ANNUAL REPORT
MARCH 31, 1998
LEGG MASON
VALUE TRUST, INC.
SPECIAL INVESTMENT
TRUST, INC.
TOTAL RETURN TRUST, INC.
THE ART OF INVESTING
[LEGG MASON LOGO APPEARS HERE]
FUNDS
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
- --------------------------------------------------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
LMF-002
5/98
<PAGE>
To Our Shareholders,
We are pleased to provide you with combined annual reports for the Legg Mason
Value Trust, Special Investment Trust and Total Return Trust for their fiscal
years ended March 31, 1998.
The following table summarizes key statistics for the Primary Class of shares
of each Fund, as of March 31, 1998:
<TABLE>
<CAPTION>
3 Month 12 Month
Total Return* Total Return*
------------- -------------
<S> <C>
Value Trust 17.20% 55.34%
Special Investment Trust 11.62% 42.88%
Total Return Trust 5.66% 42.44%
S&P 500 Composite Index 13.95% 48.00%
Value Line Index of 1700 stocks 10.59% 37.76%
Russell 2000 Index 10.06% 42.01%
</TABLE>
As the table indicates, the Value Trust outperformed the Standard and Poor's
and Value Line Indexes by impressive margins during the twelve months ended
March 31. The Special Investment Trust, which invests principally in securities
of small- and mid-sized companies, underperformed the Standard and Poor's Index
(which consists of the securities of 500 of America's largest companies), but
surpassed the broader-based Value Line Index of 1700 stocks and the Russell 2000
Index of 2,000 small- and medium-sized companies. The Total Return Trust
underperformed the Standard and Poor's Index but outperformed the Value Line
Index.
Long-term investment results for each of the Funds are shown in the
"Performance Information" section of this report. We are particularly pleased
that the Value Trust, our original equity fund, has earned an annual compounded
return for shareholders of 20.72% since its inception in 1982.
On the following pages, Bill Miller, the portfolio manager for Value Trust
and Special Investment Trust and Nancy Dennin, the portfolio manager for Total
Return Trust, discuss the investment outlook for the Funds.
Coopers and Lybrand L.L.P., independent accountants for all of these Funds,
have completed their annual examination, and audited financial statements for
the fiscal year ended March 31, 1998 are included in this report.
Sincerely,
/s/ John F. Curley Jr.
______________________
John F. Curley, Jr.
President
April 27, 1998
- ---------------------
*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.
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
The end of the first calendar quarter of 1998 is the end of the fiscal year
for our Funds. SEC regulations require that investment advisors discuss market
conditions and strategies that materially affected a Fund's results during its
fiscal year. The format of this letter, a departure from our usual random,
digressive style, is designed to facilitate covering the topics required by the
regulators.
Review of Fiscal Year 1998 Market Conditions
Large capitalization stocks performed exceptionally well in the year ending
March 31, 1998, returning 48.0% as measured by the S&P 500. Broader measures of
stock performance also performed well. The Value Line index, which includes both
large and small companies, rose 37.8% during that period. The Russell 2000
index, which covers mostly smaller companies, rose 42.0%.
Strategies Affecting Fiscal Year 1998 Results
General:
The Value Trust and the Special Investment Trust follow a value investing
style. Value investors attempt to evaluate the intrinsic worth of a company and
purchase securities in that company at prices representing a substantial
discount to calculated value. Estimates of business value are subject to
substantial uncertainty arising from, but not limited to, the availability of
accurate information, economic growth and change, changes in competitive
conditions, technological change, changes in government policy or geo-political
dynamics, and so forth. We attempt to minimize the potentially unfavorable
consequences of errors in the estimation of business value by building in a
margin of safety between our estimates and the price we are willing to pay for a
security.
A variety of quantitative methods and qualitative assessments are used to
estimate business value. These include, but again are not limited to,
traditional valuation measures such as price earnings ratios, price to book
value and price to cash flow ratios, both prospective and historic. Comparative
valuation work is extensive, and includes historic, prospective, and scenario
based methods, as well as volatility analyses. Theoretical valuation frameworks
are also employed. Discounted cash flow and free cash flow analyses are
extensively employed, as are private market and liquidation value analyses.
Qualitative assessment of business prospects involves studying companies'
products, competitive positioning, strategy, industry economics and dynamics,
regulatory frameworks, and more. We pay particularly close attention to
corporate capital allocation policies and the returns resulting therefrom. We
believe a management's commitment to shareholder value is often best
demonstrated by how they allocate capital.
The Funds' management also devotes considerable time to the study of
important academic work in financial theory and in experimental economics. We
have found recent work in behavioral finance and complex adaptive systems to be
particularly important in assessing and understanding markets, investor
behavior, and competitive strategy.
Value Trust: Strategies Affecting Results
The Value Trust has followed a consistent investment strategy for many years.
It is characterized by careful attention to value, a focused portfolio, and low
turnover. The Fund had an excellent year, significantly outperforming all
relevant indices of both the market and of comparable mutual funds.
2
<PAGE>
The Fund's results benefited from a number of its technology holdings, an
area where valuation work is often complicated and difficult. The Fund purchased
large positions in a variety of technology companies such as Dell Computer,
Storage Technology, and Digital Equipment over the last two years when such
shares were under severe pressure due to concerns about earnings' prospects.
When those concerns did not materialize, the shares of those companies rose
sharply, adding materially to the Fund's returns. We also benefited from our
long-standing position in banks and financial services companies, which
performed strongly in the past twelve months. Our returns were also enhanced by
mostly avoiding stocks whose shares suffered heavy losses. We believe our focus
on having a margin of safety in the purchase price contributed to the relative
lack of poor performers in the portfolio. A more complete list of stocks
affecting our results is included elsewhere in this report.
Special Investment Trust: Strategies Affecting Results
The Special Investment Trust follows the same investment strategy as the
Value Trust, but mostly operates in a different market segment: small- and
mid-sized companies and special situations. The Fund performed well in the
twelve months ended March 31, 1998, outperforming the Russell 2000 index, while
performing in line with the average fund that invests in small- and mid-sized
companies.
The Fund's results were benefited by many of the same factors described above
in the Value Trust section: a timely commitment to depressed and controversial
technology stocks and solid performance from financials.
Companies whose shares underperformed during the period usually did so for
company specific reasons such as disappointing earnings, a poor industry
environment, or adverse regulatory developments. A more complete list of our
strongest and weakest performers over the past twelve months is included
elsewhere in this report.
Total Return Trust: Strategies Affecting Results
The Total Return Trust follows an investment strategy similar to that of the
Value Trust and the Special Investment Trust, while focusing on securities with
above market yields. The Fund had a very good year, outperforming its peer
group, although underperforming the S&P 500. The Fund's results over the last
twelve months benefited from our long-standing position in banks and financial
services companies, as well as a variety of stocks in other industries,
including Ford Motor Company, up 107%, Unicom, an electric utility, up 80%, and
Masco, a manufacturer of kitchen and bathroom products, up 66%.
In addition to focusing on securities with above market yields, our objective
is to have the Fund's results be less volatile than those of the overall market.
Dissecting the Fund's results during the fiscal year reveals the lower
volatility profile we strive to achieve. During the third fiscal quarter (the
fourth calendar quarter of 1997), the market came under pressure due to concerns
surrounding the Asian currency crisis. During this period, the Fund
significantly outperformed its peer group, appreciating 4.1% vs. 0.8% for Lipper
Growth & Income Funds, and also outperformed the major market indices (please
see the December 31, 1997 quarterly report for additional performance
information).
