<PAGE>
Investment Adviser
Legg Mason Fund
Baltimore, MD
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
G. Peter O'Brien
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
2/00
Quarterly Report
December 31, 1999
Legg Mason
Value Trust, Inc.
Special Investment
Trust, Inc.
Total Return Trust, Inc.
Primary Class
[LEGG MASON FUNDS Logo]
The Art of Investing/SM/
<PAGE>
To Our Shareholders,
The following table summarizes key statistics for the Primary Class of shares
of the Legg Mason Value Trust, Special Investment Trust and Total Return Trust,
as of December 31, 1999:
<TABLE>
<CAPTION>
Total Returns/1/
-----------------------------
3 Months 12 Months
-------- ---------
<S> <C> <C>
Value Trust +18.9% +26.7%
Lipper Large-Cap Growth Funds/2/ +26.6% +38.1%
Standard & Poor's 500 Composite Index +14.9% +21.0%
Special Investment Trust +22.6% +35.5%
Lipper Mid-Cap Core Funds/2/ +30.2% +38.3%
Russell 2000 Index +18.4% +21.3%
Total Return Trust -2.7% -6.6%
Lipper Multi-Cap Value Funds/2/ +7.6% +7.8%
</TABLE>
As the table indicates, Value Trust and Special Investment Trust outperformed
relevant stock market indices in the quarter and year ended December 31,
although trailing the average performance of mutual funds in their respective
Lipper categories. Total Return Trust's performance was below that of the
average fund in its Lipper category during the comparison periods. Detailed
comments on each fund appear in the portfolio managers' comments on the
following pages.
I am happy to announce that Lisa Rapuano, formerly assistant manager of
Special Investment Trust, has been named co-manager of Special Investment Trust
and Director of Research for Legg Mason Fund Adviser. This promotion recognizes
Lisa's substantial contributions toFund Adviser since she joined us five years
ago.
Bill Miller, the portfolio manager of Value Trust (and who, with Lisa, manages
Special Investment Trust), has been the subject of major recent articles in the
Wall Street Journal, Barron's, and other publications. The articles point out
that, in each of the past nine years, the Value Trust (Primary Class) has
outperformed the Standard & Poor's 500 Composite Index,/3/ and that no other
mutual fund manager
- ----------
/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 were reinvested at the time
they were paid.
/2/ Lipper Analytical Services, Inc. recently revised its methods of
categorizing mutual funds. Value Trust is now included in Lipper's "Large-
Cap Growth Fund" category (funds which normally invest in larger
capitalization issues with earnings expected to grow significantly faster
than earnings of stocks included in Standard & Poor's 500 stock index).
Special Investment Trust is included in the "Mid-Cap Core Fund" category
(funds which normally invest in mid-sized capitalization issues, with wide
latitude in the companies in which they invest). Total Return Trust is
included in the "Multi-Cap Value Fund" category (funds which normally invest
in issues, with a variety of market capitalization sizes, which are
considered to be undervalued relative to stocks in the Standard & Poor's 500
stock index).
/3/ The strong performance of both the Value Trust and the S&P 500 over the past
nine years occurred during a period of substantial economic growth and
favorable equity markets. There can be no assurance that similar conditions
will prevail in the months and years ahead. The S&P 500 is an unmanaged
index of common stock prices and includes reinvested dividends.
<PAGE>
has achieved such a record since the early 1980s. For reasons he often has
discussed in these reports, Bill continues to caution that, over the next few
years, investment returns of the Value Trust and the stock market generally are
likely to decline from the exceptional levels of recent years.
We are pleased to report that Legg Mason has made a seamless transition into
the new century. Our critical internal and external systems are operating free
of Y2K disruptions. Internal and external operations, including the Fund's
custodian and transfer agency, are running smoothly, and Fund shareholders are
receiving uninterrupted account maintenance and transaction support.
Sincerely,
/s/ John F. Curley, Jr.
--------------------------
John F. Curley, Jr.
President
January 19, 2000
2
<PAGE>
Portfolio Managers' Comments
Fourth Quarter 1999
Value Trust
Your Fund had a good fourth quarter, rising 18.91%. This outpaced both the S&P
500 and the Dow, which rose 14.88% and 11.66%, respectively. Summary statistics
for those indices and for two categories of mutual funds are given below:
<TABLE>
<CAPTION>
Cumulative Returns
------------------------------------------------------------------
First Second Third Fourth Since
Quarter Quarter Quarter Quarter 1 Year 3 Year 5 Year 10 Year 15 Year Inception*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Value Trust +18.69% -0.58% -9.70% +18.91% +26.71% +157.08% +400.94% +604.57% +1,323.96% +3,129.34%
S&P 500 +4.99% +7.06% -6.25% +14.88% +21.04% +107.52% +251.12% +432.78% +1,245.97% +2,094.65%
DJIA +7.03% +12.56% -5.38% +11.66% +27.29% +87.78% +231.65% +440.76% +1,391.33% +2,368.41%
Lipper Diversified
Equity Funds +0.93% -3.33% -5.37% +19.60% +27.11% +82.43% +183.25% +341.66% +874.44% N/A
Lipper Large-Cap
Growth Funds +4.36% +6.49% -3.64% +26.58% +38.09% +139.81% +279.21% +505.21% +1,209.83% N/A
</TABLE>
- ----------
* Inception: April 16, 1982.
Our results for calendar 1999 again exceeded those of the S&P 500, the ninth
consecutive year we have been ahead of that index. You may have read that the
Value Trust is the only fund to have outperformed the S&P over that time period.
It is important to understand that those results are an artifact of the
calendar. If our returns were measured by our fiscal year end periods, for
example, they would not show the same level of persistent outperformance. Our
objective is to provide investment results in excess of those achievable by
investing in an index fund over a multi-year period; it is not to beat the index
every day, week, quarter, or year.
Value funds had one of their worst years in 1999, extending a period where
they have underperformed funds whose investment processes focus on growth, or
minimize valuation. Some funds with exceptional long-term records finished down
for the year, such as Sequoia Fund, or earned low single digit returns, such as
Longleaf Partners.
Investment success last year was determined almost exclusively by how heavily
weighted one was in technology. As you probably know, the technology-heavy
NASDAQ index rose over 85% in l999, the largest single twelve-month increase of
any broad-based index in history. Most value funds have little or no technology
exposure, principally because technology stocks are among the most highly valued
stocks in the market by conventional measures such as price to earnings or price
to book value.
