PAGE>
To Our Shareholders,
We are pleased to provide you with combined annual reports for the Legg Mason
Value Trust, Special Investment Trust and Total Return Trust for their fiscal
years ended March 31, 1997. If you own more than one of these Funds, this
combined report will eliminate extra mailings to your home. If you own only one
of these Funds, you may be interested in reviewing information on the other
Funds.
The following table summarizes key statistics for the Primary Class of shares
of each Trust, as of March 31, 1997:
3 Month 12 Month
Total Return* Total Return*
------------- -------------
Value Trust 3.4% 33.6%
Special Investment Trust -4.6% 11.6%
Total Return Trust 2.0% 24.3%
S&P 500 Composite Index 2.7% 19.8%
Value Line Index of 1700 stocks -.6% 10.1%
Russell 2000 Index -5.2% 5.1%
As the table indicates, the Value Trust and Total Return Trust outperformed
both the Standard and Poor's and Value Line indexes by impressive margins during
the twelve months ended March 31. The Special Investment Trust, which invests
principally in securities of small and mid-sized companies underperformed the
Standard and Poor's Index (which consists of the securities of 500 of America's
largest companies), but surpassed the broader based Value Line Index of 1700
stocks and the Russell 2000 Index of 2,000 small and medium sized companies.
Long-term investment results for each of the Funds are shown in the
"Performance Information" section of this report. We are particularly pleased
that the Value Trust, our original equity fund, has earned an annual compounded
return for shareholders of 18.7% over its fifteen year history.
On the following pages, Bill Miller, the portfolio manager for Value Trust
and Special Investment Trust and Nancy Dennin, the portfolio manager for Total
Return Trust, discuss the investment outlook for the Funds. We are pleased to
report that Nancy, who has served as a co-portfolio manager of Total Return
Trust for the past 6 years, recently became Total Return Trust's portfolio
manager. In this role, she will have primary authority for portfolio management
decisions, continuing to work closely with Bill Miller and her colleagues at
Legg Mason Fund Adviser, Inc., the Legg Mason investment advisory subsidiary
responsible for management of the Funds.
Coopers and Lybrand L.L.P., independent accountants for all of these Funds,
have completed their annual examination, and audited financial statements for
the fiscal year ended March 31, 1997 are included in this report.
Sincerely,
/s/ John F. Curley, Jr.
__________________________
John F. Curley, Jr.
President
May 9, 1997
- --------------------------------------------------------------------------------
*Total return measures investment performance in terms of appreciation or
depreciation in net asset value per share plus dividends and any capital gain
distributions. It assumes that dividends and distributions were reinvested at
the time they were paid.
1
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Portfolio Managers' Comments
The end of the first calendar quarter of 1997 is the end of the fiscal year
for our Funds. SEC regulations require that investment advisors discuss market
conditions and strategies that materially affected a fund's results during its
fiscal year. The format of this letter, a departure from our usual random,
digressive style, is designed to facilitate covering the topics required by the
regulators.
Review of Fiscal Year 1997 Market Conditions
Large capitalization stocks performed strongly in the year ending March 31,
1997, returning 19.83% as measured by the S&P 500. Broader measures of stock
performance did not fare as well. The Value Line index, which includes both
large and small companies, rose 10.12% during that period. The Russell 2000
index, which covers mostly smaller companies, rose only 5.11%. It does not
require an advanced degree in logic to surmise that investors whose portfolios
were concentrated in large company securities fared far better than those whose
investments were primarily in small and mid-sized equities.
The disparity in small stock performance was particularly acute in the first
calendar quarter (our last fiscal quarter) of 1997. The Russell 2000 index was
down 5.17% in that period, while the S&P 500 rose 2.68%.
The Russell 2000 peaked in January at 370, and has since fallen about 10%.
Concerns about earnings, about the appropriate level of valuation, and about
Federal Reserve policy, have combined to keep pressure on this sector of the
market.
The S&P 500 reached an interim high on February 18 at 816. As in 1996, the
S&P performed strongly in the first 6 weeks of calendar 1997, rising about 8.5%.
On March 25, the Federal Reserve Board raised short-term interest rates 25 basis
points (100 basis points = 1%). Since that time, the market has generally had a
downward bias as investors readjust portfolios in response to present or
anticipated levels of interest rates, earnings, and inflation.
Strategies Affecting Fiscal Year '97 Results
General:
The Value Trust, Special Investment Trust, and Total Return Trust follow a
value investing style. Value investors attempt to evaluate the intrinsic worth
of a company and purchase securities in that company at prices representing a
substantial discount to calculated value. Estimates of business value are
subject to substantial uncertainty arising from, but not limited to, the
availability of accurate information, economic growth and change, changes in
competitive conditions, technological change, changes in government policy or
geo-political dynamics, and so forth. We attempt to minimize the potentially
unfavorable consequences of errors in the estimation of business value by
building in a margin of safety between our estimates and the price we are
willing to pay for a security.
A variety of quantitative methods and qualitative assessments are used to
estimate business value. These include, but again are not limited to,
traditional valuation measures such as price earnings ratios, price to book
value and price to cash flow ratios, both prospective and historic. Comparative
valuation work is extensive, and includes historic, prospective, and
scenario-based methods, as well as volatility analyses. Theoretical valuation
frameworks are also employed. Discounted cash flow and free cash flow analyses
are extensively employed, as are private market and liquidation value analyses.
Qualitative assessment of business prospects involves studying companies'
products, competitive positioning, strategy, industry economics and dynamics,
regulatory frameworks, and more. We pay particularly close attention to
corporate capital allocation policies and the returns resulting therefrom. We
believe a management's commitment to shareholder value is often best
demonstrated by how they allocate capital.
2
<PAGE>
The Funds' management also devotes considerable time to the study of
important academic work in financial theory and in experimental economics. We
have found recent work in behavioral finance and complex adaptive systems to be
particularly important in assessing and understanding markets, investor
behavior, and competitive strategy.
Value Trust:
The Value Trust has followed a consistent investment strategy for many years.
It is characterized by careful attention to value, a focused portfolio, and low
turnover. The Fund had an excellent year, significantly outperforming all
relevant indices of both the market and comparable mutual funds. In 1996, the
Fund's management believed that attractive values were appearing in technology
stocks, an area where valuation work is often complicated and difficult. The
Fund purchased large positions in a variety of technology companies such as Dell
Computer, Seagate Technology, and Western Digital when such shares were under
severe pressure due to concerns about earnings' prospects. The Fund also added
to other technology holdings such as IBM during similar periods in the year.
When those concerns did not materialize, the shares of those companies rose
sharply, adding materially to the Fund's returns. We also benefited from our
long standing position in banks and financial services companies, which
performed strongly in the past twelve months. Our returns were also enhanced by
mostly avoiding stocks whose shares suffered heavy losses. We believe our focus
on having a margin of safety in the purchase price contributed to the relative
lack of poor performers in the portfolio.
Special Investment Trust:
The Special Investment Trust follows the same investment strategy as the
Value Trust, but mostly operates in a different market segment: small and
mid-sized companies and special situations. The Fund performed well in the 12
months ended March 31, 1997, outperforming the Russell 2000 index, as well as
the average fund that invests in small and mid-sized companies.
The Fund's results were benefited by many of the same factors described above
in the Value Trust section: a timely commitment to depressed and controversial
technology stocks and solid performance from financials. We also benefited from
takeover activity, as several of our holdings were acquired at prices in excess
of prevailing market value. While not predictable as to timing, takeovers have
often contributed to returns. Takeover value (private market value) is an
important aspect of the Fund's over-all analytic efforts.
Total Return Trust:
The Total Return Trust follows a similar investment strategy as the Value
Trust and the Special Investment Trust, while focusing on securities with above
market yields. The Fund had an excellent year in fiscal 1997, significantly
outperforming all relevant indices of both the market and comparable mutual
funds. The Fund's results over the last twelve months benefited from our long
standing position in banks and financial services companies. Two of the Fund's
thrift holdings, Great Western Financial and Standard Federal Bank, announced
agreements to be acquired at significant premiums to where they were trading at
the beginning of the twelve month period, with Great Western up 67%, and
Standard Federal up 39%.
