Quarterly Report
June 30, 1999
Legg Mason
Value Trust, Inc.
Special Investment
Trust, Inc.
Total Return Trust, Inc.
Navigator Class
LEGG
MASON
FUNDS
[LOGO APPEARS HERE]
HOW TO INVEST(SM)
<PAGE>
To Our Shareholders,
The following table summarizes key statistics for the Navigator Class of
shares of the Legg Mason Value Trust, Special Investment Trust and Total Return
Trust, as of June 30, 1999:
<TABLE>
<CAPTION>
Total Returns(1)
-------------------------------------------------
3 Months 6 Months 12 Months
-------- -------- ---------
<S><C>
Value Trust -0.35% +18.6% +42.9%
Lipper Growth Funds Index(2) +6.5% +11.9% +21.7%
Standard & Poor's 500 Composite Index +7.1% +12.4% +22.8%
Special Investment Trust +8.2% +14.7% +28.4%
Lipper Mid-Cap Funds Index(3) +11.0% +11.9% +13.6%
Russell 2000 Index +15.6% +9.3% +1.5%
Total Return Trust +11.2% +8.6% +4.6%
Lipper Growth & Income Funds Index(4) +9.3% +11.6% +13.6%
</TABLE>
As the table indicates, the Value Trust and Special Investment Trust
outperformed comparable funds and relevant stock market indices during the 6-
and 12-month periods, while trailing those benchmarks in the most recent
quarter. The Total Return Trust outperformed similar funds during the quarter,
but trailed their performance on a 6- and 12-month basis. Detailed comments on
the performance of each fund appear in the portfolio managers' comments on the
following pages.
Many of you may be interested to know that Bill Miller, portfolio manager of
the Value Trust (and who, with Lisa Rapuano, manages the Special Investment
Trust) is the subject of a complimentary and informative article in the August
1999 issue of MONEY magazine, beginning on page 59 of that issue.
During 1998 and into 1999, focus on the Year 2000 issue increased
significantly. As you know, the Year 2000 issue is a computer programming
problem that affects the ability of computers to correctly process dates of
January 1, 2000, and beyond. The Funds' Year 2000 project is well underway, and
is designed to ensure that the Year 2000 date change will have no adverse impact
on our ability to service our shareholders. The Funds are committed to taking
those steps necessary to protect our investors, including efforts to determine
that the Year 2000 problem will not affect such vital service functions as
shareholder transaction processing and recordkeeping. In addition, we are
continuously monitoring the Year 2000 efforts of our vendors, and will perform
tests with our critical vendors throughout 1999. Although the Funds are taking
steps to ensure that all of their systems will function properly before, during,
and after the Year 2000, the Funds could be adversely affected by computer-
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(1) 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.
(2) The Lipper Growth Funds Index is composed of 30 funds whose primary
objective is to invest in companies with long-term earnings expected to grow
significantly faster than earnings of the stocks represented in the major
unmanaged stock indices.
(3) The Lipper Mid-Cap Funds Index is composed of 30 funds whose primary
objective is to invest in companies with market capitalizations less than $5
billion at the time of purchase.
(4) The Lipper Growth & Income Funds Index is composed of 30 funds whose primary
objective combines a growth of earnings orientation and an income
requirement for level and/or rising dividends.
<PAGE>
related problems associated with the Year 2000. Contingency plans are in place
to ensure that functions critical to the Funds' operations will continue without
interruption. We are on target to complete this important project and look
forward to continuing extensive testing (including industry-wide testing) with
our industry peers, regulators and vendors throughout 1999.
Sincerely,
/s/ John F. Curley, Jr.
----------------------------
John F. Curley, Jr.
President
August 2, 1999
2
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Portfolio Managers' Comments
Second Quarter 1999
MARKET COMMENTARY
"WHEN WE THINK ABOUT THE FUTURE OF THE WORLD, WE ALWAYS HAVE IN MIND ITS
BEING AT THE PLACE WHERE IT WOULD BE IF IT CONTINUED TO MOVE AS WE SEE IT
MOVING NOW. WE DO NOT REALIZE THAT IT MOVES NOT IN A STRAIGHT LINE...AND THAT
ITS DIRECTION CHANGES CONSTANTLY."
WITTGENSTEIN
CULTURE AND VALUE
We have used the above quote before, most recently in our last report to you
a few months ago. Since it captures a recurring feature of how most people seem
to think about markets, do not be surprised if it makes regular appearances in
our letters. The expectation of what might be called linear path dependence is
strong and often underlies the reactions of analysts and commentators to change.
Instead of expecting change and uncertainty, which are common in capital
markets, people greet these normal occurrences with surprise. The surprise would
be if things continued on as they are, if markets did not exhibit unpredictable
behavior, or if portfolio returns were distributed in the future much like they
have been in the recent past.
Two important events occurred in the market in the past 90 days or so. First,
cyclical stocks (often misleadingly referred to as value stocks) staged their
strongest rally relative to the market in 50 years; second, the Federal Reserve
Board raised the benchmark federal funds rate by 25 basis points,(1) and shifted
their official bias to neutral from tightening. The latter move surprised the
markets and led to an immediate rally that lifted the major indices to records.
The rally in cyclicals was long expected and long in coming. Steel, aluminum,
paper, chemical, and copper stocks led the rebound, which extended to most major
industrial sectors and to long-suffering small capitalization stocks as well.
The big growth stocks that had been market leaders since 1995, and which had
propelled the capitalization-weighted S&P 500 ahead of the average active money
manager, whose portfolios tend to have smaller capitalizations and more of a
"value" tilt than the index, were relative losers in the quarter.
Money managers who had struggled to keep up with the S&P 500 for years
suddenly were outperforming. In the second quarter around 70% of active managers
outpaced the S&P 500, the highest level in recent memory. For the 6 months,
about 35% of active managers were ahead of the market, not a brilliant showing
but still an improvement over the pattern of recent years.
As the quarter drew to a close, these trends seemed to be attenuating. The
CRB index of commodity prices fell to a 20-year low, despite the strong rally in
oil and copper, as grain prices continued to deflate and gold's bear market
showed no sign of ending.
We believe the rally in cyclicals was a snap back from the deeply depressed
levels caused by the global financial panic last year and the recessions in the
emerging market economies. After Brazil devalued in the first quarter, it became
clear that was the last major negative event on the horizon for
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(1) 100 basis points = 1%.
