UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07692
Name of Fund: Legg Mason Investors Trust, Inc.
Address of Principal Executive Offices: 100 Light Street, Baltimore, MD 21202
Name and address of agent for service:
Richard M. Wachterman, Esq.
Legg Mason & Co., LLC
100 Light Street
Baltimore, MD 21202
Registrant’s telephone number, including area code: (410) 539-0000
Date of fiscal year end: March 31, 2006
Date of reporting period: March 31, 2006
Item 1. Report of Shareholders
Annual Report to Shareholders 1
To Our Shareholders,
We are pleased to provide you with Legg Mason Investors Trust’s annual report for American Leading Companies Trust, Balanced Trust, Financial Services Fund and U.S. Small-Capitalization Value Trust, for the year ended March 31, 2006.
PricewaterhouseCoopers LLP, the Funds’ independent registered public accounting firm, has completed its annual audit, and audited financial statements for the fiscal year ended March 31, 2006, are included in this report.
Information about each of the Funds’ performance over longer periods of time are shown in their respective Performance Information sections within this report. For more information about the Fund share classes included in the report, please contact your financial adviser.
Many Primary Class shareholders invest regularly in Fund shares on a dollar cost averaging basis. Most do so by authorizing automatic, monthly transfers of $50 or more from their bank checking or brokerage accounts. Dollar cost averaging is a convenient and sensible way to invest, as it encourages continued purchases during market downswings, when the best values are available. Of course, it does not ensure a profit nor protect against declines in the value of your investment. Your financial adviser will be happy to help you establish a dollar cost averaging account should you wish to do so.
| |
| | Sincerely, |
| |  |
| | Mark R. Fetting |
| | President |
May 19, 2006
2 Annual Report to Shareholders
Management’s Discussion of Fund Performance
American Leading Companies Trust
The U.S. equity market performed well for the fiscal year ending March 31, 2006, as corporate America posted strong earnings growth despite pressure from high oil prices and rising short-term interest rates. Market returns were particularly strong in the first calendar quarter of 2006 as concerns over inflation and an overly aggressive Federal Reserve System were alleviated somewhat by signs of a slowing housing market and a drop in fourth quarter real gross domestic product (GDP) to 1.1% from 3.8% in the prior quarter.
| | | | | | | | | |
| | | Total Returns Periods |
| | | Ending March 31, 2006 |
| | | |
| | | 3 Months | | 1 Year |
| |
S&P 500 Stock Composite IndexA | | | +4.21% | | | | +11.73% | |
Dow Jones Industrial AverageA | | | +4.24% | | | | +8.26% | |
S&P 400 Mid-Cap IndexA | | | +7.63% | | | | +21.62% | |
Russell 2000 IndexA | | | +13.94% | | | | +25.93% | |
Nasdaq Composite IndexA | | | +6.37% | | | | +18.02% | |
As illustrated above, small- and mid-cap stocks continued to outpace large-cap stocks during the year, as the twelve month returns of the S&P Mid-Cap and small cap Russell 2000 Indices dwarfed the returns of the S&P 500 Index and Dow Industrials. This return pattern was also evident in American Leading Companies Trust, as the ten largest companies in the portfolio measured by market capitalization were up an average of 2.4% for the fiscal year, while the ten smallest market capitalization companies were up an average of 16.7%.
For the twelve months ending March 31, 2006, American Leading Companies Trust gained 12.54%, bettering its principal benchmark, the S&P 500 Index, which returned 11.73%. Total
| |
| A | See Glossary of Index Definitions on page 112. It is not possible to invest in an index. |
Annual Report to Shareholders 3
returns for the Fund for various periods ended March 31, 2006, are presented below, along with those of some comparative indices:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Average Annual Total Returns |
| | | | | | | Through March 31, 2006 |
| | | First | | | | |
| | | Quarter | | One | | Three | | Five | | Ten | | Since |
| | | 2006 | | Year | | Years | | Years | | Years | | InceptionB |
| |
| American Leading Companies | | | | | | | | | | | | | | | | | | | | | | | | |
| | Primary Class | | | +1.74% | | | | +12.54% | | | | +19.16% | | | | +6.12% | | | | +9.55% | | | | +9.46% | |
| | Institutional Class | | | +2.01% | | | | +13.63% | | | | +20.35% | | | | N/A | | | | N/A | | | | +6.54% | |
| S&P 500 Stock Composite Index | | | +4.21% | | | | +11.73% | | | | +17.22% | | | | +3.97% | | | | +8.95% | | | | +10.51% | |
| Dow Jones Industrial Average | | | +4.24% | | | | +8.26% | | | | +14.13% | | | | +4.60% | | | | +9.19% | | | | +11.53% | |
Lipper Large-Cap Core FundsA | | | +3.94% | | | | +11.63% | | | | +15.46% | | | | +2.57% | | | | +7.31% | | | | +9.02% | |
Lipper Large-Cap Value FundsA | | | +4.55% | | | | +11.40% | | | | +18.82% | | | | +5.11% | | | | +8.55% | | | | +10.09% | |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary Class please visit www.leggmasonfunds.com; for the Institutional Class please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. Performance figures for periods longer than one year represent average annual returns. | |
The leading percentage gainers and laggards in the portfolio among stocks owned for the entire year are listed elsewhere in this report. On a performance contribution basis, which takes into account both price change and portfolio weighting, the leading positive contributors for the fiscal year were: Health Net Inc., Phelps Dodge Corporation, UnitedHealth Group Incorporated, Sprint Nextel Corporation and J.P. Morgan Chase & Co. The largest detractors from performance were: Tyco International Ltd., Liberty Media Corporation— Series A, Intel Corporation, International Business Machines Corporation and Bristol-Myers Squibb Company. The industries that contributed most positively to the Fund’s relative performance for the fiscal year included commodity stocks and managed-care companies. The two sectors that had the greatest negative impact on relative performance were industrials and information technology.
BThe inception date of the Primary Class is September 1, 1993. The inception date of the Institutional Class is June 14, 2001. Index returns are for periods beginning August 31, 1993.
4 Annual Report to Shareholders
Management’s Discussion of Fund Performance — Continued
For the year, we would describe portfolio activity as moderate, with turnover averaging about 20%. A complete listing of new purchases and liquidations is presented elsewhere in this report. In broad terms, during the year, we expanded the number of holdings in the portfolio by about 16%, from 57 to 66. The biggest single change in the portfolio’s structure during the year was an approximate 6.5 percentage point increase in technology holdings with new positions in Dell Inc., Symantec Corporation and Accenture Ltd., and additions to our existing holdings of Intel Corporation, Applied Materials Inc. and Hewlett-Packard Company. In addition, we added to our e-commerce holdings with the purchase of eBay Inc. and Yahoo! Inc., and additions to our holdings of Expedia Inc. and Amazon.com, Inc. We also repositioned our holdings in a number of other sectors. In materials, we broadened our diversification by reducing our positions in three existing holdings to fund the purchase of U.S. Steel Corporation. In pharmaceuticals, we sold Merck & Co., Inc. and Bristol-Myers Squibb Co. to buy more Pfizer Inc. and Johnson & Johnson. In financials, we sold Fannie Mae and reduced our positions in MGIC Investment Corporation, Washington Mutual, Inc. and Lloyds TSB Group plc to buy a new position in re-insurer XL Capital Ltd., and add to Countrywide Financial Corporation. In the consumer discretionary sector, we sold grocer Albertson’s— which is being taken over—and bought Pulte Homes, Inc. and Eastman Kodak Company. Finally, we took advantage of favorable prices to reduce our portfolio weightings in energy stocks and managed-care companies. We are now underweight energy, but remain overweighted in the managed-care sector.
