INVESTMENT ADVISER REPORT TO SHAREHOLDERS
Legg Mason Fund Adviser, Inc. FOR THE SIX MONTHS ENDED
Baltimore, MD SEPTEMBER 30, 1995
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr. THE
Charles F. Haugh LEGG MASON
Arnold L. Lehman TOTAL
Dr. Jill E. McGovern RETURN
T. A. Rodgers TRUST, INC.
Edward A. Taber, III
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA NAVIGATOR CLASS
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, DC PUTTING YOUR FUTURE FIRST
INDEPENDENT ACCOUNTANTSq (Legg Mason Funds Logo)
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
(Recycled Paper logo) PRINTED ON RECYCLED PAPER
LMF-006
<PAGE>
TO OUR SHAREHOLDERS,
In the three months ended September 30, 1995, the Total Return
Trust's net asset value per share rose from $14.07 to $15.24. Assuming
reinvestment of the $0.16 per share dividend paid in August, the Trust's
total return (appreciation plus reinvested dividends) for the quarter
was 9.5%. Total returns on the Value Line index of 1700 stocks and
Standard & Poor's 500 stock composite index were 7.1% and 7.9% during
the same period. In the nine months through September 30, the Trust's
total return was 28.1%, compared to total returns of 21.5% and 29.7% on
the Value Line and Standard & Poor's indices.
The Trust continues to invest primarily in dividend-paying common
stocks which we believe are undervalued. Our objective is to earn
long-term returns which preserve and increase the purchasing power of
your investment after taxes and inflation. While there are no
certainties in investing, we believe that ownership of a diversified
portfolio of value stocks continues to offer good prospects of achieving
that objective on a long-term basis.
On the following pages, Bill Miller and Nancy Dennin, the Trust's
portfolio managers, comment on the investment outlook.
Your Board of Directors has approved an ordinary income dividend of
$0.21 per share, payable on November 1 to shareholders of record on
October 27. Most shareholders will receive this dividend in the form of
additional shares credited to their accounts.
Sincerely,
(Signaure of John F. Curley, Jr.)
John F. Curley, Jr.
President
November 3, 1995
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
Your fund's results for the three and nine months ended September 30, 1995
are shown below with comparable data for the leading market indices:
<TABLE>
<CAPTION>
Total Lipper
Return Growth & Income S&P
Trust Funds 500 Dow Jones
<S> <C> <C> <C> <C>
3 months 9.52 % 7.12% 7.94% 5.78%
9 months 28.10 % 25.17% 29.73% 27.39%
</TABLE>
In the third quarter, your fund outperformed the Lipper Growth & Income
Index, the S&P 500 and the Dow Jones Industrial Average. The fund's results were
generally in line with the above listed indices for the nine month period.
Many investors are mystified by the stock market's strong returns this year,
and find it hard to believe a bear market is not imminent. The last time the
market performed this well was in the first nine months of 1987. Many market
commentators advise caution, and the popular press appears full of articles on
how to protect your assets in the much anticipated sell-off.
We don't believe a major correction is imminent. Bear markets begin when
four conditions come together: earnings are peaking, inflation is rising, the
Federal Reserve is raising interest rates, and stocks are overvalued. None of
these conditions are evident today, in our opinion.
S&P 500 operating earnings' growth is expected to slow to a 10% annualized
rate in the second half of 1995, compared to an unsustainable 21% annualized
pace in the first six months of the year. We believe profit growth will slow
even further, to about 6%, in 1996, yet remain comfortably positive throughout
the year.
Inflation continues to be subdued, four years into the economic expansion.
For the first nine months of the year, inflation, as measured by the consumer
price index, has risen only 2.8%, compared with the 2.6% increase recorded in
1994. Federal Reserve Chairman Alan Greenspan, in his most recent semiannual
Humphrey-Hawkins testimony, indicated he expects inflation to remain
well-controlled, at 3% or below, in 1996. The Fed lowered short-term interest
rates in July, its first easing move in nearly three years. With inflation
expected to decline next year, we believe additional cuts in short-term rates
over the next twelve months are likely.
The S&P 500 is trading at 15.7x 1995 and 14.8x 1996 estimated earnings,
neither of which are demanding multiples with long-term interest rates below 7%
and inflation around 3%. With none of the typical preconditions of poor market
performance in evidence, we continue to believe that the risk-reward profile of
the stock market remains positive.
