Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Accountants
Coopers & Lybrand L.L.P.
Baltimore, MD
This report is not to be distributed unless preceded or
accompanied by a prospectus.
Legg Mason Wood Walker, Incorporated
- ---------------------------------------------
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
[recycled logo] Printed on Recycled Paper
LMF-009
11/96
Report to Shareholders
For the Six Months Ended
September 30, 1996
The
Legg Mason
Special
Investment
Trust, Inc.
Navigator Class
Putting Your Future First
[Legg Mason Logo]
FUNDS
<PAGE>
To Our Shareholders,
The Special Investment Trust's net asset value per share rose 2.7% from
$25.81 to $26.51 in the quarter ended September 30, 1996. That gain compares to
total returns (appreciation plus reinvested dividends) of 1.2% on the Value Line
index of 1700 stocks and 3.1% 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 19.8%, compared to returns of 9.7% and 13.5% on the Value Line
and Standard & Poor's indices.
On a longer-term basis, an investment of $10,000 in the Trust's Navigator
Class from inception in December, 1994, would have grown to $14,792 by September
30, 1996 (assuming reinvestment of dividends and distributions), an average
annual return of 23.8%.
Beginning on the next page, Bill Miller, the Trust's portfolio manager,
comments on the investment outlook.
Sincerely,
/s/ John F. Curley, Jr.
-----------------------
John F. Curley, Jr.
President
November 8, 1996
<PAGE>
Portfolio Manager's Comments
Your fund rose 2.71% in the third quarter. This brings our year to date
return to 19.84%. Our return over the past twelve months is 19.93%. Comparative
data are as follows:
3 months 9 months 1 year
- ---------------------------------------------------------------
Special Investment Trust 2.71% 19.84% 19.93%
Small Company Funds(dagger) 1.76 17.20 18.40
Mid-Cap Funds(dagger) 3.25 14.77 16.72
General Equity Funds(dagger) 2.61 13.73 16.90
S&P 500 3.09 13.49 20.32
Dow Jones Industrial Average 4.64 16.95 25.72
Russell 2000 0.34 10.73 13.13
What these numbers show is that in the third quarter big stocks performed
much better than small and mid-sized companies. The sharp market correction we
saw in July hit smaller companies hard, and they have not recovered as quickly
as the large companies that make up the Dow and the S&P 500. The big stock
indices have recently moved to new highs, while the Russell remains about 5%
below its high.
As you can see, our results compare favorably to the Russell and to the
results of reasonably similar funds over most of the periods listed above. We
believe our portfolio represents excellent long-term value and are optimistic
about the prospects of the companies we hold on your behalf.
With the indices hovering at record round numbers, 6000 on the Dow and 700
on the S&P, the fears that engulfed the market during the correction in July
have become a distant memory. As we indicated in our last letter, we believed
that those fears--which related to incipient wage inflation--were misplaced and
that the Federal Reserve had no need to raise interest rates. When the Fed left
rates unchanged at its August and September meetings, those fears receded and
stocks rallied.
Most economists still appear to expect a rate increase, only now they
expect it after the election. They believe the economy is operating so close to
capacity that the risk of inflation remains high, and that the Fed should raise
rates to insure the economy does not overheat. We continue to disagree. We think
the economy is slowing, and that the risk to stocks is not an overheating
economy and rising inflation, but an economy that weakens unexpectedly. This is
not an outcome we expect, but we believe it more likely than the alternative.
The number and variety of quality companies having earnings difficulties,
such as AT&T, Motorola, Kellogg, Hewlett Packard, Whirlpool, Albertson's (the
list could be expanded but you get the drift), presages, we think, broader
difficulty in achieving profitable growth. Most companies have gone through the
downsizing and restructuring that has been so much in the news. Cost cutting,
coupled with solid economic growth, has resulted in strong profit increases,
high returns on equity, and record cash generation for the S&P 500.
Going forward, however, we think growth for many companies will be much
harder to achieve. It will have to be fueled by new products and volume growth,
not cost cutting and certainly not price increases. The consequences of a low
inflation, low nominal growth environment will become evident as the ability to
further wring out costs becomes more difficult.
Consumer spending makes up two thirds of GDP and is the primary driver of
economic growth. With unemployment low and consumer confidence high, many
economists think the consumer will continue to fuel above trend growth.
