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 (bullet) 539 (bullet) 0000
[recycled logo] Printed on Recycled Paper
LMF-006
11/96
Report to Shareholders
For the Six Months Ended
September 30, 1996
The
Legg Mason
Total
Return
Trust, Inc.
Primary Class
Putting Your Future First
[Legg Mason Funds Logo]
<PAGE>
To Our Shareholders,
In the three months ended September 30, 1996, the Total Return Trust's net
asset value per share rose from $16.74 to $17.61. Assuming reinvestment of the
$0.105 per share dividend paid in August, the Trust's total return (appreciation
plus reinvested dividends) for the quarter was 5.9%. Total returns on the Value
Line index of 1700 stocks and Standard & Poor's 500 stock composite index were
1.2% and 3.1%, respectively, during the same period. In the nine months through
September 30, the Trust's total return was 16.6%, compared to total returns of
9.7% and 13.5% 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, Nancy Dennin and Bill Miller, the Trust's portfolio
managers, comment on the investment outlook.
Your Board of Directors has approved an ordinary income dividend of $0.136
per share, payable on October 30, 1996 to shareholders of record on October 25.
Most shareholders will receive this dividend in the form of additional shares
credited to their accounts.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
November 8, 1996
<PAGE>
Portfolio Managers' Comments
Your fund's results for the three, nine and twelve months ended September
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
- --------------------------------------------------------------------------------
3 months 5.85% 2.90% 3.09% 4.64%
9 months 16.59% 12.44% 13.49% 16.95%
1 year 19.60% 17.24% 20.32% 25.72%
As you can see, your fund outperformed its peer group+ for the three, nine and
twelve months ended September 30, 1996. Your fund also outperformed the S&P 500
and the Dow Jones Industrial Average in the third quarter, and has outperformed
the S&P 500 year to date, while performing in line with the Dow over this
period.
The third quarter results mask a very volatile three months for the equity
market. After setting new highs in the second quarter, the market began a short
decline that culminated in a 10% intraday sell-off on July 16. For long-term
investors, sell-offs provide an opportunity. For speculators, they provide a
lesson.
The decoupling of the bond and stock markets that occurred in the first
half of the year--when long-term Treasuries lost almost 10% of their value,
while equities were up by about the same amount--has run its course. During the
stock market sell-off, bonds rallied. Quantitative work suggests that equities
are currently fairly valued relative to bonds. For stocks to move higher, bonds
need to do well.
The volatility of the equity and debt markets this year is remarkable,
given the sanguine economic and inflation data. Recent U.S. inflation volatility
has been only one-quarter of that which existed in the late 1980s and only
one-third of the rate that existed in the early 1990s. Changes in commodity
price volatility have led changes in inflation volatility with remarkable
reliability since 1971. Commodity price volatility is at 27 year lows and
remains in its downward trend. This suggests that the trend toward declining
inflation volatility is not about to reverse soon.
The economic environment the U.S. has experienced over the last five years
is often referred to as "The Goldilocks Economy," it hasn't been too weak, nor
has it been too strong. Since 1991, economic growth has averaged 2.8%. The
economy should continue along this path, growing 2.5-3.0% for the remainder of
this year and into 1997.
The valuation of the equity market is "just right" given the current levels
of interest rates and inflation. Over the last 75 years, when the CPI has been
3.5% or less--it's 2.7% now--the average market multiple has been 16x, slightly
less than the current multiple. In contrast, the fund continues to trade at a
significant discount to the market on both 1996 and 1997 estimated earnings.
Even after the fund's strong performance in the first nine months of the year,
it is trading at only 12x 1996 and 10.5x 1997 estimated earnings.
We have tried to use the volatility in the markets this year to take
advantage of what we consider to be attractive opportunities. Throughout the
year, we have purchased the 30-year Treasury bond after the bond market has, in
our opinion, overreacted to economic data.
Our most recent purchase was at the beginning of the third quarter with the
long bond at a 7.15% yield. We now have about 6% of the fund's assets in the
30-year treasury. Although we still believe the long bond is attractive, we
don't foresee increasing the fund's stake from here.
We added four new securities to the portfolio in the third quarter, and
sold three, as shown in the table on page 4. We purchased Hercules, a
diversified chemical company. Hercules has many of the attributes we look for in
our decision making process: it competes in sectors with an oligopoly structure,
it is almost always the low-cost producer and price leader, all of its
businesses create excess capital, its business lines are not very cyclical, and
most importantly, in our opinion, management is focused on creating shareholder
value. There is no price at which management will not buy back stock as long as
they remain confident that they can achieve their targeted growth rate of at
least 15%, before acquisitions. Growth at 15% means earnings per share will
double every five years. What is perhaps most remarkable is that in the last
five years, sales have declined by approximately one-third, as management has
been exiting low return businesses, while EBIT (earnings before interest and
taxes) margins have tripled and net income has increased fourfold.