3
<PAGE>
PORTFOLIO MANAGERS' COMMENTS--CONTINUED
However on the flip side, during periods of strong equity performance, such
as the first calendar quarter of 1998, lower volatility funds will tend to
underperform. We do not manage the Fund to outperform every quarter or every
year. Shareholders who expect this will most likely be disappointed. Our goal is
to outperform our peer group and the major market indices over long periods of
time by purchasing securities that we believe are selling at a discount to their
intrinsic value.
Our returns over the last twelve months were enhanced by avoiding stocks
whose shares suffered losses. Remarkably, none of the stocks we owned on April
1, 1997 posted a negative total return (change in share price plus dividend)
over the twelve month period! We believe our focus on having a margin of safety
in the purchase price contributed to the lack of poor performers in the
portfolio.
Given our outlook for the market's returns going forward, as described
elsewhere in this report, we believe securities with relatively high, secure
dividends will do quite well. For example, the real estate investment trusts
(REITs) held in the portfolio have an average current yield of 7.5%.
Market Outlook: Near Term
As usual, we are agnostic about the market's near term direction. A variety
of valuation tools suggest that stock prices in the aggregate approximate fair
value, a view with which we concur. Prices should tend in the direction of
market participants' shifting views about interest rates and earnings prospects.
Share prices have begun the year with another strong advance, fueled by
continued low inflation, stable monetary policy, a growing budget surplus, and
high corporate profitability. Mergers and acquisitions activity remains
extremely robust and is expected to remain so.
We believe short-term market forecasts have no predictive value and generally
avoid them. The current market advance has further extended valuations, having
occurred without a commensurate increase in profits or decrease in interest
rates. This has eroded the margin of safety we would prefer to exist when new
investment commitments are made. As a result, we believe share prices are
becoming increasingly susceptible not only to changes in fundamentals but to
changes in mass psychology.
We believe that calendar 1998 will be characterized by moderate economic
growth and subdued inflation. Corporate profits growth could be in the 6-8%
area. We think the probabilities favor a moderate stock market advance, albeit
with perhaps more volatility than has been common over the past few years.
Market Outlook: Long Term -- The Era of Extraordinary Returns is Over; "Return
to Normalcy"
"When we think about the future of the world, we always have in mind its
being at the place where it would be if it continued to move as we see it
moving now. We do not realize that it moves not in a straight line...and
that its direction changes constantly."
Wittgenstein
We thought it might be instructive to reprint in this space what we said last
year about our views on the long-term market outlook. We indicated that we
thought the extraordinary returns of the previous 15 years were over and that
investors should expect returns in the 9-10% annual range over the
4
<PAGE>
longer term. In the ensuing twelve months, share prices continued to soar with
the S&P 500 rising nearly 50%. This brings to mind Warren Buffett's comment that
the function of stock market forecasts is to make fortune tellers look good.
We find little to change, though, in our long-term outlook, hence our
repetition of it. (We have left the piece as written, with last year's interest
rates and valuation data.) Share prices rose so strongly last fiscal year
because interest rates fell from 7% to under 6%. Price earnings ratios expanded
as a result, and coupled with solid profits growth, propelled stocks higher. A
similar advance would require another sharp drop in rates amid continued strong
earnings growth, a combination that does not appear probable, though in
financial markets almost anything is possible.
"A Return to Normalcy"
In the 1920 Presidential election, Senator Warren G. Harding, a former
Ohio newspaper editor, promised a return to normalcy. The country had
experienced both the activism of Teddy Roosevelt and the idealism of
Woodrow Wilson. He thought neither extreme suited the post-war mood.
According to one source, "Voters responded to his genial nature,
impressive stature, and bland message; he won in a landslide."
We think that after the inflation driven extremes in hard asset returns in
the 1970's, and the abnormally high returns in bonds from 1981-1993 and in
stocks from 1982-1996, a return to normalcy is in store for investors
across a variety of asset classes. For much of the past 20 years, returns
far higher than historic norms could be achieved by following investment
strategies simple enough to fit on a bumper sticker: e.g. in the 70's buy
oil, buy gold; in the 80's, buy bonds; in the 90's, buy stocks. Oil, gold,
and bonds are mostly undifferentiated assets, one is pretty much like
another. With stocks, the question of which one (or ones) to buy was
likewise easy. For most of the past 15 years, no work was required: if you
bought an index fund you earned far higher returns than historic norms,
and you beat almost all the stock investors who bothered to actually do
the work and understand what they own. The past 15 years have seen the
highest returns of any 15 year period in stock market history.
From the bond market bottom on October 26, 1981 until the top on October
15, 1993, investors in government bonds earned average annual returns of
16.2% per year! This compares to returns of 5.1% per year from 1926
through 1996. Excluding the extraordinary return of the past 15 years, the
long-term return of bonds averaged just 3.2% per year from 1926 through
1981. Today's bond yields of over 7% are thus quite high by historical
standards. (But not as high as they look; read on.)
During the same period (Oct. 1981-Oct. 1993) the S&P 500 rose 16.54% per
year, just about the same as bonds. But 1926-1996 returns in stocks were
more than double those of bonds, averaging 10.7% per year.
Since the bond market peak in late 1993, stocks have far outperformed
bonds, rising in 1994, 1995, and 1996, while bonds declined in both 1994
and 1996. Bonds are down again this year, while the S&P 500 is up
modestly.
5
<PAGE>
PORTFOLIO MANAGERS' COMMENTS--CONTINUED
One problem in assessing long-term rate of return data is what physicists
call sensitive dependence on initial conditions. It matters to the
measurement where the measurement begins. Returns measured from lows to
highs give one perspective, those measured on a calendar basis another.
Economist Peter Bernstein has attempted to adjust for this phenomenon in a
new study of stock and bond returns. He found that stock returns have
averaged 9.6% per year including dividends across wide historical periods.
Inflation has averaged 3.9%, meaning the real return on stocks has been
5.7% per year. This is moderately lower than the 10.7% return noted above.
With bonds, the sensitivity to the starting point was more acute. Actual
returns were about 6%, higher than the 1926-1996 average of 5.1%.
From this data, we can make some reasonable judgments about future rates
of return in stocks. With dividend yields of about 2%, stock prices will
have to rise 7.6% per year to equal the long-term average. If valuations
remain the same at about 17x earnings, earnings growth will have to
average 7.6% per year. Over the past 40 years earnings have grown at just
under 6%. In the past ten years, earnings growth has averaged almost 9%.
Most analysts' forecasts peg the next 5 years earnings growth rate at
about 7%.
Reasonable expectations for stock returns would thus seem to be in the
9-10% range (2% yields with 7 or 8% earnings growth) or about the
long-term historic norm. This is far below the returns of the past 15
years.
We think that the period of extraordinary returns in bonds ended in
October 1993, when yields fell well under 6%. Today's 7% coupons are good,
but they are a long way from the 16% annual rates earned since yields
peaked and prices bottomed in 1981.
We believe that the period of extraordinary stock returns that began in
1982 ended in 1997. Valuations are too high and future growth rates too
low for stocks to average more than 9-10% per year. Although earnings
growth is still solid, pricing power is non-existent, unemployment is low,
and wage pressures are building. Corporate profit margins are high by
historical standards, suggesting that competitive pressures may result in
weakening margins and reduced profits when the economy slows from its
present 4% pace. We think that, absent some deus ex machina, 9-10%
long-term returns are the best that can reasonably be expected. Sensible
investors will be prepared for periods, perhaps extended, where returns
are well below those levels, or even negative.
