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
- --------------------------------------------------------------------------------
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
LMF-002
8/97
Quarterly Report
June 30, 1997
Legg Mason
Value Trust, Inc.
Special Investment
Trust, Inc.
Total Return Trust, Inc.
Putting Your Future First
[Legg Mason Logo]
FUNDS
<PAGE>
To Our Shareholders,
We are pleased to provide you with reports for the Legg Mason Value Trust,
Special Investment Trust and Total Return Trust for the quarter ended June 30,
1997.
As the following table indicates, each of the Funds performed well in the
quarter and in the six months ended June 30, as did the stock market generally.
By way of comparison, the S&P 500 Composite Index consists of the common stocks
of 500 of America's largest companies, the Value Line Index measures a broader
group of 1700 common stocks, and the Russell Index measures performance of the
stocks of 2000 small and medium-sized companies.
For the periods ended June 30, 1997:
3 Month 6 Month
Total Return* Total Return*
------------- -------------
Value Trust 18.1% 22.1%
Special Investment Trust 15.8% 10.5%
Total Return Trust 13.8% 16.0%
S&P 500 Composite Index 17.5% 20.6%
Value Line Index of 1700 stocks 13.9% 13.2%
Russell 2000 Index 16.2% 10.2%
In the quarter, the Value Trust's net asset value per share rose from $34.11
to $39.77. In addition, a long-term capital gain distribution of $.44 per share
and an ordinary income dividend of $.035 per share were paid to shareholders in
May. As you may have noticed, the Value Trust recently has been the subject of a
number of favorable comments in national business publications because of its
strong investment performance.
The Special Investment Trust's net asset value per share rose from $26.55 to
$29.36 in the quarter. In addition, a long-term capital gain distribution of
$1.325 per share was paid to shareholders in May.
Total Return Trust's net asset value per share rose from $19.39 to $20.49 in
the quarter, and in May shareholders received an ordinary income dividend of
$.105 per share, a short-term capital gain distribution of $.235 per share, and
a long-term capital gain distribution of $1.158 per share.
Long-term investment results for each of the Funds are shown in the
"Performance Information" section of this report. On the following pages, Bill
Miller, the portfolio manager for the Value Trust and Special Investment Trust
and Nancy Dennin, the portfolio manager for the Total Return Trust, discuss the
funds and the investment outlook.
The Board of Directors has approved an ordinary income dividend of $.07 per
share to Primary Class shareholders of Total Return Trust, payable on August 12,
1997, to shareholders of record on August 8, 1997. 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
August 8, 1997
- --------------
*Total return measures investment performance in terms of appreciation or
depreciation in net asset value per share plus dividends and any capital gain
distributions. It assumes that dividends and distributions were reinvested at
the time they were paid. Total return percentages and other information
regarding the Legg Mason funds in this letter are for the Primary Class of
shares of the funds.
<PAGE>
Portfolio Managers' Comments
Market Commentary
Second Quarter 1997
The S&P 500 has almost doubled in the past two years, an extraordinary
performance. Such strong results are usually achieved early in an economic
recovery, when valuations are modest and earnings are growing strongly. That
such returns are being seen after many years of strong economic growth and
rising stock prices is testimony to how unusual this period is in financial
history.
The second quarter's surge, coming after a weak first quarter that was
impacted by the Federal Reserve Board's raising short-term interest rates, was
fueled by a potent combination of better than expected earnings growth and
astonishingly low inflation.
Earnings grew about 13% in the first quarter, year over year, and appear to
be on track to grow perhaps 10% this quarter. The Producer Price Index has
fallen 6 months in a row, something unprecedented in the 50 year history of that
index. The Consumer Price Index is rising at only 2.4%, while the consumer price
deflator, a better measure of price behavior, is up at a 1.5% rate. Gold and oil
prices are down 20% from a year ago, and the commodities complex is registering
no signs of incipient inflation. Wage pressures, the most important factor in
future inflation, are muted, showing only a modest upward tilt despite the
lowest unemployment rate in a generation.
With corporate profitability high, earnings growing, interest rates gently
declining, and inflation quiescent, stock prices have powered ahead, reflecting
these unique economic circumstances. Real earnings growth and profitability--the
reported numbers minus inflation--are the highest in history. All of this is
terrific, and all of it is reflected in current stock prices.
The market's pattern throughout history has been that of short, powerful
bursts upward, followed by consolidation and range-bound trading until the next
wave of fundamentals becomes clearer. We see no reason to expect otherwise from
here, and so would expect the second half of the year to be less exuberant and
more volatile than the past 90 days or so.
In the second quarter, the economy's growth rate moderated from the 4.9%
first quarter rate, as consumer spending slowed markedly. If consumer spending
accelerates, the Fed may raise rates again, a development the market is
currently not anticipating. If it occurs, a correction similar to the almost 10%
decline seen earlier this year would not be surprising.
After the sharp run-up this year, stock prices are vulnerable to any bad
news. Current valuations leave little room for disappointment. In our last
report to shareholders, we expressed the view that equity investors should lower
their expectations and be prepared for returns more in line with historic norms
of 10% or so, than with the 19% per year experienced over the past 15 years.
With the recent move in stock prices, the past 15 years' returns have now
exceeded those of any 15 year period in any stock market in the world.
Although we are firmly in the camp that more modest returns are to be
expected, we do not believe, contrary to the views of many market strategists,
that this period of exceptional returns is likely to be followed by an extended
period of sub-par returns. Those who believe that the seven fat years we've had
must be followed by seven (or at least several) lean years don't rely on
scriptural warrant, but they do rely on faith, faith in the notion of regression
to the mean.
2
<PAGE>
They believe that many factors that underlie stock price growth--economic
growth, earnings growth, inflation, real interest rates--are constant, or nearly
so. If these factors veer sharply above or below the historic norms, they expect
them to move back in the opposite direction to re-establish the long-term mean.
