<PAGE>
As filed with the Securities and Exchange Commission on August 31, 1995.
1933 Act File No. 33-56672
1940 Act File No. 811-7418
--------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 7 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 9
LEGG MASON GLOBAL TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart
Baltimore, Maryland 21202 1800 M Street, N.W.
(Name and Address of South Lobby - Ninth Floor
Agent for Service) Washington, D.C. 20036-5891
It is proposed that this filing will become effective:
[___] immediately upon filing pursuant to Rule 485(b)
[___] on ________________________, 1995 pursuant to Rule 485(b)
[_X_ ] 60 days after filing pursuant to Rule 485(a)(i)
[___] on __________________ , 1995 pursuant to Rule 485(a)(i)
[___] 75 days after filing pursuant to Rule 485(a)(ii)
[___] on _____________, 1995 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[___] This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and filed the notice required by such Rule
for its most recent fiscal year on February 24, 1995.
Legg Mason Global Trust, Inc.
<PAGE>
Contents of Registration Statement
This registration statement consists of the following papers and
documents.
Cover Sheet
Table of Contents
Cross Reference Sheet
Legg Mason Global Government Trust -- Primary Shares
Legg Mason Global Equity Trust -- Primary Shares
Part A - Prospectus
Navigator Global Government Trust
Navigator Global Equity Trust
Part A - Prospectus
Legg Mason Global Government Trust
Legg Mason Global Equity Trust
(Primary Shares and Navigator Shares)
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Global Trust, Inc.
Legg Mason Global Government Trust - Primary Shares
Legg Mason Global Equity Trust - Primary Shares
Form N-1A Cross Reference Sheet
Part A. Item No. Prospectus Caption
1 Cover Page
2 Prospectus Highlights;
Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Description of the
Corporation and Its Shares
5 Expenses;
The Funds' Management and Investment Adviser;
The Funds' Distributor;
The Funds' Custodian and Transfer Agent
6 Prospectus Highlights;
Description of the Corporation and
Its Shares;
Dividends and Other Distributions;
Shareholder Services;
Taxes
7 How You Can Invest in the Funds;
How Your Shareholder Account is
Maintained;
How Net Asset Value is Determined;
The Funds' Distributor
8 How You Can Redeem Your Primary Shares
9 Not Applicable
<PAGE>
Legg Mason Global Trust, Inc.
Navigator Global Government Trust
Navigator Global Equity Trust
Form N-1A Cross Reference Sheet
Part A. Item No. Prospectus Caption
1 Cover Page
2 Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Description of the
Corporation and Its Shares
5 Expenses;
The Funds' Management and Investment Adviser;
The Funds' Distributor;
The Funds' Custodian and Transfer Agent
6 Description of the Corporation and
Its Shares;
Dividends and Other Distributions;
Shareholder Services;
Taxes
7 How to Purchase and Redeem Shares;
How Your Shareholder Account is
Maintained;
How Net Asset Value is Determined;
The Funds' Distributor
8 How to Purchase and Redeem Shares
9 Not Applicable
<PAGE>
Legg Mason Global Trust, Inc.
Legg Mason Global Government Trust
Legg Mason Global Equity Trust
(Primary Shares and Navigator Shares)
Form N-1A Cross Reference Sheet
Statement of Additional
Part B. Item No. Information Caption
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About
Investment Limitations and Policies;
Portfolio Transactions and Brokerage
14 The Corporation's Directors and Officers
15 The Corporation's Directors and Officers
16 The Funds' Investment Adviser/Manager;
Sub-Advisory Agreement;
The Funds' Distributor;
The Corporation's Independent Accountants;
The Funds' Custodian and
Transfer and Dividend-Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Fund Shares;
Additional Purchase and Redemption Information
20 Additional Tax Information;
Tax-Deferred Retirement Plans
21 The Funds' Distributor;
Portfolio Transactions and Brokerage
22 Performance Information
23 Financial Statements
<PAGE>
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 5
Performance Information 7
Investment Objectives and Policies 8
How You Can Invest in the Funds 20
How Your Shareholder Account is
Maintained 21
How You Can Redeem Your Primary Shares 22
How Net Asset Value is Determined 23
Dividends and Other Distributions 23
Taxes 24
Shareholder Services 25
The Funds' Management and Investment Advisers 26
The Funds' Distributor 28
The Funds' Custodian and Transfer Agent 28
Description of the Corporation and its
Shares 28
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY EITHER FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY EITHER FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
(recycle logo) PRINTED ON RECYCLED PAPER
LMF-041
LEGG MASON
GLOBAL
FUNDS
GLOBAL GOVERNMENT TRUST
GLOBAL EQUITY TRUST
PRIMARY SHARES
PUTTING YOUR FUTURE FIRST
PROSPECTUS
OCTOBER , 1995
(Legg Mason logo)
<PAGE>
LEGG MASON GLOBAL FUNDS -- PRIMARY SHARES
LEGG MASON GLOBAL TRUST , INC.:
LEGG MASON GLOBAL GOVERNMENT TRUST
LEGG MASON GLOBAL EQUITY TRUST
The Legg Mason Global Trust, Inc. ("Corporation") is an open-end management
investment company which currently offers two series: The Legg Mason Global
Government Trust ("Global Government") and The Legg Mason Global Equity Trust
("Global Equity") (each separately referred to as a "Fund" and collectively
referred to as the "Funds"). Global Government is a bond fund and Global Equity
is an equity fund.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated October [ ], 1995 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by reference. The Statement of Additional Information is
available without charge upon request from the Funds' distributor, Legg Mason
Wood Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
GLOBAL EQUITY MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN THE SECURITIES OF
COMPANIES LOCATED IN DEVELOPING COUNTRIES, INCLUDING COUNTRIES OR REGIONS WITH
RELATIVELY LOW GROSS NATIONAL PRODUCT PER CAPITA COMPARED TO THE WORLD'S MAJOR
ECONOMIES, AND IN COUNTRIES OR REGIONS WITH THE POTENTIAL FOR RAPID BUT UNSTABLE
ECONOMIC GROWTH (COLLECTIVELY, "EMERGING MARKETS"). BECAUSE OF THE RISKS
ASSOCIATED WITH COMMON STOCK INVESTMENTS, THE FUND IS INTENDED TO BE A LONG-TERM
INVESTMENT VEHICLE AND IS NOT DESIGNED TO PROVIDE INVESTORS WITH A MEANS OF
SPECULATING ON SHORT-TERM STOCK MARKET MOVEMENTS. INVESTORS SHOULD BE ABLE TO
TOLERATE SUDDEN, SOMETIMES SUBSTANTIAL FLUCTUATIONS IN THE VALUE OF THEIR
INVESTMENT.
INVESTORS SHOULD BE COGNIZANT OF THE UNIQUE RISKS OF INTERNATIONAL
INVESTING, INCLUDING EXPOSURE TO CURRENCY FLUCTUATIONS. BECAUSE OF THESE RISKS,
AN INVESTMENT IN EITHER FUND SHOULD NOT BE CONSIDERED A COMPLETE INVESTMENT
PROGRAM. BECAUSE OF THE SPECIAL RISKS ASSOCIATED WITH EMERGING MARKETS, AN
INVESTMENT IN EITHER FUND ALSO SHOULD BE CONSIDERED SPECULATIVE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS
October [ ], 1995
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
GLOBAL GOVERNMENT is a non-diversified, professionally managed
portfolio seeking capital appreciation and current income in order to
achieve an attractive total return consistent with prudent investment
risk. In attempting to achieve the Fund's objective, the Fund's investment
adviser, Legg Mason Fund Adviser, Inc. ("LMFA"), normally invests at least
75% of the Fund's total assets in debt securities issued or guaranteed by
foreign governments, the U.S. Government, their agencies,
instrumentalities and political subdivisions. At least 75% of the Fund's
total assets normally will be invested in investment grade debt securities
of foreign or domestic corporations, governments or other issuers, certain
money market instruments, and repurchase agreements collateralized by such
securities.
The value of the debt instruments held by the Fund, and thus the net
asset value of Fund shares, generally fluctuates inversely with movements
in market interest rates. The prices of longer-term securities generally
fluctuate more than those of shorter-term securities. As a non-diversified
series, the Fund may be subject to greater risk with respect to its
portfolio securities than an investment company that has a broader range
of investments.
The Fund may invest up to 25% of its assets in debt securities rated
below investment grade, whose credit quality is generally considered the
equivalent of U.S. corporate debt securities commonly known as "junk
bonds." Such securities are considered predominantly speculative and may
involve a substantial risk of default. The Fund may also invest in loans
and loan participations, and may use interest rate, currency and index
swaps, caps, collars and floors, all of which involve certain risks and
costs. See "Investment Techniques and Risks" and "Capital Appreciation and
Risk" in "Investment Objectives and Policies," at pages [ ].
GLOBAL EQUITY is a diversified, professionally managed portfolio
seeking maximum long-term total return. In attempting to achieve the
Fund's objective, the Fund's investment adviser, Batterymarch Financial
Management, Inc. ("Batterymarch"), normally invests the Fund's assets in
common stocks of companies located anywhere in the world, including the
United States. The Fund may invest up to 35% of its total assets in the
securities of companies located in developing countries, including
countries or regions with relatively low gross national product per capita
compared to the world's major economies, and in countries or regions with
the potential for rapid but unstable economic growth. Because of the
special risks associated with emerging markets, an investment in the Fund
should be considered speculative.
Global Equity is intended for investors who are seeking maximum
long-term total return. Because of the risks associated with common stock
investments, the Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of speculating on
short-term stock market movements. Investors should be able to tolerate
sudden, sometimes substantial fluctuations in the value of their
investment.The value of the equity and other instruments held by the Fund,
and thus the net asset value of Fund shares, is subject to market risk.
See "Investment Techniques and Risks" in "Investment Objectives and
Policies," at pages [ ].
Each Fund's participation in hedging and option income strategies also
involves certain investment risks and transaction costs. Investors also
should be cognizant of the unique risks of international investing,
including exposure to currency fluctuations. Because of these risks, each
Fund should not be considered a complete investment program.
There can be no assurance that either Fund will achieve its objective.
See "Investment Objectives and Policies," page [ ]. Changes in economic
conditions in, or governmental policies of, foreign nations will have a
significant impact on the performance of the Funds. Foreign investment
involves a possibility of expropriation, nationalization, confiscatory
taxation, limitations on the use or removal of funds or other assets of a
Fund, the withholding of tax on interest or dividends, and
2
<PAGE>
restrictions on the ownership of securities by foreign entities such as
the Funds. Fluctuations in the value of foreign currencies relative to the
U.S. dollar will affect the value of Fund holdings denominated in such
currencies. The risks of foreign investment are greater for investments in
emerging markets.
Global Government and Global Equity each offers two classes of shares
-- Primary Class ("Primary Shares") and Navigator Class ("Navigator
Shares"). Primary Shares offered in this Prospectus are available to all
investors except certain institutions (see page 5). No initial sales
charge is payable on purchases, and no redemption charge is payable on
sales of the Funds' shares. Each Fund pays management fees to its
respective adviser, and distribution fees with respect to Primary Shares
to its distributor, Legg Mason, as described on pages [ ] of this
Prospectus.
DISTRIBUTOR :
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER :
Legg Mason Fund Adviser, Inc. (for Global Government)
Batterymarch Financial Management, Inc. (for Global Equity)
INITIAL PURCHASE:
$1,000 minimum, generally.
SUBSEQUENT PURCHASES:
$100 minimum, generally.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. See "How You Can
Invest in the Funds," page [ ].
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page [ ].
DIVIDENDS:
Declared and paid monthly for Global Government. Declared and paid
quarterly for Global Equity. See "Dividends and Other Distributions," page
[ ]. All dividends and other distributions are automatically reinvested
in Fund shares unless cash payments are requested.
3
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor in Primary Shares will bear
directly or indirectly. The expenses and fees set forth in the table are based
on average net assets and annual Fund operating expenses related to Primary
Shares of Global Government for the year ended December 31, 1994. For Global
Equity, the expenses and fees are based on estimated Fund operating expenses for
the current fiscal year, adjusted for current expense and fee waiver levels.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND
<TABLE>
<S> <C>
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees None
</TABLE>
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
GLOBAL GLOBAL
GOVERNMENT EQUITY
<S> <C> <C>
Management fees 0.27%(A) 0.60%(B)
12b-1 fees 0.75% 1.00%
Other expenses 0.32% 0.65%(C)
<CAPTION>
<S> <C> <C>
Total operating expenses
(after fee waivers) 1.34%(A) 2.25%(B)
<CAPTION>
</TABLE>
(A) Pursuant to a voluntary expense limitation, LMFA and Legg Mason have agreed
to waive the management and 12b-1 fees and assume certain other expenses to
the extent necessary to limit total operating expenses attributable to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) to 1.90% of average daily net assets annually until December 31,
1995. In the absence of such waivers, the expected management fee, 12b-1
fee, other expenses and total operating expenses would be 0.75%, 0.75%,
0.32% and 1.82% of average net assets, respectively.
(B) Pursuant to a voluntary expense limitation, Batterymarch, LMFA and Legg
Mason have agreed to waive the management and 12b-1 fees and assume certain
other expenses to the extent necessary to limit total operating expenses
attributable to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) to 2.25% of average daily net assets annually until
December 31, 1995. In the absence of such waivers, the expected management
fee, 12b-1 fee, other expenses and total operating expenses would be 0.75%,
1.00%, 0.65% and 2.40% of average net assets, respectively.
(C) Other expenses are based on estimated amounts for the current fiscal year.
EXAMPLE OF EFFECT OF FUND EXPENSES
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1) a 5%
annual rate of return and (2) full redemption at the end of each time period. As
noted in the prior table, the Funds charge no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Global Government $ 14 $42 $73 $161
Global Equity $ 23 $70 N/A N/A
</TABLE>
This example assumes that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same over the time periods shown and that all
dividends and other distributions are reinvested. If the waivers are not
extended beyond December 31, 1995, the expense figures in the example will be
higher.
The above tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE ASSUMED
5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT, THE PROJECTED
OR ACTUAL PERFORMANCE OF PRIMARY SHARES OF THE FUNDS. THE ABOVE TABLES AND
EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The actual expenses
attributable to Primary Shares will depend upon, among other things, the level
of average net assets, the levels of sales and redemptions of shares, the extent
to which LMFA (and/or Batterymarch) and Legg Mason waive their fees and
reimburse all or a portion of each Fund's expenses and the extent to which
Primary Shares incur variable expenses, such as transfer agency costs.
Because each Fund pays a 12b-1 fee with respect to Primary Shares, long-term
shareholders may pay more in distribution expenses than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"). For further information concerning Fund
expenses, see "The Funds' Management and Investment Advisers," page [ ].
4
<PAGE>
FINANCIAL HIGHLIGHTS
Effective October [ ], 1995, Global Government and Global Equity
commenced the sale of Navigator Shares. Navigator Shares are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they
act in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust Company exercises discretionary investment
management responsibility, to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, and to
The Legg Mason Profit Sharing Plan and Trust. The information for Primary
Shares reflects the 12b-1 fees paid by that Class.
The year-end financial information that follows has been derived from
each Fund's financial statements. Global Government's financial statements
for the year ended December 31, 1994 and the report of Coopers & Lybrand
L.L.P. thereon are included in that Fund's annual report and are
incorporated by reference into the Statement of Additional Information. The
annual report for each Fund is available to shareholders without charge by
calling your Legg Mason or affiliated investment executive or Legg Mason's
Funds Marketing Department at 800-822-5544. Information shown for the
period ended June 30, 1995 has not been audited.
GLOBAL GOVERNMENT
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended December 31, 1995(B) 1994 1993(A)
(Unaudited)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.54 $10.27 $10.00
Net investment income(C) 0.31 0.57 0.36
Net realized and unrealized gain (loss) on investments, forward
currency contracts, options and currency translations 1.11 (0.71) 0.31
Total from investment operations 1.42 (0.14) 0.67
Distributions to shareholders:
Net investment income (0.27) (0.59) (0.36)
Net realized gain on investments -- -- (0.04)
Net asset value, end of period $10.69 $ 9.54 $10.27
Total return(D) 16.4% (1.4)% 6.8%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.8%(C,E) 1.3%(C) 0.3%(C,E)
Net investment income 6.2%(C,E) 5.7%(C) 5.4%(C,E)
Portfolio turnover rate 162.6%(E) 127.0% 127.8%(E)
Net assets, end of period (in thousands) $152,568 $145,415 $161,072
</TABLE>
(A) FOR THE PERIOD APRIL 15, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1993.
(B) FOR THE SIX MONTHS ENDED JUNE 30, 1995.
(C) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY LMFA FOR EXPENSES IN EXCESS
OF VOLUNTARY LIMITATIONS AS FOLLOWS: 0.2% UNTIL SEPTEMBER 30, 1993; 0.35%
UNTIL DECEMBER 31, 1993; 0.5% UNTIL JANUARY 31, 1994; 0.7% UNTIL FEBRUARY
28, 1994; 0.9% UNTIL MARCH 31, 1994; 1.1% UNTIL APRIL 30, 1994; 1.3%
UNTIL MAY 31, 1994; 1.5% UNTIL JUNE 30, 1994; 1.7% UNTIL JULY 31, 1994;
AND 1.9% UNTIL DECEMBER 31, 1995.
(D) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(E) ANNUALIZED.
5
<PAGE>
GLOBAL EQUITY
<TABLE>
<CAPTION>
PRIMARY CLASS
Year Ended December 31, 1995(A)
(Unaudited)
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00
Net investment income(B) 0.03
Net realized and unrealized gain on investments and currency translations 0.37
Total from investment operations 0.40
Distributions to shareholders from:
Net investment income --
Net realized gain on investments --
Net asset value, end of period $10.40
Total return(C) 4.0%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 2.25%(D)
Net investment income 1.51%(D)
Portfolio turnover rate 28.17%(D)
Net assets, end of period (in thousands) $28,539
</TABLE>
(A) FOR THE PERIOD FEBRUARY 17, 1995 (COMMENCEMENT OF OPERATIONS) TO JUNE 30,
1995.
(B) NET OF FEES WAIVED AND EXPENSES REIMBURSED PURSUANT TO A VOLUNTARY EXPENSE
LIMITATION OF 2.25%.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
6
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of each class of
shares in advertisements or in reports or other communications to shareholders.
A mutual fund's total return is a measurement of the overall change in value,
including changes in share price and assuming reinvestment of dividends and
capital gain distributions, of an investment in the fund. CUMULATIVE TOTAL
RETURN shows the fund's performance over a specific period of time. AVERAGE
ANNUAL TOTAL RETURN is the average annual compounded return that would have
produced the same cumulative total return if the fund's performance had been
constant over the entire period. Average annual returns, which differ from
actual year-by-year results, tend to smooth out variations in a fund's return.
No adjustment has been made for any income taxes payable by shareholders. The
total returns shown below would have been lower if LMFA had not waived certain
fees for the periods presented below.
Total returns of Primary Shares as of June 30, 1995 were as follows:
<TABLE>
<CAPTION>
GLOBAL
CUMULATIVE TOTAL RETURN GOVERNMENT GLOBAL EQUITY
<S> <C> <C>
One Year +16.43% N/A
Life of Class +21.14%(A) +4.00%(B)
<CAPTION>
AVERAGE ANNUAL TOTAL GLOBAL
RETURN GOVERNMENT GLOBAL EQUITY
<S> <C> <C>
One Year +16.43% N/A
Life of Class + 9.06%(A) N/A
</TABLE>
(A) INCEPTION OF GLOBAL GOVERNMENT -- APRIL 15, 1993.
(B) INCEPTION OF GLOBAL EQUITY -- FEBRUARY 17, 1995.
Global Government also may advertise its YIELD. Yield reflects investment
income net of expenses over a 30-day (or one-month) period on a Fund share,
expressed as an annualized percentage of the offering price per share at the end
of the period. The effective yield, although calculated similarly, will be
slightly higher than the yield because it assumes that income earned from the
investment is reinvested (i.e., it includes the compounding effect of
reinvestment). Yield computations differ from other accounting methods and
therefore may differ from dividends actually paid or reported net income.
Total return and yield information reflect past performance and are not
predictions or guarantees of future results. Investment return and share price
will fluctuate, and the value of your shares, when redeemed, may be worth more
or less than their original cost. Further information about each Fund's
performance is contained in its annual report to shareholders, which may be
obtained without charge by calling your Legg Mason or affiliated investment
executive or Legg Mason's Funds Marketing Department at 800-822-5544.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Corporation's
Board of Directors without a shareholder vote. There can be no assurance
that either Fund will achieve its investment objective.
GLOBAL GOVERNMENT'S investment objective is to provide capital
appreciation and current income in order to achieve an attractive total
return consistent with prudent investment risk. The Fund normally attempts
to achieve this objective by investing at least 75% of its total assets in
debt securities issued or guaranteed by the U. S. Government or foreign
governments, their agencies, instrumentalities or political subdivisions.
The Fund normally will invest at least 75% of its assets in debt
securities issued or guaranteed by the U. S. Government or foreign
governments, the agencies or instrumentalities of either, supranational
organizations and foreign or domestic corporations, trusts, or financial
institutions rated within the four highest grades by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's ("S&P") or, if unrated by
Moody's or S&P, judged by LMFA to be of comparable quality, certain money
market instruments and repurchase agreements involving any of the
foregoing. These are considered investment grade debt securities.
Under normal circumstances, the Fund will be invested in at least
three different countries, including the United States. The Fund will
invest no more than 40% of its total assets in any one country other than
the United States. There is no other limit on the percentage of the Fund's
assets that may be invested in any one country or currency.
The money market instruments in which the Fund may invest include
commercial paper and other money market instruments which are: rated A-1
or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of investment;
issued or guaranteed as to principal and interest by issuers or guarantors
having an existing debt security rating of A or better by Moody's or S&P,
or if unrated by Moody's or S&P, judged by LMFA to be of comparable
quality; and bank certificates of deposit and bankers' acceptances judged
by LMFA to be of comparable quality.
The remainder of the Fund's assets, not in excess of 25% of its
assets, may be invested in: (1) debt securities of issuers which are rated
at the time of purchase below Moody's or S&P's four highest grades, or
unrated securities judged by LMFA to be of comparable quality. This may
include lower-rated debt securities issued or guaranteed by foreign
governments or by domestic or foreign corporations, trusts or financial
institutions; (2) loans and participations in loans originated by banks
and other financial institutions, which also may be below investment
grade; (3) securities which may be convertible into or exchangeable for,
or carry warrants to purchase, common stock, or other equity interests
(such securities may offer attractive income opportunities, and the debt
securities of certain issuers may not be available without such features);
and (4) common and preferred stocks. See page 15 for a discussion of the
risks of lower-rated debt securities. If a security is downgraded
subsequent to its purchase, the Fund will sell that security or another if
that is necessary to assure that 75% of its assets are investment grade or
equivalent quality instruments.
The Fund may invest directly in U.S. dollar-denominated or foreign
currency-denominated foreign debt (including preferred or preference
stock) and money market securities issued or guaranteed by governmental
and non-governmental issuers, international agencies and supranational
entities. Some securities issued by foreign governments or their
subdivisions, agencies and instrumentalities may not be backed by the full
faith and credit of the foreign government.
The Fund's foreign investments may include securities of issuers based
in developed countries (including, but not limited to, countries in the
European Community, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea).
The Fund may invest in "Brady Bonds," which are debt restructurings
that provide for the exchange of cash and loans for newly issued bonds.
Brady Bonds have so far been issued by thirteen emerging market
governments, and other such governments are expected to issue them in
8
<PAGE>
the future. Brady Bonds currently are rated below investment grade. As of
the date of this Prospectus, LMFA is not aware of the occurrence of any
payment defaults on Brady Bonds. Investors should recognize, however, that
Brady Bonds have been issued only recently and, accordingly, do not have a
long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U. S.
dollar) and are actively traded in the secondary market for Latin American
debt.
The Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate par bonds or floating rate discount bonds, are collateralized
in full as to principal by U.S. Treasury zero coupon bonds having the same
maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an amount that, in the case of
fixed-rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at
least one year's rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals
thereafter.
Foreign government securities may include debt securities denominated
in multinational currency units. An example of a multinational currency
unit is the European Currency Unit ("ECU"). An ECU represents specified
amounts of currencies of certain member states of the European Economic
Community. The specific amounts of currencies comprising the ECU may be
adjusted to reflect changes in relative values of the underlying
currencies. LMFA does not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranational entities, in particular, issue
ECU-denominated obligations. The market for ECUs may become illiquid at
times of rapid change in the European currency markets, limiting the
Fund's ability to prevent potential losses.
The Fund may buy and sell options, futures and forward contracts for
hedging purposes and, to the extent permitted by regulatory agencies, for
non-hedging purposes in an effort to enhance income. See "Options and
Futures; Forward Currency Exchange Contracts," page 13 and "Risks of
Futures, Options and Forward Contracts," page 14. The Fund may purchase
securities on a when-issued basis and enter into forward commitments to
purchase securities; may enter into swaps, caps, collars and floors for
hedging and other purposes; may lend its securities to brokers, dealers
and other financial institutions to earn income; may borrow money for
temporary or emergency purposes; and may enter into short sales "against
the box." See "When-Issued Securities and Standby Commitments," page 19.
When LMFA believes such action is warranted by unusual market
conditions, the Fund may invest temporarily without limit in cash (U.S.
dollars) and U.S. dollar-denominated money market instruments.
GLOBAL EQUITY'S investment objective is to seek maximum long-term
total return. The Fund attempts to meet this objective by investing
primarily in common stocks of companies located anywhere in the world,
including the United States. Under normal circumstances, the Fund will
invest in equity securities of issuers located in at least three different
countries. Batterymarch examines securities from over 20 international
stock markets, with emphasis on several of the largest -- Japan, the
United Kingdom, France, Canada, Germany and the United States. Common
stocks are chosen using Batterymarch's system for identifying common
stocks it believes to be undervalued. The weighting of the Fund's assets
among individual countries will reflect an assessment of the
attractiveness of individual equity securities regardless of where they
trade.
In addition, the Fund may invest up to 35% of its total assets in the
securities of companies located in emerging markets. Emerging markets will
include any country: (i) having an "emerging stock market" as defined by
the International Finance Corporation; (ii) with low- to middle-income
economies according to the International Bank for Reconstruction and
Development ("World Bank"); (iii) listed in World Bank publications as
developing or (iv) determined by Batterymarch to be an emerging market as
defined above. The following issuers are considered to be located in
emerging markets: (i) companies the principal securities trading market
for which is an emerging market; (ii) companies organized under the laws
of, and with a principal office in, emerging markets; (iii) companies
whose principal activities are
9
<PAGE>
located in emerging markets; and (iv) companies that derive 50% or more of
their total revenue from either goods or services produced in emerging
markets or sold in emerging markets.
The Fund's investment portfolio will normally be diversified across a
broad range of industries and across a number of countries, consistent
with the objective of maximum total return. The Fund is expected to remain
substantially fully invested in equity securities. However, when cash is
temporarily available, or for temporary defensive purposes, the Fund may
invest without limit in repurchase agreements of domestic issuers. When
conditions warrant, for temporary defensive purposes, the Fund also may
invest without limit in short-term debt instruments, including government,
corporate and money market securities of domestic issuers. Such short-term
investments will be rated in one of the four highest rating categories by
S&P or Moody's or, if unrated by S&P or Moody's, deemed by Batterymarch to
be of comparable quality.
The Fund is authorized to invest in stock index futures and options as
discussed below. The Fund may also enter into forward foreign currency
exchange contracts in order to protect against fluctuations in exchange
rates. See "Options, Futures and Forward Currency Exchange Contracts,"
page 13 and "Risks of Futures, Options and Forward Contracts," page 14.
The Fund is permitted to hold securities other than common stock, such
as debentures or preferred stock that may or may not be convertible into
common stock. Some of these instruments may be rated below investment
grade. The Fund will not purchase securities rated below investment grade
(or comparable unrated securities) if, as a result, more than 5% of the
Fund's net assets would be so invested.
INVESTMENT RESTRICTIONS
Global Government is a "non-diversified" investment company;
therefore, the percentage of its assets invested in any single issuer is
not limited by the Investment Company Act of 1940 ("1940 Act"). However,
the Fund intends to continue to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"),
which requires that, at the close of each quarter of the Fund's taxable
year: (1) with respect to 50% of the Fund's total assets, no more than 5%
of its total assets may be invested in the securities of any one issuer;
and (2) no more than 25% of the value of the Fund's total assets may be
invested in the securities of a single issuer. To the extent the Fund's
assets are invested in the obligations of a limited number of issuers or
in a limited number of countries or currencies, the value of the Fund's
shares will be more susceptible to any single economic, political or
regulatory occurrence than would the shares of a diversified company.
The fundamental restrictions applicable to the Fund include a
prohibition on investing 25% or more of total assets in the securities of
issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U. S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto). Additional fundamental and non-fundamental
investment restrictions are set forth in the Statement of Additional
Information.
INVESTMENT TECHNIQUES AND RISKS
The following investment techniques and risks apply to each of the
Funds unless otherwise stated.
Foreign Securities
Investing in the securities of issuers in any foreign country involves
special risks and considerations not typically associated with investing
in U.S. companies. These include risks resulting from differences in
accounting, auditing and financial reporting standards; lower liquidity
than U.S. securities; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer
currency out of a country); and political instability. In many cases,
there is less publicly available information concerning foreign issuers
than is available concerning U.S. issuers. Additionally, purchases and
sales of foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes and tax withholding. Foreign
securities generally exhibit greater price volatility and a greater risk
of illiquidity. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar
irrespective of the performance of the underlying investment.
10
<PAGE>
The relative performance of various countries' fixed income and equity
markets historically has reflected wide variations relating to the unique
characteristics of each country's economy. Individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects
as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Bank deposit insurance, if any, may be subject to widely varying
regulations and limits in foreign countries.
Foreign securities purchased by a Fund may be listed on foreign
exchanges or traded over-the-counter. Transactions on foreign exchanges
are usually subject to mark-ups or commissions higher than negotiated
commissions on U.S. transactions, although each Fund will endeavor to
obtain the best net results in effecting transactions. There is less
government supervision and regulation of exchanges and brokers in many
foreign countries than in the United States. Additional costs associated
with an investment in foreign securities will include higher custodial
fees than apply to domestic custodial arrangements and transaction costs
of foreign currency conversions.
Each Fund may invest in securities of issuers based in emerging
markets (including, but not limited to, countries in Latin America,
Eastern Europe, Asia and Africa). The risks of foreign investment,
described above, are greater for investments in emerging markets. Because
of the special risks associated with investing in emerging markets, an
investment in either Fund should be considered speculative. With respect
to Global Government, debt securities of governmental and corporate
issuers in such countries will typically be rated below investment grade
or be of comparable quality.
Investors are strongly advised to consider carefully the special risks
involved in emerging markets, which are in addition to the usual risks of
investing in developed markets around the world. Many emerging market
countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations
in inflation rates have had, and may continue to have, very negative
effects on the economies and securities markets of certain emerging
markets.
Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be
affected adversely by economic conditions, trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which
they trade.
The securities markets of emerging markets are substantially smaller,
less developed, less liquid and more volatile than the securities markets
of the U.S. and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the U.S. and other
major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such
markets, and enforcement of existing regulations has been extremely
limited.
Some emerging markets have different settlement and clearance
procedures. In certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. The inability of a Fund
to make intended securities purchases due to settlement problems could
cause that Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease
or may be substantially curtailed and prices for a Fund's portfolio
securities in such markets may not be readily available.
Global Equity may invest more than 25% of its total assets in
securities of Japanese issuers. Japan is the largest capitalized stock
market outside the United States. The performance of the Fund may
therefore be significantly affected by events affecting the Japanese
economy and the exchange rate between the Japanese yen and the U.S.
dollar. Japan has recently experienced a recession, including a decline in
real estate values that adversely affected the balance sheets of many
financial institutions. The strength of the Japanese currency may
adversely affect industries engaged substantially in export. Japan's
economy is heavily
11
<PAGE>
dependent on foreign oil. Japan is located in a seismically active area,
and severe earthquakes may damage important elements of the country's
infrastructure. Japanese economic prospects may be affected by the
political and military situations of its nearby neighbors, notably North
and South Korea, China, and Russia.
Global Government may invest in sovereign debt securities of emerging
market governments. Sovereign debt is subject to risks in addition to
those relating to foreign investments generally. As a sovereign entity,
the issuing government may be immune from lawsuits in the event of its
failure or refusal to pay the obligations when due. The debtor's
willingness or ability to repay in a timely manner may be affected by,
among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the
economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which the sovereign
debtor may be subject. Sovereign debtors also may be dependent on expected
disbursements from foreign governments or multilateral agencies, the
country's access to trade and other international credits, and the
country's balance of trade. Some emerging market sovereign debtors have in
the past rescheduled their debt payments or declared moratoria on
payments, and similar occurrences may happen in the future.
Repurchase Agreements
Repurchase agreements are agreements under which either U.S.
government obligations or other high-quality, liquid debt securities are
acquired from a securities dealer or bank subject to resale at an
agreed-upon price and date. The securities are held for the Funds by State
Street Bank and Trust Company ("State Street"), the Funds' custodian, as
collateral until resold and will be supplemented by additional collateral
if necessary to maintain a total value equal to or in excess of the value
of the repurchase agreement. A Fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and
that Fund is delayed or prevented from exercising its right to dispose of
the collateral securities, which may decline in value in the interim. A
Fund will enter into repurchase agreements only with financial
institutions which its adviser believes present minimal risk of default
during the term of the agreement based on guidelines established by the
Corporation's Board of Directors.
Neither Fund will enter into repurchase agreements of more than seven
days' duration if more than 15% of its total assets would be invested in
such agreements and other illiquid investments.
Loans of Portfolio Securities
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned, is continuously maintained by the borrower with that Fund. During
the time securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividends or interest paid on such securities, and the
Fund may invest the cash collateral and earn income, or it may receive an
agreed upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the
option of the Fund or the borrower. Each Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. Each Fund presently does not
expect to have on loan at any given time securities totaling more than
one-third of its net asset value. When a Fund loans a security to another
party, it runs the risk that the other party will default on its
obligation, and that the value of the collateral will decline before the
Fund can dispose of it.
Restricted And Illiquid Securities
Restricted securities are securities subject to legal or contractual
restrictions on resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when a sale
would otherwise be desirable. No Fund will acquire a security for which
there is not a readily available market ("illiquid assets") if such
acquisition would cause the aggregate value of illiquid assets to exceed
15% of its net assets. Time deposits and repurchase agreements maturing in
more than seven days are considered illiquid. Illiquid securities may be
difficult to value, and the Fund
12
<PAGE>
may have difficulty disposing of such securities promptly.
The Funds do not consider foreign securities to be illiquid if they
can be freely sold in the principal markets in which they are traded, even
if they are not registered for sale in the U.S. Rule 144A securities,
although not registered, may be sold to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933. Each Fund's
adviser, acting pursuant to guidelines established by the Corporation's
Board of Directors, may determine that some Rule 144A securities are
liquid. If the newly-developing institutional markets for restricted
securities do not develop as anticipated, it could adversely affect the
liquidity of a Fund.
Options, Futures and Forward Currency Exchange Contracts
A futures contract is an agreement between the parties to buy or sell
a specified amount of one or more securities or currencies at a specified
price and date; futures contracts are generally closed out by the parties
in advance of that date for a cash settlement. Under an option contract,
one party has the right to require the other to buy or sell a specific
security, currency or futures contract, and may exercise that right if the
market price of the underlying instrument moves in a direction
advantageous to the holder of the option. A forward foreign currency
exchange contract is an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set at the time of the
contract. Options, futures and forward currency exchange contracts are
generally considered to be "derivatives."
FOR GLOBAL GOVERNMENT:
The Fund may use options to attempt to enhance income; use options and
futures contracts for hedging purposes; and use forward currency contracts
for hedging purposes or to attempt to enhance income. The Fund may
purchase and sell call and put options on bond indices and on securities
in which the Fund is authorized to invest for hedging purposes or to
enhance income. The Fund may also purchase and sell interest rate and bond
index futures contracts and options thereon for hedging purposes.
The Fund may enter into forward currency contracts for the purchase or
sale of a specified currency at a specified future date either with
respect to specified transactions or with respect to its portfolio
positions. For example, when LMFA anticipates making a currency exchange
transaction in connection with the purchase or sale of a security, the
Fund may enter into a forward contract in order to set the exchange rate
at which the transaction will be made. The Fund may enter into a forward
contract to sell an amount of a foreign currency approximating the value
of some or all of its security positions denominated in such currency. It
may also engage in cross-hedging by using a forward contract in one
currency to hedge against fluctuations in the value of securities
denominated in a different currency. The purpose of these contracts is to
minimize the risk to the Fund from adverse changes in the relationship
between two currencies. Cross-currency hedging requires a degree of
correlation between the two currencies involved. Some currency
relationships thought to be correlated have proven highly volatile on some
occasions.
The Fund may also purchase and sell foreign currency futures
contracts, options thereon and options on foreign currencies to hedge
against the risk of fluctuations in the market value of foreign securities
it holds or intends to purchase, resulting from changes in foreign
exchange rates. The Fund may also purchase and sell options on foreign
currencies and use forward currency contracts to enhance income.
FOR GLOBAL EQUITY:
The Fund may enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign
exchange rates in the purchase and sale of investment securities. It may
not enter into such contracts for speculative purposes. Forward currency
contracts may be bought or sold to protect the Fund to a limited extent
against adverse changes in exchange rates between foreign currencies and
the U.S. dollar.
The Fund may utilize futures contracts and options to a limited
extent. Specifically, the Fund may enter into futures contracts and
related options provided that not more than 5% of its assets are required
as a futures contract deposit and/or premium; in addition, the Fund may
not enter into futures contracts or related options if, as
13
<PAGE>
a result, more than 20% of the Fund's total assets would be so invested.
Futures contracts and options may be used for several reasons: to
simulate full investment in underlying securities while retaining a cash
balance for Fund management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying equity security
or index.
Risks of Futures, Options and Forward Currency Exchange Contracts
The use of options, futures and forward currency exchange contracts
involves certain investment risks and transaction costs. These risks
include (1) dependence on the ability of each Fund's adviser to predict
movements in the prices of individual securities, fluctuations in the
general securities markets or in market sectors and movements in interest
rates and currency markets; (2) imperfect correlation, or no correlation
at all, between movements in the price of options, currencies, futures
contracts or forward currency contracts and movements in the price of the
underlying securities or currencies; (3) the fact that skills needed to
use these instruments are different from those needed to select a Fund's
portfolio securities; (4) the possible lack of a liquid secondary market
for any particular instrument at any particular time; (5) the possibility
that the use of cover or segregation involving a large percentage of the
Fund's assets could impede portfolio management or that Fund's ability to
meet redemption requests or other short-term obligations; (6) the possible
need to defer closing out positions in these instruments in order to avoid
adverse tax consequences; and (7) the fact that, although use of these
instruments for hedging purposes can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments. There can be
no assurance that a Fund's use of futures contracts, forward currency
contracts or options will be successful. Moreover, in the event that an
anticipated change in the price of the securities or currencies that are
the subject of the strategy does not occur, the Fund might have been in a
better position had it not used that strategy at all. Forward currency
contracts, which protect the value of a Fund's investment securities
against a decline in the value of a currency, do not eliminate
fluctuations in the underlying prices of the securities. They simply
establish an exchange rate at a future date. The use of options and
futures contracts for speculative purposes, i.e., to enhance income or to
increase a Fund's exposure to a particular security or foreign currency,
subjects the Fund to additional risk. The use of options, futures or
forward contracts to hedge an anticipated purchase also subjects a Fund to
additional risk until the purchase is completed or the position is closed
out.
When a Fund purchases or sells a futures contract, it is required to
deposit with its custodian (or a broker, if legally permitted) a specified
amount of cash or U. S. government securities ("initial margin"). A Fund
will not enter into futures contracts or commodities option positions
(other than option positions that are "in-the-money" at the time of
purchase) if, immediately thereafter, its initial margin deposits plus
premiums paid by it, would exceed 5% of the fair market value of the
Fund's total assets. If a Fund writes an option or sells a futures
contract and is not able to close out that position prior to settlement
date, the Fund may be required to deliver cash or securities substantially
in excess of these amounts.
Many options on securities are traded primarily on the
over-the-counter ("OTC") market. OTC options are two-party contracts with
price and other terms negotiated between buyer and seller and generally do
not have as much liquidity as exchange-traded options. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has
purchased the option to make or take delivery of the securities underlying
the option. Failure by the dealer to do so would result in the loss of the
premium paid by that Fund as well as the loss of the expected benefit of
the transaction. OTC options may be considered "illiquid securities" for
purposes of each Fund's investment limitations. Options and futures traded
on U.S. or other exchanges may be subject to position and daily
fluctuation limits, which may limit the ability of a Fund to reduce risk
using such options and futures and may limit their liquidity.