The Value Trust has had market or greater technology weightings for several
years, which is why we have done better than our value-oriented brethren. We
have believed, and continue to believe, that technology can be analyzed on a
business value basis and that investing in companies with a sustainable
competitive advantage as evidenced by their return on invested capital will
provide above average shareholder returns.
We believe, though, that the dramatic price gains achieved by the major
technology companies have removed most of the undervaluation present a few years
ago. Accordingly, the risk of owning these securities has increased
substantially. Our experience has been that most investor's psychological
assessment of risk is inversely proportional to the most recent price action in
their holdings. If a stock has gone up a lot, they feel more confident about it
and perceive its risk to be lower than it was prior
3
<PAGE>
Portfolio Managers' Comments--Continued
to the price rise. If a stock has dropped a lot, they believe it is riskier
because of its decline. The opposite is typically the case.
Last year more funds had triple digit returns than ever before in history.
Last year the average return of general equity funds was ahead of the market for
the first time in years, although the median return still lagged the market.
Shareholders in the most successful funds no doubt are feeling quite cheerful,
while those in funds whose returns have lagged in recent years are probably
redeeming their shares in search of better results.
We have written in the past about enantiodromia, the tendency for things to
swing back and forth. We think many of the securities which have performed
poorly for us in the last year or so are likely to do much better this year,
while many of our heretofore strongest performers are more vulnerable than they
have been.
Only three weeks into the new year both America Online and Gateway, our two
largest holdings, are down 15%. AOL has agreed to buy Time Warner in the largest
merger in history, while Gateway has sold off due to a shortfall in this
quarter's earnings as a result of their inability to secure enough chips to meet
strong demand.
The history of large mergers conduces to caution. According to the accounting
firm KPMG, 83% of mergers fail to create substantial shareholder value. Many of
the worst performing stocks in the past few years have been the result of big
acquisitions and subsequent integration problems, including Waste Management,
Albertson's, Mattel, and McKesson, all names we own.
We are still assessing the implications of the AOL/Time Warner deal. The deal
is strategically extremely interesting and we believe has broad implications for
valuation in the Internet space and beyond. Companies involved in very large
deals that take a year to close such as this one, rarely outperform the market.
MCI/Worldcom is a prominent example of a company where shares have traded
sideways for the past 12 months even with few evident integration problems.
Shareholders need to be aware that should we conclude that the deal promises
attractive long-term returns, we would be unlikely to try to trade out of a
billion dollar position just to try to cycle the money into something we hoped
would do better over the next 12 months. We are investors, not traders.
We remain quite optimistic about Gateway and think they will have a good year.
The stock performed well for us last year, rising 181% and helping to offset
losses in other holdings. There is plenty of time for them to recover from this
shortfall and for the stock to regain its lost ground.
The market's rocky start has clipped some of our financials, a group which
lagged the market badly last year as interest rates rose. We think rising rates
are the biggest risk to the equity market this year. Long rates have risen to
about 6.7% without affecting much of the market outside the financial services
sector. We believe if they approach or hit 7% the entire market will be
affected. If rates peak this year, and start down or even stabilize, then our
financials should do quite well.
Portfolio activity was predictably modest in the quarter. We bought one stock:
Albertson's, a supermarket chain. The company has had some integration issues
with their purchase of American Stores, and earnings have suffered as a result.
Trading now at under 12x this year's earnings, we think Albertson's is a
bargain. Prior to l999, the company had the longest unbroken string of positive
returns to shareholders of any company in the S&P 500: 25 years (Coca Cola was
second). We sold several issues, mostly smaller positions in a variety of
industries. The money from these sales was recycled
4
<PAGE>
into stocks like Albertson's and Waste Management, whose prospects we deemed
greater than those of the companies sold.
As always, we appreciate your support and welcome your comments.
January 18, 2000 Bill Miller, CFA
DJIA 11560.72
-------------------
Special Investment Trust
The cumulative results of your fund for the various periods ending December
31, 1999, were as follows:
<TABLE>
<CAPTION>
3 Months 1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Special Investment Trust +22.64% +35.54% +104.10% +221.65% +461.22%
Lipper Midcap Core Funds +30.20% +38.27% +82.66% +169.53% +351.72%
Lipper U.S. Diversified
Equity Funds +19.60% +27.11% +82.43% +183.25% +341.66%
S&P 500 +14.88% +21.04% +107.52% +251.12% +432.78%
Russell 2000 +18.44% +21.26% +44.60% +116.37% +251.64%
</TABLE>
Special Investment Trust finished the year on a strong note, with quarterly
and full year performance ahead of the S&P 500 index of larger companies, the
Russell 2000 index of smaller companies, and the Lipper measure of all domestic
diversified funds. We slightly trailed the Lipper measure of Midcap Core funds
for the quarter and year. Our three- and five-year records are ahead of all of
these indices save the S&P 500, and our ten-year record beats all of these
indices and fund averages.
Many of our shareholder letters begin with a quote, usually from someone
famous or smart, or both. In the recent past, we have quoted Fed Chairman Alan
Greenspan, William James, William Shakespeare and Alexis de Toqueville. The
quote that seems most appropriate for the purposes of this letter however, hails
from a much more mundane source, the music group R.E.M.:
"It's the end of the world as we know it, and I feel fine."
We choose this quote not because of the over-hyped and over-covered passing of
the millennium, which caused some to reflect on the world's demise, but because
we have seen significant hand wringing over the changes in the economy and the
market. We think these changes are worth discussing. Given the level of dismay
we have heard over the ascendance of technology stocks, one would think it's the
end of the world. We believe it is a significant change to which we all need to
adapt, but, as we do so, we "feel fine."
Some investment managers, especially those who focus on stocks with low
price/earnings and low price/book ratios, have avoided technology stocks, saying
that these companies rarely hit reasonable valuation measures. As a result, many
funds have little exposure to this group, and have lagging performance as a
result. Lately, we have heard arguments that one should just buy the tech stocks
because they are going up. The implication of this view is that those who own
these stocks are not
5
<PAGE>
Portfolio Managers' Comments--Continued
doing any valid valuation work, are somehow cheating, or are not adhering to
some dogmatic philosophical purity that needs to be maintained for its own sake.
We believe that technology is an important part of the future of the economy,
and thus it is imprudent to ignore it outright. It is true that many technology
stocks have reached lofty valuations, some of which are warranted, and some of
which are not. However, we dispute that one cannot find solid value stocks in
these categories. We do not sacrifice any of our rigorous valuation discipline
in order to own technology.
