Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Legg Mason Capital Management, Inc.
Baltimore, MD
Board of Directors
John F. Curley, Jr., Chairman
Edward A. Taber, III, President
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, D.C.
Independent Auditors
Ernst &Young LLP
Baltimore, MD
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Wood Walker, Incorporated
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111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
[recycled logo] Printed on Recycled Paper
LMF-013
7/96
Report to Shareholders
For the Quarter Ended
June 30, 1996
The
Legg Mason
American
Leading
Companies
Trust
Putting Your Future First
[Legg Mason Funds logo]
FUNDS
<PAGE>
To Our Shareholders,
The American Leading Companies Trust's net asset value increased from
$12.23 to $12.69 per share during the quarter ended June 30, 1996. After taking
into account the $0.01 per share ordinary income dividend paid in May, the
Fund's total return* (not annualized) in the quarter was 3.93% compared to a
return of 4.49% in the Standard &Poor's 500 stock index. The Fund's assets have
grown to more than $78 million as of the end of June.
The Fund seeks to invest at least three-quarters of its assets in the
common stocks of large capitalization companies that exhibit the ability to
maintain or increase their market share. The balance of its assets may be
invested in smaller market capitalization stocks, bonds, or foreign securities.
On the following pages, J. Eric Leo, the Fund's portfolio manager, reviews
the portfolio's structure and comments on the investment outlook.
The American Leading Companies Trust is Legg Mason's large company growth
alternative within its family of value stock funds. It is designed for
conservative investors who are most comfortable with large, stable,
well-recognized companies. We hope you will consider using the American Leading
Companies Trust for investments of additional funds as they become available.
Some shareholders regularly add to their investment in the Fund by authorizing
automatic, monthly transfers from their bank checking accounts or Legg Mason
money market funds. Your Investment Executive will be happy to help you make
these arrangements if you would like to purchase additional shares in this
convenient manner.
Sincerely,
/s/ Edward A. Taber, III
Edward A. Taber, III
President
July 31, 1996
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*Total return measures investment performance in terms of appreciation or
depreciation in the fund's net asset value per share, plus capital gain
distributions and dividends. It assumes that capital gain distributions and
dividends were reinvested in the fund at the times they were paid.
<PAGE>
Portfolio Manager's Comments
The second quarter proved to be challenging for both the stock and
bond markets. Mixed economic signals kept investor tensions high, leading
to increased volatility levels for both markets. Equities outperformed
bonds for both the quarter and six months, assisted by record flows into
equity mutual funds. However, stock prices flattened in the last half of
the quarter due to higher interest rates and high equity valuation levels.
To the surprise of many, the U.S. economy maintained a more robust
pace than expected throughout the second quarter. The financial markets
increasingly feared that higher inflation would result from the stronger
growth, causing the Federal Reserve to increase interest rates in order to
slow the process. This environment created problems for the U. S. bond
market, sending yields as high as 7.19% on long-term Treasury bonds during
the quarter. By quarter-end, the long-term bond yield declined to 6.87% as
increasing default rates on consumer credit cards and mortgages helped to
temper economic expectations and inflation fears for the balance of the
year.
The Fund
For the second quarter, the Fund gave up a small amount of ground to
the market as measured by the S&P 500. On balance, a number of stocks that
were strong during the first quarter, such as MCI and Alco Standard,
weakened during the second quarter and vice-versa. On a year-to-date
basis, the Fund is tracking with the market. The rapid sector rotations
have been frustrating but are providing opportunities to purchase some
excellent companies at attractive valuations. Ideally, we are looking for
companies that have strong long-term fundamentals, a global focus, and a
management that has embraced EVA (Economic Value Added) principles. The
ability to transcend a slow U. S. economic environment is also a highly
desirable trait.
After an active first quarter, portfolio transactions slowed during
the second quarter. To bolster our exposure to technology we purchased
Lucent Technology, added to our Intel position and established a small
position in IBM. Lucent Technology is a name that might sound unfamiliar,
but, in reality, represents the telecommunications equipment manufacturing
arm of AT&T. Twenty percent of this company was sold to the public during
the second quarter. This position will be increased when AT&T splits into
three separate entities later this year. Lucent has always had excellent
technology but a bloated cost structure. In addition to cost cutting
benefits, Lucent will also benefit from increased marketing opportunities
from the local Bell operating companies once it is separated from their
arch rival AT&T. We believe Lucent will be a dominant player in the global
telecommunications market.
In order to fund the purchase, we eliminated positions in Guidant
Corp. (an Eli Lilly spin-off), Prudential Reinsurance and Varity
Corporation, on the basis of relative price. American Greetings and First
Colony were also profitably eliminated from the portfolio in spite of
their attractive valuation as management of both companies seemed
unwilling to work in the interest of shareholders.