We also purchased General Motors Corp. during the quarter. The stock has
come under some recent
+As measured by Lipper Analytical Services, Inc.
2
<PAGE>
pressure due to the strike by the Canadian Auto Workers, and the firm's
negotiations with the United Auto Workers of America. We believe that most of
the bad news is already reflected in the stock price. Putting the strike aside,
the stock is trading at only one-half the market multiple on 1996 and 1997
estimated earnings, and more importantly in our opinion, the company is expected
to generate about $10 per share in free cash flow next year. General Motors
has generated, on average, about $8 billion in free cash flow over each of the
last three years. However, until recently most of that cash went to funding
the company's large unfunded pension plan, which is now fully funded by the
company's calculation. We expect some of the free cash flow will begin to be
returned to shareholders next year, both through higher dividends and share
repurchases.
Lastly, we purchased small positions in two thrifts during the quarter. We
purchased Bank United Corp. on its initial public offering, and we also
purchased Collective Bancorp in New Jersey. Unfortunately, both stocks moved up
quite a bit before we had a full position. We slightly cut back our position in
Chase Manhattan Bank to offset these purchases, since we don't want to increase
the financial weighting in the fund. However, we are still very bullish on the
prospects for Chase and the other financials in the fund. Although many of them
have done very well this year, we believe they are still attractive. Chase, for
example, is up 40% this year, yet the stock sells at only 11x this year's
estimated earnings, or only 68% of the market's multiple. At the beginning of
the year, Chase sold at only 50% of the market's multiple. We continue to
believe that banks deserve even higher multiples for several reasons.
First, banks are generating higher returns on equity than corporate
America: in the second quarter, banks earned about 18% on equity, compared with
16% for the S&P 500. Second, we expect bank earnings to continue to outpace the
growth in corporate profits, with bank earnings advancing 10-12% next year
compared to about 7% for the S&P 500. Additionally, credit quality continues to
be well controlled. A recent study by Veribanc, Inc. revealed that the most
serious credit card delinquencies, those payments at least 90 days past due,
declined in the second quarter, after rising for seven straight quarters.
Lastly, we expect consolidation to pick up within the next few months. We
believe the NationsBank/Boatmen's Bancshares deal announced on August 30th is
the beginning of the next wave of consolidation. NationsBank agreed to pay about
2.5x book value and 15x 1997 estimated earnings for Missouri based Boatmen's,
with $41 billion in assets. We believe this deal will ignite another major round
of merger activity among U.S. banks. During 1995, each major deal changed the
national banking landscape and served as a meaningful catalyst for other banks
to move quickly or else lose the opportunity to acquire coveted institutions and
customer bases.
We sold Witco during the quarter as it reached our price target. We also
sold Ultramar, a refining company. When we purchased the stock about two years
ago, we expected the company to earn over $4 this year, due to higher refining
margins. While refining margins have moved up from time to time, they have not
been sustainable at higher levels; consequently, Ultramar's earnings power has
not materialized. While we were wrong in our investment case, we still had a
nice profit in the stock.
Lastly, we sold Philip Morris and significantly cut back our stake in RJR
Nabisco. Fundamentally, both stocks are still very attractive. Philip Morris has
over a 5% yield, earnings are growing about 15% annually, as has the dividend,
and management is buying in stock. However, part of our investment case was
predicated on the fact that the tobacco companies had never lost a lawsuit. That
changed in August, when a Florida jury awarded $750,000 to a plaintiff in a suit
filed against American Tobacco, a unit of Brown & Williamson.
Many investors, including ourselves, were surprised by the verdict, and we
believe the probability of the award being overturned on appeal is low. As a
result of this verdict, we believe the risk profile for the tobacco industry has
gone up. We thought it was prudent to substantially reduce our exposure in the
tobacco area until we are better able to assess the future risk-adjusted reward
potential for the industry.
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
November 4, 1996
DJIA 6041.68
3
<PAGE>
Performance Information
Legg Mason Total Return Trust, Inc.
