INVESTMENT ADVISER REPORT TO SHAREHOLDERS
Legg Mason Fund Adviser, Inc. FOR THE SIX MONTHS ENDED
Baltimore, MD SEPTEMBER 30, 1995
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr.
Richard G. Gilmore
Charles F. Haugh THE
Arnold L. Lehman LEGG MASON
Dr. Jill E. McGovern SPECIAL
T. A. Rodgers INVESTMENT
Edward A. Taber, III TRUST, INC.
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company NAVIGATOR CLASS
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, DC PUTTING YOUR FUTURE FIRST
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. (Legg Mason Funds Logo)
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR
ACCOMPANIED BY A PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(Recycled Paper logo) PRINTED ON RECYCLED PAPER
LMF-009
<PAGE>
TO OUR SHAREHOLDERS,
The Special Investment Trust's net asset value per share rose 9.0%
from $21.49 to $23.42 in the quarter ended September 30, 1995. That
gain compares to total returns (appreciation plus reinvested
dividends) of 7.1% on the Value Line index of 1700 stocks and 7.9% on
Standard & Poor's 500 stock composite index during the same period. In
the nine months through September 30, the Trust's total return was
23.7%, compared to returns of 21.5% and 29.7% on the Value Line and
Standard & Poor's indices.
An investment of $10,000 in the Trust when it was formed in
December, 1994, would have grown to $12,255 by September 30, 1995
(assuming reinvestment of dividends and distributions), a total return
of 23.3%.
Beginning on the next page, Bill Miller, the Trust's portfolio
manager, comments on the investment outlook.
Sincerely,
(Signature of John F. Curley, Jr.)
John F. Curley, Jr.
President
November 3, 1995
<PAGE>
PORTFOLIO MANAGER'S COMMENTS
Your fund rose 8.98% in the quarter, outperforming both the S&P 500 and the
Dow Jones Industrial average, which were up 7.94% and 5.78%, respectively. This
brought our year to date results to a gain of 23.73% through September 30.
Although we outperformed the major indices in the quarter, so did most other
funds, as stocks rose steadily throughout the summer, led by technology and
financial services equities. We have a good position in financials, but only
moderate weightings in technology compared to the star performers this year.
Most funds that focus on small and mid-sized companies are growth funds that
employ some version of a momentum-based investment methodology. We, of course,
use a value philosophy. In years such as this, when technology stocks are
soaring and momentum investing is in vogue, we tend to underperform funds in our
category. Despite excellent absolute results that exceed our long-term average
returns, we are trailing the high flyers this year and will probably continue to
do so as long as the market remains focused on powerful earnings stories.
We have given back some of our gains early in the fourth quarter as stocks
have been buffetted by the usual end-of-year cross currents. Taxable investors
with large profits are looking around for losses to offset those gains,
precipitating additional selling in stocks already down for the year. This is a
mixed blessing for us. We expect to find some good new ideas among the market's
lepers, but are finding some of our own names being pounded as people dump them
for tax purposes. The result is to hurt us near-term, but build in larger
long-term opportunities.
The effect on the portfolio of this tax maneuvering can be dramatic. Late in
the third quarter we had not only outperformed during that period, but had also
made up all of the underperformance of the previous six months, moving ahead of
the S&P and other similar funds. In the last six weeks, though, as the tax
selling has accelerated, our results have decelerated. This is frustrating for
us, both as investors and managers, but investing is a marathon and not a
sprint, and these fluctuations even out over time.
Michael Steinhardt announced his retirement and the disbanding of his hugely
successful investment partnership a few weeks ago. This is something you
probably missed unless you follow the markets quite closely. For 30 years
Steinhardt plied his aggressive, high turnover, trading-oriented style with
phenomenal success, reportedly averaging returns of almost 30% per year, albeit
with high volatility and using a lot of leverage. In a recent interview with the
WASHINGTON POST he commented on the art of investing, and on the current
investing environment. I have not seen a better, short account of those topics,
so rather than trying to rehash it, I'll quote part of it:
Q: HOW DO YOU MAKE MONEY IN THE MARKET?
A: The way you almost always make money in a market, in a stock, is if
you have a variant perception, a different view that proves right. There
are almost no exceptions. That is a big point. It is almost a truism, but
hardly focused on . . .