There is no doubt that regression to the mean has been a powerful force in
economic history, but as circumstances change and evolve, so too may the mean.
The implicit growth rate of the S&P 500 is a good example.
Most strategists estimate the long-term growth rate of the S&P 500 to be a
little over 7%. Where do they get this number? From history. The 40 year growth
rate has been 6.6%, while the 70 year growth rate is slower at 5.5%. The longer
period encompassed the Great Depression, which lowered the growth rate. The 10
year growth rate, though, is 10%, the 5 year growth rate has been 13%, and the 3
year growth rate about 20%.
The acceleration in the growth rate has been due to the relative lack of
cyclicality in the economy over the past 15 years and, importantly, to the
change in the composition of the S&P 500. This latter factor is little noticed
but extremely significant.
Thirty-five years ago the S&P 500 was heavily weighted in utilities, energy,
and basic industry. Finance had no weighting, and technology was only 5%. Today
finance and technology make up 30% of the index, with health care, and branded
consumer companies such as Coca Cola, Philip Morris, and Procter and Gamble
having significant weights. The composition of the index has changed as the
economy has changed. It is heavily influenced by more stable, faster growing
companies. The component companies of the index also change. Just in the past
two years, over 10% of the index components have turned over, with the general
direction continuing toward more rapid growth than historically has been the
case.
Strategists have consistently underestimated earnings growth this decade
because they have assumed the growth rate of today's S&P will be the same as
yesterday's, despite the index being significantly different. It is as though
they expected the Yankees to win the pennant this year because Mantle, Maris,
Berra, and Ford had great numbers back in the early 1960's.
It looks as if the earnings growth rate of today's index is about 10%,
considerably higher than that assumed in most analysts' models. Valuation is
highly sensitive to real growth rates. In an environment of 6.5% long bonds, it
makes a big difference if the growth rate of earnings is 7%, or 10%. We believe
it is closer to the latter, and that the future rate of return on stocks is
likely to be considerably higher than the current spate of bearish strategists
suggests.
That rate of return, though, may encompass significant fluctuations.
Investors should be prepared for periods, sometimes extended periods, of returns
that may be well below 10%.
3
<PAGE>
Portfolio Managers' Comments--Continued
Value Trust
Second Quarter 1997
The second calendar quarter provided exceptional returns for many investors
in the stock market. All of the major averages surged, a trend that continued
early into the third quarter. Our results were as follows:
<TABLE>
<CAPTION>
Second Quarter Year to Date Twelve Months Ended
1997 1997 June 30, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust 18.05% 22.06% 52.16%
Lipper Growth Funds 15.82% 14.28% 23.96%
Lipper General Equity Funds 15.34% 13.00% 22.10%
S&P 500 17.47% 20.62% 34.71%
</TABLE>
As is evident, our returns compare quite favorably with those of the major
indices and funds with similar objectives. Most fund managers continue to
underperform the indices, with this year's underperformance being particularly
acute. The S&P 500 is beating about 95% of actively managed funds so far in
l997, as the largest capitalization stocks maintain the remarkable run that they
have experienced in the past few years.
Our results have benefited significantly from our large positions in
financial services and technology. Those groups have been market leaders since
this bull market began in late l990. We have long had a major position in
financial services. Our commitment to technology is more recent and generally
accounts for the difference between our performance and that of other value
managers, many of whom avoid technology stocks.
Many of our largest holdings have had astonishing moves in the past year.
Dell is up over 500%, IBM 130%, Western Digital 250%, Warner Lambert 160%,
Philips Electronics 160%, MBNA 130%. That's the good news; the bad news is that
the business values of these companies have not expanded at that rate. Over long
periods of time, you can only earn returns in line with the expansion of
business value, adjusted for whether your purchase price was above or below that
value. We try to buy companies at large discounts to underlying value. If our
analysis is right, we hope to capture the expansion of business value and the
purchase discount.
Technology stocks have offered that opportunity over the past few years, but
it is waning as the stocks surge ahead. Our research efforts are still active in
that area, but there now appear to be better values in other sectors. We have
increased our weightings recently in the gaming industry, where the stocks have
underperformed for quite some time and expectations are low. We are quite
optimistic about the return prospects in the lowly valued auto stocks and in the
much maligned tobacco industry. We believe there may be opportunities in
airlines and in utilities, two industries where it is still possible to find
stocks selling at single digit price earnings ratios (and rightly so, many
think, since very little money has been made in these areas over the years). We
haven't bought anything here, but are looking.
Portfolio activity was light in the quarter. We sold Standard Federal Bank, a
long-standing position that was acquired by a foreign financial institution. We
bought American Express during the sharp sell-off early in the quarter. We were
not able to buy a significant position before it moved out of our price range.
Two technology stocks were added: Compaq and Storage Technology. We were able to
get solid positions in both before they rallied. Compaq trades at a below-market
valuation on next year's earnings, while growing at almost 3x the market's rate
of growth and earning 4x the market's return on capital. We
4
<PAGE>
bought Storage Technology at 10x forward twelve month earnings. It has no debt,
a strong cash position, a 12-15% growth rate, and has been repurchasing its
shares. We also bought Conseco, a highly acquisitive consolidator in the
insurance industry with an excellent long-term record and a modest valuation.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
-----------------------------------------------
Special Investment Trust
Second Quarter 1997
The Special Investment Trust had a strong quarter in absolute terms, but one
that was about in line with the results achieved by the average mutual fund. We
slightly lagged most of the indices, with the exception of the Value Line index.
For the year to date, our results are ahead of those of other managers who
invest in small and mid-size companies, but not surprisingly, trail those funds
which concentrate on the largest, most visible companies such as Microsoft,
Intel, Coca Cola and GE, where most of the action has been in this bull market
for the past several years.