David E. Nelson, CFA
April 20, 2006
DJIA 11,342.89
Annual Report to Shareholders 5
Expense Example
American Leading Companies Trust
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.
| | | | | | | | | | | | | | |
| | | Beginning | | Ending | | Expenses PaidA |
| | | Account | | Account | | During the |
| | | Value | | Value | | Period |
| | | 10/1/05 | | 3/31/06 | | 10/1/05 to 3/31/06 |
| |
| Primary Class: | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,055.80 | | | $ | 9.53 | |
| | Hypothetical (5% return before expenses) | | $ | 1,000.00 | | | $ | 1,015.66 | | | $ | 9.35 | |
| Institutional Class: | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,060.80 | | | $ | 4.32 | |
| | Hypothetical (5% return before expenses) | | $ | 1,000.00 | | | $ | 1,020.74 | | | $ | 4.23 | |
| |
| A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amount shown as “Expenses Paid” is equal to the annualized expense ratio of 1.86% and 0.84% for the Primary Class and Institutional Class respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182) and divided by 365. |
6 Annual Report to Shareholders
Performance Information
American Leading Companies Trust
The graphs on the following pages compare the Fund’s total returns to that of a closely matched broad-based securities market index. The graphs illustrate the cumulative total return of an initial $10,000 investment in the Primary Class and an initial $1,000,000 investment in the Institutional Class, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing the securities market index do not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions.
Total return measures investment performance in terms of appreciation or depreciation in a fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.
Annual Report to Shareholders 7
Growth of a $10,000 Investment — Primary Class
Periods Ended March 31, 2006
| | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| One Year | | | +12.54% | | | | +12.54% | |
| Five Years | | | +34.59% | | | | +6.12% | |
| Ten Years | | | +149.03% | | | | +9.55% | |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
8 Annual Report to Shareholders
Performance Information — Continued
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended March 31, 2006
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +13.63% | | | | +13.63% | |
| | Three Years | | | +74.33% | | | | +20.35% | |
| | Life of Class* | | | +35.50% | | | | +6.54% | |
| |
| * Inception date: June 14, 2001 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
| |
| A | Index returns are for periods beginning May 31, 2001. |
Annual Report to Shareholders 9
Portfolio Composition (As of March 31, 2006) B
(As a percentage of the portfolio)
Top Ten Holdings (As of March 31, 2006)
| | | | | |
| | | % of |
| Security | | Net Assets |
| |
| Sprint Nextel Corporation | | | 4.8% | |
| UnitedHealth Group Incorporated | | | 4.3% | |
| J.P. Morgan Chase & Co. | | | 3.9% | |
| Altria Group, Inc. | | | 3.6% | |
| Tyco International Ltd. | | | 3.4% | |
| WellPoint Inc. | | | 3.1% | |
| Citigroup Inc. | | | 2.8% | |
| Health Net Inc. | | | 2.4% | |
| Lloyds TSB Group plc | | | 2.3% | |
| Nokia Oyj – ADR | | | 2.3% | |
| |
| B | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
10 Annual Report to Shareholders
Performance Information — Continued
Selected Portfolio Performance C
| | | | | |
| Strongest performers for the year ended March 31, 2006D |
| |
| 1. | | Phelps Dodge Corporation | | +71.4% |
| 2. | | Transocean Inc. | | +56.0% |
| 3. | | Health Net Inc. | | +55.4% |
| 4. | | Baker Hughes Incorporated | | +55.1% |
| 5. | | Hewlett-Packard Company | | +51.7% |
| 6. | | Merrill Lynch & Co., Inc. | | +41.0% |
| 7. | | Nokia Oyj — ADR | | +41.0% |
| 8. | | Anadarko Petroleum Corporation | | +33.8% |
| 9. | | Devon Energy Corporation | | +28.9% |
| 10. | | Texas Instruments Incorporated | | +27.9% |
| |
| | | | | |
| Weakest performers for the year ended March 31, 2006D |
| |
| 1. | | Tyco International Ltd. | | -19.4% |
| 2. | | Sara Lee Corporation | | -15.9% |
| 3. | | Intel Corporation | | -15.0% |
| 4. | | Johnson & Johnson | | -10.0% |
| 5. | | Kimberly-Clark Corporation | | -9.4% |
| 6. | | International Business Machines Corporation | | -8.9% |
| 7. | | Liberty Media Corporation | | -6.9% |
| 8. | | Wal-Mart Stores, Inc. | | -4.5% |
| 9. | | Time Warner, Inc. | | -3.5% |
| 10. | | Pfizer Inc. | | -2.1% |
Portfolio Changes
| | | |
| Securities added during the 1st quarter 2006 | | Securities sold during the 1st quarter 2006 |
| | | |
| Boston Scientific Corporation | | Albertson’s, Inc. |
| Pulte Homes, Inc. | | Bristol-Myers Squibb Company |
| Yahoo! Inc. | | |
| |
| C | Individual security performance is measured by the change in the security’s price; for stocks, dividends are assumed to be reinvested at the time they were paid. |
| |
| D | Securities held for the entire year. |
Annual Report to Shareholders 11
Portfolio of Investments
American Leading Companies Trust
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Common Stocks and Equity Interests — 98.2% |
| Consumer Discretionary — 13.9% |
| Household Durables — 1.2% |
| | Koninklijke (Royal) Philips Electronics N.V. – ADR | | | 63 | | | $ | 2,120 | |
| | Pulte Homes, Inc. | | | 200 | | | | 7,684 | |
| | | | | | | | 9,804 | |
| | | | | | | | | |
| Internet and Catalog Retail — 4.3% |
| | Amazon.com, Inc. | | | 300 | | | | 10,953 | A |
| | Expedia, Inc. | | | 525 | | | | 10,642 | A |
| | IAC/InterActiveCorp | | | 425 | | | | 12,524 | A |
| | | | | | | | 34,119 | |
| | | | | | | | | |
| Leisure Equipment and Products — 1.1% |
| | Eastman Kodak Company | | | 300 | | | | 8,532 | |
| | | | | | | | | |
| Media — 4.3% |
| | Liberty Media Corporation | | | 1,440 | | | | 11,823 | A |
| | The DIRECTV Group, Inc. | | | 900 | | | | 14,760 | A |
| | Time Warner Inc. | | | 480 | | | | 8,059 | |
| | | | | | | | 34,642 | |
| | | | | | | | | |
| Specialty Retail — 3.0% |
| | The Home Depot, Inc. | | | 200 | | | | 8,460 | |
| | The TJX Companies, Inc. | | | 630 | | | | 15,637 | |
| | | | | | | | 24,097 | |
| | | | | | | | | |
| Consumer Staples — 5.1% |
| Beverages — 0.9% |
| | The Pepsi Bottling Group, Inc. | | | 225 | | | | 6,838 | |
| | | | | | | | | |
| Food and Staples Retailing — 0.2% |
| | Wal-Mart Stores, Inc. | | | 35 | | | | 1,654 | |
| | | | | | | | | |
12 Annual Report to Shareholders
Portfolio of Investments — Continued