Q: WHAT IS THE VARIANT PERCEPTION THAT INFORMS YOUR CURRENT VIEW OF
STOCKS?
A: The variant perception, which I call the idyllic world view, is
that to a great degree the world is a much, much, much better place. It is
a safer place, a more secure place. The risks of important political and
economic dislocation are much less. Until the market professionals reach a
level of enthusiasm for the real state of the world, the stock market will
continue to go up.
He elaborated on the positives in this environment, especially the benefits
of what he calls "benign capitalism" and his belief that "the historic fears
about inflation are exaggerated," and says he expects bond yields to fall to 6%
or below in the next year. Finally, he notes that the hardest thing about
successful investing is to have a view that is against the consensus and to bet
that view, knowing that if you do that "you will always be bombarded by the
conventional wisdom."
Many investors today might respond that with stocks up well over 20% in less
than a year, and with long-term interest rates having fallen from over 8% to
6.4% in the past twelve months, market professionals have already embraced the
idyllic world view. We believe those skeptics are wrong.
Stocks now sell at about the average price-earnings ratio of the past 70
years. Yet inflation is below the long-term average of 3.1%, while interest
rates, both short-term and long-term, are above their historic averages. The
market is still demanding a premium in rates to compensate for its fear of
inflation and has not put stock valuations up in response to either the prospect
of continued low inflation or the possibility of sustained prosperity if the
"idyllic world view" proves correct.
Put somewhat differently, stocks are as attractive today, if not more
attractive, on a long-term basis, than they were when the Dow was 1000 or
2
<PAGE>
2000 or 3000. All of the gain in stocks that we have seen has been due to the
increase in earnings over the long term. There has been no mark-up for the
world's being a safer, better, more secure place.
Philosophical followers of pragmatists William James or Charles Peirce might
respond that all this talk of an "idyllic world view" or of a "safer, better
place" is just so many words. The market has experience of unexpected inflation,
of recessions arriving to torpedo earnings, and of a myriad of unpredictable
events knocking the market when least expected. It has no experience of
sustained prosperity and minimal inflation, save perhaps the 1950s and early
1960s, and then the spector of the cold war and the memory of depression subdued
investors' enthusiasm. What practical difference has the "idyllic world view",
even if it's right, made to the investment landscape, these skeptics might ask?
If it hasn't made any practical difference, then it is meaningless
word-mongering, and waiting for the market to embrace it will be like waiting
for Godot.
That is almost, but not quite, right. If valuations are to move higher, then
many of the fears in the market will first have to dissipate. Returns on equity
and assets will have to stay elevated above historic norms, the economy will
have to avoid recession, inflation will have to remain quiescent, corporate
profits will have to move steadily higher, or at least not decline, Japan will
have to avoid imploding due to its banking and real estate woes, Russia will
have to keep from spiralling out of control, the Balkan troubles will have to be
contained, and so on.
These are legitimate concerns and it is unlikely they will all fade
harmlessly away. But there is practical evidence that things are better and it
goes beyond economic data such as the unprecedented productivity growth this far
into an economic cycle, or the 30-year lows in unit labor costs.
The main evidence is low economic and market volatility. Since 1992 the
market has exhibited record low volatility. This has led many market analysts to
predict a return to high volatility, on the grounds that low volatility
historically has been followed by higher volatility. It has been, but that has
been due to the economic, political, and social dislocations that Steinhardt
referred to. The low volatility that we have experienced is due to the lack of
such dislocations, and if we have fewer of them, the markets will remain calmer
and more consistent. Consistency and lack of volatility are the hallmarks of the
so-called ruler stocks, such as Coca-Cola and Wal Mart, whose earnings go up
steadily year after year, and which rarely experience serious setbacks.
We are not ready to proclaim the birth of the ruler market, though the first
nine months of this year are consistent with such a view. It is unlikely that
everything will go right indefinitely, and when things begin to go wrong, it is
certain that the bears, aided and abetted by the press, will encourage the
legitimate concerns that will arise.
