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
----------------------------------------
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
2/97
Report to Shareholders
For the Quarter Ended
December 31, 1996
The
Legg Mason
American
Leading
Companies
Trust
Primary Class
Putting Your Future First
(Legg Mason logo)
FUNDS
<PAGE>
To Our Shareholders,
The American Leading Companies Trust's net asset value increased from
$13.24 to $14.40 per share during the quarter ended December 31, 1996. The
Fund's assets have grown to more than $91 million as of the end of December.
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, Legg Mason Capital Management, the Fund's Adviser
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 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 Manager's Comments
It doesn't get much better than this. Nineteen ninety-six was the
second consecutive year when equities provided outstanding returns. For
the year, the stock market, as measured by the S&P 500, advanced by a
robust 22.96%. Equally noteworthy, over the past two years, the market
advanced a stellar 69.17% and recorded its strongest back-to-back gain in
over 40 years. Essentially everything that could go right for investors in
1996 did, and the "Goldilocks" economy remained in force through
year-end--not too strong and not too soft; rather, just right . Corporate
profits increased by an estimated 10% for the year and exceeded general
expectations, while inflation, as measured by virtually any indice,
remained low. Although interest rates rose early in the year, long rates
declined substantially by late fall from the peak 7.18% level reached in
July, and the outcome of the national elections, at least from Wall
Street's point of view, was as favorable as could have been hoped for.
Additionally, the inflow of capital into equity mutual funds in 1996 ($223
billion) easily exceeded the previous record of $129.6 billion established
three years earlier with corporate repurchases and merger activity at
record levels as well. For the second consecutive year, the performance of
large cap stocks exceeded that of smaller market capitalization issues,
and the stock market, as measured by the S&P 500, advanced during each
quarter of the year.
Nineteen ninety-six was also a good year for the American Leading
Companies Trust. The Fund advanced by 12.47% and 28.36%, respectively
during the final quarter and for all of 1996. Those returns compared
favorably both with the 5.14% and 19.24% returns posted by similar growth
funds, as measured by Lipper Analytical Services, Inc., and with the 8.33%
and 22.96% in returns recorded by the S&P 500 over the same periods.
KLA Instruments (+57.8%), Intel (+37.2%) and MCI Communications
(+27.5%) posted the strongest gains during the fourth quarter when the
majority of stocks in the Fund also outperformed the S&P 500. We undertook
a greater than normal amount of activity during the quarter to reposition
the Fund for what we believe will be enhanced longer-term investment
performance. Ten stocks (including Alco Standard, Diebold, Lincoln
National, Litton, Raytheon and Union Pacific) were sold and five new names
(including Electronic Data Systems, New Holland and The Travelers Group)
were added. In addition, we increased our weightings in several companies
(including Chase Manhattan, Eastman Kodak, IBM and Philip Morris) where we
had pre-existing positions. The common denominator in the stocks we sold
were either lofty valuation levels that increased the risks going forward
(Diebold), price appreciation that caused the stocks to reach our price
objectives (Union Pacific) or reduced earnings expectations (Raytheon)
that caused us to believe that more attractive investment opportunities
existed elsewhere. In aggregate, we believe the companies added to the
portfolio during the quarter enjoy stronger market positions, financial
strength and growth prospects than those that were sold. Indeed, at
present, a common denominator of the vast majority of companies in the
Fund is that they enjoy strong, if not dominant, market positions and have
outstanding financial characteristics. We increased our portfolio
weightings in the technology and health care sectors during the quarter
and reduced them in the capital goods and transportation sectors. At year
end, the median market capitalization of the stocks in the Fund was $29.2
billion. The mean market capitalization was $21.3 billion. The Fund
contained five of the top 10, eight of the top 20, and 10 of the top 25
companies included in the S&P 500.
Electronic Data Systems, one of our recent purchases, is the largest
and most profitable company in the computer services industry. Revenues
and earnings last year approximated $14.5 and $1.0 billion, respectively.
Founded by Ross Perot in 1962, EDS came public in 1968 and was acquired by
General Motors in 1984. Although GM acquired 100% of EDS at that time, it
simultaneously created a publicly traded vehicle to establish a market
value for EDS to reflect the results of that company in order to better
incentivize its employees. Last summer, GM spun off its ownership interest
in EDS to its shareholders.
EDS's longer-term results have been exemplary. Revenues and earnings
have increased by approximately 14% annually over both the past five and
ten years and shareholders have been well rewarded for their investment in
this company. During most of its history, EDS's stock has meaningfully
outperformed market averages. The shares came under considerable pressure
last fall, however, following an announcement that order growth had slowed
over the preceding months. We established a position in
2
<PAGE>
EDS subsequent to that announcement. We believe the slowdown in orders is
temporary and anticipate the company will resume its above average longer-
term growth rates in 1997. Outsourcing of data processing operations
remains an attractive growth industry and we believe investing in EDS
provides an attractive way to participate in the technology segment of
our economy without incurring the risk of rapid product obsolescence that
all too often raises its ugly head in this arena.