Demographics and debt augur otherwise. The number of people turning 25 years old
drops sharply next year and for several years thereafter. This demographic group
is closely correlated with household formations and spending on consumer
durables. Moreover, personal consumption expenditures' growth has outstripped
income growth for most of the past 4 years, leaving the average consumer with
near record debt. Reported bankruptcies are up sharply, and credit card
delinquencies were also rising before declining in the second quarter.
The 76 million baby boomers are now mostly in their 40s and have begun to
reduce their spending and increase their savings for retirement. We think these
factors will lead to subdued consumer spending, sluggish growth, and increasing
earnings difficulties over the next year or so. We do not expect an end to the
expansion, just a deceleration from above trend to below trend growth.
(dagger)As measured by Lipper Analytical Services, Inc.
2
<PAGE>
Earnings have been the elan vital of this bull market since the lows in
October 1990. Whenever earnings have flagged, interest rates have
dropped, simultaneously providing valuation support to the market and
raising expectations about future earnings. There is still considerable room
for short rates to decline if the economy begins to sag, and some room for
long rates to come down. But the bulk of the interest rate-driven moves we
have periodically experienced since the secular peak in rates in 1981 have about
run their course.
The slow growth, low inflation environment of the past 6 years has been
accompanied by a little noticed, but extremely important trend: decline in the
volatility of most economic data. Volatility is important because it is
associated with risk. Many academics believe that it is the same thing as risk,
at least insofar as stock prices are concerned. (Risk is the subject of Peter
Bernstein's wonderful new book, Against the Gods: The Remarkable Story of Risk.)
The generation of investors who entered the markets after the late 1960s
grew up with volatility. Interest rates soared then crashed, inflation went from
3% to double digits and back to 3%. Stocks collapsed in the '70s, soared in the
'80s, crashed in '87 and now have moved back to record highs. Farmland prices,
oil, Latin debt and currencies, all have exhibited high volatility over the
years. That began to change this decade. One of the reasons we went 6 years
without a 10% correction in stocks was because the economy grew steadily with
low volatility. Stock price volatility in this decade has been among the lowest
on record.
Recent U.S. inflation volatility has been only one-quarter of that which
existed in the late 1980s and one-third that of the early 1990s. The volatility
of inflation is now at 30 year lows. Changes in commodity price volatility have
led to changes in inflation volatility consistently since 1971. Commodity price
volatility is at 27 year lows and remains in a downward trend. Inflation
volatility is thus not likely to reverse soon.
The low volatility of inflation has led to record low volatility in
short-term interest rates. We think it will soon extend to long rates, much to
the consternation of bond traders, for whom volatility provides a livelihood.
Most importantly for equity investors, the volatility of economic growth
has declined. For all the ink spilled about its direction and growth rate, the
U.S. economy has had only 8 months of recession since 1982. This is in sharp
contrast to the familiar boom and bust pattern usually coinciding with the
Presidential election cycle. The economy now appears to be on a path of
moderate, sustained growth. This has important implications for stock selection.
Many investors think about investing in relation to the economic cycle.
Retailers, apparel, and autos are so-called early cycle stocks, while paper,
chemicals, and steels are late cycle companies. Food, beverages, and drug stocks
are defensive names; you are supposed to own them when the economy is on the
brink of recession. If the economy is becoming much less cyclical, as we
believe, all this rotation from one stock group to another becomes much less
effective, even counterproductive.
We think the move to low economic volatility will be with us for some time.
Careful attention to valuation and stock selection will be the keys to above
average results.
With only 8 months of recession in 15 years, unemployment down, inflation
at 30 year lows, and the deficit half what it was 4 years ago, the population
should be basking in prosperity's glow. Growth has been the exception throughout
most of recorded human history, as the Nobel laureate Douglas North has pointed
out. One would think people would notice when the economy has been performing
unusually well. But not so.
In a fine article called "A Nation that Poor Mouths Its Own Boom," the
Washington Post (October 13, 1996) reported the following:
"The average American thinks the number of jobless is four times higher
than it actually is. Nearly 1 in 4 believes the current unemployment rate tops
25%--the proportion of Americans . . . out of work at the worst of the Great
Depression. They believe prices are rising four times faster than they really
are and that the federal budget
3
<PAGE>
deficit is higher, not lower, than it was five years ago. And 7 in 10 say
there are fewer jobs than there were five years ago."
It may be that this cognitive dissonance accounts for the pessimism that
habitually surrounds the stock market, at least among the pundits quoted so
often in the press. If people really have the beliefs the Post describes, they
must surely be surprised when the market does well. They would probably believe
that the market is significantly overvalued and that a bear market is imminent.
