<PAGE>
INVESTMENT ADVISER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr.
Richard G. Gilmore
Charles F. Haugh
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
Washington, DC
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR ACCOMPANIED BY A
PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(recycle logo) PRINTED ON RECYCLED PAPER
LMF-006
REPORT TO SHAREHOLDERS
FOR THE QUARTER ENDED
JUNE 30, 1995
THE
LEGG MASON
TOTAL
RETURN
TRUST, INC.
PRIMARY CLASS
PUTTING YOUR FUTURE FIRST
(Legg Mason logo)
<PAGE>
TO OUR SHAREHOLDERS,
In the three months ended June 30, 1995, the Total Return Trust's
net asset value per share rose from $12.79 to $14.04. The latter
figure is after payment in May of an ordinary income dividend of $.11
per share. Assuming reinvestment of the dividend, the Trust's total
return (appreciation in share value plus the dividend) in the quarter
was 10.6%. Total returns on Standard & Poor's 500 stock composite
index and the Value Line Index of 1,700 stocks were 9.5% and 7.2%
during the same period. In the six months through June 30, the Trust's
total return was 16.5%, compared to total returns of 20.2% and 13.5%
on the Standard & Poor and Value Line indices.
On the following pages, Nancy Dennin and Bill Miller, the Trust's
portfolio managers, comment on the investment outlook.
Many of our shareholders invest regularly in Trust shares on a
dollar cost averaging basis through a program we call Future First.
Most do so by authorizing automatic monthly transfers of $50 or more
from their bank checking accounts or Legg Mason money market fund.
Dollar cost averaging is a convenient and sensible way to invest which
encourages continued purchases during market downswings when the best
values are available. Your Legg Mason Investment Executive will be
happy to help you establish a Future First dollar cost averaging
account should you wish to do so.
Your Board of Directors has approved an income dividend of $.14
per share, payable on August 2, 1995 to shareholders of record on July
28. Most shareholders will receive this distribution in the form of
additional shares credited to their accounts.
Sincerely,
(signature)
John F. Curley, Jr.
President
July 26, 1995
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
Your fund's results for the three, six and twelve months ended June 30, 1995
are shown below with comparable data for the leading market indices:
<TABLE>
<CAPTION>
Total Lipper
Return Growth & Income S&P
Trust Index 500 Dow Jones
<S> <C> <C> <C> <C>
3 months 10.64% 8.11% 9.53% 10.28%
6 months 16.47% 16.75% 20.19% 20.42%
1 year 11.83% 19.74% 26.03% 29.20%
</TABLE>
In the second quarter, your fund outperformed the Lipper Growth & Income
Index, the S&P 500 and the Dow Jones Industrial Average, but trailed these
indices in the first half and for the one-year period. The six and twelve-month
results were negatively affected by the fund's Mexican holdings, a subject that
we've written extensively about in prior reports.
During the quarter, bonds continued the rally that started in November 1994.
The 30-year treasury bond ended the second quarter at a 6.5% yield, compared to
7.4% on March 31, 1995. The long bond rallied as evidence accumulated that the
economy was slowing, inflation continued to be well-controlled, and expectations
of a Fed easing increased.
On July 6th the Fed cut short-term rates by 25 basis points, its first
easing move in nearly three years. Federal Reserve Chairman Alan Greenspan, in
explaining the action, said that inflationary pressures had receded enough to
accommodate the rate cut. In his more recent Humphrey-Hawkins testimony, Mr.
Greenspan indicated he expects inflation to fall to 3% or less in 1996, with
economic growth averaging around 2.5%. This would, of course, be an excellent
environment for financial assets.
Similar to the first quarter, the bond market's rise took valuation pressure
off the equity market in the latest three-month period. As the stock market has
rallied to new highs, more commentary has been written about the market's
"stretched" valuation. One of the most frequently cited concerns about higher
stock prices is that dividend yields are too low. In the past, when dividend
yields have been below 3%, as they are now, the stock market has struggled. Ed
Hyman, a well-known Wall Street economist, has analyzed the S&P 500 dividend
yield on a real (that is, adjusted for inflation) basis. With inflation at 2.5%,
almost equal to the current dividend yield, the real yield is zero, which is not
demanding by historic standards. We do not believe current dividend yields are
an impediment to satisfactory returns, unless inflation or short-term interest
rates rise, neither of which appears imminent.