The underperformance of small companies versus large capitalization stocks
over the past year has been as large as any since good records have been kept.
The valuation gap between these two sectors is now at a twenty year high, based
on price earnings ratios. While many reasons have been adduced for the
outperformance of the S&P 500, we think the simplest one is probably the best:
big stocks have done better than small stocks because big companies' results
have been consistently better than those of small stocks. The businesses have
done better, so the stocks have done better.
Valuations now appear to reflect the greater consistency and profitability
currently being experienced by big companies, so there is reason to expect
(perhaps more accurately: hope) the wide disparity in performance will
attenuate. Neither we nor anyone else can predict the timing of periods of small
stock outperformance, but valuation is definitely on our side.
We continued to focus the portfolio in the quarter, buying two stocks and
selling four. One of the two names added, General Cable, was a new issue that
performed well immediately in the aftermarket and which we have subsequently
sold. It is not our usual style to own something for such a short period, but we
were not able to accumulate enough shares before the price rose to warrant
continuing with the position. The other stock bought, Imation, is a spin-off
from 3M consisting of a grab-bag of storage and graphics related businesses with
a history of sub-par profitability. We think programs are in place that will
significantly improve shareholder value over the next few years. Management is
highly incentivized to get the stock price up, and the company has been buying
in its shares at these depressed levels.
Of the stocks sold, BBN was acquired by GTE at a nice price, while Colt
Telecom and Serfin were smaller positions that we did not believe warranted
increasing to large positions at present prices. We received Conseco stock when
they acquired Life Partners, one of our holdings. Although a fine company,
Conseco is a very large company and didn't fit with our charge to invest in
small and mid-cap stocks.
We have increased our positions in Quantum and Western Digital, fast growing
companies trading at bargain prices; in Circus Circus, a medium grower that we
believe is substantially undervalued; and in Northeast Utilities, a slow (or no)
growth company trading at fire sale valuations.
5
<PAGE>
Portfolio Managers' Comments--Continued
Elsewhere in this report we have included some thoughts on the overall
market, with particular reference to the S&P 500. Unlike the big stock area,
where bargains are rare, we continue to find ample opportunities to invest in
small and mid cap companies.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
-----------------------------------------------
Total Return Trust
Second Quarter 1997
While, as always, we are agnostic about the near-term direction of the
market, it is unreasonable to expect the market to continue to rise at rates
that exceed the growth of underlying business values. Reasonable expectations
for stock returns going forward would seem to be in the 10% range, rather than
the spectacular returns of the past few years.
Your Fund is positioned to do well in this environment, in our opinion.
Relatively high income producing securities (for details of the Fund's
objectives and strategies, please read on) should do quite well in an
environment of more modest returns. To be specific, Chrysler, one of our
holdings, currently has a dividend yield of 4.5%, and ample cash on its balance
sheet to sustain a downturn in the economic cycle. Chrysler's current yield
provides almost one-half of our expected annual market return!
The REITs (real estate investment trusts) are also very attractive, in our
opinion. The average yield on the REITs in the portfolio is 7.5%, and we
estimate dividend growth of 5-7% annually, implying attractive total returns of
12-15%.
Our assets increased from $355 million at year end 1996 to $458 million on
June 30. Since the end of the quarter, they have continued to rise and now stand
at over $492 million. Part of the increase is of course due to gains in our
securities holdings, but we have also attracted over 4,000 new shareholders
since the end of 1996.
With our shareholder base having expanded by 20% in just six months, it may
be helpful to briefly review the objectives of the Fund, and how we go about
achieving those objectives. This should enable you to better evaluate our
results and to properly place the Fund in the context of your overall investment
program.
The Total Return Trust is a growth and income fund, meaning that in addition
to analyzing the growth prospects of a company, we are focused on securities
that produce current income. Our initial screening process is for stocks with
above market, sustainable dividend yields. High income producing securities
usually grow slower than non-income producing securities. If a company's
management believed they could earn a higher return on their cash, they would
reinvest it in the company, and not pay it out to shareholders.
Since high income producing securities are slower growers, they tend to
underperform in periods of strong growth, as was the case in the second quarter.
Part of the reason the market performed as well as it did over the last three
months is because corporate profit growth has exceeded expectations. See the
market commentary section for further details.
6
<PAGE>
On the flip side, high income producing securities tend to be less volatile
than their non-income producing counterparts. A measure of volatility that
statisticians use is called "beta." Simplistically, beta measures the relative
volatility of the stocks in a portfolio to the market. While we don't calculate
the Fund's beta, many rating services do, and they have determined the Fund's
beta to be .82, meaning that for each 1% move in the market, the stocks in the
portfolio have historically fluctuated 0.82%.
We attempt to minimize the Fund's volatility by being disciplined in what we
will pay for our investments. We are value investors. In every case, we attempt
to buy stocks at substantial discounts to the worth of the underlying companies.
Despite the Total Return Trust's strong results, the Fund's holdings sell at
substantial discounts to the overall market. The Fund is trading at only 11.9x
the 1997 and 10.9x the 1998 estimated earnings of its holdings, compared to the
S&P 500's P/E of 19.7x and 18.5x, respectively.
We set risk-adjusted price targets for all the securities in the portfolio,
and continuously reassess these targets. We're quite pleased with the Fund's
performance during the two corrections the market has experienced in the last
twelve months. Yes, there really have been two corrections!
The first occurred over a two month period ending in July 1996. The S&P 500
declined about 10% during this stretch, while the Fund declined only half as
much. The second correction was even shorter in duration, with the market down
over 9% from March 10 through April 11 of this year. The Total Return Trust's
decline was 7.5% over the same period.