Bear markets happen when things go wrong in the economy: profits decline,
inflation increases, interest rates rise, etc. If these things happen, stocks
will undoubtedly come under pressure. There is little evidence that the economy
is on other than a moderate growth trajectory. If that is so, then stocks should
continue to provide acceptable returns.
We think, though, that after nearly two years of dramatically above trend
results, stock returns will moderate over the next year or so. Profits look to
be up in the single digits next year and we think it likely stock returns will
track profits growth. Reasonable expectations for the market are for returns of
8-10%, including dividends. If this is right, we would hope to do somewhat
better, since the companies in our portfolio trade at large discounts to the
market, while having what we believe to be above average profit growth
potential.
During the quarter, we continued to focus the portfolio by reducing our
number of holdings. CalFed was the subject of a takeover offer, Pioneer Group
appeared fairly valued, and we took profits in our Argentine bond position. The
other issues sold were smaller positions. We bought three stocks: Calpine, an
independent power company, Cidco, which makes telephone equipment, and Madge
Networks, a high technology supplier of switches and other internet working
products. The latter two companies stock prices had fallen sharply this year due
to earnings disappointments. The heavy selling by momentum investors provided us
with an opportunity to buy shares at bargain prices. Calpine was a new issue
that was priced at a discount to one of our other holdings, Calenergy.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
November 4, 1996
DJIA 6041.68
4
<PAGE>
Performance Information
Legg Mason Special Investment Trust, Inc.
Total Return for One, Five , Ten Years and Life of Fund,
as of September 30, 1996
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, 1996 were as follows:
Cumulative Average Annual
Total Return Total Return
- -----------------------------------------------------------------
Primary Class:
One Year +18.66% +18.66%
Five Years +89.24 +13.61
Ten Years +272.08 +14.04
Life of Class(dagger) +286.11 +13.38
Navigator Class:
One Year +19.93% +19.93%
Life of Class(dagger)(dagger) +47.92 +23.77
- ---------------
(dagger)Primary Class inception--December 30, 1985
(dagger)(dagger)Navigator Class inception--December 1, 1994
5
<PAGE>
Legg Mason Special Investment Trust, Inc.
Selected Portfolio Performance
Biggest gainers for the 3rd quarter 1996*
- ------------------------------------------------------------
1. InaCom Corp. +82.7%
2. Western Digital Corporation +53.6%
3. Gateway 2000, Inc. +40.8%
4. Mac Frugal's Bargains (bullet) Close-outs Inc. +33.1%
5. Conseco Inc.(A) +26.3%
6. Calenergy, Inc. +25.0%
7. Washington Mutual, Inc. +24.7%
8. Standard Federal Bancorporation +18.8%
9. Enhance Financial Services Group Inc. +17.9%
10. CUC International, Inc.(B) +16.5%
Biggest laggers for the 3rd quarter 1996*
- ------------------------------------------------------------
1. Somatix Therapy Corporation Warrants -89.1%
2. Somatix Therapy Corporation -39.5%
3. Players International, Inc. -21.8%
4. Value Health, Inc. -20.6%
5. Hollywood Park, Inc. -19.5%
6. Cott Corporation Quebec -19.3%
7. America Online, Inc. -18.6%
8. Sunrise Medical, Inc. -17.5%
9. Boomtown Inc. -15.4%
10. Salant Corporation -15.1%
* Securities held for the entire quarter.
(A) Formerly Life Partners Group, Inc.
(B) Formerly Ideon Group Incorporated
Portfolio Changes
Securities Added
- -----------------------------------------------------------
Calpine Corporation
Cidco, Inc.
Madge Networks N.V.
Securities Sold
- -----------------------------------------------------------
Cal Fed Bancorp Inc.
Leucadia National Corporation
Pioneer Group, Inc.
Republic of Argentina Par Bonds
5.25% 3-31-23
Salant Corporation Class B Warrants
Stratosphere Corporation
Targeted Genetics Corporation
Walden Residential Properties, Inc.
World Color Press, Inc.
6
<PAGE>
Portfolio of Investments
Legg Mason Special Investment Trust, Inc.
