Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
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 LLP
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
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111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
[recycled logo] Printed on Recycled Paper
LMF-006
Report to Shareholders
For the Quarter Ended
June 30, 1996
The
Legg Mason
Total
Return
Trust, Inc.
Primary Class
Putting Your Future First
[Legg Mason Funds logo]
FUNDS
<PAGE>
To Our Shareholders,
In the three months ended June 30, 1996, the Total Return Trust's net asset
value per share rose from $16.45 to $16.74. The latter figure is after payment
in May of an ordinary income dividend of $0.10 per share. Assuming reinvestment
of the dividend, the Trust's total return (appreciation in share value plus the
dividend) in the quarter was 2.4%. Total returns on Standard & Poor's 500 stock
composite index and the Value Line index of 1,700 stocks were 4.5% and 3.4%
during the same period. In the six months through June 30, the Trust's total
return was 10.2%, compared to total returns of 10.1% and 8.4% 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 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
or Legg Mason accounts. Dollar cost averaging is a convenient and sensible way
to invest which encourages continued purchases during market downswings when the
best values are available. Of course, it does not ensure a profit nor protect
against declines in the value of your investment. 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 $0.105 per
share, payable on August 8, 1996 to shareholders of record on August 5. Most
shareholders will receive this distribution in the form of additional shares
credited to their accounts.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
July 31, 1996
<PAGE>
Portfolio Managers' Comments
Your fund's results for the three, six and twelve months ended June 30,
1996 are shown below with comparable data for the leading market indices:
Lipper
Total Growth &
Return Income S&P Dow
Trust Funds 500 Jones
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3 months 2.38% 3.37% 4.49% 1.79%
6 months 10.15% 9.24% 10.10% 11.77%
1 year 23.28% 22.13% 26.00% 27.09%
As you can see, your fund slightly outperformed its peer group over the
last six and twelve months, although it trailed modestly in the second quarter.
On a year-to-date basis, our results are generally in line with the S&P 500 and
the economically sensitive Dow Jones Industrial Average, while slightly behind
for the one year period.
As during the first three months of the year, the divergence between
equities and bonds continued in the second quarter. The 30-year Treasury bond
was down 1.33% on a total return basis in the June quarter, and down 9.60% for
the first half of the year.
Bonds have come under pressure this year as monthly employment data has
been stronger than expected four out of the last five months. The fear is that
the economy is growing at a pace which will lead to higher inflation. We believe
this is unlikely. We think the strong employment numbers reported throughout the
first half show that output has been expanding to catch up with spending.
Consumer spending, which accounts for two-thirds of gross domestic product
(GDP), has been growing at a remarkably stable rate of about 2.5% for the last
three years. The other one-third of GDP, which includes business fixed
investment, government spending, the trade balance and inventory changes, has
been extremely volatile, oscillating widely around the growth in consumer
spending.
In the fourth quarter of 1995 and the first quarter of 1996, non-consumer
spending GDP did not grow at all while consumer spending grew at a 2.3% rate.
Now non-consumer spending GDP is catching up. This is raising industrial
production and employment growth to levels which would imply a GDP growth rate
of around 4% in the second quarter. In the meantime, second quarter consumer
spending appears to have slowed from its 3.5% first quarter rate to about 2.3%,
near its average. This implies that the surge in employment and output is likely
temporary and that non-consumer spending growth will gravitate back toward the
2.5% sustainable level of growth in the third and fourth quarters.
The bond market's reaction to the employment data this year has been
remarkable. The price of the 30-year Treasury bond has fallen by 10.1%
year-to-date, when measured on the days monthly employment data was reported and
has fallen 2.5% year-to-date, on all other days. Since early March bonds have
actually rallied by about 2% on non-employment report days.
We believe the decoupling of stocks and bonds in the first half of
1996--stock investors did well while bond holders lost money--has run its
course. If bonds continue to decline, we think stocks will follow. We also think
that the fears of an overheating economy are way overdone and that bond yields
in the 7% range offer excellent value. As shown in the portfolio changes table
which follows this letter, we purchased the 30-year Treasury bond during the
quarter. We expect the inflation worries plaguing bonds to dissipate later in
the year as it becomes clear the economy remains on a moderate growth path and
that inflation, as measured by the consumer price index (CPI), is unlikely to
exceed 3.5% or so.
Feeding the fears of the inflationists early in the year was the rise in
commodity prices. After a strong spurt earlier this year, many commodity prices
have declined sharply. Gold has retreated to the $385 level, from a peak of over
$420 in January, while the price of oil is down about 12% from its 1996 high.