American Leading Companies Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Consumer Staples — Continued |
| Food Products — 0.3% |
| | Sara Lee Corporation | | | 122 | | | $ | 2,181 | |
| | | | | | | | | |
| Household Products — 0.2% |
| | Kimberly-Clark Corporation | | | 25 | | | | 1,445 | |
| | | | | | | | | |
| Tobacco — 3.5% |
| | Altria Group, Inc. | | | 400 | | | | 28,344 | |
| | | | | | | | | |
| Energy — 5.2% |
| Energy Equipment and Services — 1.6% |
| | Baker Hughes Incorporated | | | 36 | | | | 2,463 | |
| | Transocean Inc. | | | 128 | | | | 10,238 | A |
| | | | | | | | 12,701 | |
| | | | | | | | | |
| Oil, Gas and Consumable Fuels — 3.6% |
| | Anadarko Petroleum Corporation | | | 67 | | | | 6,768 | |
| | Apache Corporation | | | 97 | | | | 6,354 | |
| | Devon Energy Corporation | | | 208 | | | | 12,693 | |
| | Exxon Mobil Corporation | | | 30 | | | | 1,826 | |
| | Royal Dutch Shell PLC | | | 24 | | | | 1,494 | |
| | | | | | | | 29,135 | |
| | | | | | | | | |
| Financials — 20.6% |
| Capital Markets — 1.2% |
| | Merrill Lynch & Co., Inc. | | | 70 | | | | 5,513 | |
| | Morgan Stanley | | | 70 | | | | 4,398 | |
| | | | | | | | 9,911 | |
| | | | | | | | | |
| Commercial Banks — 4.3% |
| | Bank of America Corporation | | | 343 | | | | 15,638 | |
| | Lloyds TSB Group plc | | | 1,950 | | | | 18,657 | |
| | | | | | | | 34,295 | |
| | | | | | | | | |
Annual Report to Shareholders 13
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Financials — Continued |
| Diversified Financial Services — 6.7% |
| | Citigroup Inc. | | | 465 | | | $ | 21,962 | |
| | J.P. Morgan Chase & Co. | | | 752 | | | | 31,313 | |
| | | | | | | | 53,275 | |
| | | | | | | | | |
| Insurance — 4.8% |
| | American International Group, Inc. | | | 250 | | | | 16,523 | |
| | The St. Paul Travelers Companies, Inc. | | | 318 | | | | 13,289 | |
| | XL Capital Ltd. | | | 127 | | | | 8,129 | |
| | | | | | | | 37,941 | |
| | | | | | | | | |
| Thrifts and Mortgage Finance — 3.6% |
| | Countrywide Financial Corporation | | | 300 | | | | 11,010 | |
| | MGIC Investment Corporation | | | 75 | | | | 4,997 | |
| | Washington Mutual, Inc. | | | 300 | | | | 12,786 | |
| | | | | | | | 28,793 | |
| | | | | | | | | |
| Health Care — 13.5% |
| Health Care Equipment and Supplies — 1.0% |
| | Boston Scientific Corporation | | | 350 | | | | 8,067 | A |
| | | | | | | | | |
| Health Care Providers and Services — 9.8% |
| | Health Net Inc. | | | 370 | | | | 18,804 | A |
| | UnitedHealth Group Incorporated | | | 616 | | | | 34,393 | |
| | WellPoint Inc. | | | 323 | | | | 25,002 | A |
| | | | | | | | 78,199 | |
| | | | | | | | | |
| Pharmaceuticals — 2.7% |
| | Johnson & Johnson | | | 180 | | | | 10,659 | |
| | Pfizer Inc. | | | 440 | | | | 10,965 | |
| | | | | | | | 21,624 | |
| | | | | | | | | |
14 Annual Report to Shareholders
Portfolio of Investments — Continued
American Leading Companies Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Industrials — 9.6% |
| Aerospace and Defense — 3.6% |
| | General Dynamics Corporation | | | 216 | | | $ | 13,820 | |
| | Lockheed Martin Corporation | | | 200 | | | | 15,026 | |
| | | | | | | | 28,846 | |
| | | | | | | | | |
| Industrial Conglomerates — 4.9% |
| | General Electric Company | | | 340 | | | | 11,825 | |
| | Tyco International Ltd. | | | 1,000 | | | | 26,880 | |
| | | | | | | | 38,705 | |
| | | | | | | | | |
| Machinery — 1.1% |
| | Caterpillar Inc. | | | 60 | | | | 4,308 | |
| | Deere & Company | | | 60 | | | | 4,743 | |
| | | | | | | | 9,051 | |
| | | | | | | | | |
| Information Technology — 16.5% |
| Communications Equipment — 2.3% |
| | Nokia Oyj — ADR | | | 875 | | | | 18,130 | |
| | | | | | | | | |
| Computers and Peripherals — 4.5% |
| | Dell Inc. | | | 400 | | | | 11,904 | A |
| | Hewlett-Packard Company | | | 350 | | | | 11,515 | |
| | International Business Machines Corporation | | | 152 | | | | 12,535 | |
| | | | | | | | 35,954 | |
| | | | | | | | | |
| Internet Software and Services — 2.5% |
| | eBay Inc. | | | 350 | | | | 13,671 | A |
| | Yahoo! Inc. | | | 200 | | | | 6,452 | A |
| | | | | | | | 20,123 | |
| | | | | | | | | |
| IT Services — 0.9% |
| | Accenture Ltd. | | | 250 | | | | 7,518 | |
| | | | | | | | | |
Annual Report to Shareholders 15
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Information Technology — Continued |
| Semiconductors and Semiconductor Equipment — 4.0% |
| | Applied Materials, Inc. | | | 550 | | | $ | 9,630 | |
| | Intel Corporation | | | 800 | | | | 15,480 | |
| | Texas Instruments Incorporated | | | 200 | | | | 6,494 | |
| | | | | | | | 31,604 | |
| | | | | | | | | |
| Software — 2.3% |
| | Microsoft Corporation | | | 405 | | | | 11,020 | |
| | Symantec Corporation | | | 450 | | | | 7,574 | A |
| | | | | | | | 18,594 | |
| | | | | | | | | |
| Materials — 7.1% |
| Metals and Mining — 7.1% |
| | Alcoa Inc. | | | 310 | | | | 9,474 | |
| | Newmont Mining Corporation | | | 255 | | | | 13,232 | |
| | Phelps Dodge Corporation | | | 210 | | | | 16,911 | |
| | United States Steel Corporation | | | 280 | | | | 16,990 | |
| | | | | | | | 56,607 | |
| | | | | | | | | |
| Telecommunication Services — 6.2% |
| Wireless Telecommunication Services — 6.2% |
| | ALLTEL Corporation | | | 180 | | | | 11,655 | |
| | Sprint Nextel Corporation | | | 1,471 | | | | 38,011 | |
| | | | | | | | 49,666 | |
| | | | | | | | | |
| Utilities — 0.5% |
| Independent Power Producers and Energy Traders — 0.5% |
| | Duke Energy Corporation | | | 140 | | | | 4,081 | |
| | | | | | | | | |
Total Common Stock and Equity Interests
(Identified Cost — $496,122) | | | 784,476 | |
| |
16 Annual Report to Shareholders
Portfolio of Investments — Continued
American Leading Companies Trust — Continued
| | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Repurchase Agreements — 0.7% |
| Bank of America 4.75%, dated 3/31/06, to be repurchased at $2,763 on 4/3/06 (Collateral: $2,815 Federal Home Loan Bank notes, 4.75%, due 8/8/07, value $2,822) | | $ | 2,762 | | | $ | 2,762 | |
| J.P. Morgan Chase & Co. 4.70%, dated 3/31/06, to be repurchased at $2,762 on 4/3/06 (Collateral: $2,810 Fannie Mae notes, 4.75%, due 8/10/07, value $2,820) | | | 2,761 | | | | 2,761 | |
| | | | | | | | | |
| Total Repurchase Agreements (Identified Cost — $5,523) | | | 5,523 | |
| |
| Total Investments — 98.9% (Identified Cost — $501,645) | | | 789,999 | |
| Other Assets Less Liabilities — 1.1% | | | 9,107 | |
| | | | | |
Net Assets — 100% | | | | | | $ | 799,106 | |
| | | | | | | | | |
See notes to financial statements.