We have no doubt that the market will experience periodic setbacks that look
to become much more serious. We believe, though, that the improvements
experienced in the past five years are sustainable and that investing on that
basis will prove quite rewarding.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
November 3, 1995
DJIA 4825.57
3
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
TOTAL RETURN FOR ONE YEAR, FIVE YEARS AND LIFE OF FUND, AS OF SEPTEMBER 30, 1995
The returns shown are based on historical results and are not intended
to indicate future performance. The investment return and principal value
of an investment in the fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Average
annual returns tend to smooth out variations in the fund's return, so they
differ from actual year-to-year results. No adjustment has been made for
any income taxes payable by shareholders.
The fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees and shareholder servicing expenses are determined
separately for each class and the Navigator Class does not incur
Rule 12b-1 distribution fees.
Total returns as of September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Cumulative Average Annual
Total Return Total Return
<S> <C> <C>
Primary Class:
One Year +12.64% +12.64%
Five Years +129.29 +18.05
Life of Class(dagger) +225.39 +12.86
Navigator Class:
Life of Class(double dagger) +23.34% --
</TABLE>
(dagger) Primary Class inception-December 30, 1985
(double dagger) Navigator Class inception-December 1, 1994
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
Biggest gainers for the 3rd quarter 1995*
<S> <C> <C>
1. America Online, Inc. +56.3%
2. Somatix Therapy Corporation +44.1%
3. Salant Corporation +42.4%
4. Targeted Genetics Corporation +37.1%
5. Biogen, Inc. +34.8%
6. John Alden Financial Corp. +32.1%
7. PennCorp Financial Group, Inc. +29.1%
8. Mego Financial Corporation Warrants +28.7%
9. WPP Group P.L.C. ADR +28.3%
10. Charter Medical Corporation +26.2%
</TABLE>
PORTFOLIO CHANGES
Securities Added
Bell & Howell Holdings Company
Briggs & Stratton Corporation
Leucadia National Corporation
<TABLE>
<CAPTION>
Biggest laggers for the 3rd quarter 1995*
<S> <C> <C>
1. Chic By H.I.S, Inc. -28.9%
2. Banyan Systems Incorporated -26.4%
3. Salant Corporation Class B Warrants -25.0%
4. Boomtown Inc. -21.9%
5. Johnstown America Industries, Inc. -21.7%
6. Circus Circus Enterprises, Inc. -20.6%
7. Value Health, Inc. -17.6%
8. Grupo Mexicano de Desarrollo S.A. ADR -13.9%
9. Playtex Products, Inc. -12.7%
10. Graff Pay-Per-View Inc. -11.8%
</TABLE>
Securities Sold
ALC Communications Corporation
Grupo Televisa, S.A. de C.V. Global ADS
Lady Luck Gaming Finance Corporation
Guaranteed 1st Mortgage Series B
10.50% 3-1-01
Stratosphere Corporation
Guaranteed 1st Mortgage Note
14.25% 5-15-02
The Leslie Fay Companies, Inc.
* SECURITIES HELD FOR THE ENTIRE QUARTER.
4
<PAGE>
PORTFOLIO OF INVESTMENTS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
(Amounts in Thousands) Shares Value
<S> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS -- 91.1%
Advertising -- 3.5%
WPP Group P.L.C. 10,200 $24,174
WPP Group P.L.C. ADR 445 2,142
26,316
Apparel -- 1.4%
Chic By H.I.S, Inc. 955 7,643A,C
Salant Corporation 450 2,644A
Salant Corporation Class B
Warrants 285 13A
10,300
Automotive -- 0.1%
Consorcio G Grupo Dina S.A. de
C.V. ADS 220 770
Banking -- 9.4%
BankAmerica Corporation 304 18,186
BankAmerica Corporation Warrants 156 6,610A
Grupo Financiero Bancomer S.A. de
C.V. ADS 525 3,216
Grupo Financiero Serfin S.A. de
C.V. ADR 914 4,226A
Peoples Heritage Financial Group,
Inc. 720 13,140
Shawmut National Corporation 750 25,219
70,597
Broadcast Media -- 0.5%
Graff Pay-Per-View Inc. 450 3,769A
Computer Services and Systems -- 11.4%
America Online, Inc. 590 40,562A
Banyan Systems Incorporated 343 3,475A
Bell & Howell Holdings Company 300 7,650A
Exabyte Corporation 600 8,099A
InaCom Corp. 785 10,696A,C
Spectrum Holobyte, Inc. 550 6,944A
Storage Technology Corporation 350 8,575A
86,001
Construction -- 0.3%
Grupo Mexicano de Desarrollo S.A.