When using options, futures or forwards, each Fund will cover its
short positions or maintain a segregated asset account, to the extent
required by SEC staff positions. The Statement of Additional
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<PAGE>
Information contains a more detailed description of futures, options and
forward strategies.
THE FOLLOWING DESCRIBES CERTAIN INVESTMENT TECHNIQUES USED PRIMARILY
BY GLOBAL GOVERNMENT:
Lower-Rated Debt Securities
The Fund may invest in debt obligations of any grade. LMFA seeks to
minimize the risks of investing in all securities through in-depth credit
analysis and attention to current developments in interest rates and
market conditions.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium-grade" obligations; they are "neither highly protected nor poorly
secured . . . [I]nterest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well." Where one rating organization has assigned an
investment grade rating to an instrument and others have given it a lower
rating, the Fund may consider the instrument to be investment grade. The
ratings do not include the risk of market fluctuations.
The Fund may invest up to 25% of its total assets in high-yield,
high-risk securities rated below investment grade. Such securities are
deemed by Moody's and S&P to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal. Those in the
lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding
the individual issuer are more likely to cause price volatility and weaken
the capacity of such securities to make principal and interest payments
than is the case for higher grade debt securities. An economic downturn
affecting the issuers may result in an increased incidence of default. The
market for lower-rated securities may be thinner and less active than that
for higher-rated securities. LMFA will invest in such securities only when
it concludes that the anticipated return to the Fund on such an investment
warrants exposure to the additional level of risk. A further description
of Moody's and S&P's ratings is included in the Appendix to the Statement
of Additional Information. Although the Fund may invest in lower-rated
debt securities of domestic issuers, it currently intends to limit
investments in lower-rated debt securities to those issued by foreign
corporations, those issued or guaranteed by foreign governmental issuers,
and those issued by domestic corporations but linked to the performance of
such foreign-issue debt. See "Foreign Securities" above.
The table below provides a summary of ratings assigned to debt
holdings in Global Government's portfolio. These figures are
dollar-weighted averages of month-end portfolio holdings during the fiscal
year ended December 31, 1994, presented as a percentage of total
investments. These percentages are historical and are not necessarily
indicative of the quality of current or future portfolio holdings, which
may vary.
<TABLE>
<CAPTION>
S&P
MOODY'S RATINGS AVERAGE RATINGS AVERAGE
<S> <C> <C> <C>
Aaa/Aa/A 63.1% AAA/AA/A 64.9%
Baa -- BBB 1.3%
Ba 12.0% BB 4.2%
B 4.9% B 0.2%
Caa -- CCC --
Ca -- CC/C --
C -- D --
NR 20.0% NR 29.4%
</TABLE>
The dollar-weighted average of securities not rated by either Moody's
or S&P amounted to 17.6%. This may include securities rated by other
nationally recognized rating organizations, as well as unrated securities.
Unrated securities are not necessarily lower-quality securities.
U.S. Government Securities
The U.S. government securities in which the Fund may invest include
direct obligations of the U.S. Treasury (such as Treasury bills, notes and
bonds) and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association ("GNMA") certificates), securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Federal Home Loan Banks) and securities supported solely
by the creditworthiness of the issuer (such as Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
securities).
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<PAGE>
Mortgage-Related Securities
The Fund may invest in mortgage-related securities. Mortgage-related
securities represent interests in pools of mortgages created by lenders
such as commercial banks, savings and loan institutions, mortgage bankers
and others. Mortgage-related securities may be issued by governmental or
government-related entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. On the other hand, a
decrease in the rate of prepayments, resulting from an increase in market
interest rates, among other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in
market interest rates. The volume of prepayments of principal on a pool of
mortgages underlying a particular mortgage-related security will influence
the yield of that security. Increased prepayment of principal may limit a
Fund's ability to realize the appreciation in the value of such securities
that would otherwise accompany declining interest rates. An increase in
mortgage prepayments could cause a Fund to incur a loss on a
mortgage-related security that was purchased at a premium. In determining
the Fund's average maturity, LMFA must apply certain assumptions and
projections about the maturity and prepayment of mortgage-related
securities; actual prepayment rates may differ.
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Although
full payoff of each class of bonds is contractually required by a certain
date, any or all classes of obligations may be paid off sooner than
expected because of an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities. However, many issuers or
servicers of mortgage-related securities guarantee timely payment of
interest and principal on such securities. Timely payment of principal may
also be supported by various forms of insurance, including individual
loan, title, pool and hazard policies. There can be no assurance that the
private issuers or insurers will be able to meet their obligations under
the relevant guarantees and insurance policies. Where privately issued
securities are collateralized by securities issued by FHLMC, FNMA or GNMA,
the timely payment of interest and principal is supported by the
government-related securities collateralizing such obligations.
Some mortgage-related securities will be considered illiquid and will
be subject to the Fund's investment limitation that no more than 15% of
its net assets will be invested in illiquid securities.
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Stripped Mortgage-Backed Securities
The Fund may invest in stripped mortgage-backed securities, which are
classes of mortgage-backed securities that receive different proportions
of interest and principal distribution from an underlying pool of mortgage
assets. These securities are more sensitive to changes in prepayment and
interest rates and the market for them is less liquid than is the case for
traditional mortgage-backed and other debt securities. A common type of
stripped mortgage-backed security will have one class receiving some of
the interest and most of the principal from the mortgage assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest only or "IO" class), while the other class will
receive all of the principal (the principal only or "PO" class). The yield
to maturity of an IO class is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. If the
Fund purchases an IO and the underlying principal is repaid faster than
expected, the Fund will recoup less than the purchase price of the IO,
even one that is highly rated. Extensions of maturity resulting from
increases of market interest rates may have an especially pronounced
effect on POs. Most IOs and POs are regarded as illiquid and will be
included in the Fund's 15% limit on illiquid securities. U.S.
government-issued IOs and POs backed by fixed-rate mortgages may be deemed
liquid by LMFA, following guidelines and standards established by the
Corporation's Board of Directors.
Asset-Backed Securities
Asset-backed securities are securities that represent direct or
indirect participations in, or are secured by and payable from, assets
such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets
are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest on
asset-backed securities may be supported by credit enhancements, such as
various forms of cash collateral accounts or letters of credit. Like
mortgage-related securities, asset-backed securities are subject to the
risk of prepayment. The risk that recovery on repossessed collateral might
be unavailable or inadequate to support payments on asset-backed
securities, however, is greater than in the case of mortgage-backed
securities.
Loans and Loan Participations
The Fund may purchase loans and participation interests in loans
originally made by banks and other lenders to governmental borrowers. Many
such interests are not rated by any rating agency and may involve
borrowers considered to be poor credit risks. The Fund's interests in
these loans may not be secured, and the Fund will be exposed to a risk of
loss if the borrower defaults. Many such interests will be illiquid and
therefore subject to the Fund's 15% limit on illiquid investments.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional
types of securities. The Fund's ability to assert its rights against the
borrower will also depend on the particular terms of the loan agreement
among the parties.
Commercial Paper and Other Short-Term Instruments
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies.
The Fund may purchase commercial paper issued pursuant to the private
placement exemption in Section 4(2) of the Securities Act of 1933. Section
4(2) paper is restricted as to disposition under the federal securities
laws in that any resale must similarly be made in an exempt transaction.
The Fund may or may not regard such securities as illiquid, depending on
the circumstances of each case. See "Restricted and Illiquid Securities,"
page 12.
The Fund may also invest in obligations (including certificates of
deposit, demand and time deposits and bankers' acceptances) of U.S. banks
and savings and loan institutions if the issuer has total assets in excess
of $1 billion at the time of purchase or if the principal amount of the
instrument is insured by the Federal Deposit Insurance Corporation. A
bankers' acceptance is a time draft
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drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of
time at a specified interest rate. Certificates of deposit are negotiable
short-term obligations issued by banks against funds deposited in the
issuing institution. The interest rate on some certificates of deposit is
periodically adjusted prior to the stated maturity, based upon a specified
market rate. While domestic bank deposits are insured by an agency of the
U. S. Government, the Fund will generally assume positions considerably in
excess of the insurance limits.
Preferred Stock
The Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of LMFA, the preferred
stock is more attractively priced in light of the risks involved.
Preferred stock pays dividends at a specified rate and generally has
preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Preferred shareholders may
have certain rights if dividends are not paid, but do not generally have a
legal right to demand payment. Shareholders may suffer a loss of value if
dividends are not paid. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the
issuer's creditworthiness than are the prices of debt securities. Under
ordinary circumstances, preferred stock does not carry voting rights.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. The Fund has no current intention
of converting any convertible securities it may own into equity or holding
them as equity upon conversion, although it may do so for temporary
purposes. A convertible security may be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. If a convertible security held by the Fund is called
for redemption, the Fund will be required to convert it into the
underlying common stock, sell it to a third party or permit the issuer to
redeem the security. Any of these actions could have an adverse effect on
the Fund's ability to achieve its investment objective.
Variable and Floating Rate Securities
The Fund may invest in variable and floating rate securities. These
securities provide for periodic adjustment in the interest rate paid on
the obligations. LMFA believes that the variable or floating rate of
interest paid on these securities may reduce the wide fluctuations in
market value typical of fixed-rate, long-term securities. The yield
available on floating rate securities is typically less than that on
fixed-rate notes of similar maturity issued by the same company. The rates
of some securities vary according to a formula based on one or more
interest rates, and some vary inversely with changes in the underlying
rates. The value of these securities can be very volatile when market
rates change.
Zero Coupon and Pay-In-Kind Bonds
A zero coupon bond is a security that makes no fixed interest payments
but instead is sold at a
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deep discount from its face value. The bond is redeemed at its face value
on the specified maturity date. Zero coupon bonds may be issued as such,
or they may be created by a broker who strips the coupons from a bond and
separately sells the rights to receive principal and interest. Pay-in-kind
securities pay interest in the form of additional securities, thereby
adding additional debt to the issuer's balance sheet. The prices of both
types of bonds fluctuate more in response to changes in market interest
rates than do the prices of debt securities with similar maturities that
pay interest in cash.
An investor in zero coupon or pay-in-kind bonds generally accrues
income on such securities prior to the receipt of cash payments. Since a
fund must distribute substantially all of its income to shareholders to
qualify for pass-through treatment under the federal income tax laws, a
fund investing in such bonds may have to dispose of other securities to
generate the cash necessary for the distribution of income attributable to
its zero coupon or pay-in-kind bonds. Such disposal could occur at a time
which would be disadvantageous to the fund and when the fund would not
otherwise choose to dispose of the assets.
Reverse Repurchase Agreements and Other Borrowing
In a reverse repurchase agreement, the Fund temporarily transfers
possession of a portfolio instrument to another person, such as a
financial institution or broker-dealer, in return for cash and agrees to
repurchase the instrument at an agreed upon time (normally within seven
days) and price, including interest payment. The Fund may also enter into
dollar rolls, in which the Fund sells a fixed income security for delivery
in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, the Fund would forego
principal and interest paid on such securities. The Fund would be
compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by the interest earned
on the proceeds of the initial sale.
The Fund may engage in reverse repurchase agreements, dollar rolls and
other borrowing as a means of raising cash to satisfy redemption requests
or for other temporary or emergency purposes without selling portfolio
instruments. While engaging in reverse repurchase agreements and dollar
rolls, the Fund will maintain cash or high-grade, liquid debt securities
in a segregated account at its custodian bank with a value at least equal
to the Fund's obligation under the agreements, adjusted daily.
To avoid potential leveraging effects of borrowing (including reverse
repurchase agreements and dollar rolls), the Fund will not purchase
securities while such borrowing is in excess of 5% of its total assets.
The Fund will limit its borrowing to no more than one-third of its total
assets.
When-Issued Securities and Standby Commitments
The Fund may enter into commitments to purchase U. S. government
securities or other securities on a when-issued basis. Such securities are
often the most efficiently priced and have the best liquidity in the bond
market. When the Fund purchases securities on a when-issued basis, it
assumes the risks of ownership at the time of purchase, not at the time of
receipt. However, the Fund does not have to pay for the obligations until
they are delivered to it. This is normally seven to 15 days later, but
could be considerably longer in the case of some mortgage-backed
securities. Use of this practice would have a leveraging effect on the
Fund. The Fund does not expect that its commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 20% of its total
assets.
Issuance of securities purchased on a when-and if-issued basis depends
on the occurrence of an event. If the anticipated event does not occur,
the securities are not issued. The characteristics and risks of
when-and-if-issued securities are similar to those involved in writing put
options.
To meet its payment obligation, the Fund will establish a segregated
account with its custodian and maintain cash or liquid high-grade debt
obligations, in an amount at least equal in value to the Fund's
commitments to purchase when- and if-issued securities.
Indexed Securities
The Fund may purchase various fixed income and debt securities whose
principal value or rate of return is linked or indexed to relative
exchange rates among two or more currencies or linked to commodities
prices or other financial indicators. Such securities may be more volatile
than the
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underlying instruments, resulting in a leveraging effect on the Fund.
The value of such securities may fluctuate in response to changes in
the index, market conditions, and the creditworthiness of the issuer.
These securities may vary directly or inversely with the underlying
investments.
Swaps, Caps, Floors and Collars
The Fund does not intend to purchase swaps, caps, collars, or floors
if, as a result, more than 5% of the Fund's net assets would thereby be
placed at risk. The Statement of Additional Information contains a more
detailed description of swaps, caps, floors and collars.
Capital Appreciation and Risk
The market value of fixed income and other debt securities is
partially a function of changes in the current level of interest rates. An
increase in interest rates generally reduces the market value of existing
fixed income and other debt securities, while a decline in interest rates
generally increases the market value of such securities. The longer the
maturity, the more pronounced is the rise or decline in the security's
price. When interest rates are falling, a fund with a shorter maturity
generally will not generate as high a level of total return as a fund with
a longer maturity. Conversely, when interest rates are rising, a fund with
a shorter maturity will generally outperform longer maturity portfolios.
When interest rates are flat, shorter duration portfolios generally will
not generate as high a level of total return as longer maturity portfolios
(assuming that long-term interest rates are higher than short-term rates,
which is commonly the case).
Changes in the creditworthiness, or the market's perception of the
creditworthiness, of the issuers of fixed income and other debt securities
will also affect their prices.
A debt security may be callable, i.e., subject to redemption at the
option of the issuer, at a price established in the security's governing
instrument. If a debt security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security or
sell it to a third party. Either of these actions could have an adverse
effect on the Fund's ability to achieve its investment objective.
FOR EACH FUND:
Portfolio Turnover
For the year ended December 31, 1994, Global Government's portfolio
turnover rate was 127.0%. Global Government and Global Equity each
anticipates that in the future its portfolio turnover rate will not exceed
250% and 100%, respectively. Global Government may sell fixed-income
securities and buy similar securities to obtain yield and take advantage
of market anomalies, a practice which will increase the reported turnover
rate of that Fund. The portfolio turnover rate is computed by dividing the
lesser of purchases or sales of securities for the period by the average
value of portfolio securities for that period. Short-term securities are
excluded from the calculation. High portfolio turnover rates (100% or
more) will involve correspondingly greater transaction costs which will be
borne directly by that Fund. It may also increase the amount of short-term
capital gains, if any, realized by a Fund and will affect the tax
treatment of distributions paid to shareholders because distributions of
net short-term capital gains are taxable as ordinary income. Each Fund
will take these possibilities into account as part of its investment
strategy.
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason or with an affiliate that has a dealer agreement
with Legg Mason (Legg Mason is a wholly owned subsidiary of Legg Mason,
Inc., a financial services holding company). Your Legg Mason or affiliated
investment executive will be pleased to explain the shareholder services
available from the Funds and answer any questions you may have. Documents
available from your Legg Mason or affiliated investment executive should
be completed if you invest in shares of the Funds through an Individual
Retirement Account ("IRA"), Self-Employed Individual Retirement Plan
("Keogh Plan"), Simplified Employee Pension Plan ("SEP") or other
qualified retirement plan.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds, is $1,000, and the minimum investment for each purchase of
additional shares is $100, except as noted below. Initial investments in
an IRA
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account established on behalf of a nonworking spouse of a shareholder who
has an IRA invested in the Funds require a minimum amount of only $250.
Subsequent investments in an IRA or similar plan require a minimum amount
of $100. However, once an account is established, the minimum amount for
subsequent investments will be waived if an investment in an IRA or
similar plan will bring the investment for the year to the maximum amount
permitted under the Code. For those investing through a Fund's Future
First Systematic Investment Plan, payroll deduction plans and plans
involving automatic payment of funds from financial institutions or
automatic investment of dividends from certain unit investment trusts,
minimum initial and subsequent investments are lower. Each Fund may change
these minimum amount requirements at its discretion.
Primary Shares purchased on behalf of an IRA, Keogh Plan, SEP or other
qualified retirement plan will be processed at the net asset value next
determined after your Legg Mason or affiliated investment executive
receives a check for the amount of the purchase. Other share purchases
will be processed at the net asset value next determined after your Legg
Mason or affiliated investment executive has received your order; payment
must be made within three business days to Legg Mason. Orders received by
your Legg Mason or affiliated investment executive before the close of
regular trading on the New York Stock Exchange ("Exchange") (normally 4:00
p.m. Eastern time) ("close of the Exchange") on any day the Exchange is
open will be executed at the net asset value determined as of the close of
the Exchange on that day. Orders received by your Legg Mason or affiliated
investment executive after the close of the Exchange or on days the
Exchange is closed will be executed at the net asset value determined as
of the close of the Exchange on the next day the Exchange is open. See
"How Net Asset Value is Determined," page 23. Each Fund reserves the right
to reject any order for its shares or to suspend the offering of shares
for a period of time.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares:
1. THROUGH YOUR LEGG MASON OR AFFILIATED INVESTMENT EXECUTIVE
Shares may be purchased through any Legg Mason or affiliated
investment executive. An investment executive will be pleased to open an
account for you, explain to you the shareholder services available from
the Funds and answer any questions you may have. After you have
established a Legg Mason or affiliated account, you can order shares from
your investment executive in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Fund of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to prepare a check each month drawn
on your checking account. There is no minimum initial investment. Please
contact any Legg Mason or affiliated investment executive for further
information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through any Legg Mason or
affiliated investment executive.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. No certificates are issued
unless you specifically request them in writing. Shareholders who elect to
receive certificates can redeem their shares only by mail. Certificates
will be issued in full shares only. No certificates will be issued for
shares of either Fund prior to 15 business days after purchase of such
shares by check unless that Fund can be reasonably assured during that
period that payment for the purchase of such shares has
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been collected. Shares may not be held in, or transferred to, an account
with any brokerage firm other than Legg Mason or its affiliates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Legg Mason or affiliated investment executive an order for
repurchase of your shares. Please have the following information ready
when you call: the name of the Fund, the number of shares to be redeemed
and your shareholder account number. Second, you may send a written
request for redemption to: [insert complete Fund name], c/o Legg Mason
Funds Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
Requests for redemption in "good order," as described below, received
by your Legg Mason or affiliated investment executive before the close of
the Exchange on any day when the Exchange is open, will be transmitted to
BFDS, transfer agent for the Funds, for redemption at the net asset value
per share determined as of the close of the Exchange on that day. Requests
for redemption received by your Legg Mason or affiliated investment
executive after the close of the Exchange will be executed at the net
asset value determined as of the close of the Exchange on its next trading
day. A redemption request received by your Legg Mason or affiliated
investment executive may be treated as a request for repurchase and, if it
is accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your Legg Mason brokerage
account two business days after trade date. However, each Fund reserves
the right to take up to seven days to make payment upon redemption if, in
the judgment of LMFA, the respective Fund could be adversely affected by
immediate payment. (The Statement of Additional Information describes
several other circumstances in which the date of payment may be postponed
or the right of redemption suspended.) The proceeds of your redemption or
repurchase may be more or less than your original cost. If the shares to
be redeemed or repurchased were paid for by check (including certified or
cashier's checks), within 15 business days of the redemption or repurchase
request, the proceeds will not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
A redemption request will be considered to be received in "good order"
only if:
1. You have indicated in writing the number of Primary Shares to be
redeemed, the complete Fund name and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of Fund shares, contact your Legg Mason
or affiliated investment executive.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. The Funds may
be liable for losses due to unauthorized or fraudulent instructions if
they do not follow reasonable procedures. Telephone redemption privileges
are available automatically to all shareholders unless certificates have
been issued. Shareholders who do not wish to have telephone redemption
privileges should call their Legg Mason or affiliated investment executive
for further instructions.
To redeem your Legg Mason Fund retirement account, a Distribution
Request Form must be completed and returned to Legg Mason Client Services
for processing. This form can be obtained through your Legg Mason or
affiliated investment
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executive or Legg Mason Client Services in Baltimore, Maryland.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having your
account closed.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily as
of the close of the Exchange on every day that the Exchange is open, by
subtracting the liabilities attributable to Primary Shares from the total
assets attributable to such shares and dividing the result by the number
of Primary Shares outstanding. Each Fund's securities are valued on the
basis of market quotations or, lacking such quotations, at fair value as
determined under the guidance of the Board of Directors. Securities for
which market quotations are readily available are valued at the last sale
price of the day for a comparable position, or, in the absence of any such
sales, the last available bid price for a comparable position. Where a
security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by
each Fund's adviser to be the primary market. Securities with remaining
maturities of 60 days or less are valued at amortized cost. Each Fund will
value its foreign securities in U.S. dollars on the basis of the
then-prevailing exchange rates.
Most securities held by Global Government are valued on the basis of
valuations furnished by a service which utilizes both dealer-supplied
valuations and electronic data processing techniques which take into
account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other data.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly for
Global Government and are declared and paid quarterly for Global Equity.
Shareholders begin to earn dividends on their Global Government shares as
of settlement date, which is normally the third business day after their
orders are placed with their Legg Mason or affiliated investment
executive. Dividends from net short-term capital gain and distributions of
substantially all net capital gain (the excess of net long-term capital
gain over net short-term capital loss), and any net realized gain from
foreign currency transactions generally are declared and paid after the
end of the taxable year in which the gain is realized. A second
distribution of net capital gain may be necessary in some years to avoid
imposition of the excise tax described under the heading "Additional Tax
Information" in the Statement of Additional Information. Dividends and
other distributions, if any, on shares held in an IRA, Keogh Plan, SEP or
other qualified retirement plan and by shareholders maintaining a
Systematic Withdrawal Plan generally are reinvested in Primary Shares on
the payment dates. Other shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares of
the distributing Fund;
2. Receive dividends in cash and other distributions in Primary Shares
of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, you may reinvest dividends and other distributions
in the corresponding class of shares of another Legg Mason fund. Please
contact your Legg Mason or affiliated investment executive for additional
information about this option.
If no election is made, both dividends and other distributions will be
credited to your account in Primary Shares of the distributing Fund at the
net asset value of the shares determined as of the close of the Exchange
on the reinvestment date. Shares received pursuant to any of the first
three (reinvestment) elections above also are credited to your account at
that net asset value. If you elect to receive dividends and/or other
distributions in
23
<PAGE>
cash, you will be sent a check or will have your Legg Mason account
credited after the payment date. You may elect at any time to change your
option by notifying the Fund in writing at: [insert complete Fund name],
c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, MD 21203-1476.
Your election must be received at least 10 days before the payment date in
order to be effective for dividends and other distributions paid as of
that date.
TAXES
Each Fund intends to continue to qualify for treatment as a RIC under
the Code so that it will be relieved of federal income tax on that part of
its investment company taxable income (generally consisting of net
investment income and any net short-term capital gain and net gains from
certain foreign currency transactions) and net capital gain that is
distributed to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Primary Shares) are taxable to its
shareholders (other than IRAs, Keogh Plans, SEPs, other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent of the Fund's earnings and profits. Distributions of each Fund's
net capital gain (whether paid in cash or reinvested in Primary Shares),
when designated as such, are taxable to those shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during the year. Each Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
non-corporate shareholders who do not provide that Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and other distributions payable to such shareholders who
otherwise are subject to backup withholding.
A redemption of Primary Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Primary Shares for shares of any other Legg Mason
fund generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege," below. If Fund shares are purchased
within 30 days before or after redeeming other shares of the same Fund
(regardless of class) at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
Each Fund's dividend and interest income, and gains realized from
disposition of foreign securities, may be subject to income, withholding
or other taxes imposed by foreign countries and U.S. possessions that
would reduce the yield on that Fund's securities. Tax conventions between
certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Primary Shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
If more than 50% of the value of Global Equity's total assets at the
close of any taxable year consists of securities of foreign corporations,
the Fund may file an election with the Internal Revenue Service that will
enable its shareholders, in effect, to receive the benefit of the foreign
tax credit with respect to any foreign and U.S. possessions income taxes
paid by it. Pursuant to any such election, the Fund would treat those
taxes as dividends paid to its shareholders, and each shareholder would be
required to (1) include in gross income, and treat as paid by the
shareholder, the shareholder's proportionate share of those taxes, (2)
treat the shareholder's share of those taxes and of any dividend paid by
the Fund that represents income from foreign or U.S. possessions sources
as the shareholder's own income from those sources, and (3) either deduct
the taxes deemed paid by the shareholder in computing the shareholder's
taxable income, or alternately, use the foregoing information in
calculating the foreign tax credit against the shareholder's federal
income tax. The Fund will
24
<PAGE>
report to its shareholders shortly after each taxable year their
respective shares of the Fund's income from sources within, and taxes paid
to, foreign countries and U.S. possessions if it makes this election.
The foregoing is only a summary of some of the important federal
income tax considerations generally affecting each Fund and its
shareholders; see the Statement of Additional Information for a further
discussion. In addition to those considerations, which are applicable to
any investment in the Funds, there may be other federal, state, local or
foreign tax considerations applicable to a particular investor.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital gain
distributions and purchases made through the Future First Systematic
Investment Plan or through automatic investments). An account statement
will be sent to you monthly unless there has been no activity in the
account or you are purchasing shares through the Future First Systematic
Investment Plan or through automatic investments, in which case an account
statement will be sent quarterly. Reports will be sent to each Fund's
shareholders at least semi-annually showing its portfolio and other
information; the annual report will contain financial statements audited
by the Corporation's independent accountants.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan. Please contact your Legg Mason or affiliated investment
executive for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence:
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Legg Mason Tax Exempt Trust, Inc.
A money market fund seeking high current income exempt from federal
income tax, preservation of capital, and liquidity.
Legg Mason U. S. Government Money Market Portfolio
A money market fund seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Value Trust, Inc.
A mutual fund seeking long-term growth of capital.
Legg Mason Special Investment Trust, Inc.
A mutual fund seeking capital appreciation by investing principally in
issuers with market capitalizations of less than $2.5 billion.
Legg Mason Total Return Trust, Inc.
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total investment return consistent with
reasonable risk.
Legg Mason American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Legg Mason Global Equity Trust
A mutual fund seeking maximum long-term total return, by investing in
common stocks of companies located in at least three different countries.
Legg Mason U. S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U. S. Government, its agencies or
instrumentalities, while
25
<PAGE>
maintaining an average dollar-weighted maturity of between three and ten
years.
Legg Mason Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, primarily
through investment in a diversified portfolio of investment grade debt
securities.
Legg Mason High Yield Portfolio
A mutual fund primarily seeking a high level of current income and
secondarily, capital appreciation, by investing principally in
lower-rated, fixed-income securities.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions.
Legg Mason Maryland Tax-Free Income Trust(A)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Legg Mason Pennsylvania Tax-Free Income Trust(A)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Legg Mason Tax-Free Intermediate-Term Income Trust(A,B)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
(A) Shares of these funds are sold with an initial sales charge.
(B) Effective August 1, 1995 through January 31, 1996, the sales charge will
be waived for all new accounts and subsequent investments into existing
accounts. After January 31, 1996, any exchanges of these shares will be
subject to the full sales charge, if any, since no sales charge will be
paid on shares purchased during this period.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds from the redemption of Fund shares to be exchanged
that were originally purchased by exchange from a Fund on which the same
or higher initial sales charge previously was paid. There is no charge for
the exchange privilege, but each Fund reserves the right to terminate or
limit the exchange privilege of any shareholder who makes more than four
exchanges from that Fund in one calendar year. To obtain further
information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your Legg Mason
or affiliated investment executive. To effect an exchange by telephone,
please call your Legg Mason or affiliated investment executive with the
information described in "How You Can Redeem Your Primary Shares," page
22. The other factors relating to telephone redemptions described in that
section apply also to telephone exchanges. Please read the prospectus for
the other fund(s) carefully before you invest by exchange. Each Fund
reserves the right to modify or terminate the exchange privilege upon 60
days' notice to shareholders.
There is no assurance the money market funds will be able to maintain
a $1.00 share price. None of the funds is insured or guaranteed by the
U.S. Government.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of the Corporation's Board of Directors.
INVESTMENT ADVISER TO GLOBAL GOVERNMENT
Pursuant to separate management or advisory agreements with each Fund
(each a "Management Agreement" or "Advisory Agreement"), which were
approved by the Corporation's Board of Directors, Legg Mason Fund Adviser,
Inc., a wholly owned subsidiary of Legg Mason, Inc., serves as investment
adviser to Global Government and manager to Global Equity. LMFA
administers and acts as the portfolio manager for Global Government and is
responsible for the
26
<PAGE>
actual investment management of the Fund, including the responsibility for
making decisions and placing orders to buy, sell or hold a particular
security. As manager, LMFA manages the non-investment affairs of Global
Equity, directs all matters related to the operation of that Fund and
provides office space and administrative staff for the Fund. Each Fund
pays LMFA, pursuant to its Advisory Agreement or Management Agreement, a
fee equal to an annual rate of 0.75% of its average daily net assets. Each
Fund pays all its other expenses which are not assumed by LMFA. LMFA has
voluntarily agreed to waive its fees and to reimburse Global Government to
the extent necessary to limit total operating expenses attributable to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) to 1.90% of Global Government's average daily net assets
annually until December 31, 1995.
Keith J. Gardner has been primarily responsible for the day-to-day
management of Global Government since its inception. Mr. Gardner has been
Vice President of Legg Mason since November, 1992. From 1985 to 1992, he
served as Vice President, bond trader and portfolio manager for both U.S.
and global portfolios at T. Rowe Price Associates, Inc.
LMFA acts as investment adviser, manager or consultant to sixteen
investment company portfolios which had aggregate assets under management
of over $4.8 billion as of July 31, 1995.
INVESTMENT ADVISER TO GLOBAL EQUITY
Pursuant to an advisory agreement with LMFA ("Advisory Agreement"),
which was approved by the Corporation's Board of Directors, Batterymarch,
a wholly owned subsidiary of Legg Mason, Inc., serves as investment
adviser to Global Equity. Batterymarch acts as the portfolio manager for
the Fund and is responsible for the actual investment management of the
Fund, including the responsibility for making decisions and placing orders
to buy, sell or hold a particular security. LMFA pays Batterymarch,
pursuant to the Advisory Agreement, a management fee equal to an annual
rate of 0.50% of the Fund's average daily net assets. LMFA and
Batterymarch have voluntarily agreed to waive their fees and to reimburse
the Fund for its expenses to the extent necessary to limit the Fund's
total operating expenses attributable to Primary Shares (exclusive of
taxes, interest, brokerage and extraordinary expenses) to 2.25% of its
average daily net assets. This agreement will expire on December 31, 1995,
unless extended by LMFA or Batterymarch.
Batterymarch acts as investment adviser to institutional accounts,
such as mutual funds, corporate pension plans and endowment funds, as well
as to individual investors. Total assets under management by the Adviser
were approximately $5.4 billion as of July 31, 1995.
Charles Lovejoy is the Portfolio Manager for Global Equity. Mr.
Lovejoy joined Batterymarch in 1992 as an investment strategist. From 1990
to 1992, he was a Managing Director of Boston International Advisors where
he managed international and emerging markets portfolios. From 1980 to
1990, Mr. Lovejoy was Senior Vice President at Putnam Management Company
where he headed the Quantitative Research Department; his responsibilities
included portfolio management and product development as well as
quantitative research for international, emerging markets and U.S.
equities. A past president of the Boston Quantitative Discussion Group and
the Boston Security Analysts Society, Mr. Lovejoy is a Director of the
International Society of Financial Analysts. Mr. Lovejoy is a Chartered
Financial Analyst.
SUB-ADVISER
Western Asset Management Company ("Western Asset"), another wholly
owned subsidiary of Legg Mason, Inc., serves as investment sub-adviser to
Global Government pursuant to the terms of a sub-advisory agreement with
LMFA dated May 1, 1995. Western Asset is responsible for providing LMFA
with research and analysis on domestic and foreign fixed-income
securities, and consulting with LMFA on portfolio strategy. For these
services, LMFA (not the Fund) pays Western Asset a fee, computed daily and
payable monthly, at an annual rate equal to 53 1/3% of the fee received by
LMFA, or 0.40% of the Fund's average daily net assets.
Western Asset also renders investment advice to sixteen open-end
investment companies and one closed-end investment company, which together
had aggregate assets under management of approximately $3.8 billion as of
July 31, 1995. Western Asset also renders investment advice to private
accounts with fixed-income assets under management of approximately $13
billion as of
27
<PAGE>
that date. The address of Western Asset is 117 East Colorado Boulevard,
Pasadena, California 91105.
Western Asset has managed fixed-income portfolios continuously since
its founding in 1971, and has focused exclusively on such accounts since
1984.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to
separate Underwriting Agreements with the Funds. The Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares of each Fund, including any compensation to its
investment executives, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and periodic reports
have been prepared, set in type and mailed to existing shareholders at the
Fund's expense, and for any supplementary sales literature and advertising
costs.
Legg Mason receives a fee from BFDS for assisting it with its transfer
agent and shareholder servicing functions; for the year ended December 31,
1994, Legg Mason received $32,407 for performing such services in
connection with Global Government.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
The Board of Directors of the Corporation has adopted Distribution and
Shareholder Services Plans (each a "Plan") pursuant to Rule 12b-1 under
the 1940 Act for each Fund. The Plans provide that as compensation for
Legg Mason's ongoing services to investors in Primary Shares and its
activities and expenses related to the sale and distribution of Primary
Shares, Legg Mason receives an annual distribution fee from each Fund
equal to 0.50% of Global Government's average daily net assets, and 0.75%
of Global Equity's average daily net assets; and an annual service fee
from each Fund equal to 0.25% of its average daily net assets. The
distribution fee and the service fee are calculated daily and paid
monthly. The fees received by Legg Mason during any year may be more or
less than its cost of providing distribution and shareholder services to
the Funds. Legg Mason has temporarily agreed to waive the distribution fee
to the extent necessary to limit total expenses attributable to Primary
Shares of each Fund (exclusive of taxes, interest, brokerage fees and
extraordinary expenses) as described above.
NASD rules limit the amount of annual distribution fees that may be
paid by mutual funds and impose a ceiling on the cumulative distribution
fees received. Each Fund's Plan complies with those rules.
The Chairman, President and Treasurer of the Corporation are employed
by Legg Mason.
THE FUNDS' CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is custodian for the securities and cash of
each Fund. Boston Financial Data Services, P.O. Box 953, Boston,
Massachusetts 02103, serves as transfer agent for Fund shares and
dividend-disbursing agent for each Fund.
Pursuant to rules adopted under Section 17(f) of the 1940 Act, each
Fund may maintain foreign securities and cash in the custody of certain
eligible foreign banks and securities depositories. Selection of these
foreign custodial institutions is made by the Board of Directors in
accordance with SEC rules. The Board of Directors will consider a number
of factors, including, but not limited to, the relationship of the
institution to State Street, the reliability and financial stability of
the institution, the ability of the institution to capably perform
custodial services for the Funds, the reputation of the institution in its
national market, the political and economic stability of the countries in
which the sub-custodians will be located and risks of potential
nationalization or expropriation of Fund assets. No assurance can be given
that the Board of Directors' appraisal of the risks in connection with
foreign custodial arrangements will always be correct or that
expropriation, nationalization, freezes, or confiscation of Fund assets
will not occur.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
The Corporation was established as a Maryland corporation on December
31, 1992. The Articles of Incorporation authorize the Corporation to issue
one billion shares of par value $.001 per
28
<PAGE>
share and to create additional series, each of which may issue separate
classes of shares.
Each Fund currently offers two Classes of Shares -- Class A (known as
"Primary Shares") and Class Y (known as "Navigator Shares"). The two
Classes represent interests in the same pool of assets. A separate vote is
taken by a Class of Shares of a Fund if a matter affects just that Class
of Shares. Each Class of Shares may bear certain differing Class-specific
expenses. Salespersons and others entitled to receive compensation for
selling or servicing Fund shares may receive more with respect to the one
Class than another.
Navigator Shares are currently offered for sale only to institutional
clients of Fairfield for investment of their own funds and funds for which
they act in a fiduciary capacity, to clients of Trust Company for which
Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. The initial and subsequent investment
minimums for Navigator Shares are $50,000 and $100, respectively.
Investments in Navigator Shares may be made through investment executives
of Fairfield Group, Inc., Horsham, Pennsylvania, or Legg Mason.
Each Fund pays no Rule 12b-1 fee with respect to Navigator Shares. The
per share net asset value of Navigator Shares, and dividends and
distributions (if any) paid to Navigator shareholders, are generally
expected to be higher than those of Primary Shares of the Funds, because
of the lower expenses attributable to Navigator Shares. The per share net
asset value of the classes of shares will tend to converge, however,
immediately after the payment of ordinary income dividends. Navigator
Shares of a Fund may be exchanged for the corresponding class of shares of
certain other Legg Mason funds. Investments by exchange into the other
Legg Mason funds are made at the per share net asset value, determined on
the same business day as redemption of the Navigator Shares the investors
wish to redeem.
The Board of Directors of the Corporation does not anticipate that
there will be any conflicts among the interests of the holders of the
different Classes of Fund shares. On an ongoing basis, the Boards will
consider whether any such conflict exists and, if so, take appropriate
action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Corporation will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omission regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
29
<PAGE>
Navigator Global Funds
Prospectus
Dated: October , 1995
Shares of Navigator Global Government Trust and Navigator Global Equity Trust
(collectively referred to as "Navigator Shares") represent separate
classes ("Navigator Classes") of interest in the Legg Mason Global
Government Trust ("Global Government") and Legg Mason Global Equity Trust
("Global Equity"), respectively. Global Government and Global Equity
(each separately referred to as a "Fund" and collectively referred to as
the "Funds") are separate, professionally managed portfolios of Legg
Mason Global Trust, Inc. ("Corporation"), an open-end management
investment company.
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other depository institution. Shares are not
insured by the FDIC, the Federal Reserve Board, or any other agency, and
are subject to investment risk, including the possible loss of the
principal amount invested.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be retained
for future reference. A Statement of Additional Information about the
Funds dated October , 1995 has been filed with the Securities and
Exchange Commission ("SEC") and, as amended or supplemented from time to
time, is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request from the Funds'
distributor, Legg Mason Wood Walker, Incorporated ("Legg Mason") (address
and telephone numbers listed below).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Global Equity is a diversified, professionally managed portfolio seeking
maximum long-term total return. In attempting to achieve the Fund's
objective, the Fund's investment adviser, Batterymarch Financial
Management, Inc. ("Batterymarch"), normally will invest the Fund's assets
in common stocks of companies located anywhere in the world, including the
United States. The Fund may invest up to 35% of its total assets in the
securities of companies located in developing countries, including
countries or regions with relatively low gross national product per capita
compared to the world's major economies, and in countries or regions with
the potential for rapid but unstable economic growth (collectively,
"emerging markets").
Global Equity is intended for investors who are seeking maximum long-term total
return. Because of the risks associated with common stock investments,
the Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
stock market movements. Investors should be able to tolerate sudden,
sometimes substantial fluctuations in the value of their investment.
<PAGE>
Global Government is a non-diversified, professionally managed portfolio
seeking capital appreciation and current income in order to achieve an
attractive total return consistent with prudent investment risk. In
attempting to achieve the Fund's objective, the Fund's investment adviser,
Legg Mason Fund Adviser, Inc. ("LMFA"), normally invests at least 75% of
the Fund's total assets in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions. At least 75% of its total assets normally will be
invested in investment grade debt securities of foreign or domestic
corporations, governments or other issuers, certain money market
instruments, and repurchase agreements collateralized by such securities.
The Fund may invest up to 25% of its total assets in lower-rated debt
securities.
