THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
EQUITY FUNDS
GROWTH
Navigator Class of Value Trust
Navigator Class of American Leading Companies Trust
GROWTH &INCOME
Navigator Class of Total Return Trust
Navigator Class of Balanced Trust
AGGRESSIVE GROWTH
Navigator Class of Special Investment Trust
Navigator Class of U.S. Small-Capitalization Value Trust
PROSPECTUS
JUNE 1, 1998
REVISED: JANUARY 15, 1999
This wrapper is not part of the prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
Authorized Dealer:
Fairfield Group, Inc.
721 Dresher Road
Horsham, PA 19044
215-657-9400 800-441-3885
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036-1800
Independent Accountants/Auditors:
Coopers &Lybrand L.L.P.
250 W. Pratt Street
Baltimore, Maryland 21201
Ernst &Young LLP
2001 Market Street
Philadelphia, Pennsylvania 19103
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.
LEGG
MASON
FUNDS
HOW TO INVEST(SM)
<PAGE>
NAVIGATOR EQUITY FUNDS
PROSPECTUS
JUNE 1, 1998/REVISED: JANUARY 15, 1999
LEGG MASON VALUE TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON INVESTORS TRUST, INC.:
LEGG MASON AMERICAN LEADING COMPANIES TRUST
LEGG MASON BALANCED TRUST
LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST
Shares of Navigator Value Trust, Navigator Total Return Trust, Navigator
Special Investment Trust, Navigator American Leading Companies, Navigator
Balanced Trust and Navigator U.S. Small-Capitalization Value Trust (collectively
referred to as "Navigator Shares") represent separate classes ("Navigator
Classes") of common stock in Legg Mason Value Trust, Inc. ("Value Trust"), Legg
Mason Total Return Trust, Inc. ("Total Return Trust"), Legg Mason Special
Investment Trust, Inc. ("Special Investment Trust"), Legg Mason American Leading
Companies Trust ("American Leading Companies"), Legg Mason Balanced Trust
("Balanced Trust") and Legg Mason U.S. Small-Capitalization Value Trust
("Small-Cap Value") (each a "Fund"), respectively.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own 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 (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with Institutional Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to any qualified retirement plan of Legg Mason, Inc. or
of any of its affiliates. Navigator Shares may not be purchased by individuals
directly, but Institutional Clients may purchase shares for Customer Accounts
maintained for individuals.
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.
Not every Fund listed in this Prospectus is available for purchase in every
jurisdiction. Please consult your Financial Advisor or Service Provider
concerning the availability of a particular Fund.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated June 1, 1998 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 distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed on the
following page).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Navigator Shares are sold and redeemed without any purchase or redemption
charge imposed by the Funds, although Institutional Clients may charge their
Customer Accounts for services provided in connection with the purchase or
redemption of shares. See "How to Purchase and Redeem Shares." Each Fund will
pay management fees to Legg Mason Fund Adviser, Inc., but Navigator Shares pay
no distribution fees.
VALUE TRUST is a diversified, open-end management investment company seeking
long-term growth of capital. Value Trust invests principally in those equity
securities which its investment adviser, Legg Mason Fund Adviser, Inc. ("LMFA"),
believes are undervalued and therefore offer above-average potential for capital
appreciation.
TOTAL RETURN TRUST is a diversified, open-end management investment company
seeking capital appreciation and current income in order to achieve an
attractive total investment return consistent with reasonable risk. In
attempting to achieve this objective, LMFA selects a diversified portfolio
composed of dividend-paying common stocks and securities convertible into common
stock which, in the opinion of LMFA, offer the potential for long-term growth;
common stocks or securities convertible into common stock which do not pay
current dividends but which offer prospects for capital appreciation and future
income; and debt instruments of various maturities. Total Return Trust may write
covered put and call options. Due to Total Return Trust's investment objective,
however, investors should not expect capital appreciation comparable to funds
devoted solely to growth, or income comparable to funds devoted to maximum
current income.
<PAGE>
SPECIAL INVESTMENT TRUST is a diversified, open-end management investment
company seeking capital appreciation. Special Investment Trust invests
principally in equity securities of companies with market capitalizations of
less than $2.5 billion which, in the opinion of LMFA, have one or more of the
following characteristics: they are not closely followed by, or are out of favor
with, investors generally, and LMFA believes they are undervalued in relation to
their long-term earning power or asset values; unusual developments have
occurred which suggest the possibility that the market value of the securities
will increase; or they are involved in actual or anticipated reorganizations or
restructurings under the Bankruptcy Code. Special Investment Trust also invests
in the securities of companies with larger capitalizations which have one or
more of these charac-teristics. Special Investment Trust may invest up to 35% of
its net assets in debt securities rated below investment grade.
AMERICAN LEADING COMPANIES is a professionally managed portfolio seeking
long-term capital appreciation and current income consistent with prudent
investment risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Investors Trust"), a diversified open-end management
investment company. Under normal market conditions, American Leading Companies
will invest at least 75% of its total assets in a diversified portfolio of
dividend-paying common stocks of Leading Companies that have market
capitalizations of at least $2 billion. LMFA defines a "Leading Company" as a
company that, in the opinion of LMFA, has attained a major market share in one
or more products or services within its industry(ies), and possesses the
financial strength and management talent to maintain or increase market share
and profit in the future. Such companies are typically well known as leaders in
their respective industries; most are found in the top half of the Standard &
Poor's Composite Index of 500 Stocks ("S&P 500").
BALANCED TRUST is a professionally managed portfolio seeking long-term
capital appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. Balanced Trust is a separate
series of the Investors Trust. Under normal conditions, Balanced Trust will
invest no more than 75% of its assets in equity securities. The term "equity
securities" includes, without limitation, common stocks and convertible
securities of domestic issuers, securities of closed-end investment companies
and U.S. dollar-denominated securities of foreign issuers, including American
Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs"). Balanced
Trust will invest at least 25% of its portfolio in fixed income securities.
SMALL-CAP VALUE, a separate series of Investors Trust, is a professionally
managed portfolio seeking long-term capital appreciation. Small-Cap Value
invests principally in equity securities of companies with market
capitalizations ranging between $10 million and the median New York Stock
Exchange ("NYSE") market capitalization. Brandywine Asset Management, Inc.
("Brandywine"), as investment adviser, favors securities it believes to be
undervalued. Brandywine believes that such small company stocks, with the lowest
prices relative to current earnings, provide superior returns over longer
periods of time. Under normal circumstances, Small-Cap Value does not intend to
invest in debt securities (except for temporary cash management), foreign
securities, futures or options.
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objectives and Policies 6
How To Purchase and Redeem Shares 16
How Shareholder Accounts are
Maintained 18
How Net Asset Value is Determined 18
Dividends and Other Distributions 18
Tax Treatment of Dividends and
Other Distributions 19
Shareholder Services 20
The Funds' Management and Investment
Advisers 20
The Funds' Distributor 22
Description of each Corporation
and its Shares 23
Legg Mason Wood Walker, Inc.