3
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Portfolio Managers' Comments -- Continued
developing countries (until the next one). The Asian economies looked to be
stabilizing, and Japan began to take realistic steps to generate growth in an
economy that has gone nowhere for a decade. OPEC put in place output cuts that
restricted the supply of oil temporarily, leading to higher prices.
The fear of deflation that gripped markets last fall ended, and the biggest
beneficiaries were those companies and industries perceived to be most
negatively affected should deflation have occurred. We believe the performance
of most cyclicals from current levels is likely to be more muted. We think many
of them are overpriced, particularly the major oils, whose share prices appear
to reflect unjustified optimism about the sustainability of oil prices in the
$20 range. We think the long-term impact of OPEC's supply constraints will be to
shift market share to non-OPEC producers, leading to both lower prices as they
increase output, and market share losses for OPEC members. Similarly, we do not
believe that the long-term trend in any of the recently rallying commodities is
up, and are avoiding the shares of their producers.
We do think that the snap-back rally in cyclicals, and the poor performance
of the market's previous leaders in the quarter, presages a broader market than
we have experienced in the past few years. The best explanation of the character
of the market is found by dissecting the relative returns on capital of its
components. For the past several years, the return on capital of the biggest
companies in the S&P 500 has risen, driving up the overall return on capital of
the index. The median return of the index, though, has stayed about the same.
This means that the relative return on capital of the largest companies has
expanded compared to that of the average company, which explains (in our
judgment, anyway) the out-performance of the biggest companies relative to the
rest, and the under-performance of managers under-weighted in these big names.
In order for this to continue, the returns on capital of the big caps would
have to continue to expand while the median returns remain stable; the world
would have to continue moving as it has in the past few years. Or, if the
cyclicals were to continue their relative strength, the world would have to
continue moving as it has in the last 90 days. We believe both extremes are
unlikely. The more likely path, in our opinion, is for a more even, but still
lumpy, distribution of returns. Practically, this means that more active
managers will do well relative to the market over the course of the next year,
but not as many as did well last quarter.
The other important event was the shift to neutral on the part of the Fed.
This caught most observers by surprise, and has engendered a lot of comment,
most of it of scant analytical value, in our opinion. The expectation was for
the Fed to raise rates by 25 basis points but to maintain their tightening bias,
keeping the stage set for further interest rate increases as the year wore on.
Despite the shift to neutral, futures markets still expect another 25 basis
point increase by year-end, strong evidence that they see the world differently.
We are willing to take the Fed at its word; they spend all their time
thinking about and analyzing the economy, and they have become increasingly
transparent under Chairman Greenspan. They have tried to telegraph their moves,
and have indicated they do not want to surprise markets. Markets were surprised,
though, by the shift to neutral, and deconstructing that move is useful.
Chairman Greenspan has indicated many times that the economic models commonly
used to predict the relationship between variables such as the unemployment
rate, economic growth, and inflation have failed to work effectively during this
expansion. He has noted that one explanation of this failure is that our
measures of productivity have understated its growth, thereby understating the
sustainable growth rate of GDP and over-predicting inflation.
4
<PAGE>
We think the shift to neutral on the part of the Fed is a signal to markets
that the Fed has adjusted, at least conceptually, its economic models in
response to the path of this expansion. This would involve adjusting the weights
of the inputs in order to better capture the observed relationships that have so
puzzled the orthodox but which have been so important in propelling this bull
market.
Some interesting evidence of this has come by way of Lyle Gramley, a former
Fed governor, and one of the more sensible and discerning of Fed watchers. Dr.
Gramley notes that recent data from Macroeconomic Advisors of St. Louis, the
forecasting firm of current Fed Governor Meyer, supports the view that
productivity growth, the main engine of economic prosperity, may be on a
sustainably higher path. Without getting into the details, this data suggests a
more bullish outlook for the economy--faster non-inflationary growth
potential--than had been previously believed warranted. The evidence is
consistent with the view of former Fed Vice Chairman Alice Rivlin, who believes
that current tight labor markets may be fostering not greater inflation, but
greater productivity, as companies search for ways to employ capital more
productively since they cannot easily find skilled labor at satisfactory prices.
We will not settle the debate about either the meaning or the appropriateness
of the Fed's changed stance. Events will make that clear. There are two other
aspects of the rate increase that we believe are important, and that have not
been sufficiently elucidated. First, the Fed is not now, nor has it been
signaling markets about the future direction of rates by the act of raising, or
lowering, them. Second, to the extent that the Fed has either raised or lowered
rates, that action has been bullish.
Beginning in the early l980's, the Fed began increasingly to incorporate
market-based indicators into their economic models. Market-based indicators are
forward looking and adaptive; standard economic models are built using
historical data and are static. As predictive mechanisms, standard models are
mostly useless, though their explanatory value is often high.
More recently, the Fed has been following, not leading markets. Last year's
three interest rate cuts followed sharp drops in both long- and short-term
rates. This most recent increase followed very strong increases in rates since
last fall, and merely brought the Fed Funds rate into line with market rates. We
think that future rate increases will follow a similar path. If long bond rates
do not rise from here, we think it unlikely the Fed will act. The futures market
thinks differently at this point.
The Fed has also noted explicitly that actions taken on rates have been
designed to extend the expansion. In other words, if they did not act, they
believed the expansion would be more likely to end sooner than if they did act.
Without judging how successful they will be, one notes that over the past 17
years we have only experienced one recession, and that one followed a war,
skyrocketing oil prices, rising inflation, and the S&L crisis.
Equities continue to look approximately fairly valued to us. They reflect
current circumstances, which remain about as perfect as an investor could hope
for: budget surpluses, low inflation, high profitability, strong profit growth
this quarter and next, and a general absence of global turmoil. Pessimists have
wrongly predicted the end of this environment for years and have suffered
significant opportunity costs as a result.
We see no evidence the expansion cannot continue, albeit at a slower pace
than we have experienced in the past 6 months. There is little margin of safety
in current valuations for any negative change from the present trajectory of the
world. Pace Wittgenstein, it would be surprising if the current trajectory
didn't change, but then the world is always surprising.
5
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Portfolio Managers' Comments -- Continued
VALUE TRUST
Your fund's cumulative results for various periods ending June 30, l999, are
as follows:
<TABLE>
<CAPTION>
3 Months 6 Months 1 Year 3 Years
- --------------------------------------------------------------------------------
<S><C>
Value Trust -0.35% +18.58% +42.93% +207.26%
S&P 500 Composite Index +7.06% +12.39% +22.77% +115.25%
Lipper Growth Funds Index +6.49% +11.89% +21.69% +96.03%
</TABLE>
As you can see, the Value Trust lagged the market and the average growth fund
this quarter as our holdings consolidated the very strong gains achieved in the
previous two periods. Our quarterly results relative to the market tend to
bounce around quite a bit, but over longer time frames our returns are
comfortably ahead of both the S&P 500 and other growth funds, as the chart above
attests.