We continue to be sanguine about the equity market for a number of reasons.
First, as mentioned above, the real dividend yield is not low, but payout ratios
are, which suggests faster dividend growth. Second, the S&P 500 is trading at
15.8x 1995 and 14.9x 1996 estimated earnings, neither of which are demanding
multiples with long-term interest rates below 7% and inflation below 3%. The P/E
multiples on your fund's holdings are substantially less than the S&P 500, at
11.5x 1995 and 9.6x 1996 estimated earnings. We also expect further reductions
in short-term interest rates later this year. The market has generally performed
well when the Federal Reserve has been in an easing mode. The only time the S&P
500 has declined while the Fed was easing was when the economy was in recession.
We believe the probability of a recession occurring in the foreseeable future is
remote, an opinion seconded by Fed Chairman Greenspan last week. The relatively
high inventory levels that contributed to the current slowdown in growth seem to
have been worked off in the second quarter. Recessions are usually proceeded by
economic excesses, which are corrected as the economy contracts. The economy
appears remarkably free of the kinds of excesses, such as overbuilding in
commercial or residential real estate, that have led to recessions.
With no recession in prospect and inflation subdued, earnings growth should
continue. However, companies that fail to achieve anticipated earnings will most
likely see their stocks come under severe pressure. We hope to take advantage of
any excessive price declines caused by the market's obsession with near-term
results.
As we wrote in the December 1994 quarterly report, in addition to evaluating
the risk of each
2
<PAGE>
security in the portfolio, we are focusing on reducing the embedded macro risk
in order to further reduce the volatility of the fund's results to events such
as the Mexican peso devaluation. Several of the fund's Mexican holdings were
quite strong in the second quarter, as shown in the "Biggest Gainers" table on
page 5. In light of their performance, we reduced several of the positions to
keep the fund's total Mexican exposure to about 5%, even though we continue to
be quite positive on the prospects for the Mexican market.
We spend a great deal of time focusing on companies with above average
dividend yields and above average dividend growth rates. For a company to be
able to grow its dividend at a relatively high rate, it needs to generate excess
cash flow from operations. We define excess cash flow as cash earnings from
operations after capital expenditures and after working capital needs. During
the quarter, we purchased the stocks of two companies -- J.C. PENNEY and
DUPONT -- that generate excess cash flow, and which have used that excess cash
flow to the shareholders' benefit.
About a dozen years ago, PENNEY established a goal of becoming the leading
middle class department store in the U.S. This goal has been achieved without
having to deploy much capital. Management's objective is to grow sales at a 4-6%
annual rate and earnings at 10-12%. Since PENNEY is not a rapidly growing entity
that needs capital to fuel above average growth, it generates more cash than it
needs to sustain its business development. As a result, over the last ten years,
PENNEY has used 75% of its earnings to pay dividends and repurchase shares. The
stock yields 4.4% on our cost basis.
We purchased shares of DUPONT, the largest chemical company in the U.S., in
a secondary stock offering, the proceeds of which were used to help fund the
repurchase of almost 25% of the company's stock from Seagram at a 13% discount
to the pre-announcement market price. Over the last several years, DUPONT'S
management has embarked on a program of substantially reducing costs, cutting
capital expenditures, and divesting businesses that cannot earn above their cost
of capital. These programs should lead to much greater free cash flow
generation, allowing the company to raise its dividend at an above average rate
and repurchase securities.
We also purchased shares of JOHN ALDEN, an insurance company with a solid
long-term record, selling at 7.7x our estimate of this year's earnings and only
modestly above book value. The market thought this $17 stock was worth $38
twelve months ago.
Given the bond market's sharp rally in the second quarter, we believe the
excess return in the long bond has already been made, and we sold our long bond
position during the quarter.