100 Light Street, P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000/800-822-5544
2
<PAGE>
EXPENSES
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. The expenses and fees set
forth below are based on average net assets and annual Fund operating expenses
related to Navigator Shares of Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies for the year ended March 31,
1998. For Balanced Trust and Small-Cap Value, other expenses are based on
estimates for the initial period of operations of each Fund's Navigator Shares.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN SMALL-
VALUE RETURN INVESTMENT LEADING BALANCED CAP
TRUST TRUST TRUST COMPANIES TRUST VALUE
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------
Management
fees 0.69% 0.75% 0.74% 0.71%(A) 0.46%(A) 0.55%(A)
12b-1 fees None None None None None None
Other
expenses 0.04% 0.08% 0.06% 0.22% 0.64% 0.45%
------------------------------------------------------------
Total
operating
expenses 0.73% 0.83% 0.80% 0.93%(A) 1.10%(A) 1.00%(A)
------------------------------------------------------------
</TABLE>
- ---------------
A After fee waivers. LMFA has voluntarily agreed to waive the management fee to
the extent necessary to limit total operating expenses relating to Navigator
Shares (exclusive of taxes, brokerage commissions, interest and extraordinary
expenses) as follows: for Total Return Trust and American Leading Companies,
0.95% of each Fund's average daily net assets attributable to Navigator Shares
indefinitely; for Balanced Trust, 1.10% of average daily net assets
attributable to Navigator Shares until July 31, 1999; and for Small-Cap Value,
1.00% of average daily net assets attributable to Navigator Shares until July
31, 1999. In the absence of such waivers, the management fee, other expenses
and total operating expenses relating to Navigator Shares would have been as
follows: for American Leading Companies, 0.75%, 0.22% and 0.97% of average net
assets; for Balanced Trust, 0.75%, 0.64% and 1.39% of average net assets; and
for Small-Cap Value, 0.85%, 0.45% and 1.30% of average net assets.
For further information concerning the Funds' expenses, please see "The
Funds' Management and Investment Advisers," page 20.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming (1) a
5% annual rate of return and (2) redemption at the end of each time period. The
Funds charge no redemption fees of any kind.
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN SMALL-
VALUE RETURN INVESTMENT LEADING BALANCED CAP
TRUST TRUST TRUST COMPANIES TRUST VALUE
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------
1 Year $ 7 $ 8 $ 8 $ 9 $ 11 $10
3 Years $ 23 $ 26 $ 26 $ 30 $ 35 $32
5 Years $ 41 $ 46 $ 44 $ 51 $ 61 N/A
10 Years $ 91 $103 $ 99 $ 114 $134 N/A
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same over the time periods shown. The above table and the
assumption in the example of a 5% annual return are required by regulations of
the SEC applicable to all mutual funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A
PREDICTION OF, AND DOES NOT REPRESENT THE PROJECTED OR ACTUAL PERFORMANCE OF,
NAVIGATOR SHARES OF THE FUNDS. THE ABOVE TABLE AND EXAMPLE SHOULD NOT BE
CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The actual expenses attributable to Navigator
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 waives
its fees and the extent to which Navigator Shares incur variable expenses, such
as transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been audited
for Value Trust, Total Return Trust and Special Investment Trust by Coopers
& Lybrand L.L.P., independent accountants, and for American Leading
Companies by Ernst & Young LLP, independent auditors. Each Fund's financial
statements for the year ended March 31, 1998 and the report of Coopers &
Lybrand L.L.P. or Ernst & Young LLP thereon are included in their combined
annual reports and are incorporated by reference in the Statement of
Additional Information. The combined annual reports are available to
shareholders without charge by calling your Legg Mason or affiliated
financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544. As of the date of this Prospectus, Small-Cap Value has not
commenced operations and has not issued any annual reports. As of the same
date, the Navigator Class of Balanced Trust has not commenced operations.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Period (Loss) Investments Operations Income Investments Distributions
- ---------------------------------------------------------------------------------------------------------------------------
VALUE TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 34.30 $.35 $18.55 $18.90 $ (.31) $ (2.32) $ (2.63)
1997 27.08 41 8.75 9.16 (.41) (1.53) (1.94)
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64)
1995(B) 18.76 .12 1.40 1.52 (.01) -- (.01)
SPECIAL INVESTMENT TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 27.04 $ -- $11.58 $11.58 $ -- $ (1.50) $ (1.50)
1997 25.26 .02 3.17 3.19 -- (1.41) (1.41)
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64)
1995(B) 19.11 .07 .85 .92 -- -- --
TOTAL RETURN TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 19.53 $.66 $ 7.29 $ 7.95 $ (.58) $ (2.03) $ (2.61)
1997 16.52 .65 3.48 4.13 (.56) (.56) (1.12)
1996 12.83 .62 3.72 4.34 (.65) -- (.65)
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23)
AMERICAN LEADING COMPANIES
-- Navigator Class
1998 $ 14.71 $.10(G) $ 4.99 $ 5.09 $ -- $ (1.85) $ (1.85)
1997(F) 13.30 .07(G) 1.94 2.01 (.12) (.48) (.60)
Ratios/Supplemental Data
----------------------------------------------------------------------------
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Period Return Net Assets Net Assets Rate Paid(A) (in thousands)
- ----------------------------
VALUE TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 50.57 56.90% .73% .9% 12.9% $.0538 $179,664
1997 34.30 34.97% .77% 1.4% 10.5% .0557 83,752
1996 27.08 43.53% .82% 1.8% 19.6% -- 52,332
1995(B) 20.27 8.11%(C) .82%(D) 1.8%(D) 20.1% -- 36,519
SPECIAL INVESTMENT TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 37.12 44.42% .80% --% 29.8% $.0481 $ 63,299
1997 27.04 12.81% .85% .1% 29.2% .0514 41,415
1996 25.26 29.85% .88% 1.0% 35.6% -- 35,731
1995(B) 20.03 4.81%(C) .90%(D) 1.0%(D) 27.5% -- 26,123
TOTAL RETURN TRUST
-- Navigator Class
Years Ended Mar. 31,
1998 $ 24.87 43.94% .83% 3.1% 20.6% $.0585 $ 17,792
1997 19.53 25.67% .86% 3.7% 38.4% .0528 10,048
1996 16.52 34.67% .94% 4.2% 34.7% -- 7,058
1995(B) 12.83 2.28%(C) .86%(D,E) 3.6%(D,E) 61.9% -- 4,823
AMERICAN LEADING COMPANIES
-- Navigator Class
1998 $ 17.95 36.68% .93%(G) .74%(G) 51.4% $.0620 $ 82
1997(F) 14.71 15.16%(C) .86%(D,G) .98%(D,G) 55.7% .0640 55
</TABLE>
--------------------
A PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE AVERAGE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY THE FUNDS.
B FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO MARCH 31, 1995.
C NOT ANNUALIZED
D ANNUALIZED
E NET OF FEES WAIVED BY LMFA IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF
.95% FROM INCEPTION TO MARCH 31, 1998.