Quarterly results, despite the scrutiny they are given by fund watchers,
offer little predictive, or even analytical value, in our opinion. Over the past
10 years, for example, Value Trust Primary Class shares have outperformed the
market in 20 of the 40 quarters, exactly half the time. Our 3-month results are
about what you'd expect from a flipped nickel relative to the market, but the
cumulative results are significantly better. (The Primary Class and Navigator
Class of shares have different fees and expenses. Please refer to page 12 for
more information.)
Our returns recall George Soros' comment that it's not how often you are
right or wrong that counts, it's how much money you make when you're right less
how much money you lose when you're wrong.
As discussed more fully in the market comment section, the second quarter saw
the strongest rally in cyclical stocks -- steel, aluminum, chemicals, papers,
oils, etc. -- relative to the market in 50 years. Since we have almost no
exposure to these companies, our returns suffered accordingly. Our banks and
other financials also performed poorly as interest rates rose and concerns about
inflation began to appear. Finally, our two biggest holdings, AMERICA ONLINE and
DELL, fell 24.3% and 9.5%, respectively, after rebounding sharply from the lows
reached early last October.
Portfolio activity was, as usual, fairly light in the past several months. We
sold COMPAQ and CONSECO, reducing by 50% the number of companies beginning with
"C" in the Fund. We still own CHASE and CITIGROUP.
COMPAQ suffered its traditional first quarter earnings shortfall, the third
in the past four years. Historically, that has been a good time to buy the
stock, since the company usually is able to recover and string together a few
good periods, igniting investor enthusiasm, before disappointing again. This
time we elected to exit the position since we think the company may be facing
deeper and longer-lasting structural problems. Subsequent to missing the
quarter, the company lost most of its top management in a board-induced
shake-up, and is still looking for a CEO.
CONSECO was sold because we could not get comfortable with underlying
business fundamentals amidst confusing accounting treatments. Management also
appears quite generous in their assessment of the compensation and incentives
due them for their stewardship.
6
<PAGE>
We bought three stocks in the quarter: AETNA, which is a relatively small
position; MCKESSON HBOC, and WASTE MANAGEMENT. AETNA appears to be effectively
consolidating its purchase of US Healthcare, finally, and also is beginning to
benefit from better pricing in the HMO sector. Valuation is low and
improvability is high.
MCKESSON collapsed after an accounting scandal surfaced in its newly
purchased HBOC subsidiary. The company has fired the senior executives
responsible and MCKESSON'S own CEO and CFO had to resign as well. In the low
30's, where the stock now trades (down from 90 or so at the peak), we think it
represents solid, but not spectacular, value.
We started buying WASTE MANAGEMENT in the low 50's on the strength of a low
multiple and accelerating free cash flow in an industry that has rapidly
consolidated. We had some concerns about estimates being too optimistic, so we
proceeded cautiously. Our concerns were well founded as WASTE indicated they
would miss the quarter and they lowered guidance for the balance of the year and
for next year. The stock collapsed as outraged analysts and growth stock
investors pulled the plug on the company, sending the stock to the low 30's. We
have been buying aggressively, believing the business is worth substantially
more than the present price.
It would be a surprise if MCKESSON and WASTE added much to our return in the
second half. Companies that dramatically disappoint take a while to regain
investor confidence. We expect that if our analysis of their business is
correct, both stocks should perform well over the next few years.
Overall, we believe your portfolio is well positioned to provide satisfactory
returns in the years ahead. As always, we thank you for your support and welcome
your comments.
Bill Miller, CFA
Portfolio Manager
-----------------------------
SPECIAL INVESTMENT TRUST
Our cumulative results for various periods ended June 30, 1999, are as
follows:
<TABLE>
<CAPTION>
3 Months 6 Months 1 Year 3 Years
- --------------------------------------------------------------------------------------
<S><C>
Special Investment Trust +8.17% +14.74% +28.40% +96.54%
Lipper Mid-Cap Funds Index +11.03% +11.90% +13.61% +55.12%
Lipper Small-Cap Funds Index(1) +14.85% +9.43% +1.92% +25.15%
Russell 2000 Index +15.55% +9.28% +1.50% +37.56%
S&P 500 Composite Index +7.06% +12.39% +22.77% +115.25%
</TABLE>
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(1) The Lipper Small-Cap Funds Index is composed of 30 funds whose primary
objective is to invest in companies with market capitalizations less than $1
billion at time of purchase.
7
<PAGE>
Portfolio Managers' Comments -- Continued
Your fund performed well in the quarter, beating the S&P 500, but did not
keep up with the stellar returns of the Russell 2000 and other indices of other
small- and mid-cap focused funds. For the one- and three-year periods we remain
significantly ahead of all the small- and mid-cap benchmarks. Our performance
has bested both the large- and small-cap indices since the market's dramatic
fall in the third quarter of 1998, when we aggressively added to undervalued
positions.
The second quarter of 1999 marked the first time since the third quarter of
1983 that smaller company indices, like the Russell 2000, outperformed larger
cap company indices, like the S&P 500. As detailed in this space at the end of
last year, the smaller company valuation measures are at or near all-time
historic lows relative to their large-cap peers. Even with this rally in the
smaller names, the relative valuation gap remains wide. We continue to find a
plethora of investment opportunities among smaller companies, and believe that
over the long term the valuation disparity between large and small companies
will narrow, creating significant value for investors who have patience and
discipline.
Our performance in the quarter was led by strong price recoveries in some of
our most depressed stocks, like longtime holdings MAGELLAN HEALTH, HOLLYWOOD
PARK, and INACOM, as well as newly added positions like MEDPARTNERS, GENERAL
NUTRITION and MODIS PROFESSIONAL SERVICES. All were up over 50%, led by
MAGELLAN'S 139% return. These substantial moves in such a short period of time
demonstrate the rewards available when pessimism becomes so great that prices
reach ridiculous lows. Our performance in the second quarter was strong in spite
of being hindered by a 24.3% decline in our largest holding, AMERICA ONLINE.
Even with this drop, however, AOL was still up over 60% for the year as of June
30th, contributing to our strong year-to-date performance.