ADR — American Depository Receipt.
Annual Report to Shareholders 17
Statement of Assets and Liabilities
American Leading Companies Trust
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | |
| |
Assets: | | | | | | | | |
| | Investment securities at market value
(Identified Cost – $496,122) | | | | | | $ | 784,476 | |
| | Short-term securities at value (Identified Cost – $5,523) | | | | | | | 5,523 | |
| | Cash | | | | | | | 1 | |
| | Receivable for fund shares sold | | | | | | | 2,585 | |
| | Receivable for securities sold | | | | | | | 11,927 | |
| | Dividends and interest receivable | | | | | | | 1,910 | |
| | Foreign tax receivable | | | | | | | 3 | |
| | Other assets | | | | | | | 7 | |
| | | | | | | | | |
| | | Total assets | | | | | | | 806,432 | |
Liabilities: | | | | | | | | |
| | Payable for fund shares repurchased | | $ | 1,310 | | | | | |
| | Payable for securities purchased | | | 4,663 | | | | | |
| | Accrued management fee | | | 470 | | | | | |
| | Accrued distribution fee | | | 636 | | | | | |
| | Tax withholding liability | | | 64 | | | | | |
| | Accrued expenses | | | 183 | | | | | |
| | | | | | | | | |
| | | Total liabilities | | | | | | | 7,326 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 799,106 | |
| | | | | | | | | |
Net assets consist of: | | | | | | | | |
| | Accumulated paid-in capital applicable to: | | | | | | | | |
| | | 30,810 Primary Class shares outstanding | | | | | | $ | 464,150 | |
| | | 1,637 Institutional Class shares outstanding | | | | | | | 32,737 | |
| | Undistributed net investment income | | | | | | | 525 | |
| | Undistributed net realized gain on investments | | | | | | | 13,340 | |
| | Unrealized appreciation/depreciation of investments | | | | | | | 288,354 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 799,106 | |
| | | | | | | | | |
Net Asset Value Per Share: | | | | | | | | |
| | Primary Class | | | | | | | $24.59 | |
| | | | | | | | | |
| | Institutional Class | | | | | | | $25.33 | |
| | | | | | | | | |
| |
See notes to financial statements.
18 Annual Report to Shareholders
Statement of Operations
American Leading Companies Trust
For the Year Ended March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | | |
| |
Investment Income: | | | | | | | | |
| | Dividends | | $ | 13,474 | A | | | | |
| | Interest | | | 390 | | | | | |
| | | | | | | | | |
| | | | Total income | | | | | | $ | 13,864 | |
Expenses: | | | | | | | | |
| | Management fees | | | 5,375 | | | | | |
| | Distribution and service fees: | | | | | | | | |
| | | Primary Class | | | 6,939 | | | | | |
| | Audit and legal fees | | | 50 | | | | | |
| | Custodian fees | | | 120 | | | | | |
| | Directors’ fees and expenses | | | 34 | | | | | |
| | Registration fees | | | 52 | | | | | |
| | Reports to shareholders | | | 137 | | | | | |
| | Transfer agent and shareholder servicing expense: | | | | | | | | |
| | | Primary Class | | | 424 | | | | | |
| | | Institutional Class | | | 14 | | | | | |
| | Other expenses | | | 82 | | | | | |
| | | | | | | | | |
| | | | 13,227 | | | | | |
| | | Less: Compensating balance credits | | | (1 | ) | | | | |
| | | | | | | | | |
| | | | Total expenses | | | | | | | 13,226 | |
| | | | | | | | | |
Net Investment Income | | | | | | | 638 | |
Net Realized and Unrealized Gain on Investments: | | | | | | | | |
| | Realized gain on investments | | | 22,746 | B | | | | |
| | Change in unrealized appreciation/depreciation of investments | | | 63,002 | | | | | |
| | | | | | | | | |
| Net Realized and Unrealized Gain on Investments | | | 85,748 | |
| |
Change in Net Assets Resulting From Operations | | | | | | $ | 86,386 | |
| |
See notes to financial statements.
| |
| A | Net of foreign taxes withheld of $132 |
| |
| B | See Note 1, Commission Recapture, in the notes to financial statements. |
Annual Report to Shareholders 19
Statement of Changes in Net Assets
American Leading Companies Trust
(Amounts in Thousands)
| | | | | | | | | | | |
| | | For the Years Ended |
| | | |
| | | 3/31/06 | | 3/31/05 |
| |
Change in Net Assets: | | | | | | | | |
| Net investment income | | $ | 638 | | | $ | 143 | |
| Net realized gain on investments | | | 22,746 | | | | 31,042 | |
| Change in unrealized appreciation of investments | | | 63,002 | | | | 29,389 | |
| |
| Change in net assets resulting from operations | | | 86,386 | | | | 60,574 | |
| Distributions to shareholders: | | | | | | | | |
| | From net investment income: | | | | | | | | |
| | | Primary Class | | | — | | | | (214 | ) |
| | | Institutional Class | | | (91 | ) | | | (176 | ) |
| Change in net assets from Fund share transactions: | | | | | | | | |
| | | Primary Class | | | 21,783 | | | | 10,335 | |
| | | Institutional Class | | | 15,623 | | | | 2,595 | |
| |
| Change in net assets | | | 123,701 | | | | 73,114 | |
Net Assets: | | | | | | | | |
| Beginning of year | | | 675,405 | | | | 602,291 | |
| |
| End of year | | $ | 799,106 | | | $ | 675,405 | |
| |
| Undistributed net investment income/(loss) | | $ | 525 | | | $ | (16 | ) |
| |
See notes to financial statements.
20 Annual Report to Shareholders
Financial Highlights
American Leading Companies Trust
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | $ | 21.85 | | | $ | 19.85 | | | $ | 14.54 | | | $ | 18.13 | | | $ | 18.28 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment income/(loss) | | �� | .01 | | | | — | A | | | .01 | | | | (.01 | ) | | | (.08 | ) |
| | Net realized and unrealized gain/(loss) on investments | | | 2.73 | | | | 2.01 | | | | 5.30 | | | | (3.58 | ) | | | (.07 | ) |
| | | |
| | Total from investment operations | | | 2.74 | | | | 2.01 | | | | 5.31 | | | | (3.59 | ) | | | (.15 | ) |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net investment income | | | — | | | | (.01 | ) | | | — | B | | | — | | | | — | |
| | | |
| | Total distributions | | | — | | | | (.01 | ) | | | — | B | | | — | | | | — | |
| | | |
| Net asset value, end of year | | $ | 24.59 | | | $ | 21.85 | | | $ | 19.85 | | | $ | 14.54 | | | $ | 18.13 | |
| | | |
| Total return | | | 12.54 | % | | | 10.12 | % | | | 36.54 | % | | | (19.80 | )% | | | (.82 | )% |
Ratios to Average Net Assets:C | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | 1.86 | % | | | 1.88 | % | | | 1.90 | % | | | 1.92 | % | | | 1.93 | % |
| | Expenses net of waivers, if any | | | 1.86 | % | | | 1.88 | % | | | 1.90 | % | | | 1.92 | % | | | 1.93 | % |
| | Expenses net of all reductions | | | 1.86 | % | | | 1.88 | % | | | 1.90 | % | | | 1.92 | % | | | 1.93 | % |
| | Net investment income/(loss) | | | .04 | % | | | (.01 | )% | | | .05 | % | | | (.05 | )% | | | (.47 | )% |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 14.3 | % | | | 19.4 | % | | | 19.6 | % | | | 19.0 | % | | | 22.7 | % |
| Net assets, end of year (in thousands) | | $ | 757,630 | | | $ | 654,019 | | | $ | 585,295 | | | $ | 410,331 | | | $ | 551,061 | |
| |
See notes to financial statements.