Investors also should be cognizant of the unique risks of international
investing, including exposure to currency fluctuations. Because of these
risks, an investment in either Fund should not be considered a complete
investment program. Because of the special risks associated with emerging
markets, an investment in either Fund should be considered speculative.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group,
Inc. ("Fairfield") for investment of their own funds and funds for which
they act in a fiduciary capacity, to clients of Legg Mason Trust Company
("Trust Company") for which Trust Company exercises discretionary
investment management responsibility (such institutional investors are
referred to collectively as "Institutional Clients" and accounts of the
customers with such Clients ("Customers") are referred to collectively as
"Customer Accounts"), to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, and to
The Legg Mason Profit Sharing Plan and Trust. Navigator Shares may not be
purchased by individuals directly, but Institutional Clients may purchase
shares for Customer Accounts maintained for individuals.
Navigator Shares are sold and redeemed without any purchase or redemption
charge imposed by the Funds, although Institutional Clients may charge
their Customer Accounts for services provided in connection with the
purchase or redemption of shares. See "How to Purchase and Redeem
Shares." Each Fund pays management fees to its respective adviser, but
Navigator Classes pay no distribution fees.
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000
800-822-5544
<PAGE>
Expenses
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor in Navigator Shares of a
Fund will bear directly or indirectly. The expenses and fees set forth in
the table are based on estimated expenses for the initial period of
operations of the Navigator Classes.
Shareholder Transaction Expenses For Each Fund
Maximum sales charge on purchases or
reinvested dividends None
Redemption and exchange fees None
<TABLE>
<CAPTION>
Annual Fund Operating Expenses -- Navigator Shares
(as a percentage of average net assets)
Global Government Global Equity
<S> <C> <C>
Management fees 0.75% 0.60%A
12b-1 fees None None
Other expenses 0.32% 0.65%
Total operating expenses (after fee waivers)
1.07% 1.25%A
</TABLE>
A The expense ratio for the Navigator Class of Global Equity would have
been 1.40% had LMFA, Manager of the Fund, not agreed to reimburse
management fees and other expenses pursuant to a voluntary expense
limitation. The reimbursement agreement, wherein LMFA has agreed to
continue to reimburse management fees and/or assume other expenses to the
extent the Navigator Class of Global Equity's expenses (exclusive of
taxes, interest, brokerage and extraordinary expenses) exceed during any
month an annual rate of 1.25% of the Fund's average daily net assets for
such month, will remain in effect until December 31, 1995, and unless
extended will terminate on that date.
For further information concerning Fund expenses, see "The Funds'
Board of Directors, Manager and Investment Advisers," page [ ].
Example of Effect of Fund Expenses
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming
(1) a 5% annual rate of return and (2) full redemption at the end of each
3
<PAGE>
time period. As noted in the table above, the Funds charge no redemption
fees of any kind.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Global Government $11 $34 $59 $131
Global Equity $13 $40 N/A N/A
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of and does not represent the
projected or actual performance of Navigator Shares of the Funds. The
above tables and example should not be considered a representation of past
or future expenses. Actual expenses may be greater or less than those
shown. The actual expenses attributed to Navigator Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, whether LMFA and/or Batterymarch
reimburses all or a portion of their respective Fund's expenses, and the
extent to which Navigator Shares incur variable expenses, such as transfer
agency costs.
4
<PAGE>
Financial Highlights
Effective October [ ], 1995, Global Government and Global Equity
commenced the sale of Navigator Shares. The information shown below for
prior periods is for Primary Shares (the other class of shares currently
offered) and reflects 12b-1 fees paid by that class and not by Navigator
Shares.
The year-end financial information that follows has been derived from
each Fund's financial statements. Global Government's financial statements
for the year ended December 31, 1994 and the report of Coopers & Lybrand
L.L.P. thereon are included in that Fund's annual report and are
incorporated by reference into the Statement of Additional Information.
The annual report for each Fund is available to shareholders without
charge by calling an investment executive at Fairfield or Legg Mason or
Legg Mason's Funds Marketing Department at 800-822-5544. Information
shown for the period ended June 30, 1995 has not been audited.
<TABLE>
<CAPTION>
Global Government
PRIMARY CLASS
Years Ended December 31, 1995B 1994 1993A
(Unaudited)
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of $10.27 $10.00
period $9.54
Net investment incomeC 0.31 0.57 0.36
Net realized and unrealized gain
(loss) on investments, forward
currency contracts, options and
currency translations 1.11 (0.71) 0.31
Total from investment operations
1.42 (0.14) 0.67
Distributions to shareholders:
Net investment income (0.27) (0.59) (0.36)
Net realized gain on investments -- -- (0.04)
Net asset value, end of period $10.69 $9.54 $10.27
Total returnD 16.4% (1.4)% 6.8%
5
<PAGE>
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses 1.8%CE 1.3%C 0.3%CE
Net investment income 6.2%CE 5.7%C 5.4%CE
Portfolio turnover rate 162.6%E 127.0% 127.8%E
Net assets, end of period (in
thousands) $152,568 $145,415 $161,072
</TABLE>
_________________________
A For the period April 15, 1993 (commencement of operations) to December
31, 1993.
B For the six months ended June 30, 1995.
C Net of fees waived and reimbursements made by LMFA for expenses in
excess of voluntary limitation as follows: 0.2% until September 30,
1993; 0.35% until December 31, 1993; 0.5% until January 31, 1994; 0.7%
until February 28, 1994; 0.9% until March 31, 1994; 1.1% until April
30, 1994; 1.3% until May 31, 1994; 1.5% until June 30, 1994; 1.7% until
July 31, 1994; and 1.9% until December 31, 1995.
D Not annualized for periods of less than a full year.
E Annualized.
Global Equity
PRIMARY CLASS
Year Ended December 31, 1995A
(Unaudited)
Per Share Operating Performance:
Net asset value, beginning of
period $10.00
Net investment incomeB 0.03
Net realized and unrealized
gain on investments and
currency translations 0.37
Total from investment 0.40
operations
Distributions to shareholders
from:
6
<PAGE>
Net investment income --
Net realized gain on --
investments
Net asset value, end of period
$10.40
Total returnC
4.0%
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses 2.25%D
Net investment income 1.51%D
Portfolio turnover rate 28.17%D
Net assets, end of period
(in thousands) $28,539
__________________
A For the period February 17, 1995 (commencement of operations) to June
30, 1995.
B Net of fees waived and expenses reimbursed pursuant to a voluntary
expense limitation of 2.25%.
C Not annualized for periods of less than a full year.
D Annualized.
Performance Information
From time to time each Fund may quote the total return of each
class of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value, including changes in share price and assuming
reinvestment of dividends and capital gain distributions of an investment
in the fund. Cumulative total return shows the fund's performance over a
specific period of time. Average annual total return is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Performance figures reflect past performance only and are not intended to
indicate future performance. Average annual returns tend to smooth out
variations in the fund's return, so they differ from actual year-by-year
results.
Total returns as of June 30, 1995 were as follows:
Cumulative Total Return
Global
Government Global Equity
Primary Class:
One Year +16.43% N/A
7
<PAGE>
Global
Government Global Equity
Life of Class +21.14%A +4.00%B
Average Annual Total Return
Global
Government Global Equity
Primary Class:
One Year +16.43% N/A
Life of Class +9.06%A N/A
A Inception of Global Government - April 15, 1993.
B Inception of Global Equity - February 17, 1995.
No adjustment has been made for any income taxes payable by
shareholders. The investment return and principal value of an investment
in the Funds will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Returns would have
been lower if LMFA had not waived/reimbursed certain fees and expenses
during the periods presented above. Because Navigator Shares have lower
total expenses, they will generally have a higher return than Primary
Shares. As of the date of this Prospectus, Navigator Shares have no
performance history.
Global Government also may advertise its yield or effective
yield. Yield reflects net investment income per share (as defined by
applicable SEC regulations) over a 30-day (or one-month) period, expressed
as an annualized percentage of net asset value at the end of the period.
The effective yield, although calculated similarly, will be slightly
higher than the yield because it assumes that income earned from the
investment is reinvested (i.e., the compounding effect of reinvestment).
Yield computations differ from other accounting methods and therefore may
differ from dividends actually paid or reported net income.
Further information about each Fund's performance is contained in
that Fund's annual report to shareholders, which may be obtained without
charge by calling an investment executive at Fairfield or Legg Mason or
Legg Mason's Funds Marketing Department at 800-822-5544.
8
<PAGE>
Investment Objectives and Policies
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Corporation's
Board of Directors without a shareholder vote. There can be no assurance
that either Fund will achieve its investment objective.
Global Government's investment objective is to provide capital
appreciation and current income in order to achieve an attractive total
return consistent with prudent investment risk. The Fund normally
attempts to achieve this objective by investing at least 75% of its total
assets in debt securities issued or guaranteed by the U. S. Government or
foreign governments, their agencies, instrumentalities or political
subdivisions. The Fund normally will invest at least 75% of its assets in
debt securities issued or guaranteed by the U. S. Government or foreign
governments, the agencies or instrumentalities of either, supranational
organizations and foreign or domestic corporations, trusts, or financial
institutions rated within the four highest grades by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's ("S&P") or, if unrated by
Moody's or S&P, judged by LMFA to be of comparable quality, certain money
market instruments and repurchase agreements involving any of the
foregoing. These are considered investment grade debt securities.
Under normal circumstances, the Fund will be invested in at least
three different countries, including the United States. The Fund will
invest no more than 40% of its total assets in any one country other than
the United States. There is no other limit on the percentage of the Fund's
assets that may be invested in any one country or currency.
The money market instruments in which the Fund may invest include
commercial paper and other money market instruments which are: rated A-1
or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of investment;
issued or guaranteed as to principal and interest by issuers or guarantors
having an existing debt security rating of A or better by Moody's or S&P,
or if unrated by Moody's or S&P, judged by LMFA to be of comparable
quality; and bank certificates of deposit and bankers' acceptances judged
by LMFA to be of comparable quality.
The remainder of the Fund's assets, not in excess of 25% of its
assets, may be invested in: (1) debt securities of issuers which are rated
at the time of purchase below Moody's or S&P's four highest grades, or
unrated securities judged by LMFA to be of comparable quality. This may
include lower-rated debt securities issued or guaranteed by foreign
governments or by domestic or foreign corporations, trusts or financial
institutions; (2) loans and participations in loans originated by banks
and other financial institutions, which also may be below investment
grade; (3) securities which may be convertible into or exchangeable for,
or carry warrants to purchase, common stock, or other equity interests
(such securities may offer attractive income opportunities, and the debt
securities of certain issuers may not be available without such features);
and (4) common and preferred stocks. See page [ ] for a discussion of the
9
<PAGE>
risks of lower-rated debt securities. If a security is downgraded
subsequent to its purchase, the Fund will sell that security or another if
that is necessary to assure that 75% of its assets are investment grade or
equivalent quality instruments.
The Fund may invest directly in U.S. dollar-denominated or
foreign currency-denominated foreign debt (including preferred or
preference stock) and money market securities issued or guaranteed by
governmental and non-governmental issuers, international agencies and
supranational entities. Some securities issued by foreign governments or
their subdivisions, agencies and instrumentalities may not be backed by
the full faith and credit of the foreign government.
The Fund's foreign investments may include securities of issuers
based in developed countries (including, but not limited to, countries in
the European Community, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea).
The Fund may invest in "Brady Bonds," which are debt
restructurings that provide for the exchange of cash and loans for newly
issued bonds. Brady Bonds have so far been issued by thirteen emerging
market governments, and other such governments are expected to issue them
in the future. Brady Bonds currently are rated below investment grade. As
of the date of this Prospectus, LMFA is not aware of the occurrence of any
payment defaults on Brady Bonds. Investors should recognize, however, that
Brady Bonds have been issued only recently and, accordingly, do not have a
long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U. S.
dollar) and are actively traded in the secondary market for Latin American
debt.
The Fund may invest in either collateralized or uncollateralized
Brady Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which
may be fixed-rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Interest payments on such bonds
generally are collateralized by cash or securities in an amount that, in
the case of fixed-rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is
equal to at least one year's rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter.
Foreign government securities may include debt securities
denominated in multinational currency units. An example of a multinational
currency unit is the European Currency Unit ("ECU"). An ECU represents
specified amounts of currencies of certain member states of the European
Economic Community. The specific amounts of currencies comprising the ECU
may be adjusted to reflect changes in relative values of the underlying
currencies. LMFA does not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranational entities, in particular, issue
10
<PAGE>
ECU-denominated obligations. The market for ECUs may become illiquid at
times of rapid change in the European currency markets, limiting the
Fund's ability to prevent potential losses.
The Fund may buy and sell options, futures and forward contracts
for hedging purposes and, to the extent permitted by regulatory agencies,
for non-hedging purposes in an effort to enhance income. See "Options and
Futures; Forward Currency Exchange Contracts," page [ ] and "Risks of
Futures, Options and Forward Contracts," page [ ]. The Fund may purchase
securities on a when-issued basis and enter into forward commitments to
purchase securities; may enter into swaps, caps, collars and floors for
hedging and other purposes; may lend its securities to brokers, dealers
and other financial institutions to earn income; may borrow money for
temporary or emergency purposes; and may enter into short sales "against
the box." See "When-Issued Securities and Standby Commitments," page [ ].
When LMFA believes such action is warranted by unusual market
conditions, the Fund may invest temporarily without limit in cash (U.S.
dollars) and U.S. dollar-denominated money market instruments.
Global Equity's investment objective is to seek maximum long-term
total return. The Fund attempts to meet this objective by investing
primarily in common stocks of companies located anywhere in the world,
including the United States. Under normal circumstances, the Fund will
invest in equity securities of issuers located in at least three different
countries. Batterymarch examines securities from over 20 international
stock markets, with emphasis on several of the largest--Japan, the United
Kingdom, France, Canada, Germany and the United States. Common stocks are
chosen using Batterymarch's system for identifying common stocks it
believes to be undervalued. The weighting of the Fund's assets among
individual countries will reflect an assessment of the attractiveness of
individual equity securities regardless of where they trade.
In addition, the Fund may invest up to 35% of its total assets in
the securities of companies located in emerging markets. Emerging markets
will include any country: (i) having an "emerging stock market" as defined
by the International Finance Corporation; (ii) with low- to middle-income
economies according to the International Bank for Reconstruction and
Development ("World Bank"); (iii) listed in World Bank publications as
developing or (iv) determined by Batterymarch to be an emerging market as
defined above. The following issuers are considered to be located in
emerging markets: (i) companies the principal securities trading market
for which is an emerging market; (ii) companies organized under the laws
of, and with a principal office in, emerging markets; (iii) companies
whose principal activities are located in emerging markets; and (iv)
companies that derive 50% or more of their total revenue from either goods
or services produced in emerging markets or sold in emerging markets.
The Fund's investment portfolio will normally be diversified
across a broad range of industries and across a number of countries,
consistent with the objective of maximum total return. The Fund is
expected to remain substantially fully invested in equity securities.
11
<PAGE>
However, when cash is temporarily available, or for temporary defensive
purposes, the Fund may invest without limit in repurchase agreements of
domestic issuers. When conditions warrant, for temporary defensive
purposes, the Fund also may invest without limit in short-term debt
instruments, including government, corporate and money market securities
of domestic issuers. Such short-term investments will be rated in one of
the four highest rating categories by S&P or Moody's or, if unrated by S&P
or Moody's, deemed by Batterymarch to be of comparable quality.
The Fund is authorized to invest in stock index futures and
options as discussed below. The Fund may also enter into forward foreign
currency exchange contracts in order to protect against fluctuations in
exchange rates. See "Options, Futures and Forward Currency Exchange
Contracts," and "Risks of Futures, Options and Forward Contracts,"
page [ ].
The Fund is permitted to hold securities other than common stock,
such as debentures or preferred stock that may or may not be convertible
into common stock. Some of these instruments may be rated below
investment grade. The Fund will not purchase securities rated below
investment grade (or comparable unrated securities) if, as a result, more
than 5% of the Fund's net assets would be so invested.
Investment Restrictions
Global Government is a "non-diversified" investment company;
therefore, the percentage of its assets invested in any single issuer is
not limited by the Investment Company Act of 1940 ("1940 Act"). However,
the Fund intends to continue to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"),
which requires that, at the close of each quarter of the Fund's taxable
year: (1) with respect to 50% of the Fund's total assets, no more than 5%
of its total assets may be invested in the securities of any one issuer;
and (2) no more than 25% of the value of the Fund's total assets may be
invested in the securities of a single issuer. To the extent the Fund's
assets are invested in the obligations of a limited number of issuers or
in a limited number of countries or currencies, the value of the Fund's
shares will be more susceptible to any single economic, political or
regulatory occurrence than would the shares of a diversified company.
The fundamental restrictions applicable to the Fund include a
prohibition on investing 25% or more of total assets in the securities of
issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U. S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto). Additional fundamental and non-fundamental
investment restrictions are set forth in the Statement of Additional
Information.
Investment Techniques and Risks
12
<PAGE>
The following investment techniques and risks apply to each of
the Funds unless otherwise stated.
Foreign Securities
Investing in the securities of issuers in any foreign country
involves special risks and considerations not typically associated with
investing in U.S. companies. These include risks resulting from
differences in accounting, auditing and financial reporting standards;
lower liquidity than U.S. securities; the possibility of nationalization,
expropriation or confiscatory taxation; adverse changes in investment or
exchange control regulations (which may include suspension of the ability
to transfer currency out of a country); and political instability. In many
cases, there is less publicly available information concerning foreign
issuers than is available concerning U.S. issuers. Additionally, purchases
and sales of foreign securities and dividends and interest payable on
those securities may be subject to foreign taxes and tax withholding.
Foreign securities generally exhibit greater price volatility and a
greater risk of illiquidity. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in currencies other than the
U.S. dollar irrespective of the performance of the underlying investment.
The relative performance of various countries' fixed income and
equity markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Individual foreign
economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. Bank deposit insurance, if any, may be subject to widely varying
regulations and limits in foreign countries.
Foreign securities purchased by a Fund may be listed on foreign
exchanges or traded over-the-counter. Transactions on foreign exchanges
are usually subject to mark-ups or commissions higher than negotiated
commissions on U.S. transactions, although each Fund will endeavor to
obtain the best net results in effecting transactions. There is less
government supervision and regulation of exchanges and brokers in many
foreign countries than in the United States. Additional costs associated
with an investment in foreign securities will include higher custodial
fees than apply to domestic custodial arrangements and transaction costs
of foreign currency conversions.
Each Fund may invest in securities of issuers based in emerging
markets (including, but not limited to, countries in Latin America,
Eastern Europe, Asia and Africa). The risks of foreign investment,
described above, are greater for investments in emerging markets. Because
of the special risks associated with investing in emerging markets, an
investment in either Fund should be considered speculative. With respect
to Global Government, debt securities of governmental and corporate
issuers in such countries will typically be rated below investment grade
or be of comparable quality.
13
<PAGE>
Investors are strongly advised to consider carefully the special
risks involved in emerging markets, which are in addition to the usual
risks of investing in developed markets around the world. Many emerging
market countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain
emerging markets.
Economies in emerging markets generally are dependent heavily
upon international trade and, accordingly, have been and may continue to
be affected adversely by economic conditions, trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which
they trade.
The securities markets of emerging markets are substantially
smaller, less developed, less liquid and more volatile than the securities
markets of the U.S. and other more developed countries. Disclosure and
regulatory standards in many respects are less stringent than in the U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such
markets, and enforcement of existing regulations has been extremely
limited.
Some emerging markets have different settlement and clearance
procedures. In certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. The inability of a Fund
to make intended securities purchases due to settlement problems could
cause that Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one
or more emerging markets as a result of which trading of securities may
cease or may be substantially curtailed and prices for a Fund's portfolio
securities in such markets may not be readily available.
Global Equity may invest more than 25% of its total assets in
securities of Japanese issuers. Japan is the largest capitalized stock
market outside the United States. The performance of the Fund may
therefore be significantly affected by events affecting the Japanese
economy and the exchange rate between the Japanese yen and the U.S.
dollar. Japan has recently experienced a recession, including a decline in
real estate values that adversely affected the balance sheets of many
financial institutions. The strength of the Japanese currency may
adversely affect industries engaged substantially in export. Japan's
economy is heavily dependent on foreign oil. Japan is located in a
seismically active area, and severe earthquakes may damage important
14
<PAGE>
elements of the country's infrastructure. Japanese economic prospects may
be affected by the political and military situations of its nearby
neighbors, notably North and South Korea, China, and Russia.
Global Government may invest in sovereign debt securities of
emerging market governments. Sovereign debt is subject to risks in
addition to those relating to foreign investments generally. As a
sovereign entity, the issuing government may be immune from lawsuits in
the event of its failure or refusal to pay the obligations when due. The
debtor's willingness or ability to repay in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of
its foreign reserves, the availability of sufficient foreign exchange on
the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which the sovereign
debtor may be subject. Sovereign debtors also may be dependent on expected
disbursements from foreign governments or multilateral agencies, the
country's access to trade and other international credits, and the
country's balance of trade. Some emerging market sovereign debtors have in
the past rescheduled their debt payments or declared moratoria on
payments, and similar occurrences may happen in the future.
Repurchase Agreements
Repurchase agreements are agreements under which either U.S.
government obligations or other high-quality, liquid debt securities are
acquired from a securities dealer or bank subject to resale at an
agreed-upon price and date. The securities are held for the Funds by State
Street Bank and Trust Company ("State Street"), the Funds' custodian, as
collateral until resold and will be supplemented by additional collateral
if necessary to maintain a total value equal to or in excess of the value
of the repurchase agreement. A Fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and
that Fund is delayed or prevented from exercising its right to dispose of
the collateral securities, which may decline in value in the interim. A
Fund will enter into repurchase agreements only with financial
institutions which the Adviser believes present minimal risk of default
during the term of the agreement based on guidelines established by the
Corporation's Board of Directors.
Neither Fund will enter into repurchase agreements of more than
seven days' duration if more than 15% of its total assets would be
invested in such agreements and other illiquid investments.
Loans of Portfolio Securities
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned, is continuously maintained by the borrower with that Fund. During
the time securities are on loan, the borrower will pay the Fund an amount
15
<PAGE>
equivalent to any dividends or interest paid on such securities, and the
Fund may invest the cash collateral and earn income, or it may receive an
agreed upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the
option of the Fund or the borrower. Each Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. Each Fund presently does not
expect to have on loan at any given time securities totaling more than
one-third of its net asset value. When a Fund loans a security to another
party, it runs the risk that the other party will default on its
obligation, and that the value of the collateral will decline before the
Fund can dispose of it.
Restricted And Illiquid Securities
Restricted securities are securities subject to legal or
contractual restrictions on resale, such as private placements. Such
restrictions might prevent the sale of restricted securities at a time
when a sale would otherwise be desirable. No Fund will acquire a security
for which there is not a readily available market ("illiquid assets") if
such acquisition would cause the aggregate value of illiquid assets to
exceed 15% of its net assets. Time deposits and repurchase agreements
maturing in more than seven days are considered illiquid. Illiquid
securities may be difficult to value, and the Fund may have difficulty
disposing of such securities promptly.
The Funds do not consider foreign securities to be illiquid if
they can be freely sold in the principal markets in which they are traded,
even if they are not registered for sale in the U.S. Rule 144A
securities, although not registered, may be sold to qualified
institutional buyers in accordance with Rule 144A under the Securities Act
of 1933. Each Fund's adviser, acting pursuant to guidelines established
by the Corporation's Board of Directors, may determine that some Rule 144A
securities are liquid. If the newly-developing institutional markets for
restricted securities do not develop as anticipated, it could adversely
affect the liquidity of a Fund.
Options, Futures and Forward Currency Exchange Contracts
A futures contract is an agreement between the parties to buy or
sell a specified amount of one or more securities or currencies at a
specified price and date; futures contracts are generally closed out by
the parties in advance of that date for a cash settlement. Under an option
contract, one party has the right to require the other to buy or sell a
specific security, currency or futures contract, and may exercise that
right if the market price of the underlying instrument moves in a
direction advantageous to the holder of the option. A forward foreign
currency exchange contract is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the
16
<PAGE>
time of the contract. Options, futures and forward currency exchange
contracts are generally considered to be "derivatives."
For Global Government:
The Fund may use options to attempt to enhance income; use
options and futures contracts for hedging purposes; and use forward
currency contracts for hedging purposes or to attempt to enhance income.
The Fund may purchase and sell call and put options on bond indices and on
securities in which the Fund is authorized to invest for hedging purposes
or to enhance income. The Fund may also purchase and sell interest rate
and bond index futures contracts and options thereon for hedging purposes.
The Fund may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date either
with respect to specified transactions or with respect to its portfolio
positions. For example, when LMFA anticipates making a currency exchange
transaction in connection with the purchase or sale of a security, the
Fund may enter into a forward contract in order to set the exchange rate
at which the transaction will be made. The Fund may enter into a forward
contract to sell an amount of a foreign currency approximating the value
of some or all of its security positions denominated in such currency. It
may also engage in cross-hedging by using a forward contract in one
currency to hedge against fluctuations in the value of securities
denominated in a different currency. The purpose of these contracts is to
minimize the risk to the Fund from adverse changes in the relationship
between two currencies. Cross-currency hedging requires a degree of
correlation between the two currencies involved. Some currency
relationships thought to be correlated have proven highly volatile on some
occasions.
The Fund may also purchase and sell foreign currency futures
contracts, options thereon and options on foreign currencies to hedge
against the risk of fluctuations in the market value of foreign securities
it holds or intends to purchase, resulting from changes in foreign
exchange rates. The Fund may also purchase and sell options on foreign
currencies and use forward currency contracts to enhance income.
For Global Equity:
The Fund may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future
foreign exchange rates in the purchase and sale of investment securities.
It may not enter into such contracts for speculative purposes. Forward
currency contracts may be bought or sold to protect the Fund to a limited
extent against adverse changes in exchange rates between foreign
currencies and the U.S. dollar.
The Fund may utilize futures contracts and options to a limited
extent. Specifically, the Fund may enter into futures contracts and
related options provided that not more than 5% of its assets are required
as a futures contract deposit and/or premium; in addition, the Fund may
17
<PAGE>
not enter into futures contracts or related options if, as a result, more
than 20% of the Fund's total assets would be so invested.
Futures contracts and options may be used for several reasons: to
simulate full investment in underlying securities while retaining a cash
balance for Fund management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying equity security
or index.
Risks of Futures, Options and Forward Currency Exchange Contracts
The use of options, futures and forward currency exchange
contracts involves certain investment risks and transaction costs. These
risks include (1) dependence on the ability of each Fund's Adviser to
predict movements in the prices of individual securities, fluctuations in
the general securities markets or in market sectors and movements in
interest rates and currency markets; (2) imperfect correlation, or no
correlation at all, between movements in the price of options, currencies,
futures contracts or forward currency contracts and movements in the price
of the underlying securities or currencies; (3) the fact that skills
needed to use these instruments are different from those needed to select
a Fund's portfolio securities; (4) the possible lack of a liquid secondary
market for any particular instrument at any particular time; (5) the
possibility that the use of cover or segregation involving a large
percentage of the Fund's assets could impede portfolio management or that
Fund's ability to meet redemption requests or other short-term
obligations; (6) the possible need to defer closing out positions in these
instruments in order to avoid adverse tax consequences; and (7) the fact
that, although use of these instruments for hedging purposes can reduce
the risk of loss, they can also reduce the opportunity for gain, or even
result in losses, by offsetting favorable price movements in hedged
investments. There can be no assurance that a Fund's use of futures
contracts, forward currency contracts or options will be successful.
Moreover, in the event that an anticipated change in the price of the
securities or currencies that are the subject of the strategy does not
occur, the Fund might have been in a better position had it not used that
strategy at all. Forward currency contracts, which protect the value of
a Fund's investment securities against a decline in the value of a
currency, do not eliminate fluctuations in the underlying prices of the
securities. They simply establish an exchange rate at a future date. The
use of options and futures contracts for speculative purposes, i.e., to
enhance income or to increase a Fund's exposure to a particular security
or foreign currency, subjects the Fund to additional risk. The use of
options, futures or forward contracts to hedge an anticipated purchase
also subjects a Fund to additional risk until the purchase is completed or
the position is closed out.
When a Fund purchases or sells a futures contract, it is required
to deposit with its custodian (or a broker, if legally permitted) a
specified amount of cash or U. S. government securities ("initial
margin"). A Fund will not enter into futures contracts or commodities
18
<PAGE>
option positions (other than option positions that are "in-the-money" at
the time of purchase) if, immediately thereafter, its initial margin
deposits plus premiums paid by it, would exceed 5% of the fair market
value of the Fund's total assets. If a Fund writes an option or sells a
futures contract and is not able to close out that position prior to
settlement date, the Fund may be required to deliver cash or securities
substantially in excess of these amounts.
Many options on securities are traded primarily on the over-the-
counter ("OTC") market. OTC options are two-party contracts with price and
other terms negotiated between buyer and seller and generally do not have
as much liquidity as exchange-traded options. Thus, when a Fund purchases
an OTC option, it relies on the dealer from which it has purchased the
option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium
paid by that Fund as well as the loss of the expected benefit of the
transaction. OTC options may be considered "illiquid securities" for
purposes of each Fund's investment limitations. Options and futures traded
on U.S. or other exchanges may be subject to position and daily
fluctuation limits, which may limit the ability of a Fund to reduce risk
using such options and futures and may limit their liquidity.
When using options, futures or forwards, each Fund will cover its
short positions or maintain a segregated asset account, to the extent
required by SEC staff positions. The Statement of Additional Information
contains a more detailed description of futures, options and forward
strategies.
The following describes certain investment techniques used primarily by
Global Government:
Lower-Rated Debt Securities
The Fund may invest in debt obligations of any grade. LMFA seeks
to minimize the risks of investing in all securities through in-depth
credit analysis and attention to current developments in interest rates
and market conditions.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium-grade" obligations; they are "neither highly protected nor poorly
secured . . . [I]nterest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well." Where one rating organization has assigned an
investment grade rating to an instrument and others have given it a lower
rating, the Fund may consider the instrument to be investment grade. The
ratings do not include the risk of market fluctuations.
The Fund may invest up to 25% of its total assets in high-yield,
high-risk securities rated below investment grade. Such securities are
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<PAGE>
deemed by Moody's and S&P to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal. Those in the
lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding
the individual issuer are more likely to cause price volatility and weaken
the capacity of such securities to make principal and interest payments
than is the case for higher grade debt securities. An economic downturn
affecting the issuers may result in an increased incidence of default. The
market for lower-rated securities may be thinner and less active than that
for higher-rated securities. LMFA will invest in such securities only when
it concludes that the anticipated return to the Fund on such an investment
warrants exposure to the additional level of risk. A further description
of Moody's and S&P's ratings is included in the Appendix to the Statement
of Additional Information. Although the Fund may invest in lower-rated
debt securities of domestic issuers, it currently intends to limit
investments in lower-rated debt securities to those issued by foreign
corporations, those issued or guaranteed by foreign governmental issuers,
and those issued by domestic corporations but linked to the performance of
such foreign-issue debt. See "Foreign Securities" above.
The table below provides a summary of ratings assigned to debt
holdings in Global Government's portfolio. These figures are
dollar-weighted averages of month-end portfolio holdings during the fiscal
year ended December 31, 1994, presented as a percentage of total
investments. These percentages are historical and are not necessarily
indicative of the quality of current or future portfolio holdings, which
may vary.
<TABLE>
<CAPTION>
Moody's Ratings Aaa/Aa/A Baa Ba B Caa Ca C NR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average 63.1% -- 12.0% 4.9% -- -- -- 20.0%
</TABLE>
<TABLE>
<CAPTION>
S&P Ratings AAA/AA/A BBB BB B CCC CC/C D NR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average 64.9% 1.3% 4.2% 0.2% -- -- -- 29.4%
</TABLE>
The dollar-weighted average of securities not rated by either
Moody's or S&P amounted to 17.6%. This may include securities rated by
other nationally recognized rating organizations, as well as unrated
securities. Unrated securities are not necessarily lower-quality
securities.
U. S. Government Securities
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<PAGE>
The U. S. government securities in which the Fund may invest
include direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds) and obligations issued by U. S. government agencies and
instrumentalities, including securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association ("GNMA") certificates), securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Federal Home Loan Banks) and securities supported solely
by the creditworthiness of the issuer (such as Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
securities).
Mortgage-Related Securities
The Fund may invest in mortgage-related securities.
Mortgage-related securities represent interests in pools of mortgages
created by lenders such as commercial banks, savings and loan
institutions, mortgage bankers and others. Mortgage-related securities may
be issued by governmental or government-related entities or by
non-governmental entities such as banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers.
Interest in pools of mortgage-related securities differ from
other forms of debt securities which normally provide for periodic payment
of interest in fixed amounts with principal payments at maturity or
specified call dates. In contrast, mortgage-related securities provide
monthly payments which consist of interest and, in most cases, principal.
In effect, these payments are a "pass-through" of the monthly payments
made by the individual borrowers on their residential mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary
widely, it is not possible to predict accurately the average life of a
particular mortgage-related security. Although mortgage-related
securities are issued with stated maturities of up to forty years,
unscheduled or early payments of principal and interest on the underlying
mortgages may shorten considerably the securities' effective maturities.
When interest rates are declining, such prepayments usually increase. On
the other hand, a decrease in the rate of prepayments, resulting from an
increase in market interest rates, among other causes, may extend the
effective maturities of mortgage-related securities, increasing their
sensitivity to changes in market interest rates. The volume of
prepayments of principal on a pool of mortgages underlying a particular
mortgage-related security will influence the yield of that security.
Increased prepayment of principal may limit the Fund's ability to realize
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<PAGE>
the appreciation in the value of such securities that would otherwise
accompany declining interest rates. An increase in mortgage prepayments
could cause the Fund to incur a loss on a mortgage-related security that
was purchased at a premium. In determining the Fund's average maturity,
LMFA must apply certain assumptions and projections about the maturity and
prepayment of mortgage-related securities; actual prepayment rates may
differ.
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series
which have different maturities and are generally retired in sequence.
Although full payoff of each class of bonds is contractually required by a
certain date, any or all classes of obligations may be paid off sooner
than expected because of an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and
government-related securities because there are no direct or indirect
government guarantees of payments in the former securities. However, many
issuers or servicers of mortgage-related securities guarantee timely
payment of interest and principal on such securities. Timely payment of
principal may also be supported by various forms of insurance, including
individual loan, title, pool and hazard policies. There can be no
assurance that the private issuers or insurers will be able to meet their
obligations under the relevant guarantees and insurance policies. Where
privately issued securities are collateralized by securities issued by
FHLMC, FNMA or GNMA, the timely payment of interest and principal is
supported by the government-related securities collateralizing such
obligations.
Some mortgage-related securities will be considered illiquid and
will be subject to the Fund's investment limitation that no more than 15%
of its net assets will be invested in illiquid securities.
Stripped Mortgage-Backed Securities
The Fund may invest in stripped mortgage-backed securities, which
are classes of mortgage-backed securities that receive different
proportions of interest and principal distribution from an underlying pool
of mortgage assets. These securities are more sensitive to changes in
prepayment and interest rates and the market for them is less liquid than
is the case for traditional mortgage-backed and other debt securities. A
common type of stripped mortgage-backed security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
22
<PAGE>
remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest only or "IO" class), while the
other class will receive all of the principal (the principal only or "PO"
class). The yield to maturity of an IO class is extremely sensitive not
only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the related underlying
mortgage assets. If the Fund purchases an IO and the underlying principal
is repaid faster than expected, the Fund will recoup less than the
purchase price of the IO, even one that is highly rated. Extensions of
maturity resulting from increases of market interest rates may have an
especially pronounced effect on POs. Most IOs and POs are regarded as
illiquid and will be included in the Fund's 15% limit on illiquid
securities. U.S. government-issued IOs and POs backed by fixed-rate
mortgages may be deemed liquid by LMFA, following guidelines and standards
established by the Corporation's Board of Directors.
Asset-Backed Securities
Asset-backed securities are securities that represent direct or
indirect participations in, or are secured by and payable from, assets
such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets
are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest on
asset-backed securities may be supported by credit enhancements, such as
various forms of cash collateral accounts or letters of credit. Like
mortgage-related securities, asset-backed securities are subject to the
risk of prepayment. The risk that recovery on repossessed collateral might
be unavailable or inadequate to support payments on asset-backed
securities, however, is greater than in the case of mortgage-backed
securities.
Loans and Loan Participations
The Fund may purchase loans and participation interests in loans
originally made by banks and other lenders to governmental borrowers. Many
such interests are not rated by any rating agency and may involve
borrowers considered to be poor credit risks. The Fund's interests in
these loans may not be secured, and the Fund will be exposed to a risk of
loss if the borrower defaults. Many such interests will be illiquid and
therefore subject to the Fund's 15% limit on illiquid investments.
In purchasing a loan participation, the Fund may have less
protection under the federal securities laws than it has in purchasing
traditional types of securities. The Fund's ability to assert its rights
against the borrower will also depend on the particular terms of the loan
agreement among the parties.
Commercial Paper and Other Short-Term Instruments
23
<PAGE>
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies.
The Fund may purchase commercial paper issued pursuant to the
private placement exemption in Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition under the federal
securities laws in that any resale must similarly be made in an exempt
transaction. The Fund may or may not regard such securities as illiquid,
depending on the circumstances of each case. See "Restricted and Illiquid
Securities," page [ ].
The Fund may also invest in obligations (including certificates
of deposit, demand and time deposits and bankers' acceptances) of U.S.
banks and savings and loan institutions if the issuer has total assets in
excess of $1 billion at the time of purchase or if the principal amount of
the instrument is insured by the Federal Deposit Insurance Corporation. A
bankers' acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial
transaction. Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a specified interest
rate. Certificates of deposit are negotiable short-term obligations issued
by banks against funds deposited in the issuing institution. The interest
rate on some certificates of deposit is periodically adjusted prior to the
stated maturity, based upon a specified market rate. While domestic bank
deposits are insured by an agency of the U. S. Government, the Fund will
generally assume positions considerably in excess of the insurance limits.
Preferred Stock
The Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of LMFA, the preferred
stock is more attractively priced in light of the risks involved.
Preferred stock pays dividends at a specified rate and generally has
preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Preferred shareholders may
have certain rights if dividends are not paid, but do not generally have a
legal right to demand payment. Shareholders may suffer a loss of value if
dividends are not paid. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the
issuer's creditworthiness than are the prices of debt securities. Under
ordinary circumstances, preferred stock does not carry voting rights.
Convertible Securities
A convertible security is a bond, debenture, note, preferred
stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
24
<PAGE>
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its
yield in comparison with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege and (2) its
worth, at market value, if converted into the underlying common stock.
Convertible securities are typically issued by smaller capitalized
companies whose stock prices may be volatile. The price of a convertible
security often reflects such variations in the price of the underlying
common stock in a way that non-convertible debt does not. The Fund has no
current intention of converting any convertible securities it may own into
equity or holding them as equity upon conversion, although it may do so
for temporary purposes. A convertible security may be subject to
redemption at the option of the issuer at a price established in the
convertible security's governing instrument. If a convertible security
held by the Fund is called for redemption, the Fund will be required to
convert it into the underlying common stock, sell it to a third party or
permit the issuer to redeem the security. Any of these actions could have
an adverse effect on the Fund's ability to achieve its investment
objective.
Variable and Floating Rate Securities
The Fund may invest in variable and floating rate securities.
These securities provide for periodic adjustment in the interest rate paid
on the obligations. LMFA believes that the variable or floating rate of
interest paid on these securities may reduce the wide fluctuations in
market value typical of fixed-rate, long-term securities. The yield
available on floating rate securities is typically less than that on
fixed-rate notes of similar maturity issued by the same company. The
rates of some securities vary according to a formula based on one or more
interest rates, and some vary inversely with changes in the underlying
rates. The value of these securities can be very volatile when market
rates change.
Zero Coupon and Pay-In-Kind Bonds
A zero coupon bond is a security that makes no fixed interest
payments but instead is sold at a deep discount from its face value. The
bond is redeemed at its face value on the specified maturity date. Zero
coupon bonds may be issued as such, or they may be created by a broker who
strips the coupons from a bond and separately sells the rights to receive
principal and interest. Pay-in-kind securities pay interest in the form of
additional securities, thereby adding additional debt to the issuer's
25
<PAGE>
balance sheet. The prices of both types of bonds fluctuate more in
response to changes in market interest rates than do the prices of debt
securities with similar maturities that pay interest in cash.
An investor in zero coupon or pay-in-kind bonds generally accrues
income on such securities prior to the receipt of cash payments. Since a
fund must distribute substantially all of its income to shareholders to
qualify for pass-through treatment under the federal income tax laws, a
fund investing in such bonds may have to dispose of other securities to
generate the cash necessary for the distribution of income attributable to
its zero coupon or pay-in-kind bonds. Such disposal could occur at a time
which would be disadvantageous to the fund and when the fund would not
otherwise choose to dispose of the assets.