As shown in the accompanying "Biggest Gainers" table, many of the fund's
financial holdings performed quite well in the third quarter, contributing to
the fund's strong results. While several of these stocks have approached full
value, many of them are still quite attractive.
CHASE MANHATTAN BANK has been the strongest of the money center stocks
through the third quarter, having risen by 75% since December 1994. We believe
the combined CHASE MANHATTAN and Chemical Banking franchises will represent one
of the few truly dominant financial services organizations in the United States
over the remainder of this decade. This powerful money center combination is
well positioned to generate strong earnings and valuation gains over the balance
of this decade, in our opinion. We expect "New Chase" will earn $7.25 in 1996,
and $8.25 in 1997. We believe the stock, currently trading at only 7.5x 1997
estimated earnings, will trade to 10x earnings in two years, resulting in about
20% annual appreciation on a total return basis.
We added three securities to the portfolio in the third quarter; one
chemical company and two insurance stocks. We purchased OLIN early in the
quarter, when management announced they were in the process of adopting
"Economic Value Added" (EVA). In very simple terms, EVA is a process whereby a
company focuses on earning a return above its cost of capital. At the time of
our purchase, OLIN had a 4% yield and was trading at 4.5x pre-tax cash flow. If
OLIN just earns its cost of capital at the peak of the cycle, it would earn $8
per share. With the adoption of EVA, we believe the company will be able to
achieve $10 in peak earnings. The stock has historically traded at 80% of the
market multiple on peak earnings, implying a price target of over $100 per
share.
We began accumulating AETNA and CIGNA toward the end of the quarter. Even
though these stocks have performed very well, we believe the risk/reward is more
favorable now than it was earlier this year. In our opinion, insurance stocks
are at the beginning of a secular change. For the last seven years, the industry
has been in a period of pricing pressure that has prevented companies from
raising their premiums. Historically, the insurance industry cycle has lasted
three years -- three years of rising premiums followed by three years of
declining premiums. After such a prolonged period of no pricing power, the
companies have begun taking decisive steps to cut costs and
2
<PAGE>
shed underperforming assets. Additionally, they have begun to take sizable
reserves for their environmental exposure, a step we feel was long overdue. The
industry has begun consolidating, and we expect the pace of merger activity to
accelerate.
While AETNA and CIGNA have had a strong move, we believe they are still
attractively priced. CIGNA has a 2.9% yield, and trades at 10x 1995 and 8x 1996
estimated earnings. Management has been tightening their underwriting standards,
shrinking the employee base, and separating their lines of business into good
risk and bad risk pools. AETNA has a 3.8% yield, trades at 10x 1996 estimated
earnings, and recently announced they are exploring a spin-off of their
property/casualty business.
Even after the strong returns the equity market has experienced so far this
year, we continue to find attractively priced securities. However, investors
should not expect the kinds of returns recently experienced to continue.
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
November 3, 1995
DJIA 4825.57
3
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON TOTAL RETURN TRUST, INC.
TOTAL RETURN FOR ONE YEAR, FIVE YEARS AND LIFE OF FUND, AS OF SEPTEMBER 30, 1995
The returns shown 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 September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Cumulative Average Annual
Total Return Total Return
<S> <C> <C>
Primary Class:
One Year +16.20% +16.20%
Five Years +131.72 +18.30
Life of Class(dagger) +140.44 +9.30
Navigator Class:
Life of Class(double dagger) +24.18% --
</TABLE>
(dagger) Primary Class inception-November 21, 1985.
(double dagger) Navigator Class inception-December 1, 1994.