A return to normalcy in stocks, like Harding's message in 1920, may seem
rather bland compared to the excitement of the past few years. We believe
though, that such returns will still exceed those of bonds and cash, and
that equity investors will continue to be rewarded for their commitment to
that asset class.
Bill Miller, CFA
Nancy Dennin, CFA
April 20, 1998
DJIA 9141.84
6
<PAGE>
PERFORMANCE INFORMATION
Total Return for One, Five, Ten Years and Life of Funds, as of March 31, 1998
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 March 31, 1998 for the Value Line Geometric Average
("Value Line") and S&P 500 Stock Indices are shown in the table below
(individual Fund performance is shown with its respective graph).
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 total returns as of March 31, 1998 were as follows:
<TABLE>
<CAPTION>
Value Special Investment Total Return Value Line S&P 500 Stock
Trust Trust Trust Index Index
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Average Annual Total Return
Primary Class:
One Year +55.34% +42.88% +42.44% +37.76% +48.00%
Five Years +27.88 +18.40 +20.06 +15.11 +22.40
Ten Years +19.24 +17.64 +15.98 +11.19 +18.94
Life of Class--Value Trust(A) +20.72 +12.12 +19.00
Life of Class--Special Investment(B) +15.25 +10.20 +17.78
Life of Class--Total Return(C) +13.33 +10.39 +18.16
Navigator Class:
One Year +56.90 +44.42 +43.94 +37.76 +48.00
Life of Class(D) +42.87 +26.98 +31.50 +22.62 +32.77
- -----------------------------------------------------------------------------------------------------------------------------
</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 Class for each Fund--December 1, 1994.
Performance Comparison of a $10,000 Investment as of March 31, 1998
The following graphs compare each Fund's total returns to the Value
Line and S&P 500 Stock Indices. The graphs illustrate the cumulative total
return of an initial $10,000 investment for the periods indicated. The
line for each Legg Mason Fund represents the total return after deducting
all Fund investment management and other administrative expenses and the
transaction costs of buying and selling portfolio securities. The line
representing each securities market index does not include any transaction
costs associated with buying and selling securities in the index or other
administrative expenses. Both the Legg Mason Funds' results and the
indices' results assume reinvestment of all dividends and distributions.
7
<PAGE>
PERFORMANCE INFORMATION--CONTINUED
Value Trust--Primary Class
- ----------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- ----------------------------------------------------
One Year +55.34% +55.34%
Five Years +241.95 +27.88
Ten Years +480.95 +19.24
Life of Class(dagger) +1,917.61 +20.72
- ----------------------------------------------------
(dagger) Primary Class inception -- April 16, 1982
- ----------------------------------------------------
[GRAPH APPEARS HERE-PLOT POINTS BELOW]
S&P 500 Value Trust
Stock Value Line Primary
Index(1) Index(2) Class
--------- ---------- -----------
Years ended March 31,
1988 $10,000 $10,000 $10,000
1989 11,815 10,773 11,837
1990 14,091 10,689 12,753
1991 16,122 10,412 12,385
1992 17,902 11,277 14,804
1993 20,629 12,274 16,989
1994 20,933 12,486 17,949
1995 24,191 12,800 19,703
1996 31,957 15,120 27,995
1997 38,292 16,253 37,398
1998 56,673 21,913 58,095
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
Special Investment Trust--Primary Class
- ---------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- ---------------------------------------------------
One Year +42.88% +42.88%
Five Years +132.70 +18.40
Ten Years +407.76 +17.64
Life of Class(dagger) +469.69 +15.25
- ---------------------------------------------------
(dagger) Primary Class inception -- December 30, 1985
- ---------------------------------------------------
[GRAPH APPEARS HERE-PLOT POINTS BELOW]
S&P 500
Stock Value Line Special Investment Trust
Index(1) Index(2) Primary Class
-------- ---------- ------------------------
Years ended March 31,
1988 $10,000 $10,000 $10,000
1989 11,815 10,773 11,699
1990 14,091 10,689 13,497
1991 16,122 10,412 16,393
1992 17,902 11,277 19,746
1993 20,629 12,274 21,820
1994 20,933 12,486 26,478
1995 24,191 12,800 24,791
1996 31,957 15,120 31,849
1997 38,292 16,253 35,536
1998 56,673 21,913 50,776
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
8
<PAGE>
Total Return Trust--Primary Class
- -----------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- -----------------------------------------------------
One Year +42.44% +42.44%
Five Years +149.45 +20.06
Ten Years +340.24 +15.98
Life of Class(dagger) +369.95 +13.33
- -----------------------------------------------------
(dagger) Primary Class inception -- November 21, 1985
- -----------------------------------------------------
[GRAPH APPEARS HERE-PLOT POINTS BELOW]
S&P 500
Stock Value Line Total Return Trust
Index(1) Index(2) Primary Class
-------- ---------- ------------------
Years ended March 31,
1988 $10,000 $10,000 $10,000
1989 11,815 10,773 11,516
1990 14,091 10,689 11,916
1991 16,122 10,412 11,911
1992 17,902 11,277 14,721
1993 20,629 12,274 17,648
1994 20,933 12,486 18,455
1995 24,191 12,800 18,657
1996 31,957 15,120 24,858
1997 38,292 16,253 30,906
1998 56,673 21,913 44,024
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
Value Trust--Navigator Class
- ------------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- ------------------------------------------------------
One Year +56.90% +56.90%
Life of Class(dagger) +228.59 +42.87
- ------------------------------------------------------
(dagger) Navigator Class inception -- December 1, 1994
- ------------------------------------------------------
[GRAPH APPEARS HERE-PLOT POINTS BELOW]
S&P 500 Value Trust
Stock Value Line Navigator
Index(1) Index(2) Class
-------- ---------- -----------
12/1/94 $10,000 $10,000 $10,000
3/31/95 11,136 10,637 10,811
3/31/96 14,711 12,566 15,517
3/31/97 17,628 13,507 20,942
3/31/98 26,089 18,211 32,859
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
9
<PAGE>
PERFORMANCE INFORMATION--CONTINUED
Special Investment Trust--Navigator Class
- ------------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- ------------------------------------------------------
One Year +44.42% +44.42%
Life of Class(dagger) +121.73 +26.98
- ------------------------------------------------------
(dagger) Navigator Class inception -- December 1, 1994
- ------------------------------------------------------
[GRAPH APPEARS HERE-PLOT POINTS BELOW]
S&P 500
Stock Value Line Special Investment Trust
Index(1) Index(2) Navigator Class
-------- ---------- ------------------------
12/1/94 $10,000 $10,000 $10,000
3/31/95 11,136 10,637 10,481
3/31/96 14,711 12,566 13,610
3/31/97 17,628 13,507 15,353
3/31/98 26,089 18,211 22,173
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
Total Return Trust--Navigator Class
- ------------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- ------------------------------------------------------
One Year +43.94% +43.94%
Life of Class(dagger) +149.17 +31.50
- ------------------------------------------------------
(dagger) Navigator Class inception -- December 1, 1994
- ------------------------------------------------------
[GRAPH APPEARS HERE-PLOT POINTS BELOW]
S&P 500
Stock Value Line Total Return Trust
Index(1) Index(2) Navigator Class
-------- ---------- ------------------
12/1/94 $10,000 $10,000 $10,000
3/31/95 11,136 10,637 10,252
3/31/96 14,711 12,566 13,774
3/31/97 17,628 13,507 17,310
3/31/98 26,089 18,211 24,917
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
10
<PAGE>
Value Trust
SELECTED PORTFOLIO PERFORMANCE(dagger)
Strong performers for the year ended March 31, 1998*
----------------------------------------------------
1. Dell Computer Corporation +300.7%
2. America Online, Inc. +222.4%
3. The Bear Stearns Companies, Inc. +95.7%
4. MBNA Corporation +92.7%
5. Lloyds TSB Group plc +89.4%
6. Nokia Corporation ADS +85.3%
7. Danaher Corporation +82.4%
8. Kroger Co. +82.0%
9. AMBAC Inc. +81.2%
10. Zions Bancorporation +77.3%
(dagger) Individual stock performance is measured by the change in the
stock's price, reinvestment of dividends is not included.