Reverse Repurchase Agreements and Other Borrowing
In a reverse repurchase agreement, the Fund temporarily transfers
possession of a portfolio instrument to another person, such as a
financial institution or broker-dealer, in return for cash and agrees to
repurchase the instrument at an agreed upon time (normally within seven
days) and price, including interest payment. The Fund may also enter into
dollar rolls, in which the Fund sells a fixed income security for delivery
in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, the Fund would forego
principal and interest paid on such securities. The Fund would be
compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by the interest earned
on the proceeds of the initial sale.
The Fund may engage in reverse repurchase agreements, dollar
rolls and other borrowing as a means of raising cash to satisfy redemption
requests or for other temporary or emergency purposes without selling
portfolio instruments. While engaging in reverse repurchase agreements and
dollar rolls, the Fund will maintain cash or high-grade, liquid debt
securities in a segregated account at its custodian bank with a value at
least equal to the Fund's obligation under the agreements, adjusted daily.
To avoid potential leveraging effects of borrowing (including
reverse repurchase agreements and dollar rolls), the Fund will not
purchase securities while such borrowing is in excess of 5% of its total
assets. The Fund will limit its borrowing to no more than one-third of its
total assets.
When-Issued Securities and Standby Commitments
The Fund may enter into commitments to purchase U. S. government
securities or other securities on a when-issued basis. Such securities are
often the most efficiently priced and have the best liquidity in the bond
market. When the Fund purchases securities on a when-issued basis, it
assumes the risks of ownership at the time of purchase, not at the time of
receipt. However, the Fund does not have to pay for the obligations until
26
<PAGE>
they are delivered to it. This is normally seven to 15 days later, but
could be considerably longer in the case of some mortgage-backed
securities. Use of this practice would have a leveraging effect on the
Fund. The Fund does not expect that its commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 20% of its total
assets.
Issuance of securities purchased on a when- and if-issued basis
depends on the occurrence of an event. If the anticipated event does not
occur, the securities are not issued. The characteristics and risks of
when-and-if-issued securities are similar to those involved in writing put
options.
To meet its payment obligation, the Fund will establish a
segregated account with its custodian and maintain cash or liquid
high-grade debt obligations, in an amount at least equal in value to the
Fund's commitments to purchase when- and if-issued securities.
Indexed Securities
The Fund may purchase various fixed income and debt securities
whose principal value or rate of return is linked or indexed to relative
exchange rates among two or more currencies or linked to commodities
prices or other financial indicators. Such securities may be more volatile
than the underlying instruments, resulting in a leveraging effect on the
Fund.
The value of such securities may fluctuate in response to changes
in the index, market conditions, and the creditworthiness of the issuer.
These securities may vary directly or inversely with the underlying
investments.
Swaps, Caps, Floors and Collars
The Fund does not intend to purchase swaps, caps, collars, or
floors if, as a result, more than 5% of the Fund's net assets would
thereby be placed at risk. The Statement of Additional Information
contains a more detailed description of swaps, caps, floors and collars.
Capital Appreciation and Risk
The market value of fixed income and other debt securities is
partially a function of changes in the current level of interest rates. An
increase in interest rates generally reduces the market value of existing
fixed income and other debt securities, while a decline in interest rates
generally increases the market value of such securities. The longer the
maturity, the more pronounced is the rise or decline in the security's
price. When interest rates are falling, a fund with a shorter maturity
generally will not generate as high a level of total return as a fund with
a longer maturity. Conversely, when interest rates are rising, a fund with
a shorter maturity will generally outperform longer maturity portfolios.
When interest rates are flat, shorter duration portfolios generally will
27
<PAGE>
not generate as high a level of total return as longer maturity portfolios
(assuming that long-term interest rates are higher than short-term rates,
which is commonly the case).
Changes in the creditworthiness, or the market's perception of
the creditworthiness, of the issuers of fixed income and other debt
securities will also affect their prices.
A debt security may be callable, i.e., subject to redemption at
the option of the issuer, at a price established in the security's
governing instrument. If a debt security held by the Fund is called for
redemption, the Fund will be required to permit the issuer to redeem the
security or sell it to a third party. Either of these actions could have
an adverse effect on the Fund's ability to achieve its investment
objective.
For each Fund:
Portfolio Turnover
For the year ended December 31, 1994, Global Government's
portfolio turnover rate was 127.0%. Global Government and Global Equity
each anticipates that in the future its portfolio turnover rate will not
exceed 250% and 100%, respectively. Global Government may sell fixed-
income securities and buy similar securities to obtain yield and take
advantage of market anomalies, a practice which will increase the reported
turnover rate of that Fund. The portfolio turnover rate is computed by
dividing the lesser of purchases or sales of securities for the period by
the average value of portfolio securities for that period. Short-term
securities are excluded from the calculation. High portfolio turnover
rates (100% or more) will involve correspondingly greater transaction
costs which will be borne directly by that Fund. It may also increase the
amount of short-term capital gains, if any, realized by a Fund and will
affect the tax treatment of distributions paid to shareholders because
distributions of net short-term capital gains are taxable as ordinary
income. Each Fund will take these possibilities into account as part of
its investment strategy.
How to Purchase and Redeem Shares
Institutional Clients of Fairfield Group, Inc. may purchase
Navigator Shares from Fairfield, the principal offices of which are
located at 200 Gibraltar Road, Horsham, Pennsylvania 19044. Other
investors eligible to purchase Navigator Shares may purchase them through
a brokerage account with Legg Mason. (Legg Mason and Fairfield are wholly
owned subsidiaries of Legg Mason, Inc., a financial services holding
company.)
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may change these minimum amounts at its discretion.
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<PAGE>
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after
the close of the Exchange or on days the Exchange is closed will be
executed at the net asset value determined as of the close of the Exchange
on the next day the Exchange is open. See "How Net Asset Value is
Determined" on page [ ].
Each Fund reserves the right to reject any order for its shares,
to suspend the offering of shares for a period of time, or to waive any
minimum investment requirements.
In addition to Institutional Clients purchasing shares directly
from Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with
the purchase of Navigator Shares. Depending upon the terms of a
particular Customer Account, however, Institutional Clients may charge
their Customers fees for automatic investment and other cash management
services provided in connection with investments in a Fund. Information
concerning these services and any applicable charges will be provided by
the Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
Redemption of Shares
Shares may ordinarily be redeemed by a shareholder via telephone,
in accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by
calling Fairfield at 1-800-441-3885. Legg Mason clients should call their
investment executives or Legg Mason Funds Processing at 1-800-822-5544.
Callers should have available the number of shares (or dollar amount) to
be redeemed and their account number.
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<PAGE>
Orders for redemption received by Legg Mason or Fairfield before
the close of the Exchange on any day when the Exchange is open will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by
a direct wire to a domestic commercial bank account previously designated
by the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. However, each Fund reserves
the right to take longer (up to seven days in some cases) to make payment
upon redemption if, in the judgment of the Adviser, the respective Fund
could be adversely affected by immediate payment. (The Statement of
Additional Information describes several other circumstances in which the
date of payment may be postponed or the right of redemption suspended.)
The proceeds of redemption or repurchase may be more or less than the
original cost. If the shares to be redeemed or repurchased were paid for
by check (including certified or cashier's checks) within 15 business days
of the redemption or repurchase request, the proceeds may not be disbursed
unless that Fund can be reasonably assured that the check has been
collected.
The Funds will not be responsible for the authenticity of
redemption instructions received by telephone, provided they follow
reasonable procedures to identify the caller. The Funds may request
identifying information from callers or employ identification numbers. A
Fund may be liable for losses due to unauthorized or fraudulent
instructions if it does not follow reasonable procedures. Telephone
redemption privileges are available automatically to all shareholders
unless certificates have been issued. Shareholders who do not wish to have
telephone redemption privileges should call their investment executive for
further instructions.
Because of the relatively high cost of maintaining small
accounts, each Fund may elect to close any account with a current value of
less than $500 by redeeming all of the shares in the account and mailing
the proceeds to the investor. However, the Funds will not redeem accounts
that fall below $500 solely as a result of a reduction in net asset value
per share. If a Fund elects to redeem the shares in an account, the
shareholder will be notified that the account is below $500 and will be
allowed 60 days in which to make an additional investment in order to
avoid having the account closed.
How Shareholder Accounts are Maintained
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A shareholder account is established automatically for each
shareholder. Any shares the shareholder purchases or receives as a
dividend or other distribution will be credited directly to the account at
the time of purchase or receipt. No certificates are issued unless the
shareholder specifically requests them in writing. Shareholders who elect
to receive certificates can redeem their shares only by mail.
Certificates will be issued in full shares only. No certificates will be
issued for shares of any Fund prior to 15 business days after purchase of
such shares by check unless that Fund can be reasonably assured during
that period that payment for the purchase of such shares has been
collected. Fund shares may not be held in, or transferred to, an account
with any brokerage firm other than Fairfield, Legg Mason or their
affiliates.
Every shareholder of record will receive a confirmation of each
new share transaction with a Fund, which will also show the total number
of shares being held in safekeeping by the Fund's Transfer Agent for the
account of the shareholder.
Navigator Shares sold to Institutional Clients acting in a
fiduciary, advisory, custodial, or other similar capacity on behalf of
persons maintaining Customer Accounts at Institutional Clients will
normally be held of record by the Institutional Clients. Therefore, in
the context of Institutional Clients, references in this Prospectus to
shareholders mean the Institutional Clients rather than their Customers.
Institutional Clients purchasing or holding Navigator Shares on behalf of
their customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to each Fund on a timely
basis.
How Net Asset Value Is Determined
Net asset value per Navigator Share of each Fund is determined
daily as of the close of the Exchange, on every day that the Exchange is
open, by subtracting the liabilities attributable to Navigator Shares from
the total assets attributable to such shares and dividing the result by
the number of Navigator Shares outstanding. Each Fund's securities are
valued on the basis of market quotations or, lacking such quotations, at
fair value as determined under the guidance of the Board of Directors.
Securities for which market quotations are readily available are valued at
the last sale price of the day for a comparable position, or, in the
absence of any such sales, the last available bid price for a comparable
position. Where a security is traded on more than one market, which may
include foreign markets, the securities are generally valued on the market
considered by each Fund's adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
Most securities held by Global Government are valued on the basis
of valuations furnished by a pricing service which utilizes both
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dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other data.
Dividends and Other Distributions
Dividends from net investment income are declared and paid
monthly for Global Government and are declared and paid quarterly for
Global Equity. Shareholders begin to earn dividends on their Global
Government shares as of settlement date, which is normally the third
business day after their orders are placed with their investment
executive. Dividends from net short-term capital gain and distributions
of substantially all net capital gain (the excess of net long-term capital
gain over net short-term capital loss), and any net gain from foreign
currency transactions, generally are declared and paid after the end of
the taxable year in which the gain is realized. A second distribution of
net capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Shareholders may elect to:
1. Receive both dividends and other distributions in Navigator
Shares of the distributing Fund;
2. Receive dividends in cash and other distributions in
Navigator Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing
Fund and other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Navigator
fund. Please contact an investment executive for additional information
about this option. Qualified retirement plans that obtained Navigator
Shares through exchange generally receive dividends and other
distributions in additional shares.
If no election is made, both dividends and other distributions
will be credited to the Institutional Client's account in Navigator Shares
of the distributing Fund at the net asset value of the shares determined
as of the close of the Exchange on the reinvestment date. Shares received
pursuant to any of the first three (reinvestment) elections above also
will be credited to the account at that net asset value. If an investor
elects to receive dividends or other distributions in cash, a check will
be sent. Investors purchasing through Fairfield may elect at any time to
change the distribution option by notifying the applicable Fund in writing
at: [insert complete Fund name], c/o Fairfield Group, Inc., 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Those purchasing through Legg Mason
should write to:[insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland, 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
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Taxes
Each Fund intends to continue to qualify for treatment as a
regulated investment company under the Code so that it will be relieved of
federal income tax on that part of its investment company taxable income
(generally consisting of net investment income and any net short-term
capital gain and net gains from certain foreign currency transactions) and
net capital gain that is distributed to its shareholders.
Dividends from a Fund's investment company taxable income
(whether paid in cash or reinvested in Navigator Shares) are taxable to
its shareholders (other than qualified retirement plans) as ordinary
income to the extent of that Fund's earnings and profits. Distributions of
a Fund's net capital gain (whether paid in cash or reinvested in Navigator
Shares), when designated as such, are taxable to those shareholders as
long-term capital gain, regardless of how long they have held their Fund
shares.
The Funds send each shareholder a notice following the end of
each calendar year specifying the amounts of all dividends and other
distributions paid (or deemed paid) during that year. Each Fund is
required to withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide that Fund with a certified
taxpayer identification number. Each Fund also is required to withhold
31% of all dividends and other distributions payable to such shareholders
who otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of another Legg Mason fund
will generally have similar tax consequences. If Fund shares are
purchased within 30 days before or after redeeming other shares of the
same Fund (regardless of class) at a loss, all or part of that loss will
not be deductible and instead will increase the basis of the newly
purchased shares.
Each Fund's dividend and interest income, and gains realized from
disposition of foreign securities, may be subject to income, withholding
or other taxes imposed by foreign countries and U.S. possessions that
would reduce the yield on that Fund's securities. Tax conventions between
certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
A dividend or other distribution paid shortly after shares have
been purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or capital gain distribution could cause the investor to incur
33
<PAGE>
tax liabilities and should not be made solely for the purpose of receiving
the dividend or other distribution.
The foregoing is only a summary of some of the important federal
tax considerations generally affecting each Fund and its shareholders; see
the Statement of Additional Information for a further discussion. In
addition to those considerations, which are applicable to any investment
in the Funds, there may be other federal, state, local or foreign tax
considerations applicable to a particular investor. Prospective
shareholders are urged to consult their tax advisers with respect to the
effects of this investment on their own tax situations.
If more than 50% of the value of Global Equity's total assets at
the close of any taxable year consists of securities of foreign
corporations, the Fund may file an election with the Internal Revenue
Service that will enable its shareholders, in effect, to receive the
benefit of the foreign tax credit with respect to any foreign and U.S.
possessions income taxes paid by it. Pursuant to any such election, the
Fund would treat those taxes as dividends paid to its shareholders, and
each shareholder would be required to (1) include in gross income, and
treat as paid by the shareholder, the shareholder's proportionate share of
those taxes, (2) treat the shareholder's share of those taxes and of any
dividend paid by the Fund that represents income from foreign or U.S.
possessions sources as the shareholder's own income from those sources,
and (3) either deduct the taxes deemed paid by the shareholder in
computing the shareholder's taxable income, or alternately, use the
foregoing information in calculating the foreign tax credit against the
shareholder's federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of
the Fund's income from sources within, and taxes paid to, foreign
countries and U.S. possessions if it makes this election.
Shareholder Services
Confirmations and Reports
Shareholders will receive from Legg Mason a confirmation after
each transaction involving Navigator Shares (except a reinvestment of
dividends or capital gains distributions). An account statement will be
sent to each shareholder monthly unless there has been no activity in the
account, in which case an account statement will be sent quarterly.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by the Corporation's
independent accountants.
Confirmations for purchases and redemptions of Navigator Shares
made by Institutional Clients acting in a fiduciary, advisory, custodial,
or other similar capacity on behalf of persons maintaining Customer
Accounts at Institutional Clients will be sent to the Institutional
Client. Beneficial ownership of shares by Customer Accounts will be
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<PAGE>
recorded by the Institutional Client and reflected in the regular account
statements provided by them to their Customers.
Shareholder inquiries should be addressed to: [insert complete
Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore,
Maryland 21203-1476 or c/o Fairfield Group Inc., 200 Gibraltar Road,
Horsham, Pennsylvania 19044.
Exchange Privilege
Holders of Navigator Shares are entitled to exchange them for
Navigator Shares of the following funds, provided the shares to be
acquired are eligible for sale under applicable state securities laws:
Navigator Money Market Fund, Inc. -- Prime Obligations Portfolio
A money market fund seeking to provide as high a level of current
interest income as is consistent with liquidity and relative stability of
principal.
Navigator Tax-Free Money Market Fund, Inc. -- Navigator Tax-Free Money
Market Fund
A money market fund seeking to provide its shareholders with as
high a level of current interest income that is exempt from federal income
taxes as is consistent with liquidity and relative stability of principal.
Navigator Value Trust
A mutual fund seeking long-term growth of capital.
Navigator Special Investment Trust
A mutual fund seeking capital appreciation by investing
principally in issuers with market capitalizations of less than $2.5
billion.
Navigator Total Return Trust
A mutual fund seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk.
Navigator American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Navigator Global Equity Trust
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A mutual fund seeking maximum long-term total return, by
investing in common stocks of companies located in at least three
different countries.
Navigator U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Navigator Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, primarily
through investment in a diversified portfolio of investment grade debt
securities.
Navigator High Yield Portfolio
A mutual fund primarily seeking a high level of current income
and secondarily, capital appreciation, by investing principally in lower-
rated, fixed-income securities.
Navigator Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions.
Navigator Maryland Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Navigator Pennsylvania Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Navigator Tax-Free Intermediate-Term Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
Legg Mason Cash Reserve Trust
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A money market fund seeking stability of principal and current
income consistent with stability of principal.
Investments by exchange into the other Navigator funds are made
at the per share net asset value determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your investment
executive. To effect an exchange by telephone, please call your investment
executive with the information described in the section "How to Purchase
and Redeem Shares," page [ ]. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders. There is no
assurance that the money market funds will be able to maintain a $1.00
share price. None of the funds is insured or guaranteed by the U.S.
Government.
The Funds' Management and Investment Advisers
Board of Directors
The business and affairs of each Fund are managed under the
direction of the Corporation's Board of Directors.
Investment Adviser to Global Government
Pursuant to separate management or advisory agreements with each
Fund (each a "Management Agreement" or "Advisory Agreement"), which were
approved by the Corporation's Board of Directors, Legg Mason Fund Adviser,
Inc., a wholly owned subsidiary of Legg Mason, Inc., serves as investment
adviser to Global Government and manager to Global Equity. LMFA
administers and acts as the portfolio manager for Global Government and is
responsible for the actual investment management of the Fund, including
the responsibility for making decisions and placing orders to buy, sell or
hold a particular security. As manager, LMFA manages the non-investment
affairs of Global Equity, directs all matters related to the operation of
that Fund and provides office space and administrative staff for the Fund.
Each Fund pays LMFA, pursuant to its Advisory Agreement or Management
Agreement, a fee equal to an annual rate of 0.75% of its average daily net
assets. Each Fund pays all its other expenses which are not assumed by
LMFA.
LMFA acts as manager, investment adviser or investment consultant
to sixteen investment company portfolios which had aggregate assets under
management of over $4.8 billion as of July 31, 1995. LMFA's address is 111
South Calvert Street, Baltimore, Maryland 21202. LMFA has agreed that
until December 31, 1995, it will continue to reimburse fees and/or assume
other expenses to the extent Global Government's expenses relating to
Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 1.15% of
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the Fund's average daily net assets for such month. These agreements are
voluntary and may not be renewed by LMFA.
Keith J. Gardner has been primarily responsible for the day-to-
day management of Global Government since its inception. Mr. Gardner has
been Vice President of Legg Mason since November, 1992. From 1985 to
1992, he served as Vice President, bond trader and portfolio manager for
both U.S. and global portfolios at T. Rowe Price Associates, Inc.
Investment Adviser to Global Equity
Pursuant to an advisory agreement with LMFA ("Advisory
Agreement"), which was approved by the Corporation's Board of Directors,
Batterymarch Financial Management, Inc. ("Batterymarch"), a wholly owned
subsidiary of Legg Mason, Inc., serves as investment adviser to Global
Equity. Batterymarch acts as the portfolio manager for the Fund and is
responsible for the actual investment management of the Fund, including
the responsibility for making decisions and placing orders to buy, sell or
hold a particular security. LMFA pays Batterymarch, pursuant to the
Advisory Agreement, a management fee equal to an annual rate of 0.50% of
the Fund's average daily net assets. LMFA and Batterymarch have
voluntarily agreed to waive their fees and to reimburse the Fund for its
expenses to the extent necessary to limit the Fund's total operating
expenses attributable to Navigator Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) to 1.25% of its average daily net
assets. This agreement will expire on December 31, 1995, unless extended
by LMFA or Batterymarch.
Batterymarch acts as investment adviser to institutional
accounts, such as mutual funds, corporate pension plans and endowment
funds, as well as to individual investors. Total assets under management
by the Adviser were approximately $5.4 billion as of July 31, 1995.
Charles Lovejoy is the Portfolio Manager for Global Equity. Mr.
Lovejoy joined Batterymarch in 1992 as an investment strategist. From 1990
to 1992, he was a Managing Director of Boston International Advisors where
he managed international and emerging markets portfolios. From 1980 to
1990, Mr. Lovejoy was Senior Vice President at Putnam Management Company
where he headed the Quantitative Research Department; his responsibilities
included portfolio management and product development as well as
quantitative research for international, emerging markets and U.S.
equities. A past president of the Boston Quantitative Discussion Group and
the Boston Security Analysts Society, Mr. Lovejoy is a Director of the
International Society of Financial Analysts. Mr. Lovejoy is a Chartered
Financial Analyst.
Sub-Adviser
Western Asset Management Company ("Western Asset"), another
wholly owned subsidiary of Legg Mason, Inc., serves as investment sub-
adviser to Global Government pursuant to the terms of a sub-advisory
agreement with LMFA dated May 1, 1995. Western Asset is responsible for
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providing LMFA with research and analysis on domestic and foreign fixed-
income securities, and consulting with LMFA on portfolio strategy. For
these services, LMFA (not the Fund) pays Western Asset a fee, computed
daily and payable monthly, at an annual rate equal to 53 % of the fee
received by LMFA, or 0.40% of the Fund's average daily net assets.
Western Asset also renders investment advice to sixteen open-end
investment companies and one closed-end investment company, which together
had aggregate assets under management of approximately $3.8 billion as of
July 31, 1995. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $13.0
billion as of that date. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, California 91105.
Western Asset has managed fixed income portfolios continuously
since its founding in 1971, and has focused exclusively on such accounts
since 1984.
The Funds' Distributor
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. The Underwriting Agreement
obligates Legg Mason to pay certain expenses in connection with the
offering of shares of the Funds, including any compensation to its
investment executives, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and reports have been
prepared, set in type and mailed to existing shareholders at each Fund's
expense, and for any supplementary sales literature and advertising costs.
Legg Mason also receives a fee from BFDS for assisting it with its
transfer agent and shareholder servicing functions.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason,
Inc., is a registered broker-dealer with principal offices located at 200
Gibraltar Road, Horsham, Pennsylvania 19044. Fairfield sells Navigator
Shares pursuant to a Dealer Agreement with the Funds' Distributor, Legg
Mason. Neither Fairfield nor Legg Mason receives compensation from the
Fund for selling Navigator Shares.
The Chairman, President and Treasurer of the Corporation are
employed by Legg Mason.
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and cash of each
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Fund. Boston Financial Data Services, P.O. Box 953, Boston, Massachusetts
02103, serves as transfer agent for Fund shares and dividend-disbursing
agent for each Fund.
Pursuant to rules adopted under Section 17(f) of the 1940 Act,
each Fund may maintain foreign securities and cash in the custody of
certain eligible foreign banks and securities depositories. Selection of
these foreign custodial institutions is made by the Board of Directors in
accordance with SEC rules. The Board of Directors will consider a number
of factors, including, but not limited to, the relationship of the
institution to State Street, the reliability and financial stability of
the institution, the ability of the institution to capably perform
custodial services for the Funds, the reputation of the institution in its
national market, the political and economic stability of the countries in
which the sub-custodians will be located and risks of potential
nationalization or expropriation of Fund assets. No assurance can be given
that the Board of Directors' appraisal of the risks in connection with
foreign custodial arrangements will always be correct or that
expropriation, nationalization, freezes, or confiscation of Fund assets
will not occur.
Description of the Corporation and its Shares
The Corporation was established as a Maryland corporation on
December 31, 1992. The Articles of Incorporation authorize the Corporation
to issue one billion shares of par value $.001 per share and to create
additional series, each of which may issue separate classes of shares.
Global Government and Global Equity currently offer two classes
of shares -- Class Y (known as "Navigator Shares") and Class A (known as
"Primary Shares"). The two classes represent interests in the same pool
of assets. A separate vote is taken by a class of shares of a Fund if a
matter affects just that class of shares. Each class of shares may bear
certain differing class-specific expenses. Salespersons and others
entitled to receive compensation for selling or servicing Fund shares may
receive more with respect to one class than another.
The initial and subsequent investment minimums for Primary Shares
are $1,000 and $100, respectively. Investments in Primary Shares may be
made through a Legg Mason or affiliated investment executive, through the
Future First Systematic Investment Plan or through automatic investment
arrangements.
Holders of Primary Shares bear distribution and service fees
under Rule 12b-1 at the rate of 0.75% and 1.00% of the net assets
attributable to Primary Shares of Global Government and Global Equity,
respectively. Investors in Primary Shares may elect to receive dividends
and/or other distributions in cash through the receipt of a check or a
credit to their Legg Mason account. The per share net asset value of the
Navigator Class of Shares, and dividends and distributions (if any) paid
to Navigator shareholders, are generally expected to be higher than those
of Primary Shares of the Fund, because of the lower expenses attributable
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to Navigator Shares. The per share net asset value of the classes of
shares will tend to converge, however, immediately after the payment of
ordinary income dividends. Primary Shares of a Fund may be exchanged for
the corresponding class of shares of other Legg Mason Funds. Investments
by exchange into the Legg Mason funds sold with an initial sales charge
are made at the per share net asset value, plus the sales charge,
determined on the same business day as redemption of the fund shares the
investors in Primary Shares wish to redeem.
LMFA has agreed that until December 31, 1995 it will continue to
reimburse management fees and/or assume other expenses to the extent the
expenses of Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 1.90% of
the average daily net assets of Global Government for such month. LMFA
and Batterymarch have also agreed that until December 31, 1995 it will
continue to reimburse management fees and/or assume other expenses to the
extent the expenses of Primary Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during any month an annual
rate of 2.25% of the average daily net assets of Global Equity for such
month. These reimbursement agreements are voluntary and may not be
renewed by LMFA and/or Batterymarch. Reimbursement by LMFA reduces a
Fund's expenses and increases its yield and total return.
The Board of Directors of the Corporation does not anticipate
that there will be any conflicts among the interests of the holders of the
different classes of Fund shares. On an ongoing basis, the Board will
consider whether any such conflict exists and, if so, take appropriate
action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Corporation will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be
deemed liable for misstatements or omissions regarding another Fund in
this Prospectus or in the joint Statement of Additional Information;
however, the Funds deem this possibility slight.
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Table of Contents
Expenses 3
Financial Highlights 5
Performance Information 9
Investment Objectives and Policies 11
How to Purchase and Redeem Shares 25
How Shareholder Accounts are Maintained 27
How Net Asset Value Is Determined 27
Dividends and Other Distributions 28
Taxes 29
Shareholder Services 30
The Funds' Management and Investment Adviser 32
The Funds' Distributor 33
The Funds' Custodian and Transfer and Dividend-Disbursing Agent
Description of the Corporation and its Shares 34
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
No person has been authorized to give any information or to make
any representations not contained in this Prospectus or the
Statement of Additional Information in connection with the
offering made by the Prospectus and, if given or made, such
information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus
does not constitute an offering by the Fund or by the principal
underwriter in any jurisdiction in which such offering may not
lawfully be made.
<PAGE>
LEGG MASON GLOBAL TRUST, INC.
Legg Mason Global Government Trust
Legg Mason Global Equity Trust
Primary Shares and Navigator Shares
STATEMENT OF ADDITIONAL INFORMATION
October [ ], 1995
Mutual fund shares are not deposits or obligations of, or guaranteed
or endorsed by, any bank or other depository institution. Shares are not
insured by the FDIC, the Federal Reserve Board or any other agency, and
are subject to investment risk, including the possible loss of the
principal amount invested.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus for Primary Shares and
for Navigator Shares of the Funds, both dated October [ ], 1995, which
have been filed with the Securities and Exchange Commission ("SEC").
Copies of the Prospectuses are available without charge from the
Corporation's distributor, Legg Mason Wood Walker, Incorporated ("Legg
Mason") (address and telephone numbers listed below).
Legg Mason Global Government Trust ("Global Government") and Legg
Mason Global Equity Trust ("Global Equity") (each separately referred to
as a "Fund" and collectively referred to as the "Funds") are separate
series of Legg Mason Global Trust, Inc. ("Corporation"), an open-end,
management investment company.
Global Government, a non-diversified, professionally managed
portfolio, seeks capital appreciation and current income in order to
achieve an attractive total return, consistent with prudent investment
risk, by normally investing at least 75% of its total assets in debt
securities issued by foreign governments, the U. S. Government, their
agencies, instrumentalities and political subdivisions. Under normal
circumstances, the Fund will invest at least 75% of its assets in debt
securities of foreign or domestic governmental entities, corporations,
financial institutions or other issuers rated within the four highest
grades by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
("S&P") or, if unrated by Moody's or S&P ("unrated securities"), judged by
the Adviser to be of comparable quality.
Global Equity, a diversified, professionally managed portfolio, seeks
maximum long-term total return. In attempting to achieve the Fund's
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objective, the Fund's investment adviser, Batterymarch Financial
Management, Inc. ("Batterymarch"), normally will invest in common stocks
of companies in at least three different countries. In addition, the Fund
may invest in the securities of companies located in developing countries,
including countries or regions with relatively low gross national product
per capita compared to the world's major economies, and in countries or
regions with the potential for rapid but unstable economic growth
(collectively, "emerging markets").
Shares of Navigator Global Government and Navigator Global Equity
("Navigator Shares"), described in this Statement of Additional
Information, represent interests in Global Government and Global Equity
that are currently offered for sale only to institutional clients of the
Fairfield Group, Inc. ("Fairfield") for investment of their own funds and
funds for which they act in a fiduciary capacity, to clients of Legg Mason
Trust Company ("Trust Company") for which Trust Company exercises
discretionary investment management responsibility (such institutional
investors are referred to collectively as "Institutional Clients" and
accounts of the customers with such Clients ("Customers") are referred to
collectively as "Customer Accounts"), to qualified retirement plans
managed on a discretionary basis and having net assets of at least $200
million, and to The Legg Mason Profit Sharing Plan and Trust. The
Navigator Class of Shares may not be purchased by individuals directly,
but Institutional Clients may purchase shares for Customer Accounts
maintained for individuals.
The Primary Class of shares of Global Government and Global Equity
("Primary Shares") are offered for sale to all other investors and may be
purchased directly by individuals.
Navigator Shares and Primary Shares are sold and redeemed without any
purchase or redemption charge imposed by the Funds, although Institutional
Clients may charge their Customer Accounts for services provided in
connection with the purchase or redemption of shares. Each Fund will pay
management fees to Legg Mason Fund Adviser, Inc. Primary Shares pay a
12b-1 distribution fee, but Navigator Shares pay no distribution fees.
See "The Funds' Distributor."
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
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ADDITIONAL INFORMATION ABOUT INVESTMENT
LIMITATIONS AND POLICIES
The following information supplements the information concerning each
Fund's investment objectives, policies and limitations found in the
Prospectuses. Each Fund has adopted certain fundamental investment
limitations that cannot be changed except by vote of a majority of each
Fund's outstanding voting securities.
Global Government may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount
not to exceed 33 % of the total assets, including borrowings, less
liabilities exclusive of borrowings, of the Fund; provided that
borrowings, including reverse repurchase agreements and dollar rolls, in
excess of 5% of such value will be only from banks (although not a
fundamental policy subject to shareholder approval, the Fund will not
purchase securities if borrowings, including reverse repurchase agreements
and dollar rolls, exceed 5% of its total assets);
2. Issue senior securities, except as permitted by the Investment
Company Act of 1940 ("1940 Act");
3. Underwrite the securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, in disposing of a portfolio security;
4. Buy or hold any real estate other than instruments secured by
real estate or interests therein;
5. Purchase or sell any commodities or commodities contracts,
except that the Fund may purchase or sell currencies, interest rate and
currency futures contracts, options on currencies and securities indexes
and options on interest rate and currency futures contracts;
6. Make loans, except loans of portfolio securities and except to
the extent the purchase of notes, bonds, loans, loan participations and
advances in connection therewith or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other
financial institutions may be considered loans;
7. Purchase any security if, as a result thereof, 25% or more of
its total assets would be invested in the securities of issuers having
their principal business activities in the same industry. This limitation
does not apply to securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements with respect
thereto.
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Global Equity may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount
not to exceed 33 % of the total assets (including borrowings), less
liabilities (exclusive of borrowings), of the Fund; provided that
borrowings, including reverse repurchase agreements and dollar rolls, in
excess of 5% of such value will be only from banks (although not a
fundamental policy subject to shareholder approval, the Fund will not
purchase securities if borrowings, including reverse repurchase agreements
and dollar rolls, exceed 5% of its total assets);
2. With respect to 75% of its total assets, invest more than 5% of
its total assets (taken at market value) in securities of any one issuer,
or purchase more than 10% of the voting securities of any one issuer
(other than, in each case, cash items, securities of the U.S. Government,
its agencies and instrumentalities, and securities issued by other
investment companies);
3. Issue senior securities, except as permitted by the Investment
Company Act of 1940 ("1940 Act");
4. Engage in the business of underwriting the securities of other
issuers except insofar as the Fund may be deemed an underwriter under the
Securities Act of 1933, as amended, in disposing of a portfolio security;
5. Buy or hold any real estate other than instruments secured by
real estate or interests therein;
6. Purchase or sell any commodities or commodities contracts,
except that the Fund may purchase or sell currencies; futures contracts on
currencies, securities or securities indexes, options on currencies,
securities, and securities indexes; and options on interest rate and
currency futures contracts;
7. Make loans, except loans of portfolio securities and except to
the extent the purchase of notes, bonds, or other evidences of
indebtedness, the entry into repurchase agreements, or deposits with banks
and other financial institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of
its total assets would be invested in the securities of issuers having
their principal business activities in the same industry. This limitation
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does not apply to securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements with respect
thereto.
The foregoing investment limitations of each Fund cannot be changed
without the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or (2) 67% or more of the shares of the
Fund present at a shareholders' meeting if more than 50% of the
outstanding shares of the Fund are represented at the meeting in person or
by proxy. Except with respect to the 33 % limit in investment limitation
number 1, if a percentage restriction is adhered to at the time of an
investment or transaction, a later increase or decrease in percentage
resulting from a change in the value of portfolio securities or amount of
total assets will not be considered a violation of any of the foregoing
limitations.
Global Government interprets fundamental investment limitation (4)
and Global Equity interprets fundamental investment limitation (5) to
prohibit investment in real estate limited partnerships.
Except as otherwise specified, the following investment limitations
and policies are non-fundamental and may be changed by the Corporation's
Board of Directors without shareholder approval.
Each Fund may not:
1. Purchase or sell any oil, gas or mineral exploration or
development programs, including leases;
2. Buy securities on "margin," except for short-term credits
necessary for clearance of portfolio transactions and except that a Fund
may make margin deposits in connection with the use of permitted futures
contracts and options on futures contracts as well as options on
currencies, securities and securities indexes;
3. Make short sales of securities or maintain a short position,
except that a Fund may (a) make short sales and maintain short positions
in connection with its use of options, futures contracts and options on
futures contracts and (b) sell short "against the box" (although not a
fundamental policy, Global Government does not intend to make short sales
in excess of 5% of its net assets during the coming year and Global Equity
does not intend to make short sales during the coming year);
4. Purchase or retain the securities of an issuer if, to the
knowledge of the Fund's management, those officers and directors of that
Fund and officers and directors of either its adviser, manager or sub-
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adviser who individually own beneficially more than 0.5% of the
outstanding securities of that issuer own in the aggregate more than 5% of
the securities of that issuer;
5. Purchase any security (except with respect to collateralized
mortgage obligations and asset-backed securities for Global Government),
if, as a result, more than 5% of a Fund's total assets would be invested
in securities of companies that together with any predecessors have been
in continuous operation for less than three years;
6. Purchase a security restricted as to resale if, as a result
thereof, more than 15% of Global Government's or 10% of Global Equity's
total assets would be invested in restricted securities. For purposes of
this limitation, securities that can be sold freely in the principal
market in which they are traded are not considered restricted, even if
they cannot be sold in the United States.
7. Make investments in warrants if such investments, valued at the
lower of cost or market, exceed 5% of the value of its net assets, which
amount may include warrants that are not listed on the New York or
American Stock Exchanges, provided that such unlisted warrants, valued at
the lower of cost or market, do not exceed 2% of a Fund's net assets, and
further provided that this restriction does not apply to warrants attached
to, or sold as a unit with, other securities. For purposes of this
restriction, the term "warrants" does not include options on securities,
stock or bond indices, foreign currencies or futures contracts.
With respect to Global Equity, the Fund may not:
8. Purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and in the open market at no more than
customary brokerage and commission rates. This limitation does not apply
to securities received or acquired as dividends, through offers of
exchange, or as a result of a reorganization, consolidation or merger.
The following information about investment policies applies only to Global
Government:
Ratings of Debt Obligations
Moody's, S&P and other nationally recognized or foreign statistical
rating organizations ("SROs") are private organizations that provide
ratings of the credit quality of debt obligations. A description of the
ratings assigned to corporate debt obligations by Moody's and S&P is
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<PAGE>
included in Appendix A. The Fund may consider these ratings in
determining whether to purchase, sell or hold a security. Ratings issued
by Moody's or S&P represent only the opinions of those agencies and are
not guarantees of credit quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices.
Credit rating agencies attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market
value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates.
Sovereign Debt
Investments in debt securities issued by foreign governments and
their political subdivisions or agencies ("Sovereign Debt") involve
special risks. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal and/or interest when due in accordance with the terms of such
debt, and the Fund may have limited legal recourse in the event of a
default.
Sovereign Debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Legal recourse is therefore somewhat
diminished. Political conditions, especially a sovereign entity's
willingness to meet the terms of its debt obligations, are of considerable
significance. Also, holders of commercial bank debt issued by the same
sovereign entity may contest payments to the holders of Sovereign Debt in
the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due,
the relative size of the debt service burden to the economy as a whole,
the sovereign debtor's policy toward principal international lenders and
the political constraints to which a sovereign debtor may be subject.
Increased protectionism on the part of a country's trading partners, or
political changes in those countries, could also adversely affect its
exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency.
The ability of some sovereign debtors to repay their obligations may
depend on the timely receipt of assistance from international agencies or
other governments, the flow of which is not assured. The willingness of
such agencies to make these payments may depend on the sovereign debtor's
willingness to institute certain economic changes, the implementation of
which may be politically difficult.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing Sovereign Debt could adversely affect the
Fund's investments. Political changes or a deterioration of a country's
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<PAGE>
domestic economy or balance of trade may affect the willingness of
countries to service their Sovereign Debt. While the Adviser intends to
manage investments in a manner that will minimize the exposure to such
risks, there can be no assurance that adverse political changes will not
cause the Fund to suffer a loss of interest or principal on any of its
holdings.
Mortgage-Related Securities
Mortgage-related securities represent participations in, or are
secured by and payable from, mortgage loans secured by real property.
These securities are designed to provide monthly payments of interest and,
in most instances, principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed through" to investors
such as the Fund. Many issuers or poolers provide guarantees of payments,
regardless of whether the mortgagor actually makes the payment. These
guarantees are often backed by various forms of credit, insurance and
collateral, although these may be in amounts less than the full obligation
of the pool to its shareholders.
Pools consist of whole mortgage loans or participations in loans.
The majority of these loans are made to purchasers of one- to four-family
homes. The terms and characteristics of the mortgage instruments are
generally uniform within a pool but may vary among pools. In addition to
fixed-rate, fixed-term mortgages, the Fund may purchase pools of variable-
rate mortgages, growing-equity mortgages, graduated-payment mortgages and
other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit
standards and underwriting criteria for individual mortgages included in
the pools. In addition, many mortgages included in pools are insured
through private mortgage insurance companies.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For
example, securities issued by the Government National Mortgage Association
("GNMAs") tend to have a longer average life than participation
certificates ("PCS") issued by the Federal Home Loan Mortgage Corporation
("FHLMC") because there is a tendency for the conventional and privately-
insured mortgages underlying FHLMC PCS to repay at faster rates than the
Federal Housing Administration and Veterans Administration loans
underlying GNMAs. In addition, the term of a security may be shortened by
unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic
conditions.
Yields on mortgage-related securities are typically quoted based on
the maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ
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<PAGE>
from the yield expected on the basis of average life. The compounding
effect from reinvestments of monthly payments received by the Fund will
increase the yield to shareholders compared to bonds that pay interest
semi-annually.