As the year progresses, a number of new issues will be added to the
Fund--without the purchase of a single share! A number of companies have
come to the conclusion that shareholders would be better served if the
businesses were split into separate entities. AT&T will be one of the
first, splitting into three separate companies--AT&T the telephone service
provider; Lucent Technologies the telecommunications equipment
manufacturer created from Bell Laboratories; and NCR Corp. the
computer-related business. Later in 1996, Corning Inc. also will split
into three separate companies, which we believe should significantly
enhance the value of the stock. Additionally, Union Pacific will spin off
its energy subsidiary, Union Pacific Resources, after completing the
acquisition of Southern Pacific Rail. In addition to EVA, the increasing
willingness of companies to separate major divisions is an indicator that
creating shareholder value is becoming a primary goal of corporate
governance.
Using EVA in our analytical process has added considerable value. We
are finding numerous benefits for corporations who use EVA. In addition to
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<PAGE>
becoming more shareholder friendly, EVA is having a positive impact on the
way companies treat employees. As we have discussed in previous letters,
EVA is most effective when incorporated in a company's incentive
compensation plan. Highly successful EVA-driven companies, such as
Monsanto, have spread incentive compensation across all employment ranks
with stock options. Last year, Monsanto gave 200 pre-split shares to each
employee (current value approximately $33,000)--what better way to focus
the entire company on working for shareholders. Over the long term, this
type of action should help repair the damage done to corporate loyalty
when workers were subjected to years of aggressive restructuring and the
ensuing layoffs. We believe this is an important and necessary event in
ensuring that U. S. industry retains its global competitive position.
Looking Forward
In addition to the U.S. election, we have two concerns going into the
second half of the year. The first and longer-term issue is Saudi Arabia.
More important than the recent tragic bombing is the question of stability
of the Saudi government. The Saudi Royal Family has ruled the country with
an "iron hand" and represented a pro-West bastian of stability in one of
the most volatile regions of the world. Stability of the Saudi regime is
important because it effectively controls the oil pricing policies of OPEC
as well as its 12% share of current global oil production. Once one of the
richest nations in the world, Saudi Arabia now has an unhappy population
living on less than one-half its former income. Some question what portion
of the Saudi citizens back the bombing by a dissident, fundamentalist
organization whose ultimate goal could be to bring down the Saudi Royal
Family and use oil as an economic weapon to further its cause. The odds
against such an event are high. However, the impact on the financial
markets would be significant, and anything is possible in the Middle East.
The situation requires close observation and is one reason we expect to
hold at least a modest weight in energy related companies.
The second concern is our sense that a larger-than-normal number of
mutual fund managers appear to be willing to accept higher levels of risk
and trading activity to outperform the market. This is evidenced by the
rapid sector rotations during the past few years, and more recently by a
stronger correlation between the Lipper Analytical Services, Inc. mutual
fund index and the over-the-counter market which implies heavy technology
and aggressive growth weightings. We suspect that the pressure to
outperform is created by more intense competition among mutual fund groups
for new money. This is not a healthy environment for the long term and may
well be setting the stage for the long overdue correction.
We believe that second quarter gross domestic product (GDP) will be
strong, and that there is a higher probability the Fed will decide to
increase short-term interest rates before year-end, as it becomes more
concerned that the strong U.S. economy will continue unabated and bring
with it higher inflation rates. The recent strength in employment and wage
growth has increased the prospects for a stronger economy and, more
importantly, higher inflation. The wage inflation data represents a sharp
increase over expectations, creating even more uncertainty for the
financial markets because it represents such a large component of
inflation. We believe the economy will not be able to sustain a GDP growth
beyond 2.5% through the end of the year because consumers are at the upper
end of their ability to add debt. However, because economists'
expectations for the U.S. economy cover such a wide range, the level of
investor uncertainty will remain high.
It is difficult to make a case for a material change in the market
environment for the balance of the year. Higher volatility for both bonds
and stocks seems to be the order of the day. Continued gains in the equity
market will be governed by money flows to mutual funds, corporate profits,
bond yields and, most importantly, expectations for the economy and
inflation.
The most powerful long-term case for equities continues to be the
improving competitive position
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<PAGE>
of U.S. industry and the awakening of corporate management to the
importance of improving shareholder value. On the negative side,
valuation levels are less attractive, competition remains intense, and
there is little pricing power in spite of the growing fears of
accelerating inflation and economic growth.
We are maintaining lower cash levels than in past market cycles due
to the market's upward propensity. At the same time, we are making a
concerted effort to keep your portfolio risk level below that of the
market. While we are somewhat less sanguine regarding the short-term
outlook for the equity market, we are excited about the long-term
prospects of the companies in the Fund.
Thank you for your continued support.
J. Eric Leo
July 31, 1996
DJIA 5528.91
4
<PAGE>
Performance Information
Legg Mason Investors Trust, Inc.
American Leading Companies Trust
Total Return for One Year and Life of Fund,
as of June 30, 1996
The returns shown below are based on historical results and are not
intended to indicate future performance. The investment return and principal
value of an investment in the fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Average
annual returns tend to smooth out variations in the fund's return, so they
differ from actual year-to-year results. No adjustment has been made for any
income taxes payable by shareholders.
The fund's total returns as of June 30, 1996 were as follows:
Cumulative Average Annual
Total Return Total Return
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One Year +19.65% +19.65%
Life of Fund(dagger) +30.05% +9.72%
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(dagger)Fund inception--September 1, 1993.
