<PAGE>
INVESTMENT ADVISER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
BOARD OF DIRECTORS
Raymond A. Mason, Chairman
John F. Curley, Jr.
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
Washington, DC
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR ACCOMPANIED BY A
PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(recycle logo) PRINTED ON RECYCLED PAPER
LMF-009
REPORT TO SHAREHOLDERS
FOR THE QUARTER ENDED
JUNE 30, 1995
THE
LEGG MASON
SPECIAL
INVESTMENT
TRUST, INC.
PRIMARY CLASS
PUTTING YOUR FUTURE FIRST
(Legg Mason logo)
<PAGE>
TO OUR SHAREHOLDERS,
In the quarter ended June 30, 1995, the Special Investment Trust's
net asset value per share rose from $19.96 to $21.36. Assuming
reinvestment of a $.134 per share long-term capital gain distribution
paid in May, the Trust's total return (share appreciation plus
reinvested dividends and capital gain distributions) in the quarter
was 7.7%, compared to gains of 9.5% in Standard & Poor's 500 stock
composite index and 7.2% in the Value Line index of 1,700 stocks. In
the six months through June 30, the Trust's total return was 12.9%,
compared to returns of 20.2% and 13.5% on the Standard & Poor and
Value Line indices.
On the following pages, Bill Miller, the Trust's portfolio
manager, comments on the investment outlook.
More than 5,400 shareholders invest regularly in Trust shares on a
dollar cost averaging basis through a program we call Future First.
Most do so by authorizing automatic monthly transfers of $50 or more
from their bank checking accounts or Legg Mason money market fund.
Dollar cost averaging is a convenient and sensible way to invest which
encourages continued purchases during market downswings when the best
values are available. Your Legg Mason Investment Executive will be
happy to help you establish a Future First dollar cost averaging
account should you wish to do so.
Sincerely,
(signature)
John F. Curley, Jr.
President
July 26, 1995
<PAGE>
PORTFOLIO MANAGER'S COMMENTS
Your fund rose 7.65% in the second quarter, bringing our six-month returns
to 12.92%. These results are behind those of the Dow, which rose 10.28% in the
quarter and 20.42% for the year to date, and the S&P 500, up 9.53% and 20.19%
for the same periods. The Russell 2000, a commonly referred to index of smaller
companies, rose 14.43% for the 12 months ended June 30, 1995.
In general, small and mid-size companies, the universe we invest in, have
underperformed large companies so far this year. Regardless of size, the
markets' stars this year have been technology and financials, the former because
of spectacular earnings and the latter because of falling interest rates.
Our results were driven by financials, where we have long had a significant
commitment. Our holdings in this group did not help us last year when rates were
rising, but they have moved sharply higher this year as both short and long
rates have fallen. The S&P financial sector has risen 23.7% this year. The
operating results of banks, for example, have not been significantly affected by
the interest rate fluctuations of the past 18 months. Investors, though, persist
in buying and selling these companies using simple minded formulas that would
fit on a bumper sticker (e.g., Rates up? Sell banks). As long as this continues,
it will create opportunities for us.
We have not had much exposure to the super-hot technology sector, where
emotion and psychology interact with the results of the companies to produce a
lot of excitement. The semiconductor index on the Philadelphia exchange was up
about 100% in the first half. In the S&P 500, three of the top five performers
this year were tech stocks -- Micron Technology +149%, Applied Material +105%,
and Intel +98%. Microsoft, the cult company for which no valuation seems too
high, was "only" up 47%. Our largest technology holding was and is AMERICA
ONLINE, which is up 57% this year. We were also helped by Lotus, up 56% due to
its being acquired by IBM.
The technology frenzy that has erupted this year is, like many enthusiasms,
soundly based. Technology is transforming society as the computer moves from a
business tool to a home appliance, and as the effects and implications of BEING
DIGITAL, as Nicholas Negroponte's new book has it, come to be instantiated. On
July 17 and 18, though, the market's fever for technology finally broke, and the
NASDAQ composite, which is heavily weighted with technology -- Intel and
Microsoft are 28% of the index -- fell over 5% in just two trading sessions. We
don't know if this is the beginning of a bear market in tech stocks, but we do
believe it is the beginning of more realism in the evaluation of those stocks.