In addition to focusing on securities with above market yields, our objective
is to have the Fund's results be less volatile than those of the overall market.
Our returns over the last twelve months were enhanced mostly by avoiding stocks
whose shares suffered heavy losses. We believe our focus on having a margin of
safety in the purchase price contributed to the relative lack of poor performers
in the portfolio.
3
<PAGE>
Portfolio Managers' Comments--Continued
Given our outlook for market returns going forward, as described elsewhere in
this report, we believe securities with relatively high, secure dividends will
do quite well. For example, the real estate investment trusts (REITs) held in
the portfolio have an average current yield of 7.3%, and are expected to grow
their dividends 4-6% over the next twelve months, implying total returns in the
11-13% range.
Market Outlook: Near Term
As usual, we are agnostic about the market's near term direction. A variety
of valuation tools suggest that stock prices in the aggregate approximate fair
value, a view with which we concur. Prices should tend in the direction of
market participants' shifting views about interest rates and earnings prospects.
At this writing, the correlation between stock and bond prices during the past
month has been over 90%, indicating that investors are overwhelmingly focused on
Federal Reserve policy and 30-year bond prices. Market direction is being
dictated by the direction of interest rates. This is a departure from what
prevailed in most of the past year or so. Bond yields have risen and bond prices
have fallen since the beginning of 1996, while stocks are up sharply over the
same period. We think that this divergence is over and that stocks and bonds
will move more synchronously over the balance of the year. If they do diverge,
we believe it will be to the benefit of bonds over stocks, since the most likely
cause of divergence would be poorer earnings prospects as the economy slows.
We believe that calendar 1997 will be characterized by moderate economic
growth and subdued inflation. Corporate profits growth could be in the 8-10%
area. Subject to the interest rate concerns noted above, we think the
probabilities favor a moderate stock market advance, albeit with perhaps more
volatility than has been common over the past few years.
Market Outlook: Long Term--The Era of Extraordinary Returns is Over; "Return to
Normalcy"
In the 1920 Presidential election, Senator Warren G. Harding, a former Ohio
newspaper editor, promised a return to normalcy. The country had experienced
both the activism of Teddy Roosevelt and the idealism of Woodrow Wilson. He
thought neither extreme suited the post-war mood. According to one source,
"Voters responded to his genial nature, impressive stature, and bland message;
he won in a landslide."
We think that after the inflation driven extremes in hard asset returns in
the 1970's, and the abnormally high returns in bonds from 1981-1993 and in
stocks from 1982-1996, a return to normalcy is in store for investors across a
variety of asset classes. For much of the past 20 years, returns far higher than
historic norms could be achieved by following investment strategies simple
enough to fit on a bumper sticker: e.g. in the 70's buy oil, buy gold; in the
80's, buy bonds; in the 90's, buy stocks. Oil, gold, and bonds are mostly
undifferentiated assets, one is pretty much like another. With stocks, the
question of which one (or ones) to buy was likewise easy. For most of the past
15 years, no work was required: if you bought an index fund you earned far
higher returns than historic norms, and you beat almost all the stock investors
who bothered to actually do the work and understand what they own. The past 15
years have seen the highest returns of any 15 year period in stock market
history.
From the bond market bottom on October 26, 1981 until the top on October 15,
1993, investors in government bonds earned average annual returns of 16.2% per
year! This compares to returns of 5.1% per year from 1926 through 1996.
Excluding the extraordinary return of the past 15 years, the long-term return of
bonds averaged just 3.2% per year from 1926 through 1981. Today's bond yields of
over 7% are thus quite high by historical standards. (But not as high as they
look; read on.)
During the same period (Oct. 1981-Oct. 1993) the S&P 500 rose 16.54% per
year, just about the same as bonds. But 1926-1996 returns in stocks were more
than double those of bonds, averaging 10.7% per year.
4
<PAGE>
Since the bond market peak in late 1993, stocks have far outperformed bonds,
rising in 1994, 1995, and 1996, while bonds declined in both 1994 and 1996.
Bonds are down again this year, while the S&P 500 is up modestly.
One problem in assessing long-term rate of return data is what physicists
call sensitive dependence on initial conditions. It matters to the measurement
where the measurement begins. Returns measured from lows to highs give one
perspective, those measured on a calendar basis another. Economist Peter
Bernstein has attempted to adjust for this phenomenon in a new study of stock
and bond returns. He found that stock returns have averaged 9.6% per year
(including dividends) across wide historical periods. Inflation has averaged
3.9%, meaning the real return on stocks has been 5.7% per year. This is
moderately lower than the 10.7% return noted above.
With bonds, the sensitivity to the starting point was more acute. Actual
returns were about 6%, higher than the 1926-1996 average of 5.1%.
From this data, we can make some reasonable judgments about future rates of
return in stocks. With dividend yields of only 2%, stock prices will have to
rise 7.6% per year to equal the long-term average. If valuations remain the same
at about 17x earnings, earnings growth will have to average 7.6% per year. Over
the past 40 years earnings have grown at just under 6%. In the past ten years,
earnings growth has averaged almost 9%. Most analysts' forecasts peg the next 5
years earnings growth rate at about 7%.
Reasonable expectations for stock returns would thus seem to be in the 9-10%
range ( 2% yields with 7 or 8% earnings growth) or about the long-term historic
norm. This is far below the returns of the past 15 years.
We think that the period of extraordinary returns in bonds ended in October
1993, when yields fell well under 6%. Today's 7% coupons are good, but they are
a long way from the 16% annual rates earned when yields peaked and prices
bottomed in 1981.
We believe that the period of extraordinary stock returns that began in 1982
ended in 1996. Valuations are too high and future growth rates too low for
stocks to average more than 9 or 10% per year. Although earnings growth is still
solid, pricing power is non-existent, unemployment is low, and wage pressures
are building. Corporate profit margins are high by historical standards,
suggesting that competitive pressures may result in weakening margins and
reduced profits when the economy slows from its present 4% pace. We think that,
absent some deus ex machina, 9-10% long-term returns are the best that can
reasonably be expected. Sensible investors will be prepared for periods, perhaps
extended, where returns are well below those levels, or even negative.
A return to normalcy in stocks, like Harding's message in 1920, may seem
rather bland compared to the excitement of the past few years. We believe
though, that such returns will still exceed those of bonds and cash, and that
equity investors will continue to be rewarded for their commitment to that asset
class.
Bill Miller, CFA
Nancy T. Dennin, CFA
May 9, 1997
DJIA 7169.53
5
<PAGE>
Performance Information
Total Return for One, Five, Ten Years and Life of Funds, as of March 31, 1997
The returns shown on these pages, are based on historical results and
are not intended to indicate future performance. The investment return and
principal value of an investment in any of these Funds 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 a fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
Total returns as of March 31, 1997 for the Value Line Geometric Average
("Value Line") and S&P 500 Stock Indices are shown in the table below
(individual fund performance is shown with its respective graph).
Each 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.
Average annual total returns as of March 31, 1997 were as follows:
<TABLE>
<CAPTION>
Value Special Investment Total Return Value Line S&P 500 Stock
Trust Trust Trust Index Index
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Average Annual Total Return
Primary Class:
One Year +33.59% +11.58% +24.33% +10.12% +19.83%
Five Years +20.36 +12.47 +15.99 +10.46 +16.41
Ten Years +13.10 +11.80 +10.75 +6.26 +13.36
Life of Class--Value Trust(A) +18.70 +10.60 +17.34
Life of Class--Special Investment(B) +13.07 +8.03 +15.42
Life of Class--Total Return(C) +11.08 +8.14 +15.88
Navigator Class:
One Year +34.97 +12.81 +25.67 +10.12 +19.83
Life of Class(D) +109.42 +20.16 +25.50 +16.61 +26.70
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Inception of Value Trust--April 16, 1982.
(B) Inception of Special Investment Trust--December 30, 1985.
(C) Inception of Total Return Trust--November 21, 1985.
(D) Commencement of sale of Navigator Shares for each fund--December 1, 1994.