Many of the Fund's better performers in the last few years have been
technology companies, and we bought them all when they were significantly
undervalued. Indeed, in many cases these stocks held low P/Es or low price/sales
ratios when we purchased them. All of these stocks would have been available to
any manager that adhered to a low P/E approach. Examples include Gateway,
Symantec, Cabletron, and Sybase, all of which were up over 100% in 1999. Each of
these companies was in the midst of negative news or coming through some sort of
turnaround when we became involved. We have owned Gateway, a consumer personal
computer company, for several years at lower prices, but one could have
purchased it in June of last year at just 16x estimated 2000 earnings. Symantec,
an anti-virus and computer security software company, traded as low as $12 1/2
in April of 1999, a mere 6.3x earnings expected for their March 2000 fiscal
year. In April, networking company Cabletron Systems was trading at 10x
estimated 1999 earnings, and less than 0.5x sales. Sybase, a database software
company with an emergent mobile software application, traded as low as 0.4x
sales and 9.5x 1999 earnings.
At the time these stocks were at these low prices, however, it was less than
clear that the earnings would materialize as they have. It required a
significant amount of work to understand the business models and competitive
challenges, and to look at the possibility of the businesses reaching their
goals. We deal with this uncertainty by forecasting a variety of scenarios and
figuring out what the company would be worth under each. In cases such as the
ones mentioned above, the stocks were already discounting a very dire scenario,
and if any of the planned improvement were to come through, the companies would
prove to be undervalued.
Though we have successfully purchased technology companies at "value" prices,
we should clearly state that not all of our technology investments work out. We
have some turnarounds that never turn around, and some seemingly undervalued
companies that deteriorate to the point that they are actually either fairly- or
over-valued. This is exactly the same situation as in any other sector in which
we invest. In fact, none of this analysis is any different than what we go
through to analyze any business, whether it is technology, garbage, retail or
health care. Yet it is the technology sector that investors seem to revile and
fear the most. Why?
We believe the answer to this question has two parts: First, technology
changes rapidly, so analysis of business models and competitive positions must
be fleet and adaptable. Second, some of the economic models are knowledge-based
instead of hard asset-based, so traditional accounting, and even some
traditional economics, may not be as applicable. Neither of these is
insurmountable. It is more difficult to forecast with confidence a growth rate
into the future for a technology company than for, say, a consumer products
company. Therefore, one must use a variety of probability-weighted scenarios, as
described above, to determine the most likely outcomes. One must also be willing
to change assumptions and forecasts as the company evolves.
6
<PAGE>
While this adaptable forecasting may be most relevant to technology companies,
we believe that this probabilistic methodology should be used for all companies.
It may be even more relevant in the current era, where traditional business
models are being challenged by technological advances and the Internet. Chemical
companies are changing because of Internet selling by companies like ChemNet,
construction companies are changing because of handheld communications and
wireless devices, entertainment companies are merging with Internet companies,
retailers are being forced to compete with online merchants. The changes affect
everyone. Understanding technology, whether you invest in it directly or not, is
crucial if one is forecasting the future of any business.
Accounting and economics for knowledge-based businesses is nothing new, but it
may require investors to adjust their thinking slightly. Traditional accounting
was designed to represent the economics of businesses that needed to invest in
physical capital to earn a rate of return. The rules are set up to represent
these hard assets on the balance sheet, and to charge the cost of the investment
to a company over the useful life of the assets. Because of the link between
capital investment and economic return, most of these types of companies run
negative free cash flow while they are growing, but generate significant free
cash once growth slows. Much of the conventional wisdom as to what a company
with such-and-such a growth rate should be worth is based on these underlying
economic assumptions. However, with many technology and so-called new economy
companies, there is very little physical asset investment. Most investment is in
people, training, and software. These assets are usually less expensive and more
scalable than physical assets, but can also be worthless or can walk out the
door. As a result, many knowledge-based businesses generate much more free cash
flow as they grow than a manufacturing business might, but the sustainability of
that cash flow is much more difficult to assess. In addition, with knowledge-
based businesses, it is more difficult to understand the barriers to competition
and the longevity of competitive advantage.
Traditional valuation metrics like P/Es are simply shortcuts that have evolved
over time to quickly discount an earnings stream. If earnings and free cash flow
are equal, P/Es can be a useful tool. However, the reason that P/Es vary so much
from one stock to another is that the economics vary from one stock to another.
It is only logical that different shortcuts to valuation should emerge for
different economic models. If you take it down to a further level of
granularity, however, to a forecast of actual free cash flows and capital
investments, all businesses can be put on equal theoretical footing and valued
using plain, old-fashioned discounted cash flow.
Not all technology companies are good investments, and we don't really have
any opinion on the very small sliver of large-cap technology stocks at the top
of the market. (These few stocks appear to have diverged from the rest of the
market in terms of traditional valuation measures like P/E. These companies may
be overvalued and may not be, we don't know. The trick is to figure out whether
the high expectations being discounted in those stocks are really achievable,
and what level of conviction one has that the companies will achieve those
results.) Our focus here is simply to show that some technology companies are
available at bargain prices, and that one need not sacrifice the tenets of a
valuation-driven philosophy in order to own technology.
We hope the above discussion provides a framework for thinking about the
changes that the economy and the market are currently experiencing. It is not,
despite the beginning quotation, the end of the world as we know it.
7
<PAGE>
Portfolio Managers' Comments--Continued
We bought four new positions in the quarter. Cadence Design Systems is a
software company providing computer-aided design ("CAD") products for designing
semiconductors. Due to a change in the sales process, Cadence experienced a
dislocation in reported revenue, and reported earnings appeared to be declining.
However, the cash flow characteristics of the business are actually improving
due to the sales change, and we believe the value of the company is determined
by the cash flow, not the misinterpreted accounting earnings. We purchased
Cadence in the low teens and believe it is currently worth $30 to $35.
Republic Services is a waste services company. Though Republic has no
accounting, billing, or operational issues, as its competitors do, the stock was
punished severely in the wake of the problems at Waste Management Inc. We
believe management has a good plan for managing their capital allocation, has
solid properties and hauling assets, and is worth $20 to $22 today, based on
their superior free cash flow.
Sungard Data Systems is a computer services company that provides disaster
recovery services and software to the financial services industry. The stock
fell in response to a short-term slowdown in sales because of concerns over the
year 2000. This is a very good business with high returns on capital and
significant recurring revenue, and it has historically traded at a fairly high
valuation. We used the market's reaction to short-term events to establish a
position in the $23 range, and we believe the company is currently worth at
least $35 to $40.
