BARTLETT MUTUAL FUNDS
Bartlett Value International Fund
Seeks capital appreciation by investing primarily
in foreign equity securities. Income is a sec-
ondary consideration. Provides a means for indi-
vidual and institutional investors to invest a
portion of their assets outside the United States.
Bartlett Basic Value Fund
Seeks capital appreciation by investing primarily
in common stocks or securities convertible into
common stocks. Income is a secondary
consideration.
Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Distributor
Legg Mason Wood Walker, Inc.
Baltimore, MD
Bartlett & Co.
----------------------------------
REGISTERED INVESTMENT ADVISORS
36 East Fourth Street o Cincinnati, OH 45202-3896
513/621-4612 o 800/822-5544 o FAX 513/621-6462
2/97
Bartlett & Co.
------------------------------
REGISTERED INVESTMENT ADVISORS
BARTLETT
MUTUAL
FUNDS
QUARTERLY
REPORT
FOR THE QUARTER ENDED
DECEMBER 31, 1996
BARTLETT
VALUE INTERNATIONAL FUND
BARTLETT
BASIC VALUE FUND
<PAGE>
CHAIRMAN'S LETTER
"...fund managers need to put
money to work, not spend
their time finding bargain
stocks that will represent
a tiny portion of their
holdings."
--emerging market analyst
with a major brokerage
firm as quoted in the
Wall Street Journal on
November 25, 1996
Dear Fellow Shareholder:
The merger of the Bartlett Fixed Income Fund and the Bartlett Short Term Bond
Fund into the Legg Mason U.S. Government Intermediate Fund and the merger of the
Bartlett Cash Reserves Fund into the Legg Mason Cash Reserve Trust were
successfully completed in December. The consolidation of these funds into the
very capably managed and substantially larger respective Legg Mason funds will
benefit shareholders. The immediate benefit, of course, will be the economies of
scale in administering a larger fund which can translate into a lower expense
ratio and, therefore, a higher return to our shareholders, all other factors
being equal. We wish to thank the former shareholders of the Bartlett Income
Mutual Funds and, at the same time, welcome them to the Legg Mason family of
fixed income funds.
With regard to the quote at the top of this letter, we wish that it had been
taken out of context. To be fair to its owner, he had been lamenting the fact
that smaller stocks are more difficult to buy so that, even if they represented
more compelling bargains, it would be difficult to include them in a portfolio.
Whatever the case, he was describing an investment professional as someone who
pumps money into the market, not someone who is given the responsibility to
painstakingly construct a portfolio of attractively priced investments.
Perhaps this is what Alan Greenspan was alluding to on Thursday, December 5,
when he made reference to the "irrational exuberance" that may exist in the
securities markets in the United States. Some people inferred, incorrectly, we
believe, that he would consider raising interest rates as an attempt to put the
brakes on securities speculation. Our reading of his comments was that care must
be taken to make certain that we do not experience a market collapse such as the
one that occurred in Japan, since a calamity such as this would have policy
implications regarding the Federal Reserve's ability to maintain a stable
economy. Mr. Greenspan is extremely sensitive to the securities markets. After
the break in 1987, he flooded the economy with reserves, thereby restoring
confidence in the capital markets. In 1994, he used "baby steps" to increase
rates for fear that one large increase in interest rates would initiate a
precipitous decline in the stock and bond markets.
People are rightfully concerned about the frothy stock market in the United
States. Of course, there is no complete refuge from a severe market decline if
and when one does occur. On the other hand, it should be kept in mind that
Japanese investors, in 1992, were borrowing against their ever increasing stock
portfolios to purchase grossly overpriced real estate and then, in turn,
borrowing against inflated real estate prices to continue to fuel the market
rally in stocks. The Nikkei Index in Japan was trading for sixty-five times
earnings in the fall of 1991 while the Emperor's Palace in Tokyo had a value
greater than all the real estate in the state of California. This is a far cry
from twenty times earnings for which the average U.S. stock is trading or the
$20 per square foot that it costs to rent space in a prime downtown office
building in Cincinnati.