ADR 540 2,093A
Energy -- 1.6%
California Energy Company, Inc. 600 12,300A
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Entertainment -- 7.3%
Boomtown Inc. 900 $ 8,438A,C
Circus Circus Enterprises, Inc. 525 14,700A
Hollywood Park, Inc. 1,555 19,052A,C
Mirage Resorts, Incorporated 400 13,150A
55,340
Finance -- 8.5%
Federal National Mortgage
Association 100 10,350
Mego Financial Corporation Warrants 300 2,529A
Pioneer Group, Inc. 750 20,531
Piper Jaffray Incorporated 299 4,333
The Bear Stearns Companies Inc. 386 8,296
United Asset Management Corporation 450 18,056
64,095
Health Care -- 4.3%
Charter Medical Corporation 975 19,987A
Physician Corporation of America 778 12,246A
32,233
Insurance -- 10.7%
CMAC Investment Corporation 400 21,050
Enhance Financial Services Group
Inc. 517 10,594
John Alden Financial Corp. 925 20,928
Leucadia National Corporation 50 2,931
PennCorp Financial Group, Inc. 404 9,650
Value Health, Inc. 599 15,887A
81,040
Manufacturing -- 2.1%
Briggs & Stratton Corporation 82 3,313
Danaher Corporation 236 7,729
Johnstown America Industries, Inc. 560 4,550A,C
15,592
Medical Products and Supplies --1.1%
Sunrise Medical, Inc. 312 8,586A
Miscellaneous -- 3.1%
Olsen & Associates AG 300 2,595A,D
Playtex Products, Inc. 1,177 10,150A
Stewart Enterprises, Inc. 285 10,331
23,076
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS -- CONTINUED
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Multi-Industry -- 1.0%
Asarco Incorporated 95 $ 2,977
UNR Industries, Inc. 530 4,571
7,548
Pharmaceuticals -- 3.2%
Biogen, Inc. 175 10,500A
Somatix Therapy Corporation 1,836 11,244A,C
Somatix Therapy Corporation
Warrants 152 266A
Targeted Genetics Corporation 400 2,125A
24,135
Real Estate -- 3.3%
Regency Realty Corporation 250 4,406
Resource Mortgage Capital
Corporation 325 6,581
Starwood Lodging Trust 100 2,813A
Summit Properties, Inc. 200 3,775
Walden Residential Properties,
Inc. 380 7,173
24,748
Savings and Loan -- 8.1%
California Federal Bank, F.S.B. 900 14,175A
California Federal Bank, F.S.B. --
Participation Interests 90 517A
Standard Federal Bank 650 25,350
Washington Mutual, Inc. 795 21,068
61,110
Services -- 2.9%
Ideon Group Incorporated 2,155 22,087C
Specialty Retail -- 4.8%
Home Shopping Network, Inc. 3,025 27,981A
Mac Frugal's Bargains(Bullet)Close-outs
Inc. 535 8,426A
36,407
Telecommunications -- 2.5%
Telefonos de Mexico S. A. ADR 133 4,207
WorldCom, Inc. 450 14,456A
18,663
Total Common Stocks and Equity
Interests
(Identified Cost - $529,824) 686,806
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
PREFERRED STOCK -- 0.3%
Mego Financial Corporation
Series A 12% Cum.
(Identified Cost - $2,000) 200 $ 2,000C,D
<CAPTION>
Principal
Amount
<S> <C> <C>
CORPORATE BONDS -- 1.6%
Grupo Mexicano de Desarrollo
S.A. ADR
8.25% 2-17-01 $11,000 5,005B
Harrah's Jazz Company
1st Mortgage Note
14.25% 11-15-01 7,425 6,942
Total Corporate Bonds
(Identified Cost - $11,473) 11,947
SOVEREIGN OBLIGATION -- 2.2%
Argentina Par Bonds
5.00%E 3-31-23
(Identified Cost - $13,460) 35,000 16,997
REPURCHASE AGREEMENT -- 4.9%
Prudential Securities, Inc.