We have no market capitalization requirements, meaning that we have the
flexibility to invest in companies of any size. As a general rule, we won't
invest in a stock whose market capitalization is less than the asset base of the
Fund, for liquidity purposes. The Fund's flexibility allows us to have a mix of
small, mid and large cap stocks in the portfolio. Currently, 47% of the
portfolio is invested in large cap stocks, 29% in mid cap and 24% in small
capitalization stocks.
Our disciplined, income-oriented value approach usually entails some
underperformance in enthusiastic markets. This should be counter-balanced by
better results in more sluggish periods. Despite the generally excellent results
of the past few years, it is not a prime objective of this Fund to outperform
each and every quarter. The Fund is managed to deliver sound long-term results,
consistent with our risk profile.
To our new shareholders, welcome, and to our existing shareholders we once
again thank you for your confidence and support.
Nancy Dennin, CFA
July 25, 1997
DJIA 8113.44
7
<PAGE>
Performance Information
Total Return for One, Five, Ten Years and Life of Funds, as of June 30, 1997
The returns shown on these pages are based on historical results and
are not intended to indicate future performance. The investment return and
principal value of an investment in any of these Funds 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 a fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
Total returns as of June 30, 1997 for each Fund and the Value Line
Geometric Average ("Value Line") and S&P 500 Stock Indices are shown in
the table below.
Each 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.
Average annual and cumulative total returns as of June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
Special
Value Investment Total Return Value Line S&P 500 Stock
Trust Trust Trust Index Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Average Annual Total Return
Primary Class:
One Year +52.16% +22.52% +38.14% +21.33% +34.71%
Five Years +24.44 +17.25 +17.98 +14.18 +19.78
Ten Years +14.74 +13.60 +12.18 +7.55 +14.66
Life of Class--Value Trust(A) +19.66 +11.29 +18.22
Life of Class--Special Investment Trust(B) +14.22 +9.08 +16.67
Life of Class--Total Return Trust(C) +12.06 +9.11 +17.08
Navigator Class:
One Year +53.67 +23.87 +39.65 +21.33 +34.71
Life of Class(D) +42.09 +25.11 +30.11 +20.81 +31.76
Cumulative Total Return
Primary Class:
One Year +52.16% +22.52% +38.14% +21.33% +34.71%
Five Years +198.43 +121.57 +128.62 +94.05 +146.57
Ten Years +295.65 +258.04 +215.55 +107.00 +292.62
Life of Class--Value Trust(A) +1,433.25 +409.01 +1,174.92
Life of Class--Special Investment Trust(B) +361.86 +171.59 +489.05
Life of Class--Total Return Trust(C) +275.30 +175.16 +523.99
Navigator Class:
One Year +53.67 +23.87 +39.65 +21.33 +34.71
Life of Class(D) +147.81 +78.39 +97.38 +62.97 +103.90
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Inception of Value Trust--April 16, 1982.
(B) Inception of Special Investment Trust--December 30, 1985.
(C) Inception of Total Return Trust--November 21, 1985.
(D) Commencement of sale of Navigator Shares for each fund--December 1, 1994.
8
<PAGE>
Value Trust
Illustration of an Assumed Investment of $10,000 made on April 16, 1982
(inception of the Value Trust Primary Class)
[Graph appears here - plot points below]
Value of original
shares purchased
plus shares acquired Value of shares
through reinvestment acquired through
of capital gain reinvestment of
distributions income dividends
4/16/82 10,000 10,000
3/31/83 16,400.97 16,160
3/31/84 19,425.44 18,870.5
3/31/85 24,682.58 23,582.98
3/31/86 34,509.73 32,555.48
3/31/87 37,924.3 35,503.58
3/31/88 34,729.33 32,267.83
3/31/89 41,109.15 37,650.23
3/31/90 44,289.55 39,890.82
3/31/91 43,013.79 37,701.34
3/31/92 51,413.83 44,210.32
3/31/93 59,003.27 50,183.93
3/31/94 62,337.34 52,789.39
3/31/95 68,426.55 57,816.96
3/31/96 97,226.16 82,355.78
3/31/97 129,881.47 110,379.07
6/30/97 153,324.61 130,446.74
-----------------------------------------------------
Selected Portfolio Performance*
Strong performers for the 2nd quarter 1997
- --------------------------------------------------------------------------------
1. Dell Computer Corporation + 73.7%
2. Philips Electronics N.V. +61.5%
3. Warner-Lambert Company +43.6%
4. MBNA Corporation +31.4%
5. International Business Machines
Corporation +31.3%
6. America Online, Inc. +31.3%
7. The Bear Stearns Companies, Inc. +30.2%
8. BankAmerica Corporation +28.2%
9. Zions Bancorporation +26.7%
10. Nokia Corporation ADS +26.6%
Weak performers for the 2nd quarter 1997
- --------------------------------------------------------------------------------
1. Seagate Technology, Inc. -21.6%
2. Circus Circus Enterprises, Inc. -5.3%
3. United States Treasury Notes, -0.2%
8.125%, 2/15/98
4. General Motors Corporation +0.6%
5. MGM Grand, Inc. +2.1%
6. RJR Nabisco Holdings Corp. +2.3%
7. The Chase Manhattan Corporation +3.7%
8. United States Treasury Bonds +4.0%
6.625%, 2/15/27
9. Republic of Argentina
Floating Rate Bonds +4.1%
6.75%, 3/31/05
10. Reebok International Ltd. +4.2%
* Securities held for the entire quarter.
Portfolio Changes
Securities added during the 2nd quarter 1997
- --------------------------------------------------------------------------------
America Online, Inc. (Private Placement)
American Express Company
Compaq Computer Corporation
Conseco Inc.