Performance Comparison of a $10,000 Investment as of March 31, 1997
The following graphs compare each Fund's total returns to the Value
Line and S&P 500 Stock Indices. The graphs illustrate the cumulative total
return of an initial $10,000 investment for the periods indicated. The
line for each Legg Mason Fund represents the total return after deducting
all Fund investment management and other administrative expenses and the
transaction costs of buying and selling portfolio securities. The line
representing each securities market index does not include any transaction
costs associated with buying and selling securities in the index or other
administrative expenses. Both the Legg Mason Funds' results and the
indices' results assume reinvestment of all dividends and distributions.
6
<PAGE>
Value Trust--Primary Class
Cumulative Average Annual
Total Return Total Return
One Year +33.59% +33.59%
Five Years +152.62 +20.36
Ten Years +242.48 +13.10
Life of Class (dagger) +1,198.81 +18.70
(dagger) Primary Class inception--April 16, 1982
[Graph appears here--see plot points below]
Standard &
Years ended Poor's 500 Value Trust Value
March 31, Stock Index(1) Primary Class Line(2)
1987 10,000 10,000 10,000
1988 8,757 9,158 9,167
1989 9,694 10,840 10,830
1990 9,924 11,678 12,917
1991 9,955 11,342 14,779
1992 11,160 13,557 16,410
1993 12,512 15,558 18,909
1994 13,083 16,437 19,187
1995 13,753 18,043 22,174
1996 16,667 25,637 29,249
1997 35,037 34,248 18,353
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
Special Investment Trust--Primary Class
Cumulative Average Annual
Total Return Total Return
One Year +11.58% +11.58%
Five Years +79.97 +12.47
Ten Years +204.97 +11.80
Life of Class(dagger) +298.71 +13.07
(dagger) Primary Class inception -- December 30, 1985
[Graph appears here--see plot points below]
Standard & Special
Years ended Poor's 500 Investment Trust Value
March 31, Stock Index(1) Primary Class Line(2)
1987 10,000 10,000 10,000
1988 9,167 8,582 8,757
1989 10,830 10,040 9,694
1990 12,917 11,583 9,924
1991 14,779 14,068 9,955
1992 16,410 16,946 11,160
1993 18,909 18,726 12,512
1994 19,187 22,724 13,083
1995 22,174 21,276 13,753
1996 29,249 27,333 16,667
1997 35,037 30,497 18,353
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
7
<PAGE>
Performance Information--Continued
Total Return Trust--Primary Class
Cumulative Average Annual
Total Return Total Return
One Year +24.33% +24.33%
Five Years +109.95 +15.99
Ten Years +177.62 +10.75
Life of Class (dagger) +229.92 +11.08
(dagger) Primary Class inception -- November 21, 1985
[Graph appears here--see plot points below]
Standard & Total
Years ended Poor's 500 Return Trust Value
March 31, Stock Index(1) Primary Class Line(2)
1987 10,000 10,000 10,000
1988 9,167 8,983 8,757
1989 10,830 10,345 9,694
1990 12,917 10,705 9,924
1991 14,779 10,700 9,955
1992 16,410 13,225 11,160
1993 18,909 15,855 12,512
1994 19,187 16,580 13,083
1995 22,174 16,762 13,753
1996 29,249 22,333 16,667
1997 35,037 27,762 18,353
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
Value Trust--Navigator Class
Cumulative Average Annual
Total Return Total Return
One Year +34.97% +34.97%
Life of Class (dagger) +109.42 +37.25
(dagger) Navigator Class inception--December 1, 1994
[Graph appears here--see plot points below]
Standard &
Value Trust Value Poor's 500
Navigator Class Line(2) Stock Index(1)
12/1/94 10,000 10,000 10,000
3/31/95 10,811 10,637 11,137
3/31/96 15,517 12,997 14,709
3/31/97 20,942 14,313 17,368
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
8
<PAGE>
Special Investment Trust--Navigator Class
Cumulative Average Annual
Total Return Total Return
One Year +12.81% +12.81%
Life of Class (dagger) +53.53 +20.16
(dagger) Navigator Class inception -- December 1, 1994
[Graph appears here--see plot points below]
Special Standard &
Investment Trust Value Poor's 500
Navigator Class Line(2) Stock Index(1)
12/1/94 10,000 10,000 10,000
3/31/95 10,481 10,637 11,137
3/31/96 13,610 12,997 14,709
3/31/97 15,353 14,313 17,368
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
Total Return Trust--Navigator Class
Cumulative Average Annual
Total Return Total Return
One Year +25.67% +25.67%
Life of Class (dagger) +73.10 +26.50
(dagger) Navigator Class inception -- December 1, 1994
[Graph appears here--see plot points below]
Total Standard &
Return Trust Value Poor's 500
Navigator Class Line(2) Stock Index(1)
12/1/94 10,000 10,000 10,000
3/31/95 10,228 10,637 11,137
3/31/96 13,774 12,997 14,709
3/31/97 17,310 14,313 17,368
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
9
<PAGE>
Performance Information--Continued
Value Trust
Selected Portfolio Performance
Strong performers for the year ended March 31, 1997*
- --------------------------------------------------------------------------------
1. Dell Computer Corp. + 150.6%
2. Lloyds TSB Group plc + 90.2%
3. Nokia Corporation ADS + 89.3%
4. Zions Bancorporation + 83.9%
5. Reebok International Ltd. + 62.4%
6. Coltec Industries Inc. + 54.9%
7. Fleet Financial Group, Inc. + 50.2%
8. Standard Federal Bancorporation + 43.0%
9. Citicorp + 41.4%
10. Bank of Boston Corporation + 37.4%
* Securities held for the entire year.
Weak performers for the year ended March 31, 1997*
- --------------------------------------------------------------------------------
1. Federal Home Loan Mortgage
Corporation -36.1%
2. Circus Circus Enterprises, Inc. -22.7%
3. Warner-Lambert Company -16.2%
4. Columbia/HCA Healthcare Corporation -12.7%
5. MBNA Corporation -5.9%
6. Chrysler Corporation -4.0%
7. Amgen Inc. -3.9%
8. United States Treasury Notes
8.125% 2-15-98 -2.3%
9. PepsiCo, Inc. +3.2%
10. General Motors Corporation +4.0%
Strong performers for the 1st quarter 1997*
- --------------------------------------------------------------------------------
1. America Online, Inc. + 27.4%
2. Dell Computer Corp. + 27.3%
3. Telefonos de Mexico S.A. ADR + 16.7%
4. Warner-Lambert Company + 15.3%
5. Foundation Health Corporation + 15.0%
6. Fleet Financial Group, Inc. + 14.8%
7. Zions Bancorporation + 14.2%
8. Seagate Technology, Inc. + 13.6%
9. PepsiCo, Inc. + 11.5%
10. Philips Electronics N.V. + 11.3%
* Securities held for the entire quarter.
Weak performers for the 1st quarter 1997*
- --------------------------------------------------------------------------------
1. Circus Circus Enterprises, Inc. -24.4%
2. Columbia/HCA Healthcare Corporation -17.5%
3. Danaher Corporation -10.7%
4. Chrysler Corporation -9.1%
5. International Business Machines
Corporation -9.0%
6. The Bear Stearns Companies, Inc. -5.8%
7. MBIA, Inc. -5.3%
8. RJR Nabisco Holdings Corp. -5.1%
9. RJR Nabisco Holdings Corp. Series C
Depositary Shares -3.7%
10. Fannie Mae -3.0%
Portfolio Changes
Securities added for the 1st quarter 1997
- --------------------------------------------------------------------------------
Washington Mutual, Inc.
Western Digital Corp.
United States Treasury Bond
6.625% due 2/15/27
Securities sold for the 1st quarter 1997
- --------------------------------------------------------------------------------
Humana, Inc.