| |
| B | $(.003) per share |
| |
| C | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
Annual Report to Shareholders 21
Institutional Class:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002D |
| |
| Net asset value, beginning of year | | | $22.34 | | | $ | 20.28 | | | $ | 14.83 | | | $ | 18.27 | | | $ | 19.08 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment income | | | .22 | | | | .21 | | | | .20 | | | | .15 | | | | .09 | |
| | Net realized and unrealized gain/(loss) on investments | | | 2.82 | | | | 2.06 | | | | 5.42 | | | | (3.59 | ) | | | (.90 | ) |
| | | |
| | Total from investment operations | | | 3.04 | | | | 2.27 | | | | 5.62 | | | | (3.44 | ) | | | (.81 | ) |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net investment income | | | (.05 | ) | | | (.21 | ) | | | (.17 | ) | | | — | | | | — | |
| | | |
| | Total distributions | | | (.05 | ) | | | (.21 | ) | | | (.17 | ) | | | — | | | | — | |
| | | |
| Net asset value, end of year | | | $25.33 | | | $ | 22.34 | | | $ | 20.28 | | | $ | 14.83 | | | $ | 18.27 | |
| | | |
| Total return | | | 13.63 | % | | | 11.21 | % | | | 37.96 | % | | | (18.83 | )% | | | (4.25 | )%E |
Ratios to Average Net Assets:C | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | .84 | % | | | .90 | % | | | .85 | % | | | .87 | % | | | .87 | %F |
| | Expenses net of waivers, if any | | | .84 | % | | | .90 | % | | | .85 | % | | | .87 | % | | | .87 | %F |
| | Expenses net of all reductions | | | .84 | % | | | .90 | % | | | .85 | % | | | .87 | % | | | .87 | %F |
| | Net investment income | | | 1.09 | % | | | .99 | % | | | 1.14 | % | | | 1.02 | % | | | .62 | %F |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 14.3 | % | | | 19.4 | % | | | 19.6 | % | | | 19.0 | % | | | 22.7 | % |
| | Net assets, end of year (in thousands) | | $ | 41,476 | | | $ | 21,386 | | | $ | 16,996 | | | $ | 8,729 | | | $ | 9,649 | |
| |
See notes to financial statements.
| |
| D | For the period June 14, 2001 to March 31, 2002. |
22 Annual Report to Shareholders
Management’s Discussion of Fund Performance
Balanced Trust
Total returns for the Fund for various periods ended March 31, 2006, are presented below, along with those of some comparative indices:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Average Annual Total Returns |
| | | | | | | Through March 31, 2006 |
| | | First | | | | |
| | | Quarter | | One | | Three | | Five | | Since |
| | | 2006 | | Year | | Years | | Years | | InceptionA |
| |
| Balanced Trust | | | | | | | | | | | | | | | | | | | | |
| | Primary Class | | | +1.60% | | | | +8.68% | | | | +10.40% | | | | +3.34% | | | | +4.40% | |
| | Financial Intermediary Class | | | +1.79% | | | | +9.24% | | | | +10.92% | | | | +3.84% | | | | +3.91% | |
| | Institutional Class | | | +1.79% | | | | +9.25% | | | | +11.15% | | | | +4.07% | | | | +4.14% | |
S&P 500 Stock Composite IndexB | | | +4.21% | | | | +11.73% | | | | +17.22% | | | | +3.97% | | | | +8.59% | |
Lehman Intermediate Government/Credit IndexB | | | -0.38% | | | | +2.08% | | | | +2.33% | | | | +4.71% | | | | +5.90% | |
Lipper Balanced Fund IndexB | | | +3.25% | | | | +10.02% | | | | +13.09% | | | | +5.25% | | | | +7.58% | |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary Class please visit www.leggmasonfunds.com; for the Financial Intermediary and Institutional Classes please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. Performance figures for periods longer than one year represent average annual returns. | |
Overview
During the 12-month period ending March 31, 2006, the Fund generated a total return of 8.68%. The Lipper Balanced Fund Index, a mutual fund comparative index, returned 10.02% during the period. The majority of this underperformance is attributable to our decision to maintain the asset allocation of the Fund at 60% equity, 40% fixed-income levels. During the period, returns from the equity market were significantly greater than those from domestic fixed-income securities.
| |
| A | The inception date of the Primary Class is October 1, 1996. The inception date of the Financial Intermediary and Institutional Classes is March 16, 2001. Index returns are for periods beginning September 30, 1996. |
| |
| B | See the Glossary of Index Definition on 112. It is not possible to invest in an index. |
Annual Report to Shareholders 23
Equity Portfolio
During the 12-month period ending March 31, 2006, the equity portfolio generated positive absolute and relative returns. The equity portion of the Fund posted a total return of 16.4% versus 11.73% for the S&P 500 Stock Composite Index, the Fund’s equity benchmark. This level of return enabled the overall Fund to close some, but not all, of the performance gap with the Lipper Balanced Fund Index.
Stock selection was the primary driver of equity portfolio performance during the period. The best-performing stocks owned by the Fund during the last 12 months were Schlumberger Limited (+81.3%), Rio Tinto plc-ADR (+66.1%) and MedImmune Inc (+53.6%). Meanwhile, the worst-performing stocks were Intel Corporation (-15.0%), Johnson & Johnson (-10.0%) and Kimberly-Clark Corporation (-9.4%). Beyond the individual securities selected, the Fund benefited from an overweighed allocation to energy and modest underweighting of technology and consumer companies. Our decision to avoid the telecommunications companies as well as our underweighted exposure to financial service companies detracted from the Fund’s overall return.
Fixed-Income Portfolio
The fixed-income portfolio also generated positive absolute and relative returns. The fixed-income portion of the Fund posted a total return of 2.27% versus 2.08% for the Lehman Intermediate Government/ Credit Index, the Fund’s fixed income benchmark. Interest rates moved higher throughout the period and that negatively impacted bond prices and reduced returns for the period.
The favorable relative performance is due to the Fund’s allocation to mortgage-backed securities and to a conservative posture toward interest rate risk. The Fund’s interest rate risk, as measured by duration, averaged 97% of the benchmark throughout the period. Owning quality investment-grade corporate bonds also added to the relative outperformance.