Storage Technology Corporation
Securities sold during the 2nd quarter 1997
- --------------------------------------------------------------------------------
Standard Federal Bancorporation
9
<PAGE>
Performance Information--Continued
Special Investment Trust
Illustration of an Assumed Investment of $10,000 made on December 30, 1985
(inception of the Special Investment Trust Primary Class)
[Graph appears below - plot points here]
Value of original
shares purchased
plus shares acquired Value of shares
through reinvestment acquired through
of capital gain reinvestment of
distributions income dividends
12/30/85 10,000 10,000
3/31/86 11,530 11,530
3/31/87 13,073.55 13,050.76
3/31/88 11,219.7 11,106.84
3/31/89 13,125.95 12,981.74
3/31/90 15,142.97 14,889.53
3/31/91 18,391.89 17,776.51
3/31/92 22,154.2 21,249.28
3/31/93 24,481.5 23,528.14
3/31/94 29,708.01 28,511.3
3/31/95 27,814.8 26,706.89
3/31/96 35,733.08 34,291
3/31/97 39,870.52 38,344.53
6/30/97 46,186.49 44,498.99
-----------------------------------------------------
Selected Portfolio Performance*
Strong performers for the 2nd quarter 1997
- --------------------------------------------------------------------------------
1. Anchor Gaming +71.3%
2. Bell & Howell Company +47.6%
3. Sun Healthcare Group Inc. +44.8%
4. CMAC Investment Corporation +43.1%
5. Physician Corporation of America +37.8%
6. InaCom Corp. +36.8%
7. America Online, Inc. +31.3%
8. The Bear Stearns Companies, Inc. +30.2%
9. Gateway 2000, Inc. +26.6%
10. Boomtown Inc. +26.3%
Weak performers for the 2nd quarter 1997
- --------------------------------------------------------------------------------
1. Players International, Inc. -38.5%
2. Salant Corporation -27.3%
3. Novell Inc. -27.0%
4. Circus Circus Enterprises, Inc. -5.3%
5. Cell Genesys, Inc. -5.0%
6. Ultrafem, Inc. -4.3%
7. WPP Group P.L.C. -2.6%
8. Olsen & Associates AG -1.4%
9. WPP Group P.L.C. ADR 0.0%
10. Argyle Television, Inc. +1.0%
* Securities held for the entire quarter.
Portfolio Changes
Securities added during the 2nd quarter 1997
- --------------------------------------------------------------------------------
General Cable Corporation
Imation Corporation
Securities sold during the 2nd quarter 1997
- --------------------------------------------------------------------------------
BBN Corporation
COLT Telecom Group PLC
Conseco Inc.
Grupo Financiero Serfin S.A. de C.V. ADR
10
<PAGE>
Total Return Trust
Illustration of an Assumed Investment of $10,000 made on November 21, 1985
(inception of the Total Return Trust Primary Class)
[Graph appears below - plot points here]
Value of original
shares purchased
plus shares acquired Value of shares
through reinvestment acquired through
of capital gain reinvestment of
distributions income dividends
11/21/85 10,000 10,000
3/31/86 10,780 10,780
3/31/87 11,884.09 11,673.03
3/31/88 10,675 10,295.43
3/31/89 12,293 11,689.85
3/31/90 12,720.53 11,874.31
3/31/91 12,714.62 11,498.61
3/31/92 15,714.56 13,884.21
3/31/93 18,839.3 16,234.03
3/31/94 19,701.15 16,637.21
3/31/95 19,916.82 16,593.36
3/31/96 26,535.98 21,341.73
3/31/97 32,992.2 26,102.28
6/30/97 37,529.81 30,062.16
---------------------------------------------------------------
Selected Portfolio Performance*
Strong performers for the 2nd quarter 1997
- --------------------------------------------------------------------------------
1. Great Western Financial Corporation +33.1%
2. International Business Machines
Corporation +31.3%
3. The Bear Stearns Companies, Inc. +30.2%
4. Bank United Corp. +28.8%
5. BankAmerica Corporation +28.2%
6. Lloyds TSB Group plc +25.2%
7. John Alden Financial Corporation +25.0%
8. Telefonos de Mexico S.A. ADR +24.0%
9. Fannie Mae +20.8%
10. Ford Motor Company +20.3%
Weak performers for the 2nd quarter 1997
- --------------------------------------------------------------------------------
1. Olin Corporation -1.7%
2. UST, Inc. -0.5%
3. Mid-America Apartment
Communities, Inc. +0.2%
4. General Motors Corporation +0.6%
5. RJR Nabisco Holdings Corp. +1.5%(dagger)
6. Regency Realty Corporation +1.9%
7. Tanger Factory Outlet Centers, Inc. +2.4%
8. Kmart Corporation, 7.75%, Cv. Pfd. +2.6%
9. LaSalle Re Holdings Ltd. +2.6%
10. Nationwide Health Properties, Inc. +2.9%
* Securities held for the entire quarter.
(dagger) The return reflects the mandatory conversion of preferred shares to
common shares on May 15, 1997.
Portfolio Changes
Securities added during the 2nd quarter 1997
- --------------------------------------------------------------------------------
Edison International
Illinova Corporation
Securities sold during the 2nd quarter 1997
- --------------------------------------------------------------------------------
National Australia Bank, 7.875%, Cv. Series Unit
Summit Properties, Inc.