We added two new positions in the quarter. FINOVA GROUP is a commercial
finance company focusing on smaller and mid-sized businesses. The company has a
long track record of consistent growth, very high quality loans and a
conservative balance sheet. Management is focused on shareholder value,
demonstrated by their share repurchases and the fact that compensation of top
management is aligned well with providing excess returns to shareholders. The
company has rising returns on capital, generates cash flow in excess of
accounting earnings and trades at a discount on a variety of measures to its
peers.
We also added a position in TALK.COM, a consumer long distance company that
differentiates itself with a low cost back office combined with a strategy of
marketing and billing over the Web. This strategy creates value by capturing
high revenue long distance customers at a low cost. The company is already
generating $280 million in annual revenue from their online customer base. In
addition, they have a compelling new management team and a powerful but
misunderstood four-year agreement with AOL. At a market capitalization of just
over $600 million, we believe this profitable, growing business is undervalued.
We sold one position in the quarter, WESTERN DIGITAL CORPORATION. The desktop
disk drive market has become even more competitive over the last year. Maxtor
and Fujitsu have established sizeable market share, and Seagate and Quantum have
cut prices aggressively, making it increasingly difficult for WESTERN to return
to profitability and taxing their already weak balance sheet.
As always, we thank you for your support and welcome any suggestions or
comments.
Bill Miller, CFA
Portfolio Manager
Lisa O. Rapuano, CFA
Assistant Portfolio Manager
8
<PAGE>
TOTAL RETURN TRUST
Cumulative results for various periods ended June 30, 1999, are as follows:
<TABLE>
<CAPTION>
3 Months 6 Months 1 Year 3 Years
- --------------------------------------------------------------------------------------
<S><C>
Total Return Trust +11.22% +8.62% +4.56% +81.99%
Lipper Growth & Income Funds Index +9.28% +11.59% +13.56% +78.91%
S&P 500 Composite Index +7.06% +12.39% +22.77% +115.25%
</TABLE>
As shown in the above chart, your Fund had a very good second quarter, on
both an absolute and relative basis, although the Fund still trails its peer
group and the S&P 500 for the year to date.
After a fifteen-month period of narrow equity returns, with the top twenty
("Nifty Twenty") market cap companies in the S&P 500 trouncing the returns of
the other 480 stocks, the market's returns broadened in the second quarter,
which benefited the Total Return Trust.
The broadening of equity returns is due to the relative valuation level and
relative earnings growth of the 20 largest market cap stocks, as compared to the
rest of the index. The shift in earnings growth last year, when the Nifty Twenty
experienced double digit earnings growth, with the remaining names posting
negative earnings growth, reversed in the second quarter.
As the second quarter progressed, 1999 expected earnings growth for the top
20 names declined modestly, while advancing slightly for the rest of the S&P
500. Likewise, the P/E multiple spread between the top 20 names and the rest of
the index declined from 8.9x at the end of March to 7.0x at June 30. The
combination of these two factors resulted in a broadening of equity returns,
with the bottom 480 market cap stocks advancing 9.0% in the second quarter and
the top 20 returning 3.0%.
We believe the broadening of equity returns will continue for a number of
reasons. First, relative valuations, while having recently narrowed, are still
stretched by historical standards. Second, the divergence in the earnings growth
rate between the largest and smallest companies will most likely continue to
narrow. Much more importantly than these two reasons, though, is the probability
of productivity improvements accruing, at this point in the cycle, more to mid-
and small-size companies.
The return on invested capital (ROIC) for the top 50 market cap names in 1998
averaged 32%, well ahead of the median ROIC of about 10%. Productivity
improvements certainly contributed to the significantly higher ROIC of the
largest companies.
Federal Reserve Chairman Alan Greenspan has for several years been discussing
the prospects for enhanced productivity gains inherent in the high rates of
business investment in new and modern equipment, especially computers and other
information processing equipment. One of the many skeptics about sustainable
productivity improvements was the group at Macroeconomic Advisers (MA) of St.
Louis, an economic forecasting and advisory service. However, with productivity
gains continuing to advance, including two quarters of roughly 4% annualized
gains last year, the group at MA rebuilt their model estimating productivity
improvements.
9
<PAGE>
Portfolio Managers' Comments -- Continued
Dr. Lyle Gramley, a former Fed governor, recently published a report
detailing the modeling changes. As part of their methodology, the researchers at
MA divided the total change in productivity into three parts: the part that
comes from "capital deepening" (an increase in the amount of capital used per
unit of labor), the part that is associated with technological advance, and the
part that stems from changes in rates of utilization of capital and labor.
Technology has, and is, profoundly changing the way companies conduct their
business. As is typical, these changes tend to accrue to the larger companies
first, since they generally have greater capital resources to invest. We believe
this is an important factor in the relative ROIC of the top 50 market cap
companies compared to the rest of the S&P 500.
With the cost of technology continuing its decline in an exponential fashion,
the cost of productivity improvements is no longer prohibitively expensive for
smaller (i.e. non-top 50) companies. The smaller companies should be better able
than the largest companies to leverage the productivity improvements coming from
capital deepening and technological advancement, given the substantial decline
in computer pricing over the last several years.
We believe these factors could significantly increase the returns on invested
capital for these companies, with the result being a diminution in the ROIC
spreads between larger and smaller companies. Of course, quite a few smaller
companies will most likely never embrace technological initiatives to the extent
they should, with the result being, at best, a continuation of their current
returns on invested capital.
An example of two smaller companies that should benefit from technological
improvements are Avalon Bay Communities and United Dominion, two apartment REITs
that have recently announced a joint venture to develop a multifamily property
management software application to track occupancy rates. Calculating average
occupancy sounds very simple. However, current software applications commonly
used by both private and public operators are typically designed for an
individual property. An owner of, say, 150 properties would need to print out
occupancy and rental rate reports for each property and then manually input the
relevant data into a spreadsheet to calculate the properties' average occupancy
and rental rate.
This software is expected to provide complete data mining and tracking needs
for the multifamily industry. Avalon estimates the software could save its
industry $3 to 4 million, or about 5%, annually in operating costs, while
providing better and more timely data.
As is typical, portfolio activity was light in the quarter. We purchased
three new stocks, EASTMAN KODAK, ORION CAPITAL and CONAGRA, and sold one,
BANKAMERICA.