At its peak of $109 a few weeks ago, Microsoft had a market value of almost
$70 billion, over 12x its revenues for this fiscal year and 35x next year's
expected earnings. The market believed it was worth more than IBM, valued now at
about $60 billion, whose after tax earnings this year will exceed Microsoft's
total sales. IBM's sales this year will be over $70 billion, versus about $6
billion for Microsoft, and it is generating excess cash of around $400 million
per month. IBM this year will generate more excess cash from its business than
Microsoft had business last year: $4.8 billion of excess cash this year for IBM
versus Microsoft's revenue last year of $4.6 billion. Even Microsoft's chief
financial officer said he was "mystified" at the company's valuation, and called
it "unbelievable." These comments were as shocking to hi-tech investors as
hearing the truth about the tooth fairy would be to a 6 year old.
Mexico bounced back in the quarter and our Mexican holdings generally
outperformed most indices for the first time in a year. The worst appears over
down there. The devaluation induced inflation has peaked and the economy seems
to be bottoming. Capital has begun to return to the country; the currency has
been strengthening, interest rates are falling, and the Bolsa is moving higher.
It looks like growth will resume in Mexico in 1996. We added to our Mexican
stocks at lower prices several months ago. Although the Mexican market looks to
be a little ahead of the economic fundamentals, the overall picture is much
improved.
2
<PAGE>
Financials and Mexico helped us in the quarter. Hurting our results were
earnings-induced declines in two or our large holdings, IDEON GROUP, which
provides credit card services, and PHYSICIAN CORPORATION OF AMERICA, an HMO
which emphasizes the Medicaid market. The market has severely punished the share
prices of companies whose earnings are below expectations, as often happens when
momentum investing is in vogue. Momentum investors buy and sell without regard
to price or value. They typically try to be invested in shares of companies
whose earnings are beating expectations or whose stocks are outperforming the
market. They are short-term oriented and will usually sell a stock without
regard to price if it disappoints them. We took advantage of the momentum
induced sell off in IDEON and PHYSICIAN CORP. to add to our holdings.
Many investors are mystified by the stock market's 20% rise in only six
months, and find it hard to believe a bear market (or worse) is not imminent.
The last time the market rose this fast was in the first six months of 1987.
Many market commentators advise caution, and the popular press appears full of
articles on how to protect your assets, how to hedge your portfolio with
options, and so forth.
Our view echoes something Warren Buffett once said: the market may look
expensive, but it's not as expensive as it looks. Some of the traditional market
measures are in ranges that previously led to below average returns, most
prominently dividend yields. The S&P 500 yields about 2.5%, near the low end of
its historic range. But with inflation also at about 2.5%, the real yield is
zero, which is not demanding by historic standards. With payout ratios well
below traditional levels, balance sheets solid, and cash generation strong,
dividend growth should average at least 7% for several years. If inflation stays
at today's level, which we expect, that would put the real return on stocks at
7% per year, right in line with the long-term average.
Price/earnings ratios on the Dow are only about 13x earnings, again around
the long-term average. Even though stocks are up 20% in only six months, their
average annual return from January 1, 1990 through June 30, 1995 has been 12%,
good but certainly not frothy.
The stock market almost always goes up; it rises about two thirds of the
time, measured yearly or even monthly. People seem surprised when the market is
at a new high, and worry that it may fall. But the surprise should be when it is
not at a high. GDP is at an all-time high, as are corporate profits, and both
usually rise. The stock market tracks those economic variables, adjusted for
changes in inflation and interest rates.
Bear markets do not just appear mysteriously when the real economy is doing
well. Persistently poor periods in the market -- more than the usual 5-7%
correction -- arrive when things go wrong in the world. Last year stocks were
flat because interest rates rose dramatically due to Fed tightening and fears of
inflation. The last bad market, in 1990, was a year of recession, war in the
Middle East, and skyrocketing energy prices. The Crash culminated a 40-day bear
market caused by relentless Fed tightening coupled with price/earnings ratios
50% higher than today and long-term interest rates 300 basis points higher than
now. The 1981-82 bear market was due to recession, Fed tightening, a third world
debt crisis, and mid-teens interest rates. The worst bear market since the
depression, 1973-74, occurred when we were in recession, had an oil embargo,
double-digit interest rates for the first time and a constitutional crisis
culminating in the President's resignation.