Private Mortgage-Related Securities
The private mortgage-related securities in which the Fund may invest
include foreign mortgage pass-through securities ("Foreign Pass-
Throughs"), which are structurally similar to the pass-through instruments
described above. Such securities are issued by originators of and
investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment bankers, specialized
financial institutions and special purpose subsidiaries of the foregoing.
Foreign Pass-Throughs usually are backed by a pool of fixed rate or
adjustable-rate mortgage loans. The Foreign Pass-Throughs in which the
Fund may invest are not guaranteed by an entity having the credit status
of the Government National Mortgage Association, but generally utilize
various types of credit enhancement.
Other Debt Securities
The rate of return or return of principal on some obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar
and a foreign currency or currencies.
The market for lower-rated securities may be thinner and less active
than that for higher-rated securities, which can adversely affect the
prices at which these securities can be sold, and may make it difficult
for the Fund to obtain market quotations daily. If market quotations are
not available, these securities will be valued by a method that the Fund's
Board of Directors believes accurately reflects fair market value.
Judgment may play a greater role in valuing lower-rated debt securities
than is the case with respect to securities for which a broader range of
dealer quotations and last-sale information are available.
Although the market for lower-rated debt securities is not new, and
the market has previously weathered economic downturns, there has been in
recent years a substantial increase in the use of such securities to fund
corporate acquisitions and restructurings. Accordingly, the past
performance of the market for such securities may not be an accurate
indication of its performance during future economic downturns or periods
of rising interest rates.
Bank Obligations
Bank obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances and time deposits in U.S. banks (including
foreign branches) which have more than $1 billion in total assets at the
time of investment and are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured
by the Federal Deposit Insurance Corporation. The Fund also may invest in
9
<PAGE>
certificates of deposit of savings and loan associations (federally or
state chartered and federally insured) having total assets in excess of $1
billion.
The Fund may invest in obligations of domestic or foreign branches of
foreign banks and foreign branches of domestic banks. These investments
involve risks that are different from investments in securities of
domestic branches of domestic banks. These risks include seizure of
foreign deposits, currency controls, interest limitations or other
governmental restrictions which might affect the payment of principal or
interest on the bank obligations held by the Fund.
The Fund limits its investments in foreign bank obligations to U.S.
dollar-denominated or foreign currency-denominated obligations of foreign
banks (including U.S. branches of foreign banks) which at the time of
investment (1) have more than $10 billion, or the equivalent in other
currencies, in total assets; (2) have branches or agencies (limited
purpose offices which do not offer all banking services) in the United
States; and (3) are judged by the Adviser to be of comparable quality to
obligations of U.S. banks in which the Fund may invest. Subject to the
limitation on concentration of less than 25% of the Fund's assets in the
securities of issuers in a particular industry, there is no limitation on
the amount of the Fund's assets which may be invested in obligations of
foreign banks which meet the conditions set forth herein. Foreign banks
are not generally subject to examination by any U.S. government agency or
instrumentality.
The following information about investment policies applies to each Fund:
Foreign Investments
Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated
with investing in U.S. companies. Since the stocks of foreign companies
are frequently denominated in foreign currencies, and since the Fund may
temporarily hold uninvested reserves in bank deposits in foreign
currencies, the Fund will be affected favorably or unfavorably by changes
in currency rates and in exchange control regulations, and may incur costs
in connection with conversions between various currencies. The investment
policies of the Fund permit it to enter into forward foreign currency
exchange contracts in order to hedge the Fund's holdings and commitments
against changes in the level of future currency rates, although the Fund
may not hedge many of its positions. Such contracts involve an obligation
to purchase or sell a specific currency at a future date at a price set at
the time of the contract.
Although the Fund will endeavor to achieve most favorable executions
costs in its portfolio transactions, commissions on many foreign stock
exchanges are at fixed rates, and generally these are higher than
negotiated commissions on U.S. exchanges.
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Certain foreign governments levy withholding taxes against dividend
and interest income. Although in some countries a portion of these taxes
is recoverable, the non-recovered portion of foreign withholding taxes
will reduce the income received from the companies comprising the Fund.
However, these foreign withholding taxes are not expected to have a
significant impact on the Fund, since the Fund's investment objective is
to seek long-term total return and any income should be considered
incidental.
Restricted and Illiquid Securities
Each Fund is authorized to invest up to 15% of its net assets in
securities for which no readily available market exists, which for this
purpose includes, among other things, repurchase agreements maturing in
more than seven days, over-the-counter ("OTC") options and securities used
as cover for such options. Restricted securities may be sold only (1)
pursuant to SEC Rule 144A or other exemption, (2) in privately negotiated
transactions or (3) in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933.
Such securities may include those that are subject to restrictions
contained in the securities laws of other countries. Securities that are
freely marketable in the country where they are principally traded, but
would not be freely marketable in the United States, will not be subject
to this 15% limit. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell
and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable
price than prevailed when it decided to sell.
Not all restricted securities are illiquid. SEC regulations permit
certain restricted securities to be traded freely among qualified
purchasers. The SEC has stated that an investment company's board of
directors, or its investment adviser acting under authority delegated by
the board, may determine that a security eligible for trading under this
rule is not "illiquid." Each Fund intends to rely on this rule, to the
extent appropriate, to deem restricted securities as not "illiquid." If
the newly-developing institutional markets for restricted securities do
not develop as anticipated, it could adversely affect the liquidity of the
Fund.
Repurchase Agreements
When a Fund enters into a repurchase agreement with a foreign or
domestic entity, it will obtain from that entity securities equal in value
to 102% of the amount of the repurchase agreement (or 100%, if the
securities obtained are U.S. Treasury bills, notes or bonds). Such
securities will be held by that Fund's custodian, an approved foreign sub-
custodian, or an approved securities depository or book-entry system.
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Reverse Repurchase Agreements and Other Borrowing
A reverse repurchase agreement is a portfolio management technique in
which a Fund temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in
return for cash. At the same time, that Fund agrees to repurchase the
instrument at an agreed upon time (normally within seven days) and price,
including interest payment. A Fund may also enter into dollar rolls, in
which a Fund sells a security for delivery in the current month and
simultaneously contracts to repurchase a substantially similar security on
a specified future date. That Fund would be compensated by the difference
between the current sales price and the forward price for the future
purchase. A Fund may engage in reverse repurchase agreements and dollar
rolls as a means of raising cash to satisfy redemption requests or for
other temporary or emergency purposes without the necessity of selling
portfolio instruments. While engaging in reverse repurchase agreements or
dollar rolls, each Fund will maintain cash, U.S. government securities or
other high-grade liquid securities in a segregated account at its
custodian bank with a value at least equal to that Fund's obligation under
the agreements.
Each Fund may borrow for temporary purposes, which borrowing may be
unsecured. The 1940 Act requires that Fund to maintain continuous asset
coverage (that is, total assets including borrowings, less liabilities
exclusive of borrowings) of at least 300% of the amount borrowed. If the
asset coverage should decline below 300% as a result of market
fluctuations or for other reasons, the Fund may be required to sell some
of its holdings within three days (exclusive of Sundays and holidays) to
reduce the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that
time. Borrowing may exaggerate the effect on net asset value of any
increase or decrease in the market value of the portfolio. To avoid the
potential leveraging effects of a Fund's borrowings, each Fund will not
make investments while borrowings are in excess of 5% of its total assets.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing
over the stated interest rate. For purposes of its borrowing limitation
and policies, each Fund considers reverse repurchase agreements and dollar
rolls to constitute borrowing. Global Equity does not currently intend to
use reverse repurchase agreements and dollar rolls.
Short Sales
No Fund will sell securities short, other than through the use of
short sales against the box, futures and options as described in the
Prospectuses. In a short sale against the box, a Fund simultaneously
owns, or has the right to acquire, without the payment of any additional
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consideration, securities identical in kind and amount to those sold
short.
Options and Futures
As described in the Prospectuses, Global Government may purchase and
sell (write) both put options and call options on securities and bond
indices, may enter into interest rate and bond index futures contracts
and may purchase and sell options on such futures contracts ("futures
options") for hedging purposes or in other circumstances permitted by the
Commodity Futures Trading Commission ("CFTC") as part of its investment
strategy. Global Equity may enter into futures contracts, options and
options on futures contracts for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when Batterymarch
believes a futures contract is priced more attractively than the
underlying equity security or index. In addition, a Fund may purchase and
sell put and call options on foreign currencies, may enter into futures
contracts on foreign currencies and purchase and sell options on such
futures contracts. If other types of options, futures contracts or
options on futures are traded in the future, each Fund may also use those
investment strategies. Options and futures are generally considered to be
"derivatives."
Options on Securities
A Fund may purchase call options on securities that its adviser
intends to include in that Fund's investment portfolio in order to fix the
cost of a future purchase. Purchased options also may be used as a means
of participating in an anticipated price increase of a security on a more
limited risk basis than would be possible if the security itself were
purchased. In the event of a decline in the price of the underlying
security, use of this strategy would serve to limit a Fund's potential
loss to the option premium paid; conversely, if the market price of the
underlying security increases above the exercise price and the Fund either
sells or exercises the option, any profit realized will be reduced by the
premium.
A Fund may purchase put options in order to hedge against a decline
in the market value of securities held in its portfolio or to enhance
income. The put option enables the Fund to sell the underlying security
at the predetermined exercise price; thus the potential for loss to the
Fund below the exercise price is limited to the option premium paid. If
the market price of the underlying security is higher than the exercise
price of the put option, any profit the Fund realizes on the sale of the
security would be reduced by the premium paid for the put option less any
amount for which the put option may be sold.
A Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will
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be exercised if the market value of the underlying security increases to a
level greater than the exercise price, the Fund might write covered call
options on securities generally when its adviser believes that the premium
received by the Fund will exceed the extent to which the market price of
the underlying security will exceed the exercise price. The strategy may
be used to provide limited protection against a decrease in the market
price of the security, in an amount equal to the premium received for
writing the call option less any transaction costs. Thus, in the event
that the market price of the underlying security held by the Fund
declines, the amount of such decline will be offset wholly or in part by
the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than
its market value. The Fund would give up the ability to sell the
portfolio securities used to cover the call option while the call option
was outstanding. Such securities would also be considered illiquid in the
case of OTC options written by a Fund, and therefore subject to its
limitation on investing no more than 15% of its net assets in illiquid
securities, unless the OTC options are sold to qualified dealers who agree
that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The
cover for an OTC call option written subject to this procedure will be
considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option. In addition,
the Fund could lose the ability to participate in an increase in the value
of such securities above the exercise price of the call option because
such an increase would likely be offset by an increase in the cost of
closing out the call option (or could be negated if the buyer chose to
exercise the call option at an exercise price below the securities'
current market value).
The sale of a put option on a security by a Fund also serves to
partially offset the cost of a security that the Fund anticipates
purchasing. If the price of the security rises, the increased cost to the
Fund of purchasing the security will be offset, in whole or in part, by
the premium received. In the event, however, that the price of the
security falls below the exercise price of the option and the option is
exercised, the Fund will be required to purchase the security from the
holder of the option at a price in excess of the current market price of
the security. A Fund's loss on this transaction will be offset, in whole
or in part, to the extent of the premium received by the Fund for writing
the option.
Global Government may purchase put and call options and write covered
put and call options on bond indices in much the same manner as securities
options, except that bond index options may serve as a hedge against
overall fluctuations in the debt securities markets (or a market sector)
rather than anticipated increases or decreases in the value of a
particular security. A bond index assigns a value to the securities
included in the index and fluctuates with changes in such values.
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Settlements of bond index options are effected with cash payments and do
not involve the delivery of securities. Thus, upon settlement of a bond
index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price and the closing
price of the bond index. The effectiveness of hedging techniques using
bond index options will depend on the extent to which price movements in
the bond index selected correlate with price movements of the securities
in which the Fund invests.
Global Government may purchase and write covered straddles on
securities, currencies or bond indices. A long straddle is a combination
of a call and a put option purchased on the same security, index or
currency where the exercise price of the put is less than or equal to the
exercise price of the call. The Fund would enter into a long straddle
when its adviser believes that it is likely that interest rates or
currency exchange rates will be more volatile during the term of the
options than the option pricing implies. A short straddle is a
combination of a call and a put written on the same security, index or
currency where the exercise price of the put is less than or equal to the
exercise price of the call. In a covered short straddle, the same issue
of security or currency is considered cover for both the put and the call
that the Fund has written. The Fund would enter into a short straddle
when its adviser believes that it is unlikely that interest rates or
currency exchange rates will be as volatile during the term of the options
as the option pricing implies. In such case, the Fund will set aside cash
and/or liquid, high grade debt securities in a segregated account with its
custodian equivalent in value to the amount, if any, by which the put is
in-the-money, that is, the amount by which the exercise price of the put
exceeds the current market value of the underlying security.
Foreign Currency Options and Related Risks
A Fund may purchase and write (sell) options on foreign currencies in
order to hedge against the risk of foreign exchange rate fluctuation on
foreign securities that Fund holds or which it intends to purchase. For
example, if a Fund enters into a contract to purchase securities
denominated in a foreign currency, it could effectively fix the maximum
U.S. dollar cost of the securities by purchasing call options on that
foreign currency. Similarly, if a Fund held securities denominated in a
foreign currency and anticipated a decline in the value of that currency
against the U.S. dollar, it could hedge against such a decline by
purchasing a put option on the currency involved. The purchase of an
option on foreign currency may be used to hedge against fluctuations in
exchange rates although, in the event of exchange rate movements adverse
to that Fund's options position, it may forfeit the entire amount of the
premium plus related transaction costs. In addition, Global Government
may purchase call options on foreign currency to enhance income when its
adviser anticipates that the currency will appreciate in value, but the
securities denominated in that currency do not present attractive
investment opportunities.
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If a Fund writes an option on foreign currency, it will constitute
only a partial hedge, up to the amount of the premium received, and that
Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. A Fund may use
options on currency to cross-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates of a
different, but related, currency.
A Fund's ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. Although many
options on foreign currencies are exchange traded, the majority are traded
on the OTC market. A Fund will not purchase or write such options unless,
in the opinion of its adviser, the market for them has developed
sufficiently. There can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally. These OTC
options also involve credit risks that may not be present in the case of
exchange-traded currency options.
Futures Contracts and Options on Futures Contracts
Global Government:
The Fund will limit its use of futures contracts and options on
futures contracts to hedging transactions or other circumstances permitted
by regulatory authorities. For example, the Fund might use futures
contracts to attempt to hedge against anticipated changes in interest
rates that might adversely affect either the value of the Fund's
securities or the price of the securities that the Fund intends to
purchase. The Fund's hedging may include sales of futures contracts as an
offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to
reduce exposure to interest rate fluctuations, the Fund may be able to
hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and options on futures contracts.
The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk.
The Fund may purchase a call option on a foreign currency futures contract
to hedge against a rise in the foreign exchange rate while intending to
invest in a foreign security of the same currency. The Fund may purchase
put options on foreign currency futures contracts as a hedge against a
decline in the foreign exchange rates or the value of its foreign
portfolio securities. The Fund may write a call option on a foreign
currency futures contract as a partial hedge against the effects of
declining foreign exchange rates on the value of foreign securities. The
Fund may sell a put option on a foreign currency to partially offset the
cost of a security denominated in that currency that the Fund anticipates
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purchasing; however, the cost will only be offset to the extent of the
premium received by the Fund for writing the option.
The Fund also may use futures contracts on fixed income instruments
and options thereon to hedge its investment portfolio against changes in
the general level of interest rates. A futures contract on a fixed income
instrument is a bilateral agreement pursuant to which one party agrees to
make, and the other party agrees to accept, delivery of the specified type
of fixed income security called for in the contract at a specified future
time and at a specified price. The Fund may purchase a futures contract
on a fixed income security when it intends to purchase fixed income
securities but has not yet done so. This strategy may minimize the effect
of all or part of an increase in the market price of the fixed income
security that the Fund intends to purchase in the future. A rise in the
price of the fixed income security prior to its purchase may be either
offset by an increase in the value of the futures contract purchased by
the Fund or avoided by taking delivery of the fixed income securities
under the futures contract. Conversely, a fall in the market price of the
underlying fixed income security may result in a corresponding decrease in
the value of the futures position. The Fund may sell a futures contract
on a fixed income security in order to continue to receive the income from
a fixed income security, while endeavoring to avoid part or all of the
decline in the market value of that security that would accompany an
increase in interest rates.
The Fund may purchase a call option on a futures contract to hedge
against a market advance in debt securities that the Fund plans to acquire
at a future date. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual fixed income
security that can be used as a temporary substitute for a position in the
security itself. The Fund also may write covered call options on futures
contracts as a partial hedge against a decline in the price of fixed
income securities held in the Fund's investment portfolio, or purchase put
options on futures contracts in order to hedge against a decline in the
value of fixed income securities held in the Fund's investment portfolio.
The Fund may write a put option on a security that the Fund anticipates
purchasing to partially offset the cost of purchasing that security;
however, the cost will only be offset to the extent of the premium the
Fund receives for writing the option.
The Fund may sell bond index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the
market value of its investments. To the extent that a portion of the
Fund's investments correlate with a given index, the sale of futures
contracts on that index could reduce the risks associated with a market
decline and thus provide an alternative to the liquidation of securities
positions. For example, if the Fund correctly anticipates a general
market decline and sells bond index futures to hedge against this risk,
the gain in the futures position should offset some or all of the decline
in the value of the portfolio. The Fund may purchase bond index futures
contracts if a significant market or market sector advance is anticipated.
Such a purchase of a futures contract would serve as a temporary
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substitute for the purchase of individual debt securities, which debt
securities may then be purchased in an orderly fashion. This strategy may
minimize the effect of all or part of an increase in the market price of
securities that the Fund intends to purchase. A rise in the price of the
securities should be partly or wholly offset by gains in the futures
position.
As in the case of a purchase of a bond index futures contract, the
Fund may purchase a call option on a bond index futures contract to hedge
against a market advance in securities that the Fund plans to acquire at a
future date. The Fund may write put options on bond index futures as a
partial anticipatory hedge and may write covered call options on bond
index futures as a partial hedge against a decline in the prices of bonds
held in its portfolio. This is analogous to writing covered call options
on securities. The Fund also may purchase put options on bond index
futures contracts. The purchase of put options on bond index futures
contracts is analogous to the purchase of protective put options on
individual securities where a level of protection is sought below which no
additional economic loss would be incurred by the Fund.
The Fund may also write put options on interest rate, bond index or
foreign currency futures contracts while, at the same time, purchasing
call options on the same interest rate, bond index or foreign currency
futures contract in order synthetically to create a long interest rate,
bond index or foreign currency futures contract position. The options
will have the same strike prices and expiration dates. The Fund will
engage in this strategy only when its adviser believes it is more
advantageous to the Fund to do so as compared to purchasing the futures
contract.
The Fund may also purchase and write covered straddles on interest
rate, foreign currency or bond index futures contracts. A long straddle
is a combination of a call and a put purchased on the same futures
contract where the exercise price of the put option is less than the
exercise price of the call option. The Fund would enter into a long
straddle when it believes that it is likely that interest rates or foreign
currency exchange rates will be more volatile during the term of the
options than the option pricing implies. A short straddle is a
combination of a call and put written on the same futures contract where
the exercise price of the put option is less than the exercise price of
the call option. In a covered short straddle, the same futures contract
is considered "cover" for both the put and the call that the Fund has
written. The Fund would enter into a short straddle when it believes that
it is unlikely that interest rates or foreign currency exchange rates will
be as volatile during the term of the options as the option pricing
implies. In such case, the Fund will set aside cash and/or liquid, high
grade debt securities in a segregated account with its custodian equal in
value to the amount, if any, by which the put is "in-the-money", that is,
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the amount by which the exercise price of the put exceeds the current
market value of the underlying futures contract.
Global Equity:
Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific instrument
at a specified future time and at a specified price. Domestic futures
contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Domestic
futures exchanges and trading are regulated under the Commodity Exchange
Act by the CFTC, a U.S. Government agency. Foreign futures exchanges and
futures contracts may be regulated differently, or may be unregulated.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or
taking of delivery. Closing out an open futures position is done by
taking an opposite position ("buying" a contract which has previously been
"sold," "selling" a contract previously "purchased") in an identical
contract to terminate the position. Brokerage commissions are incurred
when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of
the underlying security) if it is not closed out prior to the specified
delivery date. Minimal initial margin requirements are established by the
futures exchange and may be changed. Brokers may establish deposit
requirements which are higher than the exchange minimums. Futures
contracts are customarily purchased and sold on margin deposits that may
range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the
contract is marked-to-market daily. If the futures contract price changes
to the extent that the margin on deposit does not satisfy margin
requirements, payment of additional "variation" margin will be required.
Conversely, change in the contract value may reduce the required margin,
resulting in a repayment of excess margin to the contract holder.
Variation margin payments are made to and from the futures broker for as
long as the contract remains open. The Fund expects to earn interest
income on its margin deposits.
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Regulations of the CFTC applicable to the Fund limit the assets that
can be committed to futures transactions that do not constitute bona fide
hedging transactions. The Fund will sell futures contracts only to
protect securities it owns against price declines or purchase contracts to
protect against an increase in the price of securities it intends to
purchase. As evidence of this hedging interest, the Fund expects that
approximately 75% of its futures contract purchases will be "completed";
that is, equivalent amounts of related securities will have been purchased
or are being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures
contracts could be used to control the exposure of the Fund income to
market fluctuations, the use of futures contracts may be a more effective
means of hedging this exposure. While the Fund will incur commission
expenses in both opening and closing out futures positions, these costs
are lower than transaction costs incurred in the purchase and sale of
underlying equity securities.
For each Fund:
A Fund may also purchase and sell futures contracts on a foreign
currency. A Fund may sell a foreign currency futures contract to hedge
against possible variations in the exchange rate of the foreign currency
in relation to the U.S. dollar. In addition, a Fund may sell a foreign
currency futures contract when its adviser anticipates a general weakening
of the foreign currency exchange rate that could adversely affect the
market values of that Fund's foreign securities holdings. In this case,
the sale of futures contracts on the underlying currency may reduce the
risk to the Fund caused by foreign currency variations and, by so doing,
provide an alternative to the liquidation of securities positions in the
Fund and resulting transaction costs. When a Fund's adviser anticipates a
significant foreign exchange rate increase while intending to invest in a
security denominated in a foreign currency, the Fund may purchase a
foreign currency futures contract to hedge against a rise in foreign
exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against
any rise in the foreign exchange rate that may add additional costs to
acquiring the foreign security position.
A Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk.
A Fund may purchase a call option or write a put option on a foreign
currency futures contract to hedge against a rise in the foreign exchange
rate while intending to invest in a foreign security of the same currency.
A Fund may purchase put options on foreign currency futures contracts as a
partial hedge against a decline in the foreign exchange rates or the value
of its foreign portfolio securities. It may also write a call option on a
foreign currency futures contract as a partial hedge against the effects
of declining foreign exchange rates on the value of foreign securities.
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When a purchase or sale of a futures contract is made by a Fund, it
is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government securities
("initial margin"). The margin required for a futures contract is set by
the exchange on which the contract is traded and may be modified during
the term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract, which is
returned to the Fund upon termination of the contract assuming all
contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, a Fund may be required by an exchange
to increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased generally in the future by
regulatory action. A Fund expects to earn interest income on its initial
margin deposits. A futures contract held by a Fund is valued daily at the
official settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking-to-market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the broker
of the amount one would owe the other if the futures contract had expired
on that date. In computing daily net asset value, a Fund will mark-to-
market its open futures positions.
A Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts and on certain foreign
currencies written by it. Such margin deposits will vary depending on the
nature of the underlying futures contract or currency (and the related
initial margin requirements), the current market value of the option and
other options and futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally futures contracts are closed out
prior to delivery by offsetting purchases or sales of matching futures
contracts (involving the same currency, index or underlying security and
delivery month). If an offsetting purchase price is less than the
original sale price, the Fund realizes a gain, or if it is more, the Fund
realizes a loss. If an offsetting sale price is more than the original
purchase price, the Fund realizes a gain, or if it is less, the Fund
realizes a loss. A Fund will also bear transaction costs for each
contract, which must be considered in these calculations.
The Corporation has filed on behalf of each Fund a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which
regulate trading in the futures markets. Under Section 4.5 of the
regulations under the Commodity Exchange Act, the notice of eligibility
must include representations that the Fund will use futures contracts and
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related options solely for bona fide hedging purposes within the meaning
of the CFTC regulations provided that a Fund may hold futures contracts
and related options that do not fall within the definition of bona fide
hedging transactions if, with respect to such non-hedging transactions,
the initial margin deposits plus premiums paid by that Fund, less the
amount by which any such options positions are "in-the-money" at the time
of purchase, would exceed 5% of the fair market value of the Fund's net
assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of
the futures contract that is the subject of the option. Foreign currency
options traded on a commodities exchange are considered commodity options
for this purpose. In addition, Global Equity will not enter into futures
contracts to the extent that its outstanding obligations to purchase
securities under those contracts would exceed 20% of the Fund's total
assets. Pursuant to an undertaking to a state securities administrator,
the Fund will not invest in puts, calls, straddles, spreads, or any
combination thereof if, as a result, the value of its aggregate investment
in such instruments would exceed 10% of its total assets. Also pursuant
to an undertaking to a state securities administrator, the Fund will buy
and sell options in the OTC market only when such options are unavailable
on exchanges, only when there is an active OTC market for such options
which could establish their pricing and liquidity, and only with dealers
having a minimum net worth of $20 million.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Fund may engage in transactions in
options, futures, options on futures or forward contracts. See
"Additional Tax Information."
Risks Associated with Futures and Options
In considering a Fund's use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such
futures contracts. Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement
price at the end of the current trading session. Once the daily limit has
been reached in a futures contract subject to the limit, no more trades
may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of
positions and subjecting some holders of futures contracts to substantial
losses.
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(2) The ability to establish and close out positions in either
futures contracts or exchange-listed options is also subject to the
maintenance of a liquid secondary market. Consequently, it may not be
possible for a Fund to close a position and, in the event of adverse price
movements, that Fund would have to make daily cash payments of variation
margin (except in the case of purchased options). However, in the event
futures contracts or options have been used to hedge portfolio securities,
such securities will not be sold until the contracts can be terminated.
In such circumstances, an increase in the price of the securities, if any,
may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in
fact, correlate with the price movements in the contracts and thus provide
an offset to losses on the contracts.
(3) Successful use by a Fund of futures contracts and options will
depend upon its adviser's ability to predict movements in the direction of
the overall securities, currency and interest rate markets, which may
require different skills and techniques than predicting changes in the
prices of individual securities. Moreover, futures contracts relate not
to the current level of the underlying instrument but to the anticipated
levels at some point in the future. There is, in addition, the risk that
the movements in the price of the futures contract will not correlate with
the movements in prices of the securities or currencies being hedged. For
example, if the price of the futures contract moves less than the price of
the securities or currencies that are subject to the hedge, the hedge will
not be fully effective; however, if the price of securities or currencies
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at all. If the price of the
securities or currencies being hedged has moved in a favorable direction,
this advantage may be partially offset by losses in the futures position.
In addition, if a Fund has insufficient cash, it may have to sell assets
from its investment portfolio to meet daily variation margin requirements.
Any such sale of assets may or may not be made at prices that reflect the
rising market; consequently, that Fund may need to sell assets at a time
when such sales are disadvantageous to it. If the price of the futures
contract moves more than the price of the underlying securities or
currencies, the Fund will experience either a loss or a gain on the
futures contract that may or may not be completely offset by movements in
the price of the securities or currencies that are the subject of the
hedge.
(4) The value of an option position will reflect, among other
things, the current market price of the underlying security, futures
contract or currency, the time remaining until expiration, the
relationship of the exercise price to the market price, the historical
price volatility of the underlying security, index, futures contract or
currency and general market conditions. For this reason, the successful
use of options as a hedging strategy depends upon a Fund's adviser's
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ability to forecast the direction of price fluctuations in the underlying
market or market sector.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the
futures position and the securities or currencies being hedged, movements
in the prices of futures contracts may not correlate perfectly with
movements in the prices of the hedged securities or currencies due to
price distortions in the futures market. There may be several reasons
unrelated to the value of the underlying securities or currencies that
cause this situation to occur. First, as noted above, all participants in
the futures market are subject to initial and variation margin
requirements. If, to avoid meeting additional margin deposit requirements
or for other reasons, investors choose to close a significant number of
futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the
futures markets may occur. Second, because the margin deposit
requirements in the futures market are less onerous than margin
requirements in the securities market, there may be increased
participation by speculators in the futures market; such speculative
activity in the futures market also may cause temporary price distortions.
Third, participants could make or take delivery of the underlying
securities or currencies instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in
successful hedging through the use of futures contracts over the short
term. In addition, activities of large traders in both the futures and
securities markets involving arbitrage and other investment strategies may
result in temporary price distortions.
(6) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current
market value of the underlying security, index, futures contract or
currency. Purchased options that expire unexercised have no value, and a
Fund will realize a loss in the amount paid plus any transaction costs.
(7) Like options on securities and currencies, options on futures
contracts have a limited life. The ability to establish and close out
options on futures will be subject to the development and maintenance of
liquid secondary markets on the relevant exchanges or boards of trade.
There can be no certainty that liquid secondary markets for all options on
futures contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash
at the time of purchase. This amount and the transaction costs are all
that is at risk. Sellers of options on futures contracts, however, must
post an initial margin and are subject to additional margin calls that
could be substantial in the event of adverse price movements. In
addition, although the maximum amount at risk when a Fund purchases an
option is the premium paid for the option and the transaction costs, there
may be circumstances when the purchase of an option on a futures contract
would result in a loss to the Fund when the use of a futures contract
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would not, such as when there is no movement in the value of the
securities or currencies being hedged.
(9) A Fund's activities in the futures and options markets may
result in a higher portfolio turnover rate and additional transaction
costs in the form of added brokerage commissions; however, a Fund also may
save on commissions by using such contracts as a hedge rather than buying
or selling individual securities or currencies in anticipation or as a
result of market movements.
(10) A Fund may purchase and write both exchange-traded options and
options traded on the OTC market. The ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid
secondary market. Although each Fund intends to purchase or write only
those exchange-traded options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any specific time. Closing
transactions may be effected with respect to options traded in the OTC
markets (currently the primary markets for options on debt securities and
foreign currencies) only by negotiating directly with the other party to
the option contract, or in a secondary market for the option if such
market exists. Although a Fund will enter into OTC options only with
dealers that agree to enter into, and that are expected to be capable of
entering into, closing transactions with that Fund, there can be no
assurance that the Fund will be able to liquidate an OTC option at a
favorable price at any time prior to expiration. In the event of
insolvency of the contra-party, the Fund may be unable to liquidate an OTC
option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that the
Fund would have to exercise those options that it has purchased in order
to realize any profit. With respect to options written by a Fund, the
inability to enter into a closing transaction may result in material
losses to the Fund. For example, because a Fund must maintain a covered
position with respect to any call option it writes on a security, futures
contract or currency, the Fund may not sell the underlying security,
futures contract or currency or invest any cash, U.S. government
securities or other liquid, high quality debt securities used as cover
during the period it is obligated under such option. This requirement may
impair that Fund's ability to sell a portfolio security or make an
investment at a time when such a sale or investment might be advantageous.
Options traded on U.S. or other exchanges may be subject to position and
daily fluctuation limits which may limit the ability of the Fund to reduce
risk using such options and may limit their liquidity.
With respect to Global Government,
(11) Bond index options are settled exclusively in cash. If the Fund
purchases a put or call option on an index, the Fund will not know in
advance the difference, if any, between the closing value of the index on
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the exercise date and the exercise price of the option itself. Thus, if
the Fund exercises a bond index option before the closing index value for
that day is available, the Fund runs the risk that the level of the
underlying index may subsequently change.
Special Risks Related to Foreign Currency Futures Contracts and Options on
Such Contracts and Options on Foreign Currencies
Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the use of futures generally. In
addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated
with options on foreign currencies described below. Further, settlement
of a foreign currency futures contract must occur within the country
issuing the underlying currency. Thus, a Fund must accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign restrictions or regulations regarding the maintenance of foreign
banking arrangements by U.S. residents and may be required to pay any
fees, taxes or charges associated with such delivery that are assessed in
the issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid secondary market.
To reduce this risk, a Fund will not purchase or write options on foreign
currency futures contracts unless and until, in the opinion of its
adviser, the market for such options has developed sufficiently that the
risks in connection with such options are not greater than the risks in
connection with transactions in the underlying foreign currency futures
contracts. Compared to the purchase or sale of foreign currency futures
contracts, the purchase of call or put options on futures contracts
involves less potential risk to a Fund because the maximum amount at risk
is the premium paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or put option on a
foreign currency futures contract would result in a loss, such as when
there is no movement in the price of the underlying currency or futures
contract, when the purchase of the underlying futures contract would not
result in a loss.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or
both currencies and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting
of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
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There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are
closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying
markets that cannot be reflected in the options markets until they reopen.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures and Forward Currency Exchange Contracts and Options Thereon Traded
on Foreign Exchanges
Options on securities, futures contracts, options on futures
contracts, currencies and options on currencies may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as
similar transactions in the United States, may not involve a clearing
mechanism and related guarantees and are subject to the risk of
governmental actions affecting trading in, or the price of, foreign
securities. The value of such positions also could be adversely affected
by (1) other complex foreign political, legal and economic factors, (2)
less available data than in the United States on which to make trading
decisions, (3) delays in a Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) less
trading volume.
Cover for Strategies Involving Options, Futures and Forward Contracts
Global Government will not use leverage in its options, futures and
forward contract strategies. The Fund will not enter into an options,
futures or forward currency strategy that exposes it to an obligation to
another party unless it owns either (1) an offsetting ("covering")
position in securities, currencies or other options, futures or forward
contracts or (2) cash, receivables and liquid high quality debt securities
with a value sufficient to cover its potential obligations.
Each Fund will comply with guidelines established by the SEC with
respect to coverage of these strategies by mutual funds, and, if the
guidelines so require, will set aside cash and/or liquid, high-grade debt
securities in a segregated account with its custodian in the amount
prescribed, as marked-to-market daily. Securities, currencies or other
options or futures positions used for cover and securities held in a
segregated account cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets. As a result,
there is a possibility that the use of cover or segregation involving a
large percentage of a Fund's assets could impede portfolio management or
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that Fund's ability to meet redemption requests or other current
obligations.
Forward Currency Exchange Contracts
A Fund may use forward currency exchange contracts to hedge against
uncertainty in the level of future exchange rates or, with respect to
Global Government, to enhance income. Forward contracts are generally
considered to be derivatives.
A Fund may enter into forward currency exchange contracts with
respect to specific transactions. For example, when a Fund anticipates
purchasing or selling a security denominated in a foreign currency, or
when it anticipates the receipt in a foreign currency of dividend or
interest payments on a security that it holds, that Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment, as the case may be, by entering into a forward
contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the
underlying transaction. That Fund will thereby attempt to protect itself
against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the
payment is declared, and the date on which such payments are made or
received.
A Fund also may use forward currency exchange contracts to lock in
the U.S. dollar value of its portfolio positions, to increase its exposure
to foreign currencies that its adviser believes may rise in value relative
to the U.S. dollar or to shift its exposure to foreign currency
fluctuations from one country to another. For example, when a Fund's
adviser believes that the currency of a particular foreign country may
suffer a substantial decline relative to the U.S. dollar or another
currency, it may enter into a forward contract to sell the amount of the
former foreign currency approximating the value of some or all of that
Fund's securities denominated in such foreign currency. These investment
practices generally are referred to as "cross-currency hedging" when two
foreign currencies are involved. In cross-currency hedging, a Fund may
suffer losses on both currencies if their values do not move as its
adviser anticipates.
At or before the maturity date of a forward contract requiring a Fund
to sell a currency, that Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security
and offset its contractual obligation to deliver the currency by
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purchasing a second contract pursuant to which the Fund will obtain, on
the same maturity date, the same amount of the currency that it is
obligated to deliver. Similarly, a Fund may close out a forward contract
requiring it to purchase a specified currency by entering into a second
contract entitling it to sell the same amount of the same currency on the
maturity date of the first contract. A Fund would realize a gain or loss
as a result of entering into such an offsetting forward contract under
either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first
contract and the offsetting contract.
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the future
value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between
the date the forward contract is entered into and the date it matures.
Accordingly, it may be necessary for a Fund to purchase additional foreign
currency on the spot (i.e., cash) market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is
made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency the Fund is obligated
to deliver.
The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy
is highly uncertain. Forward contracts involve the risk that anticipated
currency movements will not be accurately predicted, causing a Fund to
sustain losses on these contracts and transaction costs. A Fund may enter
into forward contracts or maintain a net exposure to such contracts only
if (1) the consummation of the contracts would not obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency or (2)
the Fund maintains cash, U.S. Government securities or other liquid, high-
grade debt securities in a segregated account with the Fund's custodian,
marked-to-market daily, in an amount not less than the value of the Fund's
total assets committed to the consummation of the contract. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer-term investment decisions made with regard to
overall diversification strategies. However, each Fund's adviser believes
that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of that Fund will be
served. Some foreign currency forward contracts into which a Fund enters
may be illiquid.
The cost to a Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period
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and the market conditions then prevailing. Because forward contracts are
usually entered into on a principal basis, no fees or commissions are
involved. The use of forward contracts does not eliminate fluctuations in
the prices of the underlying securities a Fund owns or intends to
acquire, but it does fix a rate of exchange in advance. In addition,
although forward contracts limit the risk of loss due to a decline in the
value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. Each Fund may convert foreign currency from
time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should that Fund desire to resell that
currency to the dealer.
The following information applies only to Global Government:
Foreign Currency Exchange-Related Securities and Foreign Currency Warrants
Foreign currency warrants entitle the holder to receive from their
issuer an amount of cash (generally, for warrants issued in the United
States, in U.S. dollars) that is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant.
Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt offerings
by major corporate issuers in an attempt to reduce the foreign currency
exchange risk that is inherent in the international fixed income/debt
marketplace. The formula used to determine the amount payable upon
exercise of a foreign currency warrant may make the warrant worthless
unless the applicable foreign currency exchange rate moves in a particular
direction.
Foreign currency warrants are severable from the debt obligations
with which they may be offered and may be listed on exchanges. Foreign
currency warrants may be exercisable only in certain minimum amounts, and
an investor wishing to exercise warrants who possesses less than the
minimum number required for exercise may be required either to sell the
warrants or to purchase additional warrants, thereby incurring additional
transaction costs. In the case of any exercise of warrants, there may be
a time delay between the time a holder of warrants gives instructions to
exercise and the time the exchange rate relating to exercise is
determined, during which time the exchange rate could change
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significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised.
The expiration date of the warrants may be accelerated if the
warrants are delisted from an exchange or if their trading is suspended
permanently, which would result in the loss of any remaining "time value"
of the warrants (i.e., the difference between the current market value and
the exercise value of the warrants) and, in the case where the warrants
were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers
and are not standardized foreign currency options issued by the Options
Clearing Corporation ("OCC"). Unlike foreign currency options issued by
OCC, the terms of foreign currency warrants generally will not be amended
in the event of governmental or regulatory actions affecting exchange
rates or in the event of the imposition of other regulatory controls
affecting the international currency markets. The initial public offering
price of foreign currency warrants is generally considerably in excess of
the price that a commercial user of foreign currencies might pay in the
interbank market for a comparable option involving significantly larger
amounts of foreign currencies. Foreign currency warrants are subject to
significant foreign exchange risk, including risks arising from complex
political and economic factors.
Swaps, Caps, Collars and Floors
The Fund may enter into interest rate, currency and index swaps, and
may purchase and sell caps, collars and floors for hedging purposes or in
an effort to increase overall return. Interest rate swap transactions
involve an agreement between two parties under which one makes to the
other periodic payments based on a fixed rate of interest and receives in
return periodic payments based on a variable rate of interest; the rates
are calculated on the basis of a specified amount of principal (the
"notional principal amount") for a specified period of time. A currency
swap is an agreement to exchange cash flows based on changes in the value
of an exchange rate; participants in currency swaps may also exchange the
principal amount. Index swaps link one of the payments to the total return
of a market portfolio. Cap and floor transactions involve an agreement
between two parties in which one agrees to pay the other when a designated
market interest rate, currency rate or index value goes above (in the case
of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. In an interest
rate collar, one party agrees to pay the other when a designated market
interest rate either goes above a specified cap level or below a specified
floor level, either on predetermined dates or during a specified time
period.