EASTMAN KODAK'S stock has been weak recently, off 20% from its high,
reflecting concerns about increased competition in the U.S. film market. While
KODAK has certainly been in a price war with Fuji in the U.S., we believe the
market is overly discounting this part of the company's business. We believe
most of the value in KODAK is franchise value, or the value of future earnings
and cash flow that will be generated by transferring KODAK 's franchise into
other markets such as China and new domestic initiatives such as digitization.
With KODAK likely to dominate digital and China, return on invested capital
expected to accelerate from 14% to 22% by 2003, and the stock selling at a
substantial discount to the market (at only 14.2x and 12.6x, 1999 and 2000
estimated earnings), we believe the stock has substantial appreciation
potential.
10
<PAGE>
ORION CAPITAL is a property and casualty insurance company specializing in
nonstandard personal automobile, worker's compensation, and specialty commercial
insurance. The stock collapsed from $59 to the $30 level, after announcing a
significant strengthening of the company's reserves. At our average $30 purchase
price, the stock was selling at only 1.3x book value (after the special
reserve), 11.0x 1999 and 9.5x 2000 estimated earnings, with a 2.4% yield, and
what we thought to be very limited downside.
As many of our shareholders are aware, we have a relatively long time
horizon, looking out 3 to 5 years when we assess the prospects for our
companies. Sometimes we get lucky, which was certainly the case with ORION
CAPITAL. Within three months of accumulating our position, Royal & Sun Alliance
announced an agreement to acquire ORION for $50 cash, a 67% premium over our
purchase price!
We acquired a small position in CONAGRA, the second largest food processor in
the U.S. Management recently reiterated its 14% long-term earnings growth
target. If achieved, the stock should do well relative to the market.
We sold our BANKAMERICA and rolled the money into an existing (small)
position in WASHINGTON MUTUAL. Both companies are in the mist of integrating
major acquisitions made over the last few years; however, we believe the
integration risk is less for WASHINGTON MUTUAL (WAMU) than BANKAMERICA (BAC),
and WAMU sells for a much lower P/E multiple than BAC.
As always, we appreciate your support and welcome your comments.
Nancy Dennin, CFA
Portfolio Manager
July 23, 1999
DJIA 10910.96
11
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Performance Information
Total Returns for One and Three Years and Life of Class, as of June 30, 1999
The returns shown are based on historical results and are not intended
to indicate future performance. Total return measures investment
performance in terms of appreciation or depreciation in a Fund's 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. The investment return and principal value of an investment in
each 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 that
they differ from actual year-to-year results. No adjustment has been made
for any income taxes payable by shareholders.
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. Information about the Primary Class, offered to
retail investors, is contained in a separate report to its shareholders.
The Funds' total returns as of June 30, 1999, were as follows:
<TABLE>
<CAPTION>
Special Total S&P 500
Value Investment Return Composite
Trust Trust Trust Index
-------------------------------------------------------------------------------------
<S><C>
Average Annual Total Return
Navigator Class:
One Year +42.93% +28.40% +4.56% +22.77%
Three Years +45.38 +25.26 +22.09 +29.09
Life of Class(A) +41.79 +25.48 +22.89 +29.25
Cumulative Total Return
Navigator Class:
One Year +42.93% +28.40% +4.56% +22.77%
Three Years +207.26 +96.54 +81.99 +115.25
Life of Class(A) +395.51 +183.06 +157.24 +217.31
-------------------------------------------------------------------------------------
</TABLE>
(A) Commencement of sale of Navigator Class for each Fund: December 1,
1994.
12
<PAGE>
VALUE TRUST
Illustration of an Assumed Investment of $50,000 made on December 1, 1994
(inception of the Value Trust Navigator Class)
[CHART APPEARS HERE -- PLOT POINTS BELOW]
Value of original
shares purchased
Value of shares plus shares acquired
acquired through through reinvestment
reinvestment of of capital gain
income dividends distributions
---------------- --------------------
12/1/94 50,000 50,000
3/31/95 54,053 54,025
3/31/96 77,583 76,245
3/31/97 104,712 101,616
3/31/98 164,295 158,566
3/31/99 248,629 240,189
6/30/99 247,755 239,636
-----------------------------
Selected Portfolio Performance*
Strong performers for the 2nd quarter 1999
----------------------------------------------------
1. International Business
Machines Corporation +45.8%
2. MGM Grand, Inc. +45.7%
3. Metro-Goldwyn-Mayer, Inc. +39.0%
4. MGIC Investment Corporation +38.7%
5. Nextel Communications, Inc. +37.0%
6. MBNA Corporation +28.3%
7. Telefonos de Mexico S.A. ADR +23.4%
8. Foundation Health Systems, Inc. +23.1%
9. Mandalay Resort Group +20.3%
10. United HealthCare Corporation +19.0%
Weak performers for the 2nd quarter 1999
----------------------------------------------------
1. America Online, Inc. -24.3%
2. Mirage Resorts, Incorporated -21.2%
3. Amgen Inc. -18.7%
4. Storage Technology Corporation -18.4%
5. Western Digital Corporation -18.1%
6. Gateway, Inc. -13.9%
7. Washington Mutual, Inc. -13.5%
8. Lloyds TSB Group plc -10.4%
9. Dell Computer Corporation -9.5%
10. General Motors Corporation -8.2%
* Securities held for the entire quarter.
Portfolio Changes
Securities added during the 2nd quarter 1999
---------------------------------------------
Aetna Inc.
McKesson HBOC, Inc.
Waste Management, Inc.
Securities sold during the 2nd quarter 1999
---------------------------------------------
Compaq Computer Corporation
Conseco, Inc.
13
<PAGE>
Performance Information -- Continued
SPECIAL INVESTMENT TRUST
Illustration of an Assumed Investment of $50,000 made on December 1, 1994
(inception of the Special Investment Trust Navigator Class)
[CHART APPEARS HERE -- PLOT POINTS BELOW]
Value of original
shares purchased
Value of shares plus shares acquired
acquired through through reinvestment
reinvestment of of capital gain
income dividends distributions
---------------- --------------------
12/1/94 50,000 50,000
3/31/95 52,407 52,407
3/31/96 68,049 67,446
3/31/97 76,766 76,120
3/31/98 110,867 109,981
3/31/99 130,835 129,868
6/30/99 141,529 141,268
-----------------------------
Selected Portfolio Performance*
Strong performers for the 2nd quarter 1999
----------------------------------------------------
1. Magellan Health Services, Inc. +138.8%
2. Remedy Corporation +92.0%
3. General Nutrition Companies, Inc. +66.5%
4. Hollywood Park, Inc. +64.8%
5. InaCom Corp. +62.9%
6. MedPartners, Inc. +59.2%
7. Cabletron Systems, Inc. +58.8%
8. PhyCor, Inc. +55.9%
9. Modis Professional Services, Inc. +51.7%
10. Symantec Corporation +50.6%
Weak performers for the 2nd quarter 1999
----------------------------------------------------
1. Dynex Capital, Inc. -39.6%
2. LASER Mortgage Management, Inc. -36.8%
3. America Online, Inc. -24.3%
4. Amazon.com Inc., 4.75% due 2/1/09 -22.9%
5. ICO Global Communications,
15% due 8/1/05 -20.0%
6. Storage Technology Corporation -18.4%
7. CKE Restaurants, Inc. -17.7%
8. Micron Electronics, Inc. -14.4%
9. Gateway, Inc. -13.9%
10. Enhance Financial Services
Group, Inc. -13.2%
* Securities held for the entire quarter.
