TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 6 LEGG MASON
Performance Information 8 GLOBAL
Investment Objectives and Policies 9 FUNDS
How You Can Invest in the Funds 23
How Your Shareholder Account is
Maintained 24
How You Can Redeem Your Primary Shares 24 GLOBAL GOVERNMENT TRUST
How Net Asset Value is Determined 26 INTERNATIONAL EQUITY TRUST
Dividends and Other Distributions 26 EMERGING MARKETS TRUST
Taxes 27 PRIMARY SHARES
Shareholder Services 28
The Funds' Management and Investment Advisers 30
The Funds' Distributor 31 PUTTING YOUR FUTURE FIRST
The Funds' Custodian and Transfer Agent 32
Description of the Corporation and its
Shares 32 PROSPECTUS
MAY 1, 1996
AS AMENDED DECEMBER 31, 1996
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc. [Legg Mason Logo]
111 South Calvert Street FUNDS
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 Massachusetts Avenue, N.W.,
Washington, DC 20036-1800
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, MD 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 ANY FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY ANY 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
<PAGE>
LEGG MASON GLOBAL FUNDS -- PRIMARY SHARES
LEGG MASON GLOBAL TRUST , INC.:
LEGG MASON GLOBAL GOVERNMENT TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
The Legg Mason Global Trust, Inc. ("Corporation") is an open-end management
investment company which currently offers three series: The Legg Mason Global
Government Trust ("Global Government"), The Legg Mason International Equity
Trust ("International Equity") and the Legg Mason Emerging Markets Trust
("Emerging Markets") (each separately referred to as a "Fund" and collectively
referred to as the "Funds"). Global Government is a bond fund; International
Equity and Emerging Markets are equity funds.
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 May 1, 1996 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).
INTERNATIONAL EQUITY AND EMERGING MARKETS MAY INVEST UP TO 35% AND 100%,
RESPECTIVELY, OF THEIR 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, BOTH INTERNATIONAL EQUITY AND EMERGING MARKETS ARE INTENDED
TO BE LONG-TERM INVESTMENT VEHICLES AND ARE NOT DESIGNED TO PROVIDE INVESTORS
WITH A MEANS OF SPECULATING ON SHORT-TERM STOCK MARKET MOVEMENTS. INVESTORS IN
THESE TWO FUNDS SHOULD BE ABLE TO TOLERATE SUDDEN, SOMETIMES SUBSTANTIAL
FLUCTUATIONS IN THE VALUE OF THEIR INVESTMENTS.
INVESTORS SHOULD BE COGNIZANT OF THE UNIQUE RISKS OF INTERNATIONAL
INVESTING, INCLUDING EXPOSURE TO CURRENCY FLUCTUATIONS. BECAUSE OF THESE RISKS,
AN INVESTMENT IN ANY OF THESE FUNDS SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM. BECAUSE OF THE SPECIAL RISKS ASSOCIATED WITH EMERGING
MARKETS, AN INVESTMENT IN EITHER OF THE EQUITY FUNDS ALSO SHOULD BE CONSIDERED
SPECULATIVE.
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.
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
May 1, 1996
As amended December 31, 1996
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 to provide 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 or 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" in "Investment Objectives and
Policies," at pages 12-23.
INTERNATIONAL 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 outside the United States.
The Fund may invest up to 35% of its total assets in emerging market
securities.
EMERGING MARKETS is a diversified, professionally managed portfolio
seeking long-term capital appreciation. In attempting to achieve the
Fund's objective, Batterymarch, as the Fund's investment adviser, normally
invests at least 65% of the Fund's total assets in equity securities of
emerging market companies. Assets not invested in emerging market equity
securities may be invested in any combination of debt securities of the
U.S. Government, equity securities of issuers in developed countries, cash
and money market instruments.
The adviser considers emerging markets to include most of the
countries of Asia, Africa, Latin America, Eastern Europe and the Middle
East, as well as certain countries in Western or Southern Europe. Most
emerging market countries or regions have relatively low gross national
products per capita compared to the world's major economies, and have the
potential for rapid but unstable economic growth. The risks of foreign
investing are heightened in emerging markets.