6.25% dated 9-29-95, to be
repurchased at $36,676 on
10-2-95 (Collateral: Federal
Home Loan Mortgage Corporation
Mortgage-backed securities,
11.0% due 8-1-24, value
$37,932)
(Identified Cost - $36,642) 36,642 36,642
Total Investments -- 100.1%
(Identified Cost - $593,399) $754,392
</TABLE>
A NON-INCOME PRODUCING.
B RULE 144A SECURITY -- A SECURITY PURCHASED PURSUANT TO RULE 144A UNDER
THE SECURITIES ACT OF 1933 WHICH MAY NOT BE RESOLD SUBJECT TO THAT RULE
EXCEPT TO QUALIFIED INSTITUTIONAL BUYERS.
C 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.
D PRIVATE PLACEMENT.
E COUPON INCREASES 0.25% ANNUALLY UNTIL MARCH 31, 1999, THEREAFTER
REMAINS FIXED AT 6.0% UNTIL MATURITY.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
LEGG MASON SPECIAL INVESTMENTS TRUST, INC.
SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
ASSETS:
Investments at value:
Affiliated Companies (Identified Cost - $106,390) $ 85,710
Other Securities (Identified Cost - $487,009) 668,682
$754,392
Foreign currency at value (Cost - $8) 8
Receivable for:
Investments sold 2,645
Fund shares sold 881
Dividends and interest receivable 1,616
Other assets 30
Total assets 759,572
LIABILITIES:
Payable for:
Investments purchased 4,102
Fund shares repurchased 618
Accrued expenses 188
Due to adviser and distributor 1,080
Total liabilities 5,988
Net assets $753,584
ANALYSIS OF NET ASSETS:
Accumulated paid-in capital applicable to:
31,099 Primary shares outstanding $546,270
1,367 Navigator shares outstanding 26,452
Undistributed net investment income 1,056
Undistributed net realized gain on investments 18,813
Unrealized appreciation of investments 160,993
Net assets $753,584
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $ 23.20
NAVIGATOR CLASS $ 23.42
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Dividends:
Affiliated companies $ 366
Other securities (net of foreign taxes withheld of $25) 3,573
Interest 3,827
Total investment income $ 7,766
EXPENSES:
Investment advisory fee 2,756
Distribution and service fees 3,362
Transfer agent and shareholder servicing expense 337
Custodian fee 94
Reports to shareholders 71
Registration fees 45
Legal and audit fees 38
Directors' fees 5
Other expenses 18
6,726
Less expenses reimbursed (17)
Total expenses, net of reimbursement 6,709
NET INVESTMENT INCOME 1,057
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments 19,155
Increase in unrealized appreciation of investments 88,938
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 108,093
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $109,150
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
(Amount in Thousands) September 30, 1995 March 31, 1995
(Unaudited)
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income (loss) $ 1,057 $ (1,431)
Net realized gain on investments 19,155 5,583
Change in unrealized appreciation of investments 88,938 (44,299)
Change in net assets resulting from operations 109,150 (40,147)
Distributions to shareholders from
net realized gain on investments:
Primary Class (4,137) (6,356)
Navigator Class (178) --
Increase in net assets from Fund share transactions:
Primary Class 9,064 94,311
Navigator Class 1,469 24,922
Increase in net assets 115,368 72,730
NET ASSETS:
Beginning of period 638,216 565,486
End of period (including undistributed net investment income of $1,056 and
$1,488, respectively) $753,584 $638,216
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Primary
Class Navigator Class
For the Six For the Six
Months Ended Months Ended December 1, 1994C
Sept. 30, Sept. 30, to
1995 1995 March 31, 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $19.96 $20.03 $19.11
Net investment income (loss) 0.03 0.14 0.07
Net realized and unrealized gain (loss) on investments and options 3.34 3.38 0.85
Total from investment operations 3.37 3.52 0.92
Distributions to shareholders from:
Net investment income -- -- --
Net realized gain on investments (0.13) (0.13) --
Total distributions (0.13) (0.13) --
Net asset value, end of period $23.20 $23.42 $20.03
Total return 16.98%B 17.68%B 4.81%B
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.96%A 0.86%A 0.90%A
Net investment income (loss) 0.3%A 1.4%A 1.0%A
Portfolio turnover rate 23.1%A 23.1%A 27.5%
Net assets, end of period (in thousands) $721,564 $ 32,020 $26,123
</TABLE>
A ANNUALIZED.
B NOT ANNUALIZED.