Portfolio Changes
Securities added during the 2nd quarter 1999
---------------------------------------------
The FINOVA Group Inc.
TALK.com, Inc.
Securities sold during the 2nd quarter 1999
---------------------------------------------
Western Digital Corporation
Total Return Trust
14
<PAGE>
TOTAL RETURN TRUST
Illustration of an Assumed Investment of $50,000 made on December 1, 1994
(inception of the Total Return Trust Navigator Class)
[CHART APPEARS HERE -- PLOT POINTS BELOW]
Value of original
shares purchased
Value of shares plus shares acquired
acquired through through reinvestment
reinvestment of of capital gain
income dividends distributions
---------------- --------------------
12/1/94 50,000 50,000
3/31/95 51,261 51,013
3/31/96 68,870 65,532
3/31/97 86,551 79,947
3/31/98 124,583 113,028
3/31/99 115,638 102,543
6/30/99 128,613 113,509
-----------------------------
Selected Portfolio Performance*
Strong performers for the 2nd quarter 1999
----------------------------------------------------
1. Brunswick Corporation +46.2%
2. International Business
Machines Corporation +45.8%
3. Tupperware Corporation +41.7%
4. Tanger Factory Outlet Centers, Inc. +35.9%
5. Olin Corporation +31.1%
6. Illinova Corporation +28.6%
7. Walden Residential Properties, Inc. +22.0%
8. Edison International +20.2%
9. J.C. Penney Company, Inc. +19.9%
10. Millennium Chemicals Inc. +18.6%
Weak performers for the 2nd quarter 1999
----------------------------------------------------
1. Wyndham International Incorporated -17.1%
2. Washington Mutual, Inc. -13.5%
3. Enhance Financial Services
Group, Inc. -13.2%
4. Lloyds TSB Group plc -10.4%
5. General Motors Corporation -8.2%
6. American Financial Group, Inc. -3.2%
7. Ford Motor Company -0.6%
8. Nationwide Health Properties, Inc. +0.3%
9. United Asset Management
Corporation +0.6%
10. IPC Holdings Limited +0.6%
* Securities held for the entire quarter.
Portfolio Changes
Securities added during the 2nd quarter 1999
---------------------------------------------
ConAgra, Inc.
Eastman Kodak Company
Orion Capital Corporation
Securities sold during the 2nd quarter 1999
---------------------------------------------
BankAmerica Corporation
15
<PAGE>
Portfolio of Investments
June 30, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Value Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Common Stocks and Equity Interests -- 93.8%
Advertising -- 2.2%
WPP Group plc 30,890 $ 261,225
----------
Automotive -- 1.7%
Delphi Automotive Systems Corporation 2,600 48,262
General Motors Corporation 2,400 158,400
----------
206,662
----------
Banking -- 15.5%
Bank One Corporation 5,500 327,594
BankAmerica Corporation 3,027 221,935
BankBoston Corporation 5,100 260,737
Citigroup Inc. 7,088 336,656
Fleet Financial Group, Inc. 1,338 59,387
Lloyds TSB Group plc 12,143 164,611
The Chase Manhattan Corporation 4,600 398,475
Zions Bancorporation 1,313 83,376
----------
1,852,771
----------
Computer Services and Systems -- 12.7%
Dell Computer Corporation 15,000 555,000(A)
First Data Corporation 2,100 102,769
Gateway, Inc. 5,500 324,500(A)
International Business Machines Corporation 2,550 329,587
Storage Technology Corporation 8,000 182,000(A,B)
Western Digital Corporation 2,885 18,753(A)
----------
1,512,609
----------
Consumer Cyclicals -- 1.5%
Mattel, Inc. 7,000 185,062
----------
Electrical Equipment and Electronics -- 2.0%
Koninklijke (Royal) Philips Electronics N.V. 2,323 234,333(A)
----------
Entertainment -- 2.7%
Mandalay Resort Group 5,200 109,850(A,B)
MGM Grand, Inc. 2,570 125,930(A)
Mirage Resorts, Incorporated 5,110 85,594(A)
----------
321,374
----------
Finance -- 6.6%
Fannie Mae 4,400 300,850
Freddie Mac 2,500 145,000
MBNA Corporation 6,368 195,024
The Bear Stearns Companies, Inc. 3,150 147,262
----------
788,136
----------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Food, Beverage and Tobacco -- 1.8%
PepsiCo, Inc. 2,700 $ 104,456
Philip Morris Companies, Inc. 2,636 105,934
----------
210,390
----------
Food Merchandising -- 1.2%
The Kroger Co. 5,000 139,688(A)
----------
Health Care -- 6.5%
Foundation Health Systems, Inc. 8,805 132,075(A,B)
McKesson HBOC, Inc. 9,279 298,094
United HealthCare Corporation 5,600 350,700
----------
780,869
----------
Hotels and Motels -- 2.7%
Hilton Hotels Corporation 5,025 71,292
Starwood Hotels & Resorts Worldwide, Inc. 8,250 252,141
----------
323,433
----------
Insurance -- 6.4%
Aetna Inc. 990 88,552
Ambac Financial Group, Inc. 925 52,841
Berkshire Hathaway Inc. - Class A 4 282,421(A)
MBIA, Inc. 650 42,088
MGIC Investment Corporation 6,114 297,293(B)
----------
763,195
----------
Manufacturing -- 1.2%
Danaher Corporation 2,400 139,500
----------
Media -- 12.8%
America Online, Inc. 13,900 1,535,950(A)
----------
Motion Pictures and Services -- 0.4%
Metro-Goldwyn-Mayer, Inc. 2,747 50,129(A)
----------
Non-Hazardous Waste Disposal -- 1.6%
Waste Management, Inc. 3,600 193,500
----------
Pharmaceuticals -- 1.5%
Amgen Inc. 3,000 182,625(A)
----------
Retail Sales -- 2.0%
Toys "R" Us, Inc. 11,500 237,906(A)
----------
</TABLE>
17
<PAGE>
Portfolio of Investments -- Continued
Legg Mason Value Trust, Inc. -- Continued
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Savings and Loan -- 2.5%
Washington Mutual, Inc. 8,400 $ 297,150
-----------
Telecommunications -- 8.3%
MCI WorldCom, Inc. 3,178 273,521(A)
Nextel Communications, Inc. 6,200 311,162(A)
Nokia Oyj 3,000 274,688
Telefonos de Mexico S.A. ADR 1,600 129,300
-----------
988,671
-----------
Total Common Stocks and Equity Interests
(Identified Cost-- $6,131,035) 11,205,178
------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 6.9%
Goldman, Sachs & Company
5%, dated 6/30/99, to be repurchased at $275,972 on 7/1/99
(Collateral: $305,160 Fannie Mae mortgage-backed securities,
6%, due 1/1/29-2/1/29, value $286,418) $275,934 275,934
Merrill Lynch & Co., Inc.