With the bulk of long bond gains having been made, and equity markets having
enjoyed a robust first half, investors should not expect the kinds of returns
recently experienced to continue. Further strong gains in stock prices would
require lower rates at the short and long end of the yield curve, as well as
continued expectations for solid economic growth. Nevertheless with valuations
reasonable, inflation well controlled, and the economy growing, the stock market
should continue to be a rewarding place to invest.
As always, we appreciate your support and welcome your comments.
Nancy Dennin, CFA
Bill Miller, CFA
July 26, 1995
DJIA 4707.06
3
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON TOTAL RETURN TRUST, INC.
TOTAL RETURN FOR ONE YEAR, FIVE YEARS AND LIFE OF FUND, AS OF JUNE 30, 1995
The returns shown below are based on historical results and are not
intended to indicate future performance. The investment return and
principal value of an investment in the fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Average annual returns tend to smooth out variations in the
fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees and shareholder servicing expenses are determined
separately for each class and the Navigator Class does not incur Rule
12b-1 distribution fees.
The fund's total returns as of June 30, 1995 were as follows:
<TABLE>
<CAPTION>
Cumulative Average Annual
Total Return Total Return
<S> <C> <C>
Primary Class:
One Year +11.83% +11.83%
Five Years +72.03 +11.46
Life of Class(|) +120.37 +8.57
Navigator Class:
Life of Class(|)(|) +13.38% N/A
</TABLE>
(|) Primary Class inception-November 21, 1985.
(|)(|) Navigator Class inception-December 1, 1994.
4
<PAGE>
LEGG MASON TOTAL RETURN TRUST , INC.
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
Biggest gainers for the 2nd quarter 1995*
<C> <S> <C>
1. Grupo Mexicano de Desarrollo
S.A. ADR Bonds
8.25% 2-17-01 +65.3%
2. The Chase Manhattan Corporation +31.9%
3. Mexican Cetes
6.0% 2-29-96 +31.7%
4. Resource Mortgage Capital Inc. +25.4%
5. Standard Federal Bancorporation +25.1%
6. Bankers Trust New York Corporation +18.7%
7. International Business Machines
Corporation +17.3%
8. PepsiCo, Inc. +17.0%
9. MBNA Corporation +16.4%
10. Federal National Mortgage
Association +16.0%
</TABLE>
* SECURITIES HELD FOR THE ENTIRE QUARTER.
<TABLE>
<CAPTION>
Biggest laggers for the 2nd quarter 1995*
<C> <S> <C>
1. Torchmark Corporation -9.0%
2. RJR Nabisco Holdings Corp.
preferred equity redemption
cumulative stock
Series C Depositary Shares -3.9%
3. Ultramar Corporation -2.9%
4. Harrah's Jazz Company
1st Mortgage Note
14.25% 11-15-01 -2.8%
5. Walden Residential Properties, Inc. -2.6%
6. Masco Corporation -2.3%
7. Lloyds Bank P.L.C. -1.0%
8. Columbus Realty Trust 0.0%
9. DeBartolo Realty Corporation +3.5%
10. Telefonos de Mexico S.A. ADR +3.9%
</TABLE>
PORTFOLIO CHANGES
Securities Added
duPont (E.I.) de Nemours
John Alden Financial Corp.
J.C. Penney Company, Inc.
Securities Sold
American Home Products Corporation
Bradlees, Inc.
Chelsea GCA Realty, Inc.
Stratosphere Corporation
Guaranteed 1st Mortgage Note
14.25% 5-15-02
United States Treasury Bond
7.25% 5-15-16
5
<PAGE>
PORTFOLIO OF INVESTMENTS
LEGG MASON TOTAL RETURN TRUST, INC.
JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS -- 82.1%
Apparel -- 0.1%
The Leslie Fay Companies, Inc. 380 $ 154(A)
Automotive -- 3.4%
Chrysler Corporation 157 7,516
Banking -- 13.0%
BankAmerica Corporation 122 6,416
Bankers Trust New York Corporation 108 6,696
Lloyds Bank P.L.C. 754 7,482
The Chase Manhattan Corporation 165 7,755
28,349
Chemicals -- 4.1%
duPont (E.I.) de Nemours 70 4,812
Witco Corporation 131 4,241
9,053
Computer Services and Systems -- 3.3%
International Business Machines
Corporation 75 7,200
Construction Materials -- 2.5%
Masco Corporation 200 5,400
Finance -- 12.3%
Federal National Mortgage
Association 88 8,305
MBNA Corporation 163 5,501
Resource Mortgage Capital Inc. 272 5,202
The Bear Stearns Companies Inc. 369 7,886
26,894
Food, Beverage and Tobacco -- 6.0%
PepsiCo, Inc. 125 5,703
Philip Morris Companies Inc. 100 7,438
13,141
Gas and Pipeline Utilities -- 2.7%
Williams Companies, Inc. 170 5,929
Health Care -- 2.2%
Baxter International Inc. 130 4,729
Insurance -- 4.8%
Enhance Financial Services Group
Inc. 283 5,485
John Alden Financial Corp. 127 2,168
Torchmark Corporation 73 2,741
10,394
Oil Services -- 1.3%
Ultramar Corporation 115 2,904
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Real Estate -- 11.3%
Columbus Realty Trust 100 $ 1,875
DeBartolo Realty Corporation 200 2,925
Irvine Apartment Communities, Inc. 115 1,984
National Golf Properties, Inc. 344 7,218
Nationwide Health Properties, Inc. 70 2,730
Regency Realty Corporation 122 2,082
Summit Properties, Inc. 183 3,157
Walden Residential Properties,
Inc. 150 2,756
24,727
Retail Sales -- 4.6%
J.C. Penney Company, Inc. 120 5,760
Kmart Corporation 205 2,998
Sears, Roebuck and Co. 20 1,197
9,955
Savings and Loan -- 8.5%
Great Western Financial
Corporation 180 3,712
Standard Federal Bancorporation 247 8,305
Washington Federal Incorporated 301 6,611
18,628
Telecommunications -- 2.0%
Telefonos de Mexico S.A. ADR 152 4,503
Total Common Stocks and Equity
Interests
(Identified Cost -- $152,263) 179,476
</TABLE>
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK -- 2.7%
<TABLE>
<S> <C> <C>
RJR Nabisco Holdings Corp. Series
C Depositary Shares
(Identified Cost -- $6,430) 975 5,972
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
CORPORATE BONDS -- 2.8%
<S> <C> <C>
Grupo Mexicano de Desarrollo
S.A. ADR
8.25% 2-17-01 $ 5,000 2,025
Harrah's Jazz Company
1st Mortgage Note
14.25% 11-15-01 3,925 4,082
Total Corporate Bonds
(Identified Cost -- $5,695) 6,107
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 10.7%
Repurchase Agreements -- 8.7%
Morgan Stanley & Co.,
Incorporated
6.1% dated 6-30-95, to be
repurchased at
$18,165 on 7-5-95
(Collateral: $22,087
Federal Home Loan Mortgage
Corporation Mortgage-
backed securities, 6.0% due
1-1-99, value $18,543) $18,150 $ 18,150
State Street Bank and Trust
Company, N.A.
4.75% dated 6-30-95, to be
repurchased at $1,000 on
7-3-95 (Collateral: $940
U.S. Treasury Bonds, 7.25%
due
5-15-16, value $1,013) 1,000 1,000
19,150
Sovereign Obligation -- 2.0%
Mexican Cetes
6.0% 2-29-96 mxp35,000 4,348
Total Short-term Investments
(Identified Cost -- $22,921) 23,498
Total Investments -- 98.3%
(Identified Cost -- $187,309) 215,053
Other Assets Less Liabilities -- 1.7% 3,655
NET ASSETS -- 100.0% $218,708
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $14.04
NAVIGATOR CLASS $14.07
</TABLE>
(A) NON-INCOME PRODUCING
MXP MEXICAN PESO (NEW)
7