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
Biggest gainers for the 3rd quarter 1995*
<S> <C> <C>
1. John Alden Financial Corp. +32.1%
2. The Chase Manhattan Corporation +30.1%
3. Sears, Roebuck and Co. +25.4%
4. MBNA Corporation +23.3%
5. Standard Federal Bancorporation +16.0%
6. Great Western Financial Corporation +15.2%
7. BankAmerica Corporation +13.8%
8. Bankers Trust New York Corporation +13.3%
9. Baxter International Inc. +13.1%
10. Grupo Mexicano de Desarrollo S.A. ADR
8.25% 2-17-01 +12.3%
</TABLE>
PORTFOLIO CHANGES
Securities Added
Aetna Life and Casualty Company
Cigna Corporation
Olin Corporation
<TABLE>
<CAPTION>
Biggest laggers for the 3rd quarter 1995*
<S> <C> <C>
1. Harrah's Jazz Company
1st Mortgage Note
14.25% 11-15-01 -10.1%
2. Ultramar Corporation -5.9%
3. DeBartolo Realty Corporation -4.3%
4. International Business Machines
Corporation -1.7%
5. Kmart Corporation -0.9%
6. du Pont (E.I.) de Nemours 0.0%
7. The Bear Stearns Companies Inc. +0.6%
8. Columbus Realty Trust +1.3%
9. Masco Corporation +1.9%
10. Irvine Apartment Communities, Inc. +2.2%
</TABLE>
Securities Sold
The Leslie Fay Companies, Inc.
* SECURITIES HELD FOR THE ENTIRE QUARTER.
4
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON TOTAL RETURN TRUST, INC.
SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
(Amounts in Thousands) Shares Value
COMMON STOCKS AND EQUITY INTERESTS -- 87.6%
Automotive -- 3.5%
Chrysler Corporation 157 $ 8,321
Banking -- 13.9%
BankAmerica Corporation 122 7,300
Bankers Trust New York
Corporation 108 7,587
Lloyds Bank P.L.C. 764 8,339
The Chase Manhattan Corporation 165 10,086
33,312
Chemicals -- 8.1%
du Pont (E.I.) de Nemours 100 6,875
Olin Corporation 115 7,906
Witco Corporation 131 4,619
19,400
Computer Services and Systems -- 3.3%
International Business Machines
Corporation 85 8,022
Construction Materials -- 2.3%
Masco Corporation 200 5,500
Finance -- 8.9%
Federal National Mortgage
Association 88 9,108
MBNA Corporation 103 4,287
The Bear Stearns Companies Inc. 369 7,932
21,327
Food, Beverage and Tobacco --6.1%
PepsiCo, Inc. 125 6,375
Philip Morris Companies Inc. 100 8,350
14,725
Gas and Pipeline Utilities --2.8%
Williams Companies, Inc. 170 6,630
Health Care -- 2.2%
Baxter International Inc. 130 5,346
Insurance -- 7.3%
Aetna Life and Casualty Company 20 1,467
Allstate Corporation 19 656
Cigna Corporation 30 3,124
Enhance Financial Services Group Inc. 305 6,259
John Alden Financial Corp. 127 2,864
Torchmark Incorporated 73 3,058
17,428
Oil Services -- 1.1%
Ultramar Corporation 115 2,731
Real Estate -- 13.3%
Columbus Realty Trust 100 $ 1,900
DeBartolo Realty Corporation 200 2,800
Irvine Apartment Communities, Inc.
115 2,027
National Golf Properties, Inc. 344 7,518
Nationwide Health Properties,
Inc. 70 2,870
Regency Realty Corporation 122 2,159
Resource Mortgage Capital
Corporation 272 5,508
Summit Properties, Inc. 223 4,215
Walden Residential Properties,
Inc. 150 2,831
31,828
Retail Sales -- 4.0%
J.C. Penney Company, Inc. 120 5,955
Kmart Corporation 205 2,973
Sears, Roebuck and Co. 20 738
9,666
Savings and Loan -- 8.8%
Great Western Financial
Corporation 180 4,275
Standard Federal Bancorporation 247 9,633
Washington Mutual, Inc. 300 7,137
21,045
Telecommunications -- 2.0%
Telefonos de Mexico S.A. ADR 152 4,826
Total Common Stocks and Equity
Interests
(Identified Cost -- $165,308) 210,107
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK
-- 2.7%
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost -- $6,430) 975 6,581
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
<S> <C> <C>
CORPORATE BONDS -- 2.5%
Grupo Mexicano de Desarrollo
S.A. ADR
8.25% 2-17-01 $ 5,000 2,275
Harrah's Jazz Company
1st Mortgage Note
14.25% 11-15-01 3,925 3,670
Total Corporate Bonds
(Identified Cost -- $5,695) 5,945
</TABLE>
5
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON TOTAL RETURN TRUST, INC.
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 8.0%
Repurchase Agreement -- 6.0%
Morgan Stanley & Co.
