Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Bartlett & Co.
Cincinnati, OH
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
--------------------------------------------
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
(Recycled Logo) Printed on Recycled Paper
LMF-185
2/97
Report to Shareholders
For the Quarter Ended
December 31, 1996
The
Legg Mason
Balanced
Trust
Putting Your Future First
(Legg Mason Logo)
FUNDS
<PAGE>
To Our Shareholders,
We are pleased to report to you for the first time on the progress of the
Legg Mason Balanced Trust.
The Trust commenced operations on October 1, 1996, with an initial asset
value of $10.00. As this letter is written on January 31, 1997, with a net asset
value of $10.39 per share, the Trust's assets have risen to $16.5 million.
The Trust seeks to invest at least 25% of its portfolio in fixed income
securities and no more than 75% of its assets in equity securities. The Trust
will emphasize investments in dividend-paying equity securities.
On the following pages, Dale Rabiner and Woodrow Uible, the Trust's
portfolio managers review the portfolio's structure and comment on the
investment outlook.
The Balanced Trust is Legg Mason's long-term capital appreciation and
current income alternative within its family of value stock funds. We hope you
will consider using the Balanced Trust for investments of additional funds as
they become available. Some shareholders regularly add to their investment in
the Trust by authorizing automatic, monthly transfers from their bank checking
or Legg Mason accounts. Your Financial Advisor 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
January 31, 1997
<PAGE>
Portfolio Managers' Comments
We are very pleased to have the opportunity to serve as investment
advisor to the Legg Mason Balanced Trust. We look forward to a long,
successful relationship in this capacity. Since this is our initial report
to shareholders, we think it is appropriate to provide you with background
information about Bartlett &Co.
Bartlett, which was founded in 1898 and became a Legg Mason company in
1996, is a value-oriented manager of equity, fixed income and balanced
accounts for high-net worth individuals, institutions, and mutual funds.
Our firm utilizes a "bottom-up value-oriented approach" in the management
of common stocks and fixed income securities. With this methodology, we
seek to invest in those securities which are selling at the most
attractive valuations. This approach tends to produce portfolios that are
less volatile than their respective markets, as these valuation levels
tend to act as a "safety net" during turbulent periods. Over a full market
cycle, our goal is to provide an attractive total investment return,
consistent with reasonable risk.
Starting any mutual fund is a challenging prospect. Commencing fund
operations during the fourth quarter of 1996 proved to be even more
challenging as stocks and bonds rallied significantly during most of the
fourth quarter. Stock prices, in particular, were rising on a meteoric
upward trajectory that made it difficult to initiate positions in an
opportunistic fashion.
Our low equity exposure during the quarter resulted in the fund's
investment returns lagging the market. We do know, however, from past
experience that these types of market moves do not go on forever and a
patient, disciplined investment approach such as ours should serve our
investors well, particularly during less buoyant markets.
At present, the fund has approximately 50% of its assets invested in
equity securities with the remaining 50% invested in fixed income
securities. Our asset mix should trend up to our expected allocation of
60% total assets in common stocks and 40% in fixed income securities as we
are able to find additional attractively priced equity securities over the
next three to six months.
Equities
At December 31, the fund had a widely diversified portfolio of 45
equity positions. Our focus on value has resulted in a number of holdings
in the financial, basic industry and consumer cyclical industries. We are
typically outside the market mainstream where "irrational exuberance"
seems to be most prominent, which at this time means we are underweighting
technology and household name growth stocks. The current mania, too, will
pass and, when it does, we believe that we shall be held in very good
stead with holdings that have attractive financial characteristics such as
Washington Federal, Kaydon, Fleetwood Enterprises and Jostens.
Our desire to avoid any immediate market surprises on the downside led
us to some significant weightings in yield-oriented stocks such as
utilities and REITs. Utility holdings such as KUEnergy and TNPEnterprises
represent good value because of their attractive distribution systems
and/or low cost generation capacity. ROCCommunities is a dominant operator
of manufactured home communities and its high yield and significant
dividend growth prospects should generate an appealing total return.
Our investment approach is research driven in that we expend
considerable effort to identify companies which are trading below
intrinsic value, which we define as what a knowledgeable and sophisticated
business person would pay for a company, either as an ongoing enterprise
or upon liquidation. In addition to these
2
<PAGE>
factors, we look for a positive trend in the underlying business.