Specific bonds that performed particularly well tended to be shorter in maturity. The Ford Motor Credit 6.875% bonds due 2/1/06, returned 5.16%, and the Safeway 4.80% bonds due 7/16/07, returned 3.96% for the 12 months. A convertible bond for IVAX Corp’s 4.5% bonds due 5/15/08, were called at par on 1/9/06, and returned 7% for their 250 day holding period in the Fund. Of the mortgage-backed securities, the higher coupons did the best. The GNMA 7% bonds due 2/15/28, returned 5.07% for the year. Our decision to hold an underweight allocation to agency notes, a sector that ultimately performed well for the year, detracted from performance. Inflation notes, which comprise about 5% of the
24 Annual Report to Shareholders
Management’s Discussion of Fund Performance — Continued
fixed-income portfolio, performed well at times throughout the year, but lagged in performance for the 12 months.
Peter A. Sorrentino, CFA
Troy R. Snider, CFA
David P. Francis
April 20, 2006
DJIA 11,342.89
Annual Report to Shareholders 25
Expense Example
Balanced Trust
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary and Financial Intermediary Class shares, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.
| | | | | | | | | | | | | | |
| | | Beginning | | Ending | | Expenses PaidA |
| | | Account | | Account | | During the |
| | | Value | | Value | | Period |
| | | 10/1/05 | | 3/31/06 | | 10/1/05 to 3/31/06 |
| |
| Primary Class | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,026.90 | | | $ | 9.35 | |
| | Hypothetical (5% return before expenses) | | | 1,000.00 | | | | 1,015.71 | | | | 9.30 | |
| Financial Intermediary Class | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,029.30 | | | $ | 6.83 | |
| | Hypothetical (5% return before expenses) | | | 1,000.00 | | | | 1,018.20 | | | | 6.79 | |
| Institutional Class | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,028.50 | | | $ | 5.56 | |
| | Hypothetical (5% return before expenses) | | | 1,000.00 | | | | 1,019.45 | | | | 5.54 | |
| |
| A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amount shown as “Expenses Paid” is equal to the annualized expense ratio of 1.85%, 1.35% and 1.10% for the Primary Class, Financial Intermediary Class and Institutional Class respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182) and divided by 365. |
26 Annual Report to Shareholders
Performance Information
Balanced Trust
The graphs on the following pages compare the Fund’s total returns to that of two closely matched broad-based securities market indices. The graphs illustrate the cumulative total return of an initial $10,000 investment in the Primary Class and an initial $1,000,000 investment in each of the Financial Intermediary or Institutional Classes, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing each securities market index do not include any transaction costs associated with buying and selling securities in the indices or other administrative expenses. Both the Fund’s results and the indices’ results assume reinvestment of all dividends and distributions.
Total return measures investment performance in terms of appreciation or depreciation in a fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.
Annual Report to Shareholders 27
Growth of a $10,000 Investment — Primary Class
Periods Ended March 31, 2006
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +8.68% | | | | +8.68% | |
| | Five Years | | | +17.84% | | | | +3.34% | |
| | Life of Class* | | | +50.52% | | | | +4.40% | |
| |
| * Inception date: October 1, 1996 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
| |
| A | Index returns are for periods beginning September 30, 1996. |
28 Annual Report to Shareholders
Performance Information — Continued
Growth of a $1,000,000 Investment — Financial Intermediary Class
Periods Ended March 31, 2006
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +9.24% | | | | +9.24% | |
| | Five Years | | | +20.73% | | | | +3.84% | |
| | Life of Class* | | | +21.35% | | | | +3.91% | |
| |
| * Inception date: March 16, 2001 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
| |
| B | Index returns are for periods beginning March 31, 2001. |
Annual Report to Shareholders 29
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended March 31, 2006
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +9.25% | | | | +9.25% | |
| | Five Years | | | +22.06% | | | | +4.07% | |
| | Life of Class* | | | +22.69% | | | | +4.14% | |
| |
| * Inception date: March 16, 2001 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
30 Annual Report to Shareholders
Performance Information — Continued
Portfolio Composition (As of March 31 2006) C
(As a percentage of the portfolio)
Top Ten Holdings (As of March 31, 2006)
| | | | | |
| | | % of |
| Security | | Net Assets |
| |
| United States Treasury Notes, 3.38%, due 11/15/08 | | | 2.6% | |
| Questar Corporation | | | 2.2% | |
| Citigroup Inc. | | | 2.0% | |
| Fannie Mae | | | 1.9% | |
| United States Treasury Notes, 3.25%, due 8/15/07 | | | 1.9% | |
| General Electric Company | | | 1.9% | |
| Target Corporation | | | 1.9% | |
| Kansas City Southern | | | 1.9% | |
| The PMI Group, Inc. | | | 1.7% | |
| McDonald’s Corporation | | | 1.7% | |
| |
| C | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
Annual Report to Shareholders 31
Selected Portfolio Performance D
| | | | | |
| Strongest performers for the year ended March 31, 2006E |
| |
| 1. | | Schlumberger Limited | | +81.3% |
| 2. | | Rio Tinto plc | | +66.1% |
| 3. | | MedImmune, Inc. | | +53.6% |
| 4. | | Kyphon Inc. | | +47.8% |
| 5. | | Nokia Oyj | | +41.0% |
| 6. | | EnCana Corp. | | +33.6% |
| 7. | | Kansas City Southern | | +28.3% |
| 8. | | Texas Instruments Incorporated | | +27.9% |
| 9. | | Lincoln National Corporation | | +24.6% |
| 10. | | L-3 Communications Holdings, Inc. | | +21.7% |
| |
| | | | | |
| Weakest performers for the year ended March 31, 2006E |
| |
| 1. | | Intel Corporation | | -15.0% |
| 2. | | Johnson & Johnson | | -10.0% |
| 3. | | Kimberly-Clark Corporation | | -9.4% |
| 4. | | SYSCO Corporation | | -9.2% |
| 5. | | International Business Machines Corporation | | -8.9% |
| 6. | | Abbott Laboratories | | -6.6% |
| 7. | | United States Treasury Notes, 2%, 1/15/14 | | -4.7% |
| 8. | | Wal-Mart Stores, Inc. | | -4.5% |
| 9. | | Kroger Company | | -4.5% |
| 10. | | SLM Corporation | | -3.9% |
Portfolio Changes
| | | |
| Securities added during the 1st quarter 2006 | | Securities sold during the 1st quarter 2006 |