F FOR THE PERIOD OCTOBER 4, 1996 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES)
TO MARCH 31, 1997.
G NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 0.95% OF
AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY LMFA, THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD
OCTOBER 4, 1996 TO MARCH 31, 1997 AND THE YEAR ENDED MARCH 31, 1998 WOULD
HAVE BEEN 0.97% AND 0.98%, RESPECTIVELY.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time the Funds may quote the TOTAL RETURN of a 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 of an
investment in the fund, including changes in share price and assuming
reinvestment of dividends and other distributions. 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-to-year
results, tend to smooth out variations in a fund's returns. For comparison
purposes, each Fund's total return is compared with total returns of the Value
Line Geometric Average, an index of approximately 1,700 stocks ("Value Line
Index"), and the S&P 500, two unmanaged indexes of widely held common stocks. No
adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in each Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns of each Fund would have been lower if the
Manager and/or Legg Mason had not waived certain fees for the fiscal years ended
March 31, as follows: 1989 through 1998 for Value Trust; 1986 through 1995 for
Total Return; 1986 through 1998 for Special Investment; 1994 through 1998 for
American Leading Companies and 1997 through 1998 for Balanced Trust.
Performance figures reflect past performance only and are not intended to
and do not indicate future performance. 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 financial
advisor or Legg Mason's Funds Marketing Department at 800-822-5544.
Although U.S. equity funds have grown significantly in recent years, the
average long-term growth of general equity funds as reported by Lipper
Analytical Services, Inc. over the last 25 years has been 13.2%, and some years
have shown a net decline in value.
Total returns as of March 31, 1998 are shown below.
<TABLE>
<CAPTION>
TOTAL RETURN SPECIAL
VALUE TRUST TRUST INVESTMENT TRUST
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year +55.34% +42.44% +42.88%
Five Years +241.95% +149.45% +132.70%
Ten Years +480.95% +340.24% +407.76%
Life of Class -- Value Trust(A) +1,917.61%
Life of Class -- Total Return Trust(B) +369.95%
Life of Class -- Special Investment Trust(C) +469.69%
Life of Class -- American Leading Companies(D)
Life of Class -- Balanced Trust(E)
Navigator Class:
One Year +56.90% +43.94% +44.42%
Life of Class(F) +228.59% +149.17% +121.73%
Life of Class(G) -- -- --
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C>
Primary Class:
One Year +55.34% +42.44% +42.88%
Five Years +27.88% +20.06% +18.40%
Ten Years +19.24% +15.98% +17.64%
Life of Class -- Value Trust(A) +20.72%
Life of Class -- Total Return Trust(B) +13.33%
Life of Class -- Special Investment Trust(C) +15.25%
Life of Class -- American Leading Companies(D)
Life of Class -- Balanced Trust(E)
Navigator Class:
One Year +56.90% +43.94% +44.42%
Life of Class(F) +42.87% +31.50% +26.98%
Life of Class(G) -- -- --
AMERICAN
LEADING BALANCED VALUE USE S&P STOCK
COMPANIES TRUST INDEX INDEX
------------------------------------------------
CUMULATIVE TOTAL RETURN
Primary Class:
One Year +35.18% +27.80% +37.76% +48.00 %
Five Years N/A N/A +102.11% +174.73 %
Ten Years N/A N/A +188.76% +466.73 %
Life of Class -- Value Trust(A) +521.14% +1,507.01 %
Life of Class -- Total Return Trust(B) +239.41% +686.53 %
Life of Class -- Special Investment Trust(C) +228.64% +642.49 %
Life of Class -- American Leading Companies(D) +111.00% +98.78% +166.32 %
Life of Class -- Balanced Trust(E) +30.38% +33.66% +60.18 %
Navigator Class:
One Year +36.68% -- +37.76% +48.00 %
Life of Class(F) +57.40% -- +82.11% +160.89 %
Life of Class(G) -- -- +33.66% +60.22 %
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year +35.18% +27.80% +37.76% +48.00 %
Five Years N/A N/A +15.11% +22.40 %
Ten Years N/A N/A +11.19% +18.94 %
Life of Class -- Value Trust(A) +12.12% +19.00 %
Life of Class -- Total Return Trust(B) +10.39% +18.16 %
Life of Class -- Special Investment Trust(C) +10.20% +17.78 %
Life of Class -- American Leading Companies(D) +17.69% +16.49% +24.32 %
Life of Class -- Balanced Trust(E) +19.36% +22.73% +39.45 %
Navigator Class:
One Year +36.68% -- +37.76% +48.00 %
Life of Class(F) +35.50% -- +22.62% +32.77 %
Life of Class(G) -- -- +22.73% +39.48 %
</TABLE>
--------------------
A INCEPTION OF VALUE TRUST -- APRIL 16, 1982.
B INCEPTION OF TOTAL RETURN TRUST -- NOVEMBER 21, 1985.
C INCEPTION OF SPECIAL INVESTMENT TRUST -- DECEMBER 30, 1985.
D INCEPTION OF AMERICAN LEADING COMPANIES -- SEPTEMBER 1, 1993.
E INCEPTION OF BALANCED TRUST -- OCTOBER 1, 1996.
F FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES
OF VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST) TO MARCH
31, 1998.
G FOR THE PERIOD OCTOBER 4, 1996 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES
OF AMERICAN LEADING COMPANIES) TO MARCH 31, 1998.
The S&P 500 and Value Line Index figures assume reinvestment of
dividends paid by their component stocks. Unlike the figures presented for
the Funds, the S&P 500 and Value Line Index figures do not include
brokerage commissions and other costs of investing.
5
<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 Fund's Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. LMFA believes
that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
LMFA believes that the securities of sound, well-managed companies
that may be temporarily out of favor due to earnings declines or other
adverse developments are likely to provide a greater total return than
securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. LMFA
believes, however, that purchasing securities depressed by temporary
factors will provide investment returns superior to those obtained when
premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
LMFA believes the return on certain debt securities may equal or exceed
the return on equity securities. The Fund may invest in debt securities of
both foreign and domestic issuers of any maturity without regard to
rating, and may invest its assets in such securities without regard to a
percentage limit. LMFA currently anticipates that under normal market
conditions, the Fund will invest no more than 25% of its total assets in
long-term debt securities. Up to 10% of its total assets may be invested
in debt securities not rated investment grade, i.e., not rated at least
BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's") or, if unrated by those entities, deemed by LMFA to be of
comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. LMFA attempts to meet its objective by
investing in dividend-paying common stocks, debt securities and securities
convertible into common stocks which, in the opinion of LMFA, offer
potential for attractive total return. The Fund also invests in common
stocks and securities convertible into common stocks which do not pay
current dividends but which, in LMFA's opinion, offer prospects for
capital appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where LMFA believes
the return on certain debt securities may equal or exceed the return on
equity securities. The Fund may invest in debt securities of any maturity
of both foreign and domestic issuers without regard to rating and may
invest its assets in such securities without regard to a percentage limit.