We would rather not be market timers, since that is a risky proposition in and
of itself. We want to continue concentrating on attractively priced securities
that will give our clients a margin of safety that is not present in the markets
in general. This may not be the same way that others in our industry perceive
their jobs, but it is the most practical way to ensure long-term investment
success.
The new year presents us with opportunities and challenges and reminds us of our
privilege in serving you during the past year. We pass along our thanks and best
wishes for a fulfilling and prosperous 1997.
Sincerely,
/s/ Dale H. Rabiner, CFA
Dale H. Rabiner, CFA
Chairman
Bartlett Capital Trust
This report is for the information of shareholders of the Bartlett Mutual Funds.
It is authorized for distribution only when it is preceded or accompanied by a
current prospectus of the Bartlett Mutual Funds.
<PAGE>
PERFORMANCE
SUMMARY
Periods Ended December 31, 1996
<TABLE>
<CAPTION>
Average Annual Compound
Total Return* Total Return*
---------------- ------------------------------------------------------
10 Years
or
Fourth Quarter From
3 Months 1 Year 3 Years 5 Years Inception
(Not Annualized)
<S> <C>
Bartlett Value International Fund 6.56% 16.05% 8.01% 10.19% **
Inception 10/6/89 7.76%
Bartlett Basic Value Fund 10.21% 18.42% 16.08% 14.00% 11.52%
Inception 5/5/83
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*The Bartlett Mutual Funds' total return figures above assume all dividends and
distributions are reinvested at the net asset value on the reinvestment date.
The performance figures for the Bartlett Value International Fund reflects the
periodic absorption of some Fund expenses through the waiver of management fees.
Had a portion of these fees not been waived, the Fund's total returns would have
been slightly lower.
**Fund did not exist during this entire time period.
This performance information represents past performance and is no
guarantee of future results. Shares of these Funds are not bank deposits or
obligations, nor are they insured or guaranteed by any bank, federal agency or
government entity, including the Federal Deposit Insurance Corporation (FDIC).
The principal value and investment returns of the Funds will fluctuate so that
upon redemption you may receive more or less than your original investment.
For more information about your account or any of the Bartlett Mutual Funds'
services, please call your financial advisor, or the Bartlett Mutual
Funds at 800-822-5544 or 513-621-4612 in Cincinnati.
<PAGE>
BARTLETT VALUE INTERNATIONAL FUND
QUARTERLY REVIEW
Bartlett Value International Fund's total returns were 16.1% in 1996 and 6.6%
during the fourth quarter, outpacing the Europe, Australia and Far East (EAFE)
Index* by a healthy margin. International markets posted widely divergent
performances during 1996, with European markets doing quite well, Pacific
markets lagging badly, and emerging markets rising modestly. For the year, the
EAFE Index increased 6%, including net dividends and measured in U.S. dollars.
The European component of the index surged 21.1%, while the Pacific portion,
largely influenced by the Japanese market, sank 8.6%. This variation in
performance was a theme that played throughout the entire year, including the
fourth quarter. The EAFE Index rose 1.6% over the three months ending December
31, 1996, with Europe rising 9.6% and the Pacific falling 7.1%.
The Bartlett Value International Fund's portfolio benefited from a slightly
higher exposure to European markets than the index, 57% versus 56%, as well as a
lower exposure to the lackluster Japanese market. The portfolio also had little
direct exposure to the weak yen and deutschemark, as the emphasis had been
placed on companies with dollar-based earnings which would benefit from an
increase in the value of the dollar. Currency played a role in the index's
performance over the year, as the yen fell ll% against the dollar, and the
deutschemark and related European currencies fell about 7% versus the dollar.
Industry exposure also had a positive influence on the Fund's performance as
compared with the index, with relatively higher exposure to the capital
equipment and energy sectors, which did well, and lower exposure to finance and
services, which were weaker performers.
The principal reason for Bartlett Value International's outperformance, however,
was good individual performance by stocks that were purchased as undervalued
investments in excellent companies. These types of investments produce good
returns in various market environments without regard for geography.