11
<PAGE>
Portfolio of Investments
June 30, 1997 (Unaudited)
(Amounts in Thousands)
Legg Mason Value Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
-------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 93.0%
Automotive -- 4.2%
Chrysler Corporation 1,900 $ 62,344
General Motors Corporation 1,125 62,648
----------
124,992
----------
Banking -- 17.3%
BankAmerica Corporation 800 51,650
BankBoston Corporation 850 61,253
Citicorp 800 96,450
Fleet Financial Group, Inc. 669 42,324
Lloyds TSB Group plc 7,852 80,675
Provident Bankshares Corporation 304 12,636
The Chase Manhattan Corporation 1,175 114,048
Zions Bancorporation 1,403 52,781
----------
511,817
----------
Computer Services and Systems -- 21.5%
Compaq Computer Corporation 650 64,513(A)
Dell Computer Corporation 1,850 217,259(A)
International Business Machines Corporation 1,350 121,753
Seagate Technology, Inc. 1,800 63,338(A)
Storage Technology Corporation 1,481 65,905(A)
Western Digital Corporation 3,250 102,780(A)
----------
635,548
----------
Electrical Equipment -- 2.3%
Philips Electronics N.V. 950 68,281
----------
Entertainment -- 5.0%
Circus Circus Enterprises, Inc. 4,000 98,500(A)
MGM Grand, Inc. 1,303 48,193(A)
----------
146,693
----------
Finance -- 12.8%
American Express Company 150 11,175
Fannie Mae 3,200 139,600
Federal Home Loan Mortgage Corporation 2,000 68,750
MBNA Corporation 2,830 103,659
The Bear Stearns Companies, Inc. 1,654 56,537
----------
379,721
----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
-------------------------------------------------------------------------------------------------------
<S> <C>
Food, Beverage and Tobacco -- 5.1%
PepsiCo, Inc. 850 $ 31,928
Philip Morris Companies, Inc. 1,425 63,235
RJR Nabisco Holdings Corp. 1,700 56,100
----------
151,263
----------
Food Merchandising -- 2.3%
The Kroger Co. 2,400 69,600(A)
----------
Footwear -- 0.8%
Reebok International Ltd. 527 24,619
----------
Health Care -- 3.1%
Columbia/HCA Healthcare Systems, Inc. 775 30,467
Foundation Health Systems, Inc. 2,025 61,383(A)
----------
91,850
----------
Insurance -- 2.7%
AMBAC Inc. 383 29,252
Conseco Inc. 575 21,275
MBIA, Inc. 255 28,767
----------
79,294
----------
Manufacturing -- 2.1%
Danaher Corporation 1,200 60,975
----------
Media -- 3.7%
America Online, Inc. 1,650 91,781(A)
America Online, Inc. 363 18,147(A,B)
----------
109,928
----------
Multi-Industry -- 0.7%
Coltec Industries Inc. 967 19,694(A)
----------
Pharmaceuticals -- 3.5%
Amgen Inc. 875 50,859(A)
Warner-Lambert Company 425 52,807
----------
103,666
----------
Savings and Loan -- 1.2%
Washington Mutual, Inc. 600 35,850
----------
</TABLE>
13
<PAGE>
Portfolio of Investments--Continued
Legg Mason Value Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
-------------------------------------------------------------------------------------------------------
<S> <C>
Telecommunications -- 4.7%
MCI Communications Corporation $ 500 $ 19,141
Nokia Corporation ADS 700 51,625
Telefonos de Mexico S.A. ADR 1,425 68,043
----------
138,809
----------
Total Common Stocks and Equity Interests (Identified Cost-- $1,311,703) 2,752,600
-------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 1.7%
United States Treasury Notes, 8.125%, 2/15/98 230 233
United States Treasury Bonds, 6.625%, 2/15/27 50,000 48,922
----------
Total U.S. Government Obligations (Identified Cost-- $50,866) 49,155
-------------------------------------------------------------------------------------------------------
Sovereign Obligations -- 2.4%
Republic of Argentina Floating Rate Bonds, 6.75%, 3/31/05 58,200 54,708(C)
Republic of Argentina Par Bonds, 5.25%, 3/31/23 25,000 17,344(D)
----------
Total Sovereign Obligations (Identified Cost-- $36,949) 72,052
-------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 2.6%
Lehman Brothers, Inc.
6.10%, dated 6/30/97, to be repurchased at $77,137 on 7/1/97
(Collateral: $21,400 Federal Home Loan Mortgage Corporation
Mortgage-backed securities, 5.5%-7.5%, due 2/1/03-3/1/27,
value $21,014; and $55,828 Federal National Mortgage Association
Mortage-backed securities, 7.5%-9%, due 6/1/09-4/1/27, value $57,754)
(Identified Cost-- $77,124) 77,124 77,124
-------------------------------------------------------------------------------------------------------
Total Investments-- 99.7% (Identified Cost-- $1,476,642) 2,950,931
Other Assets Less Liabilities-- 0.3% 10,240
----------
Net Assets-- 100.0% $2,961,171
==========
Net Asset Value Per Share:
Primary Class $39.77
======
Navigator Class $39.97
======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Non-income producing
(B) Private Placement
(C) The rate of interest earned is tied to the London Interbank Offered Rate
(LIBOR) and the coupon rate shown is the rate as of June 30, 1997.
(D) Coupon increases 0.25% annually until April 1, 1999, thereafter remains
fixed at 6.0% until maturity.