LMFA currently anticipates that under normal market conditions, the Fund
will invest no more than 50% of its total assets in intermediate-term and
long-term debt securities, and no more than 5% of its total assets in debt
securities not rated investment grade, i.e., not rated at least BBB by S&P
or Baa by Moody's or, if unrated by those entities, deemed by LMFA to be
of comparable quality.
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SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities, and securities convertible into equity securities, of
companies with market capitalizations of less than $2.5 billion which LMFA
believes have one or more of the following characteristics:
1. The companies generally are not closely followed by, or are out of
favor with, investors, and appear to be undervalued in relation to their
long-term earning power or asset values. A security may be undervalued
because of many factors, including market decline, poor economic
conditions, tax-loss selling, or actual or anticipated developments
affecting the issuer.
2. The companies are experiencing unusual and possibly non-repetitive
developments which, in the opinion of LMFA, may cause the market values of
the securities to increase. Such developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. The companies are involved in actual or anticipated reorganizations
or restructurings under the Bankruptcy Code. No more than 20% of the
Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, LMFA believes that such investments also may offer
greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, LMFA may invest in larger, more
highly-capitalized companies when circumstances warrant such investments.
In addition, companies whose market capitalizations grow to exceed $2.5
billion after investment by the Fund may continue to be held by the Fund.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
net assets may be invested in debt securities not rated at least BBB by
S&P, or Baa by Moody's, and securities unrated by those entities, deemed
by LMFA to be of comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be in issuers whose long-term debt is rated in one of the
four highest rating categories by S&P or Moody's or, if unrated by S&P or
Moody's, deemed by LMFA to be of comparable quality.
AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMFA
defines a "Leading Company" as a company that, in the opinion of LMFA, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMFA's goal is to invest in companies having what LMFA believes is a
reasonable price/earnings ratio, and it
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will favor those companies with well established histories of dividends
and dividend growth rates. The Fund may also invest in companies having
capitalizations above or below $2 billion which LMFA believes show strong
potential for future market leadership, and in companies which LMFA
believes, because of corporate restructuring or other changes, are
undervalued based on their potential for future growth. There is always a
risk that LMFA will not properly assess the potential for an issuer's
future growth, or that an issuer will not realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. The Fund's portfolio turnover rate is not
expected to exceed 100%. Under normal circumstances, the Fund expects to
own a minimum of 35 different securities. The Fund may also invest in
common stocks and securities convertible into common stocks which do not
pay current dividends but which offer prospects for capital appreciation
and future income. The Fund may invest in when-issued securities, which
may involve additional risks.
During periods when LMFA believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMFA to be of comparable quality.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities not rated at least Ba by Moody's or BB by S&P or, if unrated by
those entities, deemed by LMFA to be of comparable quality.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. The Fund will invest in
a combination of equity, debt and money market securities in attempting to
achieve its objective. Under normal conditions, the Fund will invest no
more than 75% of its assets in equity securities. Bartlett & Co.
("Bartlett"), as investment adviser, will emphasize investments in
dividend-paying equity securities that, in the opinion of Bartlett, offer
the potential for long-term growth, and in common stocks or securities
convertible into common stock that do not pay current dividends but offer
prospects for capital appreciation and future income.
The Fund will invest at least 25% of its portfolio in fixed income
securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations and mortgage-related securities;
certificates of deposit; Treasury bills, notes, bonds and other
obligations of the U.S. Government, its agencies and instrumentalities;
commercial paper and other money market instruments rated not less than
A-1, P-1 or F-1 by Moody's, S&P or Fitch Investors Services ("Fitch"),
respectively; and repurchase agreements. No more than 5% of the Fund's
total assets may be invested in fixed income or convertible securities not
rated at least BBB or Baa at the time of purchase, or comparable unrated
securities. If an investment grade security purchased by the Fund
subsequently loses its investment grade rating, Bartlett will determine
whether to retain that security in the Fund's portfolio. The Fund may
invest in securities of any maturity, but, under normal circumstances,
expects to maintain its portfolio of fixed income securities so as to have
an average dollar-weighted maturity of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity and
debt securities. This approach attempts to "balance" the potential for
growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common and
preferred stocks and the remaining 40% in various fixed income securities.
These percentages may vary in attempting to increase returns or reduce
risk.
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The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and may purchase exchange-traded futures contracts
on stock indices and options thereon. The Fund may use derivatives, such
as options and futures, in its investment activities. No more than 15% of
the Fund's net assets may be invested in illiquid securities. The Fund may
also engage in reverse repurchase agreements.
For the year ended March 31, 1998, the portfolio turnover rate for the
equity portion of the Fund's portfolio was 18.8% and the portfolio
turnover rate for the fixed income portion was 58.1%. The Fund's total
portfolio turnover rate for the year ended March 31, 1998 was 34.5%.
SMALL-CAP VALUE'S investment objective is long-term capital
appreciation. Under normal circumstances, the Fund will invest at least
65% of its total assets in equity securities of small-capitalization
companies, defined as those whose market capitalizations at the time of
investment range between $10 million and the median NYSE market
capitalization. Brandywine selects securities from the universe of stocks
generally traded on the major stock exchanges and in the over-the-counter
market. For purposes of the Fund's investment policies, securities of
small-capitalization companies purchased by the Fund may still be
considered small-capitalization securities, even if the company's market
cap later exceeds the median market cap of the NYSE. The Fund will invest
at least 65% of its total assets in domestic securities.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
FOR EACH FUND:
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in repurchase agreements and
money market instruments, including high-quality short-term debt
securities. A repurchase agreement is an agreement under which either U.S.
government obligations or 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 each Fund by a custodian bank 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. Each Fund bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose
of the collateral securities, which may decline in value in the interim.
The Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust and Total Return Trust) or 15% (for American Leading Companies,
Balanced Trust, Special Investment Trust and Small-Cap Value) of its net
assets would be invested in such agreements and other illiquid
investments.
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its net assets.
For further information concerning securities lending, see the Statement
of Additional Information.
SMALL AND MID-SIZED COMPANY STOCKS
The advisers for Special Investment Trust and Small-Cap Value believe
that the comparative lack of attention by investment analysts and
institutional investors to small and mid-sized companies may result in
opportunities to purchase the securities of such companies at attractive
prices compared to historical or market price-earnings ratios, book value,
return on equity or long-term prospects. Each Fund's policy of investing
primarily in the securities of smaller companies differs from the
investment approach of many other mutual funds, and investment in such
securities involves special risks. Among other things, the prices of
securities of small and mid-sized companies generally are more volatile
than those of larger companies; the securities of smaller companies
generally are less liquid; and smaller companies generally are more likely
to be adversely affected by poor economic or market conditions.
It is anticipated that some of the portfolio securities of either
Special Investment Trust or Small-Cap Value may not be widely traded, and
that a Fund's position in such securities may be substantial in relation
to the market for such securities. Accordingly, it may be difficult for a
Fund to dispose of such securities at prevailing market prices in order to
meet redemptions. However, as a non-fundamental policy, Special Investment
Trust and Small-Cap Value will not invest more than 15% of their
respective net assets in illiquid securities.