10
<PAGE>
Special Investment Trust
Selected Portfolio Performance
Strong performers for the year ended March 31, 1997*
- --------------------------------------------------------------------------------
1. HSN, Inc. + 150.6%
2. Calenergy, Inc. + 90.2%
3. MacFrugal's Bargains CloseoOuts Inc. + 89.3%
4. Gateway 2000, Inc. + 83.9%
5. Washington Mutual, Incorporated + 62.4%
6. Cott Corporation Quebec + 54.9%
7. Storage Technology Corporation + 50.2%
8. Enhance Financial Services Group, Inc. + 43.0%
9. Peoples Heritage Financial Group, Inc. + 41.4%
10. WPP Group. P.L.C. ADR + 37.4%
* Securities held for the entire year.
Weak performers for the year ended March 31, 1997*
- --------------------------------------------------------------------------------
1. Somatix Therapy Corporation Warrants -100.0%
2. Physician Corporation of America -71.1%
3. Somatix Therapy Corporation -67.3%
4. Mirage Resorts Incorporated -51.6%
5. Players International, Inc. -48.8%
6. United Asset Management Corp. -44.7%
7. CMAC Investment Corporation -40.9%
8. Bell & Howell Company -36.3%
9. Grupo Financiero Serfin S.A.
de C.V. ADR -32.4%
10. America Online, Inc. -24.3%
Strong performers for the 1st quarter 1997*
- --------------------------------------------------------------------------------
1. Cott Corporation Quebec + 36.2%
2. America Online, Inc. + 27.4%
3. Salant Corporation + 26.9%
4. Conseco Inc. + 11.8%
5. Washington Mutual, Inc. + 11.5%
6. Magellan Health Services, Inc. + 10.1%
7. Peoples Heritage Financial Group, Inc. + 9.8%
8. Enhance Financial Services Group, Inc. + 8.2%
9. HSN, Inc. + 6.8%
10. Argyle Television, Inc. + 3.1%
* Securities held for the entire quarter.
Weak performers for the 1st quarter 1997*
- --------------------------------------------------------------------------------
1. Physician Corporation of America -53.8%
2. InaCom Corp. -43.1%
3. Somatix Therapy Corporation -39.6%
4. Anchor Gaming -30.7%
5. Shoney's Inc. -30.4%
6. Circus Circus Enterprises, Inc. -24.4%
7. Grupo Financiero Serfin S.A. de C.V. ADR -24.2%
8. Boomtown Inc. -18.6%
9. Sunrise Medical, Inc. -18.1%
10. Ultrafem, Inc. -17.9%
Portfolio Changes
Securities added for the 1st quarter 1997
- --------------------------------------------------------------------------------
Amerin Corporation
BBN Corporation
Northeast Utilities System
Novell Inc.
Quantum Corporation
Sun Healthcare Group Inc.
Securities sold for the 1st quarter 1997
- --------------------------------------------------------------------------------
Calpine Corporation
Cidco, Inc.
CUC International, Inc.
Fannie Mae
Intergraph Corporation
Mego Financial Corporation Warrants
Standard Federal Bancorporation
Value Health, Inc.
11
<PAGE>
Performance Information--Continued
Total Return Trust
Selected Portfolio Performance
Strong performers for the year ended March 31, 1997*
- --------------------------------------------------------------------------------
1. Lloyds TSB Group plc + 71.31%
2. Great Western Financial Corporation + 67.36%
3. Regency Realty Corporation + 58.52%
4. Enhance Financial Services Group, Inc. + 42.99%
5. BankAmerica Corporation + 30.00%
6. Resource Mortgage Capital
Corporation + 26.99%
7. International Business Machines
Corporation + 23.62%
8. Masco Corporation + 23.28%
9. National Golf Properties, Inc. +21.67%
10. Telefonos de Mexico S.A. ADR +17.11%
* Securities held for the entire year.
Weak performers for the year ended March 31, 1997*
- --------------------------------------------------------------------------------
1. Ford Motor Company -8.73%
2. Olin Corporation -8.62%
3. John Alden Financial Corporation -4.96%
4. J.C. Penney Company, Inc. -4.27%
5. Chrysler Corporation -3.61%
6. Summit Properties, Inc. +1.25%
7. Nationwide Health Properties, Inc. +1.79%
8. Washington Federal, Inc. +4.60%
9. The Bear Stearns Companies, Inc. +6.06%
10. RJR Nabisco Holdings Corp. Series C
Depository Shares +6.12%
Strong performers for the 1st quarter 1997*
- --------------------------------------------------------------------------------
1. Great Western Financial Corporation + 39.2%
2. Telefonos de Mexico S.A. ADR + 16.7%
3. Ogden Corporation + 12.7%
4. Lloyds TSB Group plc + 11.2%
5. Bank United Corp. + 10.3%
6. Kmart Corporation 7.75% Cv. + 9.7%
7. IPC Holdings Limited + 8.9%
8. Enhance Financial Services Group, Inc. + 8.2%
9. Olin Corporation + 5.6%
10. The Chase Manhattan Corporation + 4.9%
* Securities held for the entire quarter.
Weak performers for the 1st quarter 1997*
- --------------------------------------------------------------------------------
1. Washington Federal, Inc. -14.2%
2. Resource Mortgage Capital Corporation -11.9%
3. Nationwide Health Properties, Inc. -11.9%
4. John Alden Financial Corporation -9.5%
5. Chrysler Corporation -9.1%
6. International Business Machines
Corporation -9.0%
7. Northrop Grumman Corporation -8.6%
8. Summit Properties, Inc. -8.5%
9. United States Treasury Bond, 6% 2/15/26 -6.0%
10. The Bear Stearns Companies, Inc. -5.8%
Portfolio Changes
Securities added for the 1st quarter 1997
- --------------------------------------------------------------------------------
Exxon Corporation
Mid-America Apartment Communities, Inc.
National Australia Bank 7.875% Cv. Series Unit
Tanger Factory Outlet Centers, Inc.
UST, Inc.
Unicom Corporation
Securities sold for the 1st quarter 1997
- --------------------------------------------------------------------------------
COLT Telecom-Units, 0% 12/15/06
Standard Federal Bancorporation
Williams Companies, Inc.
12
<PAGE>
Statement of Net Assets
March 31, 1997
(Amounts in Thousands)
Legg Mason Value Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 89.9%
Automotive -- 5.1%
Chrysler Corporation 1,900 $ 57,000
General Motors Corporation 1,100 60,913
----------
117,913
----------
Banking -- 19.3%
Bank of Boston Corporation 850 56,950
BankAmerica Corporation 400 40,309
Citicorp 800 86,600
Fleet Financial Group, Inc. 669 38,300
Lloyds TSB Group plc 7,716 63,345
Provident Bankshares Corporation 289 11,127
The Chase Manhattan Corporation 1,175 110,009
Zions Bancorporation 351 41,646
----------
448,286
----------
Computer Services and Systems -- 17.6%
America Online, Inc. 1,650 69,919(A)
Dell Computer Corp 1,850 125,106(A)
International Business Machines Corporation 650 89,294
Seagate Technology, Inc. 1,750 78,531(A)
Western Digital Corp. 826 46,744(A)
----------
409,594
----------
Electrical Equipment -- 1.8%
Philips Electronics N.V. 950 42,275
----------
Entertainment -- 5.3%
Circus Circus Enterprises, Inc. 3,050 79,300(A)
MGM Grand, Inc. 1,115 40,419(A)
----------
119,719
----------
Finance -- 12.6%
Fannie Mae 3,200 115,600
Federal Home Loan Mortgage Corporation 2,000 54,500
MBNA Corporation 2,830 78,894
The Bear Stearns Companies, Inc. 1,654 43,411
----------
292,405
----------
Food, Beverage and Tobacco -- 4.9%
PepsiCo, Inc. 850 27,732
Philip Morris Companies, Inc. 475 54,209
RJR Nabisco Holdings Corp. 1,000 32,250
----------
114,191
----------
</TABLE>
13
<PAGE>
Statement of Net Assets--Continued
Legg Mason Value Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Food Merchandising -- 2.6%
The Kroger Co. 1,200 $ 60,900(A)
----------
Footwear -- 1.0%
Reebok International Ltd. 527 23,631
----------
Health Care -- 1.9%
Foundation Health Corporation 1,200 43,800(A)
----------
Hospital Management -- 0.9%
Columbia/HCA Healthcare Corporation 622 20,922
----------
Insurance -- 2.1%
AMBAC Inc. 383 24,704
MBIA, Inc. 255 24,448
----------
49,152
----------
Manufacturing -- 2.1%
Danaher Corporation 1,200 49,950
----------
Multi-Industry -- 0.8%
Coltec Industries Inc. 967 17,882(A)
----------
Pharmaceuticals -- 3.5%
Amgen Inc. 800 44,700(A)
Warner-Lambert Company 425 36,763
----------
81,463
----------
Savings and Loan -- 3.0%
Standard Federal Bancorporation 1,082 62,767
Washington Mutual, Inc. 125 6,039
----------
68,806
----------
Telecommunications -- 5.4%
MCI Communications Corporation 800 28,500
Nokia Corporation ADS 700 40,775
Telefonos de Mexico S.A. ADR 1,425 54,863
----------
124,138
----------
Total Common Stocks and Equity Interests (Identified Cost-- $1,009,016) 2,085,027
- ----------------------------------------------------------------------------------------------------------------
Preferred Shares -- 0.4%
RJR Nabisco Holdings Corp.,
Series C Depositary Shares
(Identified Cost-- $9,003) 1,385 9,003
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Obligations -- 2.0%
United States Treasury Notes
8.125% 2/15/98 $ 230 $ 234
United States Treasury Bonds
6.625% 2/15/27 50,000 47,047
-----------
Total U.S. Government Obligations (Identified Cost-- $50,868) 47,281
- ----------------------------------------------------------------------------------------------------------------
Sovereign Obligations -- 2.9%
Republic of Argentina
6.75% 3/31/05 58,250 52,582(B)
5.25% 3/31/23 25,000 15,520(C)
-----------
Total Sovereign Obligations (Identified Cost--$36,969) 68,102
- -----------------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 4.7%
Lehman Brothers, Inc.