Because of the risks associated with common stock investments in
emerging markets, International Equity and Emerging Markets are intended
to be long-term investment vehicles and are 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 these Funds, and thus the net
asset values of Fund shares, are subject to market risk. See "Investment
Techniques and Risks" in "Investment Objectives and Policies," at pages
12-23.
There can be no assurance that any Fund will achieve its objective.
See "Investment Objectives and Policies," page 9. Changes in economic
conditions in, or governmental policies of, foreign
2
<PAGE>
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 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. Each Fund's participation in
hedging and option income strategies also involves certain investment
risks and transaction costs. Because of these risks, each Fund should not
be considered a complete investment program.
Each Fund 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 6). 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 30-31 of this Prospectus.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISER:
Legg Mason Fund Adviser, Inc. and Western Asset Management Company (as
sub-adviser) (for Global Government)
Batterymarch Financial Management, Inc. (for International Equity and
Emerging Markets)
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 23.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 28.
DIVIDENDS:
Declared and paid monthly for Global Government. Declared and paid
annually for International Equity and Emerging Markets. See "Dividends and
Other Distributions," page 26. 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 and International Equity for the year ended December
31, 1995. For Emerging Markets, which has no operating history prior to the date
of this Prospectus, other expenses are based on estimates for the current fiscal
period, and fees are adjusted for current expense limits and fee waiver levels.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees:
For Global Government and International
Equity None
For Emerging Markets 2.00%*
* Because of the costs involved in trading emerging market securities, Emerging
Markets assesses a 2.00% redemption fee on the proceeds of shares redeemed or
exchanged within one year of purchase. The fee is paid directly to the Fund,
and not to LMFA or Legg Mason. See page 25.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
GLOBAL INTERNATIONAL EMERGING
GOVERNMENT EQUITY MARKETS
Management fees
(after fee
waivers) 0.75% 0.09% 0.00%
12b-1 fees (after
fee waivers) 0.75% 1.00% 1.00%
Other expenses
(after expense
reimbursement) 0.31% 1.16% 1.50%(B)
---------------------------------
Total operating
expenses (after
fee waivers and
expense
reimbursement) 1.81% 2.25% 2.50%
=================================
(A) Pursuant to voluntary expense limitations, LMFA, Legg Mason, and each Fund's
sub-adviser 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 the Primary Shares of each Fund (exclusive of
taxes, interest, brokerage and extraordinary expenses) as follows: For
Global Government, 1.90% of average daily net assets indefinitely; for
International Equity, 2.25% of average daily net assets until May 1, 1997;
and for Emerging Markets, 2.50% of average daily net assets until May 1,
1997. In the absence of such waivers, the expected management fee, 12b-1
fee, other expenses, and total operating expenses of each Fund would be as
follows: For International Equity, 0.75%, 1.00%, 1.16% and 2.91% of average
net assets; and for Emerging Markets, 1.00%, 1.00%, 1.50% and 3.50% of
average net assets. No fee waivers or expense reimbursements were necessary
for Global Government.
(B) Other expenses are based on annualized estimated amounts for the current
fiscal year.
EXAMPLE
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, Global Government and International Equity charge no
redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Global Government $ 18 $57 $98 $213
International Equity $ 23 $70 $120 $258
Emerging Markets $ 46 $78 N/A N/A
Emerging Markets
(Assuming no
redemption) $ 25 $78 N/A N/A
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 May 1, 1997, the expense figures in the example may 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
4
<PAGE>
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 a
Fund's sub-adviser) 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 30.
5
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. Navigator Shares are currently offered for sale only to
institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own monies and monies 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 financial highlights tables that follow have been derived from each
Fund's financial statements which have been audited by Coopers & Lybrand
L.L.P. Global Government's and International Equity's financial statements
for the year ended December 31, 1995 and the report of Coopers & Lybrand
L.L.P. thereon are included in each respective Fund's Annual Report to
Shareholders 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. As of the date of this Prospectus, Emerging Markets has not
issued any annual reports.