Total Return for One, Five, Ten Years and Life of Fund, as of
September 30, 1996
The returns shown on this page 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, 1996 were as follows:
Cumulative Average Annual
Total Return Total Return
- --------------------------------------------------------------------------------
Primary Class:
One Year +19.60% +19.60%
Five Years +97.69 +14.60
Ten Years +176.92 +10.72
Life of Class+ +187.56 +10.21
Navigator Class:
One Year +20.82% +20.82%
Life of Class++ +50.03 +24.73
- --------------------------------------------------------------------------------
+Primary Class inception--November 21, 1985
++Navigator Class inception--December 1, 1994
Selected Portfolio Performance
Biggest gainers for the 3rd quarter 1996*
- --------------------------------------------------------------------------------
1. International Business Machines
Corporation +25.8%
2. Lloyds TSB Group plc +20.9%
3. Standard Federal Bancorporation +18.8%
4. Enhance Financial Services Group Inc. +17.9%
5. Northrop Grumman Corporation +17.8%
6. Washington Federal, Inc. +15.2%
7. National Golf Properties, Inc. +14.9%
8. The Chase Manhattan Corporation +13.5%
9. duPont (E.I.) de Nemours +11.5%
10. Tyco Toys Inc. Series C, Cv. +11.1%
* Securities held for the entire quarter.
Portfolio Changes
Securities Added
- --------------------------------------------------------------------------------
Bank United Corp.
Collective Bancorp, Inc.
General Motors Corporation
Hercules, Inc.
Biggest laggers for the 3rd quarter 1996*
- --------------------------------------------------------------------------------
1. RJR Nabisco Holdings Corp. Series C
Depositary Shares -17.3%
2. Kmart Corporation 7.75% Cv. -9.9%
3. Chrysler Corporation -7.7%
4. Olin Corporation -5.9%
5. Telefonos de Mexico S.A. ADR -4.1%
6. Ford Motor Company -3.5%
7. IPC Holdings Limited -1.9%
8. The Bear Stearns Companies Inc. -1.6%
9. United States Treasury Bond
6.00% 2-15-26 -0.9%
10. Masco Corporation -0.8%
Securities Sold
- --------------------------------------------------------------------------------
Philip Morris Companies Inc.
Ultramar Corporation
Witco Corporation
4
<PAGE>
Statement of Net Assets
Legg Mason Total Return Trust, Inc.
September 30, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
- --------------------------------------------------------------------------------
Common Stocks and Equity Interests -- 84.1%
Aerospace -- 2.6%
Northrop Grumman Corporation 100 $ 8,025
- --------------------------------------------------------------------------------
Automotive -- 7.5%
Chrysler Corporation 314 8,988
Ford Motor Company 175 5,469
General Motors Corporation 175 8,400
- --------------------------------------------------------------------------------
22,857
- --------------------------------------------------------------------------------
Banking -- 11.4%
BankAmerica Corporation 122 10,013
Lloyds TSB Group plc 2,140 12,664
The Chase Manhattan Corporation 152 12,147
- --------------------------------------------------------------------------------
34,824
- --------------------------------------------------------------------------------
Chemicals -- 9.1%
duPont (E.I.) de Nemours 100 8,825
Hercules, Inc. 169 9,253
Olin Corporation 115 9,660
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27,738
- --------------------------------------------------------------------------------
Computer Services and Systems -- 4.9%
International Business Machines
Corporation 120 14,940
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Construction Materials -- 2.0%
Masco Corporation 200 6,000
- --------------------------------------------------------------------------------
Finance -- 5.8%
Federal National Mortgage Association 252 8,789
The Bear Stearns Companies Inc. 387 9,006
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17,795
- --------------------------------------------------------------------------------
Gas and Pipeline Utilities-- 2.8%
Williams Companies, Inc. 170 8,670
- --------------------------------------------------------------------------------
Insurance -- 10.7%
American Financial Group Incorporated 229 7,214
CIGNA Corporation 61 7,264
Enhance Financial Services Group Inc. 305 10,075
IPCHoldings Limited 413 8,157
- --------------------------------------------------------------------------------
32,710
- --------------------------------------------------------------------------------
(Amounts in Thousands) Shares Value
- --------------------------------------------------------------------------------
Real Estate -- 12.9%
National Golf Properties, Inc. 346 $ 9,645
Nationwide Health Properties, Inc. 140 3,080
Regency Realty Corporation 373 8,335
Resource Mortgage Capital Corporation 315 7,481
Summit Properties, Inc. 223 4,410
Walden Residential Properties, Inc. 300 6,337
- --------------------------------------------------------------------------------
39,288
- --------------------------------------------------------------------------------
Retail Sales -- 2.1%
J.C. Penney Company, Inc. 120 6,495
- --------------------------------------------------------------------------------
Savings and Loan -- 10.4%
Bank United Corp. 90 2,239
Collective Bancorp, Inc. 53 1,513
Great Western Financial Corporation 239 6,325
Standard Federal Bancorporation 247 11,300
Washington Federal, Inc. 447 10,562
- --------------------------------------------------------------------------------
31,939
- --------------------------------------------------------------------------------
Telecommunications -- 1.9%
Telefonos de Mexico S.A. ADR 180 5,782
- --------------------------------------------------------------------------------
Total Common Stocks and Equity
Interests
(Identified Cost-- $184,789) 257,063
- --------------------------------------------------------------------------------
Preferred Shares -- 4.9%
RJR Nabisco Holdings Corp.