The following seven companies represent significant holdings in the
Balanced Trust at this time:
Pioneer-Standard Electronics--The third largest distributor of
electronic components in the United States is a lower risk way of
participating in the growth of technology without the attendant risk of
obsolescence. Its P/E (Price to Earnings ratio) of 12 is below its
long-term growth rate.
Washington Federal, Inc.--The Pacific Northwest is a terrific operating
environment for savings and loans, which is made more attractive by this
company's extremely low operating cost and excellent management record.
Its P/E is 11 with a dividend yield approaching 4%.
Salomon Inc.--Salomon is among a handful of firms with a worldwide
investment banking franchise that sells at a low multiple of book value
and earnings, and is accompanied by strengthening in its general
operations.
Kaydon Co.--Kaydon is a specialized industrial products manufacturer
with a very impressive record of growth and profitability. It is selling
at an earnings multiple of 14 with a long-term growth rate in the low
teens.
UST--The smokeless tobacco company has a dominant industry position and
a yield of nearly 5% with substantial dividend growth potential.
ADT--The largest player in the security alarm business has steadily
growing cash flow and the appeal of several potential acquirers.
Jostens--Dominant in the class ring business, new management has
restructured around its strengths. Jostens has good growth prospects with
a P/E of 14 and a dividend yield over 4%.
All of these companies can be characterized as out-of-favor, unpopular,
misunderstood or neglected. Investor expectations for these enterprises
are low and surprises tend to be on the upside, which should result in
good long-term performance. Our success over the years is based upon
adhering to this approach to stock selection.
Fixed Income
The fourth quarter was a favorable period for fixed income investors
with the Lehman Intermediate Government/Corporate Index posting a 2.5%
return.
It seems every market has a unique economic variable which becomes the
focus (usually to excess) of market participants for forecasting future
interest rates. The indicator du jour seems to be the unemployment report
because there is a perception that periods of low unemployment tend to be
inflationary while periods of moderate or high unemployment tend to be
disinflationary. While this may be true in theory, a careful examination
of postwar U.S. economic history suggests otherwise. That is to say, there
have been periods of significant economic activity, such as the early
1960s, where inflation remained very low and, conversely, there have been
periods such as the mid-to-late 1970s when there was significant
unemployment while inflation remained high. We do not forecast interest
rates, but, if pressed, we would say that we are in a period of moderate
economic growth with very little in the way of inflationary pressures
due to rising labor costs. In sum, we believe that 1997 should be a
relatively attractive period for fixed income investors.
Our investment strategy for the fixed income portion of the Balanced
Trust is to maintain a 3.5 year duration in that portion of the fund,
consistent with our benchmark, the Lehman Intermediate
Government/Corporate Index.
3
<PAGE>
At present, the fund is focused toward U.S. treasury securities with a
maturity range of 2-8 years. Within the treasury sector, we favor
zero coupon treasury strips which are currently attractively priced,
particularly in the 7-8 year maturity range. We also favor the
mortgage-backed sector and, outside of treasuries, this represents
our most significant commitment. In the mortgage area, spreads have
narrowed considerably; however, we believe this sector continues to offer
good value, particularly when compared to corporate bonds which are,
for the most part, noticeably absent from the portfolio. The risk/reward
trade off of corporate bonds due to the extremely narrow spreads is not a
favorable one at present and, accordingly, we are significantly
underweighting this sector pending more attractive opportunities. We think
it is more than coincidental that 1996 witnessed a significant number of
companies issuing 100-year maturity bonds, and, what is good for the
issuer generally is not good for the investor. Having said this, we shall
continue to monitor conditions closely and, if there is any significant
spread widening in the corporate sector, we shall utilize the opportunity
to make a commitment there.
From an expected return standpoint, the yield curve is almost exactly
average based on the past twenty years of data. This fact, coupled with
the fact that spreads on non-treasury issues are historically narrow,
would require one to take significant interest rate risk in an attempt to
gain incremental performance. This is something we are not willing to do.
Therefore, until there is a significant change in the slope of the yield
curve or in yield spreads, we expect to deliver returns that will tend to
be very close to the market indices.
In summary, Bartlett &Co. follows a disciplined approach in both the
equity and fixed income components of its portfolios, which we expect will
provide our investors with attractive total returns over the long-term. We
are grateful for the opportunity to serve our fund shareholders and
welcome any comments or questions that you may have.