September 30, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
- ---------------------------------------------------------
Common Stocks and Equity Interests -- 96.9%
Advertising -- 4.4%
WPP Group P.L.C. 10,200 $ 37,438
WPP Group P.L.C. ADR 89 3,260
--------
40,698
--------
Apparel -- 0.2%
Salant Corporation 450 1,406(A)
--------
Banking -- 2.6%
Grupo Financiero Serfin S.A.
de C.V. ADR 1,363 6,472(A)
Peoples Heritage Financial
Group, Inc. 750 17,531
--------
24,003
--------
Biotechnology -- 0.9%
Somatix Therapy Corporation 1,980 8,539(A,B)
Somatix Therapy Corporation Warrants 152 48(A,B)
--------
8,587
--------
Broadcast Media -- 0.7%
Argyle Television, Inc. 225 6,328(A)
--------
Computer Services and Systems-- 22.3%
America Online, Inc. 1,350 48,094(A)
Bell & Howell Company 303 9,611(A)
Gateway 2000, Inc. 500 23,937(A)
InaCom Corp. 805 27,571(A,B)
Intergraph Corporation 955 10,505(A)
Madge Networks N.V. 1,925 24,303(A)
Storage Technology Corporation 900 34,088(A)
Western Digital Corporation 700 28,088(A)
--------
206,197
--------
Energy -- 2.9 %
Calenergy, Inc. 750 23,906(A)
Calpine Corporation 165 2,640(A)
--------
26,546
--------
Entertainment -- 8.5%
Boomtown Inc. 900 3,712(A,B)
Circus Circus Enterprises, Inc. 825 29,184(A)
Hollywood Park, Inc. 1,775 13,756(A,B)
Mirage Resorts, Incorporated 575 14,037(A)
Players International, Inc. 2,400 18,300(A,B)
--------
78,989
--------
(Amounts in Thousands) Shares Value
- ---------------------------------------------------------
Finance -- 6.1%
Federal National Mortgage Association 375 $ 13,078
Mego Financial Corporation Warrants 300 2,190(A,B,C)
The Bear Stearns Companies Inc. 525 12,206
United Asset Management Corporation 1,238 29,248
--------
56,722
--------
Food, Beverage and Tobacco -- 3.3%
Cott Corporation Quebec 4,100 31,006(B)
--------
Health Care -- 7.7%
Magellan Health Services, Inc. 950 19,713(A)
Physician Corporation of America 1,520 18,430(A)
Sunrise Medical, Inc. 872 13,848(A)
Value Health, Inc. 1,041 19,524(A)
--------
71,515
--------
Insurance -- 14.1%
CMAC Investment Corporation 400 25,400
Conseco Inc. 517 25,484
Enhance Financial Services Group Inc. 550 18,150
John Alden Financial Corp. 975 20,109
Orion Capital Corporation 590 30,459
PennCorp Financial Group, Inc. 354 11,423
--------
131,025
--------
Manufacturing -- 2.1%
Briggs & Stratton Corporation 227 10,073
Danaher Corporation 236 9,764
--------
19,837
--------
Miscellaneous -- 1.2%
Olsen & Associates AG 300 2,390(A,C)
Stewart Enterprises, Inc. 253 8,522
--------
10,912
--------
7
<PAGE>
Portfolio of Investments--Continued
Legg Mason Special Investment Trust, Inc.
(Amounts in Thousands) Shares Value
- ---------------------------------------------------------
Real Estate -- 1.8%
Resource Mortgage Capital Corporation 684 $ 16,250
--------
Savings and Loan -- 6.4%
Standard Federal Bancorporation 660 30,200
Washington Mutual, Inc. 770 28,683
--------
58,883
--------
Specialized Services -- 3.1%
CUC International, Inc. 722 28,774(A)
--------
Specialty Retail -- 7.2%
Home Shopping Network, Inc. 3,108 32,240(A)
Mac Frugal's Bargains (bullet)
Close-outs Inc. 1,453 34,332(A,B)
--------
66,572
--------
Telecommunications -- 1.4%
Cidco, Inc. 639 13,253(A)
--------
Total Common Stocks and Equity
Interests
(Identified Cost-- $628,934) 897,503
- ---------------------------------------------------------
Preferred Shares -- 0.2%
Mego Financial Corporation
Series A 12% Cum.
(Identified Cost -- $2,000) 200 2,000(B,C)
- ---------------------------------------------------------
Principal
(Amounts in Thousands) Amount Value
- ---------------------------------------------------------
Repurchase Agreement -- 2.8%
Prudential Securities, Inc.