* Securities held for the entire year.
Weak performers for the year ended March 31, 1998*
-----------------------------------------------------
1. Seagate Technology, Inc. -43.7%
2. Western Digital Corporation -38.0%
3. Reebok International Ltd. -32.0%
4. Foundation Health Systems, Inc. -24.5%
5. Circus Circus Enterprises, Inc. -19.2%
6. MGM Grand, Inc. -5.5%
7. Columbia/HCA Healthcare Corporation -4.1%
8. RJR Nabisco Holdings Corp. -2.9%
9. Amgen Inc. +9.0%
10. Philip Morris Companies, Inc. +9.6%
PORTFOLIO CHANGES
Securities added during the 1st quarter 1998
--------------------------------------------
PennCorp Financial Group, Inc.
Toys "R" Us, Inc.
Securities sold during the 1st quarter 1998
-------------------------------------------
American Express Company
United States Treasury Notes, 8.125%, 2/15/98
Warner-Lambert Company
11
<PAGE>
PERFORMANCE INFORMATION--CONTINUED
Special Investment Trust
SELECTED PORTFOLIO PERFORMANCE(dagger)
Strong performers for the year ended March 31, 1998*
----------------------------------------------------
1. America Online, Inc. +222.4%
2. Mego Financial Corp. +158.9%
3. USA Networks, Inc. +114.8%
4. CMAC Investment Corporation +100.0%
5. The Bear Stearns Companies, Inc. +95.7%
6. Storage Technology Corporation +93.8%
7. Gateway 2000, Inc. +83.2%
8. Danaher Corporation +82.4%
9. Northeast Utilities System +81.8%
10. Orion Capital Corporation +77.1%
(dagger) Individual stock performance is measured by the change in the
stock's price, reinvestment of dividends is not included.
* Securities held for the entire year.
Weak performers for the year ended March 31, 1998*
--------------------------------------------------
1. Western Digital Corporation -38.0%
2. Madge Networks N.V. -28.8%
3. Cott Corporation -22.8%
4. Circus Circus Enterprises, Inc. -19.2%
5. Calenergy Company, Inc. -16.9%
6. PennCorp Financial Group, Inc. -9.8%
7. Hollywood Park, Inc. -8.7%
8. Dynex Capital, Inc. -7.3%
9. Olsen & Associates AG -5.6%
10. Players International, Inc. +1.3%
PORTFOLIO CHANGES
Securities added during the 1st quarter 1998
--------------------------------------------
Cabletron Systems, Inc.
Capital Automotive REIT
Hadco Corp.
Ryder System, Inc.
Sybase, Inc.
Vencor, Inc.
Securities sold during the 1st quarter 1998
-------------------------------------------
Briggs & Stratton Corporation
Consolidated Stores Corporation
Oxford Health Plans, Inc.
Salant Corporation
Washington Mutual, Inc.
12
<PAGE>
Total Return Trust
SELECTED PORTFOLIO PERFORMANCE(dagger)
Strong performers for the year ended March 31, 1998*
----------------------------------------------------
1. Ford Motor Company +106.6%
2. The Bear Stearns Companies, Inc. +95.7%
3. Lloyds TSB Group plc +89.4%
4. Unicom Corporation +79.5%
5. Enhance Financial Services Group, Inc. +75.8%
6. Fannie Mae +75.1%
7. Masco Corporation +66.4%
8. BankAmerica Corporation +64.0%
9. J.C. Penney Company, Inc. +58.9%
10. International Business Machines
Corporation +51.2%
(dagger) Individual stock performance is measured by the change in the
stock's price, reinvestment of dividends is not included.
* Securities held for the entire year.
Weak performers for the year ended March 31, 1998*
-------------------------------------------------------
1. Dynex Capital, Inc. -7.3%
2. Regency Realty Corporation -1.2%
3. Mid-America Apartment Communities, Inc. +0.7%
4. National Golf Properties, Inc. +3.2%
5. Walden Residential Properties, Inc. +4.7%
6. Tanger Factory Outlet Centers, Inc. +11.0%
7. UST, Inc. +15.7%
8. United States Treasury Bonds,
6%, 2/15/26 +16.8%
9. Hercules, Inc. +16.9%
10. Nationwide Health Properties, Inc. +17.0%
PORTFOLIO CHANGES
Securities added during the 1st quarter 1998
--------------------------------------------
Briggs & Stratton Corporation
British Steel plc
Hutchinson Technology, Inc.,
6%, 3/15/05
Ultramar Diamond Shamrock Corporation
Securities sold during the 1st quarter 1998
-------------------------------------------
Kmart Corporation, 7.75%, Cv. Pfd. Shares
13
<PAGE>
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
Legg Mason Value Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 89.2%
Automotive -- 4.6%
Chrysler Corporation 2,700 $ 112,219
Ford Motor Company 550 35,647
General Motors Corporation 1,200 80,925
----------
228,791
----------
Banking -- 15.5%
BankAmerica Corporation 800 66,100
BankBoston Corporation 850 93,713
Chase Manhattan Corporation 1,400 188,825
Citicorp 1,200 170,400
Fleet Financial Group, Inc. 669 56,920
Lloyds TSB Group plc 8,011 124,581
Zions Bancorporation 1,403 73,822
----------
774,361
----------
Computer Services and Systems -- 19.9%
Compaq Computer Corporation 3,800 98,325
Dell Computer Corporation 5,300 359,075(A)
Digital Equipment Corporation 2,000 104,625(A)
International Business Machines Corporation 1,275 132,441
Seagate Technology, Inc. 2,000 50,500(A)
Storage Technology Corporation 2,343 178,245(A)
Western Digital Corporation 4,000 70,250(A)
----------
993,461
----------
Electrical Equipment -- 1.5%
Philips Electronics N.V. 1,000 73,438
----------
Entertainment -- 3.4%
Circus Circus Enterprises, Inc. 5,100 107,100(A)(B)
MGM Grand, Inc. 1,760 60,280(A)
----------
167,380
----------
Finance -- 10.7%
Fannie Mae 3,200 202,400
Freddie Mac 2,000 94,875
MBNA Corporation 4,245 152,039
The Bear Stearns Companies, Inc. 1,654 84,961
----------
534,275
----------
Food, Beverage and Tobacco -- 3.7%
PepsiCo, Inc. 850 36,284
Philip Morris Companies, Inc. 1,700 70,869
RJR Nabisco Holdings Corp. 2,400 75,150
----------
182,303
----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Food Merchandising -- 2.2%
Kroger Co. 2,400 $ 110,850(A)
----------
Footwear -- 0.4%
Reebok International Ltd. 700 21,350(A)
----------
Health Care -- 3.0%
Columbia/HCA Healthcare Corporation 2,400 77,400
Foundation Health Systems, Inc. 2,550 70,284(A)
----------
147,684
----------
Hotels & Motels -- 1.9%
Hilton Hotels Corporation 2,900 92,437
----------
Insurance -- 3.0%
AMBAC Inc. 766 44,763
Conseco Inc. 725 41,053
MBIA, Inc. 510 39,525
PennCorp Financial Group, Inc. 810 23,389
----------
148,730
----------
Manufacturing -- 1.8%
Danaher Corporation 1,200 91,125
----------
Media -- 5.5%
America Online, Inc. 4,025 274,958(A)
----------
Motion Pictures & Services -- 0.5%
Metro-Goldwyn-Mayer, Inc. 1,200 26,850(A)
----------
Multi-Industry -- 0.5%
Coltec Industries Inc. 967 24,165(A)
----------
Pharmaceuticals -- 1.8%
Amgen Inc. 1,500 91,313(A)
----------
Real Estate -- 2.1%
Starwood Hotels & Resorts 2,000 106,875
----------
Savings and Loan -- 1.9%
Washington Mutual, Inc. 1,325 95,027
----------
Specialty Retail -- 0.2%
Toys "R" Us, Inc. 401 12,055(A)
----------
</TABLE>
15
<PAGE>
STATEMENT OF NET ASSETS--CONTINUED
Legg Mason Value Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Telecommunications -- 5.1%
MCI Communications Corporation 2,025 $ 100,237
Nokia Corporation ADS 700 75,556
Telefonos de Mexico S.A. ADR 1,425 80,334
----------
256,127
----------
Total Common Stocks and Equity Interests
(Identified Cost-- $2,134,322) 4,453,555
-------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 1.1%
United States Treasury Bonds, 6.625%, 2/15/27
(Identified Cost-- $50,632) $ 50,000 54,250
-------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 9.5%
Prudential Securities, Inc.