Investments in securities of companies with small market
capitalizations are generally considered to offer greater opportunity for
appreciation
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but also may involve greater risks than customarily are associated with
more established companies. The securities of smaller companies may be
subject to more abrupt fluctuations in market price than larger, more
established companies. Small companies may have limited product lines,
markets or financial resources, or they may be dependent upon a limited
management group. In addition to exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks, I.E., small company stocks may decline in price as the prices of
large company stocks rise or vice versa.
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. 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.
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. 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.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, its adviser reviews and
monitors the creditworthiness of each issuer and issue. The adviser also
analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA")); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Bank
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Fannie Mae securities); and (4) solely the
creditworthiness of the issuer (e.g., Freddie Mac securities). Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees
the market value of the securities they issue. Therefore, the market value
of such securities can be expected to fluctuate in response to changes in
interest rates.
STRIPPED SECURITIES
Stripped securities are created by separating bonds into their
principal and interest components and selling each piece separately
(commonly referred to as IOs and POs). Stripped securities are more
volatile than other fixed income securities in their response to changes
in market interest rates. The value of some stripped securities moves in
the
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same direction as interest rates, further increasing their volatility.
ZERO COUPON BONDS
Zero coupon bonds do not provide for cash interest payments but
instead are issued at a significant discount from face value. Each year, a
holder of such bonds must accrue a portion of the discount as income.
Because each Fund is required to pay out substantially all of its income
each year, including income accrued on zero coupon bonds, a Fund may have
to sell other holdings to raise cash necessary to make the payout. Because
issuers of zero coupon bonds do not make periodic interest payments, their
prices can be very volatile when market interest rates change.
INDEXED SECURITIES
Each Fund may invest up to 5% of its net assets in securities whose
prices are indexed to the prices of securities indexes, currencies or
other financial statistics. Such investments must be consistent with each
Fund's investment objective and policies.
CLOSED-END INVESTMENT COMPANIES
Each Fund may invest in the securities of closed-end investment
companies. 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. 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.
FOREIGN SECURITIES
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. These risks are intensified when investing in countries
with developing economies and securities markets also known as "emerging
markets." Moreover, securities of many foreign issuers may be less liquid
and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the
possibility of expropriation, confiscatory taxation, withholding taxes and
limitations on the use or removal of funds or other assets.
The Funds may also invest in ADRs, which are securities issued by
banks evidencing their ownership of specific foreign securities. ADRs may
be sponsored or unsponsored; issuers of securities underlying unsponsored
ADRs are not contractually obligated to disclose material information in
the U.S. Accordingly, there may be less information available about such
issuers than there is with respect to domestic companies and issuers of
securities underlying sponsored ADRs. Although ADRs are denominated in
U.S. dollars, the underlying security often is not; thus, the value of the
ADR may be subject to exchange controls and variations in the exchange
rate. The Funds may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank
evidencing its ownership of the underlying foreign securities.
Although not a fundamental policy subject to shareholder vote, the
advisers currently anticipate that Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies will each invest
no more than 25% of its total assets in foreign securities. Bartlett
currently anticipates that Balanced Trust will not invest more than 10% of
its total assets in foreign securities, either directly or through ADRs or
GDRs. Small-Cap Value does not currently intend to invest in foreign
securities.
ILLIQUID SECURITIES
Value Trust and Total Return Trust may each invest up to 10% of its
net assets in illiquid securities. American Leading Companies, Balanced
Trust, Special Investment Trust and Small-Cap Value may each invest up to
15% of its net assets in illiquid securities. Illiquid securities are
securities that cannot be expected to be sold within seven days at
approximately the price at which they are valued by the Fund. Due to the
absence of an active trading market, a Fund may have difficulty valuing or
disposing of illiquid securities promptly. Securities whose sale is
legally restricted are often considered illiquid. Foreign securities that
are freely tradable in their country of origin or in their principal
market are not considered restricted securities even if they are not
registered for sale in the U.S.
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WHEN-ISSUED SECURITIES
Each Fund may enter into commitments to purchase securities on a
when-issued basis. Such securities are often the most efficiently priced
and have the best liquidity in the bond market. When a Fund purchases
securities on a when-issued basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at
the time of receipt. However, a Fund does not have to pay for the
obligations until they are delivered to it. This is normally 7 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 a Fund. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations in an amount at least equal to the payment that will be
due. A Fund may sell the securities subject to a when-issued purchase,
which may result in a gain or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
Each of these Funds can invest in futures and options transactions,
including puts and calls. Because such investments "derive" their value
from the value of the underlying security, index, or interest rate on
which they are based, they are sometimes referred to as "derivative"
securities. Such investments involve risks that are different from those
presented by investing directly in the securities themselves. While
utilization of options, futures contracts and similar instruments may be
advantageous to a Fund, if its adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance
will be worse than if the Fund did not make such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. A Fund
may sell an interest rate futures contract to offset price changes of debt
securities it already owns. This strategy is intended to minimize any
price changes in the debt securities a Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be limited to the amount of
the premium it received. If stock prices remain the same over time, it is
likely that the Fund will also profit, because it should be able to close
out the option at a lower price. If stock prices fall, the Fund would
expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying stock, with results similar to
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<PAGE>
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, when writing call
options the Fund would give up some ability to participate in security
price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the advisers in managing the Funds'
portfolios. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate hedged positions. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested. Small-Cap Value does not currently
intend to invest in futures and options.
AMERICAN LEADING COMPANIES:
Although American Leading Companies may not invest in futures
transactions, it may to a limited extent sell covered call options on any
security in which it is permitted to invest for the purpose of enhancing
income. American Leading Companies may not invest in any other form of
option transaction.
A call option is "covered" if, at all times the option is outstanding,
the Fund holds the underlying security or a right to obtain that security
at no additional cost. The risks of selling covered call options are
described above.
As a non-fundamental policy, the Fund will not sell a covered call
option if, as a result, the value of the portfolio securities underlying
all outstanding covered call options would exceed 25% of the value of the
equity securities held by the Fund.
FOR EACH FUND:
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract is an obligation to purchase or sell a
specific amount of 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. By entering into a
foreign currency contract, a Fund "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration
of the contract. A Fund may enter into these contracts for the purpose of
hedging against risk arising from its investment in securities denominated
in foreign currencies or when it anticipates investing in such securities.
Forward currency contracts involve certain costs and risks, including the
risk that currency movements will not be accurately predicted, causing a
Fund to sustain losses on these contracts.