As with options and future transactions, successful use of swap
agreements depends on the Adviser's ability to predict movements in the
direction of the overall currency and interest rate markets. There might
be imperfect correlation between the value of a swap, cap, collar or floor
agreement and movements in the underlying interest rate or currency
markets. While swap agreements can offset the potential for loss on a
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position, they can also limit the opportunity for gain by offsetting
favorable price movements.
Swaps, caps, collars and floors can be highly volatile instruments.
The value of these agreements is dependent on the ability of the
counterparty to perform and is therefore linked to the counterparty's
creditworthiness. The Fund may also suffer a loss if it is unable to
terminate an outstanding swap agreement.
The Fund will enter into swaps, caps, collars and floors only with
parties deemed by its adviser to present a minimal risk of default during
the period of agreement. When the Fund enters into a swap, cap, collar or
floor, it will maintain a segregated account containing cash and high-
quality liquid debt securities equal to the payment, if any, due to the
other party; where contracts are on a net basis, only the net payment will
be segregated. The Fund regards caps, collars and floors as illiquid, and
therefore subject to the Fund's 15% limit on illiquid securities. There
can be no assurance that the Fund will be able to terminate a swap at the
appropriate time. The Fund will sell caps, collars and floors only to
close out its positions in such instruments.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. Caps, collars and
floors are more recent innovations for which documentation is less
standardized, and accordingly, they are less liquid than swaps. The
market for all of these instruments is largely unregulated. Swaps, caps,
collars and floors are generally considered "derivatives."
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason and
certain of its affiliates. Navigator Shares are currently offered for
sale only to Institutional Clients, to clients of Trust Company for which
Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. Navigator Shares may not be
purchased by individuals directly, but Institutional Clients may purchase
shares for Customer Accounts maintained for individuals. Primary Shares
are available to all other investors.
Future First Systematic Investment Plan
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future
First Systematic Investment Plan. Under this plan, you may arrange for
automatic monthly investments in Primary Shares of $50 or more by
authorizing Boston Financial Data Services ("BFDS"), the Funds' transfer
agent, to prepare a check each month drawn on your checking account. Each
month the transfer agent will send a check to your bank for collection,
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and the proceeds of the check will be used to buy Primary Shares at the
per share net asset value determined on the day the check is sent to your
bank. You will receive a quarterly account statement. You may terminate
the Future First Systematic Investment Plan at any time without charge or
penalty. Forms to enroll in the Future First Systematic Investment Plan
are available from any Legg Mason or affiliated office.
Purchases by Check
In making purchases of Fund shares by check, you should be aware that
checks drawn on a member bank of the Federal Reserve System will normally
be converted to federal funds and used to purchase shares of the Fund
within two business days of receipt by Legg Mason. Legg Mason is closed
on the days that the New York Stock Exchange ("Exchange") is closed,
which are listed under "Valuation of Fund Shares" on page [ ]. Checks
drawn on banks that are not members of the Federal Reserve System may take
up to nine business days to be converted.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or more,
you may also elect to make systematic withdrawals from your Fund account
of a minimum of $50 on a monthly basis. The amounts paid to you each
month are obtained by redeeming sufficient Primary Shares from your
account to provide the withdrawal amount that you have specified. The
Systematic Withdrawal Plan is not currently available for shares held in
an Individual Retirement Account ("IRA"), Self-Employed Individual
Retirement Plan ("Keogh Plan"), Simplified Employee Pension Plan ("SEP")
or other qualified retirement plan. You may change the monthly amount to
be paid to you without charge not more than once a year by notifying Legg
Mason or the affiliate with which you have an account. Redemptions will
be made at the Primary Shares' net asset value determined as of the close
of regular trading of the Exchange on the first day of each month. If the
Exchange is not open for business on that day, the shares will be redeemed
at the net asset value determined as of the close of regular trading of
the Exchange on the preceding business day. The check for the withdrawal
payment will usually be mailed to you on the next business day following
redemption. If you elect to participate in the Systematic Withdrawal
Plan, dividends and distributions on all Primary Shares in your account
must be automatically reinvested in Primary Shares. You may terminate the
Systematic Withdrawal Plan at any time without charge or penalty. Each
Fund, its transfer agent, and Legg Mason also reserve the right to modify
or terminate the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or a capital gain distribution. These payments are taxable to
the extent that the total amount of the payments exceeds the tax basis of
the shares sold. If the periodic withdrawals exceed reinvested dividends
and other distributions, the amount of your original investment may be
correspondingly reduced.
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Ordinarily, you should not purchase additional shares of the Fund in
which you have an account if you maintain a Systematic Withdrawal Plan
because you may incur tax liabilities in connection with such purchases
and withdrawals. Each Fund will not knowingly accept purchase orders from
you for additional shares if you maintain a Systematic Withdrawal Plan
unless your purchase is equal to at least one year's scheduled
withdrawals. In addition, if you maintain a Systematic Withdrawal Plan
you may not make periodic investments under the Future First Systematic
Investment Plan.
Redemption Services
Each Fund reserves the right to modify or terminate the wire or
telephone redemption services described in the Prospectuses at any time.
The date of payment may not be postponed for more than seven days,
and the right of redemption may not be suspended except (a) for any period
during which the Exchange is closed (other than for customary weekend and
holiday closings), (b) when trading in markets a Fund normally utilizes is
restricted or an emergency, as defined by rules and regulations of the
SEC, exists, making disposal of that Fund's investments or determination
of its net asset value not reasonably practicable, or (c) for such other
periods as the SEC, by order, may permit for protection of a Fund's
shareholders. In the case of any such suspension, you may either withdraw
your request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.
Each Fund reserves the right under certain conditions, to honor any
request or combination of requests for redemption from the same
shareholder in any 90-day period, totaling $250,000 or 1% of the net
assets of the Fund, whichever is less, by making payment in whole or in
part by securities valued in the same way as they would be valued for
purposes of computing that Fund's net asset value per share. If payment
is made in securities, a shareholder generally will incur brokerage
expenses in converting those securities into cash and will be subject to
fluctuation in the market price of those securities until they are sold.
Each Fund does not redeem in kind under normal circumstances, but would do
so where its adviser determines that it would be in the best interests of
the shareholders as a whole.
Foreign securities exchanges may be open for trading on days when the
Funds are not open for business. The net asset value of Fund shares may
be significantly affected on days when investors do not have access to
their respective Fund to purchase and redeem shares.
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ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting the Fund and its shareholders. Investors are
urged to consult their own tax advisers for more detailed information
regarding any federal, state or local taxes that may be applicable to
them.
General
In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as
amended ("Code"), a Fund must distribute annually to its shareholders at
least 90% of its investment company taxable income (generally, net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if any) ("Distribution Requirement") and
must meet several additional requirements. These requirements include the
following: (1) a Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities or
foreign currencies, or other income (including gains from options, futures
or forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) a Fund must
derive less than 30% of its gross income each taxable year from the sale
or other disposition of securities, or any of the following, that were
held for less than three months -- options, futures or forward contracts
(other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly
related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of a Fund's taxable year,
at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. government securities, securities of other RICs and
other securities, with those other securities limited, in respect of any
one issuer, to an amount that does not exceed 5% of the value of that
Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (4) at the close of each
quarter of a Fund's taxable year, not more than 25% of the value of its
total assets may be invested in the securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term,
capital loss to the extent of any capital gain distributions received on
those shares. Investors also should be aware that if shares are purchased
shortly before the record date for any dividend or other distribution, the
investor will pay full price for the shares and receive some portion of
the price back as a taxable distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain
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net income for the one-year period ending on October 31 of that year, plus
certain other amounts. For this and other purposes, dividends and other
distributions declared by a Fund in December of any year and payable to
shareholders of record on a date in that month will be deemed to have been
paid by that Fund and received by the shareholders on December 31 if the
distributions are paid by that Fund during the following January.
Accordingly, those dividends and other distributions will be taxed to
shareholders for the year in which that December 31 falls.
Foreign Securities
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if that Fund
distributes the PFIC income as a taxable dividend to its shareholders.
The balance of the PFIC income will be included in the Fund's investment
company taxable income and, accordingly, will not be taxable to it to the
extent that income is distributed to its shareholders.
Proposed regulations have been published pursuant to which open-end
RICs, such as the Funds, would be entitled to elect to "mark-to-market"
their stock in certain PFICs. "Marking-to-market," in this context, means
recognizing as gain for each taxable year the excess, as of the end of
that year, of the fair market value of each such PFIC's stock over the
adjusted basis in that stock (including mark-to-market gain for each prior
year for which an election was in effect).
Gains or losses from the disposition of foreign currencies, and gains
or losses attributable to fluctuations in exchange rates that occur
between the time a Fund accrues dividends or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects the receivables or pays the liabilities,
generally will be treated as ordinary income or loss. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders.
Options, Futures, Forward Contracts and Foreign Currencies
The use of hedging instruments, such as writing (selling) and
purchasing options and futures contracts and entering into forward
contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses a
Fund realizes in connection therewith. Income from foreign currencies
(except certain gains therefrom that may be excluded by future
regulations), and income from transactions in options, futures and forward
contracts derived by a Fund with respect to its business of investing in
securities and foreign currencies, will qualify as permissible income
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under the Income Requirement. However, income from the disposition of
options and futures contracts (other than those on foreign currencies)
will be subject to the Short-Short Limitation if they are held for less
than three months. Income from the disposition of foreign currencies, and
options, futures and forward contracts on foreign currencies, that are not
directly related to a Fund's principal business of investing in securities
(or options and futures with respect to securities) also will be subject
to the Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining
whether that Fund satisfies the Short-Short Limitation. Thus, only the
net gain, if any, from the designated hedge will be included in gross
income for purposes of that limitation. Each Fund will consider whether
it should seek to qualify for this treatment for its hedging transactions.
To the extent a Fund does not so qualify, it may be forced to defer the
closing out of certain options, futures and forward contracts beyond the
time when it otherwise would be advantageous to do so, in order for that
Fund to qualify as a RIC.
Certain options and futures in which a Fund may invest will be
"section 1256 contracts." Section 1256 contracts held by a Fund at the
end of each taxable year, other than section 1256 contracts that are part
of a "mixed straddle" with respect to which that Fund has made an election
not to have the following rules apply, must be "marked-to-market" (that
is, treated as sold for their fair market value) for federal income tax
purposes, with the result that unrealized gains or losses will be treated
as though they were realized. Sixty percent of any net gain or loss
recognized on these deemed sales, and 60% of any net realized gain or loss
from any actual sales of section 1256 contracts, will be treated as long-
term capital gain or loss, and the balance will be treated as short-term
capital gain or loss. Section 1256 contracts also may be marked-to-market
for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the
taxation of options and futures contracts in which a Fund may invest.
Section 1092 defines a "straddle" as offsetting positions with respect to
personal property; for these purposes, options and futures contracts are
personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent
the loss exceeds the unrealized gain on the offsetting position(s) of the
straddle. Section 1092 also provides certain "wash sale" rules, which
apply to transactions where a position is sold at a loss and a new
offsetting position is acquired within a prescribed period, and "short
sale" rules applicable to straddles. If a Fund makes certain elections,
the amount, character and timing of the recognition of gains and losses
from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the
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regulations implementing the straddle rules have been promulgated, the tax
consequences to a Fund of straddle transactions are not entirely clear.
Miscellaneous
If a Fund invests in shares of common stock or preferred stock or
otherwise holds dividend-paying securities as a result of exercising a
conversion privilege, a portion of the dividends from its investment
company taxable income (whether paid in cash or reinvested in additional
Fund shares) may be eligible for the dividends-received deduction allowed
to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative
minimum tax.
Original Issue Discount and "Pay-in-Kind" Securities (for Global
Government only)
The Fund may purchase zero coupon or other debt securities issued
with original issue discount. As a holder of those securities, the Fund
must include in its income the original issue discount that accrues during
the taxable year, even if the Fund receives no corresponding payment on
the securities during the year. Similarly, the Fund must include in its
gross income securities it receives as "interest" on pay-in-kind
securities. Because the Fund annually must distribute substantially all
of its investment company taxable income, including any original issue
discount and other non-cash income, to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax, it may be required in
a particular year to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash, assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or
losses from those dispositions, which would increase or decrease its
investment company taxable income and/or net capital gain (the excess of
net long-term capital gain over net short-term capital loss). In
addition, any such gains may be realized on the disposition of securities
held for less than three months. Because of the Short-Short Limitation,
any such gains would reduce the Fund's ability to sell other securities
(and certain options, futures, forward contracts and foreign currencies)
held for less than three months that it might wish to sell in the ordinary
course of its portfolio management.
38
<PAGE>
PERFORMANCE INFORMATION
Total Return Calculations Average annual total return quotes used in
a Fund's advertising and other promotional materials ("Performance
Advertisements") are calculated according to the following formula:
n
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of
a hypothetical $1,000 payment made
at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at
least to the last day of the most recent quarter prior to submission of
the Performance Advertisements for publication. Total return, or "T" in
the formula above, is computed by finding the average annual change in the
value of an initial $1,000 investment over the period. In calculating the
ending redeemable value, all dividends and other distributions by a Fund
are assumed to have been reinvested at net asset value on the reinvestment
dates during the period.
For Global Government:
Yield Yields used in the Fund's Performance Advertisements are
calculated by dividing the Fund's net investment income for a 30-day
period ("Period"), by the average number of shares entitled to receive
dividends during the Period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the maximum offering
price per share at the end of the Period. Yield quotations are calculated
according to the following formula:
6
YIELD = 2 [(a-b + 1) ] - 1
cd
where: a = dividends and interest earned during the Period
b = expenses accrued for the Period (net of
reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the Period.
Except as noted below, in determining net investment income earned
during the Period (variable "a" in the above formula), the Fund calculates
interest earned on each debt obligation held by it during the Period by
39
<PAGE>
(1) computing the obligation's yield to maturity based on the market value
of the obligation (including actual accrued interest) on the last business
day of the Period or, if the obligation was purchased during the Period,
the purchase price plus accrued interest and (2) dividing the yield to
maturity by 360, and multiplying the resulting quotient by the market
value of the obligation (including actual accrued interest). Once
interest earned is calculated in this fashion for each debt obligation
held by the Fund, interest earned during the Period is then determined by
totalling the interest earned on all debt obligations. For purposes of
these calculations, the maturity of an obligation with one or more call
provisions is assumed to be the next on which the obligation reasonably
can be expected to be called or, if none, the maturity date. The Fund's
yield for the thirty-day period ended December 31, 1994 was 8.01%. The
Fund's annualized thirty-day yield at June 30, 1995 was 6.78%. The yields
would have been lower if the Fund's adviser had not waived certain fees
and expenses.
With respect to the treatment of discount and premium on mortgage-
backed and other asset-backed obligations that are expected to be subject
to monthly payments of principal and interest ("paydowns"): (1) the Fund
accounts for gain or loss attributable to actual paydowns as an increase
or decrease in interest income during the period and (2) the Fund accrues
the discount and amortizes the premium on the remaining obligation, based
on the cost of the obligation, to the weighted average maturity date or,
if weighted average maturity information is not available, to the
remaining term of the obligation.
The following table shows the value, as of the end of each fiscal
year, of a hypothetical investment of $10,000 made in Global Government at
the Fund's commencement of operations on April 15, 1993. The table
assumes that all dividends and other distributions are reinvested in the
Fund. It includes the effect of all charges and fees applicable to shares
the Fund has paid. (There are no fees for investing or reinvesting in the
Fund, and there are no redemption fees.) It does not include the effect
of any income taxes that an investor would have to pay on distributions.
40
<PAGE>
<TABLE>
<CAPTION>
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Fiscal Through Reinvestment of Through Reinvestment of Total
Year Capital Gain Income Dividends Value
Distributions
<S> <C> <C> <C>
1993* $10,311 $365 $10,676
1994 9,578 948 10,526
</TABLE>
*April 15, 1993 (commencement of operations) to December 31 1993.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1994
would have been $10,984, and the investor would have received a total of
$984 in distributions. Returns would have been lower if Global
Government's adviser had not waived/reimbursed certain Fund expenses
during the fiscal years 1993 and 1994.
The table above is based only on Primary Shares. As of the date of
this Statement of Additional Information, Navigator Shares have no
performance history of their own.
For each Fund:
In performance advertisements each Fund may compare its total return
with data published by Lipper Analytical Services, Inc. ("Lipper") for
U.S. government funds and corporate bond (BBB) funds, CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), or Morningstar Mutual Funds ("Morningstar"), or with the
performance of U.S. Treasury securities of various maturities, recognized
stock, bond and other indexes, including (but not limited to) the Salomon
Brothers Bond Index, Shearson Lehman Bond Index, Shearson Lehman
Government/Corporate Bond Index, the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500"), Value Line, the Dow Jones Industrial Average, and
changes in the Consumer Price Index as published by the U.S. Department of
Commerce.
A Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels
with funds having similar investment objectives, published by Lipper, CDA,
41
<PAGE>
Wiesenberger or Morningstar. Performance Advertisements also may refer to
discussions of a Fund and comparative mutual fund data and ratings
reported in independent periodicals, including (but not limited to) THE
WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL
WORLD, BARRONS, FORTUNE and THE NEW YORK TIMES.
Global Government invests primarily in fixed-income securities and
Global Equity invests primarily in global equity securities, as described
in the Prospectuses. Each Fund does not generally invest in the equity
securities that make up the S&P 500 or the Dow Jones indices. Comparison
with such indices is intended to show how an investment in either Fund
behaved as compared to indices that are often taken as a measure of
performance of the equity market as a whole. The indices, like each
Fund's total return, assume reinvestment of all dividends and other
distributions. They do not take into account the costs or the tax
consequences of investing.
Each Fund may include discussions or illustrations of the effects of
compounding in performance advertisements. "Compounding" refers to the
fact that, if dividends or other distributions on an investment in a Fund
are reinvested in additional Fund shares, any future income or capital
appreciation of that Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been
paid in cash.
Each Fund may also compare its performance with the performance of
bank certificates of deposit (CDs) as measured by the CDA Investment
Technologies, Inc. Certificate of Deposit Index and the Bank Rate Monitor
National Index. In comparing a Fund's performance to CD performance,
investors should keep in mind that bank CDs are insured in whole or in
part by an agency of the U.S. Government and offer fixed principal and
fixed or variable rates of interest, and that bank CD yields may vary.
Fund shares are not insured or guaranteed by the U.S. Government and
returns and net asset value will fluctuate. The securities held by a Fund
generally have longer maturities than most CDs and may reflect interest
rate fluctuations for longer-term securities. An investment in each Fund
involves greater risks than an investment in certificates of deposit.
Fund advertisements may reference the history of the distributor and
its affiliates, and the education and experience of the portfolio manager.
Advertisements may also describe techniques each Fund's adviser employs in
selecting among the sectors of the fixed-income market and adjusting
average portfolio maturity. In particular, the advertisements may focus on
the techniques of 'value investing'. With value investing, a Fund's
adviser invests in those securities it believes to be undervalued in
relation to the long-term earning power or asset value of their issuers.
42
<PAGE>
Securities may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting the issuer of the security.
Global Equity's adviser believes that the securities of sound, well-
managed companies that may be temporarily out of favor due to earnings
declines or other adverse developments are likely to provide a greater
total return than securities with prices that appear to reflect
anticipated favorable developments and that are therefore subject to
correction should any unfavorable developments occur.
In advertising, a Fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving
for a child's college education or for retirement. Sources such as the
Internal Revenue Service, the Social Security Administration, the Consumer
Price Index and Chase Global Data and Research may supply data concerning
interest rates, college tuitions, the rate of inflation, Social Security
benefits, mortality statistics and other relevant information. A Fund may
use other recognized sources as they become available.
A Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets
and to show the value of a hypothetical investment in a capital market.
Ibbotson relies on different indices to calculate the performance of
common stocks, corporate and government bonds and Treasury bills.
A Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is
represented by the performance of an appropriate market index, such as the
S&P 500 and the performance of bonds is represented by a nationally
recognized bond index, such as the Lehman Brothers Long-Term Government
Bond Index.
A Fund may also include in advertising biographical information on
key investment and managerial personnel.
A Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar
amount, thereby purchasing more shares when prices are low and fewer
shares when prices are high. Although such a plan does not guarantee
profit or guard against loss in declining markets, the average cost per
share could be lower than if a fixed number of shares were purchased at
the same intervals. Investors should consider their ability to purchase
shares through periods of low prices.
43
<PAGE>
A Fund may discuss Legg Mason's tradition of service. Since 1899,
Legg Mason and its affiliated companies have helped investors address
their specific investment goals and have provided a full spectrum of
financial services. Legg Mason affiliates serve as investment advisors
for private accounts and mutual funds with assets of more than $26 billion
as of June 30, 1995.
In advertising, a Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into
an IRA, factors to consider in determining whether you qualify for such a
rollover, and the other options available. These discussions may include
graphs or other illustrations that compare the growth of a hypothetical
tax-deferred investment to the after-tax growth of a taxable investment.
A Fund may include in advertising and sales literature descriptive
material relating to both domestic and international economic conditions
including but not limited to discussions regarding the effects of
inflation as well as discussions which compare the growth of various world
equity markets. A Fund may depict the historical performance of the
securities in which that Fund may invest over periods reflecting a variety
of market or economic conditions whether alone or in comparison with
alternative investments, performance indexes of those investments or
economic indicators. A Fund may also describe its portfolio holdings and
depict its size, the number and make-up of its shareholder base and other
descriptive factors concerning that Fund.
A Fund may discuss its investment adviser's philosophy regarding
international investing. Recognizing the differing evolutionary stages of
the distinct emerging market segments, each Fund's adviser, intent on
participating in all of these marketplaces, does not apply a uniform
investment process and approach to its different marketplaces. As a
result, an adviser's investment processes for the U.S., non-U.S. developed
countries and emerging markets are distinct. Well-defined disciplines
appropriate to the respective markets are applied within the company's
framework of strong, experienced management, sound fundamental research
and analysis, and superior data and modeling resources.
Batterymarch, adviser to Global Equity, is recognized as a "pioneer"
in international investing and is well-known in the investment community.
Batterymarch has been applying a consistent investment discipline in the
international markets for over 10 years. During this time, Batterymarch
has studied the world's equity markets and developed time-tested
disciplines appropriate to each country's respective market.
44
<PAGE>
VALUATION OF FUND SHARES
As described in the Prospectuses, securities for which market
quotations are readily available are valued at current market value.
Securities are valued at the last sale price for a comparable position on
the day the securities are being valued or, lacking any sales on such day,
at the last available bid price. In cases where securities are traded on
more than one market, the securities are generally valued on the market
considered by each Fund's adviser as the primary market. Each Fund is
open for business and its net asset value is calculated each day the
Exchange is open for business. The Exchange currently observes the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
All investments valued in foreign currency are valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at
the time such valuation is determined. Foreign currency exchange rates
are generally determined prior to the close of trading on the Exchange.
Occasionally, events affecting the value of foreign investments and such
exchange rates occur between the time at which they are determined and the
close of trading on the Exchange. Such investments will be valued at
their fair value, as determined in good faith by or under the direction of
the Board of Directors. Foreign currency exchange transactions of a Fund
occurring on a spot basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market.
TAX-DEFERRED RETIREMENT PLANS
Investors may invest in shares of a Fund through IRAs, Keogh Plans,
SEPs and other qualified retirement plans. In general, income earned
through the investment in assets of qualified retirement plans is not
taxed to the beneficiaries of such plans until the income is distributed
to them. Investors who are considering establishing such a plan should
consult their attorneys or tax advisers with respect to individual tax
questions. The option of investing in these plans through regular payroll
deductions may be arranged with a Legg Mason or affiliated investment
executive and your employer. Additional information with respect to these
plans is available upon request from any Legg Mason or affiliated
investment executive.
Individual Retirement Account - IRA
Certain Primary Share investors may obtain tax advantages by
establishing IRAs. Specifically, if neither you nor your spouse is an
45
<PAGE>
active participant in a qualified employer or government retirement plan,
or if either you or your spouse is an active participant and your adjusted
gross income does not exceed a certain level, then you may deduct cash
contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. In
addition, if your spouse is not employed and you file a joint return, you
may establish a separate IRA for your spouse and contribute up to a total
of $2,250 to the two IRAs, provided that the contribution to either does
not exceed $2,000. If you and your spouse are both employed and neither
of you is an active participant in a qualified employer or government
retirement plan and you establish separate IRAs, you each may contribute
all of your earned income, up to $2,000 each, and thus may together
receive tax deductions of up to $4,000 for contributions to your IRAs. If
your employer's plan qualifies as a SEP, permits voluntary contributions,
and meets certain other requirements, you may make voluntary contributions
to that plan that are treated as deductible IRA contributions.
Even if you are not in one of the categories described in the
preceding paragraph, you may find it advantageous to invest in Primary
Shares through IRA contributions, up to certain limits, because all
dividends and capital gain distributions on your Primary Shares are then
not immediately taxable to you or the IRA; they become taxable only when
distributed to you. To avoid penalties, your interest in an IRA must be
distributed, or start to be distributed, to you not later than the end of
the taxable year in which you attain age 70 1/2. Distributions made
before age 59 1/2, in addition to being taxable, generally are subject to
a penalty equal to 10% of the distribution, except in the case of death or
disability, where the distribution is rolled over into another qualified
plan, or certain other situations.
Self-Employed Individual Retirement Plan - Keogh Plan
Legg Mason makes available to self-employed individuals a Plan and
Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. Primary Share investors have the right to use a bank of your
own choice to provide these services at your own cost. There are
penalties for distributions from a Keogh Plan prior to age 59 1/2, except
in the case of death or disability.
Simplified Employee Pension Plan - SEP
Legg Mason also makes available to corporate and other employers a
Simplified Employee Pension Plan for investment in Primary Shares.
Withholding at the rate of 20% is required for federal income tax
purposes on distributions eligible for rollover from the foregoing
retirement plans (except IRAs and SEPs), unless the recipient transfers
the distribution directly to an "eligible retirement plan" (including IRAs
and other qualified plans) that accepts those distributions. Other
distributions generally are subject to regular wage withholding or to
46
<PAGE>
withholding at the rate of 10% (depending on the type and amount of the
distribution), unless the recipient elects not to have any withholding
apply. Primary Share investors should consult your plan administrator or
tax advisor for further information.
THE CORPORATION'S DIRECTORS AND OFFICERS
The Corporation's officers are responsible for the operation of the
Corporation under the direction of the Board of Directors. The officers
and directors and their principal occupations during the past five years
are set forth below. An asterisk (*) indicates those officers and/or
directors who are "interested persons" of the Corporation as defined by
the 1940 Act. The business address of each officer and director is 111
South Calvert Street, Baltimore, Maryland, unless otherwise indicated.
JOHN F. CURLEY, JR.*, [56] Chairman of the Board and Director of each
Fund; Vice Chairman and Director of Legg Mason Wood Walker, Inc. and Legg
Mason, Inc.; Director of Legg Mason Fund Adviser, Inc. and Western Asset
Management Company; Officer and/or Director of various other affiliates of
Legg Mason, Inc.; President and Director of three Legg Mason funds;
Chairman of the Board and Trustee of one Legg Mason fund; Chairman of the
Board, President and Trustee of one Legg Mason fund; Chairman of the Board
and Director of three Legg Mason funds.
EDWARD A. TABER, III,* [52] President and Director of each Fund;
Executive Vice President of Legg Mason, Inc. and Legg Mason Wood Walker,
Inc.; Vice Chairman and Director of Legg Mason Fund Adviser, Inc.;
Director of three Legg Mason funds; Trustee of one Legg Mason fund;
President and Director of two Legg Mason funds; and Vice President of
Worldwide Value Fund, Inc. Formerly: Executive Vice President of T. Rowe
Price-Fleming International, Inc. (1986-1992) and Director of the Taxable
Fixed Income Division at T. Rowe Price Associates, Inc. (1973-1992).
RICHARD G. GILMORE, [68] Director of each Fund; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS
Industries, Inc. (diversified holding company engaged in manufacture and
sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia
Electric Company); Director of six Legg Mason funds; Trustee of one Legg
Mason fund. Formerly: Senior Vice President and Chief Financial Officer of
Philadelphia Electric Company (now PECO Energy Company); Executive Vice
President and Treasurer, Girard Bank, and Vice President of its parent
holding company, the Girard Company (bank holding company) and Director of
Finance, City of Philadelphia.
CHARLES F. HAUGH, [70] Director of each Fund; 14201 Laurel Park
Drive, Laurel, Maryland. Real Estate Developer and Investor; President and
Director of Resource Enterprises, Inc. (real estate brokerage); Chairman
47
<PAGE>
of Resource Realty LLC (management of retail and office space); Partner in
Greater Laurel Health Park Ltd. Partnership (real estate investment and
development); Director of six Legg Mason funds; Trustee of two Legg Mason
funds.
ARNOLD L. LEHMAN, [52] Director of each Fund; The Baltimore Museum of
Art, Art Museum Drive, Baltimore, Maryland. Director of the Baltimore
Museum of Art; Director of six Legg Mason funds; Trustee of two Legg Mason
funds.
JILL E. McGOVERN, [51] Director of each Fund; 1500 Wilson Boulevard,
Arlington, Virginia. Chief Executive Officer of the Marrow Foundation;
Director of six Legg Mason funds; Trustee of two Legg Mason funds.
Formerly: Executive Director of the Baltimore International Festival
(January 1991 - March 1993); Senior Assistant to the President of The
Johns Hopkins University (1986-1991).
T. A. RODGERS, [61] Director of each Fund; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director and Vice President of Corporate Development of Polk
Audio, Inc.(manufacturer of audio components); Director of six Legg Mason
funds; Trustee of one Legg Mason fund. Formerly: Director of Polk Audio,
Inc. (manufacturer of audio components) through July 1994.
The executive officers of the Corporation, other than those who also
serve as directors, are:
MARIE K. KARPINSKI*, [46] Vice-President and Treasurer of each Fund;
Treasurer of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer
of eight Legg Mason funds; Secretary/Treasurer of Worldwide Value Fund,
Inc.; Vice President of Legg Mason.
KATHI D. GLENN*, [30] Secretary and Assistant Treasurer of each Fund;
Secretary and Assistant Treasurer of two Legg Mason funds; employee of
Legg Mason.
BLANCHE P. ROCHE*, [46] Assistant Secretary and Assistant Vice
President of each Fund; Assistant Secretary and Assistant Vice President
of seven Legg Mason funds; employee of Legg Mason since 1991. Formerly:
Manager of Consumer Financial Services, Primerica Corporation (1989-1991).
Officers and directors of the Corporation who are "interested
persons" thereof, as defined in the 1940 Act, receive no salary or fees
from the Corporation. Independent directors of the Corporation receive a
48
<PAGE>
fee of $400 annually for serving as a director and a fee of $400 for each
meeting of the Board of Directors attended by him or her.
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Gilmore, Haugh, Lehman and Rodgers and Dr. McGovern.
At July 31, 1995, the directors and officers of the Corporation
beneficially owned, in the aggregate, less than 1% of each Fund's
outstanding shares.
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended
December 31, 1994.
49
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total Compensation
Aggregate Pension or Retirement Estimated From Corporation and
Compensation From Benefits Accrued as Annual Fund Complex Paid to
Name of Person and CorporationA,B Part of Corporation's Benefits Upon DirectorsB,C
Position Expenses Retirement
<S> <C> <C> <C> <C>
John F. Curley, Jr. -
Chairman of the Board
and Director None N/A N/A None
Edward A. Taber, III -
President and Director None N/A N/A None
Marie K. Karpinski -
Vice President and None N/A N/A None
Treasurer
Richard G. Gilmore -
Director $2,000 N/A N/A $21,600
Charles F. Haugh -
Director $2,000 N/A N/A $23,600
Arnold L. Lehman -
Director $2,000 N/A N/A $23,600
Jill E. McGovern -
Director $2,000 N/A N/A $23,600
T. A. Rodgers -
Director $2,000 N/A N/A $21,600
</TABLE>
A Represents fees paid to each director during the fiscal year ended
December 31, 1994.
B This information applies only to Global Government since Global Equity
did not commence operations until February 17, 1995.
C Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1994.
50
<PAGE>
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland corporation,
is located at 111 South Calvert Street, Baltimore, Maryland 21202. LMFA
is a wholly owned subsidiary of Legg Mason, Inc., which also is the parent
of Legg Mason. LMFA serves as Global Government's investment adviser and
manager under an Investment Advisory and Management Agreement ("Advisory
Agreement") dated April 5, 1993. Continuation of the Agreement was most
recently approved by the Board of Directors on October 21, 1994. A revised
Advisory Agreement between Global Government and LMFA was approved by the
vote of a majority of the Fund's outstanding shares on April 21, 1995.
Pursuant to the revised Advisory Agreement, and subject to overall
direction by the Board of Directors, LMFA manages the investment and other
affairs of Global Government. LMFA is responsible for managing the Fund
consistent with the Fund's investment objectives and policies described in
the Prospectus and this Statement of Additional Information. LMFA also is
obligated to (a) furnish the Fund with office space and executive and
other personnel necessary for the operations of the Fund; (b) supervise
all aspects of the Fund's operations; (c) bear the expense of certain
informational and purchase and redemption services to the Fund's
shareholders; (d) arrange, but not pay for, the periodic updating of
prospectuses, proxy material, tax returns and reports to shareholders and
state and federal regulatory agencies; and (e) report regularly to the
Corporation's officers and directors. LMFA and its affiliates pay all the
compensation of directors and officers of the Corporation who are
employees of LMFA.
The Fund pays all its other expenses which are not expressly
assumed by LMFA. These expenses include, among others, interest expense,
taxes, brokerage fees, commissions, expenses of preparing and printing
prospectuses, statements of additional information, proxy statements and
reports and of distributing them to existing shareholders, custodian
charges, transfer agency fees, organizational expenses, distribution fees
to the Fund's distributor, compensation of the independent directors,
legal and audit expenses, insurance expenses, expenses of registering and
qualifying shares of the Fund for sale under federal and state law,
governmental fees and expenses incurred in connection with membership in
investment company organizations.
As explained in the Prospectus, LMFA receives for its services an
advisory fee, calculated daily and payable monthly, at an annual rate
equal to 0.75% of the Fund's average daily net assets. LMFA voluntarily
agreed to waive its fees and reimburse the Fund if and to the extent its
expenses (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceeded during any month an annual rate of the Fund's average
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<PAGE>
daily net assets in accordance with the following schedule: 0.20%
annually until September 30, 1993; 0.35% annually until December 31, 1993;
0.50% annually until January 31, 1994; 0.70% annually until February 28,
1994; 0.90% annually until March 31, 1994; 1.10% annually until April 30,
1994; 1.30% annually until May 31, 1994; 1.50% annually until June 30,
1994, 1.70% annually until July 31, 1994; and 1.90% annually until
December 31, 1995. For the year ended December 31, 1994 and the period
April 15, 1993 (commencement of operations) to December 31, 1993, LMFA
waived advisory fees of $765,018 and $647,723, respectively. For the year
ended December 31, 1994 and the period April 15, 1993 (commencement of
operations) to December 31, 1993, the Fund paid advisory fees of $428,854
and $0, respectively.
Under the Advisory Agreement, LMFA will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for services or a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties
or from reckless disregard by it of its obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment.
It also is terminable at any time without penalty by vote of the
Corporation's Board of Directors, by vote of a majority of the Fund's
outstanding voting securities, or by the Adviser, on not less than 60
days' notice to the other party to the Agreement and may be terminated
immediately upon the mutual written consent of both parties to the
Agreement.
Under the Advisory Agreement, the Fund has the non-exclusive
right to use the name "Legg Mason" until that Agreement is terminated or
until the right is withdrawn in writing by the Adviser.
LMFA also serves as the manager for Global Equity under a
Management Agreement ("Management Agreement"), which was approved by the
Corporation's Board of Directors, including a majority of the directors
who are not "interested persons" (as defined in the 1940 Act) of the
Corporation, LMFA or Batterymarch, on October 21, 1994. The Management
Agreement provides that, subject to overall direction by the Board of
Directors, LMFA will manage the investment and other affairs of Global
Equity. LMFA is responsible for managing Global Equity's securities and
for making purchases and sales of securities consistent with the
investment objectives and policies described in the Prospectus and this
Statement of Additional Information. LMFA is obligated to furnish the
Fund with office space and certain administrative services as well as
executive and other personnel necessary for the operation of the Fund.
LMFA and its affiliates also are responsible for the compensation of
directors and officers of the Corporation who are employees of LMFA and/or
its affiliates. LMFA has delegated the portfolio management functions for
the Fund to its adviser, Batterymarch Financial Management, Inc.
52
<PAGE>
As explained in the Fund's Prospectus, LMFA receives for its
services a management fee, calculated daily and payable monthly, at an
annual rate equal to 0.75% of Global Equity's average daily net assets.
LMFA and Batterymarch have voluntarily agreed to waive their fees if and
to the extent necessary to limit the Fund's total operating expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) to
2.25% of its average daily net assets. This agreement will expire on
December 31, 1995, unless extended by LMFA and Batterymarch.
Under the Management Agreement, LMFA will not be liable for any
error of judgment or mistake of law or for any loss suffered by Global
Equity in connection with the performance of the Management Agreement,
except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or losses resulting from willful
misfeasance, bad faith or gross negligence in the performance of its
duties or from reckless disregard of its obligations or duties thereunder.
The Management Agreement terminates automatically upon assignment
and is terminable at any time without penalty by vote of the Corporation's
Board of Directors, by vote of a majority of the outstanding voting
securities or by LMFA, on not less than 60 days' written notice to the
other party, and may be terminated immediately upon the mutual written
consent of LMFA and the Fund.
The Fund pays all its other expenses which are not expressly
assumed by LMFA. These expenses include, among others, interest expense,
taxes, brokerage fees, commissions, expenses of preparing and printing
prospectuses, statements of additional information, proxy statements and
reports and of distributing them to existing shareholders, custodian
charges, transfer agency fees, organizational expenses, distribution fees
to the Fund's distributor, compensation of the independent directors,
legal and audit expenses, insurance expenses, expenses of registering and
qualifying shares of the Fund for sale under federal and state law,
governmental fees and expenses incurred in connection with membership in
investment company organizations.
Under the Management Agreement, the Fund has the non-exclusive
right to use the name "Legg Mason" until that Agreement is terminated or
until the right is withdrawn in writing by LMFA.
Batterymarch
Batterymarch Financial Management, Inc. is a wholly owned
subsidiary of Legg Mason, Inc., which also is the parent of Legg Mason.
Batterymarch serves as Global Equity's investment adviser under an
Investment Advisory Agreement ("Advisory Agreement"). Under the Advisory
53
<PAGE>
Agreement, Batterymarch is responsible, subject to the general supervision
of LMFA and the Corporation's Board of Directors, for the actual
management of Global Equity's assets, including the responsibility for
making decisions and placing orders to buy, sell or hold a particular
security. For Batterymarch's services, LMFA (not the Fund) pays
Batterymarch a fee, computed daily and payable monthly, at an annual rate
equal to 0.50% of the average daily net assets of the Fund.
Under the Advisory Agreement, Batterymarch will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the performance of the Advisory Agreement, except
a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations or
duties thereunder.
The Advisory Agreement terminates automatically upon assignment.
It also is terminable at any time without penalty by vote of the
Corporation's Board of Directors, by vote of a majority of the Fund's
outstanding voting securities, or by Batterymarch, on not less than 60
days' notice to the other party to the Agreement and may be terminated
immediately upon the mutual written consent of both parties to the
Agreement.
SUB-ADVISORY AGREEMENT
Western Asset Management Company, 117 East Colorado Boulevard,
Pasadena, CA 91105, an affiliate of Legg Mason, serves as an investment
sub-adviser ("Western") to Global Government under a Sub-Advisory
Agreement, dated May 1, 1995, between Western and LMFA ("Sub-Advisory
Agreement"). The Sub-Advisory Agreement was approved by the Board of
Directors, including a majority of the directors who are not "interested
persons" of the Corporation, Western or LMFA, on February 14, 1995, and
was approved by the shareholders of Global Government on April 21, 1995.
Western is responsible for providing LMFA with research and
analysis on domestic and foreign fixed-income securities, and consulting
with LMFA on portfolio strategy. Western may execute portfolio
transactions when requested to do so by LMFA. For Western's services to
Global Government, LMFA (not the Fund) pays Western a fee, computed daily
and payable monthly, at an annual rate equal to 53 % of the fee received
by LMFA or 0.40% of the Fund's average daily net assets.
Under the Sub-Advisory Agreement, Western will not be liable for
any error of judgment or mistake of law or for any loss suffered by LMFA
or by the Fund in connection with the performance of the Sub-Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with
54
<PAGE>
respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.