4.80%, dated 6/30/99, to be repurchased at $275,971 on 7/1/99
(Collateral: $173,224 Fannie Mae mortgage-backed securities, 6-7%,
due 4/1/09-7/1/29, value $169,261; $120,298 Freddie Mac mortgage-
backed securities, 6-7%, due 9/1/18-6/1/29, value $116,354) 275,934 275,934
Morgan Stanley Dean Witter & Co.
4.90%, dated 6/30/99, to be repurchased at $275,971 on 7/1/99
(Collateral: $250,000 Freddie Mac mortgage-backed securities,
5-5.55%, due 9/28/00-1/15/04, value $244,348; $36,660 Freddie
Mac mortgage-backed securities, 5.63%, due 3/15/01, value $37,147) 275,934 275,934
-----------
Total Repurchase Agreements (Identified Cost -- $827,802) 827,802
------------------------------------------------------------------------------------------------------------------
Total Investments -- 100.7% (Identified Cost -- $6,958,837) 12,032,980
Other Assets Less Liabilities -- (0.7)% (80,026)
-----------
NET ASSETS -- 100.0% $11,952,954
===========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $70.10
======
NAVIGATOR CLASS $71.67
======
------------------------------------------------------------------------------------------------------------------
</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 June 30, 1999,
the total market value of Affiliated Companies was $721,218 and the
identified cost was $713,054.
18
<PAGE>
Portfolio of Investments
June 30, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Common Stocks and Equity Interests -- 96.4%
Advertising -- 5.3%
WPP Group plc 13,250 $ 112,050
----------
Banking -- 1.4%
Peoples Heritage Financial Group, Inc. 1,600 30,100
----------
Biotechnology -- 0.3%
Cell Genesys, Inc. 1,260 5,670(A)
----------
Business Services -- 2.9%
Modis Professional Services, Inc. 4,525 62,219(A)
----------
Computer Services and Systems -- 21.4%
Bell & Howell Company 1,000 37,813(A)
Gateway, Inc. 1,800 106,200(A)
ICG Communications 2,700 57,712(A,B)
InaCom Corp. 2,555 32,253(A,B)
Micron Electronics, Inc. 3,250 32,703(A)
Remedy Corporation 378 10,170(A)
Silicon Graphics, Inc. 3,000 49,125(A)
Storage Technology Corporation 2,200 50,050(A)
Symantec Corporation 3,015 76,882(A,B)
----------
452,908
----------
Computer Software -- 1.9%
Sybase, Inc. 3,700 40,700(A)
----------
Electronic-Semiconductor -- 2.4%
Hadco Corp. 1,265 50,284(A,B)
----------
Energy -- 4.7%
Midamerica Energy Holdings Company 1,625 56,265
Northeast Utilities System 2,500 44,219(A)
----------
100,484
----------
Entertainment -- 7.5%
Hollywood Entertainment Corp. 2,520 49,297(A,B)
Hollywood Park, Inc. 2,515 42,755(A,B)
</TABLE>
19
<PAGE>
Portfolio of Investments-- Continued
Legg Mason Special Investment Trust, Inc. -- Continued
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Entertainment -- Continued
Mandalay Resort Group 2,300 $ 48,588(A)
Players International, Inc. 2,485 17,861(A,B)
----------
158,501
----------
Finance -- 4.9%
Mego Financial Corp. 300 234(A)
The FINOVA Group Inc. 1,100 57,888
United Asset Management Corporation 2,000 45,500
----------
103,622
----------
Food, Beverage and Tobacco -- 1.0%
Cott Corporation 6,000 21,750(B)
----------
Health Care -- 7.0%
Magellan Health Services, Inc. 2,746 27,457(A,B)
MedPartners, Inc. 8,933 67,557(A)
PhyCor, Inc. 7,185 53,214(A,B)
----------
148,228
----------
Insurance -- 9.5%
Enhance Financial Services Group, Inc. 2,700 53,325(B)
Orion Capital Corporation 1,725 61,885(B)
Radian Group Inc. 1,737 84,784
----------
199,994
----------
Media -- 11.0%
America Online, Inc. 2,100 232,050(A)
----------
Miscellaneous -- 0.1%
Olsen & Associates AG 300 1,929(A,C)
----------
Networking Products -- 2.2%
Cabletron Systems, Inc. 3,600 46,800(A)
----------
Real Estate -- 0.5%
Dynex Capital, Inc. 1,857 3,714
LASER Mortgage Management, Inc. 1,795 6,170(B)
----------
9,884
----------
Restaurants -- 3.1%
CKE Restaurants, Inc. 4,000 65,000(B)
----------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Specialty Retail -- 7.7%
Consolidated Stores Corporation 2,200 $ 59,400(A)
General Nutrition Companies, Inc. 2,453 57,181(A)
Liz Claiborne, Inc. 1,249 45,574
----------
162,155
----------
Telecommunications -- 1.6%
TALK.com, Inc. 3,000 33,750(A)
----------
Total Common Stocks and Equity Interests
(Identified Cost-- $1,472,245) 2,038,078
------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 1.2%
Amazon.com Inc., 4.75%, due 2/1/09 $20,000 19,400(D)
ICO Global Communications, 15%, due 8/1/05 15,000 6,000
----------
Total Corporate Bonds and Notes (Identified Cost -- $28,700) 25,400
------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 2.2%
Goldman, Sachs & Company
5%, dated 6/30/99, to be repurchased at $15,776 on 7/1/99
(Collateral: $17,445 Fannie Mae mortgage-backed securities,
6%, due 2/1/29, value $16,374) 15,775 15,775
Merrill Lynch & Co., Inc.