| | | |
| CANON Inc. — ADR | | Fannie Mae, 5.50%, 10/1/34 |
| First Data Corporation, 3.38%, 8/1/08 | | Fannie Mae, 5.00%, 7/1/18 |
| General Electric Company, 5.00%, 2/1/13 | | Ford Motor Credit Company, 6.88%, 2/1/06 |
| Teva Pharmaceutical Industries Ltd. — ADR | | IVAX Corporation |
| The Goldman Sachs Group, Inc. | | IVAX Corporation, 4.50%, 5/15/08 |
| |
| D | Individual security performance is measured by the change in the security’s price; for stocks, dividends are assumed to be reinvested at the time they were paid. |
| |
| E | Securities held for the entire year. |
32 Annual Report to Shareholders
Portfolio of Investments
Balanced Trust
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | |
| | | Par/Shares | | Value |
| |
| Common Stocks and Equity Interests — 59.0% |
| Consumer Discretionary — 6.4% |
| Hotels, Restaurants and Leisure — 1.7% |
| | McDonald’s Corporation | | | 28 | | | $ | 962 | |
| | | | | | | | | |
| Media — 0.8% |
| | The Walt Disney Company | | | 15 | | | | 429 | |
| | | | | | | | | |
| Multi-Line Retail — 1.9% |
| | Target Corporation | | | 20 | | | | 1,050 | |
| | | | | | | | | |
| Office Electronics — 0.9% |
| | CANON Inc. — ADR | | | 8 | | | | 542 | |
| | | | | | | | | |
| Specialty Retail — 1.1% |
| | Lowe’s Companies, Inc. | | | 10 | | | | 619 | |
| | | | | | | | | |
| Consumer Staples — 4.9% |
| Beverages — 1.5% |
| | PepsiCo, Inc. | | | 15 | | | | 838 | |
| | | | | | | | | |
| Food and Staples Retailing — 1.5% |
| | SYSCO Corporation | | | 10 | | | | 308 | |
| | Wal-Mart Stores, Inc. | | | 12 | | | | 548 | |
| | | | | | | | 856 | |
| | | | | | | | | |
| Household Products — 1.2% |
| | Kimberly-Clark Corporation | | | 12 | | | | 670 | |
| | | | | | | | | |
| Personal Products — 0.7% |
| | Avon Products, Inc. | | | 12 | | | | 362 | |
| | | | | | | | | |
Annual Report to Shareholders 33
| | | | | | | | | | |
| | | Par/Shares | | Value |
| |
| Energy — 8.7% |
| Energy Equipment and Services — 4.8% |
| | Nabors Industries, Ltd. | | | 13 | | | $ | 959 | A |
| | National-Oilwell Varco Inc. | | | 13 | | | | 840 | A |
| | Schlumberger Limited | | | 7 | | | | 873 | |
| | | | | | | | 2,672 | |
| | | | | | | | | |
| Oil, Gas & Consumable Fuels — 3.9% |
| | BP plc – ADR | | | 10 | | | | 717 | |
| | ChevronTexaco Corporation | | | 12 | | | | 707 | |
| | EnCana Corp. | | | 16 | | | | 767 | |
| | | | | | | | 2,191 | |
| | | | | | | | | |
| Financials — 8.8% |
| Capital Markets — 1.0% |
| | The Goldman Sachs Group, Inc. | | | 4 | | | | 549 | |
| | | | | | | | | |
| Consumer Finance — 1.0% |
| | Capital One Financial Corporation | | | 7 | | | | 580 | |
| | | | | | | | | |
| Diversified Financial Services — 2.0% |
| | Citigroup Inc. | | | 24 | | | | 1,138 | |
| | | | | | | | | |
| Insurance — 1.1% |
| | Lincoln National Corporation | | | 12 | | | | 633 | |
| | | | | | | | | |
| Thrifts and Mortgage Finance — 3.7% |
| | Fannie Mae | | | 21 | | | | 1,085 | |
| | The PMI Group, Inc. | | | 21 | | | | 978 | |
| | | | | | | | 2,063 | |
| | | | | | | | | |
| Health Care — 9.5% |
| Biotechnology — 2.9% |
| | MedImmune, Inc. | | | 24 | | | | 874 | A |
| | Medtronic, Inc. | | | 15 | | | | 782 | |
| | | | | | | | 1,656 | |
| | | | | | | | | |
34 Annual Report to Shareholders
Portfolio of Investments — Continued
Balanced Trust — Continued
| | | | | | | | | | |
| | | Par/Shares | | Value |
| |
| Health Care — Continued |
| Health Care Equipment and Supplies — 3.3% |
| | Biomet, Inc. | | | 21 | | | $ | 753 | |
| | DENTSPLY International Inc. | | | 6 | | | | 372 | |
| | Kyphon Inc. | | | 10 | | | | 357 | A |
| | STERIS Corporation | | | 15 | | | | 358 | |
| | | | | | | | 1,840 | |
| | | | | | | | | |
| Pharmaceuticals — 3.3% |
| | Abbott Laboratories | | | 12 | | | | 493 | |
| | Johnson & Johnson | | | 10 | | | | 586 | |
| | Teva Pharmaceutical Industries Ltd. – ADR | | | 19 | | | | 786 | |
| | | | | | | | 1,865 | |
| | | | | | | | | |
| Industrials — 7.3% |
| Aerospace and Defense — 1.5% |
| | L-3 Communications Holdings, Inc. | | | 10 | | | | 824 | |
| | | | | | | | | |
| Industrial Conglomerates — 1.9% |
| | General Electric Company | | | 31 | | | | 1,071 | |
| | | | | | | | | |
| Machinery — 1.3% |
| | Dover Corporation | | | 15 | | | | 723 | |
| | | | | | | | | |
| Road and Rail — 2.6% |
| | Kansas City Southern | | | 42 | | | | 1,047 | A |
| | Norfolk Southern Corporation | | | 8 | | | | 444 | |
| | | | | | | | 1,491 | |
| | | | | | | | | |
| Information Technology — 8.7% |
| Communications Equipment — 2.8% |
| | Cisco Systems, Inc. | | | 37 | | | | 793 | A |
| | Nokia Oyj – ADR | | | 39 | | | | 798 | |
| | | | | | | | 1,591 | |
| | | | | | | | | |
Annual Report to Shareholders 35
| | | | | | | | | | |
| | | Par/Shares | | Value |
| |
| Information Technology — Continued |
| Computers and Peripherals — 1.1% |
| | International Business Machines Corporation | | | 7 | | | $ | 602 | |
| | | | | | | | | |
| Semiconductors and Semiconductor Equipment — 3.6% |
| | Applied Materials, Inc. | | | 35 | | | | 604 | |
| | Intel Corporation | | | 35 | | | | 681 | |
| | Texas Instruments Incorporated | | | 22 | | | | 721 | |
| | | | | | | | 2,006 | |
| | | | | | | | | |
| Software — 1.2% |
| | Oracle Corporation | | | 48 | | | | 660 | A |
| | | | | | | | | |
| Materials — 2.5% |
| Chemicals — 1.7% |
| | Praxair, Inc. | | | 17 | | | | 960 | |
| | | | | | | | | |
| Metals and Mining — 0.8% |
| | Rio Tinto plc – ADR | | | 2 | | | | 455 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | Par/ | | |
| | | Rate | | Maturity Date | | Shares | | Value |
| |
| Utilities — 2.2% |
| Gas Utilities — 2.2% |
| | Questar Corporation | | | | | | | | | 17 | | | $ | 1,219 | |
| | | | | | | | | | | | | | | |
| Total Common Stocks and Equity Interests (Identified Cost — $25,890) | | | 33,117 | |
| Corporate Bonds and Notes — 13.9% |
| Aerospace and Defense — 0.9% |
| | General Dynamics Corporation | | 4.500% | | | 8/15/10 | | | $ | 500 | | | $ | 484 | |
| | | | | | | | | | | | | | | |
| Capital Markets — 0.9% |
| | Merrill Lynch & Co., Inc. | | 3.700% | | | 4/21/08 | | | | 500 | | | | 486 | |
| | | | | | | | | | | | | | | |
36 Annual Report to Shareholders
Portfolio of Investments — Continued
Balanced Trust — Continued
| | | | | | | | | | | | | | | | |
| | | | | | | Par/ | | |
| | | Rate | | Maturity Date | | Shares | | Value |
| |
| Corporate Bonds and Notes — Continued |
| Commercial Banks — 0.6% |