6.68% dated 3/31/97, to be repurchased at $109,156
on 4/1/97 (Collateral: $113,689 Federal National
Mortgage Association Mortgage-backed Securities,
7% - 8.5% due 2/1/26 - 3/1/27, value $111,895)
(Identified Cost--$109,136) 109,136 109,136
- ----------------------------------------------------------------------------------------------------------------
Total Investments--99.9% (Identified Cost-- $1,214,992) 2,318,549
Other Assets Less Liabilities-- 0.1% 1,603
-----------
Net assets consisting of:
Accumulated paid-in capital applicable to:
65,562 Primary shares outstanding $1,129,164
2,442 Navigator shares outstanding 53,649
Undistributed net investment income 2,703
Undistributed net realized gain on investments 31,070
Unrealized appreciation of investments 1,103,566
----------
Net assets-- 100.0% $2,320,152
==========
Net asset value per share:
Primary Class $34.11
======
Navigator Class $34.30
======
- -----------------------------------------------------------------------------------------------------------------
</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 March 31, 1997.
(C) Coupon increases 0.25% annually until April 1, 1999, thereafter remains
fixed at 6.0% until maturity.
See notes to financial statements.
15
<PAGE>
Statement of Net Assets
March 31, 1997
(Amounts in Thousands)
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 97.0%
Advertising -- 4.7%
WPP Group P.L.C. 10,200 $ 42,793
WPP Group P.L.C. ADR 89 3,627
---------
46,420
---------
Apparel -- 0.2%
Salant Corporation 450 1,856(A)
---------
Banking -- 2.7%
Grupo Financiero Serfin S.A. de C.V. ADR 1,215 3,797(A)
Peoples Heritage Financial Group, Inc. 750 23,062
---------
26,859
---------
Biotechnology -- 0.5%
Somatix Therapy Corporation 2,294 4,588(A,B)
Somatix Therapy Corporation Warrants 152 0(A,B)
---------
4,588
---------
Broadcast Media -- 0.7%
Argyle Television, Inc. 260 6,571(A)
---------
Computer Services and Systems -- 27.2%
America Online, Inc. 1,425 60,384(A)
BBN Corporation 549 9,119(A)
Bell & Howell Company 675 14,090(A)
Gateway 2000, Inc. 500 25,625(A)
InaCom Corp. 904 20,566(A,B)
Madge Networks N.V. 2,023 17,573(A)
Novell Inc. 2,450 23,275(A)
Quantum Corporation 601 23,194(A)
Storage Technology Corporation 900 35,325(A)
Western Digital Corporation 700 39,638(A)
---------
268,789
---------
Energy -- 4.0%
Calenergy, Inc. 750 25,500(A)
Northeast Utilities System 1,850 14,569
---------
40,069
---------
Entertainment -- 8.0%
Anchor Gaming 184 5,135(A)
Boomtown Inc. 900 6,413(A,B)
Circus Circus Enterprises, Inc. 825 21,450(A)
Hollywood Park, Inc. 1,775 22,853(A,B)
Mirage Resorts, Incorporated 548 11,641(A)
Players International, Inc. 2,400 11,700(A,B)
---------
79,192
---------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Finance -- 7.1%
Amerin Corporation 1,000 $ 20,125(A)
Mego Financial Corporation 643 4,182(A,C)
The Bear Stearns Companies, Inc. 551 14,470
United Asset Management Corporation 1,238 31,723
---------
70,500
---------
Food, Beverage and Tobacco -- 4.1%
Cott Corporation Quebec 4,100 40,488(B)
---------
Health Care -- 6.8%
Magellan Health Services, Inc. 950 23,394(A)
Physician Corporation of America 3,526 16,307(A)
Sun Healthcare Group Inc. 1,000 14,375(A)
Sunrise Medical, Inc. 817 10,625(A)
Ultrafem, Inc. 200 2,875(A)
---------
67,576
---------
Insurance -- 14.5%
CMAC Investment Corporation 760 25,365
Conseco Inc. 662 23,584
Enhance Financial Services Group, Inc. 550 21,725
John Alden Financial Corp. 1,050 17,587
Orion Capital Corporation 590 36,433
PennCorp Financial Group, Inc. 585 18,720
---------
143,414
---------
Manufacturing -- 2.0%
Briggs & Stratton Corporation 227 10,186
Danaher Corporation 236 9,824
---------
20,010
---------
Miscellaneous -- 0.2%
Olsen & Associates AG 300 2,085(A,C)
---------
Real Estate -- 1.8%
Resource Mortgage Capital Corporation 696 18,001
---------
Resturants -- 0.9%
Shoney's Inc. 1,889 9,210(A)
---------
Savings and Loan -- 3.7%
Washington Mutual Inc. 750 36,234
---------
Specialty Retail -- 7.7%
HSN, Inc. 1,498 38,022(A)
MacFrugal's BargainsoClose-outs Inc. 1,439 38,125(A,B)
---------
76,147
---------
</TABLE>
17
<PAGE>
Statement of Net Assets--Continued
Legg Mason Special Investment Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
-----------------------------------------------------------------------------------------------------------
<S> <C>
Telecommunications -- 0.2%
COLT Telecom Group PLC 100 $ 1,887(A)
---------
Total Common Stocks and Equity Interests (Identified Cost-- $713,973) 959,896
-----------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 2.1%
Lehman Brothers, Inc.
6.68% dated 3/31/97, to be repurchased at $20,405
on 4/1/97 (Collateral: $21,153 Federal National
Mortgage Association Mortgage-backed Securities,
7.5% due 3/1/27, value $20,836)
(Identified Cost-- $20,401) $ 20,401 20,401
--------------------------------------------------------------------------------------------------------
Total Investments-- 99.1% (Identified Cost-- $734,374) 980,297
Other Assets Less Liabilities-- 0.9% 8,802
---------
Net assets consisting of:
Accumulated paid-in capital applicable to:
35,689 Primary shares outstanding $662,297
1,531 Navigator shares outstanding 30,834
Accumulated net operating loss (3)
Undistributed net realized gain on investments 50,048
Unrealized appreciation of investments 245,923
--------
Net assets-- 100.0% $ 989,099
=========
Net asset value per share:
Primary Class $26.55
======
Navigator Class $27.04
======
--------------------------------------------------------------------------------------------------------
</TABLE>
(A) Non-income producing
(B) Affiliated Companies -- As defined in the Investment Company Act of 1940
an "Affiliated Company" represents Fund ownership of at least 5% of
the outstanding voting securities of the issuer. At March 31, 1997, the
total market value of Affiliated Companies was $166,182 and identified
cost was $158,556.