14
<PAGE>
Portfolio of Investments
June 30, 1997 (Unaudited)
(Amounts in Thousands)
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 96.8%
Advertising -- 4.1%
WPP Group P.L.C. 11,000 $ 44,971
WPP Group P.L.C. ADR 89 3,627
----------
48,598
----------
Apparel -- 0.1%
Salant Corporation 450 1,350(A)
----------
Banking -- 2.4%
Peoples Heritage Financial Group, Inc. 750 28,406
----------
Biotechnology -- 0.4%
Cell Genesys, Inc. 883 4,361(A)
----------
Broadcast Media -- 0.6%
Argyle Television, Inc. 258 6,585(A)
----------
Computer Services and Systems -- 19.9%
Bell & Howell Company 720 22,185(A)
Gateway 2000, Inc. 1,000 32,438(A)
General Cable Corporation 150 3,844(A)
InaCom Corp. 925 28,791(A,B)
Madge Networks N.V. 2,019 12,870(A)
Novell Inc. 1,900 13,181(A)
Quantum Corporation 1,650 33,516(A)
Storage Technology Corporation 1,000 44,500(A)
Western Digital Corporation 1,400 44,275(A)
----------
235,600
----------
Energy -- 4.6%
Calenergy, Inc. 750 28,500(A)
Northeast Utilities System 2,700 25,819(A)
----------
54,319
----------
Entertainment -- 8.6%
Anchor Gaming 164 7,841(A)
Boomtown Inc. 900 8,100(A,B)
Circus Circus Enterprises, Inc. 1,573 38,735(A)
Hollywood Park, Inc. 1,775 25,959(A,B)
Mirage Resorts, Incorporated 548 13,832(A)
Players International, Inc. 2,442 7,325(A,B)
----------
101,792
----------
</TABLE>
15
<PAGE>
Portfolio of Investments--Continued
Legg Mason Special Investment Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------
<S> <C>
Finance -- 8.2%
Amerin Corporation 1,500 $ 36,375(A,B)
Mego Financial Corporation 643 4,664(A,C)
The Bear Stearns Companies, Inc. 551 18,846
United Asset Management Corporation 1,300 36,806
----------
96,691
----------
Food, Beverage and Tobacco -- 3.6%
Cott Corporation Quebec 4,100 43,563(B)
----------
Health Care -- 8.5%
Imation Corporation 160 4,220(A)
Magellan Health Services, Inc. 950 28,025(A)
Physician Corporation of America 3,600 22,950(A,B)
Sun Healthcare Group Inc. 1,435 29,856(A)
Sunrise Medical, Inc. 822 12,437(A)
Ultrafem, Inc. 200 2,750(A)
----------
100,238
----------
Insurance -- 13.0%
CMAC Investment Corporation 760 36,290
Enhance Financial Services Group, Inc. 555 24,350
John Alden Financial Corporation 1,250 26,172
Orion Capital Corporation 590 43,513
PennCorp Financial Group, Inc. 600 23,100
----------
153,425
----------
Manufacturing -- 2.1%
Briggs & Stratton Corporation 262 13,100
Danaher Corporation 236 11,992
----------
25,092
----------
Media -- 6.7%
America Online, Inc. 1,425 79,266(A)
----------
Miscellaneous -- 0.2%
Olsen & Associates AG 300 2,055(A,C)
----------
Real Estate -- 1.7%
Dynex Capital, Inc. 1,473 20,524
----------
Restaurants -- 1.0%
Shoney's Inc. 2,000 11,875(A)
----------
Savings and Loan -- 3.8%
Washington Mutual Inc. 750 44,810
----------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Speciality Retail -- 7.3%
HSN, Inc. 1,498 $ 46,825(A)
MacFrugal's Bargains o Close-outs Inc. 1,439 39,205(A,B)
----------
86,030
----------
Total Common Stocks and Equity Interests (Identified Cost-- $754,953) 1,144,580
------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 3.1%
Lehman Brothers, Inc.
6.10%, dated 6/30/97, to be repurchased at $36,651 on 7/1/97
(Collateral: $23,378 Federal National Mortgage Association
Mortgage-backed securities, 7%-8%, due 3/1/27-6/1/27, value $23,740; and
$14,411 Federal Home Loan Mortgage Corporation Mortgage-backed
securities, 6.5%, due 6/1/27, value $14,486)
(Identified Cost-- $36,644) $36,644 36,644
------------------------------------------------------------------------------------------------------
Total Investments-- 99.9% (Identified Cost-- $791,597) 1,181,224
Other Assets Less Liabilities-- 0.1% 1,456
----------
Net Assets-- 100.0% $1,182,680
==========
Net Asset Value Per Share:
Primary Class $29.36
======
Navigator Class $30.02
======
------------------------------------------------------------------------------------------------------
</TABLE>
(A) Non-income producing
(B) Affiliated Companies--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.
(C) Private Placement
17
<PAGE>
Portfolio of Investments
June 30, 1997 (Unaudited)
(Amounts in Thousands)
Legg Mason Total Return Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 89.9%
Aerospace -- 3.0%
Northrop Grumman Corporation 155 $ 13,611
----------
Automotive -- 8.0%
Chrysler Corporation 400 13,125
Ford Motor Company 315 11,891
General Motors Corporation 210 11,694
----------
36,710
----------
Banking -- 9.5%
BankAmerica Corporation 140 9,039
Lloyds TSB Group plc 2,178 22,381
The Chase Manhattan Corporation 125 12,133
----------
43,553
----------
Chemicals -- 5.6%
Hercules, Inc. 280 13,405
Olin Corporation 310 12,121
----------
25,526
----------
Commercial Services -- 2.2%
Ogden Corporation 473 10,286
----------
Computer Services and Systems --5.7%
International Business Machines Corporation 290 26,154
----------
Construction Materials -- 1.5%
Masco Corporation 165 6,889
----------
Electric Utilities --3.8%
Edison International 175 4,353
Illinova Corporation 383 8,430
Unicom Corporation 200 4,450
----------
17,233
----------
Energy -- 0.5%
Exxon Corporation 40 2,460
----------
Finance --5.1%
Fannie Mae 222 9,685
The Bear Stearns Companies, Inc. 397 13,564
----------
23,249
----------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
------------------------------------------------------------------------------------------------------
<S> <C>
Food, Beverage and Tobacco -- 4.2%
RJR Nabisco Holdings Corp. 202 $ 6,670
UST, Inc. 445 12,349
----------
19,019
----------
Insurance -- 12.1%
American Financial Group Incorporated 254 10,779
Enhance Financial Services Group, Inc. 305 13,395
IPC Holdings Limited 463 12,501
John Alden Financial Corporation 450 9,422
LaSalle Re Holdings Ltd. 309 9,130
----------
55,227
----------
Real Estate -- 14.6%
Dynex Capital, Inc. 640 8,926
Mid-America Apartment Communities, Inc. 360 10,105
National Golf Properties, Inc. 346 12,023
Nationwide Health Properties, Inc. 425 9,350
Regency Realty Corporation 373 10,151
Tanger Factory Outlet Centers, Inc. 312 8,382
Walden Residential Properties, Inc. 310 7,944
----------
66,881
----------
Retail Sales -- 3.0%
J.C. Penney Company, Inc. 260 13,569
----------
Savings and Loan -- 8.8%
Bank United Corp. 366 13,912
Great Western Financial Corporation 259 13,905
Washington Federal, Inc. 492 12,632
----------
40,449
----------
Telecommunications -- 2.3%
Telefonos de Mexico S.A. ADR 225 10,744
----------
Total Common Stocks and Equity Interests (Identified Cost -- $281,981) 411,560
------------------------------------------------------------------------------------------------------
Preferred Stock -- 2.1%
Kmart Corporation, 7.75%, Cv. (Identified Cost -- $8,763) 178 9,746
------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 4.3%
United States Treasury Bonds, 6.00%, 2/15/26 (Identified Cost -- $19,121) $22,000 19,690
------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Portfolio of Investments--Continued
Legg Mason Total Return Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
----------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement -- 3.3%
Lehman Brothers, Inc.