Dale H. Rabiner, CFA
Woodrow H. Uible, CFA
January 31, 1997
DJIA 6813.09
4
<PAGE>
Performance Information
Legg Mason Investors Trust, Inc.
Balanced Trust
Total Return for Life of Fund,
as of December 31, 1996
The return shown is based on historical results and is 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. No adjustment has
been made for any income taxes payable by shareholders.
The fund's total return as of December 31, 1996 was:
Cumulative
Total Return
--------------------------------------------------
Life of Fund(dagger) +3.83%
------------------
(dagger)Fund inception--October 1, 1996.
Selected Portfolio Performance
<TABLE>
Top Ten Holdings
- ----------------------------------------- --------------------------------------
<S><C>
1.United States Treasury Strip 6.United States Treasury Strip
0.0% 8-15-98 0.0% 5-15-04
2.United States Treasury Note 7.United States Treasury Note
7.13% 2-29-00 5.88% 8-15-98
3.United States Treasury Strip 8.Blackrock North American Government
0.0% 2-15-99 Income Trust, Inc.
4.Federal National Mortgage Association 9.Time Warner Sr. Note
6.0% 1-1-27 0.0% 6-22-13
5.United States Treasury Strip 10.Kaydon Corporation
0.0% 8-15-99
</TABLE>
<TABLE>
Strong Performers for the 4th quarter 1996 Weak Performers for the 4th quarter 1996
- --------------------------------------------------- ---------------------------------------------------
<S><C>
Stewart & Stevenson Services, Inc. +37.87% Fleetwood Enterprises, Inc. -12.16%
Zilog, Inc. +26.86% John Alden Financial Corporation -5.29%
Philip Morris Companies Inc. +21.91% A.H. Belo Corporation -5.11%
Raymond James Financial, Inc. +17.80% Blackrock North American Government
Pioneer-Standard Electronics, Inc. +17.19% Income Trust, Inc. -4.22%
Kansas City Southern Industries, Inc. -3.96%
</TABLE>
5
<PAGE>
Portfolio of Investments
Legg Mason Investors Trust, Inc.
Balanced Trust
December 31, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
---------------------------------------------------------
Common Stocks and Equity Interests -- 49.0%
Aerospace -- 2.4%
Lockheed Martin Corporation 2 $ 187
Raytheon Company 4 171
-------
358
-------
Automotive -- 1.7%
Ford Motor Company 8 252
-------
Chemicals -- 2.4%
Ferro Corporation 6 182
Potash Corporation of Saskatchewan, Inc. 2 170
-------
352
-------
Computer Services & Systems-- 0.4%
Zilog, Inc. 2 57(A)
-------
Construction/Building Materials-- 1.0%
Martin Marietta Materials, Inc. 7 153
-------
Electrical Equipment/Electronics-- 1.6%
Pioneer-Standard Electronics, Inc. 18 236
-------
Energy -- 3.1%
Cabot Oil & Gas Corporation 7 115
Phillips Petroleum Company 3 146
Southwestern Energy Company 14 206
-------
467
-------
Finance -- 3.6%
Federal National Mortgage Association 5 171
Raymond James Financial, Inc. 2 54
Salomon, Inc. 5 245
U.S. Trust Corporation 1 63
-------
533
-------
Food, Beverage & Tobacco -- 4.0%
Archer Daniels Midland Co. 9 198
Philip Morris Companies, Inc. N.M. 45
Universal Foods Corporation 4 152
UST, Inc. 6 204
-------
599
-------
Insurance/Hospital Management--1.7%
John Alden Financial Corporation 7 130
MBIA, Inc. 1 116
-------
246
-------
(Amounts in Thousands) Shares Value
---------------------------------------------------------
Manufacturing -- 5.4%
Fleetwood Enterprises, Inc. 8 $ 220
Kaydon Corporation 6 273
National Presto Industries, Inc. 2 60
Stewart & Stevenson Services, Inc. 1 29
York International Corporation 4 229
-------
811
-------
Media/Advertising -- 2.4%
A.H. Belo Corporation 5 181
Time Warner, Inc. 5 169
-------
350
-------
Miscellaneous -- 2.0%
Blackrock North American Government
Income Trust 30 296
-------
Multi-Industry -- 1.8%