(C) Private placement
See notes to financial statements.
18
<PAGE>
Statement of Net Assets
March 31, 1997
(Amounts in Thousands)
Legg Mason Total Return Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 87.7%
Aerospace -- 1.9%
Northrop Grumman Corporation 100 $ 7,563
-------
Automotive -- 8.6%
Chrysler Corporation 400 12,000
Ford Motor Company 315 9,883
General Motors Corporation 210 11,629
-------
33,512
-------
Banking -- 9.8%
BankAmerica Corporation 90 9,068
Lloyds TSB Group plc 2,140 17,573
The Chase Manhattan Corporation 125 11,703
-------
38,344
-------
Chemicals -- 6.5%
Hercules, Inc. 305 12,886
Olin Corporation 314 12,485
-------
25,371
-------
Commercial Services -- 2.6%
Ogden Corporation 473 9,990
-------
Computer Services and Systems -- 5.1%
International Business Machines Corporation 145 19,919
-------
Construction Materials -- 1.8%
Masco Corporation 200 7,150
-------
Electric -- 2.2%
Unicom Corporation 450 8,775
-------
Energy -- 1.4%
Exxon Corporation 50 5,387
-------
Finance -- 5.1%
Fannie Mae 252 9,103
The Bear Stearns Companies Inc. 407 10,677
-------
19,780
-------
Insurance -- 12.0%
American Financial Group Incorporated 229 8,358
Enhance Financial Services Group, Inc. 305 12,059
IPC Holdings Limited 463 11,286
John Alden Financial Corporation 400 6,700
LaSalle Re Holdings Ltd. 300 8,611
-------
47,014
-------
</TABLE>
19
<PAGE>
Statement of Net Assets--Continued
Legg Mason Total Return Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Real Estate -- 14.3%
Mid-America Apartment Communities, Inc. 228 $ 6,378
National Golf Properties, Inc. 346 10,683
Nationwide Health Properties, Inc. 400 8,544
Regency Realty Corporation 373 9,964
Resource Mortgage Capital Corporation 320 8,285
Summit Properties, Inc. 131 2,657
Tanger Factory Outlet Centers, Inc. 75 1,963
Walden Residential Properties, Inc. 300 7,238
-------
55,712
-------
Retail Sales -- 3.2%
J.C. Penney Company, Inc. 260 12,383
-------
Savings and Loan -- 8.7%
Bank United Corp. 376 11,095
Great Western Financial Corporation 289 11,656
Washington Federal, Inc. 492 11,188
-------
33,939
-------
Telecommunications -- 2.5%
Telefonos de Mexico S.A. ADR 255 9,818
-------
Tobacco -- 2.0%
UST, Inc. 275 7,666
-------
Total Common Stocks and Equity Interests (Identified Cost-- $257,455) 342,323
----------------------------------------------------------------------------------------------------------
Preferred Shares -- 4.6%
RJR Nabisco Holdings Corp.
Series C Depositary Shares 1,011 6,569
Kmart Corporation
7.75% Cv. 184 9,865
National Australia Bank
7.875% Cv. Series Unit 60 1,500
-------
Total Preferred Shares (Identified Cost-- $17,204) 17,934
----------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 5.4%
United States Treasury Bond
6.00% 2/15/26 (Identified Cost-- $21,721) $25,000 21,390
----------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement -- 2.0%
Lehman Brothers, Inc.
6.68% dated 3/31/97, to be repurchased
at $7,830 on 4/1/97 (Collateral: $7,612
Federal National Mortgage Association
Mortgage-backed Securities, 9.0%
due 11/1/25, value $8,016) (Identified Cost-- $7,829) $ 7,829 $ 7,829
----------------------------------------------------------------------------------------------------------
Total Investments--99.7% (Identified Cost--$304,209) 389,476
Other Assets Less Liabilities-- 0.3% 1,030
--------
Net assets consisting of:
Accumulated paid-in capital applicable to:
19,623 Primary shares outstanding $268,252
515 Navigator shares outstanding 7,083
Undistributed net investment income 1,651
Undistributed net realized gain on investments 28,250
Unrealized appreciation of investments 85,270
--------
Net assets --100.0% $390,506
========
Net asset value per share:
Primary Class $19.39
======
Navigator Class $19.53
======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
21
<PAGE>
Statements of Operations
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 3/31/97
- ---------------------------------------------------------------------------------------------------------------------------
Value Special Investment Total Return
Trust Trust Trust
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends:
Affiliated companies $ -- $ 183 $ 151
Other securities(A) 30,644 7,244 10,651
Interest 9,937 1,819 3,743
-------- -------- -------
Total income 40,581 9,246 14,545
-------- -------- -------
Expenses:
Investment advisory fee 13,200 7,273 2,404
Distribution and service fees 16,864 8,966 3,121
Transfer agent and shareholder servicing expense 907 727 249
Custodian fee 384 235 143
Reports to shareholders 195 180 64
Registration fees 144 82 38
Audit and legal fees 139 93 55
Directors' fees 18 10 11
Other expenses 107 55 19
-------- -------- -------
31,958 17,621 6,104
Less expenses reimbursed (78) (36) --
-------- -------- -------
Total expenses, net of reimbursement 31,880 17,585 6,104
-------- -------- -------
Net Investment Income (Loss) 8,701 (8,339) 8,441
-------- -------- -------
Net Realized and Unrealized Gain on Investments:
Realized gain on investments 88,721 71,717(B) 41,202
Change in unrealized appreciation of investments 409,292 32,855 18,340
-------- -------- -------
Net Realized and Unrealized Gain on Investments 498,013 104,572 59,542
=====================================================================================================================
Change in Net Assets Resulting from Operations $506,714 $ 96,233 $67,983
======== ======== =======
</TABLE>
(A) Net of foreign taxes withheld of $759, $46 and $100, respectively.
(B) Includes $839 realized gain on sale of shares of Affiliated Companies.
See notes to financial statements.