While grain prices have remained firm due to drought conditions in the farm
region, such temporary phenomena obscure the remarkable long-term trend--food
commodity prices have declined an annual 2% after inflation for the past twenty
years.
With the drop in commodity prices, the inflation alarmists have turned to
wage increases as the harbinger of future inflation, citing the nine cent rise
in June hourly earnings reported on July 5th as the first evidence of
substantially higher future wages. To some extent the record rise in July wages
was making up for low figures in prior months. The longer-term perspective shows
a gradual upward trend in hourly earnings and a rate of wage inflation that
matches CPI inflation.
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<PAGE>
The bond and stock markets initially sold off after the employment data was
reported. More recently bond prices have held up while stocks continue to
decline. We believe this divergence is suggesting the economy will be weaker
later in the year instead of stronger, as many economists are predicting. We
believe this sell-off is a correction in a bull market and not the start of a
bear market. The long awaited 10% correction (the last time the market declined
10% was in 1990) was reached intraday on July 16th. The S&P 500 is trading at
15.5x 1996 and 14.5x 1997 estimated earnings, neither of which are demanding
multiples with long-term interest rates around 7% and inflation in the 3.5%
range. Your portfolio is trading at price/earnings (P/E) multiples much lower
than those of the market, at 10.5x 1996 and 9.6x 1997 estimated earnings.
In addition to the 30-year Treasury bond, we purchased three securities in
the second quarter, one common stock and two convertibles.
We purchased the convertible preferred stock that Kmart Corp. recently
issued with a 7.75% yield. After meeting with the new management team, led by
CEOFloyd Hall, we believe their strategy, while very basic, is the correct one
for the company. Very simply, their goal is to get the right merchandise in the
store and increase the number of times the consumer shops Kmart. The statistics
are remarkable. Sixty-three percent of America shops Kmart at least once a
quarter. The average transaction is $25-30 per visit, the same as Wal-Mart.
However, the issue is frequency. The average consumer shops Kmart 15 times per
year versus 32 times for Wal-Mart. If Kmart can get their consumer to shop the
store one more time per year, their same store sales would increase 7%.
We also purchased the Tyco Toys convertible preferred stock offering with
an 8.25% yield. The company recently completed a major restructuring, including
the elimination of $75 million of low margin products.
Lastly, we purchased Northrop Grumman. Northrop recently bought the
electronics division of Westinghouse. This acquisition should reduce the
volatility of the company's earnings, allowing it to trade at a multiple more in
line with its peer group. The stock is currently trading at about a 25% discount
to its peers on a cash flow basis.
We sold four securities during the quarter. Pepsico and Bankers Trust were
sold as they reached our price targets. John Alden and Nordbanken were small
positions, and we sold them to continue to keep the portfolio tightly focused.
We would like to thank our shareholders, both old and new, for their
confidence. As always, we appreciate your support and welcome your comments and
suggestions.
Nancy Dennin, CFA
Bill Miller, CFA
July 31, 1996
DJIA 5528.91
3
<PAGE>
Performance Information
Legg Mason Total Return Trust, Inc.
Total Return for One, Five, Ten Years and Life of Fund, as of
June 30, 1996
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, 1996 were as follows:
Cumulative Average Annual
Total Return Total Return
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Primary Class:
One Year +23.28% +23.28%
Five Years +107.01 +15.66
Ten Years +147.64 +9.49
Life of Class(dagger) +171.67 +9.88
Navigator Class:
One Year +24.66% +24.66%
Life of Class(dagger)(dagger) +41.34 +24.42
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(dagger) Primary Class inception--November 21, 1985.
(dagger)(dagger) Navigator Class inception--December 1, 1994.
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<PAGE>
Selected Portfolio Performance
Biggest gainers for the 2nd quarter 1996*
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1.Regency Realty Corporation +24.4%
2.Philip Morris Companies Inc. +18.5%
3.Resource Mortgage Capital Corporation +10.4%
4.Mexican Cetes 1-30-97 +10.2%
5.RJR Nabisco Holdings Corp.
preferred equity redemption
cumulative stock
Series C Depositary Shares +6.1%
6.J.C. Penney Company, Inc. +5.5%
7.Federal National Mortgage Association +5.1%
8.Masco Corporation +4.3%
9.Cigna Corporation +3.2%
10.Olin Corporation +2.6%
* Securities held for the entire quarter.
Portfolio Changes
Securities Added
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Northrop Grumman Corporation
Kmart Corporation, Cv. pfd.
Tyco Toys Inc.
Series C, Cv. pfd.