5.98%, dated 3/31/98, to be repurchased at $472,793 on 4/1/98
(Collateral: $482,379 Fannie Mae Mortgage-backed securities,
6.50% due 12/1/12, value $486,198) 472,715 472,715
State Street Bank & Trust Company
4.25% dated 3/31/98, to be repurchased at $2,334 on 4/1/98
(Collateral: $2,355 United States Treasury Notes,
5.875% due 1/31/99, value $2,348) 2,334 2,334
----------
Total Repurchase Agreements (Identified Cost-- $475,049) 475,049
-------------------------------------------------------------------------------------------------------------------
Total Investments-- 99.8% (Identified Cost-- $2,660,003) 4,982,854
Other Assets Less Liabilities-- 0.2% 7,219
----------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to:
96,021 Primary shares outstanding $2,459,443
3,553 Navigator shares outstanding 103,094
Undistributed net realized gain on investments 104,685
Unrealized appreciation of investments 2,322,851
----------
NET ASSETS-- 100.0% $4,990,073
==========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $50.10
==========
NAVIGATOR CLASS $50.57
==========
</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. At March 31, 1998, the
total market value of Affiliated Companies was $107,100 and the identified
cost was $145,268.
See notes to financial statements.
16
<PAGE>
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 96.6%
Advertising -- 4.6%
WPP Group plc 13,250 $ 75,414
----------
Banking -- 2.2%
Peoples Heritage Financial Group, Inc. 750 36,188
----------
Biotechnology -- 0.5%
Cell Genesys, Inc. 1,173 7,771(A)
----------
Computer Services and Systems -- 20.8%
Bell & Howell Company 975 26,752(A)
Gateway 2000, Inc. 1,800 84,487(A)
ICG Communications 949 35,353(A)
InaCom Corp. 1,100 30,387(A)(B)
Madge Networks N.V. 2,436 15,074(A)(B)
Quantum Corporation 1,860 39,641(A)
Storage Technology Corporation 1,000 76,062(A)
Western Digital Corporation 1,600 28,100(A)
----------
335,856
----------
Computer Software -- 1.8%
Sybase, Inc. 3,065 29,596(A)
----------
Electronics - Semiconductor -- 0.6%
Hadco Corp. 256 10,140(A)
----------
Energy -- 4.1%
Calenergy Company, Inc. 850 24,013(A)
Northeast Utilities System 3,000 42,938(A)
----------
66,951
----------
Entertainment -- 9.1%
Circus Circus Enterprises, Inc. 2,000 42,000(A)
Hollywood Entertainment Corp. 3,324 46,539(A)(B)
Hollywood Park, Inc. 2,515 29,551(A)(B)
Mirage Resorts, Incorporated 685 16,654(A)
Players International, Inc. 2,485 12,270(A)(B)
----------
147,014
----------
Environmental Services-- 4.6%
Philip Services Corp. 7,100 74,106(A)(B)
----------
</TABLE>
17
<PAGE>
STATEMENT OF NET ASSETS--CONTINUED
Legg Mason Special Investment Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Finance -- 7.5%
Amerin Corporation 1,660 $ 50,007(A)(B)
Mego Financial Corp. 643 3,357(A)
The Bear Stearns Companies, Inc. 551 28,320
United Asset Management Corporation 1,450 39,513
----------
121,197
----------
Food, Beverage and Tobacco -- 2.0%
Cott Corporation 4,300 32,788(A)(B)
----------
Health Care -- 5.5%
Magellan Health Services, Inc. 1,263 32,825(A)
Sun Healthcare Group Inc. 1,750 32,594(A)
Sunrise Medical, Inc. 822 13,105(A)
Vencor, Inc. 375 11,227(A)
----------
89,751
----------
Insurance -- 12.0%
CMAC Investment Corporation 442 29,504
Enhance Financial Services Group, Inc. 555 38,538
John Alden Financial Corporation 779 16,797
Orion Capital Corporation 1,180 64,531
PennCorp Financial Group, Inc. 1,550 44,756
----------
194,126
----------
Manufacturing -- 0.9%
Danaher Corporation 192 14,542
----------
Media -- 12.9%
America Online, Inc. 2,480 169,415(A)
USA Networks,Inc. 1,435 39,109(A)
----------
208,524
----------
Miscellaneous -- 0.1%
Olsen & Associates AG 300 1,968(A)(C)
----------
Networking Products -- 2.4%
Cabletron Systems, Inc. 2,700 39,319(A)
----------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Real Estate -- 4.2%
Capital Automotive REIT 247 $ 4,655
Catellus Development Corporation 475 8,817(A)
Dynex Capital, Inc. 1,473 17,671
Hospitality Properties Trust 316 11,195
LASER Mortgage Management, Inc. 1,500 24,469(B)
Mego Mortgage Corporation 306 632
----------
67,439
----------
Restaurants -- 0.7%
Shoney's, Inc. 2,050 10,634(A)
----------
Trucking & Leasing -- 0.1%
Ryder System, Inc. 24 893
----------
Total Common Stocks and Equity Interests
(Identified Cost-- $997,664) 1,564,217
-------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 2.7%
Prudential Securities, Inc.