We purchased Wellpoint Health Networks in the wake of the fear over HMO
lawsuits. Wellpoint is considered one of the best managed health care companies
and has virtually no "gatekeeper"-type HMO business. Nonetheless, the stock was
punished and we scooped up shares in the low $50 range. The shares have since
recovered to the price level seen before the tobacco trial attorneys filed the
lawsuits. We believe Wellpoint continues to be undervalued.
We eliminated eight positions in the quarter. Midamerica Energy Holdings,
Orion Capital, Northeast Utilities and Players International were all acquired
or were in the midst of being acquired. We sold Dynex Capital, InaCom Corp. and
Silicon Graphics as the fundamentals of the businesses deteriorated and our
expectations for improvement were incorrect. Finally, we sold Remedy Corp.,
which had more than doubled and was a fairly small position.
As always, we welcome your comments and appreciate your continued support.
January 18, 2000 Lisa O. Rapuano, CFA
DJIA 11560.72 Bill Miller, CFA
-------------------
Total Return Trust
<TABLE>
<CAPTION>
Cumulative Returns
Fourth -------------------------------
Quarter 1 Year 3 Years 5 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Trust -2.72% -6.56% +27.98% +118.80%
Lipper Multi-Cap Value Funds +7.58% +7.78% +47.56% +135.37%
S&P 500 +14.88% +21.04% +107.52% +251.12%
DJIA +11.66% +27.29% +87.78% +231.65%
NASDAQ Composite +48.18% +85.59% +215.20% +441.16%
</TABLE>
8
<PAGE>
The market's return in 1999 was heavily skewed toward technology. The NASDAQ's
remarkable 86% gain was the best twelve-month performance ever posted by an
index in the history of the market, surpassing the 81% gain by the DJIA in 1915.
Dissecting the NASDAQ, though, shows the astonishing narrowness of the market.
Half of the composite's stocks were down for the year, while the median return
of the index was only slightly positive. Likewise, the 21% rise in the S&P 500
masks the fact that excluding technology, the index would have gained only 2%
for the year. If a fund was overweight in technology, it outperformed its
benchmark. If it was underweight, it underperformed.
The Total Return Trust has historically invested in securities with above
market dividend yields and below average volatility relative to the S&P 500. The
majority of technology stocks have little or no yield and above average
volatility. Consequently, the Fund has generally been underweight in technology,
and has underperformed the S&P 500 for the time periods shown. The Fund's
current peer group/1/ of multi-cap value funds has focused less on yield than
has the Total Return Trust. The average pre-expense dividend yield of the multi-
cap value funds is 2.05%, compared to the 3.41% pre-expense dividend yield of
the Fund./2/
Yield was among the poorest correlation of market performance last year.
Breaking down the S&P 500 by yield shows the amazing inverse relationship
between yield and performance. The 50 highest yielding stocks (average yield
5.8%) were down an average 26% in 1999. The next 50 highest yielding stocks
(average yield 3.7%) were down on average 18%; the next 50 (average yield 2.8%)
declined 6%. In stark contrast, the 94 stocks in the S&P 500 that didn't pay a
dividend were up an average 78% last year.
The poor performance of yield was not confined to the equity market. Thirty-
year Treasury bonds declined 14% in 1999, marking their worst performance since
sales of the securities began 22 years ago. The last time the bond market posted
a negative return was 1994. The Total Return Trust was down 7% that year. The
rally in yield that began in 1995 resulted in the Fund posting 30%+ annual gains
in each of the subsequent three years.
Certain structural facts have made yield less effective as a source of
performance over the last couple of years. First, tax law changes have reduced
the relative attractiveness of dividends compared to capital gains. Investors
generally prefer paying capital gains tax rather than receiving dividends that
are taxed at ordinary income tax rates. Secondly, management philosophies have
changed over the last several years. Managements increasingly prefer the
flexibility to use their free cash flow generation to buy back stock rather than
raise their dividends. The universe of relatively high yielding stocks used to
include many high quality names with strong growth potential. The universe is
now more oriented toward companies with generally slower growth prospects.
As I outlined in the prior quarter's report to shareholders, I began
implementing several changes in the third quarter to reduce the volatility of
the Fund relative to its peer group. The first change involves expanding the
universe of companies from those with high current yields to those returning
excess capital generation to shareholders through dividends and actual or
anticipated share repurchases. The
- -----------
/1/ Morningstar and Lipper changed their fund classification system last year.
The Total Return Trust was previously classified as a growth and income
fund.
/2/ The average after-expense dividend yield of the multi-cap value funds is
+.68%, compared to +1.54% for the Fund. This yield is computed by dividing
income dividends distributed during the prior year by the latest NAV
adjusted for capital gains distributions, and is based on the twelve-month
period ended December 31, 1999.
9
<PAGE>
Portfolio Managers' Comments--Continued
second change has been to expand the number of holdings in the Fund to between
50 and 70, and to expand the industry representations to reduce the volatility
of the Fund relative to its peer group. The restructuring continued during the
fourth quarter, as shown in the list of purchases and sales found elsewhere in
this report.
The investment strategy of the Fund remains the same: to invest in a portfolio
of securities that we believe are being priced by the market at significant
discounts to their intrinsic value, consistent with the Fund's low risk profile.
The result of the changes made in the portfolio has been an expansion in the
number of holdings to 63 as this letter is written, and a portfolio that
continues to trade at a significant discount to the S&P 500, 16x 1999 and 14x
2000 estimated earnings, compared to 26x and 24x for the S&P 500.
I'm pleased to announce that Jay Leopold, CFA, has been named assistant
manager of your Fund. Jay has more than 13 years of investment experience in
senior analyst roles at various Legg Mason subsidiaries, and has been an
integral part of our analytic team for the last several years. Jay holds a B.A.
from The Wharton School of the University of Pennsylvania.
January 14, 2000 Nancy Dennin, CFA
DJIA 11722.98
10
<PAGE>
Performance Information
Total Returns for One, Five and Ten Years and Life of Class, as of
December 31, 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.
Information about the Navigator Class, offered only to certain institutional
investors, is contained in a separate report to its shareholders.