4.80%, dated 6/30/99, to be repurchased at $15,776 on 7/1/99
(Collateral: $16,932 Fannie Mae mortgage-backed securities,
6.50%, due 4/1/29, value $16,333) 15,774 15,774
Morgan Stanley Dean Witter & Co.
4.90%, dated 6/30/99, to be repurchased at $15,776 on 7/1/99
(Collateral: $16,060 Freddie Mac mortgage-backed securities,
5.10%, due 5/17/00, value $16,093) 15,774 15,774
----------
Total Repurchase Agreements (Identified Cost -- $47,323) 47,323
------------------------------------------------------------------------------------------------------------------
Total Investments-- 99.8% (Identified Cost -- $1,548,268) 2,110,801
Other Assets Less Liabilities -- 0.2% 3,392
----------
NET ASSETS -- 100.0% $2,114,193
==========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $34.95
======
NAVIGATOR CLASS $36.88
======
------------------------------------------------------------------------------------------------------------------
</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 June 30, 1999,
the total market value of Affiliated Companies was $615,845 and the
identified cost was $605,651.
(C) Private placement and an illiquid security valued at fair value under
procedures adopted by the Board of Directors. This security represents
.09% of net assets.
(D) Rule 144a security -- A security purchased pursuant to Rule 144a under
the Securities Act of 1933 which may not be resold subject to that
rule except to qualified institutional buyers. This security
represents .92% of net assets.
21
<PAGE>
Portfolio of Investments
June 30, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Total Return Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Common Stocks and Equity Interests -- 93.5%
Aerospace/Defense -- 4.0%
Northrop Grumman Corporation 381 $ 25,278
--------
Automotive -- 4.8%
Delphi Automotive Systems Corporation 217 4,022
Ford Motor Company 100 5,644
General Motors Corporation 310 20,460
--------
30,126
--------
Banking -- 17.6%
Bank One Corporation 225 13,401
Citigroup Inc. 450 21,375
Fleet Financial Group, Inc. 235 10,428
Lloyds TSB Group plc 2,584 35,023
The Chase Manhattan Corporation 360 31,185
--------
111,412
--------
Chemicals -- 2.3%
Millennium Chemicals Inc. 284 6,684
Olin Corporation 616 8,129
--------
14,813
--------
Computer Services and Systems -- 8.2%
International Business Machines Corporation 400 51,700
--------
Consumer Products -- 6.2%
Brunswick Corporation 679 18,913
Tupperware Corporation 796 20,298
--------
39,211
--------
Electric Utilities -- 5.3%
Edison International 785 20,999
Illinova Corporation 465 12,671
--------
33,670
--------
Finance -- 5.3%
The Bear Stearns Companies, Inc. 396 18,493
United Asset Management Corporation 648 14,747
--------
33,240
--------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Food, Beverage and Tobacco -- 2.1%
ConAgra, Inc. 150 $ 3,994
Nabisco Holdings Corp. 209 9,039
--------
13,033
--------
Hotels and Motels -- 0.9%
Wyndham International Incorporated 1,380 5,867
--------
Insurance -- 9.9%
American Financial Group, Inc. 420 14,306
Enhance Financial Services Group, Inc. 1,166 23,031
IPC Holdings Limited 466 9,324
Lasalle Re Holdings Limited 416 7,071
Orion Capital Corporation 242 8,678
--------
62,410
--------
Oil Refining and Marketing -- 1.4%
Unocal Corporation 228 9,031
--------
Photo Equipment and Supplies -- 2.7%
Eastman Kodak Company 250 16,938
--------
Real Estate -- 12.2%
Mid-America Apartment Communities, Inc. 663 15,327
National Golf Properties, Inc. 561 13,634
Nationwide Health Properties, Inc. 650 12,391
Regency Realty Corporation 578 12,676
Tanger Factory Outlet Centers, Inc. 524 13,634(B)
Walden Residential Properties, Inc. 450 9,675
--------
77,337
--------
Retail Sales -- 7.1%
J.C. Penney Company, Inc. 441 21,421
Toys "R" Us, Inc. 1,135 23,480(A)
--------
44,901
--------
Savings and Loan -- 3.5%
Washington Federal, Inc. 535 12,003
Washington Mutual, Inc. 290 10,259
--------
22,262
--------
Total Common Stocks and Equity Interests
(Identified Cost-- $459,247) 591,229
------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Portfolio of Investments--Continued
Legg Mason Total Return Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------
<S><C>
Repurchase Agreements -- 6.0%
Goldman, Sachs & Company
5%, dated 6/30/99, to be repurchased at $12,569 on 7/1/99
(Collateral: $13,899 Fannie Mae mortgage-backed securities,
6%, due 2/1/29, value $13,046) $12,567 $ 12,567
Merrill Lynch & Co., Inc.
4.80%, dated 6/30/99, to be repurchased at $12,569 on 7/1/99
(Collateral: $13,490 Fannie Mae mortgage-backed securities,
6.50%, due 4/1/29, value $13,013) 12,567 12,567
Morgan Stanley Dean Witter & Co.
4.90%, dated 6/30/99, to be repurchased at $12,569 on 7/1/99
(Collateral: $12,670 Federal Home Loan Bank government-backed
securities, 5.63%, due 3/19/01, value $12,822) 12,568 12,568
--------
Total Repurchase Agreements (Identified Cost -- $37,702) 37,702
------------------------------------------------------------------------------------------------------------------
Total Investments -- 99.5% (Identified Cost -- $496,949) 628,931
Other Assets Less Liabilities -- 0.5% 3,310
--------
NET ASSETS -- 100.0% $632,241
========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $22.39
======
NAVIGATOR CLASS $22.55
======
------------------------------------------------------------------------------------------------------------------
</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 June 30, 1999,
the total market value of Affiliated Companies was $13,634 and the
identified cost was $13,003.
24
<PAGE>
Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
This report is not to be distributed unless preceded or
accompanied by a prospectus.
LEGG MASON WOOD WALKER, INCORPORATED
---------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
LMF-002
8/99