Incorporated
6.25% dated 9-29-95, to be
repurchased at $14,323 on
10-2-95 (Collateral: $15,336
Federal National Mortgage
Association Mortgage-backed
securities, 5.50% due
1-1-09,
value $14,616) $14,316 $14,316
Sovereign Obligation -- 2.0%
Mexican Cetes
6.0% 2-29-96
mxp 35,000 4,727
Total Short-term Investments
(Identified Cost -- $18,644) 19,043
Total Investments -- 100.8%
(Identified Cost -- $196,077) 241,676
Liabilities in Excess of Other
Assets -- (0.8%) (1,835)
NET ASSETS -- 100.0% $239,841
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
Net Assets Consisting of:
Accumulated paid-in capital
applicable to:
15,393 Primary shares
outstanding $191,207
412 Navigator shares
outstanding 5,377
Undistributed net investment
income 2,341
Distributions in excess of
net realized gain on investments (4,683)
Unrealized appreciation of
investments 45,599
NET ASSETS $239,841
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $15.17
NAVIGATOR CLASS $15.24
</TABLE>
MXP MEXICAN PESO (NEW)
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON TOTAL RETURN TRUST, INC.
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands)
INVESTMENT INCOME:
<S> <C> <C>
Dividends (net of foreign taxes withheld of $19) $ 3,997
Interest 2,636
Total investment income $ 6,633
EXPENSES:
Investment advisory fee 827
Distribution and service fees 1,075
Transfer agent and shareholder servicing expense 96
Custodian fee 46
Legal and audit fees 19
Reports to shareholders 18
Registration fees 14
Directors' fees 5
Other expenses 8
Total expenses 2,108
NET INVESTMENT INCOME 4,525
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized loss on investments (21)
Increase in unrealized appreciation of investments 36,716
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 36,695
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 41,220
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON TOTAL RETURN TRUST, INC.
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
(Amounts in Thousands) September 30, 1995 March 31, 1995
(Unaudited)
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 4,525 $ 5,026
Net realized loss on investments (21) (1,890)
Change in unrealized appreciation of investments 36,716 (1,746)
Increase in net assets resulting from operations 41,220 1,390
Net equalization credits -- 428
Distributions to shareholders from:
Net investment income:
Primary Class (3,789) (4,366)
Navigator Class (120) (22)
Net realized gain on investments:
Primary Class -- (8,620)
Navigator Class -- (61)
Increase in net assets from Fund share transactions:
Primary Class 2,425 21,748
Navigator Class 515 4,809
Increase in net assets 40,251 15,306
NET ASSETS:
Beginning of period 199,590 184,284
End of period (including undistributed net investment income of $2,341
and $1,725, respectively) $ 239,841 $199,590
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON TOTAL RETURN TRUST, INC.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Navigator
Class
Primary Class For the Six
For the Six Months Ended
Months Ended Sept. 30,
Sept. 30, 1995 1995
(Unaudited) (Unaudited)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period $12.79 $12.83
Net investment income 0.29 0.35
Net realized and unrealized gain (loss) on
investments 2.34 2.37
Total from investment operations 2.63 2.72
Distributions to shareholders from:
Net investment income (0.25) (0.31)
Net realized gain on investments -- --
Total distributions (0.25) (0.31)
Net asset value, end of period $15.17 $15.24
Total return 20.72%B 21.41%B
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.94%A 0.86%A
Net investment income 4.1%A 5.2%A
Portfolio turnover rate 30.6%A 30.6%A
Net assets, end of period (in thousands) $ 233,536 $6,305
<CAPTION>
December 1, 1994C
to
March 31, 1995
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period $12.66
Net investment income 0.15
Net realized and unrealized gain (loss) on
investments 0.25
Total from investment operations 0.40
Distributions to shareholders from:
Net investment income (0.06)
Net realized gain on investments (0.17)
Total distributions (0.23)
Net asset value, end of period $12.83
Total return 2.28%B
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.86%A
Net investment income 3.6%A
Portfolio turnover rate 61.9%A
Net assets, end of period (in thousands) $4,823
</TABLE>
A ANNUALIZED.
B NOT ANNUALIZED.
C COMMENCEMENT OF NAVIGATOR CLASS.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON TOTAL RETURN TRUST, INC.