The Funds' total returns as of December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Special S&P 500
Value Investment Total Return Composite
Trust Trust Trust Index
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total
Return
Primary Class:
One Year +26.7% +35.5% -6.6% +21.0%
Five Years +38.0 +26.3 +17.0 +28.6
Ten Years +21.6 +18.8 +12.0 +18.2
Life of Class--Value Trust/A/ +21.7 +19.1
Life of Class--Special Investment Trust/A/ +16.5 +18.0
Life of Class--Total Return Trust/A/ +10.6 +18.3
Cumulative Total Return
Primary Class:
One Year +26.7% +35.5% -6.6% +21.0%
Five Years +400.9 +221.7 +118.8 +251.1
Ten Years +604.6 +461.2 +209.7 +432.8
Life of Class--Value Trust/A/ +3,129.3 +2,094.7
Life of Class--Special Investment Trust/A/ +753.0 +914.0
Life of Class--Total Return Trust/A/ +314.0 +974.1
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Primary Class inception dates are:
Value Trust--April 16, 1982
Special Investment Trust--December 30, 1985
Total Return Trust--November 21, 1985
11
<PAGE>
Portfolio Manager's Comments
Value Trust
Illustration of an Assumed Investment of $10,000 made on April 16, 1982
(inception of the Value Trust Primary Class)
[MOUNTAIN CHART APPEARS HERE -- SEE 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
4/16/82 10,000 10,000
10,250 10,250
11,680 11,680
14,091 13,940
16,401 16,160
18,490 18,199
19,144 18,780
12/31/83 20,108 19,633
19,425 18,871
19,333 18,742
21,233 20,468
22,679 21,755
24,683 23,583
26,754 25,531
26,239 24,947
12/31/85 29,910 28,332
34,510 32,555
35,225 33,209
32,816 30,797
32,737 30,745
37,924 35,504
38,753 36,279
40,308 37,582
12/31/87 30,324 28,175
34,729 32,268
37,411 34,660
37,659 34,766
38,134 34,926
41,109 37,650
43,646 39,817
48,463 43,918
12/31/89 45,834 41,282
44,290 39,891
45,741 40,928
36,006 31,981
38,063 33,362
43,014 37,701
43,365 37,800
48,373 41,928
12/31/91 51,282 44,239
51,414 44,210
51,377 44,041
52,396 44,830
57,149 48,803
59,003 50,184
58,545 49,649
60,411 51,114
12/31/93 63,584 53,674
62,337 52,622
61,392 51,845
65,142 54,953
64,465 54,297
68,427 57,634
78,331 66,254
86,742 73,242
12/31/95 90,742 76,635
97,226 82,111
100,767 85,218
109,666 92,606
125,617 106,456
129,881 110,070
153,325 130,086
178,615 151,544
12/31/97 172,156 147,182
201,761 172,493
212,323 182,113
187,600 160,908
254,865 218,882
302,502 259,794
300,753 259,791
271,578 234,591
12/31/99 322,934 278,952
-------------------------------
Selected Portfolio Performance*
Strong performers for the 4th quarter 1999
--------------------------------------------
1. Nokia Oyj +111.6%
2. WPP Group plc +70.4%
3. Gateway Inc. +62.2%
4. Telefonos de Mexico S.A. ADR +57.9%
5. Nextel Communications, Inc. +52.1%
6. Amgen Inc. +47.4%
7. America Online, Inc. +45.0%
8. Metro-Goldwyn-Mayer, Inc. +34.6%
9. Koninklijke (Royal) Philips
Electronics N.V. +33.7%
10. Citigroup Inc. +26.3%
* Securities held for the entire quarter.
Weak performers for the 4th quarter 1999
--------------------------------------------
1. Mattel, Inc. -30.9%
2. McKesson HBOC, Inc. -22.2%
3. The Kroger Co. -14.4%
4. Washington Mutual, Inc. -11.1%
5. International Business Machines
Corporation -11.0%
6. Waste Management Inc. -10.7%
7. Bank of America Corporation -9.9%
8. Freddie Mac -9.5%
9. Danaher Corporation -8.4%
10. Bank One Corporation -7.9%
Portfolio Changes
Securities added during the 4th quarter 1999
--------------------------------------------
Albertson's, Inc.
Securities sold during the 4th quarter 1999
--------------------------------------------
Ambac Financial Group, Inc.
BankBoston Corporation
Delphi Automotive Systems Corporation
MBIA, Inc.
PepsiCo, Inc.
Philip Morris Companies Inc.
Zions Bancorporation#
12
<PAGE>
Special Investment Trust
Illustration of an Assumed Investment of $10,000 made on December 30, 1985
(inception of the Special Investment Trust Primary Class)
[MOUNTAIN CHART APPEARS HERE -- SEE 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
12/30/85 10,000 10,000
11,530 11,530
12,070 12,070
10,377 10,359
10,735 10,716
13,074 13,051
12,900 12,877
13,343 13,322
12/31/87 9,614 9,517
11,220 11,107
12,128 12,006
11,762 11,633
11,507 11,381
13,126 12,982
14,623 14,462
16,816 16,534
12/31/89 15,199 14,944
15,143 14,890
16,225 15,953
14,191 13,808
15,278 14,767
18,392 17,777
20,403 19,686
21,304 20,555
12/31/91 21,406 20,653
22,154 21,249
20,846 20,034
20,887 20,073
24,577 23,620
24,482 23,528
26,206 25,144
29,068 27,890
12/31/93 30,507 29,278
29,708 28,511
27,508 26,413
28,888 27,737
26,519 25,463
27,815 26,707
29,944 28,759
32,539 31,251
12/31/95 32,486 31,175
35,733 34,291
37,696 36,228
38,611 37,107
41,793 40,193
39,871 38,345
46,186 44,499
53,171 51,228
12/31/97 51,038 49,183
56,969 54,898
56,481 54,587
44,911 43,405
62,934 60,824
66,576 64,345
71,831 69,822
73,577 71,520
12/31/99 85,298 82,990
------------------------------
Selected Portfolio Performance*
Strong performers for the 4th quarter 1999
----------------------------------------------
1. WPP Group plc +70.4%
2. Cabletron Systems, Inc. +65.7%
3. Symantec Corporation +63.0%
4. Cell Genesys, Inc. +62.7%
5. Gateway Inc. +62.2%
6. Hollywood Park, Inc. +45.9%
7. America Online, Inc. +45.0%
8. Sybase, Inc. +43.9%
9. TALK.com, Inc. +37.5%
10. Manpower Inc. +29.2%
* Securities held for the entire quarter.
Weak performers for the 4th quarter 1999
----------------------------------------------
1. PhyCor, Inc. -57.1%
2. Consolidated Stores Corporation -26.3%
3. CKE Restaurants, Inc. -19.0%
4. Magellan Health Services, Inc. -13.7%
5. Bell & Howell Company -13.3%
6. Caremark Rx, Inc. -10.0%
7. Peoples Heritage Financial
Group, Inc. -9.4%
8. Enhance Financial Services
Group, Inc. -8.1%
9. Olsen & Associates AG -5.6%
10. Storage Technology Corporation -4.2%
Portfolio Changes
Securities added during the 4th quarter 1999
----------------------------------------------
Cadence Design Systems, Inc.