THE FOLLOWING DISCUSSION OF INVESTMENTS AND RISKS APPLIES ONLY TO BALANCED
TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general
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<PAGE>
operating expenses and the making of loans to other public institutions
and facilities. In addition, certain types of industrial development bonds
("IDBs") and private activity bonds ("PABs") are issued by or on behalf of
public authorities to finance various privately operated facilities,
including certain pollution control facilities, convention or trade show
facilities, and airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
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. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-related
security will influence the yield of that security. Increased prepayment
of principal may limit the Fund's ability to realize the appreciation in
the value of such securities that would otherwise accompany declining
interest rates. An increase in mortgage prepayments could cause the Fund
to incur a loss on a mortgage-related security that was purchased at a
premium. 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. In
determining the average maturity of the fixed income portion of the Fund,
Bartlett must apply certain assumptions and projections about the maturity
and prepayment of mortgage-related securities; actual prepayment rates may
differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-
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<PAGE>
through securities are, however, subject to the same market risk as
comparable debt securities. Therefore, the effective maturity and market
value of the Fund's GNMA securities can be expected to fluctuate in
response to changes in interest rate levels.
Freddie Mac, a corporate instrumentality of the U.S. Government,
issues mortgage participation certificates ("PCs") which represent
interests in mortgages from Freddie Mac's national portfolio. The mortgage
loans in Freddie Mac's portfolio are not government-backed; rather, the
loans are either uninsured with loan-to-value ratios of 80% or less, or
privately insured if the loan-to-value ratio exceeds 80%. Freddie Mac, not
the U.S. Government, guarantees the timely payment of interest and
ultimate collection of principal on Freddie Mac PCs.
Fannie Mae is a government-sponsored corporation owned entirely by
private stockholders that purchases residential mortgages from a list of
approved seller/servicers, including savings and loan associations,
savings banks, commercial banks, credit unions and mortgage bankers. Pass-
through certificates issued by Fannie Mae ("Fannie Mae certificates") are
guaranteed as to timely payment of principal and interest by Fannie Mae,
not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
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 Freddie
Mac, Fannie Mae, or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal payments and any prepayments from the collateral pool are paid
first to the "Class 1" bondholders. The principal payments are such that
the Class 1 obligations are scheduled to be completely repaid no later
than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds
until that class of bonds has been fully repaid. 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, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER-RATED DEBT SECURITIES
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher
current yield than that provided by higher grade issues, but also involve
higher risks. Debt securities rated C by Moody's and S&P are bonds on
which no interest is being paid and which can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
However, debt securities, regardless of their ratings, generally have a
higher priority in the issuer's capital structure than do equity
securities.
Lower-rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
Lower-rated debt securities are also sometimes referred to as "junk
bonds."
The market for lower-rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower-rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on
15
<PAGE>
lower-rated debt securities rose dramatically, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur.
The market for lower-rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower-rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers. If
securities are rated investment grade by one rating organization and below
investment grade by the other, the adviser may rely on the rating that it
believes is more accurate. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed
by the adviser to determine, to the extent possible, that the planned
investment is sound.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Fund policies, unless described as fundamental, can be changed
by action of its respective Board of Directors.
The fundamental restrictions applicable to each Fund include a
prohibition on investing 25% or more of its 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).
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 721 Dresher Road,
Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason.
Customers of certain Institutional Clients that maintain omnibus
accounts with the Funds' transfer agent may obtain shares through those
Institutions. Such Institutional Clients may receive payments from the
Funds' distributor for account servicing, and may receive payments from
their customers for other services performed. Investors otherwise eligible
to purchase Navigator Shares can purchase them from Legg Mason without
receiving or paying for such other services.
Institutional Clients purchasing or holding Navigator Shares on behalf
of their Customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to a Fund on a timely basis.
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after the
close of the Exchange or on days the Exchange is closed will be executed
at the net asset value determined as of the close of the Exchange on the
next day the
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<PAGE>
Exchange is open. See "How Net Asset Value is Determined" on page 18.
Certain institutions that have agreements with Legg Mason or the Funds
may be authorized to accept purchase and redemption orders on their
behalf. In that case, a Fund will be deemed to have received your purchase
or redemption order when the authorized institution accepts the order, and
your order will receive the next price calculated after the order has been
accepted by the institution. You should consult with your institution to
determine the time by which it must receive your order for you to purchase
or redeem Fund shares at that day's price. It is the institution's
responsibility to transmit your order to the Fund in a timely fashion.
Each Fund reserves the right to reject any order for its shares or to
suspend the offering of shares for a period of time, or to waive any
minimum investment requirements. In addition to Institutional Clients
purchasing shares directly from Fairfield, Navigator Shares may be
purchased through procedures established by Fairfield in connection with
requirements of Customer Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in a Fund. Information concerning
these services and any applicable charges will be provided by the
Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
Redemption of Shares
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
financial advisor at 1-800-822-5544. Callers should have available the
number of shares (or dollar amount) to be redeemed and their account
number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange. See above
for information on pricing of redemptions made through certain
institutions having agreements with Legg Mason or the Funds.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. The proceeds of redemption or
repurchase may be more or less than the original cost. If the shares to be
redeemed or repurchased were paid for by check (including certified or
cashier's checks) within 10 business days of the redemption or repurchase
request, the proceeds may not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
the adviser, that 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.)
Each Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable
procedures to identify the caller. Each Fund may request identifying
information from callers or employ identification numbers. Each Fund may
be liable for losses due to unauthorized or fraudulent
17
<PAGE>
instructions if it does not follow reasonable procedures. Telephone
redemption privileges are available automatically to all shareholders
unless certificates have been issued. Shareholders who do not wish to have
telephone redemption privileges should call their financial advisor for
further instructions.
Because of the relatively high cost of maintaining small accounts, a
Fund may elect to close any account with a current value of less than $500
by redeeming all of the shares in the account and mailing the proceeds to
the investor. However, the Funds will not redeem accounts that fall below
$500 solely as a result of a reduction in net asset value per share. If a
Fund elects to redeem the shares in an account, the investor will be
notified that the account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having the
account closed. Each Institutional Client may establish its own minimum
account size for investors using its services.
HOW SHAREHOLDER ACCOUNTS ARE MAINTAINED
A shareholder account is established automatically for each investor.
Any shares the investor purchases or receives as a dividend or other
distribution will be credited directly to the account at the time of
purchase or receipt. Shares may not be held in, or transferred to, an
account with any brokerage firm that does not have an agreement with Legg
Mason or Fairfield. The Funds do not issue share certificates.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Securities owned by each Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by each Fund's Board of Directors.
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.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Navigator Shares out of its
investment company taxable income (which generally consists of net
investment income, any net short-term capital gain and net gains from
certain foreign currency transactions) attributable to those shares. Value
Trust, Total Return Trust and Balanced Trust declare and pay dividends
from net investment income quarterly; they pay dividends from any net
short-term capital gains and net gains from foreign currency transactions
annually. Special Investment Trust, American Leading Companies and
Small-Cap Value declare and pay dividends from investment company taxable
income following the end of each taxable year. Each Fund also distributes
substantially all of its net capital gain (the excess of net long-term
capital gain over net short-term capital loss) after the end of the
taxable year in which the gain is realized. A second distribution of net
capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Navigator Shares held by qualified
retirement plans generally receive dividends and other distributions in
additional shares. Other shareholders may elect to:
1. Receive both dividends and other distributions in Navigator Shares
of the distributing Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically
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<PAGE>
be converted to having all dividends and other distributions reinvested in
additional Navigator Shares. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
In certain cases, shareholders may reinvest dividends and other
distributions in shares of another Navigator fund. Please contact a
financial advisor for additional information about this option.