GLOBAL GOVERNMENT
<TABLE>
<CAPTION>
PRIMARY CLASS
-----------------------------------------
Years Ended December 31, 1995 1994 1993(A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.54 $10.27 $10.00
----------------------------------------
Net investment income(B) 0.63 0.57 0.36
Net realized and unrealized gain (loss) on investments, forward
currency contracts, options and currency translations 1.32 (0.71) 0.31
----------------------------------------
Total from investment operations 1.95 (0.14) 0.67
----------------------------------------
Distributions to shareholders:
Net investment income (1.16) (0.59) (0.36)
Net realized gain on investments -- -- (0.04)
----------------------------------------
Total distributions (1.16) (0.59) (0.40)
----------------------------------------
Net asset value, end of period $10.33 $ 9.54 $10.27
========================================
Total return 20.80% (1.4)% 6.8%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 1.8% 1.3% 0.3%(D)
Net investment income(B) 5.7% 5.7% 5.4%(D)
Portfolio turnover rate 169.5% 127.0% 127.8%(D)
Net assets, end of period (in thousands) $153,954 $145,415 $161,072
</TABLE>
(A) FOR THE PERIOD APRIL 15, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1993.
(B) 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% INDEFINITELY.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
6
<PAGE>
INTERNATIONAL EQUITY
<TABLE>
<CAPTION>
PRIMARY CLASS
-------------
Year Ended December 31, 1995(A)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00
------
Net investment income(B) 0.04
Net realized and unrealized gain on investments and currency translations 0.77
------
Total from investment operations 0.81
------
Distributions to shareholders from:
Net investment income (0.04)
In excess of net realized gain on investments (0.07)
------
Net asset value, end of period $10.70
======
Total return 8.11%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) 2.25%(D)
Net investment income(B) 0.52%(D)
Portfolio turnover rate 57.58%(D)
Net assets, end of period (in thousands) $65,947
</TABLE>
(A) FOR THE PERIOD FEBRUARY 17, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 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.
EMERGING MARKETS
<TABLE>
<CAPTION>
May 28, 1996(A)
to
Primary Class September 30, 1996
- ----------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00
------
Net operating loss(B) (0.01)
Net realized and unrealized loss on investments
and currency transactions (0.02)
------
Total from investment operations (0.03)
------
Net asset value, end of period $9.97
======
Total return (0.30)%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratio to average net assets:
Expenses(B) 2.50%(D)
Net operating loss(B) (0.23)%(D)
Portfolio turnover rate 70.10%(D)
Net assets, end of period (in thousands) $15,463
</TABLE>
(A) COMMENCEMENT OF OPERATIONS.
(B) NET OF FEES WAIVED AND EXPENSES REIMBURSED PURSUANT TO A VOLUNTARY EXPENSE
LIMITATION OF 2.50%.
(C) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(D) ANNUALIZED.
7
<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 and Legg Mason had not
waived certain fees for the periods presented below. As of the date of this
Prospectus, Emerging Markets has no operating history.
Prior to May 1, 1996, International Equity was named Legg Mason Global
Equity Trust ("Global Equity"). Global Equity invested primarily in common
stocks of companies located anywhere in the world, including the United States.
Since May 1, 1996, with this name change, it invests in common stocks located
outside the United States.
Total returns of Primary Shares as of December 31, 1995 were as follows:
GLOBAL INTERNATIONAL
CUMULATIVE TOTAL RETURN GOVERNMENT EQUITY
One Year +20.80% N/A
Life of Class +27.16%(A) +8.11%(B)
GLOBAL INTERNATIONAL
AVERAGE ANNUAL TOTAL RETURN GOVERNMENT EQUITY
One Year +20.80% N/A
Life of Class +9.25%(A) N/A
(A) INCEPTION OF GLOBAL GOVERNMENT -- APRIL 15, 1993.
(B) INCEPTION OF INTERNATIONAL 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.
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 any 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 19 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 been issued by numerous emerging market governments, and
other such
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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
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 17 and "Risks of
Futures, Options and Forward Contracts," page 18. 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 22.
When LMFA believes such action is warranted by abnormal market or
economic situations, the Fund may invest temporarily without limit in cash
and U.S. dollar-denominated money market instruments including repurchase
agreements.
INTERNATIONAL 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 outside the
United States. Under normal circumstances, the Fund will invest at least
65% of its total assets in equity securities of issuers located in at
least three different countries other than the United States. In
implementing this policy, Batterymarch currently intends to invest
substantially all of the Fund's assets in non-U.S. equity securities.
Batterymarch examines securities from over 20 international stock markets,
with emphasis on several of the largest -- Japan, the United Kingdom,
France, Canada and Germany. 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 emerging market securities.