The Sub-Advisory Agreement terminates automatically upon
assignment and is terminable at any time without penalty by vote of the
Corporation's Board of Directors, by vote of a majority of the Fund's
outstanding voting securities, by LMFA or by Western, on not less than 60
days' notice to the Fund and/or the other party(ies). The Sub-Advisory
Agreement terminates immediately upon any termination of the Advisory
Agreement or upon the mutual written consent of LMFA, Western and the
Fund.
To mitigate the possibility that a Fund will be affected by
personal trading of employees, the Corporation, LMFA, Batterymarch and
Western have adopted policies that restrict securities trading in the
personal accounts of portfolio managers and others who normally come into
advance possession of information on portfolio transactions. These
policies comply, in all material respects, with the recommendations of the
Investment Company Institute.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of the Funds' shares pursuant to
separate Underwriting Agreements with the Corporation. Each Underwriting
Agreement obligates Legg Mason to promote the sale of Fund shares and to
pay certain expenses in connection with its distribution efforts,
including the printing and distribution of prospectuses and periodic
reports used in connection with the offering to prospective investors
(after the prospectuses and reports have been prepared, set in type and
mailed to existing shareholders at each Fund's expense) and for
supplementary sales literature and advertising costs.
Each Fund has adopted a Distribution and Shareholder Services
Plan ("Plan") which, among other things, permits a Fund to pay Legg Mason
fees for its services related to sales and distribution of Fund shares and
the provision of ongoing services to shareholders. Distribution
activities for which such payments may be made include, but are not
limited to, compensation to persons who engage in or support distribution
and redemption of shares, printing of prospectuses and reports for persons
other than existing shareholders, advertising, preparation and
distribution of sales literature, overhead, travel and telephone expenses.
The Plan was adopted, as required by Rule 12b-1 under the 1940
Act, by a vote of the Board of Directors on February 5, 1993 (for Global
Government) and October 21, 1994 (for Global Equity), including a majority
55
<PAGE>
of the directors who are not "interested persons" of each Fund as that
term is defined in the 1940 Act and who have no direct or indirect
financial interest in the operation of the Plan or the Underwriting
Agreement ("12b-1 Directors"). Amendment of the Plan to conform to new
rules of the National Association of Securities Dealers, Inc., was
approved by the Board on May 14, 1993. Continuation of the Plan was most
recently approved by the Board of Directors on October 21, 1994, including
a majority of the 12b-1 Directors. In approving the continuance of the
Plan, in accordance with the requirements of Rule 12b-1, the directors
determined that there was a reasonable likelihood that the Plan would
benefit each Fund and its shareholders.
As compensation for its services and expenses, Legg Mason
receives from each Fund an annual distribution fee equivalent to 0.50%
(for Global Government) and 0.75% (for Global Equity) of its average daily
net assets attributable to Primary Shares and a service fee each
equivalent to 0.25% of its average daily net assets attributable to
Primary Shares in accordance with the Plan. The distribution and service
fees are calculated daily and payable monthly. Legg Mason voluntarily
agreed to waive its fees and reimburse each Fund if and to the extent its
expenses attributable to Primary Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceeded during any month an annual
rate of each Fund's average daily net assets in accordance with the
following schedule:
Global Government: 0.20% until September 30, 1993; 0.35% until December
31, 1993; 0.50% until January 31, 1994; 0.70% until February 28, 1994;
0.90% until March 31, 1994; 1.10% until April 30, 1994; 1.30% until May
31, 1994; 1.50% until June 30, 1994, 1.70% until July 31, 1994; and 1.90%
until December 31, 1995.
Global Equity: 2.25% until December 31, 1995.
For the year ended December 31, 1994 and the period April 15,
1993 (commencement of operations) to December 31, 1993, Legg Mason waived
distribution and service fees of $0 and $647,723, respectively, for Global
Government. For the year ended December 31, 1994 and the period April 15,
1993 (commencement of operations) to December 31, 1993, Global Government
paid distribution and service fees of $1,193,872 and $0, respectively.
The Plan continues in effect only so long as it is approved at
least annually by the vote of a majority of the Board of Directors,
including a majority of the 12b-1 Directors, cast in person at a meeting
called for the purpose of voting on the Plan. The Plan may be terminated
with respect to each Fund by a vote of a majority of 12b-1 Directors or by
vote of a majority of the outstanding voting securities of that Fund. Any
change in the Plan that would materially increase the distribution costs
56
<PAGE>
to a Fund requires shareholder approval; otherwise, the Plan may be
amended by the directors, including a majority of the 12b-1 Directors.
Rule 12b-1 requires that any person authorized to direct the
disposition of monies paid or payable by a Fund, pursuant to the Plan or
any related agreement shall provide to that Fund's Board of Directors, and
the directors shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which the expenditures were made.
Rule 12b-1 also provides that a Fund may rely on that Rule only if, while
the Plan is in effect, the nomination and selection of that Fund's
independent directors is committed to the discretion of such independent
directors.
For the year ended December 31, 1994, Legg Mason incurred the
following expenses with respect to Global Government:
Compensation to sales personnel $854,000
Advertising 62,000
Printing and mailing of prospectuses to
prospective shareholders 48,000
Other 342,000
-------
Total expenses $1,306,000
==========
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded
from the calculation. For the year ended December 31, 1994, Global
Government's portfolio turnover rate was 127.0%. For the period April 15,
1993 (commencement of operations) to December 31, 1993, Global
Government's annualized portfolio turnover rate was 127.8%.
Under each Advisory Agreement, each Fund's adviser is responsible
for the execution of portfolio transactions. Corporate and government
debt securities are generally traded on the OTC market on a "net" basis
without a stated commission, through dealers acting for their own account
and not as brokers. Prices paid to a dealer in debt securities will
generally include a "spread," which is the difference between the price at
which the dealer is willing to purchase and sell the specific security at
the time, and includes the dealer's normal profit. Some portfolio
transactions may be executed through brokers acting as agent. In
selecting brokers or dealers, each adviser must seek the most favorable
price (including the applicable dealer spread) and execution for such
transactions, subject to the possible payment as described below of higher
57
<PAGE>
brokerage commissions to brokers who provide research and analysis. A
Fund may not always pay the lowest commission or spread available.
Rather, in placing orders on behalf of a Fund, each adviser also takes
into account such factors as size of the order, difficulty of execution,
efficiency of the executing broker's facilities (including the services
described below) and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution,
each adviser may give consideration to research and statistical services
furnished by brokers or dealers to that adviser for its use, may place
orders with broker-dealers who provide supplemental investment and market
research and securities and economic analysis, and may pay to these
broker-dealers a higher brokerage commission than may be charged by other
broker-dealers. Such research and analysis may be useful to each adviser
in connection with services to clients other than the Funds. Each
adviser's fee is not reduced by reason of its receiving such brokerage and
research services. For the year ended December 31, 1994 and the period
April 15, 1993 (commencement of operations) to December 31, 1993, Global
Government paid no brokerage commissions.
Although Global Government does not expect to purchase securities
on a commission basis, each Fund may use Legg Mason to effect agency
transactions in listed securities at commission rates and under
circumstances consistent with the policy of best execution. Commissions
paid to Legg Mason will not exceed "usual and customary brokerage
commissions." Rule 17e-1 under the 1940 Act defines "usual and customary"
commissions to include amounts which are "reasonable and fair compared to
the commission, fee or other remuneration received or to be received by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time." In the OTC market, a Fund generally will deal
with responsible primary market makers unless a more favorable execution
can otherwise be obtained.
No Fund may buy securities from, or sell securities to, Legg
Mason or its affiliated persons as principal. However, the Corporation's
Board of Directors has adopted procedures in conformity with Rule 10f-3
under the 1940 Act whereby a Fund may purchase securities that are offered
in certain underwritings in which Legg Mason or any of its affiliated
persons is a participant.
Section 11(a) of the Securities Exchange Act of 1934 prohibits
Legg Mason from retaining compensation for executing transactions on an
exchange for its affiliates, such as the Funds, unless the affiliate
expressly consents by written contract. Each Advisory Agreement expressly
provides such consent in accordance with Rule 11a2-2(T).
58
<PAGE>
Investment decisions for each Fund are made independently from
those of other funds and accounts advised by LMFA, Batterymarch or
Western. However, the same security may be held in the portfolios of more
than one fund or account. When two or more accounts simultaneously engage
in the purchase or sale of the same security, the prices and amounts will
be equitably allocated to each account. In some cases, this procedure may
adversely affect the price or quantity of the security available to a
particular account. In other cases, however, an account's ability to
participate in large-volume transactions may produce better executions and
prices.
THE CORPORATION'S CUSTODIAN AND
TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston
Massachusetts, serves as custodian of each Fund's assets. Boston
Financial Data Services, P.O. Box 953, Boston, Massachusetts 02103 serves
as transfer and dividend-disbursing agent and administrator of various
shareholder services. Legg Mason also assists BFDS with certain of its
duties as transfer agent, for which BFDS pays Legg Mason a fee. Each Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
THE CORPORATION'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 M Street, N.W., Washington, D.C.
20036, serves as counsel to the Corporation.
THE CORPORATION'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore,
Maryland 21202, have been selected by the directors to serve as the
Corporation's independent accountants.
FINANCIAL STATEMENTS
The Portfolio of Investments as of December 31, 1994; the
Statement of Assets and Liabilities as of December 31, 1994; the Statement
of Operations for the period ended December 31, 1994; the Statement of
Changes in Net Assets for the period April 15, 1993 (commencement of
operations) to December 31, 1993 and the year ended December 31, 1994; the
Financial Highlights for the periods presented; the Notes to Financial
Statements and the Report of the Independent Accountants, all of which are
included in Global Government's annual report for the year ended December
31, 1994, are hereby incorporated by reference in this Statement of
Additional Information. The Statement of Assets and Liabilities of Global
Equity Trust as of November 16, 1994, and the Report of the Independent
Accountants are included in this Statement of Additional Information.
59
<PAGE>
The unaudited financial statements for the six months ended June
30, 1995 for each Fund are hereby incorporated by reference in this
Statement of Additional Information.
60
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. ("Moody's") corporate bond
ratings:
Aaa-Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge". Interest payments are protected by
a large or exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment
attributes and are to be considered upper-medium grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time
may be small.
A - 1
<PAGE>
Caa- Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C- Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Description of Standard & Poor's Ratings Group ("Standard & Poor's")
corporate bond ratings:
AAA-This is the highest rating assigned by Standard & Poor's to
an obligation and indicates an extremely strong capacity to pay principal
and interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity
to pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominately speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
D-Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Description of Moody's preferred stock ratings:
aaa-An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of preferred
stock.
A - 2
<PAGE>
aa-An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable
assurance that earnings and asset protection will remain relatively well
maintained in the foreseeable future.
a-An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than
in the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa-An issue which is rated "baa" is considered to be a medium-
grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba-An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks
in this class.
Description of Moody's Short-Term Debt Ratings
Prime-1. Issuers (or supporting institutions) rated Prime-1 (P-
1) have a superior capacity for repayment of short-term promissory
obligations. P-1 repayment capacity will normally be evidenced by many of
the following characteristics: leading market positions in well-
established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and
ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Prime-2. Issuers (or supporting institutions) rated Prime-2 (P-
2) have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor's Commercial Paper Ratings
A. Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2, and 3 to indicate the relative degree of
safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
A - 3
<PAGE>
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2. Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for
the issues designated "A-1".
A - 4
<PAGE>
Appendix B
The Funds may use the following instruments for the purposes
described on page [ ].
Options on Debt Securities and Foreign Currencies (Global Government)
A call option is a short-term contract pursuant to which the
purchaser of the option, in return for a premium, has the right to buy the
security or currency underlying the option at a specified price at any
time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option
during the option term, to deliver the underlying security or currency
against payment of the exercise price. A put option is a similar contract
that gives its purchaser, in return for a premium, the right to sell the
underlying security or currency at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
Option on a Bond Index (Global Government)
An option on a bond index is similar to an option on a security
or foreign currency, except that settlement of a bond index option is
effected with a cash payment based on the value of the bond index and does
not involve the delivery of the securities included in the index. Thus,
upon settlement of a bond index option, the purchaser will realize, and
the writer will pay, an amount based on the difference between the
exercise price of the option and the closing price of the bond index.
Interest Rate, Foreign Currency and Bond Index Futures Contracts (Global
Government)
Interest rate and foreign currency futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the
other party agrees to accept, delivery of a specified type of debt
security or currency at a specified future time and at a specified price.
Although such futures contracts by their terms call for actual delivery or
acceptance of debt securities or currency, in most cases the contracts are
closed out before the settlement date
without the making or taking of delivery. A bond index futures contract is
similar to any other futures contract except that settlement of a bond
index futures contract is effected with a cash payment based on the value
of the bond index and does not involve the delivery of the securities
included in the index.
Options on Futures Contracts
Options on futures contracts are similar to options on securities
or currencies, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
A - 5
<PAGE>
futures contract (a long position if the option is a call, and a short
position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option
term. Upon exercise of the option, the delivery of the futures position to
the holder of the option will be accompanied by delivery of the
accumulated balance that represents the amount by which the market price
of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the future. The
writer of an option, upon exercise, will assume a short position in the
case of a call, and a long position in the case of a put. An option on a
bond index futures contract is similar to any other option on a futures
contract except that the purchaser has the right, in return for the
premium, to assume a position in a bond index futures contract at a
specified price at any time during the option term.
Forward Currency Contracts
A forward currency contract involves an obligation to purchase or
sell a specific currency at a specified future date, which may be any
fixed number of days from the contract date agreed upon by the parties, at
a price set at the time the contract is entered into.
A - 6
<PAGE>
TABLE OF CONTENTS
Page
Additional Information About Investment Limitations and
Policies 2
Additional Purchase and Redemption Information 22
Additional Tax Information 24
Performance Information 26
Valuation of Fund Shares 30
Tax-Deferred Retirement Plans 31
The Corporation's Directors and Officers 32
The Funds' Investment Adviser/Manager 36
Sub-Advisory Agreement 37
The Funds' Distributor 38
Portfolio Transactions and Brokerage 39
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent 40
The Corporation's Legal Counsel 41
The Corporation's Independent Accountants 41
Financial Statements 41
Appendix A A-1
Appendix B A-4
No person has been authorized to give any
information or to make any representations not contained
in the Prospectuses or this Statement of Additional
Information in connection with the offerings made by the
Prospectuses and, if given or made, such information or
representations must not be relied upon as having been
authorized by any Fund or its distributor. The
Prospectuses and the Statement of Additional Information
do not constitute offerings by any Fund or by the
distributor in any jurisdiction in which such offerings
may not lawfully be made.
<PAGE>
LEGG MASON GLOBAL TRUST, INC.
INTERNATIONAL EQUITY TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 16, 1994
Assets
Cash $1,000
Deferred organization and initial offering costs 50,000
------
Total assets 51,000
------
Liabilities
Accrued organization expenses and initial
offering costs 50,000
------
Total liabilities 50,000
------
Net Assets - Offering and redemption price of $10.00 per
share with 100 shares outstanding (1,000,000,000
shares par value $.001 per share authorized) $1,000
======
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
A. Legg Mason Global Trust, Inc. ("Corporation") was organized on
December 31, 1992. The International Equity Trust ("Fund") constitutes
one of the two series established under the Corporation at November 16,
1994. The Fund has had no operations other than those matters related to
its organization and registration as an investment company under the
Investment Company Act of 1940 and the sale of its shares. Legg Mason
Fund Adviser, Inc. ("Fund Adviser"), a wholly owned subsidiary of Legg
Mason, Inc. (a financial services holding company), has provided the
initial capital for the Fund by purchasing 100 shares of the Fund at
$10.00 per share. Such shares were acquired for investment and can be
disposed of only by redemption. Legg Mason Wood Walker, Incorporated, a
wholly owned subsidiary of Legg Mason, Inc. and a member of the New York
Stock Exchange, acts as distributor of the Fund's shares.
B. Deferred organization and initial offering costs represent
expenses incurred in connection with the Fund's organization and will be
amortized on a straight line basis over five years commencing on the
effective date of the Fund's initial sale of shares to the public. The
Fund has agreed to reimburse Fund Adviser for organization expenses
advanced by Fund Adviser. The advances are repayable on demand but must
be fully repaid within five years from the commencement of operations.
The proceeds realized by Fund Adviser upon redemption during the
amortization period of any of the shares constituting initial capital will
be reduced by a proportionate amount of unamortized deferred organization
<PAGE>
expenses which the number of initial shares redeemed bears to the number
of initial shares then outstanding.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Legg Mason Global Trust, Inc.:
We have audited the accompanying statement of assets and liabilities
of the Legg Mason International Equity Trust (the Fund ), one of the
portfolios of the Legg Mason Global Trust, Inc., as of November 16, 1994.
This financial statement is the responsibility of the Fund s management.
Our responsibility is to express an opinion on this financial statement
based on our audit.
We conducted our audit 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 statement
is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statement. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial position of
the Legg Mason International Equity Trust as of November 16, 1994, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Baltimore, Maryland
November 16, 1994
<PAGE>
Legg Mason Global Trust, Inc.
Part C. Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements: The financial statements for the Legg
Mason Global Government Trust for the year ended December 31,
1994 and the Report thereon of the independent accountants are
incorporated into the Statement of Additional Information by
reference to its Annual Report to Shareholders for the same
period. The financial statements for the six months ended June
30, 1995 are incorporated into the Statement of Additional
Information by reference to its Report to Shareholders for the
same period.
The financial statements for the Legg Mason Global Equity Trust
for the period February 17, 1995 (commencement of operations) to
June 30, 1995 are incorporated into the Statement of Additional
Information by reference to its Report to Shareholders for the
same period.
Financial Data Schedules with respect to the above series are
included as Exhibit 27.1 through 27.2.
(b) Exhibits
(1) (a) Articles of Incorporation2/
(b) Articles Supplementary6/
(2) By-Laws1/
(3) Voting trust agreement -- none
(4) Specimen security
(a) Global Government Trust2/
(b) Global Equity Trust6/
(5) (a) Investment Advisory Agreement--Global Equity Trust -
filed herewith
(b) Management Agreement--Global Equity Trust- filed
herewith
(c) Investment Advisory Agreement--Global Government Trust
- filed herewith
(d) Investment Advisory and Management Agreement-- Global
Government Trust - filed herewith
(6) Underwriting Agreement
(a) Global Government Trust3/
(b) Global Equity Trust - filed herewith
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian Agreement3/
(9) Transfer Agency and Service Agreement3/
(10) Opinion and consent of counsel
(a) Global Government Trust2/
(b) Global Equity Trust6/
(11) Other opinions, appraisals, rulings and consents
-- Accountant's consent
<PAGE>
(a) Global Government Trust - filed herewith
(b) Global Equity Trust - filed herewith
(12) Financial statements omitted from Item 23 -- none
(13) Agreement for providing initial capital2/
(14) (a) Prototype IRA Plan5/
(b) Prototype Corporate Simplified Employee Pension Plan5/
(c) Prototype Keogh Plan5/
(15) Plan pursuant to Rule l2b-1
(a) Global Government Trust3/
(b) Global Equity Trust - filed herewith
(16) Schedule for computation of performance quotations
(a) Global Government Trust - filed herewith
(b) Global Equity Trust - filed herewith
(18) Copies of Plans Pursuant to Rule 18f-3 -- none
(27) Financial Data Schedules -- filed herewith
_________________
1/ Incorporated by reference from the initial registration statement,
SEC File No. 33-56672, filed December 31, 1992.
2/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
registration statement, SEC File No. 33-56672, filed April 1, 1993.
3/ Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement, SEC File No. 33-56672, filed October 4, 1993.
4/ Incorporated by reference from Post-Effective Amendment No. 2 to the
registration statement, SEC File No. 33-56672, filed April 28, 1994.
5/ Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 8 to the registration statement of Legg Mason Income Trust,
Inc., SEC File No. 33-12092, filed April 28, 1991.
6/ Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 3 to the registration statement, SEC File No. 33-56672,
filed November 28, 1994.
7/ Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 4 to the registration statement, SEC File No. 33-56672,
filed January 31, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
None.
<PAGE>
Item 26. Number of Holders of Securities
Number of Recordholders
Title of Class as of July 31, 1995
Capital Stock
par value $.001
Legg Mason Global Government Trust 10,042
Legg Mason Global Equity Trust 4,935
Item 27. Indemnification
This item is incorporated by reference from Item 27 of Part C of
Post-Effective Amendment No. 1 to the registration statement, SEC File No.
33-56672, filed October 4, 1993.
Item 28. Business and Other Connections of Investment Adviser
I. Legg Mason Fund Adviser, Inc. ("Adviser"), investment adviser to
the Registrant's Legg Mason Global Government Trust series, is a
registered investment adviser incorporated on January 20, 1982. The
Adviser is engaged primarily in the investment advisory business. The
Adviser also serves as manager and/or investment adviser to fifteen open-
end investment companies and as investment consultant for one closed-end
investment company. Information as to the officers and directors of the
Adviser is included in its Form ADV-S filed June 30, 1995 with the
Securities and Exchange Commission (registration number 801-16958) and is
incorporated herein by reference.
II. Western Asset Management Company ("Western"), sub-adviser to the
Registrant's Legg Mason Global Government Trust series, is a registered
investment adviser incorporated on October 5, 1971. Western is primarily
engaged in the investment advisory business. Western also serves as
investment adviser for sixteen open-end investment companies and one
closed-end investment company. Information as to the officers and
directors of Western is included in its Form ADV filed on May 17, 1995
with the Securities and Exchange Commission (registration number 801-
08162) and is incorporated herein by reference.
III. Batterymarch Financial Management, Inc. ("Batterymarch"),
investment adviser to the Registrant's Legg Mason Global Equity Trust
series, is a registered investment adviser incorporated on January 5,
1995. Batterymarch is engaged primarily in the investment advisory
business. Batterymarch also acts as investment adviser or subadviser to
five investment companies. Information as to the officers and directors
of Batterymarch is included in its Form ADV filed June 29, 1995 with the
Securities and Exchange Commission (registration number 801-25379) and is
incorporated herein by reference.
<PAGE>
Item 29. Principal Underwriters
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
Legg Mason Value Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Investors Trust, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal underwriter,
Legg Mason Wood Walker, Incorporated ("LMWW").
<TABLE>
<CAPTION>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
<S> <C> <C>
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. Vice Chairman Chairman of the Board
and Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Richard J. Himelfarb Executive Vice None
President and
Director
Edward A. Taber III Executive Vice President and
President and Director
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
<PAGE>
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
<PAGE>
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice None
President
Douglas C. Petty, Jr. Senior Vice None
1747 Pennsylvania President
Avenue, N.W.
Washington, D.C. 20006
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
E. Robert Quasman Senior Vice None
President
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
Peter J. Biche Vice President None
1735 Market Street
Philadelphia, PA 19103
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
<PAGE>
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Robert Dickey, IV Vice President None
One World Trade Center
New York, NY 10048
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Seth J. Lehr Vice President None
1735 Market St.
Philadelphia, PA 19103
Edward W. Lister, Jr. Vice President None
Eileen M. O'Rourke Vice President None
and Controller
Marie K. Karpinski Vice President Vice President
and Treasurer
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Lewis T. Yeager Vice President None
7 E. Redwood St.
<PAGE>
Baltimore, MD 21202
Joseph F. Zunic Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
<PAGE>
______________________
* All addresses are 111 South Calvert Street, Baltimore, Maryland 21202,
unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services - None
Item 32. Undertakings
Registrant hereby undertakes to provide each person to whom a
prospectus is delivered with a copy of its latest annual report
to shareholders upon request and without charge.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Baltimore and State of Maryland,
on the 30th day of August, 1995.
LEGG MASON GLOBAL TRUST, INC.
By: /s/ John F. Curley, Jr.
--------------------------------
John F. Curley, Jr.
Chairman of the Board and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
</TABLE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/John F. Curley, Jr. Chairman of the Board August 30, 1995
John F. Curley, Jr. and Director
/s/Edward A. Taber, III President and Director August 30, 1995
Edward A. Taber, III
/s/Richard G. Gilmore Director August 30, 1995
Richard G. Gilmore*
/s/Charles F. Haugh Director August 30, 1995
Charles F. Haugh*
/s/Arnold L. Lehman Director August 30, 1995
Arnold L. Lehman*
/s/Jill E. McGovern Director August 30, 1995
Jill E. McGovern*
/s/T.A. Rodgers Director August 30, 1995
T. A. Rodgers*
/s/Marie K. Karpinski Vice President August 30, 1995
Marie K. Karpinski and Treasurer
</TABLE>
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney
dated February 5, 1993 incorporated herein by reference to Pre-Effective
Amendment No. 2, filed April 1, 1993.
<PAGE>
<PAGE>
INVESTMENT ADVISORY AGREEMENT
LEGG MASON GLOBAL TRUST, INC.
AGREEMENT made this 11th day of February, 1995 by and between
Legg Mason Fund Adviser, Inc. ("Manager"), a Maryland corporation, and
Batterymarch Financial Management, Inc. ("Adviser"), a Maryland
corporation, each of which is registered as an investment adviser under
the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Global Trust, Inc.
(the "Corporation"), an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), and
WHEREAS, Manager wishes to retain Adviser to provide it with
certain investment advisory services in connection with Manager's
management of the Legg Mason International Equity Trust ("Fund"), a series
of shares of the Corporation; and
WHEREAS, Adviser is willing to furnish such services on the terms
and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. Appointment. Manager hereby appoints Batterymarch
Financial Management, Inc. as investment adviser for the Fund for the
period and on the terms set forth in this Agreement. Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. Manager has furnished the
Adviser with copies properly certified or authenticated of each of the
following:
(a) The Corporation's Articles of Incorporation, as
filed with the State Department of Assessments and Taxation of
the State of Maryland on December 31, 1992 and all amendments
thereto (such Articles of Incorporation, as presently in effect
and as they shall from time to time be amended, are herein called
the "Articles");
(b) The Corporation's By-Laws and all amendments
thereto (such By-Laws, as presently in effect and as they shall
from time to time be amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of
Directors authorizing the appointment of Manager as the manager
and Batterymarch Financial Management, Inc. as investment adviser
and approving the Management Agreement between Manager and the
Fund dated February 11, 1995 (the "Management Agreement") and
this Agreement;
<PAGE>
(d) The Corporation's Registration Statement on Form
N-1A under the Securities Act of 1933, as amended, and the 1940
Act (File No. 33-56672) as filed with the Securities and Exchange
Commission on December 31, 1992, including all exhibits thereto,
relating to shares of common stock of the Fund, par value $.001
per share (herein called "Shares") and all amendments thereto;
(e) The Fund's most recent prospectus (such
prospectus, as presently in effect and all amendments and
supplements thereto are herein called the "Prospectus"); and
(f) The Fund's most recent statement of additional
information (such statement of additional information, as
presently in effect and all amendments and supplements thereto
are herein called the "Statement of Additional Information").
The Manager will furnish Adviser from time to time with copies of all
amendments of or supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the
supervision of the Corporation's Board of Directors and the Manager,
Adviser shall regularly provide the Fund with investment research, advice,
management and supervision and shall furnish a continuous investment
program for the Fund's portfolio of securities consistent with the Fund's
investment objective, policies, and limitations as stated in the Fund's
current Prospectus and Statement of Additional Information. The Adviser
shall determine from time to time what securities will be purchased,
retained or sold by the Fund, and shall implement those decisions, all
subject to the provisions of the Corporation's Articles of Incorporation
and By-Laws, the 1940 Act, the applicable rules and regulations of the
Securities and Exchange Commission, and other applicable federal and state
law, as well as the investment objective, policies, and limitations of the
Fund. The Adviser will place orders pursuant to its investment
determinations for the Fund either directly with the issuer or with any
broker or dealer. In placing orders with brokers and dealers, Adviser
will attempt to obtain the best net price and the most favorable execution
of its orders; however, the Adviser may, in its discretion, purchase and
sell portfolio securities from and to brokers and dealers who provide the
Fund with research, analysis, advice and similar services, and Adviser may
pay to these brokers, in return for research and analysis, a higher
commission than may be charged by other brokers. The Adviser is
authorized to combine orders on behalf of the Fund with orders on behalf
of other clients of the Adviser, consistent with guidelines adopted by the
Board of Directors of the Corporation. In no instance will portfolio
securities be purchased from or sold to the Adviser or any affiliated
person thereof except in accordance with the rules, regulations or orders
promulgated by the Securities and Exchange Commission pursuant to the 1940
Act. The Adviser shall also perform such other functions of management
and supervision as may be requested by the Manager and agreed to by
Adviser.
(b) The Adviser will oversee the maintenance of all books and
records with respect to the securities transactions of the Fund in
accordance with all applicable federal and state laws and regulations, and
<PAGE>
will furnish the Board of Directors of the Corporation with such periodic
and special reports as the Board or the Manager reasonably may request.
(c) The Corporation hereby authorizes any entity or person
associated with the Adviser which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Corporation which is permitted by Section 11(a) of the Securities Exchange
Act of 1934 and Rule 11a2-2(T) thereunder, and the Corporation hereby
consents to the retention by such person associated with the Adviser of
compensation for such transactions in accordance with Rule 11a2-
2(T)(a)(2)(iv).
4. Services Not Exclusive. The Adviser's services hereunder
are not deemed to be exclusive, and Adviser shall be free to render
similar services to others. It is understood that persons employed by
Adviser to assist in the performance of its duties hereunder might not
devote their full time to such service. Nothing herein contained shall be
deemed to limit or restrict the right of the Adviser or any affiliate of
Adviser to engage in and devote time and attention to other businesses or
to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements
of Rule 31a-3 under the 1940 Act, Adviser hereby agrees that all books and
records which it maintains for the Fund are property of the Fund and
further agrees to surrender promptly to the Fund or its agents any of such
records upon the Fund's request. The Adviser further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act, any such
records required to be maintained by Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, Adviser
will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Fund.
7. Compensation. For the services which Adviser will render
to Manager and the Fund under this Agreement, Manager will pay Adviser a
fee, computed daily and paid monthly, at an annual rate equal to 66.67% of
the fee received by the Manager from the Fund, net of any waivers or
reimbursements by the Manager of its fee. Fees due to the Adviser
hereunder shall be paid promptly to Adviser by the Manager following its
receipt of fees from the Fund. If this Agreement is terminated as of any
date not the last day of a calendar month, a final fee shall be paid
promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in
effect.
8. Limitation of Liability. The Adviser will not be liable
for any error of judgment or mistake of law or for any loss suffered by
Manager or by the Fund in connection with the performance of this
Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations or duties under this Agreement.
<PAGE>
9. Definitions. As used in this Agreement, the terms
"securities" and "net assets" shall have the meanings ascribed to them in
the Articles of Incorporation of the Corporation; and the terms
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have the meanings given to them by Section 2(a) of the
1940 Act, subject to such exemptions as may be granted by the Securities
and Exchange Commission by any rule, regulation or order.
10. Duration and Termination. This Agreement will become
effective February 11, 1995, provided that it shall have been approved by
the Corporation's Board of Directors and by the shareholders of the Fund
in accordance with the requirements of the 1940 Act and, unless sooner
terminated as provided for herein, shall continue in effect until February
11, 1997. Thereafter, if not terminated, this Agreement shall continue in
effect for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by the Corporation's Board of
Directors or (ii) by a vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities of the Fund, provided that in either
event the continuance is also approved by a majority of the Corporation's
Directors who are not interested persons (as defined in the 1940 Act) of
the Corporation or of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. This
Agreement is terminable without penalty, by vote of the Corporation's
Board of Directors, by vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities of the Fund, by the Manager or by the
Adviser, on not less than 60 days' notice to the Fund and/or the other
party(ies) and will be terminated immediately upon any termination of the
Management Agreement with respect to the Fund or upon the mutual written
consent of the Adviser, the Manager, and the Fund. Termination of this
Agreement with respect to the Fund shall in no way affect continued
performance with regard to any other portfolio of the Corporation. This
Agreement will automatically and immediately terminate in the event of its
assignment.
11. Further Actions. Each party agrees to perform such
further acts and execute such further documents as are necessary to
effectuate the purposes hereof.
12. Amendments. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no material
amendment of this Agreement shall be effective until approved by vote of
the holders of a majority of the Fund's outstanding voting securities.
13. Miscellaneous. This Agreement embodies the entire
agreement and understanding between the parties hereto, and supersedes all
prior agreements and understandings relating to the subject matter hereof.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
<PAGE>
This Agreement shall be binding and shall inure to the benefit of the
parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers designated below on the day and year
first above written.
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/ Kathi D. Glenn By: /s/ Edward A. Taber, III
______________________ _______________________________
[SEAL] BATTERYMARCH FINANCIAL MANAGEMENT, INC.
Attest:
By: /s/ Emilia Moss By: /s/ Francis Tracy
______________________ _______________________________
<PAGE>
<PAGE>
MANAGEMENT AGREEMENT
This INVESTMENT MANAGEMENT AGREEMENT, made this 11th day of
February, 1995, by and between Legg Mason Global Trust, Inc., a Maryland
corporation (the "Corporation"), on behalf of Legg Mason International
Equity Trust ("Fund"), and Legg Mason Fund Adviser, Inc., a Maryland
corporation (the "Manager").
WHEREAS, the Corporation is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
("1940 Act") currently consisting of two portfolios; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund;
and
WHEREAS, the Manager is willing to furnish such services on the
terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. The Corporation hereby appoints Legg Mason Fund Adviser,
Inc. as Manager of the Fund for the period and on the terms set forth in
this Agreement. The Manager accepts such appointment and agrees to render
the services herein set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Manager fully
informed with regard to the securities owned by it, its funds available,
or to become available, for investment, and generally as to the condition
of its affairs. It shall furnish the Manager with such other documents
and information with regard to its affairs as the Manager may from time to
time reasonably request.
3. (a) Subject to the supervision of the Corporation's
Board of Directors, the Manager shall regularly provide the Fund with
investment research, advice, management and supervision and shall furnish
a continuous investment program for the Fund's portfolio of securities
consistent with the Fund's investment goals and policies. The Manager
shall determine from time to time what securities will be purchased,
retained or sold by the Fund, and shall implement those decisions, all
subject to the provisions of the Corporation's Articles of Incorporation
and By-laws, the 1940 Act, the applicable rules and regulations of the
Securities and Exchange Commission, and other applicable federal and state
law, as well as the investment goals and policies of the Fund. The Manager
will place orders pursuant to its investment determinations for the Fund
either directly with the issuer or with any broker or dealer. In placing
orders with brokers and dealers the Manager will attempt to obtain the
best net price and the most favorable execution of its orders; however,
the Manager may, in its discretion, purchase and sell portfolio securities
through brokers who provide the Fund with research, analysis, advice and
similar services, and the Manager may pay to these brokers, in return for
research and analysis, a higher commission or spread than may be charged
<PAGE>
by other brokers. The Manager is authorized to combine orders on behalf
of the Fund with orders on behalf of other clients of the Manager,
consistent with guidelines adopted by the Board of Directors of the
Corporation. The Manager shall also provide advice and recommendations
with respect to other aspects of the business and affairs of the Fund, and
shall perform such other functions of management and supervision as may be
directed by the Board of Directors of the Corporation.
(b) The Fund hereby authorizes any entity or person
associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Fund which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and the Fund hereby consents to the
retention by such person associated with the Manager of compensation for
such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Investment
Advisory Agreement") with an investment adviser in which the Manager
delegates to such investment adviser any or all its duties specified in
Paragraph 3 hereunder, provided that such Investment Advisory Agreement
imposes on the investment adviser bound thereby all duties and conditions
to which the Manager is subject hereunder, and further provided that such
Investment Advisory Agreement meets all requirements of the 1940 Act and
rules thereunder.
5. (a) The Manager, at its expense, shall supply the
Board of Directors and officers of the Corporation with all statistical
information and reports reasonably required by them and reasonably
available to the Manager and shall furnish the Fund with office
facilities, including space, furniture and equipment and all personnel
reasonably necessary for the operation of the Fund. The Manager shall
oversee the maintenance of all books and records with respect to the
Fund's securities transactions and the keeping of the Fund's books of
account in accordance with all applicable federal and state laws and
regulations. In compliance with the requirements of Rule 31a-3 under the
1940 Act, the Manager hereby agrees that any records which it maintains
for the Fund are the property of the Corporation, and further agrees to
surrender promptly to the Fund or its agents any of such records upon the
Fund's request. The Manager further agrees to arrange for the
preservation of the records required to be maintained by Rule 31a-1 under
the 1940 Act for the periods prescribed by Rule 31a-2 under the 1940 Act.
The Manager shall authorize and permit any of its directors, officers and
employees, who may be elected as directors or officers of the Fund, to
serve in the capacities in which they are elected.
(b) Other than as herein specifically indicated, the Manager
shall not be responsible for the Fund's expenses. Specifically, the
Manager will not be responsible, except to the extent of the reasonable
compensation of employees of the Fund whose services may be used by the
Manager hereunder, for any of the following expenses of the Fund, which
expenses shall be borne by the Fund: advisory fees; distribution fees;
interest, taxes, governmental fees, fees, voluntary assessments and other
- 2 -
<PAGE>
expenses incurred in connection with membership in investment company
organizations; the cost (including brokerage commissions or charges, if
any) of securities purchased or sold by the Fund and any losses in
connection therewith; fees of custodians, transfer agents, registrars or
other agents; legal expenses; expenses of preparing share certificates;
expenses relating to the redemption or repurchase of the Fund's shares;
expenses of registering and qualifying shares of the Fund for sale under
applicable federal and state law; expenses of preparing, setting in print,
printing and distributing prospectuses, reports, notices and dividends to
Fund shareholders; costs of stationery; costs of stockholders' and other
meetings of the Fund; directors' fees; audit fees; travel expenses of
officers, directors and employees of the Corporation if any; and the
Corporation's pro rata portion of premiums on any fidelity bond and other
insurance covering the Corporation and its officers and directors.
6. No director, officer or employee of the Corporation or
Fund shall receive from the Corporation any salary or other compensation
as such director, officer or employee while he is at the same time a
director, officer, or employee of the Manager or any affiliated company of
the Manager. This paragraph shall not apply to directors, executive
committee members, consultants and other persons who are not regular
members of the Manager's or any affiliated company's staff.
7. As compensation for the services performed and the
facilities furnished and expenses assumed by the Manager, including the
services of any consultants or sub-advisers retained by the Manager, the
Fund shall pay the Manager, as promptly as possible after the last day of
each month, a fee, computed daily at an annual rate of 0.75% of the
average daily net assets of the Fund. The first payment of the fee shall
be made as promptly as possible at the end of the month succeeding the
effective date of this Agreement. If this Agreement is terminated as of
any date not the last day of a month, such fee shall be paid as promptly
as possible after such date of termination, shall be based on the average
daily net assets of the Fund in that period from the beginning of such
month to such date of termination, and shall be based on that proportion
of such average daily net assets as the number of business days in such
period bears to the number of business days in such month. The average
daily net assets of the Fund shall in all cases be based only on business
days and be computed as of the time of the regular close of business of
the New York Stock Exchange, or such other time as may be determined by
the Board of Directors of the Corporation. Each such payment shall be
accompanied by a report prepared either by the Fund or by a reputable firm
of independent accountants, which shall show the amount properly payable
to the Manager under this Agreement and the detailed computation thereof.
8. The Manager assumes no responsibility under this
Agreement other than to render the services called for hereunder, in good
faith, and shall not be responsible for any action of the Board of
Directors of the Corporation in following or declining to follow any
advice or recommendations of the Manager; provided, that nothing in this
Agreement shall protect the Manager against any liability to the Fund or
its shareholders to which it would otherwise be subject by reason of
- 3 -
<PAGE>
willful misfeasance, bad faith, or gross negligence in the performance of
its duties or by reason of its reckless disregard of its obligations and
duties hereunder.
9. Nothing in this Agreement shall limit or restrict the
right of any director, officer, or employee of the Manager who may also be
a director, officer, or employee of the Corporation or the Fund, to engage
in any other business or to devote his time and attention in part to the
management or other aspects of any other business, whether of a similar
nature or a dissimilar nature, or limit or restrict the right of the
Manager to engage in any other business or to render services of any kind,
including investment advisory and management services, to any other
corporation, firm, individual or association.
10. As used in this Agreement, the terms "assignment",
"interested persons", and "majority of the outstanding voting securities"
shall have the meanings given to them by Section 2(a) of the 1940 Act,
subject to such exemptions and interpretations as may be granted by the
Securities and Exchange Commission by any rule, regulation or order.
11. This Agreement will become effective with respect to the
Fund on the date first written above, provided that it shall have been
approved by the Corporation's Board of Directors and by the shareholders
of the Fund in accordance with the requirements of the 1940 Act and,
unless sooner terminated as provided herein, will continue in effect for
two years from the above written date. Thereafter, if not terminated,
this Agreement shall continue in effect with respect to the Fund for
successive annual periods ending on the same date of each year, provided
that such continuance is specifically approved at least annually (i) by
the Corporation's Board of Directors or (ii) by a vote of a majority of
the outstanding voting securities of the Fund (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not interested persons (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in
person at a meeting called for the purpose of voting on such approval.