22
<PAGE>
Statements of Changes in Net Assets
(Amounts in Thousands)
<TABLE>
<CAPTION>
Value Special Investment Total Return
Trust Trust Trust
------------------- -------------------- --------------------
Years Ended Years Ended Years Ended
3/31/97 3/31/96 3/31/97 3/31/96 3/31/97 3/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Change in Net Assets:
Net investment income (loss) $ 8,701 $ 10,667 $ (8,339) $ 123 $ 8,441 $ 7,723
Net realized gain on investments 88,721 57,010 71,717 42,151 41,202 928
Change in unrealized appreciation of
investments 409,292 369,425 32,855 141,013 18,340 58,047
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations 506,714 437,102 96,233 183,287 67,983 66,698
Distributions to shareholders:
From net investment income:
Primary Class (9,017) (8,750) -- (96) (7,201) (7,831)
Navigator Class (814) (745) -- (27) (258) (262)
From net realized gain on investments:
Primary Class (85,562) (62,321) (46,505) (14,508) (9,643) --
Navigator Class (3,095) (2,262) (2,070) (832) (261) --
Change in net assets from Fund share
transactions:
Primary Class 391,899 114,171 110,520 19,357 64,231 15,144
Navigator Class 16,921 3,067 2,950 2,574 1,587 729
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets 817,046 480,262 161,128 189,755 116,438 74,478
Net Assets:
Beginning of year 1,503,106 1,022,844 827,971 638,216 274,068 199,590
----------------------------------------------------------------------
End of year $2,320,152 $1,503,106 $989,099 $827,971 $390,506 $274,068
---------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (loss) $ 2,703 $ 3,842 $ (3) $ -- $ 1,651 $ 1,222
========== ========== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
23
<PAGE>
Financial Highlights
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>
Investment Operations Distributions From:
--------------------------------------- ------------------------
Net Asset Net Net Realized Total Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Year (Loss) Investments Operations Income Investments Distributions Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
--Primary Class
Years Ended Mar. 31,
1997 $26.99 $.13 $8.68 $8.81 $(.16) $(1.53) $(1.69) $34.11
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41) 26.99
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09) 20.21
1994 17.81 .08 .92 1.00 (.11) (.20) (.31) 18.50
1993 15.69 .18 2.12 2.30 (.18) -- (.18) 17.81
--Navigator Class
Years Ended Mar. 31,
1997 $27.08 $.41 $8.75 $9.16 $(.41) $(1.53) $(1.94) $34.30
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64) 27.08
1995(B) 18.76 .12 1.40 1.52 (.01) -- (.01) 20.27
Special Investment Trust
--Primary Class
Years Ended Mar. 31,
1997 $25.09 $(.23) $3.10 $2.87 $ -- $(1.41) $(1.41) $26.55
1996 19.96 -- 5.60 5.60 -- (.47) (.47) 25.09
1995 21.56 (.06) (1.31) (1.37) -- (.23) (.23) 19.96
1994 17.91 (.11) 3.93 3.82 (.03) (.14) (.17) 21.56
1993 17.00 .03 1.66 1.69 -- (.78) (.78) 17.91
--Navigator Class
Years Ended Mar. 31,
1997 $25.26 $.02 $3.17 $3.19 $ -- $(1.41) $(1.41) $27.04
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64) 25.26
1995(B) 19.11 .07 .85 .92 -- -- -- 20.03
Total Return Trust
--Primary Class
Years Ended Mar. 31,
1997 $16.45 $.46 $3.47 $3.93 $(.43) $(.56) $ (.99) $19.39
1996 12.79 .48 3.69 4.17 (.51) -- (.51) 16.45
1995 13.54 .33 (.19) .14 (.29) (.60) (.89) 12.79
1994 13.61 .36 .24 .60 (.33) (.34) (.67) 13.54
1993 11.64 .39 1.89 2.28 (.31) -- (.31) 13.61
--Navigator Class
Years Ended Mar. 31,
1997 $16.52 $.65 $3.48 $4.13 $(.56) $(.56) $(1.12) $19.53
1996 12.83 .62 3.72 4.34 (.65) -- (.65) 16.52
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23) 12.83
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net
Investment Average Net Assets
Expenses Income (Loss) Portfolio Commission End of
Total to Average to Average Turnover Rate Year
Return Net Assets Net Assets Rate Paid(A) (in thousands)
----------------------------------------------------------------------------------
<S> <C>
Value Trust
--Primary Class
Years Ended Mar. 31,
1997 33.59% 1.77% .4% 10.5% $.0557 $2,236,400
1996 42.09% 1.82% .8% 19.6% -- 1,450,774
1995 9.77% 1.81% .5% 20.1% -- 986,325
1994 5.65% 1.82% .5% 25.5% -- 912,418
1993 14.76% 1.86% 1.1% 21.8% -- 878,394
--Navigator Class
Years Ended Mar. 31,
1997 34.97% .77% 1.4% 10.5% $.0557 $ 83,752
1996 43.53% .82% 1.8% 19.6% -- 52,332
1995(B) 8.11%(C) .82%(D) 1.8%(D) 20.1% -- 36,519
Special Investment Trust
--Primary Class
Years Ended Mar. 31,
1997 11.58% 1.92% (.9)% 29.2% $.0514 $ 947,684
1996 28.47% 1.96% -- 35.6% -- 792,240
1995 (6.37)% 1.93% (.2)% 27.5% -- 612,093
1994 21.35% 1.94% (.6)% 16.7% -- 565,486
1993 10.50% 2.00% .2% 32.5% -- 322,572
--Navigator Class
Years Ended Mar. 31,
1997 12.81% .85% .1% 29.2% $.0514 $ 41,415
1996 29.85% .88% 1.0% 35.6% -- 35,731
1995(B) 4.81%(C) .90%(D) 1.0%(D) 27.5% -- 26,123
Total Return Trust
--Primary Class
Years Ended Mar. 31,
1997 24.33% 1.93% 2.6% 38.4% $.0528 $ 380,458
1996 33.23% 1.95% 3.2% 34.7% -- 267,010
1995 1.09% 1.93% 2.5% 61.9% -- 194,767
1994 4.57% 1.94% 2.7% 46.6% -- 184,284
1993 19.88% 1.95%(E) 3.1%(E) 40.5% -- 139,034
--Navigator Class
Years Ended Mar. 31,
1997 25.67% .86% 3.7% 38.4% $.0528 $ 10,048
1996 34.67% .94% 4.2% 34.7% -- 7,058
1995(B) 2.28%(C) .86%(D) 3.6%(D) 61.9% -- 4,823
</TABLE>
- ----------------
(A) Pursuant to SEC regulations effective for fiscal years beginning after
September 1, 1995, this is the average commission rate paid on securities
purchased and sold by the Funds.
(B) For the period December 1, 1994 (commencement of sale of Navigator shares)
to March 31, 1995.
(C) Not annualized
(D) Annualized
(E) Net of fees waived by the Adviser in excess of a voluntary expense
limitation of 1.95% on the Primary Class from November 1, 1992, and .95% on
the Navigator Class from inception, both to March 31, 1997.
See notes to financial statements.
24
<PAGE>
Notes to Financial Statements
Value Trust
Special Investment Trust
Total Return Trust
(Amounts in Thousands)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Value Trust, Inc. ("Value Trust"), the Legg Mason
Special Investment Trust, Inc. ("Special Investment Trust") and the Legg
Mason Total Return Trust, Inc. ("Total Return Trust") (each separately
referred to as a "Fund" and collectively as the "Funds") are registered
under the Investment Company Act of 1940, as amended, each as an open-end,
diversified investment company.
Each of the Funds consist of two classes of shares: Primary Class,
offered since 1982 for Value Trust, and since 1985 for Special Investment
Trust and Total Return Trust, and Navigator Class, offered to certain
institutional investors since December 1, 1994 for all Funds. The income
and expenses of each of these Funds is allocated proportionately to the
two classes of shares based on daily net assets, except for Rule 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. Securities for which market
quotations are not readily available are valued at fair value as
determined by management and approved in good faith by the Board of
Directors. Fixed income securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized. Dividend income and distributions to shareholders are
allocated at the class level and are recorded on the ex-dividend date. Net
capital gain distributions, which are calculated at a composite level, are
declared and paid after the end of the tax year in which the gain is
realized.
Investment Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes. At
March 31, 1997 receivables for securities sold and not yet delivered and
payables for securities purchased and not yet received for each of the
Funds were as follows:
Repurchase Agreements
Receivable for Payable for
Securities Sold Securities Purchased
--------------------------------------------------------------------------
Value Trust $ 267 $1,417
Special Investment Trust 15,625 7,142
Total Return Trust 1,480 1,750
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 Funds' 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. The Funds' investment advisers,
acting under the supervision of their Board of Directors, review the
value of the collateral and the creditworthiness of those banks and
dealers with which the Funds enter into repurchase agreements to
evaluate potential risks.
25
<PAGE>
Notes to Financial Statements--Continued
(Amounts in Thousands)
--------------------------------------------------------------------------
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Funds intend to continue to qualify as regulated investment companies and
distribute all of their taxable income to their shareholders.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Investment Transactions:
For the year ended March 31, 1997 investment transactions (excluding
short-term investments) were as follows:
Purchases Proceeds from Sales
--------------------------------------------------------------------------
Value Trust $454,107 $184,781
Special Investment Trust 318,442 265,557
Total Return Trust 185,159 115,758
At March 31, 1997, cost, aggregate gross unrealized appreciation and
gross unrealized depreciation based on the cost of securities for
federal income tax purposes for each Fund were as follows:
Cost Appreciation Depreciation
--------------------------------------------------------------------------
Value Trust $1,214,992 $1,129,267 $(25,710)
Special Investment Trust 734,513 334,239 (88,455)
Total Return Trust 304,237 90,070 (4,831)
3. Transactions with Affiliates:
Each 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 Funds. Pursuant to their
respective agreements, the Adviser provides the Funds with investment
advisory, management and administrative services for which each Fund pays
a fee, computed daily and payable monthly at annual rates of each Fund's
average daily net assets as follows: Value Trust, 1% for the first $100
million, 0.75% between $100 million and $1 billion and 0.65% in excess of
$1 billion; Special Investment Trust, 1% for the first $100 million, 0.75%
between $100 million and $1 billion and 0.65% in excess of $1 billion; and
Total Return Trust, 0.75% for all such assets.