Series C Depositary Shares 1,011 5,432
Kmart Corporation
7.75% Cv. 108 5,254
Tyco Toys Inc.
Series C, Cv. 685 4,281
- --------------------------------------------------------------------------------
Total Preferred Shares
(Identified Cost-- $15,507) 14,967
- --------------------------------------------------------------------------------
5
<PAGE>
Statement of Net Assets--Continued
Legg Mason Total Return Trust, Inc.
September 30, 1996
Principal
(Amounts in Thousands) Amount Value
- --------------------------------------------------------------------------------
U.S. Government Obligation -- 5.5%
United States Treasury Bond
6.00% 2-15-26
(Identified Cost-- $16,518) $19,000 $ 16,696
- --------------------------------------------------------------------------------
Short-Term Investments -- 5.3%
Repurchase Agreement -- 2.6%
Prudential Securities, Inc.
5.75% dated 9-30-96, to be
repurchased at $7,935 on
10-1-96 (Collateral: $7,475
Federal National Mortgage
Association Mortgage-backed
securities, 10.5% due 6-1-21,
value $8,097) 7,934 7,934
Sovereign Obligation-- 2.7%
Mexican Cetes 1-30-97 mxp 69,445 8,425
- --------------------------------------------------------------------------------
Total Short-term Investments
- --------------------------------------------------------------------------------
(Identified Cost-- $16,346) 16,359
- --------------------------------------------------------------------------------
Total Investments -- 99.8%
(Identified Cost -- $233,160) 305,085
Other Assets Less Liabilities -- 0.2% 482
- --------------------------------------------------------------------------------
Net assets-- 100.0% $305,567
- --------------------------------------------------------------------------------
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Net Assets Consisting of:
Accumulated paid-in capital
applicable to:
16,891 Primary shares
outstanding $215,180
463 Navigator shares
outstanding 6,095
Undistributed net investment
income 2,411
Undistributed net realized gain on
investments 9,956
Unrealized appreciation of
investments 71,925
- --------------------------------------------------------------------------------
Net assets-- 100.0% $305,567
- --------------------------------------------------------------------------------
Net asset value per share:
Primary Class $17.61
- --------------------------------------------------------------------------------
Navigator Class $17.68
mxp Mexican peso
See notes to financial statements.
6
<PAGE>
Statement of Operations
Legg Mason Total Return Trust, Inc.
For the Six Months Ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
(Amounts in Thousands)
- ------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends:
Affiliated companies $ 151
Other securities (net of foreign taxes withheld of $41) 4,909
Interest 2,380
- ------------------------------------------------------------------------------------------
Total investment income $ 7,440
Expenses:
Investment advisory fee 1,071
Distribution and service fees 1,391
Transfer agent and shareholder servicing expense 118
Custodian fee 80
Reports to shareholders 33
Legal and audit fees 29
Registration fees 22
Directors' fees 5
Other expenses 10
- ------------------------------------------------------------------------------------------
2,759
Less fees waived (14)
- ------------------------------------------------------------------------------------------
Total expenses, net of waivers 2,745
- ------------------------------------------------------------------------------------------
Net Investment Income 4,695
Net Realized and Unrealized Gain on Investments:
Realized gain on investments 13,557
Increase in unrealized appreciation of investments 4,995
- ------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments 18,552
- ------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations $23,247
- ------------------------------------------------------------------------------------------
</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, 1996 March 31, 1996
- --------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Change in Net Assets:
Net investment income $ 4,695 $ 7,723
Net realized gain on investments 13,557 928
Increase in unrealized appreciation of investments 4,995 58,047
- --------------------------------------------------------------------------------------------------
Increase in net assets resulting from operations 23,247 66,698
Distributions to shareholders from
net investment income:
Primary Class (3,375) (7,831)
Navigator Class (131) (262)
Increase in net assets from Fund share transactions:
Primary Class 11,159 15,144
Navigator Class 599 729
- --------------------------------------------------------------------------------------------------
Increase in net assets 31,499 74,478
Net Assets:
Beginning of period 274,068 199,590
- --------------------------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $2,411 and $1,222,
respectively) $305,567 $274,068
</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>
Primary Class Navigator Class
- -----------------------------------------------------------------------------------------------------------------------------------