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, when
Batterymarch believes such action is warranted by abnormal market or
economic situations, the Fund may invest without limit in cash and
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U.S. dollar-denominated money market instruments, including repurchase
agreements of domestic issuers. When Batterymarch believes such action is
warranted by abnormal market or economic situations, 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, judged 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 17 and "Risks of Futures, Options and Forward Contracts," page 18.
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.
EMERGING MARKETS' investment objective is long-term capital
appreciation. The Fund attempts to meet this objective by investing at
least 65% of its total assets in emerging market equity securities under
normal conditions.
Assets not invested in emerging market equity securities may be
invested in any combination of debt securities of the U.S. Government,
equity securities of issuers in developed countries, cash and money market
instruments, including repurchase agreements. Batterymarch intends to be
substantially fully invested in equity securities and convertible
securities of emerging market issuers. The Fund may use options and stock
index futures as discussed below. It may also enter into forward foreign
currency exchange contracts in order to protect against fluctuations in
exchange rates. However, appropriate hedging instruments are not available
with respect to most emerging markets, and the Fund accordingly does not
now intend to employ hedging strategies. See "Options, Futures and Forward
Currency Exchange Contracts," page 17, and "Risks of Futures, Options,
Futures and Forward Contracts," page 18.
The Fund may invest in the following types of equity securities:
common stock, preferred stock, securities convertible into common stock,
rights and warrants to acquire such securities and substantially similar
forms of equity with comparable risk characteristics.
The Fund intends to invest in Asia, Latin America, the Indian
Sub-continent, Southern and Eastern Europe, the Middle East, and Africa,
although it may not invest in all these markets at all times and may not
invest in any particular market when it deems investment in that country
or region to be inadvisable.
More than 25% of the Fund's total assets may be denominated in a
single currency. Concentration in a single foreign currency will increase
the Fund's exposure to adverse developments affecting the value of that
currency. An issuer of securities purchased by the Fund may be domiciled
in a country other than the country in whose currency the securities are
denominated.
When abnormal market or economic situations warrant in the opinion of
Batterymarch, the Fund may invest without limit for temporary defensive
purposes in short-term debt instruments, including government, corporate
and money market securities of domestic issuers, as well as repurchase
agreements. Such short-term instruments will be rated in one of the four
highest rating categories by S&P or Moody's or, if unrated, judged by the
adviser to be of comparable quality.
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, among other things, 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
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value of the Fund's total assets may be invested in the securities of a
single issuer; these limits do not apply to U.S. government securities. 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.
As a fundamental policy, each Fund may borrow an amount equal to
33 1/3% of its total assets. Because of the limited liquidity of some
emerging markets, Emerging Markets, in particular, occasionally may be
required to borrow to meet redemption requests. Borrowing may cause
greater fluctuation in share value, but also may enable the Fund to retain
favorable securities positions rather than liquidating them to meet
redemptions. None of the Funds will borrow for the purpose of leveraging
its portfolio. As a non-fundamental policy, none of the Funds may purchase
securities when outstanding borrowings exceed 5% of total assets.
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.
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 domestic 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.
Emerging Market Securities
Each Fund may invest in securities of issuers based in emerging
markets (including, but not limited to, countries in Asia, Latin America,
the Indian Sub-continent, Southern and Eastern Europe, the Middle East,
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 any of the
Funds 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
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grade or be of comparable quality. 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 in
accordance with the criteria of those organizations. The following are
considered emerging market securities: (1) securities publicly traded on
emerging market stock exchanges, or whose principal trading market is
over-the-counter (i.e., off-exchange) in an emerging market; (2)
securities (i) denominated in any emerging market currency or (ii)
denominated in a major currency if issued by companies to finance
operations in an emerging market; (3) securities of companies that derive
a substantial portion of their total revenues from goods or services
produced in, or sales made in, emerging markets; (4) securities of
companies organized under the laws of an emerging market country or
region, which are publicly traded in securities markets elsewhere; and (5)
American depositary receipts ("ADRs") (or similar instruments) with
respect to the foregoing.
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.
Over the last quarter of a century, inflation in many emerging market
countries has been significantly higher than the world average. While some
emerging market countries have sought to develop a number of corrective
mechanisms to reduce inflation or mitigate its effects, inflation may
continue to have significant effects both on emerging market economies and
their securities markets. In addition, many of the currencies of emerging
market countries have experienced steady devaluations relative to the U.S.
dollar, and major devaluations have occurred in certain countries.