United States Treasury Bond
6.00% 2-15-26
Biggest laggers for the 2nd quarter 1996*
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1. International Business Machines
Corporation -10.9%
2. Standard Federal Bancorporation -9.4%
3. Walden Residential Properties, Inc. -6.9%
4. Ford Motor Company -5.8%
5. Washington Federal, Inc. -5.7%
6. duPont (E.I.) de Nemours -4.7%
7. The Bear Stearns Companies Inc. -4.5%
8. National Golf Properties, Inc. -4.4%
9. The Chase Manhattan Corporation -3.9%
10. IPC Holdings Limited -3.6%
Securities Sold
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Bankers Trust New York Corporation
John Alden Financial Corp.
Nordbanken Ab ADR
PepsiCo, Inc.
5
<PAGE>
Portfolio of Investments
Legg Mason Total Return Trust, Inc.
June 30, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
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Common Stocks and Equity Interests -- 81.4%
Aerospace -- 2.4%
Northrop Grumman Corporation 100 $ 6,813
Automotive -- 5.4%
Chrysler Corporation 157 9,734
Ford Motor Company 175 5,666
15,400
Banking -- 11.2%
BankAmerica Corporation 122 9,235
Lloyds TSB Group plc 2,115 10,346
The Chase Manhattan Corporation 172 12,119
31,700
Chemicals -- 6.9%
duPont (E.I.) de Nemours 112 8,862
Olin Corporation 115 10,264
Witco Corporation 16 553
19,679
Computer Services and Systems -- 3.5%
International Business Machines
Corporation 100 9,900
Construction Materials -- 2.1%
Masco Corporation 200 6,050
Finance -- 6.2%
Federal National Mortgage
Association 252 8,442
The Bear Stearns Companies Inc. 387 9,152
17,594
Food, Beverage and Tobacco-- 3.7%
Philip Morris Companies Inc. 100 10,400
Gas and Pipeline Utilities-- 3.0%
Williams Companies, Inc. 170 8,415
Insurance -- 10.0%
American Financial Group
Incorporated 229 6,899
Cigna Corporation 61 7,143
Enhance Financial Services
Group Inc. 305 8,548
IPC Holdings Limited 290 5,836
28,426
(Amounts in Thousands) Shares Value
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Oil Services -- 2.3%
Ultramar Corporation 230 $ 6,670
Real Estate -- 12.8%
National Golf Properties, Inc. 346 8,390
Nationwide Health Properties, Inc. 140 2,958
Regency Realty Corporation 373 7,823(A)
Resource Mortgage Capital
Corporation 297 6,683
Summit Properties, Inc. 223 4,382
Walden Residential Properties, Inc. 300 6,113
36,349
Retail Sales -- 2.2%
J.C. Penney Company, Inc. 120 6,300
Savings and Loan -- 7.6%
Great Western Financial Corporation 219 5,221
Standard Federal Bancorporation 247 9,510
Washington Federal, Inc. 331 6,776
21,507
Telecommunications -- 2.1%
Telefonos de Mexico S.A. ADR 180 6,030
Total Common Stocks and Equity
Interests
(Identified Cost-- $168,699) 231,233
Preferred Equity Redemption Cumulative Stock
-- 2.8%
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost-- $7,823) 1,205 7,832
Preferred Stocks -- 3.4%
Kmart Corporation
7.75% Cv. 107 5,832
Tyco Toys, Inc.
Series C, Cv. 685 3,853
Total Preferred Stocks
(Identified Cost-- $8,948) 9,685
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<PAGE>
Principal
(Amounts in Thousands) Amount Value
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U.S. Government Obligation -- 3.1%
United States Treasury Bond
6.00% 2-15-26
(Identified Cost-- $8,667) $10,000 $ 8,867
Short-Term Investments -- 7.1%
Repurchase Agreement -- 4.4%
Prudential Securities, Inc.
5.48% dated 6-28-96, to be
repurchased at $12,496 on
7-1-96 (Collateral: $12,960
Federal National Mortgage
Association Mortgage-backed
securities, 7.5% due 6-1-26,
value $12,847) 12,490 12,490
Sovereign Obligation-- 2.7%
Mexican Cetes 1-30-97 mxp 69,445 7,605
Total Short-term Investments
(Identified Cost-- $20,073) 20,095
Total Investments -- 97.8%
(Identified Cost-- $214,210) 277,712
Other Assets Less Liabilities-- 2.2% 6,333
Net assets-- 100.0% $284,045
Net asset value per share:
Primary Class $16.74
Navigator Class $16.80
<PAGE>
(A) Affiliated Company -- 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.
mxp Mexican peso (New)
7