C COMMENCEMENT OF NAVIGATOR CLASS.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
(Amounts in Thousands) (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Special Investment Trust, Inc. ("Fund") is registered
under the Investment Company Act of 1940, as amended, as an open-end,
diversified investment company.
The Fund consists of two classes of shares: Primary Class, offered
since 1985, and Navigator Class, offered to certain institutional
investors since December 1, 1994. Expenses of the Fund are allocated
proportionately to the two classes of shares except for 12b-1 distribution
fees, which are charged only on Primary shares, and transfer agent and
shareholder servicing expenses, which are determined separately for each
class.
Security Valuation
Securities traded on national securities exchanges are valued at the
last quoted sales price. Over-the-counter and listed securities for which
no sales price is available are valued at the mean between the latest bid
and asked prices. Short-term securities are valued at cost which, when
combined with accrued interest receivable, approximates current value.
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.
Dividends and Distribution to Shareholders
Net investment income for dividend purposes consists of dividends and
interest earned, less expenses. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Net capital gain distributions
are declared and paid after the end of the tax year in which the gains are
realized.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially.
Federal Income Taxes
No provision for federal income or excise taxes is
required since the Fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income to its
shareholders.
Equalization
In prior years, the Fund followed the practice of equalization by
which a portion of proceeds from sales and cost of redemptions of Fund
shares is credited or charged to undistributed net investment income. In
the current fiscal year ending March 31, 1996, the Fund discontinued the
practice of equalization, resulting in a reclassification from
undistributed net investment income of $1,489 to accumulated paid-in
capital.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the six months ended September 30, 1995
(excluding short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $ 77,152
Proceeds from sales 90,233
</TABLE>
At September 30, 1995, the cost of securities for federal income tax
purposes was $593,724. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$216,866 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $56,198.
10
<PAGE>
(Amounts in Thousands)
3. FUND SHARE TRANSACTIONS:
At September 30, 1995, there were 100,000 shares authorized at $.001
par value for all classes of the Fund. On December 1, 1994, when the
Navigator Class became effective, 1,287 shares held in Legg Mason Profit
Sharing Plan accounts, with a value of $24,601, were transferred from
Primary Class to Navigator Class. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
For the
Six Months Ended For the
September 30, Year Ended
1995 March 31, 1995
Primary Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 8,881 $ 193,103 22,874 $ 464,052
Reinvestment of
distributions 198 4,106 310 6,299
Repurchased (8,651) (188,145) (18,741) (376,040)
Net increase 428 $ 9,064 4,443 $ 94,311
</TABLE>
<TABLE>
<CAPTION>
For the December 1, 1994(dagger)
Six Months Ended to
September 30, 1995 March 31, 1995
<S> <C> <C> <C> <C>
Navigator Class Shares Amount Shares Amount
Sold 171 $ 3,912 1,375 $26,290
Reinvestment of
distributions 9 177 -- --
Repurchased (117) (2,620) (71) (1,368)
Net increase 63 $ 1,469 1,304 $24,922
</TABLE>
(dagger) COMMENCEMENT OF NAVIGATOR CLASS.
4. TRANSACTIONS WITH AFFILIATES:
The Fund has an investment advisory and management agreement with Legg
Mason Fund Adviser, Inc. ("Adviser"), a corporate affiliate of Legg Mason
Wood Walker, Incorporated ("Legg Mason"), a member of the New York Stock
Exchange and the distributor for the Fund. Under this agreement, the
Adviser provides the Fund with investment advisory, management and
administrative services for which the Fund pays a fee at an annual rate of
1% of average daily net assets of the Fund for the first $100 million of
such assets and 0.75% of such assets exceeding $100 million, calculated
daily and payable monthly. The agreement with the Adviser provides that an
expense reimbursement be made to the Fund for auditing fees, compensation
of the Fund's independent directors and expenses in excess of statutory
limitations.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.75% and an annual service fee of 0.25% of the
Primary Class' average daily net assets, calculated daily and payable
monthly. Legg Mason also has an agreement with the Fund's transfer agent
to assist with certain of its duties. For this assistance, Legg Mason was
paid $94 by the transfer agent for the six months ended September 30,
1995. No brokerage commissions were paid to Legg Mason or its affiliates
during the six months ended September 30, 1995.
11