Because of the high levels of foreign-denominated debt owed by many
emerging market countries, fluctuating exchange rates can significantly
affect the debt service obligations of those countries. This could, in
turn, affect local interest rates, profit margins and exports which are a
major source of foreign exchange earnings. Although it might be
theoretically possible to hedge for anticipated income and gains, the
ongoing and indeterminate nature of the foregoing risk (and the costs
associated with hedging transactions) makes it virtually impossible to
hedge effectively against such risks.
To the extent an emerging market country faces a liquidity crisis with
respect to its foreign exchange reserves, it may increase restrictions on
the outflow of any foreign exchange. Repatriation is ultimately dependent
on the ability of the Fund to liquidate its investments and convert the
local currency proceeds obtained from such liquidation into U.S. dollars.
Where this conversion must be done through official channels (usually the
central bank or certain authorized commercial banks), the ability to
obtain U.S. dollars is dependent on the availability of such U.S. dollars
through those channels and, if available, upon the willingness of those
channels to allocate those U.S. dollars to the Fund. In such a case, the
Fund's ability to obtain U.S. dollars may be adversely affected by any
increased restrictions imposed on the outflow of foreign exchange. If the
Fund is unable to repatriate any amounts due to exchange controls, it may
be required to accept an obligation payable at some future date by the
central bank or other governmental entity of the jurisdiction involved. If
such conversion can legally be done outside official channels, either
directly or indirectly, the Fund's ability to obtain U.S. dollars may not
be affected as much by any increased restrictions except to the extent of
the price which may be required to be paid for the U.S. dollars.
Many emerging market countries have little experience with the
corporate form of business organization, and may not have well developed
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corporation and business laws or concepts of fiduciary duty in the
business context.
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; 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.
Investment in Japan
International 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
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.
Sovereign Debt Securities
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
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minimal risk of default during the term of the agreement based on
guidelines established by the Corporation's Board of Directors.
Preferred Stock
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, 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. Global Government 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 Global
Government 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.
Reverse Repurchase Agreements and Other Borrowing
In a reverse repurchase agreement, a 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. Each Fund may also enter into
dollar rolls, in which a 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, that 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.
Each 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.
To avoid potential leveraging effects of borrowing (including reverse
repurchase agreements and dollar rolls), each Fund will not purchase
securities while such borrowing is in excess of 5%
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of its total assets. Each Fund will limit its borrowing to no more than
one-third of its total assets.
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 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, the liquidity of a Fund could be
adversely affected.
Depositary Receipts
The Funds may invest in ADRs or similar non-U.S. instruments issued by
foreign banks or trust companies. ADRs are securities issued by a U.S.
depositary (usually a bank) and represent a specified quantity of
underlying non-U.S. stock on deposit with a custodian bank as collateral.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositaries. The Funds may invest in either type of ADR. A foreign
issuer of the security underlying an ADR is generally not subject to the
same reporting requirements in the United States as a domestic issuer.
Accordingly, the information available to a U.S. investor will be limited
to the information the foreign issuer is required to disclose in its own
country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer or the underlying security.
ADRs may also be subject to exchange rate risks if the underlying
securities are denominated in foreign currency. Some of these depositary
receipts may be issued in bearer form. For purposes of their investment
policies, each Fund will treat ADRs and similar instruments as equivalent
to investment in the underlying securities.
Securities of Other Investment Companies
Due to restrictions on direct investment by foreign entities in
certain emerging markets, or other difficulties limiting the availability
of local securities, investment in other investment companies may be the
most practical or only manner in which a Fund can invest in certain
emerging markets. A Fund may invest in the securities of other investment
companies, but it will not own more than 3% of the total outstanding
voting stock of any investment company, invest more than 5% of its total
assets in any one investment company, or
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invest more than 10% of its total assets in investment companies in
general. Such investments may involve the payment of substantial premiums
above the net asset value of such issuers' portfolio securities, and the
total return on such investments will be reduced by the operating expenses
and fees of such investment companies, including advisory fees. There can
be no assurance that a Fund will be able to invest in certain emerging
markets. A Fund will invest in such funds when, in the adviser's judgment,
the potential benefits of such investment justify the payment of any
applicable premium or sales charge.