If no election is made, both dividends and other distributions are
credited to the Institutional Client's account in Navigator Shares of the
distributing Fund at the net asset value of the shares determined as of
the close of the Exchange on the reinvestment date. Shares received
pursuant to any of the first three (reinvestment) elections above also are
credited to your account at that net asset value. If an investor elects to
receive dividends and/or other distributions in cash, a check will be
sent. Investors purchasing through Fairfield may elect at any time to
change the distribution option by notifying the applicable Fund in writing
at: [insert complete Fund name], c/o Fairfield Group, Inc., 721 Dresher
Road, Horsham, Pennsylvania 19044. Those purchasing through Legg Mason
should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Code"), so that it will be relieved of federal income tax on that part
of its investment company taxable income and net capital gain that it
distributes to its shareholders.
Dividends from a Fund's investment company taxable income (whether
paid in cash or reinvested in Navigator Shares) are taxable to their
shareholders (other than qualified retirement plans and other tax-exempt
investors) as ordinary income to the extent of that Fund's earnings and
profits. Distributions of a Fund's net capital gain (whether paid in cash
or reinvested in Navigator Shares), when designated as such, are taxable
to those shareholders as long-term capital gain, regardless of how long
they have held their Fund shares. Under the Taxpayer Relief Act of 1997,
different maximum tax rates apply to a noncorporate taxpayer's net capital
gain depending on the holding period of the security and the taxpayer's
marginal rate of federal income tax -- generally, 28% for gain recognized
on capital assets held for more than one year but not more than 18 months
and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain
recognized on capital assets held for more than 18 months. In the case of
a regulated investment company such as a Fund, the relevant holding period
is determined by how long the Fund has held the portfolio security on
which the gain was earned, not by how long you have held your Fund shares.
Each Fund sends each shareholder 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 that year. The notice
will tell you what portion of the capital gain falls into each of the
different tax rate categories mentioned above.
A redemption of Navigator 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 Navigator Shares of any Fund for shares of any
other Navigator 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 at a loss other shares
of the same Fund (regardless of class), all or part of that loss will not
be deductible and instead will increase the basis of the newly purchased
shares.
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 Navigator 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.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, an investor may also be subject to state, local or
foreign taxes on distributions from the Funds, depending on the laws of
its home state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations
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<PAGE>
is not subject to state and local income taxes in most jurisdictions; each
Fund's annual notice to shareholders regarding the amount of dividends
identifies this portion. 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
Every shareholder of record will receive a confirmation of each new
share transaction with a Fund. In addition, Legg Mason clients will
receive a monthly statement, which will also show the total number of
shares being held in safekeeping by the Funds' transfer agent for the
account of the shareholder.
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends or other distributions) of Navigator Shares made
by Institutional Clients acting in a fiduciary, advisory, custodial, or
other similar capacity on behalf of persons maintaining Customer Accounts
at Institutional Clients will be sent to the Institutional Client by the
transfer agent. Beneficial ownership of shares by Customer Accounts will
be recorded by the Institutional Client and reflected in the regular
account statements provided by them to their Customers.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual reports for the
Funds will contain financial statements audited by their respective
independent accountants/auditors.
Shareholder inquiries should be addressed to "[insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476," or "[insert complete Fund name], c/o Fairfield Group, Inc.,
721 Dresher Road, Horsham, Pennsylvania 19044."
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for the
corresponding class of shares of any of the Legg Mason Funds, the Legg
Mason Cash Reserve Trust, the Navigator Money Market Fund, Inc. and the
Navigator Tax-Free Money Market Fund, Inc., provided the shares to be
acquired are eligible for sale under applicable state securities laws.
Investments by exchange into other Navigator funds are made at the per
share net asset value next determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your financial
advisor. To effect an exchange by telephone, please call your financial
advisor with the information described in the section "How to Purchase and
Redeem Shares," page 16. 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. Some
Institutional Clients may not offer all of the Navigator Funds for
exchange.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
MANAGEMENT AGREEMENTS
Each Fund has a management agreement with LMFA which was approved by
the Fund's Board of Directors (each a "Management Agreement"). Under the
Management Agreements, LMFA is obligated to provide the Funds with
investment management and administrative services, and to oversee the
Funds' relationships with outside service providers, such as the
custodian, transfer agent, accountants, and lawyers.
For services under the Management Agreements, LMFA receives a fee from
each Fund, calculated daily and payable monthly, at the following annual
rate:
<TABLE>
<S> <C>
American Leading Companies: 0.75%
Balanced Trust: 0.75%
Small-Cap Value: 0.85%
Total Return Trust 0.75%
Value Trust
and Special Investment
Trust: 1.0% of the first $100
million of average net
assets; 0.75%
of assets between
$100 million and
$1 billion; and 0.65% of
assets exceeding $1
billion.
</TABLE>
Because of fee waivers (see below), American Leading Companies paid a
management fee of 0.71% and Balanced Trust paid a management fee of 0.46%
for the fiscal year ended March 31, 1998.
20
<PAGE>
ADVISORY AGREEMENTS
LMFA has entered into investment advisory agreements with Bartlett and
Brandywine to provide investment advisory services to Balanced Trust and
Small-Cap Value, respectively. These advisers have the responsibility for
making investment decisions and placing orders to buy or sell a particular
security. LMFA provides these services for Value Trust, Special Investment
Trust, Total Return Trust and American Leading Companies Trust under the
Management Agreements.
Under its Advisory Agreement, Bartlett receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 66 2/3%
of the fee received by LMFA, or 0.50% of Balanced Trust's average daily
net assets, adjusted for any fee waivers, as discussed below.
Under its Advisory Agreement, Brandywine receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 58.8% of
the fee received by LMFA, or 0.50% of Small-Cap Value's average daily net
assets, adjusted for any fee waivers.
Legg Mason Capital Management, Inc. ("LMCM") also serves as an
investment adviser to American Leading Companies pursuant to an Investment
Advisory Agreement with LMFA. LMCM may provide the Fund with research and
investment advisory services for which LMFA (not the Fund) may pay LMCM a
fee. Currently, LMCM is not providing any services to the Fund.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent a Fund's
expenses related to Navigator Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during that month annual
rates of that Fund's average daily net assets attributable to Navigator
Shares as follows:
Total Return Trust and
American Leading Companies: 0.95%, indefinitely
Balanced Trust: 1.10% until July 31, 1999
Small-Cap Value: 1.00% until July 31, 1999
These agreements are voluntary and may be terminated by LMFA at any
time. Each Fund pays all its other expenses which are not assumed by LMFA.
NAVIGATOR SHARES EXPENSE RATIOS
For the fiscal year ended March 31, 1998, the ratio of each Fund's
expenses to its average net assets (after application of any fee waivers)
was:
Value Trust 0.73 %
Total Return Trust 0.83 %
Special Investment Trust 0.80 %
American Leading Companies Trust 0.93 %
As of the date of this Prospectus, the Navigator Class of Balanced
Trust has not commenced operations.