(Amounts in Thousands) (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Total Return Trust, Inc. ("Fund") is registered under
the Investment Company Act of 1940, as amended, as an open-end,
diversified investment company.
The Fund consists of two classes of shares: Primary Class, offered
since 1985, and Navigator Class, offered to certain institutional
investors since December 1, 1994. Expenses of the Fund are allocated
proportionately to the two classes of shares except for 12b-1 distribution
fees, which are charged only on Primary shares, and transfer agent and
shareholder servicing expenses, which are determined separately for each
class.
Security Valuation
Securities traded on national securities exchanges are valued at the
last quoted sales price. Over-the-counter securities, and listed
securities for which no sales price is available are valued at the mean
between the latest bid and asked prices. Short-term securities are valued
at cost which, when combined with accrued interest receivable,
approximates current value.
Dividends and Distributions to Shareholders
Net investment income for dividend purposes consists of dividends and
interest earned, less expenses. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Net capital gain distributions
are declared and paid after the end of the tax year in which the gains are
realized.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis. At September 30, 1995, $2,473 was receivable for investments sold,
but not yet delivered and $4,724 was payable for investments purchased but
not yet received.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
Equalization
In prior years, the Fund followed the practice of equalization by
which a portion of proceeds from sales and cost of redemptions of Fund
shares is credited or charged to undistributed net investment income. In
the current fiscal year ending March 31, 1996, the Fund discontinued the
practice of equalization, resulting in a reclassification from
undistributed net investment income of $2,641 to accumulated paid-in
capital -- Primary Class and $53 to accumulated paid-in
capital -- Navigator Class.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the six months ended September 30, 1995
(excluding short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $ 33,295
Proceeds from sales 31,190
</TABLE>
At September 30, 1995, the cost of securities for federal income tax
purposes was $196,077. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $49,337
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $3,738.
10
<PAGE>
(Amounts in Thousands)
3. FUND SHARE TRANSACTIONS:
At September 30, 1995 there were 100,000 shares authorized at $.001
par value for all classes of the Fund. On December 1, 1994, when the
Navigator Class became effective, 367 shares held in Legg Mason Profit
Sharing Plan accounts, with a value of $4,686, were transferred from
Primary Class to Navigator Class. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
For the
Six Months Ended For the
September 30, Year Ended
1995 March 31, 1995
Primary Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 1,443 $ 20,448 3,969 $ 51,355
Reinvestment of
distributions 261 3,678 961 12,173
Repurchased (1,541) (21,701) (3,306) (41,780)
Net increase 163 $ 2,425 1,624 $ 21,748
</TABLE>
<TABLE>
<CAPTION>
For the December 1, 1994(Dagger)
Six Months Ended to
September 30, 1995 March 31, 1995
Navigator Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 60 $ 852 385 $4,921
Reinvestment of
distributions 8 119 7 83
Repurchased (32) (456) (16) (195)
Net increase 36 515 376 $4,809
</TABLE>
(Dagger) COMMENCEMENT OF NAVIGATOR CLASS.
4. TRANSACTIONS WITH AFFILIATES:
The Fund has an investment advisory and management agreement with Legg
Mason Fund Adviser, Inc. ("Adviser"), a corporate affiliate of Legg Mason
Wood Walker, Incorporated ("Legg Mason"), a member of the New York Stock
Exchange and the distributor for the Fund. Under this agreement, the
Adviser provides the Fund with investment advisory, management and
administrative services for which the Fund pays a fee at an annual rate of
0.75% of average daily net assets, calculated daily and payable monthly.
The agreement with the Adviser provides that expense reimbursements be
made to the Fund for expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) which in any month are in excess of an annual rate
of 1.95% of the Fund's average net assets. No expense reimbursement is due
for the six months ended September 30, 1995. At September 30, 1995, $145
was due to the Adviser.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.75% and an annual service fee of 0.25% of the
Primary Class' average daily net assets, calculated daily and payable
monthly. At September 30, 1995, $189 was due to the distributor. Legg
Mason also has an agreement with the Fund's transfer agent to assist with
certain of its duties. For this assistance, Legg Mason was paid $27 by the
transfer agent for the six months ended September 30, 1995. No brokerage
commissions were paid to Legg Mason or its affiliates during the six
months ended September 30, 1995.
11