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 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. 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 INTERNATIONAL EQUITY AND EMERGING MARKETS:
A 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.
Each Fund may utilize futures contracts and options to a limited
extent. Specifically, a Fund may enter into futures contracts and related
options provided that not more than 5% of its net assets are required as a
futures contract deposit and/or premium; in addition, a Fund may 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
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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 or option is priced more
attractively than the underlying equity security or index.
As noted above, it may be difficult or impossible to hedge exposures
in emerging markets, both because of the nature of the risks and because
of the limited availability of suitable hedging instruments.
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 net 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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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. The Fund may invest in lower-rated debt
securities of domestic issuers, 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" page 12.
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. Although the prices of lower-rated bonds are
generally less sensitive to interest rate changes than those of
higher-rated bonds, the prices of lower-rated bonds may be more sensitive
to adverse economic changes and developments regarding the individual
issuer. Issuers of lower-rated debt securities are often highly leveraged
and may not have access to more traditional methods of financing.
As a result of the limited liquidity of high yield securities, the
valuation of these securities may require greater judgment than is
necessary with respect to securities having more active markets. In
addition, their prices have at time experienced rapid decline when a
significant number of holders of such securities decided to sell them.
Widespread sales may result from adverse publicity and investor
perceptions, whether or not based on fundamental analysis.
Debt securities may be subject to mandatory call provisions. If
issuers were to invoke these provisions during periods of declining
interest rates, the Fund would receive redemption proceeds at times when
only lower-yielding securities were available for investment by the Fund.
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, 1995, 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.
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MOODY'S AAA/
RATINGS AA/A BAA BA B CAA CA C NR
Average 68.2% -- 3.5% 5.6% -- -- -- 22.7%
AAA/ CC/
S&P RATINGS AA/A BBB BB B CCC C D NR
Average 67.9% 1.4% 5.5% 1.1% -- -- -- 24.1%
The dollar-weighted average of securities not rated by either Moody's
or S&P amounted to 20.7%. 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).
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.
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<PAGE>
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 assets.
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.
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<PAGE>
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.
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
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 the
Fund must distribute substantially all of its income to its shareholders
to qualify for pass-through treatment under the federal income tax laws,
the Fund, as an investor 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.
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 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.
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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, 1995, Global Government's portfolio
turnover rate was 169.5%. For the period February 17, 1995 (commencement
of operations) to December 31, 1995, International Equity's annualized
portfolio turnover rate was 57.6%. Global Government, International Equity
and Emerging Markets each anticipates that in the future its portfolio
turnover rate will not exceed 250%, 100% and 150%, 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.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
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 and subsequent
investments in an IRA account established on behalf of a nonworking spouse
of a shareholder who has an IRA invested in the Funds require a minimum
amount
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<PAGE>
of only $250. 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 26. 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. 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 any Fund prior to 10 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. 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
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<PAGE>
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 10 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.
Emerging Markets' investment objective results in it investing a
substantial portion of its assets in thinly traded stocks which can
experience large price fluctuations and whose purchase and sale can
involve significant transaction costs. The Fund is intended for long-term
investors, and short-term "market timers" who engage in frequent purchases
and redemptions affect the Fund's investment planning and create
additional transaction costs which are borne by all shareholders. For this
reason, the Fund imposes a 2% redemption fee on all redemptions, including
exchanges, of Fund shares held for less than one year.
The redemption fee will be paid directly to the Fund to help offset
the costs imposed on it by short-term trading in emerging markets. The fee
will not be paid to either LMFA or Legg Mason. No fees are charged on
redemptions from Global Government or International Equity.
The Fund will use the "first-in, first-out" (FIFO) method to determine
the one year holding period. Under this method, the date of redemption or
exchange will be compared with the earliest purchase date of shares held
in the account. If this holding period is less than one year, the
redemption fee will be assessed.
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The fee will not apply to any shares purchased through reinvestment of
dividends or to shares held in retirement plans such as 401(k), 403(b),
457, Keogh, SEP-IRA, profit sharing, and money purchase pension accounts.
The fee does apply to shares held in IRA accounts and to shares purchased
through automatic investment plans (described under "How You Can Invest in
the Funds"). The fee may apply to shares in broker omnibus accounts.