American Brands, Inc. 1 60
Loews Corporation 2 212
-------
272
-------
Real Estate -- 2.1%
ROC Communities, Inc. 7 191
United Dominion Realty Trust, Inc. 8 124
-------
315
-------
Retail -- 2.9%
Federated Department Stores, Inc. 6 191(A)
Jostens, Inc. 11 239
-------
430
-------
Savings & Loan -- 1.6%
Washington Federal, Inc. 9 236
-------
Services -- 1.5%
ADT, Ltd. 10 229(A)
-------
Telecommunications -- 0.1%
Ameritech Corporation N.M. 18
-------
Transportation -- 3.8%
AMR Corporation 2 190(A)
GATX Corp. 3 146
Kansas City Southern Industries, Inc. 5 238
-------
574
-------
6
<PAGE>
(Amounts in Thousands) Shares Value
---------------------------------------------------------
Utilities -- 3.5%
KU Energy Corporation 7 $ 201
NIPSCO Industries, Inc. 1 47
TNP Enterprises, Inc. 6 151
Western Resources, Inc. 4 124
-------
523
-------
Total Common Stocks and Equity
Interests
(Identified Cost--$7,085) 7,307
---------------------------------------------------------
Principal
Amount
---------
Corporate Note-- 1.9%
Time Warner Sr. Notes
0%(B) 6/22/13
(Identified Cost--$282) $ 650 282
---------------------------------------------------------
U.S. Government and Agency Obligations -- 28.6%
Fixed Rate Securities -- 8.9%
United States Treasury Notes
5.875% 8/15/98 300 300
6.50% 5/31/01 250 253
7.125% 2/29/00 750 772
-------
1,325
-------
Stripped Securities(C) -- 19.7%
United States Treasury Bond
0% 8/15/98 1,325 1,208
0% 2/15/99 700 619
0% 8/15/99 600 514
0% 8/15/03 300 199
0% 5/15/04 500 314
0% 11/15/04 150 91
-------
2,945
-------
Total U.S. Government and
Agency Obligations
(Identified Cost--$4,277) 4,270
---------------------------------------------------------
Principal
(Amounts in Thousands) Amount Value
---------------------------------------------------------
U.S. Government Agency Mortgage-backed
Securities -- 14.3%
Federal Home Loan Mortgage
Corporation
6.00% 3/1/26 $ 99 $ 92
6.50% 1/1/26 198 189
6.50% 5/1/26 124 118
6.50% 5/1/26 200 191
-------
590
-------
Federal National Mortgage Association
6.00% 1/1/27D 600 557
-------
Government National Mortgage
Association
7.00% 3/15/26 101 99
7.00% 4/15/26 188 183
7.50% 10/15/26 198 198
8.00% 4/15/26 97 99
8.00% 10/15/26 100 102
8.00% 10/15/26 200 204
8.00% 11/15/26 99 101
-------
986
-------
Total U.S. Government Agency
Mortgage-backed Securities
(Identified Cost--$2,142) 2,133
----------------------------------------------------------
Short-Term Investments -- 8.2%
Corporate Note -- 6.7%
Raytheon Company
6.50% 1/2/97 1,000 1,000
-------
Repurchase Agreement -- 1.5%
State Street Bank and Trust Co., N.A.
4.00% dated 12/31/96, to be
repurchased at $225 on 1/2/97
(Collateral: $230 United States
Treasury Note 6.00% due 5/31/98,
value $232) 225 225
-------
Total Short-Term Investments
(Identified Cost--$1,225) 1,225
---------------------------------------------------------
Total Investments -- 102.0%
(Identified Cost -- $15,011) 15,217
Other Assets Less Liabilities -- (2.0)% (301)
-------
Net assets-- 100.0% $14,916
=======
Net asset value per share $10.34
=======
A Non-income producing
B Zero-coupon bond -- A bond with no periodic interest payments which
is sold at such a discount as to produce a current yield-to-maturity.
This security is callable on June 22, 1998.
C Stripped Security -- A security with interest-only payment streams.
For these interest-only securities, the amount shown as principal is
the notional balance used to calculate the amount of interest due.
D When-issued Security -- A security purchased on a delayed delivery
basis. Final settlement amount and maturity
date have not yet been announced.
N.M. Not meaningful
7