5.98%, dated 3/31/98, to be repurchased at $43,759 on 4/1/98
(Collateral: $44,636 Fannie Mae Mortgage-backed securities,
6.50% due 12/1/12, value $44,989)
(Identified Cost-- $43,752) $ 43,752 43,752
-------------------------------------------------------------------------------------------------------------------
Total Investments-- 99.3% (Identified Cost-- $1,041,416) 1,607,969
Other Assets Less Liabilities-- 0.7% 10,666
----------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to:
43,175 Primary shares outstanding $894,478
1,705 Navigator shares outstanding 37,177
Undistributed net realized gain on investments 120,427
Unrealized appreciation of investments 566,553
--------
NET ASSETS-- 100.0% $1,618,635
==========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $36.02
======
NAVIGATOR CLASS $37.12
======
- -------------------------------------------------------------------------------------------------------------------------
</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. At March 31, 1998, the
total market value of Affiliated Companies was $315,191 and the
identified cost was $324,473.
(C) Private placement
See notes to financial statements.
19
<PAGE>
STATEMENT OF NET ASSETS
March 31, 1998
(Amounts in Thousands)
Legg Mason Total Return Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 89.0%
Aerospace/Defense -- 1.2%
Northrop Grumman Corporation 80 $ 8,595
--------
Automotive -- 8.0%
Chrysler Corporation 475 19,742
Ford Motor Company 315 20,416
General Motors Corporation 255 17,197
--------
57,355
--------
Banking -- 15.7%
BankAmerica Corporation 220 18,177
Chase Manhattan Corporation 170 22,929
Fleet Financial Group, Inc. 210 17,863
Lloyds TSB Group plc 2,222 34,562
Union Planters Corporation 315 19,589
--------
113,120
--------
Chemicals -- 3.6%
Hercules, Inc. 230 11,356
Olin Corporation 310 14,565
--------
25,921
--------
Computer Services and Systems -- 4.8%
International Business Machines Corporation 335 34,798
--------
Construction Materials -- 1.4%
Masco Corporation 165 9,818
--------
Consumer Products -- 2.2%
Tupperware Corporation 600 15,975
--------
Electric Utilities -- 6.2%
Edison International 510 14,981
Illinova Corporation 745 22,490
Unicom Corporation 200 7,000
--------
44,471
--------
Finance -- 4.6%
Fannie Mae 202 12,776
The Bear Stearns Companies, Inc. 397 20,382
--------
33,158
--------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Food, Beverage and Tobacco -- 4.9%
RJR Nabisco Holdings Corp. 550 $ 17,222
UST, Inc. 550 17,738
--------
34,960
--------
Insurance -- 11.2%
American Financial Group Inc. 420 18,217
Enhance Financial Services Group, Inc. 305 21,199
IPC Holdings Limited 463 14,932
John Alden Financial Corporation 422 9,104
LaSalle Re Holdings Ltd. 404 16,954
--------
80,406
--------
Manufacturing -- 2.9%
Briggs & Stratton Corporation 450 20,616
--------
Oil Refining & Marketing -- 0.8%
Ultramar Diamond Shamrock Corporation 160 5,640
--------
Real Estate -- 12.3%
Dynex Capital, Inc. 800 9,605
Mid-America Apartment Communities, Inc. 445 12,538
National Golf Properties, Inc. 488 15,539
Nationwide Health Properties, Inc. 600 15,000
Regency Realty Corporation 465 12,304
Tanger Factory Outlet Centers, Inc. 423 12,317(A)
Walden Residential Properties, Inc. 450 11,363
--------
88,666
--------
Retail Sales -- 2.2%
J.C. Penney Company, Inc. 210 15,894
--------
Savings and Loan -- 1.9%
Washington Federal, Inc. 486 13,495
--------
Steel Products -- 3.5%
AK Steel Holding Corporation 657 13,885
British Steel plc 460 11,155
--------
25,040
--------
</TABLE>
21
<PAGE>
STATEMENT OF NET ASSETS--CONTINUED
Legg Mason Total Return Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Telecommunications -- 1.6%
Telefonos de Mexico S.A. ADR 200 $ 11,275
--------
Total Common Stocks and Equity Interests
(Identified Cost-- $422,891) 639,203
-------------------------------------------------------------------------------------------------------------------
Corporate Bonds -- 0.9%
Hutchinson Technology, Inc.
6% due 3/15/05 (Identified Cost-- $5,500) $ 5,500 6,421
-------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 3.0%
United States Treasury Bonds
6% due 2/15/26 (Identified Cost-- $19,121) 22,000 21,979
-------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 7.0%
Prudential Securities, Inc.
5.98%, dated 3/31/98, to be repurchased at $50,176 on 4/1/98
(Collateral: $51,195 Fannie Mae Mortgage-backed securities,
6.50% due 12/1/12, value $51,600)
(Identified Cost-- $50,168) 50,168 50,168
-------------------------------------------------------------------------------------------------------------------
Total Investments-- 99.9% (Identified Cost-- $497,680) 717,771
Other Assets Less Liabilities-- 0.1% 556
--------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to:
28,448 Primary shares outstanding $464,080
715 Navigator shares outstanding 11,484
Undistributed net investment income 3,525
Undistributed net realized gain on investments 19,147
Unrealized appreciation of investments 220,091
--------
NET ASSETS --100.0% $718,327
========
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $24.63
======
NAVIGATOR CLASS $24.87
======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) 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. At March 31, 1998, the
total market value of Affiliated Companies was $12,317 and the identified
cost was $11,294.
See notes to financial statements.
22
<PAGE>
STATEMENTS OF OPERATIONS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 3/31/98
- ---------------------------------------------------------------------------------------------------------------------------
Value Special Investment Total Return
Trust Trust Trust
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends:
Affiliated companies $ -- $ 1,061 $ 754
Other securities(A) 40,448 7,340 17,676
Interest 18,652 2,263 2,810
---------- -------- --------
Total income 59,100 10,664 21,240
---------- -------- --------
Expenses:
Investment advisory fee 24,283 9,875 4,032
Distribution and service fees 32,478 12,734 5,233
Transfer agent and shareholder servicing expense 1,745 861 307
Audit and legal fees 137 82 55
Custodian fees 589 290 162
Directors' fees 18 13 12
Registration fees 399 106 88
Reports to shareholders 356 186 59
Other expenses 91 47 24
---------- -------- --------
60,096 24,194 9,972
Less expenses reimbursed (81) (44) --
---------- -------- --------
Total expenses, net of reimbursement 60,015 24,150 9,972
---------- -------- --------
NET INVESTMENT INCOME (LOSS) (915) (13,486) 11,268
---------- -------- --------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on investments(B) 265,457 141,560 35,393
Change in unrealized appreciation (depreciation)
of investments 1,219,286 320,630 134,822
---------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 1,484,743 462,190 170,215
---------------------------------------------------------------------------------------------------------------------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $1,483,828 $448,704 $181,483
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Net of foreign taxes withheld of $909, $72 and $173, respectively.
(B) Includes net realized losses of $302 and $0 for Special Investment
Trust and Total Return Trust, respectively, on sale of shares of
Affiliated Companies. Value Trust sold no shares of Affiliated Companies
during the period.
See notes to financial statements.