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 executive or Legg Mason Client Services in
Baltimore, Maryland. Upon receipt of your form, your shares will be
redeemed at the net asset value per share determined as of the next close
of the Exchange.
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 annually for International
Equity and Emerging Markets. 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
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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 are
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 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 applicable 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 qualify or 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
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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 International Equity's or Emerging
Markets' 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, such 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. Each of the Funds
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.
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.
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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 International Equity Trust
A mutual fund seeking maximum long-term total return, by investing
primarily in common stocks of companies located outside the United States.
Legg Mason Emerging Markets Trust
A mutual fund seeking long-term capital appreciation, by investing
primarily in equity securities of companies based in or doing business in
emerging market countries.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total return consistent with prudent investment
risk, by investing principally in debt securities issued or guaranteed by
foreign governments, the U.S. Government, their agencies,
instrumentalities or political subdivisions.
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 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, through
investment in a diversified portfolio consisting primarily 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 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 July 31, 1996, the sales charge will be
waived for all new accounts and subsequent investments into existing
accounts. After July 31, 1996, any exchanges of these shares will be
subject to the full sales charge, if any, since no sales charge will have
been 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
29
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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 24. 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.
Emerging Markets imposes a 2% redemption fee on exchanges of shares
held less than one year. See page 25.
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.
LEGG MASON FUND ADVISER
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 International Equity and
Emerging Markets. 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 International Equity and Emerging
Markets, directs all matters related to the operation of those Funds and
provides office space and administrative staff for the Funds. Pursuant to
its Advisory Agreement or Management Agreement, Global Government and
International Equity each pays LMFA a fee equal to an annual rate of 0.75%
and Emerging Markets pays a fee at an annual rate equal to 1.00%, 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 indefinitely 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.
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 and Senior Portfolio
Manager at Western Asset Management Company since December, 1994. 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 $5.5 billion as of March 31, 1996.
WESTERN ASSET MANAGEMENT COMPANY
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
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LMFA, or 0.40% of the Fund's average daily net assets.
Western Asset also renders investment advice to fourteen open-end
investment companies and one closed-end investment company, which together
had aggregate assets under management of approximately $3.3 billion as of
March 31, 1996. Western Asset also renders investment advice to private
accounts with fixed-income assets under management of approximately $16.6
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.
BATTERYMARCH FINANCIAL MANAGEMENT, INC.
Pursuant to advisory agreements with LMFA (each an "Advisory
Agreement"), which were approved by the Corporation's Board of Directors,
Batterymarch, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to International Equity and Emerging Markets.
Batterymarch acts as the portfolio manager for each Fund and is
responsible for the actual investment management of the Funds, including
the responsibility for making decisions and placing orders to buy, sell or
hold a particular security. LMFA pays Batterymarch, pursuant to each
Advisory Agreement, a management fee equal to an annual rate of 0.50% of
International Equity's average daily net assets and 0.75% of Emerging
Markets' average daily net assets. LMFA and Batterymarch have voluntarily
agreed to waive their fees and to reimburse each Fund for its expenses to
the extent necessary to limit each Fund's total operating expenses
attributable to Primary Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) to 2.25% of International Equity's and 2.50%
of Emerging Markets average daily net assets. These agreements will expire
on May 1, 1997, unless extended by LMFA or Batterymarch.
Batterymarch acts as investment adviser to institutional accounts,
such as corporate pension plans, mutual funds and endowment funds, as well
as to individual investors. Total assets under management by Batterymarch
were approximately $4.1 billion as of April 1, 1996. The address of
Batterymarch is 200 Clarendon Street, Boston, Massachusetts 02116.
An investment committee is responsible for the day-to-day management
of International Equity and Emerging Markets.
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,
1995, Legg Mason received $31,000 and $14,000 for performing such services
in connection with Global Government and International Equity,
respectively.
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 International Equity's and Emerging Markets' 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
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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 perceived political and economic stability of the
countries in which the sub-custodians will be located and perceived 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. Securities traded abroad are more likely to be in
bearer form, which heightens the risk of loss through inadvertance or
theft. In such event, a Fund may be dependent on its foreign custodian,
the custodian's business insurance, or foreign law for any recovery.
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.
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. 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
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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 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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