While we do not make market projections, we continue to see good values in the
European markets, especially as companies begin to institute U.S.-style
restructuring moves. Pacific markets are starting to show some better values,
including Japan, especially as much of the currency risk from an overvalued yen
has been corrected. The S&P 500 Index outpaced the EAFE Index again in 1996, and
has outperformed it over the last five and ten years as well. As the U.S.
economy's growth and market outperformance stretches into a record-breaking time
span, it is increasingly probable that European and Pacific economic growth will
begin to catch up, which would be followed by improved international equity
market gains.
- -- Madelynn M. Matlock, CFA, Portfolio Manager
Portfolio Composition
December 31, 1996
[PIE CHART APPEARS HERE--SEE VALUES BELOW]
52% Europe
21% Other Pacific
13% Japan
8% Latin America/Canada
6% Cash Equivalents
*The EAFE Index is an unmanaged index of common stocks of foreign companies. The
returns for the Index do not include any expenses or transaction costs. The
returns for the Fund include such expenses.
BARTLETT BASIC VALUE FUND
QUARTERLY REVIEW
The Bartlett Basic Value Fund's total returns for the quarter and twelve months
ended December 31, 1996 were 10.2% and 18.4%, respectively. In December, it
looked as though Santa Claus came through for the Bartlett Basic Value Fund once
again. Much like last year, our value methodology allowed us to outperform the
market by a substantial degree during the last three months of the year, thereby
putting the Fund's return of 21.5% in line with the 23% return produced by the
S&P 500*.
The Fund's performance is compelling given that the S&P 500 returned 8.4% in the
fourth quarter alone! Even without the high flying technology stocks and some of
the more aggressive health care related issues, the Fund's value-oriented
portfolio managed to do very well on a relative basis.
This is the time of year that people reflect less on the past year and worry
more about the one at hand. We viewed 1996 as a bonus, coming on the heels of
the superior results that came our way during 1995. Looking forward, it would
appear unlikely that investors will enjoy similar prosperity.
We are not advocating a bunker mentality approach to common stock selection.
Rather, we believe that forays away from the S&P 500 Index, which has been
pushed somewhat, would be sensible. The S&P 500 Index consists largely of the
"great names of America" which, in many instances, have been overplayed in the
frothy market environment that exists today. This does not mean that we shall
not continue to hold some of the larger capitalization issues that are not
currently overpriced. In this area, Federal National Mortgage, General Motors,
and Toys R Us (2.9%, 2.7% and 2.0% of the Fund's portfolio, respectively) come
to mind. However, there is more than an abundance of high quality, cheaply to
reasonably priced issues in the small to mid-cap area of the market which have
been overlooked.
We have found smaller, superior domestic economic entities such as Fleetwood
Enterprises, Josten's, and Washington Federal, Inc. (2.8%, 2.3% and 1.8% of the
Fund's portfolio, respectively), which have been generally ignored when the
market skyrockets from time to time. They have been more stable, less erratic
performers since their inclusion among our investment holdings.
We shall continue to follow our discipline of avoiding the latest theme or fad
on Wall Street. Our refusal to pay more than reasonable multiples of earnings,
cash flow, or net worth for a company should make our results very appealing if
the market takes it on the chin. Perhaps this is the year that the small to
mid-capitalization issues will also play a bigger role in generating excellent
returns, risk adjusted or not.
We appreciate your continued support of our value oriented investment approach.
- --James A. Miller, CFA, Portfolio Manager
- --Woodrow H. Uible, CFA, Portfolio Manager
Portfolio Composition
December 31, 1996
[PIE CHART APPEARS HERE--SEE VALUES BELOW]
28% Consumer Products
23% Financial
13% Basic Industry
33% All Other Industries
3% Cash Equivalents
*The Standard &Poor's 500 Index is an unmanaged index of common stocks. The
returns for the Index do not include any expenses or transaction costs. The
returns for the Fund include such expenses.