The Adviser has agreed to waive its fees and reimburse Total Return
Trust for its expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) which in any month are in excess of an annual rate
of 1.95% of average daily net assets for Primary Shares and 0.95% for
Navigator Shares. The Funds' agreements with the Adviser provide that
expense reimbursements be made to Value Trust and Special Investment Trust
for audit fees and compensation of the Funds' independent directors. At
March 31, 1997 amounts due to the Adviser were $1,379, $675, and $259,
respectively, for Value Trust, Special Investment Trust and Total Return
Trust.
26
<PAGE>
Legg Mason, as distributor of the Funds, receives an annual
distribution fee and an annual service fee, computed daily and payable
monthly from each of the Funds at annual rates based on the average daily
net assets of each Fund's Primary Class as follows: Value Trust, 0.70% and
0.25%; Special Investment Trust and Total Return Trust, 0.75% and 0.25%,
for distribution and service fees respectively. At March 31, 1997,
distribution and service fees due to the distributor were as follows:
Value Trust, $1,890; Special Investment Trust, $844; and Total Return
Trust, $330.
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was
paid the following amounts by the transfer agent for the year ended March
31, 1997: Value Trust, $262; Special Investment Trust, $195; and Total
Return Trust, $53.
4. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in
a $75 million line of credit ("Credit Agreement") to be utilized as an
emergency source of cash in the event of unanticipated, large redemption
requests by shareholders. Pursuant to the Credit Agreement, each
participating fund is liable only for principal and interest payments
related to borrowings made by that Fund. Borrowings under the line of
credit bear interest at prevailing short-term interest rates. For the year
ended March 31, 1997, the Funds had no borrowings under the line of
credit.
5. Fund Share Transactions:
At March 31, 1997, there were 100,000 shares authorized at $.001 par
value for all classes of each of the Funds. Share transactions were as
follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
----------------- ---------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
--Primary Class
Year Ended March 31, 1997 20,980 $690,516 3,078 $93,067 (12,250) $(391,684) 11,808 $391,899
Year Ended March 31, 1996 13,216 311,427 3,120 70,153 (11,393) (267,409) 4,943 114,171
--Navigator Class
Year Ended March 31, 1997 686 22,688 127 3,838 (303) (9,605) 510 16,921
Year Ended March 31, 1996 262 6,350 133 3,006 (265) (6,289) 130 3,067
Special Investment Trust
--Primary Class
Year Ended March 31, 1997 20,143 520,404 1,751 46,003 (17,785) (455,887) 4,109 110,520
Year Ended March 31, 1996 20,227 456,482 666 14,447 (19,985) (451,572) 908 19,357
--Navigator Class
Year Ended March 31, 1997 312 8,240 78 2,060 (273) (7,350) 117 2,950
Year Ended March 31, 1996 313 7,199 39 859 (242) (5,484) 110 2,574
Total Return Trust
--Primary Class
Year Ended March 31, 1997 4,769 88,767 901 16,417 (2,274) (40,953) 3,396 64,231
Year Ended March 31, 1996 3,191 47,587 528 7,596 (2,722) (40,039) 997 15,144
--Navigator Class
Year Ended March 31, 1997 142 2,588 29 518 (83) (1,519) 88 1,587
Year Ended March 31, 1996 100 1,483 18 259 (68) (1,013) 50 729
</TABLE>
27
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of Legg Mason Value Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Total Return Trust, Inc.:
We have audited the accompanying statements of net assets of Legg Mason Value
Trust, Inc., Legg Mason Special Investment Trust, Inc. and Legg Mason Total
Return Trust, Inc. ("the Funds") as of March 31, 1997, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Legg Mason Value Trust, Inc., Legg Mason Special Investment Trust, Inc. and Legg
Mason Total Return Trust, Inc. as of March 31, 1997, and the results of their
operations, the changes in their net assets, and their financial highlights for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
May 2, 1997
28
<PAGE>
Legg Mason Family of Funds
Equity Funds
Legg Mason Balanced Trust
Growth and Income--An equity mutual fund which seeks long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk.
Legg Mason Total Return Trust
Growth and Income--An equity mutual fund with investment objectives of capital
appreciation and current income.
Legg Mason American Leading Companies Trust
Growth--A large capitalization equity mutual fund which seeks long-term capital
appreciation and current income consistent with prudent investment management.
Legg Mason Value Trust
Growth--An equity mutual fund which seeks long-term growth of capital using the
"Value Approach" to investing.
Legg Mason Special Investment Trust
Aggressive Growth--An equity mutual fund which seeks capital appreciation. It
invests principally in securities of companies that are involved in
restructurings or other special situations, or are out of favor with, or not
closely followed by the market.
Global Funds
Legg Mason Emerging Markets Trust
Aggressive Growth--A mutual fund which is designed for investors seeking
long-term growth possibilities available in emerging markets.(dagger)
Legg Mason International Equity Trust
Aggressive Growth--A diversified, professionally managed portfolio seeking
maximum long-term total return by investing primarily in common stocks of
companies located outside the United States.(dagger)
Legg Mason Global Government Trust
Growth and Income--A global bond fund which seeks to provide a competitive total
return by investing primarily in a global portfolio of high quality debt
securities of U.S. and foreign governments, their agencies and
instrumentalities, denominated in various currencies.(dagger)
Taxable Bond Funds
Legg Mason U.S. Government Intermediate-Term Portfolio
Conservative Income--A mutual fund which seeks to achieve high current income
consistent with prudent investment risk and liquidity needs.
Legg Mason Investment Grade Income Portfolio
Income--A mutual fund which seeks to provide investors with a high level of
current income through a diversified portfolio of debt instruments.
Legg Mason High Yield Portfolio
Growth and Income--A fund which seeks to provide high current income, and as a
secondary objective, seeks capital appreciation. Under normal circumstances, the
Fund will invest a majority of its total assets in high yield fixed income
securities commonly known as "junk" bonds. The Fund may invest up to 25% of
total assets in foreign securities.
Tax-Free Bond Funds
Legg Mason Tax-Free
Intermediate-Term Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax consistent with prudent investment risk.(double dagger)
Legg Mason Maryland Tax-Free Income Trust
Tax-Free Income--A fund whose objective is a high level of current income exempt
from federal, Maryland state, and local income taxes.(double dagger)
Legg Mason Pennsylvania Tax-Free Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax and Pennsylvania personal income tax.(double dagger)
Money Market Funds
Legg Mason U.S. Government Money Market Portfolio
A professionally managed portfolio seeking high current income consistent with
liquidity and conservation of principal.*
Legg Mason Cash Reserve Trust
A diversified management investment company investing in money market
instruments to achieve stability of principal and current income consistent
with stability of principal.*
Legg Mason Tax Exempt Trust
A money market fund seeking to produce high current income exempt from federal
income tax, to preserve capital and to maintain liquidity.*
(dagger) Investment in foreign securities involves increased risks, such
as currency rate fluctuations, foreign taxation and political
changes.
(double dagger) Income produced from the tax-free funds may be subject to state
and local taxes. Long-term capital gain distributions generally
are taxable. A portion of each Fund's dividends may be subject
to the federal alternative minimum tax.
* An investment in any of these Funds is neither insured nor
guaranteed by the U.S. Government and there can be no
guarantee that these Funds will maintain a stable $1 share
price.
For a prospectus containing more complete information, including charges and
expenses on any of the Legg Mason funds, call 1-800-577-8589. Please read it
carefully before investing or sending money.
29