Bear markets begin when four conditions come together: earnings peaking,
inflation rising, interest rates rising, and stocks being overvalued. What
Federal Reserve Chairman Greenspan calls the most probable of several credible
scenarios has profits rising and inflation falling next year. The Fed has
recently moved to lower rates, and most measures of stock valuations are at
long-term averages. None of the typical preconditions of poor markets are in
evidence.
The market, though, does not rise the way the balance in your money fund
does: steadily, inexorably, linearly. Those returns are algorithmic. A formula
is applied to a fixed quantity to generate a new quantity. Markets are what the
professors call
3
<PAGE>
complex adaptive systems. They process information and react to it. Those
reactions are part of the new information that generates a continuous recursive
feedback loop between market participants and the external environment. Markets
exhibit what is known as sensitive dependence on initial conditions. In plainer
English, you can't tell what's going to happen with certainty, it's just too
complex. A researcher in this area, when asked to explain more simply how
complex adaptive systems work so a client could understand it, replied, "I can't
explain it simply. It is the nature of complex things to be complex."
Does the break in tech stocks presage a broader market decline? Does the
recent bond market decline, which was even sharper than the fall in the NASDAQ
index, mean the rise in financials is over? If the market were algorithmic you
could tell, if you could figure out the algorithm, which is what all those
technicians, strategists, and quants are trying to do.
The market may not be predictable, but it is bettable. As someone once said,
"the race may not always be to the swift, nor the contest to the strong, but
that's the way to bet." In the past, when the market had a first half where the
returns have been as robust as this one, the second half usually has been down.
That outcome thus would not be unusual were it to recur. It would also not be
terribly unnerving, though undoubtedly the press and pundits would do their best
to make it so.
It should not be surprising that we are agnostic about the near-term
direction of the market, believing it not only unpredictable but probably
random. We do believe that the long-term outlook for financial assets is
unusually favorable, and that low inflation, and moderate, persistent growth
will continue to reward the patient shareholder.
Portfolio activity was modest in the quarter. We bought ASARCO, a metals
company trading at under 6x earnings, BANYAN SYSTEMS, which was down sharply due
to earnings disappointments, but which has market leading positions in
enterprise-wide networking products, and STARWOOD LODGING, a hotel Real Estate
Investment Trust with an entrepreneurial young management team. We also added to
our SOMATIX THERAPY holdings via a private placement. Our final purchase was of
OLSEN & ASSOCIATES AG, a Zurich, Switzerland based company involved in research,
development, and marketing of adaptive computation systems, mainly for currency
analysis and forecasting. We believe their work has wide applicability to
financial markets in general.
We would like to thank the shareholders who have written with comments and
who have suggested investment ideas. We very much appreciate your support,
interest, and confidence.
Bill Miller, CFA
July 26, 1995
DJIA 4707.06
4
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
TOTAL RETURN FOR ONE YEAR, FIVE YEARS AND LIFE OF FUND, AS OF JUNE 30, 1995
The returns shown below are based on historical results and are not
intended to indicate future performance. The investment return and
principal value of an investment in the fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Average annual returns tend to smooth out variations in the
fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
The fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees and shareholder servicing expenses are determined
separately for each class and the Navigator Class does not incur Rule
12b-1 distribution fees.