Republic Services, Inc.
SunGard Data Systems Inc.
Wellpoint Health Networks Inc.
Securities sold during the 4th quarter 1999
----------------------------------------------
Dynex Capital, Inc.
InaCom Corp.
Midamerica Energy Holdings Company
Northeast Utilities System
Orion Capital Corporation
Players International, Inc.
Remedy Corporation
Silicon Graphics, Inc.
13
<PAGE>
Performance Information -- Continued
Total Return Trust
Illustration of an Assumed Investment of $10,000 made on November 21, 1985
(inception of the Total Return Trust Primary Class)
[MOUNTAIN CHART APPEARS HERE -- SEE 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
11/21/85 10,000 10,000
10,780 10,780
10,971 10,900
10,384 10,258
10,231 10,077
11,884 11,673
11,893 11,658
12,409 12,084
12/31/87 9,434 9,099
10,675 10,295
11,315 10,888
11,244 10,772
11,467 10,923
12,293 11,690
12,918 12,201
14,314 13,433
12/31/89 13,367 12,478
12,721 11,874
12,810 11,928
10,389 9,566
11,119 10,055
12,715 11,499
13,124 11,833
14,546 13,013
12/31/91 15,620 13,884
15,715 13,884
16,416 14,409
16,824 14,683
17,856 15,483
18,839 16,234
18,823 16,141
19,623 16,700
12/31/93 20,370 17,202
19,701 16,637
19,706 16,640
20,691 17,380
18,920 15,763
19,917 16,593
22,037 18,215
24,044 19,681
12/31/95 24,665 19,837
26,536 21,342
27,167 21,718
28,756 22,847
32,346 25,591
32,992 26,102
37,530 30,062
42,720 34,111
12/31/97 44,477 35,424
46,996 37,430
46,277 36,931
38,945 30,894
44,301 35,167
43,175 34,273
47,872 38,174
42,555 33,808
12/31/99 41,397 32,911
Selected Portfolio Performance*
Strong performers for the 4th quarter 1999
----------------------------------------------
1. Citigroup Inc. +26.3%
2. The Bear Stearns Companies, Inc. +16.8%
3. AT&T Corp. +16.7%
4. General Motors Corporation +15.5%
5. XL Capital Ltd. +15.3%
6. UnumProvident Corporation +8.9%
7. Edison International +7.7%
8. Ford Motor Company +6.5%
9. Exxon Mobil Corporation +6.1%
10. Mid-America Apartment
Communities, Inc. +5.2%
* Securities held for the entire quarter.
Weak performers for the 4th quarter 1999
----------------------------------------------
1. Xerox Corporation -45.9%
2. J.C. Penney Company, Inc. -42.0%
3. Mattel, Inc. -30.9%
4. IPC Holdings Limited -20.7%
5. Albertson's, Inc. -18.5%
6. Nationwide Health Properties, Inc. -17.3%
7. Tupperware Corporation -16.4%
8. Northrop Grumman Corporation -14.9%
9. Washington Federal, Inc. -14.8%
10. National Golf Properties, Inc. -12.2%
Portfolio Changes
Securities added during the 4th quarter 1999
----------------------------------------------
Abbott Laboratories
Aetna Inc.
The Allstate Corporation
Avon Products, Inc.
Bank of America Corporation
Boston Scientific Corporation
Bristol-Myers Squibb Company
Countrywide Credit Industries, Inc.
Fannie Mae
GTE Corporation
Hewlett-Packard Company
Intel Corporation
Maytag Corporation
Mutual Risk Management Ltd.
Nordstrom, Inc.
Raytheon Company
SBC Communications Inc.
Safeway Inc.
Saks Incorporated
Sears, Roebuck & Co.
Shared Medical Systems Corporation
Unisys Corporation
The Walt Disney Company
Securities sold during the 4th quarter 1999
----------------------------------------------
Lasalle Re Holdings Limited
Philip Morris Companies, Inc.
Walden Residential Properties, Inc.
14
<PAGE>
Portfolio of Investments
December 31, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Value Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks and Equity Interests -- 98.9%
Advertising -- 3.6%
WPP Group plc 30,890 $ 489,488
-----------
Automotive -- 1.6%
General Motors Corporation 3,000 218,063
-----------
Banking -- 12.5%
Bank One Corporation 9,500 304,594
Bank of America Corporation 3,285 164,866
Citigroup Inc. 7,100 394,494
FleetBoston Financial Corporation 7,479 260,353
Lloyds TSB Group plc 16,642 208,196
The Chase Manhattan Corporation 4,600 357,362
-----------
1,689,865
-----------
Computer Services and Systems -- 15.6%
Dell Computer Corporation 15,000 765,000/A/
First Data Corporation 2,100 103,556
Gateway Inc. 11,400 821,513/A/
International Business Machines Corporation 2,550 275,400
Storage Technology Corporation 8,000 147,500/A,B/
-----------
2,112,969
-----------
Consumer Cyclicals -- 0.9%
Mattel, Inc. 9,600 126,000
-----------
Electrical Equipment and Electronics -- 2.3%
Koninklijke (Royal) Philips Electronics N.V. 2,323 313,605
-----------
Entertainment -- 1.6%
Mandalay Resort Group 7,000 140,875/A,B/
MGM Grand, Inc. 1,552 78,106/A/
-----------
218,981
-----------
Finance -- 5.5%
Fannie Mae 5,000 312,187
Freddie Mac 2,600 122,363
MBNA Corporation 6,400 174,400
The Bear Stearns Companies, Inc. 3,308 141,396
-----------
750,346
-----------
Food - Retail -- 2.0%
Albertson's, Inc. 5,400 174,150
The Kroger Co. 5,400 101,925/A/
-----------
276,075
-----------
</TABLE>
15
<PAGE>
Portfolio of Investments--Continued
Legg Mason Value Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care -- 5.1%
Foundation Health Systems, Inc. 11,100 $ 110,306/A,B/
McKesson HBOC, Inc. 10,100 227,881
United HealthCare Corporation 6,700 355,938
-----------
694,125
-----------
Hotels and Motels -- 1.6%
Starwood Hotels & Resorts Worldwide, Inc. 9,000 211,500
-----------
Insurance -- 6.5%
Aetna Inc. 4,600 256,737
Berkshire Hathaway Inc. -- Class A 4 235,620/A/
MGIC Investment Corporation 6,500 391,219/B/
-----------
883,576
-----------
Manufacturing -- 0.9%
Danaher Corporation 2,400 115,800
-----------
Media -- 15.5%
America Online, Inc. 27,800 2,097,162/A/
-----------
Motion Pictures and Services -- 0.6%
Metro-Goldwyn-Mayer, Inc. 3,705 87,288/A/
-----------
Non-Hazardous Waste Disposal -- 2.3%
Waste Management Inc. 17,984 309,097
-----------
Pharmaceuticals -- 2.7%
Amgen Inc. 6,200 372,387/A/
-----------
Retail Sales -- 1.6%
Toys "R" Us, Inc. 15,500 221,844/A,B/
-----------
Retail-Internet -- 1.8%
Amazon.com, Inc. 3,150 239,794/A/
-----------