23
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Value Special Investment Total Return
Trust Trust Trust
------------------- -------------------- ------------------
Years Ended Years Ended Years Ended
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Change in Net Assets:
Net investment income (loss) $ (915) $ 8,701 $ (13,486) $ (8,339) $ 11,268 $ 8,441
Net realized gain (loss) on investments 265,457 88,721 141,560 71,717 35,393 41,202
Change in unrealized appreciation
(depreciation) of investments 1,219,286 409,292 320,630 32,855 134,822 18,340
- --------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations 1,483,828 506,714 448,704 96,233 181,483 67,983
Distributions to shareholders:
From net investment income:
Primary Class (1,871) (9,017) -- -- (9,038) (7,201)
Navigator Class (833) (814) -- -- (356) (258)
From net realized gain on investments:
Primary Class (184,252) (85,562) (55,315) (46,505) (43,292) (9,643)
Navigator Class (6,674) (3,095) (2,378) (2,070) (1,205) (261)
Change in net assets from Fund share transactions:
Primary Class 1,330,278 391,899 232,869 110,520 195,828 64,231
Navigator Class 49,445 16,921 5,656 2,950 4,401 1,587
- --------------------------------------------------------------------------------------------------------------------------
Change in net assets 2,669,921 817,046 629,536 161,128 327,821 116,438
Net Assets:
Beginning of year 2,320,152 1,503,106 989,099 827,971 390,506 274,068
- --------------------------------------------------------------------------------------------------------------------------
End of year $4,990,073 $2,320,152 $1,618,635 $989,099 $718,327 $390,506
- --------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (loss) $ -- $ 2,703 $ -- $ (3) $ 3,525 $ 1,651
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
24
<PAGE>
FINANCIAL HIGHLIGHTS
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>
Investment Operations Distributions From:
-------------------------------------- -----------------------
Net Asset Net Net Realized Total Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Year (Loss) Investments Operations Income Investments Distributions Year
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
- --Primary Class
Years Ended Mar. 31,
1998 $34.11 $(.02) $18.37 $18.35 $(.04) $(2.32) $(2.36) $50.10
1997 26.99 .13 8.68 8.81 (.16) (1.53) (1.69) 34.11
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41) 26.99
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09) 20.21
1994 17.81 .08 .92 1.00 (.11) (.20) (.31) 18.50
- --Navigator Class
Years Ended Mar. 31,
1998 $34.30 $ .35 $18.55 $18.90 $(.31) $(2.32) $(2.63) $50.57
1997 27.08 .41 8.75 9.16 (.41) (1.53) (1.94) 34.30
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64) 27.08
1995(B) 18.76 .12 1.40 1.52 (.01) -- (.01) 20.27
Special Investment Trust
- --Primary Class
Years Ended Mar. 31,
1998 $26.55 $(.31) $11.28 $10.97 $ -- $(1.50) $(1.50) $36.02
1997 25.09 (.23) 3.10 2.87 -- (1.41) (1.41) 26.55
1996 19.96 -- 5.60 5.60 -- (.47) (.47) 25.09
1995 21.56 (.06) (1.31) (1.37) -- (.23) (.23) 19.96
1994 17.91 (.11) 3.93 3.82 (.03) (.14) (.17) 21.56
- --Navigator Class
Years Ended Mar. 31,
1998 $27.04 $-- $11.58 $11.58 $ -- $(1.50) $(1.50) $37.12
1997 25.26 .02 3.17 3.19 -- (1.41) (1.41) 27.04
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64) 25.26
1995(B) 19.11 .07 .85 .92 -- -- -- 20.03
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------------------------------------
Net
Investment Average Net Assets,
Expenses Income (Loss) Portfolio Commission End of
Total to Average to Average Turnover Rate Year
Return Net Assets Net Assets Rate Paid(A) (in thousands)
- ---------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
- --Primary Class
Years Ended Mar. 31,
1998 55.34% 1.73% (.1)% 12.9% $.0538 $4,810,409
1997 33.59% 1.77% .4% 10.5% .0557 2,236,400
1996 42.09% 1.82% .8% 19.6% -- 1,450,774
1995 9.77% 1.81% .5% 20.1% -- 986,325
1994 5.65% 1.82% .5% 25.5% -- 912,418
- --Navigator Class
Years Ended Mar. 31,
1998 56.90% .73% .9% 12.9% $.0538 $ 179,664
1997 34.97% .77% 1.4% 10.5% .0557 83,752
1996 43.53% .82% 1.8% 19.6% -- 52,332
1995(B) 8.11%(C) .82%(D) 1.8%(D) 20.1%(D) -- 36,519
Special Investment Trust
- --Primary Class
Years Ended Mar. 31,
1998 42.88% 1.86% (1.1)% 29.8% $.0481 $1,555,336
1997 11.58% 1.92% (.9)% 29.2% .0514 947,684
1996 28.47% 1.96% -- 35.6% -- 792,240
1995 (6.37)% 1.93% (.2)% 27.5% -- 612,093
1994 21.35% 1.94% (.6)% 16.7% -- 565,486
- --Navigator Class
Years Ended Mar. 31,
1998 44.42% .80% --% 29.8% $.0481 $ 63,299
1997 12.81% .85% .1% 29.2% .0514 41,415
1996 29.85% .88% 1.0% 35.6% -- 35,731
1995(B) 4.81%(C) .90%(D) 1.0%(D) 27.5%(D) -- 26,123
- ---------------------------------------------------------------------------------------------------
</TABLE>
(A) 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 Funds.
(B) For the period December 1, 1994 (commencement of sale of Navigator
Class) to March 31, 1995.
(C) Not annualized
(D) Annualized
See notes to financial statements.
25
<PAGE>
FINANCIAL HIGHLIGHTS--CONTINUED
<TABLE>
<CAPTION>
Investment Operations Distributions From:
-------------------------------------- -----------------------
Net Asset Net Net Realized Total Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Year (Loss) Investments Operations Income Investments Distributions Year
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Total Return Trust
- --PRIMARY CLASS
Years Ended Mar. 31,
1998 $19.39 $.44 $7.23 $7.67 $(.40) $(2.03) $(2.43) $24.63
1997 16.45 .46 3.47 3.93 (.43) (.56) (.99) 19.39
1996 12.79 .48 3.69 4.17 (.51) -- (.51) 16.45
1995 13.54 .33 (.19) .14 (.29) (.60) (.89) 12.79
1994 13.61 .36 .24 .60 (.33) (.34) (.67) 13.54
- --Navigator Class
Years Ended Mar. 31,
1998 $19.53 $.66 $7.29 $7.95 $(.58) $(2.03) $(2.61) $24.87
1997 16.52 .65 3.48 4.13 (.56) (.56) (1.12) 19.53
1996 12.83 .62 3.72 4.34 (.65) -- (.65) 16.52
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23) 12.83
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------------------------------------
Net
Investment Average Net Assets,
Expenses Income (Loss) Portfolio Commission End of
Total to Average to Average Turnover Rate Year
Return Net Assets Net Assets Rate Paid(A) (in thousands)
- ---------------------------------------------------------------------------------------------------
<S> <C>
Total Return Trust
- --PRIMARY CLASS
Years Ended Mar. 31,
1998 42.44% 1.88% 2.1% 20.6% $ .0585 $700,535
1997 24.33% 1.93% 2.6% 38.4% .0528 380,458
1996 33.23% 1.95% 3.2% 34.7% -- 267,010
1995 1.09% 1.93% 2.5% 61.9% -- 194,767
1994 4.57% 1.94% 2.7% 46.6% -- 184,284
- --Navigator Class
Years Ended Mar. 31,
1998 43.94% .83% 3.1% 20.6%$ .0585 $ 17,792
1997 25.67% .86% 3.7% 38.4% .0528 10,048
1996 34.67% .94% 4.2% 34.7% -- 7,058
1995(B) 2.28%(C) .86%(D) 3.6%(D) 61.9%(D) -- 4,823
- ---------------------------------------------------------------------------------------------------
</TABLE>
(A) 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 Funds.