Total returns as of June 30, 1995 were as follows:
<TABLE>
<CAPTION>
Cumulative Average Annual
Total Return Total Return
<S> <C> <C>
Primary Class:
One Year +8.85% +8.85%
Five Years +84.56 +13.04
Life of Class(|) +199.44 +12.24
Navigator Class:
Life of Class(|)(|) +13.18% N/A
</TABLE>
(|) Primary Class inception-December 30, 1985
(|)(|) Navigator Class inception-December 1, 1994
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
Biggest gainers for the 2nd quarter 1995*
<C> <S> <C>
1. Salant Corporation Class B Warrants +100.0%
2. Grupo Mexicano de Desarrollo S.A. ADR
Bonds
8.25% 2-17-01 +65.3%
3. Grupo Financiero Bancomer S.A. de
C.V. ADS +61.0%
4. Grupo Mexicano de Desarrollo S.A. ADR +56.5%
5. InaCom Corp. +51.5%
6. UNR Industries, Inc. +37.2%
7. ALC Communications Corporation +32.2%
8. Piper Jaffray Incorporated +30.1%
9. Pioneer Group, Inc. +29.5%
10. Storage Technology Corporation +28.8%
</TABLE>
<TABLE>
<CAPTION>
Biggest laggers for the 2nd quarter 1995*
<C> <S> <C>
1. Ideon Group Incorporated -48.4%
2. Physician Corporation of America -39.4%
3. Targeted Genetics Corporation -34.0%
4. Johnstown America Industries, Inc. -23.2%
5. Diagnostek, Inc. -21.5%
6. Exabyte Corporation -19.6%
7. Sunrise Medical, Inc. -12.9%
8. Charter Medical Corporation -12.8%
9. Spectrum Holobyte, Inc. -10.9%
10. Consorcio G Grupo Dina S.A. de C.V. ADS -10.7%
</TABLE>
* SECURITIES HELD FOR THE ENTIRE QUARTER.
PORTFOLIO CHANGES
Securities Added
Asarco, Incorporated
Banyan Systems Incorporated
Olsen & Associates AG
Starwood Lodging Trust
Somatix Therapy Corporation Units
Securities Sold
Chemi-Trol Chemical Co.
Lotus Development Corporation
Showbiz Pizza Time, Inc.
Showboat, Inc.
The Samuel Goldwyn Company
5
<PAGE>
PORTFOLIO OF INVESTMENTS
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS -- 87.8%
Advertising -- 3.1%
WPP Group P.L.C. 10,200 $19,793
WPP Group P.L.C. ADR 445 1,669
21,462
Apparel -- 2.0%
Chic By H.I.S, Inc. 955 10,748(A,C)
Salant Corporation 450 1,856(A)
Salant Corporation Class B
Warrants 285 18(A)
The Leslie Fay Companies, Inc. 1,714 696(A,C)
13,318
Automotive -- 0.1%
Consorcio G Grupo Dina S.A. de
C.V. ADS 245 766
Banking -- 9.3%
BankAmerica Corporation 304 15,984
BankAmerica Corporation Warrants 156 5,480(A)
Grupo Financiero Bancomer S.A. de
C.V. ADS 525 3,117
Grupo Financiero Serfin S.A. de
C.V. ADR 914 4,226
Peoples Heritage Financial Group,
Inc. 720 10,800
Shawmut National Corporation 750 23,906
63,513
Broadcast Media -- 1.0%
Graff Pay-Per-View Inc. 450 4,275(A)
Grupo Televisa, S.A. de C.V.
Global ADS 130 2,649
6,924
Computer Services and Systems -- 8.6%
America Online, Inc. 590 25,960(A)
Banyan Systems Incorporated 249 3,419(A)
Exabyte Corporation 439 6,087(A)
InaCom Corp. 785 10,107(A,C)
Spectrum Holobyte, Inc. 625 8,945(A)
Storage Technology Corporation 179 4,418(A)
58,936
Construction -- 0.4%
Grupo Mexicano de Desarrollo
S.A. ADR 540 2,430(A)
Energy -- 1.4%
California Energy Company, Inc. 600 9,825(A)
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Entertainment -- 7.6%
Boomtown Inc. 864 $10,365(A,C)
Circus Circus Enterprises, Inc. 323 11,400(A)
Hollywood Park, Inc. 1,412 18,003(A,C)
Mirage Resorts, Incorporated 400 12,250(A)
52,018
Finance -- 8.8%
Federal National Mortgage
Association 100 9,438
Mego Financial Corporation
Warrants 300 1,965(A)
Pioneer Group, Inc. 750 20,156
Piper Jaffray Incorporated 299 4,519
The Bear Stearns Companies Inc. 386 8,248