The Travelers Group is one of the pre-eminent success stories of the
financial services industry. Although it doesn't bear his name, The
Travelers is as closely identified with Sandy Weill as Charles Schwab is
with his namesake company. Mr. Weill, who built and then sold Shearson to
the American Express company in 1981, re-entered the financial services
industry in 1986 when he assumed control of Commercial Credit, a consumer
finance company that previously had been owned by Control Data. Commercial
Credit was Mr. Weill's vehicle for growth. In 1988, Commercial Credit
acquired Primerica Corporation, the parent company of Smith Barney. In
subsequent years, Primerica acquired the retail and asset management
operations of Shearson Lehman Brothers from American Express and The
Travelers Group, an old line life, health and property and casualty
insurance company. The trademarks of all those acquisitions have been
vintage Sandy Weill--astute purchases, significant cost reductions and
tight operational controls. Shareholders have benefited significantly from
those efforts. The Travelers' earnings have increased by more than 20% per
year on average during the 1990s and the stock has consistently
outperformed market averages. We believe the combination of The Travelers'
financial strength, management skills and diversified business mix will
help enable the company to continue to provide superior financial and
investment returns.
Although New Holland is a new name to investors, the company traces
its origins back to the early 1900s and is one of the world's largest
agri-cultural equipment manufacturers, with estimated 1996 revenues of
$5.4 billion. New Holland was formed in 1991 through the merger of Ford
and Fiat's agricultural equipment operations and the company came public
in October of last year. New Holland's revenue stream is diversified. The
U.S. and Europe each generate forty percent of sales. The remaining 20% of
sales are derived from emerging markets around the world. New Holland's
financial position is extremely sound. Shareholder equity comprises more
than 80% of the company's capitalization. New Holland is a numbers and
valuation story. We anticipate the combination of product line extension,
facilities reduction and other cost-cutting measures will help enable the
company to post strong earnings gains both in 1997 and 1998, and that
investors will be well rewarded as the company's earnings power begins to
be realized.
Looking Forward
Although 1996 proved to be a stellar year for investors, market
volatility increased during the year. indeed, the DJIA declined by 101
points, or 1.5% on the final trading day of 1996, and heightened market
volatility has continued into the new year. While we believe that the
economic environment for 1997 will remain favorable (i.e. continued
moderate economic growth and low inflation) we also believe portfolio
performance this year will be far more constrained than in 1996.
Essentially everything that could go right for investors in 1996 did and
we doubt conditions can improve much from current levels. An acceleration
of economic activity most likely would lead to renewed inflationary
concerns and higher interest rates, while a slowdown in growth most
probably would lead to earnings disappointments. Additionally, valuation
levels can only be described as full. Both 1995 and 1996 proved to be far
better years for investors than was generally anticipated at the
beginning of those years. Historically, back-to-back years of 20% plus
market gains generally have been followed by a more subdued performance in
the following year. we suspect that pattern could persist in 1997.
Overall, we believe your fund is well diversified and contains
companies that possess stronger growth characteristics, more attractive
valuation levels and more solid financial characteristics than equities in
general. We continue to look for attractive new investment opportunities
and remain willing to eliminate positions if fundamental or valuation
considerations warrant.
Legg Mason Capital Management, Inc.
January 31, 1997
DJIA 6813.09
3
<PAGE>
Performance Information
Legg Mason Investors Trust, Inc.
American Leading Companies Trust
Total Return for One Year and Life of Fund,
as of December 31, 1996
The returns shown are based on historical results and are not intended to
indicate future performance. The investment return and principal value of an
investment in the fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Average annual
returns tend to smooth out variations in the fund's return, so they differ from
actual year-to-year results. No adjustment has been made for any income taxes
payable by shareholders.
The fund's total returns as of December 31, 1996 were as follows:
Cumulative Average Annual
Total Return Total Return
- ---------------------------------------------------------
One Year +28.36% +28.36%
Life of Fund(dagger) +52.48 +13.48
- ---------------
(dagger)Fund inception--September 1, 1993.
Selected Portfolio Performance
Top Ten Holdings
---------------------------------------------------
1.Intel Corporation
2.Monsanto Co.
3.Philip Morris Companies Inc.
4.KLA Instruments Corporation
5.Avon Products, Inc.
6.First USA, Inc.
7.Mattel Inc.
8.Aetna Inc.