As of the date of this Prospectus, Small-Cap Value had not yet begun
operations. In addition to management and distribution fees, that Fund,
like the others, will be responsible for interest, taxes, brokerage fees
and commissions, expenses of preparing and printing prospectuses, proxy
statements and reports to shareholders and of distributing them to
existing shareholders, custodian charges, transfer agency fees,
compensation of the independent directors, legal and audit expenses,
insurance expenses, shareholder meetings, proxy solicitations, expenses of
registering and qualifying Fund shares for sale under federal and state
law, governmental fees and expenses incurred in connection with industry
organizations.
LMFA
LMFA acts as adviser or manager to seventeen investment company
portfolios which had aggregate assets under management of approximately
$12 billion as of April 30, 1998. LMFA's address is 100 Light Street,
Baltimore, Maryland 21202.
Like other mutual funds, financial and business organizations around
the world, the Funds could be adversely affected if the computer systems
used by LMFA and other service providers do not properly process and
calculate date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." LMFA is taking
steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer system that it uses and to obtain
assurances that comparable steps are being taken by the Funds' other major
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds.
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<PAGE>
BARTLETT
Bartlett acts as adviser to individuals, corporations, pension and
profit sharing plans and trust accounts, as well as to four investment
company portfolios. Bartlett's aggregate assets under management totalled
approximately $3.2 billion as of April 30, 1998. Bartlett's address is 36
East Fourth Street, Cincinnati, Ohio 45202.
BRANDYWINE
Brandywine acts as adviser or sub-adviser to individuals, public
funds, corporations, pension and profit sharing plans, Taft-Hartley Plans,
endowments and foundations, as well as to three investment company
portfolios. Brandywine's aggregate assets under management totalled
approximately $8.2 billion as of April 30, 1998. Brandywine's address is
201 North Walnut Street, Wilmington, Delaware 19801.
LMCM
LMCM acts as investment adviser to private accounts and investment
company portfolios with a value as of April 30, 1998 of approximately $2.9
billion. LMCM's address is 100 Light Street, Baltimore, Maryland 21202.
LMFA, LMCM, Bartlett and Brandywine are wholly owned subsidiaries of
Legg Mason, Inc., a financial services holding company.
PORTFOLIO MANAGEMENT
William H. Miller, III, President of LMFA, co-managed Value Trust from
its inception in 1982 to November 1990, when he assumed primary
responsibility for its day-to-day management. Nancy T. Dennin, Senior Vice
President of LMFA, has primary responsibility for the day-to-day
management of Total Return Trust. Prior to April 1, 1997, Mrs. Dennin and
Mr. Miller were co-managers of Total Return Trust. Mr. Miller has also
been primarily responsible for the day-to-day management of Special
Investment Trust since its inception in 1985. Lisa O. Rapuano is assistant
portfolio manager of Special Investment Trust. Mrs. Rapuano has been the
analyst responsible for the technology, media and telecommunication
sectors, as well as for some special situations outside these sectors,
since joining LMFA in September 1994. From July 1991 to September 1994 she
was an analyst at Franklin Street Partners, a money management firm.
Effective March 9, 1998, David E. Nelson, Senior Vice President of
LMFA, has primary responsibility for the day-to-day management of American
Leading Companies. Previously, Mr. Nelson was the portfolio manager for
the UAM ICM Equity Portfolio since its inception on October 1, 1993. Mr.
Nelson was employed at Investment Counselors of Maryland from 1989-1998.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced
Trust. Both are senior portfolio managers of Bartlett. Mr. Rabiner has
been employed by Bartlett since 1983 and has served since then as Director
of its Fixed Income Group. Mr. Uible has been employed by Bartlett since
1980. He chairs Bartlett's Equity Investment Group, and is responsible for
Bartlett's equity investment processes. Mr. Rabiner and Mr. Uible are
members of Bartlett's Management Committee and Investment Policy
Committee.
Henry F. Otto and Steven M. Tonkovich jointly manage Small-Cap Value.
Both are Managing Directors of Brandywine. Mr. Otto is a senior portfolio
manager and has been employed at Brandywine since 1987. Mr. Tonkovich is a
portfolio manager and analyst and has been employed at Brandywine since
1989.
BROKERAGE
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 FUNDS' DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of each Fund's shares pursuant to a separate Underwriting
Agreement with each Fund. Each Underwriting Agreement obligates Legg Mason
to pay certain expenses in connection with the offering of shares,
including any compensation to its financial advisors, the printing and
distribution of prospectuses, statements of additional information and
periodic reports used in connection with the offering to prospective
investors, after the prospectuses, statements of additional information
and reports have been prepared, set in type and mailed to existing
shareholders at the Fund's expense, and for any supplementary sales
literature and advertising costs. Legg Mason also assists BFDS with
certain of its duties as transfer agent; for the year ended March 31,
1998, Legg Mason received from BFDS $439,000, $76,000, $238,000, $28,000
and $7,000 for performing such services in connection with Value Trust,
Total Return Trust, Special Investment Trust, American Leading Companies
and Balanced Trust, respectively.
22
<PAGE>
Fairfield, a wholly owned subsidiary of Legg Mason, Inc., is a
registered broker-dealer with principal offices located at 721 Dresher
Road, Horsham, Pennsylvania 19044. Fairfield may sell Navigator Shares
pursuant to a Dealer Agreement with the Funds' Distributor, Legg Mason.
Legg Mason and LMFA may make payments out of their own assets to Fairfield
or others to support the distribution of Navigator Shares and shareholder
servicing.
The President and Treasurer of each Fund are employed by Legg Mason.
DESCRIPTION OF EACH CORPORATION AND ITS SHARES
Value Trust, Total Return Trust, Special Investment Trust and
Investors Trust were established as Maryland corporations on January 20,
1982, May 22, 1985, October 31, 1985 and May 5, 1993, respectively. Value
Trust has authorized capital of 300 million shares of common stock, par
value $0.001 per share. Total Return Trust has authorized capital of 100
million shares of common stock, par value $0.001 per share. Special
Investment Trust has authorized capital of 150 million shares of common
stock, par value $0.001 per share. The Articles of Incorporation of
Investors Trust authorize issuance of 500 million shares of par value
$.001 per share of American Leading Companies, 250 million shares of par
value $.001 per share of Balanced Trust and 100 million shares of par
value $.001 per share of Small-Cap Value. Each corporation may issue
additional series 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 and sales charges, which may
affect performance.
Investors may obtain more information concerning the Primary Class
from their financial advisor or by calling 1-800-822-5544.
The Boards of Directors of the Funds do not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of each Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of each Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the Investment
Company Act of 1940 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). Each Fund
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 the Fund at 100 Light Street,
Baltimore, Maryland 21202, stating the purpose of the proposed meeting and
the matters to be acted upon. The address of BFDS is P.O. Box 953, Boston,
Massachusetts 02103.
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.
23