12. This Agreement is terminable with respect to the Fund
without penalty by the Corporation's Board of Directors, by vote of a
majority of the outstanding voting securities of the Fund (as defined in
the 1940 Act), or by the Manager, on not less than 60 days' notice to the
other party and will be terminated upon the mutual written consent of the
Manager and the Corporation. This Agreement shall terminate automatically
in the event of its assignment by the Manager and shall not be assignable
by the Corporation without the consent of the Manager.
13. In the event this Agreement is terminated by either party
or upon written notice from the Manager at any time, the Corporation
hereby agrees that it will eliminate from its corporate name any reference
to the name of "Legg Mason." The Corporation shall have the non-exclusive
use of the name "Legg Mason" in whole or in part only so long as this
Agreement is effective or until such notice is given.
- 4 -
<PAGE>
14. The Manager agrees that for services rendered to the
Fund, or indemnity due in connection with service to the Fund, it shall
look only to assets of the Fund for satisfaction and that it shall have no
claim against the assets of any other fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers thereunto duly authorized.
Attest: LEGG MASON GLOBAL TRUST, INC.
By: /s/ Kathi D. Glenn By: /s/ Marie K. Karpinski
______________________ _____________________________
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Kathi D. Glenn By: /s/ Edward A. Taber, III
______________________ _____________________________
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<PAGE>
<PAGE>
Exhibit 5(c)
INVESTMENT ADVISORY AGREEMENT
LEGG MASON GLOBAL TRUST, INC.
AGREEMENT made this 1st day of May, 1995 by and between Legg
Mason Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Western
Asset Management Company ("Western"), a California corporation, each of
which is registered as an investment adviser under the Investment Westerns
Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Global Trust, Inc.
(the "Corporation"), an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), and
WHEREAS, Manager wishes to retain Western to provide it with
certain investment advisory services in connection with Manager's
management of the Legg Mason Global Government Trust ("Fund"), a portfolio
of the Corporation represented by a separate series of shares; and
WHEREAS, Western is willing to furnish such services on the terms
and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. Appointment. Manager hereby appoints Western Asset
Management Company as an investment adviser for the Fund for the period
and on the terms set forth in this Agreement. Western accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. Manager has furnished the
Western with copies properly certified or authenticated of each of the
following:
(a) The Corporation's Articles of Incorporation, as
filed with the State Department of Assessments and Taxation of
the State of Maryland on December 31, 1992 and all amendments
thereto (such Articles of Incorporation, as presently in effect
and as they shall from time to time be amended, are herein called
the "Articles");
(b) The Corporation's By-Laws and all amendments
thereto (such By-Laws, as presently in effect and as they shall
from time to time be amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of
Directors authorizing the appointment of Manager as the manager
and Western Asset Management Company as investment adviser and
approving the Management Agreement between Manager and the Fund
<PAGE>
dated May 1, 1995 (the "Management Agreement") and this
Agreement;
(d) The Corporation's Registration Statement on Form
N-1A under the Securities Act of 1933, as amended, and the 1940
Act (File No. 33-56672) as filed with the Securities and Exchange
Commission most recently, including all exhibits thereto,
relating to shares of common stock of the Fund, par value $.001
per share (herein called "Shares") and all amendments thereto;
(e) The Fund's most recent prospectus (such
prospectus, as presently in effect and all amendments and
supplements thereto are herein called the "Prospectus"); and
(f) The Fund's most recent statement of additional
information (such statement of additional information, as
presently in effect and all amendments and supplements thereto
are herein called the "Statement of Additional Information").
The Manager will furnish Western from time to time with copies of all
amendments of or supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the
supervision of the Corporation's Board of Directors and the Manager,
Western shall as requested by the Manager regularly provide the Fund with
investment research, advice, management and supervision and shall furnish
a continuous investment program for the Fund's portfolio of securities
consistent with the Fund's investment objective, policies, and limitations
as stated in the Fund's current Prospectus and Statement of Additional
Information. Western shall as requested by the Manager determine from
time to time what securities will be purchased, retained or sold by the
Fund, and shall implement those decisions, all subject to the provisions
of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act,
the applicable rules and regulations of the Securities and Exchange
Commission, and other applicable federal and state law, as well as the
investment objective, policies, and limitations of the Fund. Western will
as requested by the Manager place orders pursuant to investment
determinations for the Fund either directly with the issuer or with any
broker or dealer. In placing orders with brokers and dealers, Western
will attempt to obtain the best net price and the most favorable execution
of its orders; however, the Western may, in its discretion, purchase and
sell portfolio securities from and to brokers and dealers who provide the
Fund with research, analysis, advice and similar services, and Western may
pay to these brokers, in return for research and analysis, a higher
commission than may be charged by other brokers. In no instance will
portfolio securities be purchased from or sold to the Western or any
affiliated person thereof except in accordance with the rules, regulations
or orders promulgated by the Securities and Exchange Commission pursuant
to the 1940 Act. Western shall also perform such other functions of
management and supervision as may be requested by the Manager and agreed
to by Western.
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<PAGE>
(b) Western will as requested by the Manager oversee the
maintenance of all books and records with respect to the securities
transactions of the Fund in accordance with all applicable federal and
state laws and regulations, and will furnish the Board of Directors of the
Corporation with such periodic and special reports as the Board or the
Manager reasonably may request.
(c) The Corporation hereby authorizes any entity or person
associated with the Western which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Corporation which is permitted by Section 11(a) of the Securities Exchange
Act of 1934, and the Corporation hereby consents to the retention by such
person associated with the Western of compensation for such transactions,
whether in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise.
4. Services Not Exclusive. Western's services hereunder are
not deemed to be exclusive, and Western shall be free to render similar
services to others. It is understood that persons employed by Western to
assist in the performance of its duties hereunder might not devote their
full time to such service. Nothing herein contained shall be deemed to
limit or restrict the right of the Western or any affiliate of Western to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
5. Books and Records. In compliance with the requirements
of Rule 31a-3 under the 1940 Act, Western hereby agrees that all books and
records which it maintains for the Fund are property of the Fund and
further agrees to surrender promptly to the Fund or its agents any of such
records upon the Fund's request. Western further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act, any such records
required to be maintained by Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, Western
will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Fund.
7. Compensation. For the services which Western will render
to Manager and the Fund under this Agreement, Manager will pay Western a
fee, computed daily and paid monthly, at an annual rate equal to 53-1/3%
of the fee received by the Manager from the Fund, net of any waivers or
reimbursements by the Manager of its fee. Fees due to the Western
hereunder shall be paid promptly to Western by the Manager following its
receipt of fees from the Fund. If this Agreement is terminated as of any
date not the last day of a calendar month, a final fee shall be paid
promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in
effect.
8. Limitation of Liability. Western will not be liable for
any error of judgment or mistake of law or for any loss suffered by
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<PAGE>
Manager or by the Fund in connection with the performance of this
Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations or duties under this Agreement.
9. Definitions. As used in this Agreement, the terms
"securities" and "net assets" shall have the meanings ascribed to them in
the Articles of Incorporation of the Corporation; and the terms
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have the meanings given to them by Section 2(a) of the
1940 Act, subject to such exemptions as may be granted by the Securities
and Exchange Commission by any rule, regulation or order.
10. Duration and Termination. This Agreement will become
effective May 1, 1995, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of the Fund in
accordance with the requirements of the 1940 Act and, unless sooner
terminated as provided for herein, shall continue in effect until May 1,
1997. Thereafter, if not terminated, this Agreement shall continue in
effect for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by the Corporation's Board of
Directors or (ii) by a vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities of the Fund, provided that in either
event the continuance is also approved by a majority of the Corporation's
Directors who are not interested persons (as defined in the 1940 Act) of
the Corporation or of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. This
Agreement is terminable without penalty, by vote of the Corporation's
Board of Directors, by vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities of the Fund, by the Manager or by the
Western, on not less than 60 days' notice to the Fund and/or the other
party(ies) and will be terminated immediately upon any termination of the
Management Agreement with respect to the Fund or upon the mutual written
consent of the Western, the Manager, and the Fund. Termination of this
Agreement with respect to the Fund shall in no way affect continued
performance with regard to any other portfolio of the Corporation. This
Agreement will automatically and immediately terminate in the event of its
assignment.
11. Further Actions. Each party agrees to perform such
further acts and execute such further documents as are necessary to
effectuate the purposes hereof.
12. Amendments. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no material
amendment of this Agreement shall be effective until approved by vote of
the holders of a majority of the Fund's outstanding voting securities.
- 4 -
<PAGE>
13. Miscellaneous. This Agreement embodies the entire
agreement and understanding between the parties hereto, and supersedes all
prior agreements and understandings relating to the subject matter hereof.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
This Agreement shall be binding and shall inure to the benefit of the
parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers designated below on the day and year
first above written.
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/ Kathi D. Glenn By: William H. Miller, III
---------------------- -------------------------------
[SEAL] WESTERN ASSET MANAGEMENT COMPANY
Attest:
By: /s/ Donna Barnes By: /s/ Ilene S. Harker
---------------------- --------------------------------
- 5 -
<PAGE>
<PAGE>
Exhibit 5(d)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT, made this 1st
day of May, 1995, by and between Legg Mason Global Trust, Inc., a Maryland
corporation (the "Corporation"), on behalf of Legg Mason Global Government
Trust ("Fund"), and Legg Mason Fund Adviser, Inc., a Maryland corporation
(the "Manager").
WHEREAS, the Corporation is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
("1940 Act"); and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund;
and
WHEREAS, the Manager is willing to furnish such services on the
terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. The Corporation hereby appoints Legg Mason Fund Adviser,
Inc. as Manager of the Fund for the period and on the terms set forth in
this Agreement. The Manager accepts such appointment and agrees to render
the services herein set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Manager fully
informed with regard to the securities owned by it, its funds available,
or to become available, for investment, and generally as to the condition
of its affairs. It shall furnish the Manager with such other documents
and information with regard to its affairs as the Manager may from time to
time reasonably request.
3. (a) Subject to the supervision of the Corporation's
Board of Directors, the Manager shall regularly provide the Fund with
investment research, advice, management and supervision and shall furnish
a continuous investment program for the Fund's portfolio of securities
consistent with the Fund's investment goals and policies. The Manager
shall determine from time to time what securities will be purchased,
retained or sold by the Fund, and shall implement those decisions, all
subject to the provisions of the Corporation's Articles of Incorporation
and By-laws, the 1940 Act, the applicable rules and regulations of the
Securities and Exchange Commission, and other applicable federal and state
law, as well as the investment goals and policies of the Fund. The Manager
will place orders pursuant to its investment determinations for the Fund
either directly with the issuer or with any broker or dealer. In placing
orders with brokers and dealers the Manager will attempt to obtain the
best net price and the most favorable execution of its orders; however,
the Manager may, in its discretion, purchase and sell portfolio securities
through brokers who provide the Fund with research, analysis, advice and
<PAGE>
similar services, and the Manager may pay to these brokers, in return for
research and analysis, a higher commission or spread than may be charged
by other brokers. The Manager shall also provide advice and
recommendations with respect to other aspects of the business and affairs
of the Fund, and shall perform such other functions of management and
supervision as may be directed by the Board of Directors of the
Corporation.
(b) The Corporation hereby authorizes any entity or person
associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Fund which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and the Corporation hereby consents to the retention by such person
associated with the Manager of compensation for such transactions, whether
in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise.
4. The Manager may enter into a contract ("Investment
Advisory Agreement") with an investment adviser in which the Manager
delegates to such investment adviser any or all its duties specified in
Paragraph 3 hereunder, provided that such Investment Advisory Agreement
imposes on the investment adviser bound thereby all duties and conditions
to which the Manager is subject hereunder with respect to the duties so
delegated. Such Investment Advisory Agreement must meet all requirements
of the 1940 Act and rules thereunder.
5. (a) The Manager, at its expense, shall supply the
Board of Directors and officers of the Corporation with all statistical
information and reports reasonably required by them and reasonably
available to the Manager and shall furnish the Corporation and the Fund
with office facilities, including space, furniture and equipment and all
personnel reasonably necessary for the operation of the Corporation and
the Fund. The Manager shall oversee the maintenance of all books and
records with respect to the Fund's securities transactions and the keeping
of the Corporation and the Fund's books of account in accordance with all
applicable federal and state laws and regulations. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Manager hereby agrees
that any records which it maintains for the Corporation or the Fund are
the property of the Corporation, and further agrees to surrender promptly
to the Corporation or its agents any of such records upon the
Corporation's request. The Manager further agrees to arrange for the
preservation of the records required to be maintained by Rule 31a-1 under
the 1940 Act for the periods prescribed by Rule 31a-2 under the 1940 Act.
The Manager shall authorize and permit any of its directors, officers and
employees, who may be elected as directors or officers of the Corporation,
to serve in the capacities in which they are elected.
(b) Other than as herein specifically indicated, the Manager
shall not be responsible for the expenses of the Corporation or any
Series. Specifically, the Manager will not be responsible, except to the
extent of the reasonable compensation of employees of the Corporation and
the Fund whose services may be used by the Manager hereunder, for any of
the following expenses of the Fund, which expenses shall be borne by the
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<PAGE>
Fund: advisory fees; distribution fees; interest, taxes, governmental
fees, fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; the cost
(including brokerage commissions or charges, if any) of securities
purchased or sold by the Fund and any losses in connection therewith; fees
of custodians, transfer agents, registrars or other agents; legal
expenses; expenses of preparing share certificates; expenses relating to
the redemption or repurchase of the Fund's shares; expenses of registering
and qualifying shares of the Fund for sale under applicable federal and
state law; expenses of preparing, setting in print, printing and
distributing prospectuses, reports, notices and dividends to Fund
shareholders; costs of stationery; costs of stockholders' and other
meetings of the Fund; directors' fees; audit fees; travel expenses of
officers, directors and employees of the Corporation, if any; and the
Corporation's pro rata portion of premiums on any fidelity bond and other
insurance covering the Corporation, its officers or directors.
6. No director, officer or employee of the Corporation or
Fund shall receive from the Corporation any salary or other compensation
as such director, officer or employee while he is at the same time a
director, officer, or employee of the Manager or any affiliated company of
the Manager. This paragraph shall not apply to directors, executive
committee members, consultants and other persons who are not regular
members of the Manager's or any affiliated company's staff.
7. As compensation for the services performed and the
facilities furnished and expenses assumed by the Manager, including the
services of any consultants or sub-advisers retained by the Manager, the
Fund shall pay the Manager, as promptly as possible after the last day of
each month, a fee, computed daily at an annual rate of 0.75% of the
average daily net assets of the Fund. The first payment of the fee shall
be made as promptly as possible at the end of the month succeeding the
effective date of this Agreement. If this Agreement is terminated as of
any date not the last day of a month, such fee shall be paid as promptly
as possible after such date of termination, shall be based on the average
daily net assets of the Fund in that period from the beginning of such
month to such date of termination, and shall be based on that proportion
of such average daily net assets as the number of business days in such
period bears to the number of business days in such month. The average
daily net assets of the Fund shall in all cases be based only on business
days and be computed as of the time of the regular close of business of
the New York Stock Exchange, or such other time as may be determined by
the Board of Directors of the Corporation. Each such payment shall be
accompanied by a report prepared either by the Fund or by a reputable firm
of independent accountants, which shall show the amount properly payable
to the Manager under this Agreement and the detailed computation thereof.
8. The Manager assumes no responsibility under this
Agreement other than to render the services called for hereunder, in good
faith, and shall not be responsible for any action of the Board of
Directors of the Corporation in following or declining to follow any
advice or recommendations of the Manager; provided, that nothing in this
- 3 -
<PAGE>
Agreement shall protect the Manager against any liability to the Fund or
its shareholders to which it would otherwise be subject by reason or
willful misfeasance, bad faith, or gross negligence in the performance of
its duties or by reason of its reckless disregard of its obligations and
duties hereunder.
9. Nothing in this Agreement shall limit or restrict the
right of any director, officer, or employee of the Manager who may also be
a director, officer, or employee of the Corporation or the Fund, to engage
in any other business or to devote his time and attention in part to the
management or other aspects of any other business, whether of a similar
nature or a dissimilar nature, or limit or restrict the right of the
Manager to engage in any other business or to render services of any kind,
including investment advisory and management services, to any other
corporation, firm, individual or association.
10. As used in this Agreement, the terms "assignment",
"interested persons", and "majority of the outstanding voting securities"
shall have the meanings given to them by Section 2(a) of the 1940 Act,
subject to such exemptions and interpretations as may be granted by the
Securities and Exchange Commission by any rule, regulation or order.
11. This Agreement will become effective on the date first
written above, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of the Fund in
accordance with the requirements of the 1940 Act and, unless sooner
terminated as provided herein, will continue in effect for two years from
the above written date. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to the Fund for successive annual
periods ending on the same date of each year, provided that such
continuance is specifically approved at least annually (i) by the
Corporation's Board of Directors or (ii) by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act),
provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not interested persons (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in
person at a meeting called for the purpose of voting on such approval.
12. This Agreement is terminable with respect to the Fund
without penalty by the Corporation's Board of Directors, by vote of a
majority of the outstanding voting securities of the Fund (as defined in
the 1940 Act), or by the Manager, on not less than 60 days' notice to the
other party and will be terminated upon the mutual written consent of the
Manager and the Corporation. This Agreement shall terminate automatically
in the event of its assignment by the Manager and shall not be assignable
by the Corporation without the consent of the Manager.
13. In the event this Agreement is terminated by either party
or upon written notice from the Manager at any time, the Corporation
hereby agrees that it will eliminate from its corporate name any reference
to the name of "Legg Mason." The Corporation shall have the non-exclusive
- 4 -
<PAGE>
use of the name "Legg Mason" in whole or in part only so long as this
Agreement is effective or until such notice is given.
14. The Manager agrees that for services rendered to the
Fund, or indemnity due in connection with service to the Fund, it shall
look only to assets of the Fund for satisfaction and that it shall have no
claim against the assets of any other Series of the Corporation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers thereunto duly authorized.
Attest: LEGG MASON GLOBAL TRUST, INC.
By: /s/ Kathi D. Glenn By: /s/ Edward A. Taber, III
----------------------- -----------------------------
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Kathi D. Glenn By: /s/ William H. Miller, III
----------------------- -----------------------------
- 5 -
<PAGE>
<PAGE>
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 11th day of February,
1995, by and between Legg Mason Global Trust, Inc., a Maryland corporation
("Corporation") on behalf of the Legg Mason International Equity Trust
("Fund"), and Legg Mason Wood Walker, Incorporated, a Maryland corporation
(the "Distributor").
WHEREAS, the Corporation is registered with the Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered
shares of common stock of the Fund for sale to the public under the
Securities Act of 1933 (the "1933 Act") and various state securities laws;
and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the
shares of common stock of the Fund ("Shares") and to furnish certain other
services to the Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of
the Corporation's Board of Directors and of certain disinterested
directors in conformity with Section 15 of, and paragraph (b)(2) of Rule
12b-1 under, the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal
underwriter and to furnish such services on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as
principal underwriter in connection with the offering and sale of shares
of the Fund. The Distributor, as exclusive agent for the Corporation,
upon the commencement of operations of the Fund and subject to applicable
federal and state law and the Articles of Incorporation and By-Laws of the
Corporation, shall: (i) promote the Fund; (ii) solicit orders for the
purchase of the Shares subject to such terms and conditions as the
Corporation may specify; and (iii) accept orders for the purchase of the
Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply with all applicable federal and
state laws and offer the Shares of the Fund on an agency or "best efforts"
basis under which the Corporation shall issue only such Shares of the Fund
as are actually sold. The Distributor shall have the right to use any
list of shareholders of the Corporation or the Fund or any other list of
investors which it obtains in connection with its provision of services
under this Agreement; provided, however, that the Distributor shall not
sell or knowingly provide such list or lists to any unaffiliated person
without the consent of the Corporation's Board of Directors.
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing
<PAGE>
shareholders with information on their investments, and any other services
now or hereafter deemed to be appropriate subjects for the payments of
"service fees" under Article III, Section 26 of the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (collectively,
"Shareholder Services").
2. The Distributor may enter into dealer agreements with
registered and qualified securities dealers it may select for the
performance of Distribution and Shareholder Services, the form thereof to
be as mutually agreed upon and approved by the Corporation and the
Distributor. In making arrangements with such dealers, the Distributor
shall act only as principal and not as agent for the Corporation. No
dealer is authorized to act as agent for the Corporation in connection
with the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of the Fund shall
be the net asset value per share (as determined by the Corporation) of the
outstanding Shares of the Fund plus any applicable sales charge as
described in the Registration Statement of the Corporation. The
Corporation shall furnish the Distributor with a statement of each
computation of public offering price and of the details entering into such
computation.
4. As compensation for providing Distribution Services under
this Agreement, the Distributor shall retain the sales charge, if any, on
purchases of Shares as set forth in the Registration Statement. The
Distributor is authorized to collect the gross proceeds derived from the
sale of the Shares, remit the net asset value thereof to the Corporation
upon receipt of the proceeds and retain the sales charge, if any. The
Distributor shall receive from the Fund a distribution fee and a service
fee at the rates and under the terms and conditions of the Plan of
Distribution ("Plan") adopted by the Corporation with respect to the Fund,
as such Plan is in effect from time to time, and subject to any further
limitations on such fees as the Corporation's Board of Directors may
impose. The Distributor may reallow any or all of the sales charge,
distribution fee and service fee that it has received under this Agreement
to such dealers as it may from time to time determine; provided, however,
that the Distributor may not reallow to any dealer for Shareholder
Services an amount in excess of .25% of the average annual net asset value
of the shares with respect to which said dealer provides Shareholder
Services.
5. As used in this Agreement, the term "Registration
Statement" shall mean the registration statement most recently filed by
the Corporation with the Securities and Exchange Commission and effective
under the 1940 Act and 1933 Act, as such Registration Statement is amended
by any amendments thereto at the time in effect, and the terms
"Prospectus" and "Statement of Additional Information" shall mean,
respectively, the form of prospectus and statement of additional
information with respect to the Fund filed by the Corporation as part of
the Registration Statement, or as they may be amended from time to time.
- 2 -
<PAGE>
6. The Distributor shall print and distribute to prospective
investors Prospectuses, and shall print and distribute, upon request, to
prospective investors Statements of Additional Information, and may print
and distribute such other sales literature, reports, forms and
advertisements in connection with the sale of the Shares as comply with
the applicable provisions of federal and state law. In connection with
such sales and offers of sale, the Distributor and any dealer shall give
only such information and make only such statements or representations as
are contained in the Prospectus, Statement of Additional Information, or
in information furnished in writing to the Distributor by the Corporation,
and the Corporation shall not be responsible in any way for any other
information, statements or representations given or made by the
Distributor, any dealer, or their representatives or agents. Except as
specifically provided in this Agreement, the Corporation shall bear none
of the expenses of the Distributor in connection with its offer and sale
of the Shares.
7. The Corporation agrees at its own expense to register the
Shares with the Securities and Exchange Commission, state and other
regulatory bodies, and to prepare and file from time to time such
Prospectuses, Statements of Additional Information, amendments, reports
and other documents as may be necessary to maintain the Registration
Statement. The Fund shall bear all expenses related to preparing and
typesetting such Prospectuses, Statements of Additional Information, and
other materials required by law and such other expenses, including
printing and mailing expenses, related to such Fund's communications with
persons who are shareholders of the Fund.
8. The Corporation agrees to indemnify, defend and hold the
Distributor, its several officers and directors, and any person who
controls the Distributor within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending
such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Distributor, its officers or directors, or
any such controlling person may incur, under the 1933 Act or under common
law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
required to be stated or necessary to make the Registration Statement not
misleading, provided that in no event shall anything contained in this
Agreement be construed so as to protect the Distributor against any
liability to the Corporation or its shareholders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under this Agreement, and
further provided that the Corporation shall not indemnify the Distributor
for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who
controls the Corporation within the meaning of Section 15 of the 1933 Act,
- 3 -
<PAGE>
free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending
such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Corporation, its officers or directors, or
any such controlling person may incur, under the 1933 Act or under common
law or otherwise, on account of any wrongful act of the Distributor or any
of its employees or arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing
by the Distributor to the Corporation for use in the Registration
Statement or arising out of or based upon any alleged omission to state a
material fact in connection with such information required to be stated in
the Registration Statement or necessary to make such information not
misleading. As used in this paragraph, the term "employee" shall not
include a corporate entity under contract to provide services to the
Corporation or the Fund, or any employee of such a corporate entity,
unless such person is otherwise an employee of the Corporation.
10. The Corporation reserves the right at any time to
withdraw all offerings of the Shares of the Fund by written notice to the
Distributor at its principal office.
11. The Corporation shall not issue certificates representing
Shares unless requested by a shareholder. If such request is transmitted
through the Distributor, the Corporation will cause certificates
evidencing the Shares owned to be issued in such names and denominations
as the Distributor shall from time to time direct, provided that no
certificates shall be issued for fractional Shares.
12. The Distributor may at its sole discretion, directly or
through dealers, repurchase Shares offered for sale by the shareholders or
dealers. Repurchase of Shares by the Distributor shall be at the net
asset value next determined after a repurchase order has been received.
The Distributor will receive no commission or other remuneration for
repurchasing Shares. At the end of each business day, the Distributor
shall notify by telex or in writing, the Corporation and State Street Bank
and Trust Company, the Corporation's transfer agent, of the orders for
repurchase of Shares received by the Distributor since the last such
report, the amount to be paid for such Shares, and the identity of the
shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by
the Distributor for the repurchase of such Shares in cash or in the form
of a credit against moneys due the Corporation from the Distributor as
proceeds from the sale of Shares. The Corporation reserves the right to
suspend such repurchase right upon written notice to the Distributor. The
Distributor further agrees to act as agent for the Corporation to receive
and transmit promptly to the Corporation's transfer agent shareholder and
dealer requests for redemption of Shares.
13. The Distributor is an independent contractor and shall be
agent for the Corporation only in respect to the sale and redemption of
the Shares.
- 4 -
<PAGE>
14. The services of the Distributor to the Corporation under
this Agreement are not to be deemed exclusive, and the Distributor shall
be free to render similar services or other services to others so long as
its services hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the
Corporation's Board of Directors on a quarterly basis showing such
information concerning expenditures related to this Agreement as from time
to time shall be reasonably requested by the Board of Directors.
16. As used in this Agreement, the terms "assignment",
"interested person", and "majority of the outstanding voting securities"
shall have the meanings given to them by Section 2(a) of the 1940 Act,
subject to such exemptions as may be granted by the Securities and
Exchange Commission by any rule, regulation or order.
17. This Agreement will become effective with respect to the
Fund on the date first written above and, unless sooner terminated as
provided herein, will continue in effect for one year from the above
written date. Thereafter, if not terminated, this Agreement shall
continue in effect with respect to the Fund for successive annual periods
ending on the same date of each year, provided that such continuance is
specifically approved at least annually (i) by the Corporation's Board of
Directors or (ii) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act), provided that in
either event the continuance is also approved by a majority of the
Corporation's Directors who are not interested persons (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval.
18. This Agreement is terminable with respect to the Fund or
in its entirety without penalty by the Corporation's Board of Directors,
by vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act), or by the Distributor, on not less than 60 days'
notice to the other party and will be terminated upon the mutual written
consent of the Distributor and the Corporation. This Agreement will also
automatically and immediately terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived,
discharged or terminated orally, except by an instrument in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
20. In the event this Agreement is terminated by either party
or upon written notice from the Distributor at any time, the Corporation
hereby agrees that it will eliminate from its corporate name any reference
to the name of "Legg Mason." The Corporation shall have the non-exclusive
use of the name "Legg Mason" in whole or in part only so long as this
Agreement is effective or until such notice is given.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to
be executed by their officers thereunto duly authorized.
Attest: LEGG MASON GLOBAL TRUST, INC.
By: /s/ Kathi D. Glenn By: /s/ Marie K. Karpinski
___________________ _________________________________
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ Kathi D. Glenn By: /s/ John F. Curley, Jr.
___________________ _________________________________
- 6 -
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective
Amendment No. 7 to the Registration Statement of Legg Mason Global Trust,
Inc. ("Corporation") on Form N-1A (File Number 33-56672) of: 1) our report
dated January, 30 1995, on our audit of the financial statements and
financial highlights of Legg Mason Global Government Trust as of and for
the year ending December 31, 1994, and 2) our report dated November 16,
1994, on our audit of the statement of assets and liabilities of Legg
Mason Global Equity Trust as of November 16, 1994, which are incorporated
by reference in the Registration Statement. We also consent to the
reference of our firm under the caption "The Corporation's Independent
Accountants".
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
August 29, 1995
<PAGE>
<PAGE>
DISTRIBUTION PLAN OF
LEGG MASON GLOBAL TRUST, INC.
WHEREAS, Legg Mason Global Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment
Company Act of 1940, as amended ("1940 Act"), and intends to offer for
public sale shares of common stock of a series to be known as the Legg
Mason International Equity Trust ("Fund");
WHEREAS, the Corporation has registered the offering of its
shares of common stock under a Registration Statement filed with the
Securities and Exchange Commission and that Registration Statement is in
effect as of the date hereof or expected to be made effective in the near
future;
WHEREAS, the Corporation's Board of Directors has established a
second Series of shares of common stock of the Corporation: Legg Mason
Global Equity Trust;
WHEREAS, the Corporation desires to adopt a Distribution Plan
pursuant to Rule 12b-1 under the 1940 Act and the Board of Directors has
determined that there is a reasonable likelihood that adoption of the
Distribution Plan will benefit the Corporation and its shareholders; and
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Distribution
Plan (the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the
following terms and conditions:
1. A. Legg Mason Global Equity Trust shall pay to Legg
Mason, as compensation for Legg Mason's services as principal underwriter
of the Fund shares, a distribution fee at the rate of 0.75% on an
annualized basis of the average daily net assets of the Fund's shares,
such fee to be calculated and accrued daily and paid monthly or at such
other intervals as the Board shall determine.
B. The Corporation shall pay to Legg Mason, as
compensation for ongoing services provided to the Fund's shareholders, a
service fee at the rate of 0.25% on an annualized basis of the average
daily net assets of the Fund's shares, such fee to be calculated and
accrued daily and paid monthly or at such other intervals as the Board
shall determine.
DC-163477.2
<PAGE>
C. The Corporation may pay a distribution or service
fee to Legg Mason at a lesser rate than the fees specified in paragraphs
1.A. and 1.B., respectively, of this Plan, in either case as agreed upon
by the Board and Legg Mason and as approved in the manner specified in
paragraph 3 of this Plan. The distribution and service fees payable
hereunder are payable without regard to the aggregate amount that may be
paid over the years, provided that, so long as the limitations set forth
in Article III, Section 26(d) of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") remain in effect
and apply to distributors or dealers in the Corporation's shares, the
amounts paid hereunder shall not exceed those limitations, including
permissible interest.
2. As principal underwriter of the Corporation's shares,
Legg Mason may spend such amounts as it deems appropriate on any
activities or expenses primarily intended to result in the sale of the
shares of the Fund and/or the servicing and maintenance of shareholder
accounts, including, but not limited to, compensation to employees of Legg
Mason; compensation to Legg Mason and other broker-dealers that engage in
or support the distribution of shares or who service shareholder accounts;
expenses of Legg Mason and such other broker-dealers, including overhead
and telephone and other communication expenses; the printing of
prospectuses, statements of additional information, and reports for other
than existing shareholders; and preparation and distribution of sales
literature and advertising materials.
3. This Plan shall take effect on February 11, 1995 and
shall continue in effect for successive periods of one year from its
execution for so long as such continuance is specifically approved at
least annually together with any related agreements, by votes of a
majority of both (a) the Board of Directors of the Corporation and (b)
those Directors who are not "interested persons" of the Corporation, as
defined in the 1940 Act, and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Plan and such related agreements;
and only if the Directors who approve the Plan taking effect have reached
the conclusion required by Rule 12b-1(e) under the 1940 Act.
4. Any person authorized to direct the disposition of monies
paid or payable by the Fund pursuant to this Plan or any related agreement
shall provide to the Corporation's Board of Directors and the Board shall
review, at least quarterly, a written report of the amounts so expended
and the purposes for which such expenditures were made. Legg Mason shall
submit only information regarding amounts expended for "distribution
activities," as defined in this paragraph 4, to the Board in support of
the distribution fee payable hereunder and shall submit only information
regarding amounts expended for "service activities," as defined in this
paragraph 4, to the Board in support of the service fee payable hereunder.
For purposes of this Plan, "distribution activities"
shall mean any activities in connection with Legg Mason's performance of
- 2 -
<PAGE>
its obligations under the underwriting agreement, dated February 11, 1995,
by and between the Corporation and Legg Mason, that are not deemed
"service activities." "Service activities" shall mean activities covered
by the definition of "service fee" contained in amendments to Article III,
Section 26(d) of the NASD's Rules of Fair Practice that became effective
July 7, 1993, including the provision by Legg Mason of personal,
continuing services to investors in the Corporation's shares. Overhead
and other expenses of Legg Mason related to its "distribution activities"
or "service activities," including telephone and other communications
expenses, may be included in the information regarding amounts expended
for such distribution or service activities, respectively.
5. This Plan may be terminated with respect to the Fund at
any time by vote of a majority of the Rule 12b-1 Directors or by vote of a
majority of the outstanding voting securities of the Fund.
6. This Plan may not be amended to increase materially the
amount of distribution fees provided for in paragraph 1.A. hereof or the
amount of service fees provided for in paragraph 1.B. hereof unless such
amendment is approved by a vote of at least a majority of the outstanding
securities, as defined in the 1940 Act, of the Corporation, and no
material amendment to the Plan shall be made unless such amendment is
approved in the manner provided for continuing approval in paragraph 3
hereof.
8. While this Plan is in effect, the selection and
nomination of Directors who are not interested persons of the Corporation,
as defined in the 1940 Act, shall be committed to the discretion of
Directors who are themselves not interested persons.
9. The Corporation shall preserve copies of this Plan and
any related agreements for a period of not less than six years from the
date of expiration of the Plan or agreement, as the case may be, the first
two years in an easily accessible place; and shall preserve copies of each
report made pursuant to paragraph 4 hereof for a period of not less than
six years from the date of such report, the first two years in an easily
accessible place.
IN WITNESS WHEREOF, the Corporation has executed this
Distribution Plan as of the day and year set forth below.
Date: February 11, 1995 LEGG MASON GLOBAL TRUST, INC.
Attest: By: /s/ Marie K. Karpinski
--------------------------
By: /s/ Kathi D. Glenn
--------------------
- 3 -
<PAGE>
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ John F. Curley, Jr.
________________________________
- 4 -
<PAGE>
Exhibit 16(a)
LEGG MASON GLOBAL GOVERNMENT TRUST
June 30, 1994 - June 30, 1995 (one year)
Cumulative Total Return:
ERV= (10.69 x 1.133173) - (9.77 x 1.0649271) x 1000 + 1000 = 1164.29
----------------------------------------
(9.77 x 1.0649271)
P = 1000
C = 1164.29 - 1 = 0.16429 = 16.43%
------- -----
1000
Average Annual Return: Same
April 15, 1993 - June 30, 1995 (life of fund)
Cumulative Total Return:
ERV = (10.69 x 1.133173) - (10.00 x 1.0) x 1000 + 1000 = 1211.36
---------------------------------
(10.00 x 1.0)
P = 1000
P = 1211.36 - 1 = 0.21136 = 21.14%
------- -----
1000
Average Annual Return:
1
-----
2.21096
(0.21136 + 1) - 1 = 0.0906 = 9.06%
----
<PAGE>
Exhibit 16(b)
LEGG MASON GLOBAL EQUITY TRUST
February 17, 1995 - June 30, 1995 (life of fund)
Cumulative Total Return:
ERV = (10.40 x 1.0) - (10.00 x 1.0) x 1000 + 1000 = 1040.00
----------------------------
(10.00 x 1.0)
P = 1000
P = 1040.00 - 1 = 0.0400 = 4.00%
------- ----
1000
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> GLOBAL GOVERNMENT TRUST
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995
<PERIOD-START> JAN-01-1994 JAN-01-1995
<PERIOD-END> DEC-31-1994 JUN-30-1995
<INVESTMENTS-AT-COST> 142,416,578 143,941,560
<INVESTMENTS-AT-VALUE> 136,884,205 147,749,479
<RECEIVABLES> 10,431,709 5,256,431
<ASSETS-OTHER> 87,056 75,447
<OTHER-ITEMS-ASSETS> 5,283,148 441,491
<TOTAL-ASSETS> 152,686,118 153,522,848
<PAYABLE-FOR-SECURITIES> 693,474 0
<SENIOR-LONG-TERM-DEBT> 0 0
<OTHER-ITEMS-LIABILITIES> 6,577,151 955,030
<TOTAL-LIABILITIES> 7,270,625 955,030
<SENIOR-EQUITY> 0 0
<PAID-IN-CAPITAL-COMMON> 153,580,967 144,013,344
<SHARES-COMMON-STOCK> 15,243,184 14,270,485
<SHARES-COMMON-PRIOR> 15,677,428 15,992,751
<ACCUMULATED-NII-CURRENT> 1,348,981 365,328
<OVERDISTRIBUTION-NII> 0 0
<ACCUMULATED-NET-GAINS> (4,059,337) 4,645,940
<OVERDISTRIBUTION-GAINS> 0 0
<ACCUM-APPREC-OR-DEPREC> (5,455,118) 3,543,206
<NET-ASSETS> 145,415,493 152,567,818
<DIVIDEND-INCOME> 0 0
<INTEREST-INCOME> 11,225,130 5,875,592
<OTHER-INCOME> 0 0
<EXPENSES-NET> 2,133,479 1,334,370
<NET-INVESTMENT-INCOME> 9,091,651 4,541,222
<REALIZED-GAINS-CURRENT> (3,080,501) 7,113,142
<APPREC-INCREASE-CURRENT> (8,606,854) 8,998,324
<NET-CHANGE-FROM-OPS> (2,595,704) 20,852,888
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> (9,401,864) (3,932,740)
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 5,165,037 1,111,645
<NUMBER-OF-SHARES-REDEEMED> (6,276,848) (2,425,903)
<SHARES-REINVESTED> 679,872 341,580
<NET-CHANGE-IN-ASSETS> (15,657,004) 7,152,325
<ACCUMULATED-NII-PRIOR> 0 1,348,981
<ACCUMULATED-GAINS-PRIOR> 775,432 (4,059,337)
<OVERDISTRIB-NII-PRIOR> (95,074) 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 1,193,872 548,035
<INTEREST-EXPENSE> 0 0
<GROSS-EXPENSE> 2,898,495 1,334,370
<AVERAGE-NET-ASSETS> 159,182,995 147,356,900
<PER-SHARE-NAV-BEGIN> 10.27 9.54
<PER-SHARE-NII> 0.57 0.31
<PER-SHARE-GAIN-APPREC> (0.71) 1.11
<PER-SHARE-DIVIDEND> (0.59) (0.27)
<PER-SHARE-DISTRIBUTIONS> 0.00 0.00
<RETURNS-OF-CAPITAL> 0.00 0.00
<PER-SHARE-NAV-END> 9.54 10.69
<EXPENSE-RATIO> 1.34 1.83
<AVG-DEBT-OUTSTANDING> 0 0
<AVG-DEBT-PER-SHARE> 0 0
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> GLOBAL EQUITY TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> FEB-17-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 28,123,847
<INVESTMENTS-AT-VALUE> 28,438,438
<RECEIVABLES> 937,227
<ASSETS-OTHER> 56,862
<OTHER-ITEMS-ASSETS> 1,100,136
<TOTAL-ASSETS> 30,542,663
<PAYABLE-FOR-SECURITIES> 1,718,234
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 285,741
<TOTAL-LIABILITIES> 2,003,975
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,150,777
<SHARES-COMMON-STOCK> 2,745,326
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 84,622
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 53,214
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 250,076
<NET-ASSETS> 28,538,688
<DIVIDEND-INCOME> 162,338
<INTEREST-INCOME> 48,243
<OTHER-INCOME> 0
<EXPENSES-NET> 125,959
<NET-INVESTMENT-INCOME> 84,622
<REALIZED-GAINS-CURRENT> 53,214
<APPREC-INCREASE-CURRENT> 250,075
<NET-CHANGE-FROM-OPS> 387,911
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,798,653
<NUMBER-OF-SHARES-REDEEMED> (53,427)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 28,537,688
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42,151
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 214,960
<AVERAGE-NET-ASSETS> 15,308,584
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.40
<EXPENSE-RATIO> 2.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
</TABLE>