(B) For the period December 1, 1994 (commencement of sale of Navigator
Class) to March 31, 1995.
(C) Not annualized
(D) Annualized
See notes to financial statements.
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Value Trust
Special Investment Trust
Total Return Trust
(Amounts in Thousands)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Value Trust, Inc. ("Value Trust"), the Legg Mason
Special Investment Trust, Inc. ("Special Investment Trust") and the Legg
Mason Total Return Trust, Inc. ("Total Return Trust") (each a "Fund") are
registered under the Investment Company Act of 1940, as amended, each as
an open-end, diversified investment company.
Each Fund consists of two classes of shares: Primary Class, offered
since 1982 for Value Trust, and since 1985 for Special Investment Trust
and Total Return Trust, and Navigator Class, offered to certain
institutional investors since December 1, 1994 for all Funds. The income
and expenses of each of these Funds are allocated proportionately to the
two classes of shares based on daily net assets, except for Rule 12b-1
distribution fees, which are charged only on Primary Class shares, and
transfer agent and shareholder servicing expenses, which are determined
separately for each class.
26
<PAGE>
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. Securities for which market
quotations are not readily available are valued at fair value as
determined by management and approved in good faith by the Board of
Directors. Fixed income securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized. Dividend income is allocated and distributions are
declared to shareholders at the class level and are recorded on the
ex-dividend date. Capital gain distributions, which are calculated at the
Fund level, are declared and paid after the end of the tax year in which
the gain is realized.
Investment Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes. At
March 31, 1998, receivables for securities sold and not yet delivered and
payables for securities purchased and not yet received for each of the
Funds were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
- -------------------------------------------------------------------------------
Value Trust $ -- $23,759
Special Investment Trust 7,894 3,422
Total Return Trust 1,674 3,892
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Funds intend to continue to qualify as regulated investment companies and
distribute all of their taxable income to their 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.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
2. Investment Transactions:
For the year ended March 31, 1998, investment transactions (excluding
short-term investments) were as follows:
Purchases Proceeds from Sales
- --------------------------------------------------------------------------------
Value Trust $1,238,636 $426,788
Special Investment Trust 523,279 381,086
Total Return Trust 222,108 105,747
At March 31, 1998, cost, aggregate gross unrealized appreciation and
gross unrealized depreciation based on the cost of securities for federal income
tax purposes for each Fund were as follows:
Cost Appreciation (Depreciation)
- --------------------------------------------------------------------------------
Value Trust $2,660,003 $2,414,079 $(91,228)
Special Investment Trust 1,041,677 626,991 (60,699)
Total Return Trust 497,705 221,141 (1,075)
3. 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 Funds' 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. The Funds' investment adviser,
acting under the supervision of their Board of Directors, reviews the
value of the collateral and the creditworthiness of those banks and
dealers with which the Funds enter into repurchase agreements to evaluate
potential risks.
4. Transactions with Affiliates:
Each 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 Funds. Pursuant to their
respective agreements, the Adviser provides the Funds with investment
advisory, management and administrative services for which each Fund pays
a fee, computed daily and payable monthly at annual rates of each Fund's
average daily net assets as follows: for Value Trust and Special
Investment Trust, 1% for the first $100 million, 0.75% between $100
million and $1 billion and 0.65% in excess of $1 billion; and for Total
Return Trust, 0.75% for such assets.
The Adviser has agreed to waive indefinitely its fees in any month to
the extent Total Return Trust's expenses (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during that month an annual
rate of 1.95% of average daily net assets for Primary Shares and 0.95% for
Navigator Shares. The Funds' agreements with the Adviser provide that
expense reimbursements be made to Value Trust and Special Investment Trust
for audit fees and compensation of the Funds' independent directors. At
March 31, 1998, amounts due to the Adviser were $2,741, $977, and $446,
for Value Trust, Special Investment Trust and Total Return Trust,
respectively.
Legg Mason, as distributor of the Funds, receives an annual
distribution fee and an annual service fee, computed daily and payable
monthly from each of the Funds at annual rates based on the average daily
net assets of each Fund's Primary Class as follows: Value Trust, 0.70% and
0.25%; Special Investment Trust and Total Return Trust, 0.75% and 0.25%,
for distribution and service fees, respectively. At March 31, 1998,
28
<PAGE>
distribution and service fees due to Legg Mason were as follows: Value
Trust, $3,721; Special Investment Trust, $1,288; and Total Return Trust,
$580.
Brokerage commissions paid to Legg Mason for Fund security
transactions for the year ended March 31, 1998 were as follows: for Value
Trust, $3; and for Total Return Trust, $1. Special Investment Trust paid
no brokerage commissions to Legg Mason for the year ended March 31, 1998.
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was
paid the following amounts by the transfer agent for the year ended March
31, 1998: Value Trust, $439; Special Investment Trust, $238; and Total
Return Trust, $76.
5. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in
a $150 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 year
ended March 31, 1998, the Funds had no borrowings under the line of
credit.
6. Fund Share Transactions:
At March 31, 1998, there were 200,000, 100,000 and 50,000 shares
authorized at $.001 par value for the Primary Class of Value Trust,
Special Investment Trust and Total Return Trust, respectively. At March
31, 1998, there were 100,000 shares authorized at $.001 par value for the
Navigator Class of Value Trust. The Navigator Class of Special Investment
Trust and Total Return Trust each have 50,000 shares authorized at $.001
par value.
Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
----------------- ---------------- ----------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
--Primary Class
Year Ended March 31, 1998 42,311 $1,841,372 4,360 $179,702 (16,212) $(690,796) 30,459 $1,330,278
Year Ended March 31, 1997 20,980 690,516 3,078 93,067 (12,250) (391,684) 11,808 391,899
--Navigator Class
Year Ended March 31, 1998 1,680 74,966 150 6,238 (719) (31,759) 1,111 49,445
Year Ended March 31, 1997 686 22,688 127 3,838 (303) (9,605) 510 16,921
Special Investment Trust
--Primary Class
Year Ended March 31, 1998 13,850 $ 441,297 1,933 $54,702 (8,297) $(263,130) 7,486 $ 232,869
Year Ended March 31, 1997 20,143 520,404 1,751 46,003 (17,785) (455,887) 4,109 110,520
--Navigator Class
Year Ended March 31, 1998 587 19,039 81 2,349 (494) (15,732) 174 5,656
Year Ended March 31, 1997 312 8,240 78 2,060 (273) (7,350) 117 2,950
Total Return Trust
--Primary Class
Year Ended March 31, 1998 9,633 $ 216,730 2,451 $50,878 (3,259) $(71,780) 8,825 $ 195,828
Year Ended March 31, 1997 4,769 88,767 901 16,417 (2,274) (40,953) 3,396 64,231
--Navigator Class
Year Ended March 31, 1998 265 5,997 75 1,559 (140) (3,155) 200 4,401
Year Ended March 31, 1997 142 2,588 29 518 (83) (1,519) 88 1,587
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Legg Mason Value Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Total Return Trust, Inc.:
We have audited the accompanying statements of net assets of Legg Mason Value
Trust, Inc., Legg Mason Special Investment Trust, Inc. and Legg Mason Total
Return Trust, Inc. ("the Funds") as of March 31, 1998, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Legg Mason Value Trust, Inc., Legg Mason Special Investment Trust, Inc. and Legg
Mason Total Return Trust, Inc. as of March 31, 1998, and the results of their
operations, the changes in their net assets, and their financial highlights for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
April 24, 1998