United Asset Management
Corporation 450 16,031
60,357
Health Care -- 3.8%
Charter Medical Corporation 975 15,844(A)
Physician Corporation of America 755 10,287(A)
26,131
Insurance -- 7.6%
CMAC Investment Corporation 450 19,519
Enhance Financial Services Group
Inc. 481 9,314
John Alden Financial Corp. 900 15,412
PennCorp Financial Group, Inc. 404 7,478
51,723
Manufacturing -- 1.7%
Danaher Corporation 236 7,139
Johnstown America Industries, Inc. 460 4,773(A)
11,912
Medical Products and
Supplies -- 1.1%
Sunrise Medical, Inc. 250 7,781(A)
Miscellaneous -- 3.5%
Olsen & Associates AG 300 2,605(A,D)
Playtex Products, Inc. 1,187 11,720(A)
Stewart Enterprises, Inc. 285 9,547
23,872
Multi-Industry -- 1.0%
Asarco Incorporated 95 2,882
UNR Industries, Inc. 530 3,909
6,791
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Pharmaceuticals -- 5.1%
Biogen, Inc. 175 $ 7,787(A)
Diagnostek, Inc. 1,125 18,000(A)
Somatix Therapy Corporation 1,515 6,439(A,C)
Somatix Therapy Corporation Units 272 1,000(A,C,D)
Targeted Genetics Corporation 400 1,550(A)
34,776
Real Estate -- 3.4%
Regency Realty Corporation 250 4,250
Resource Mortgage Capital
Corporation 325 6,216
Starwood Lodging Trust 100 2,350(A)
Summit Properties, Inc. 200 3,450
Walden Residential Properties,
Inc. 380 6,982
23,248
Savings and Loan -- 7.6%
California Federal Bank, F.S.B. 900 11,813(A)
Standard Federal Bank 650 21,856
Washington Mutual Incorporated 795 18,633
52,302
Services -- 1.9%
Ideon Group Incorporated 1,300 12,837
Specialty Retail -- 5.1%
Home Shopping Network, Inc. 3,025 25,712(A)
Mac Frugal's Bargains(Bullet)
Close-outs Inc. 535 9,363(A)
35,075
Telecommunications -- 3.7%
ALC Communications Corporation 272 12,261(A)
Telefonos de Mexico S.A. ADR 133 3,925
WorldCom, Inc. 350 9,450(A)
25,636
Total Common Stocks and Equity
Interests
(Identified Cost - $500,725) 601,633
</TABLE>
PREFERRED STOCK -- 0.4%
<TABLE>
<S> <C> <C>
Mego Financial Corporation
Series A 12% Cum.
(Identified Cost - $3,000) 300 3,000(C,D)
</TABLE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C>
CORPORATE BONDS -- 4.2%
Grupo Mexicano de Desarrollo
S.A. ADR
8.25% 2-17-01 $11,000 $ 4,455(B)
Lady Luck Gaming Finance
Corporation
Guaranteed 1st Mortgage Series B
10.50% 3-1-01 10,000 6,800
Harrah's Jazz Company
1st Mortgage Note
14.25% 11-15-01 7,425 7,722
Stratosphere Corporation
Guaranteed 1st Mortgage Note
14.25% 5-15-02 10,000 10,200
Total Corporate Bonds
(Identified Cost - $25,278) 29,177
</TABLE>
SOVEREIGN OBLIGATION -- 2.4%
<TABLE>
<S> <C> <C>
Argentina Par Bonds
5.00%(E) 3-31-23
(Identified Cost - $13,460) 35,000 16,691
<CAPTION>
</TABLE>
REPURCHASE AGREEMENTS -- 3.4%
<TABLE>
<S> <C> <C>
Morgan Stanley & Co.,
Incorporated
6.10% dated 6-30-95, to be
repurchased at $20,578 on
7-5-95 (Collateral: $20,733
Federal National Mortgage
Association Mortgage-backed
securities, 7.0% due 8-1-99 to
3-1-00, value $21,004) 20,561 20,561
State Street Bank and Trust
Company, N.A.
4.75% dated 6-30-95, to be
repurchased at $2,501 on
7-3-95 (Collateral: $2,390
U.S. Treasury Bonds, 7.25% due
5-15-16, value $2,573) 2,500 2,500
Total Repurchase Agreements
(Identified Cost - $23,061) 23,061
Total Investments -- 98.2%
(Identified Cost - $565,524) 673,562
Other Assets Less
Liabilities -- 1.8% 11,999
NET ASSETS -- 100.0% $685,561
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $21.35
NAVIGATOR CLASS $21.49
</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.
7