9.Chase Manhattan Corporation
10.International Business Machines Corporation
Strong Performers for the 4th quarter 1996*
---------------------------------------------------
KLA Instruments Corporation +57.78%
Intel Corporation +37.19%
MCI Communications Corporation +27.54%
Philip Morris Companies Inc. +25.49%
Microsoft Corporation +25.30%
Weak Performers for the 4th quarter 1996*
---------------------------------------------------
Lucent Technologies Incorporated +0.81%
Eastman Kodak Company +2.23%
CPC International Inc. +3.50%
The PMI Group, Inc. +4.23%
Pfizer Inc. +4.73%
* Securities held for the entire quarter.
Portfolio Changes
Securities Added
--------------------------------------------------
Electronic Data Systems Corporation
Mellon Bank Corporation
New Holland N.V.
Travelers Group, Inc.
Waban, Inc.
Securities Sold
---------------------------------------------------
Alco Standard Corporation
American General Corporation
AMP Incorporated
Diebold, Inc.
McCormick & Company, Incorporated
Minnesota Mining and Manufacturing Company
Lincoln National Corporation
Litton Industries, Inc.
Raytheon Company
Union Pacific Corporation
4
<PAGE>
Portfolio of Investments
Legg Mason Investors Trust, Inc.
American Leading Companies Trust
December 31, 1996 (Unaudited)
(Amounts in Thousands) Shares Value
----------------------------------------------------
Common Stocks and Equity Interests -- 97.3%
Basic Materials -- 3.9%
Monsanto Co. 90 $ 3,499
-------
Capital Goods -- 11.0%
Corning Incorporated 60 2,333
Emerson Electric Company 30 2,902
New Holland N.V. 105 2,192(A)
Rockwell International Corporation 42 2,557(A)
-------
9,984
-------
Consumer Cyclicals -- 8.0%
Eastman Kodak Company 28 2,247
Mattel Inc. 110 3,052
Waban, Inc. 75 1,950(A)
-------
7,249
-------
Consumer Staples -- 15.8%
American Brands, Inc. 48 2,382
Avon Products, Inc. 55 3,142
CPC International Inc. 20 1,550
Colgate-Palmolive Company 20 1,845
The Walt Disney Company 15 1,044
Philip Morris Companies Inc. 30 3,379
Procter and Gamble Company 10 1,075
-------
14,417
-------
Energy -- 8.6%
Texaco Inc. 20 1,963
Union Pacific Resources Group Inc. 38 1,107
Unocal Corporation 55 2,234
Western Atlas Inc. 35 2,481(A)
-------
7,785
-------
Financial Services -- 12.1%
Chase Manhattan Corporation 34 3,035
First USA, Inc. 90 3,116
J.P. Morgan & Co. Incorporated 20 1,953
Mellon Bank Corporation 9 639
The PMI Group, Inc. 20 1,107
Travelers Group, Inc. 26 1,180
-------
11,030
-------
(Amounts in Thousands) Shares Value
----------------------------------------------------
Health Care -- 12.5%
Aetna Inc. 38 $ 3,040
Bristol-Myers Squibb Company 22 2,393
Eli Lilly and Company 20 1,460
Pfizer Inc. 20 1,657
Schering-Plough Corporation. 44 2,849
-------
11,399
-------
Technology -- 17.6%
Electronic Data Systems Corporation 60 2,595
Intel Corporation 33 4,321
International Business Machines
Corporation 20 3,020
KLA Instruments Corporation 90 3,195(A)
Lucent Technologies Incorporated 35 1,606
Microsoft Corporation 16 1,322(A)
-------
16,059
-------
Telecommunication Services-- 7.8%
AT&T Corp. 40 1,670
Comsat Corporation 115 2,832
GTE Corporation 25 1,137
MCI Communications Corporation 45 1,471
-------
7,110
-------
Total Common Stocks and Equity
Interests
(Identified Cost--$64,641) 88,532
-----------------------------------------------------
5
<PAGE>
Portfolio of Investments -- Continued
Legg Mason Investors Trust, Inc.
American Leading Companies Trust
Principal
(Amounts in Thousands) Amount Value
------------------------------------------------------
Repurchase Agreement -- 4.3%
Prudential Securities, Inc.
7.15% dated 12-31-96,
to be repurchased at
$3,935 on 01-02-97
(Collateral: $4,321
Federal National Mortgage
Association Mortgage-
backed securities, 6.00%
due 07-01-24, value $4,036)
(Identified Cost--$3,935) $3,935 $ 3,935
------------------------------------------------------
Total Investments -- 101.6%
(Identified Cost -- $68,576) 92,467
Other Assets Less Liabilities -- (1.6)% (1,446)
-------
Net assets-- 100.0% $91,021
=======
Net asset value per share:
Primary Class $14.40
=======
Navigator Class $14.33
=======
(A) Non-income producing
6