Savings and Loan -- 1.9%
Washington Mutual, Inc. 10,000 260,000
-----------
Telecommunications -- 12.8%
MCI WorldCom, Inc. 6,450 342,253/A/
Nextel Communications, Inc. 6,200 639,375/A/
Nokia Oyj 3,000 570,000
Telefonos de Mexico S.A. ADR 1,600 180,000
-----------
1,731,628
-----------
Total Common Stocks and Equity Interests (Identified Cost -- $7,335,157) 13,419,593
------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements -- 1.1%
Bank of America
3.10%, dated 12/31/99, to be repurchased at $73,643 on 1/3/00
(Collateral:$50,000 Freddie Mac mortgage-backed securities,
7%, due 12/1/14, value $49,714; $25,956 Fannie Mae
mortgage-backed securities, 7%, due 9/1/14, value $25,799) $ 73,623 $ 73,623
Morgan Stanley Dean Witter
2.25%, dated 12/31/99, to be repurchased at $73,638 on 1/3/00
(Collateral: $61,445 U.S. Treasury Bills, 8.75%, due 5/15/20,
value $75,100) 73,624 73,624
-----------
Total Repurchase Agreements (Identified Cost -- $147,247) 147,247
------------------------------------------------------------------------------------------------------------------------
Total Investments -- 100.0% (Identified Cost -- $7,482,404) 13,566,840
Other Assets Less Liabilities -- N.M. 3,244
-----------
Net assets -- 100.0% $13,570,084
===========
Net asset value per share:
Primary Class $75.27
======
Navigator Class $77.35
======
------------------------------------------------------------------------------------------------------------------------
</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 December 31, 1999, the total
market value of Affiliated Companies was $1,011,744 and the identified cost
was $1,105,543.
N.M. - Not meaningful.
17
<PAGE>
Portfolio of Investments
December 31, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks and Equity Interests -- 91.8%
Advertising -- 7.8%
WPP Group plc 13,250 $ 209,961
-----------
Apparel -- 1.8%
Liz Claiborne, Inc. 1,288 48,442
-----------
Banking -- 0.9%
Peoples Heritage Financial Group, Inc. 1,600 24,100
-----------
Biotechnology -- 0.7%
Cell Genesys, Inc. 1,557 19,944/A/
-----------
Business Services -- 5.0%
Manpower Inc. 1,805 67,894
Modis Professional Services, Inc. 4,800 68,400/A/
-----------
136,294
-----------
Computer Services and Systems -- 16.0%
Bell & Howell Company 1,221 38,837/A/
Gateway Inc. 3,600 259,425/A/
Micron Electronics, Inc. 3,250 36,156/A/
Storage Technology Corporation 2,200 40,562/A/
SunGard Data Systems Inc. 2,365 56,169/A/
-----------
431,149
-----------
Computer Software -- 10.1%
Cadence Design Systems, Inc. 1,400 33,600/A/
Sybase, Inc. 3,700 62,900/A/
Symantec Corporation 3,015 176,754/A,B/
-----------
273,254
-----------
Electronic/Semiconductor -- 2.4%
Hadco Corp. 1,265 64,515/A,B/
-----------
Entertainment -- 3.9%
Hollywood Park, Inc. 2,515 56,430/A,B/
Mandalay Resort Group 2,500 50,313/A/
-----------
106,743
-----------
Finance -- 4.4%
The FINOVA Group Inc. 2,277 80,823
United Asset Management Corporation 2,000 37,125
-----------
117,948
-----------
Food, Beverage and Tobacco -- 1.2%
Cott Corporation 6,000 31,500/B/
-----------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care -- 2.9%
Magellan Health Services, Inc. 2,746 $ 17,332/A,B/
PhyCor, Inc. 7,500 14,063/A,B/
Wellpoint Health Networks Inc. 700 46,156/A/
-----------
77,551
-----------
Insurance -- 4.9%
Enhance Financial Services Group, Inc. 3,000 48,750/B/
Radian Group Inc. 1,737 82,939
-----------
131,689
-----------
Media -- 11.7%
America Online, Inc. 4,200 316,837/A/
-----------
Miscellaneous -- 0.1%
Olsen & Associates AG 300 1,884/A,C/
-----------
Networking Products -- 3.5%
Cabletron Systems, Inc. 3,600 93,600/A/
-----------
Non-Hazardous Waste Disposal -- 2.0%
Republic Services, Inc. 3,702 53,218/A/
-----------
Pharmaceuticals -- 1.7%
Caremark Rx, Inc. 9,000 45,563/A/
-----------
Restaurants -- 0.9%
CKE Restaurants, Inc. 4,000 23,500/B/
-----------
Specialty Retail -- 3.8%
Consolidated Stores Corporation 3,260 52,980/A/
Hollywood Entertainment Corp. 3,384 49,068/A,B/
-----------
102,048
-----------
Telecommunications -- 6.1%
ICG Communications 3,550 66,562/A,B/
TALK.com, Inc. 5,500 97,625/A,B/
-----------
164,187
-----------
Total Common Stocks and Equity Interests (Identified Cost -- $1,516,079) 2,473,927
------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Portfolio of Investments--Continued
Legg Mason Special Investment Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate and Other Bonds -- 0.9%
Amazon.com, Inc., 4.75%, due 2/1/09 $ 20,000 $ 22,650/D/
-----------
Total Corporate and Other Bonds (Identified Cost -- $20,000) 22,650
------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 7.3%
Bank of America
3.10%, dated 12/31/99, to be repurchased at $98,248 on 1/3/00
(Collateral: $80,555 Freddie Mac mortgage-backed securities,
6%, due 9/1/28, value $74,136; $26,755 Fannie Mae
mortgage-backed securities, 7%, due 11/1/14, value $26,594) 98,223 98,223
Morgan Stanley Dean Witter
2.25%, dated 12/31/99, to be repurchased at $98,241 on 1/3/00
(Collateral: $86,555 U.S. Treasury Notes, 8.125%, due 5/15/21,
value $100,195) 98,223 98,223
-----------
Total Repurchase Agreements (Identified Cost -- $196,446) 196,446
------------------------------------------------------------------------------------------------------------------------
Total Investments -- 100.0% (Identified Cost -- $1,732,525) 2,693,023
Other Assets Less Liabilities -- N.M. 865
-----------
Net assets -- 100.0% $ 2,693,888
===========
Net asset value per share:
Primary Class $40.15
======
Navigator Class $42.67
======
------------------------------------------------------------------------------------------------------------------------
</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 December 31, 1999, the total
market value of Affiliated Companies was $646,099 and the identified cost
was $566,937.