5.75% dated 9-30-96, to be
repurchased at $26,072 on
10-1-96 (Collateral: $35,000
Government National
Mortgage Association
Mortgage-backed securities,
7.5% due 1-15-23,
value $26,991)
(Identified Cost-- $26,068) $26,068 $ 26,068
- ---------------------------------------------------------
Total Investments -- 99.9%
(Identified Cost-- $657,002) $925,571
========
(A) Non-income producing
(B) Affiliated Companies -- As defined in the Investment Company Act of 1940,
an "Affiliated Company" represents Fund ownership of at least 5% of the
outstanding voting securities of the issuer.
(C) Private placement
See notes to financial statements.
8
<PAGE>
Statement of Assets and Liabilities
Legg Mason Special Investment Trust, Inc.
September 30, 1996 (Unaudited)
(Amounts in Thousands)
- -------------------------------------------------------------------------------
Assets:
Investments at value:
Affiliated companies (Identified Cost -- $135,743) $141,455
Other securities (Identified Cost -- $521,259) 784,116
--------
$925,571
Receivable for:
Investments sold 185
Fund shares sold 2,769
Dividends and interest 991
Other assets 39
--------
Total assets 929,555
Liabilities:
Payable for:
Investments purchased 848
Fund shares repurchased 843
Accrued expenses 348
Due to adviser and distributor 1,244
--------
Total liabilities 3,283
- -------------------------------------------------------------------------------
Net assets $926,272
========
Analysis of Net Assets:
Accumulated paid-in capital applicable to:
33,797 Primary shares oustanding $613,282
1,574 Navigator shares outstanding 32,157
Accumulated net operating loss (3,273)
Undistributed net realized gain on investments 15,537
Unrealized appreciation of investments 268,569
- -------------------------------------------------------------------------------
Net assets $926,272
========
Net asset value per share:
Primary Class $ 26.17
========
Navigator Class $ 26.51
========
See notes to financial statements.
9
<PAGE>
Statement of Operations
Legg Mason Special Investment Trust, Inc.
For the Six Months Ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
(Amounts in Thousands)
- ----------------------------------------------------------------------------------------------------
<S><C>
Investment Income:
Dividends:
Affiliated companies $ 243
Other securities (net of foreign taxes withheld of $28) 3,581
Interest 1,284
-------
Total investment income $ 5,108
Expenses:
Investment advisory fee 3,437
Distribution and service fees 4,222
Transfer agent and shareholder servicing expense 390
Custodian fee 119
Reports to shareholders 108
Legal and audit fees 52
Registration fees 50
Directors' fees 5
Other expenses 22
-------
8,405
Less expenses reimbursed (24)
-------
Total expenses, net of reimbursement 8,381
-------
Net Operating Loss (3,273)
Net Realized and Unrealized Gain on Investments:
Realized gain on investments 16,245
Increase in unrealized appreciation of investments 55,501
-------
Net Realized and Unrealized Gain on Investments 71,746
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations $68,473
=======
</TABLE>
See notes to financial statements.
10
<PAGE>
Statement of Changes in Net Assets
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
(Amounts in Thousands) September 30, 1996 March 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S><C>
Change in Net Assets:
Net investment income (loss) $ (3,273) $ 123
Net realized gain on investments 16,245 42,151
Increase in unrealized appreciation of investments 55,501 141,013
-------- --------
Increase in net assets resulting from operations 68,473 183,287
Distributions to shareholders from:
Net investment income:
Primary Class -- (96)
Navigator Class -- (27)
Net realized gain on investments:
Primary Class (30,162) (14,508)
Navigator Class (1,330) (832)
Increase in net assets from Fund share transactions:
Primary Class 57,234 19,357
Navigator Class 4,086 2,574
-------- --------
Increase in net assets 98,301 189,755
Net Assets:
Beginning of period 827,971 638,216
- ---------------------------------------------------------------------------------------------------------------------------
End of period (net of accumulated net operating
losses of $3,273 and $0, respectively) $926,272 $827,971
======== ========
</TABLE>
See notes to financial statements.