Selected Portfolio Performance
Top Ten Holdings
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1.Monsanto Co.
2.Aetna Life and Casualty Corporation
3.Emerson Electric Company
4.Avon Products, Inc.
5.Intel Corporation
6.Diebold, Inc.
7.Corning Incorporated
8.Union Pacific Corporation
9.American Brands, Inc.
10.Western Atlas Inc.
Strong Performers for the 2nd quarter 1996*
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Intel Corporation +29.12%
Diebold, Inc. +21.77%
Philip Morris Companies Inc. +18.52%
Microsoft Corporation +16.48%
Emerson Electric Company +11.92%
* Securities held for the entire quarter.
Portfolio Changes
Securities Added
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International Business Machines Corporation
Lucent Technologies Incorporated
Weak Performers for the 2nd quarter 1996*
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MCI Communications Corporation -15.29%
Alco Standard Corporation -13.19%
Lincoln National Corporation -8.87%
Litton Industries, Inc. -5.43%
Aetna Life and Casualty Company -5.30%
Securities Sold
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American Greetings Corporation
Cleveland-Cliffs Inc.
First Colony Corporation
Guidant Corporation
Prudential Reinsurance Holdings Inc.
Varity Corporation
5
<PAGE>
Portfolio of Investments
Legg Mason Investors Trust, Inc.
American Leading Companies Trust
June 30, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
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Common Stocks and Equity Interests -- 94.2%
Aerospace -- 2.1%
TRW Inc. 18 $ 1,618
Banking -- 2.2%
J.P. Morgan & Co. Incorporated 20 1,692
Chemicals -- 3.8%
Monsanto Co. 90 2,925
Computer Services and Systems -- 3.7%
International Business Machines
Corporation 5 495
Diebold, Inc. 50 2,412
2,907
Cosmetics -- 3.5%
Avon Products, Inc. 60 2,708
Defense -- 3.3%
Litton Industries, Inc. 30 1,305(A)
Raytheon Company 25 1,291
2,596
Electrical Equipment -- 5.8%
AMP Incorporated 45 1,806
Emerson Electric Company 30 2,711
4,517
Electronics -- 4.9%
Intel Corporation 33 2,423
KLA Instruments Corporation 60 1,395(A)
3,818
Entertainment -- 1.2%
The Walt Disney Company 15 943
Food, Beverage, and Tobacco-- 8.0%
American Brands, Inc. 45 2,042
CPCInternational, Inc. 20 1,440
McCormick & Company, Incorporated 40 885
Philip Morris Companies Inc. 18 1,872
6,239
Financial Services -- 4.4%
Chase Manhattan Corporation 25 1,766
First USA, Inc. 30 1,650
3,416
Forest Products -- 0.9%
Georgia-Pacific Corporation 10 710
Household Products -- 2.2%
Colgate-Palmolive Company 20 1,695
(Amounts in Thousands) Shares Value
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Insurance -- 8.4%
Aetna Life & Casualty Company 38 $ 2,717
American General Corporation 45 1,637
LincolnNational Corporation 25 1,156
The PMI Group, Inc. 25 1,062
6,572
Multi-Industry -- 9.4%
Alco Standard Corporation 20 905
Corning Incorporated 60 2,302
Eastman Kodak Company 18 1,400
Minnesota Mining and Manufacturing
Company 15 1,035
Rockwell International Corporation 30 1,718
7,360
Oil and Oil Services -- 7.1%
Texaco Inc. 20 1,677
Unocal Corporation 55 1,856
Western Atlas Inc. 35 2,039(A)
5,572
Pharmaceuticals -- 6.4%
Bristol-Myers Squibb Company 15 1,350
Eli Lilly and Company 20 1,300
Pfizer Inc. 20 1,428
Schering-Plough Corporation 15 941
5,019
Railroads and Equipment -- 4.1%
Southern Pacific Rail Corporation 45 1,125(A)
Union Pacific Corporation 30 2,096
3,221
Software/Technology -- 1.8%
Microsoft Corporation 12 1,441(A)
Telecommunications -- 8.6%
AT&TCorp. 30 1,860
Comsat Corporation 60 1,560
GTECorporation 35 1,566
Lucent Technologies Incorporated 25 947
MCICommunications Corporation 30 769
6,702
Toys & Amusements -- 2.4%
Mattel Inc. 65 1,861
Total Common Stocks and Equity
Interests
(Identified Cost-- $56,944) 73,532
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<PAGE>
Principal
(Amounts in Thousands) Amount Value
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Repurchase Agreement -- 4.1%
Prudential Securities, Inc.
5.48% dated 6-28-96, to be
repurchased at $3,219 on
7-1-96 (Collateral: $3,350 Federal
National Mortgage Association
Mortgage-backed securities,
7% due 6-1-11, value $3,319)
(Identified Cost-- $3,218) $3,218 $ 3,218
Total Investments -- 98.3%
(Identified Cost-- $60,162) $76,750
Other Assets Less Liabilities-- 1.7% 1,306
Net assets-- 100% $78,056
Net asset value per share $12.69
(A) Non-income producing
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