For the Years
For the Six For the Years Ended March 31, For the Six Ended March 31,
Months Ended -------------------------------------------------- Months Ended -------------------
Sept. 30, 1996 1996 1995 1994 1993 1992 Sept. 30, 1996 1996 1995(A)
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C>
Per Share Operating Performance:
Net asset value, beginning
of period $16.45 $12.79 $13.54 $13.61 $11.64 $ 9.64 $16.52 $12.83 $12.66
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.27 0.48 0.33 0.36 0.39 0.34 0.36 0.62 0.15
Net realized and unrealized
gain (loss) on investments 1.10 3.69 (0.19) 0.24 1.89 1.91 1.10 3.72 0.25
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.37 4.17 0.14 0.60 2.28 2.25 1.46 4.34 0.40
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to share-
holders from:
Net investment income (0.21) (0.51) (0.29) (0.33) (0.31) (0.25) (0.30) (0.65) (0.06)
Net realized gain on
investments -- -- (0.60) (0.34) -- -- -- -- (0.17)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.21) (0.51) (0.89) (0.67) (0.31) (0.25) (0.30) (0.65) (0.23)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $17.61 $16.45 $12.79 $13.54 $13.61 $11.64 $17.68 $16.52 $12.83
Total return 8.36%(C) 33.23% 1.09% 4.57% 19.88% 23.59% 8.92%(C) 34.67% 2.28%(C)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses 1.95%(B,D) 1.95% 1.93% 1.94% 1.95%(B) 2.34% 0.87%(B,D) 0.94% 0.86%(D)
Net investment income 3.3%(B,D) 3.2% 2.5% 2.7% 3.1%(B) 3.1% 4.3%(B,D) 4.2% 3.6%(D)
Portfolio turnover rate 39.6%(D) 34.7% 61.9% 46.6% 40.5% 38.4% 39.6%(D) 34.7% 61.9%
Average commission rate
paid(E) $0.0581 -- -- -- -- -- $0.0581 -- --
Net assets, end of period
(in thousands) $297,387 $267,010 $194,767 $184,284 $139,034 $52,360 $8,180 $7,058 $4,823
</TABLE>
(A) For the period December 1, 1994 (commencement of Navigator Class)
to March 31, 1995.
(B) Net of fees waived by the Adviser in excess of a voluntary
expense limitation of 1.95% on the Primary Class from November 1,
1992, and 0.95% on the Navigator Class from inception, both to
March 31, 1997.
(C) Not annualized
(D) Annualized
(E) Pursuant to SEC regulations effective for fiscal years beginning
after September 1, 1995, this is the average commission rate paid on
securities purchased and sold by the Fund.
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.
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.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Investment Transactions:
Investment transactions for the six months ended September 30, 1996
(excluding short-term securities) were as follows:
Purchases $69,571
Proceeds from sales 52,119
At September 30, 1996, the cost of securities for federal income tax
purposes was $233,160. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $76,592
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $4,667.
3. Fund Share Transactions:
At September 30, 1996 there were 100,000 shares authorized at $.001
par value for all classes of the Fund. Transactions in Fund shares were as
follows:
For the For the
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
- --------------------------------------------------------------------------------
Primary Class Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Sold 1,611 $ 27,024 3,191 $ 47,587
Reinvestment of
distributions 195 3,276 528 7,596
Repurchased (1,142) (19,141) (2,722) (40,039)
- --------------------------------------------------------------------------------
Net increase 664 $ 11,159 997 $ 15,144
================================================================================
10
<PAGE>
For the For the
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
- --------------------------------------------------------------------------------
Navigator Class Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Sold 67 $1,132 100 $ 1,483
Reinvestment of
distributions 8 131 18 259
Repurchased (39) (664) (68) (1,013)
- --------------------------------------------------------------------------------
Net increase 36 $ 599 50 $ 729
================================================================================
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. At September 30, 1996, $202 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, 1996, $239 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 $26 by the
transfer agent for the period ended September 30, 1996. No brokerage
commissions were paid to Legg Mason or its affiliates during the six
months ended September 30, 1996.
In November 1995, the Fund, along with certain other Legg Mason
Funds, entered into a $75 million line of credit ("Credit Agreement") to
be utilized as an emergency source of cash in the event of unanticipated,
large redemption requests by shareholders. Pursuant to the Credit
Agreement, each participating Fund is liable only for principal and
interest payments related to borrowings made by that Fund. Borrowings
under the line of credit bear interest at prevailing short-term interest
rates. For the six months ended September 30, 1996, the Fund had no
borrowings under the line of credit.
11