11
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 Years
For the Six For the Years Ended March 31, For the Six Ended March 31,
Months Ended ------------------------------------------------ Months Ended ---------------
Sept. 30, 1996 1996 1995 1994 1993 1992 Sept. 30, 1996 1996 1995(A)
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S><C>
Per Share Operating Performance:
Net asset value, beginning
of period $25.09 $19.96 $21.56 $17.91 $17.00 $14.59 $25.26 $20.03 $19.11
---------------------------------------------------------------------------------------------
Net investment income (loss) (0.10) -- (0.06) (0.11) 0.03 0.12 0.04 0.09 0.07
Net realized and unrealized
gain (loss) on investments 2.11 5.60 (1.31) 3.93 1.66 2.83 2.14 5.78 0.85
---------------------------------------------------------------------------------------------
Total from investment
operations 2.01 5.60 (1.37) 3.82 1.69 2.95 2.18 5.87 0.92
---------------------------------------------------------------------------------------------
Distributions to share-
holders from:
Net investment income -- -- -- (0.03) -- (0.14) -- (0.17) --
Net realized gain on
investments (0.93) (0.47) (0.23) (0.14) (0.78) (0.40) (0.93) (0.47) --
---------------------------------------------------------------------------------------------
Total distributions (0.93) (0.47) (0.23) (0.17) (0.78) (0.54) (0.93) (0.64) --
---------------------------------------------------------------------------------------------
Net asset value, end of
period $26.17 $25.09 $19.96 $21.56 $17.91 $17.00 $26.51 $25.26 $20.03
=============================================================================================
Total return 8.05%(B) 28.47% (6.37)% 21.35% 10.50% 20.46% 8.69%(B) 29.85% 4.81%(B)
---------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses 1.95%(C) 1.96% 1.93% 1.94% 2.00% 2.10% 0.88%(C) 0.88% 0.90%(C)
Net investment
income (loss) (0.8)%(C) --% (0.2)% (0.6)% 0.2% 0.8% 0.3%(C) 1.0% 1.0%(C)
Portfolio turnover rate 24.6%(C) 35.6% 27.5% 16.7% 32.5% 56.9% 24.6%(C) 35.6% 27.5%
Average commission
rate paidD $0.0509 -- -- -- -- -- $0.0509 -- --
Net assets, end of period
(in thousands) $884,551 $792,240 $612,093 $565,486 $322,572 $201,772 $41,721 $35,731 $26,123
</TABLE>
(A) For the period December 1, 1994 (commencement of Navigator Class) to
March 31, 1995.
(B) Not annualized
(C) Annualized
(D) Pursuant to SEC regulations effective for fiscal years beginning after
September 1, 1995, this is the average commission rate paid on securities
purchased and sold by the Fund.
See notes to financial statements.
12
<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 Distributions to Shareholders
Net investment income for dividend purposes consists of dividends and
interest earned, less expenses. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Net capital gain distributions
are declared and paid after the end of the tax year in which the gains are
realized.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Investment Transactions:
Investment transactions for the six months ended September 30, 1996
(excluding short-term securities) were as follows:
Purchases $130,852
Proceeds from sales 105,532
At September 30, 1996, the cost of securities for federal income tax
purposes was $657,327. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$322,474 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $54,230.
13
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Special Investment Trust, Inc.
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3. Fund Share Transactions:
At September 30, 1996, there were 100,000 shares authorized at $.001
par value for all classes of the Fund. Transactions in Fund shares were as
follows:
For the For the
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
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Primary Class Shares Amount Shares Amount
- -------------------------------------------------------------------
Sold 13,427 $ 337,274 20,227 $ 456,482
Reinvestment of
distributions 1,156 29,833 666 14,447
Repurchased (12,366) (309,873) (19,985) (451,572)
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Net increase 2,217 $ 57,234 908 $ 19,357
===================================================================
For the For the
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
- -------------------------------------------------------------------
Navigator Class Shares Amount Shares Amount
- -------------------------------------------------------------------
Sold 225 $ 5,722 313 $ 7,199
Reinvestment of
distributions 51 1,328 39 859
Repurchased (116) (2,964) (242) (5,484)
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Net increase 160 $ 4,086 110 $ 2,574
===================================================================
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 $112 by the transfer agent for the six months ended September 30,
1996. No brokerage commissions were paid to Legg Mason or its affiliates
during the six months ended September 30, 1996.
In November 1995, the Fund, along with certain other Legg Mason
Funds, entered into a $75 million line of credit ("Credit Agreement") to
be utilized as an emergency source of cash in the event of unanticipated,
large redemption requests by shareholders. Pursuant to the Credit
Agreement, each participating Fund is liable only for principal and
interest payments related to borrowings made by that Fund. Borrowings
under the line of credit bear interest at prevailing short-term interest
rates. For the six months ended September 30, 1996, the Fund had no
borrowings under the line of credit.