6.10%, dated 6/30/97, to be repurchased at $15,206 on 7/1/97
(Collateral: $10,189 Federal National Mortgage Association
Mortgage-backed securities, 7.5%, due 6/1/09,
value $10,365; and $5,137 Federal Home Loan Mortgage Corporation
Mortgage-backed securities, 7.0%, due 10/1/07, value $5,143)
(Identified Cost-- $15,203) $15,203 $ 15,203
----------------------------------------------------------------------------------------------------
Total Investments-- 99.6% (Identified Cost-- $325,068) 456,199
Other Assets Less Liabilities-- 0.4% 1,625
--------
Net Assets --100.0% $457,824
========
Net Asset Value Per Share:
Primary Class $20.49
======
Navigator Class $20.58
======
----------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Legg Mason Family of Funds
Equity Funds
Legg Mason Balanced Trust
Growth and Income--An equity mutual fund which seeks long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk.
Legg Mason Total Return Trust
Growth and Income--An equity mutual fund with investment objectives of capital
appreciation and current income.
Legg Mason American Leading Companies Trust
Growth--A large capitalization equity mutual fund which seeks long-term capital
appreciation and current income consistent with prudent investment management.
Legg Mason Value Trust
Growth--An equity mutual fund which seeks long-term growth of capital using the
"Value Approach" to investing.
Legg Mason Special Investment Trust
Aggressive Growth--An equity mutual fund which seeks capital appreciation. It
invests principally in securities of companies that are involved in
restructurings or other special situations, or are out of favor with, or not
closely followed by the market.
Global Funds*
Legg Mason Emerging Markets Trust
Aggressive Growth--A mutual fund which is designed for investors seeking
long-term growth possibilities available in emerging markets.
Legg Mason International Equity Trust
Aggressive Growth--A diversified, professionally managed portfolio seeking
maximum long-term total return by investing primarily in common stocks of
companies located outside the United States.
Legg Mason Global Government Trust
Growth and Income--A global bond fund which seeks to provide a competitive total
return by investing primarily in a global portfolio of high quality debt
securities of U.S. and foreign governments, their agencies and
instrumentalities, denominated in various currencies.
Taxable Bond Funds
Legg Mason U.S. Government Intermediate-Term Portfolio
Conservative Income--A mutual fund which seeks to achieve high current income
consistent with prudent investment risk and liquidity needs.
Legg Mason Investment Grade Income Portfolio
Income--A mutual fund which seeks to provide investors with a high level of
current income through a diversified portfolio of debt instruments.
Legg Mason High Yield Portfolio
Growth and Income--A fund which seeks to provide high current income, and as a
secondary objective, seeks capital appreciation. Under normal circumstances, the
Fund will invest a majority of its total assets in high yield fixed income
securities commonly known as "junk" bonds. The Fund may invest up to 25% of
total assets in foreign securities.
Tax-Free Bond Funds(dagger)
Legg Mason Tax-Free Intermediate-Term Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax consistent with prudent investment risk.
Legg Mason Maryland Tax-Free Income Trust
Tax-Free Income--A fund whose objective is a high level of current income exempt
from federal, Maryland state, and local income taxes.
Legg Mason Pennsylvania Tax-Free Income Trust
Tax-Free Income--A fund which seeks a high level of current income exempt from
federal income tax and Pennsylvania personal income tax.
Money Market Funds(dagger)(dagger)
Legg Mason U.S. Government Money Market Portfolio
A professionally managed portfolio seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Cash Reserve Trust
A diversified management investment company investing in money market
instruments to achieve stability of principal and current income consistent with
stability of principal.
Legg Mason Tax Exempt Trust
A money market fund seeking to produce high current income exempt from federal
income tax, to preserve capital and to maintain liquidity.
* Investment in foreign securities involves increased risks, such
as currency rate fluctuations, foreign taxation and political
changes.
(dagger) Income produced from the tax-free funds may be subject to state
and local taxes. Long-term capital gain distributions generally
are taxable. A portion of each Fund's dividends may be subject
to the federal alternative minimum tax.
(dagger dagger) An investment in any of these Funds is neither insured nor
guaranteed by the U.S. Government and there can be no guarantee
that these Funds will maintain a stable $1 share price.
For a prospectus containing more complete information, including charges and
expenses on any of the Legg Mason funds, call 1-800-577-8589. Please read the
prospectus carefully before investing or sending money.
21