/C/Private placement and an illiquid security valued at fair value under
procedures adopted by the Board of Directors. This security represents 0.1%
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 0.9% of net
assets.
N.M. -- Not meaningful.
20
<PAGE>
Portfolio of Investments
December 31, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Total Return Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks and Equity Interests -- 94.4%
Aerospace/Defense -- 1.8%
Northrop Grumman Corporation 95 $ 5,136
Raytheon Company 125 3,101
-----------
8,237
-----------
Automotive -- 3.2%
Delphi Automotive Systems Corporation 132 2,074
Ford Motor Company 100 5,344
General Motors Corporation 100 7,268
-----------
14,686
-----------
Banking -- 13.9%
Bank of America Corporation 75 3,764
Bank One Corporation 200 6,413
Citigroup Inc. 148 8,196
First Union Corporation 132 4,331
Lloyds TSB Group plc 2,260 28,275
The Chase Manhattan Corporation 165 12,795
-----------
63,774
-----------
Computer Services and Systems -- 9.3%
Hewlett-Packard Company 60 6,836
Intel Corporation 25 2,058
International Business Machines Corporation 265 28,620
Unisys Corporation 150 4,791/A/
-----------
42,305
-----------
Consumer Cyclicals -- 1.1%
Mattel, Inc. 395 5,184
-----------
Consumer Products -- 3.0%
Avon Products, Inc. 80 2,640
Brunswick Corporation 228 5,073
Maytag Corporation 60 2,880
Tupperware Corporation 189 3,205
-----------
13,798
-----------
Electric Utilities -- 2.4%
Edison International 410 10,737
-----------
Entertainment and Leisure -- 0.6%
The Walt Disney Company 100 2,925
-----------
</TABLE>
21
<PAGE>
Portfolio of Investments--Continued
Legg Mason Special Investment Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance -- 5.0%
Countrywide Credit Industries, Inc. 50 $ 1,262
Fannie Mae 50 3,122
The Bear Stearns Companies, Inc. 95 4,074
United Asset Management Corporation 786 14,596
-----------
23,054
-----------
Food, Beverage and Tobacco -- 1.0%
Sara Lee Corporation 210 4,633
-----------
Food - Retail -- 3.6%
Albertson's, Inc. 375 12,094
Safeway Inc. 120 4,267/A/
-----------
16,361
-----------
Insurance -- 13.5%
Aetna Inc. 150 8,372
American Financial Group, Inc. 220 5,797
Enhance Financial Services Group, Inc. 1,156 18,782
IPC Holdings Limited 486 7,222
Mutual Risk Management Ltd 109 1,832
The Allstate Corporation 225 5,400
UnumProvident Corporation 310 9,939
XL Capital Ltd. 81 4,202
-----------
61,546
-----------
Medical Supplies/Services -- 6.4%
Abbott Laboratories 205 7,444
Boston Scientific Corporation 75 1,641/A/
Bristol-Myers Squibb Company 80 5,135
Eli Lilly & Company 80 5,320
Merck & Co., Inc. 135 9,053
Shared Medical Systems Corporation 16 820
-----------
29,413
-----------
Non-Hazardous Waste Disposal -- 2.5%
Waste Management Inc. 660 11,344
-----------
Office Automation and Equipment -- 1.1%
Xerox Corporation 225 5,105
-----------
Oil and Gas -- 1.8%
Exxon Mobil Corporation 100 8,056
-----------
Photo Equipment and Supplies -- 2.5%
Eastman Kodak Company 175 11,594
-----------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate -- 6.2%
Mid-America Apartment Communities, Inc. 331 $ 7,493
National Golf Properties, Inc. 379 7,483
Nationwide Health Properties, Inc. 552 7,594
Regency Realty Corporation 158 3,168
Tanger Factory Outlet Centers, Inc. 114 2,364
-----------
28,102
-----------
Retail Sales -- 6.8%
J.C. Penney Company, Inc. 200 3,987
Nordstrom Inc. 115 3,012
Saks Incorporated 300 4,669/A/
Sears, Roebuck & Co. 125 3,805
Toys "R" Us, Inc. 1,100 15,744/A/
-----------
31,217
-----------
Savings and Loan -- 4.6%
Washington Federal, Inc. 327 6,465
Washington Mutual, Inc. 568 14,755
-----------
21,220
-----------
Telecommunications -- 4.1%
AT&T Corp. 140 7,105
GTE Corporation 75 5,292
SBC Communications Inc. 125 6,094
-----------
18,491
-----------
Total Common Stocks and Equity Interests (Identified Cost -- $394,528) 431,782
------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 7.2%
Bank of America
3.10%, dated 12/31/99, to be repurchased at $16,471 on 1/3/00
(Collateral $18,348 Freddie Mac mortgage-backed securities,
6%, due 9/1/28, value $16,886) $16,467 16,467
Morgan Stanley Dean Witter
2.25%, dated 12/31/99, to be repurchased at $16,469 on 1/3/00
(Collateral$13,335 U.S. Treasury Notes, 11.75%, due 2/15/10,
value $16,799) 16,466 16,466
-----------
Total Repurchase Agreements (Identified Cost -- $32,933) 32,933
------------------------------------------------------------------------------------------------------------------------
Total Investments -- 101.6% (Identified Cost -- $427,461) 464,715
Other Assets Less Liabilities -- (1.6)% (7,132)
-----------
Net assets --100.0% $ 457,583
===========
Net asset value per share:
Primary Class $18.75
======
Navigator Class $18.84
======
------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Non-income producing.
23