| | Bank of America Corporation | | 5.125% | | | 11/15/14 | | | | 330 | | | $ | 321 | |
| | | | | | | | | | | | | | | |
| Computers and Peripherals — 0.9% |
| | International Business Machines Corporation | | 3.800% | | | 2/1/08 | | | | 550 | | | | 536 | |
| | | | | | | | | | | | | | | |
| Diversified Financial Services — 1.7% |
| | Citigroup Inc. | | 3.500% | | | 2/1/08 | | | | 500 | | | | 485 | |
| | First Data Corporation | | 3.375% | | | 8/1/08 | | | | 475 | | | | 454 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 939 | |
| | | | | | | | | | | | | | | |
| Industrial Conglomerates — 0.8% |
| | General Electric Company | | 5.000% | | | 2/1/13 | | | | 450 | | | | 438 | |
| | | | | | | | | | | | | | | |
| Finance — 3.5% |
| | American Express Credit Corporation | | 3.000% | | | 5/16/08 | | | | 575 | | | | 549 | |
| | Caterpillar Financial Services Corporation | | 4.300% | | | 6/1/10 | | | | 500 | | | | 480 | |
| | John Deere Capital Corporation | | 3.900% | | | 1/15/08 | | | | 500 | | | | 488 | |
| | SLM Corporation | | 5.54% | | | 1/31/14 | | | | 500 | | | | 481 | B |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 1,998 | |
| | | | | | | | | | | | | | | |
| Food and Staples Retailing — 2.5% |
| | Kroger Company | | 6.750% | | | 4/15/12 | | | | 400 | | | | 416 | |
| | Safeway Inc. | | 4.800% | | | 7/16/07 | | | | 525 | | | | 520 | |
| | Wal-Mart Stores, Inc. | | 4.550% | | | 5/1/13 | | | | 475 | | | | 452 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 1,388 | |
| | | | | | | | | | | | | | | |
| Oil, Gas & Consumable Fuels — 0.5% |
| | Pacific Gas and Electric Company | | 4.200% | | | 3/1/11 | | | | 325 | | | | 306 | |
| | | | | | | | | | | | | | | |
Annual Report to Shareholders 37
| | | | | | | | | | | | | | | | |
| | | | | | | Par/ | | |
| | | Rate | | Maturity Date | | Shares | | Value |
| |
| Pharmaceuticals — 0.8% |
| | Abbott Laboratories | | 3.750% | | | 3/15/11 | | | | 500 | | | $ | 466 | |
| | | | | | | | | | | | | | | |
| Road and Rail — 0.8% |
| | Union Pacific Corporation | | 6.625% | | | 2/1/08 | | | | 450 | | | | 459 | |
| | | | | | | | | | | | | | | |
| Total Corporate Bonds and Notes (Identified Cost — $8,031) | | | 7,821 | |
| | | | | |
| U.S. Government and Agency Obligations — 17.3% |
| Fixed Rate Securities — 15.5% |
| | Fannie Mae | | 3.250% | | | 2/15/09 | | | | 750 | | | | 713 | |
| | Fannie Mae | | 3.875% | | | 2/15/10 | | | | 750 | | | | 717 | |
| | Fannie Mae | | 4.625% | | | 10/15/14 | | | | 300 | | | | 289 | |
| | Federal Farm Credit Bank | | 3.750% | | | 4/9/10 | | | | 475 | | | | 451 | |
| | Freddie Mac | | 3.160% | | | 5/7/07 | | | | 675 | | | | 661 | |
| | Freddie Mac | | 3.625% | | | 9/15/08 | | | | 750 | | | | 726 | |
| | Freddie Mac | | 4.500% | | | 11/15/12 | | | | 650 | | | | 627 | |
| | United States Treasury Notes | | 3.250% | | | 8/15/07 | | | | 1,100 | | | | 1,076 | |
| | United States Treasury Notes | | 3.375% | | | 11/15/08 | | | | 1,500 | | | | 1,447 | |
| | United States Treasury Notes | | 3.625% | | | 7/15/09 | | | | 950 | | | | 916 | |
| | United States Treasury Notes | | 5.000% | | | 8/15/11 | | | | 450 | | | | 454 | |
| | United States Treasury Notes | | 4.000% | | | 2/15/14 | | | | 650 | | | | 613 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 8,690 | |
| | | | | | | | | | | | | | | |
| Stripped Securities — 0.8% |
| | United States Treasury STRIPS | | 0.000% | | | 5/15/13 | | | | 625 | | | | 442 | C |
| | | | | | | | | | | | | | | |
| Treasury Inflation-Indexed Securities — 1.0% |
| | United States Treasury Inflation-Protected Security | | 2.000% | | | 1/15/14 | | | | 590 | | | | 576 | D |
| | | | | | | | | | | | | | | |
| Total U.S. Government and Agency Obligations (Identified Cost — $10,027) | | | 9,708 | |
| | | | | |
38 Annual Report to Shareholders
Portfolio of Investments — Continued
Balanced Trust — Continued
| | | | | | | | | | | | | | | | |
| | | | | | | Par/ | | |
| | | Rate | | Maturity Date | | Shares | | Value |
| |
| U.S. Government Agency Mortgage-Backed Securities — 5.8% |
| Fixed Rate Securities — 5.8% |
| | Fannie Mae | | 5.000% | | | 7/1/18 to 1/1/36 | | | | 1,058 | | | $ | 1,023 | |
| | Fannie Mae | | 5.550% | | | 10/1/34 | | | | 943 | | | | 922 | |
| | Government National Mortgage Association | | 7.000% | | | 2/15/28 to 12/15/31 | | | | 186 | | | | 195 | |
| | Government National Mortgage Association | | 6.000% | | | 1/15/29 to 1/15/34 | | | | 500 | | | | 506 | |
| | Government National Mortgage Association | | 5.500% | | | 6/15/34 to 6/15/35 | | | | 627 | | | | 621 | |
| | | | | | | | | | | | | | | |
| Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $3,327) | | | 3,267 | |
| |
| Total Investments — 96.0% (Identified Cost — $47,275) | | | 53,913 | |
| Other Assets Less Liabilities — 4.0% | | | 2,241 | |
| | | | | |
Net Assets — 100.0% | | | | | | | | | | | | $ | 56,154 | |
| | | | | | | | | | | | | | | |
| |
| ADR | — American Depository Receipt. |
See notes to financial statements.
| |
| B | Indexed Security — The rates of interest earned on these securities are tied to the Consumer Price Index or to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of March 31, 2006. |
| |
| C | STRIPS — Separate Trading of Registered Interest and Principal of Securities. This is a pre-stripped zero coupon bond that is a direct obligation of the U.S. Treasury. |
| |
| D | Inflation-Protected Securities — Security whose principal value is adjusted daily or monthly in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value. |
Annual Report to Shareholders 39
Statement of Assets and Liabilities
Balanced Trust
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | |
| |
Assets: | | | | | | | | |
| | Investment securities at market value (Identified Cost — $47,275) | | | | | | $ | 53,913 | |
| | Cash | | | | | | | 112 | |
| | Receivable for fund shares sold | | | | | | | 114 | |
| | Receivable for securities sold | | | | | | | 1,973 | |
| | Dividends and interest receivable | | | | | | | 233 | |
| | | | | | | | | |
| | | Total assets | | | | | | | 56,345 | |
Liabilities: | | | | | | | | |
| | Payable for fund shares repurchased | | $ | 86 | | | | | |
| | Accrued management fee | | | 9 | | | | | |
| | Accrued distribution fee | | | 23 | | | | | |
| | Tax withholding liability | | | 3 | | | | | |
| | Accrued expenses | | | 70 | | | | | |
| | | | | | | | | |
| | | Total liabilities | | | | | | | 191 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 56,154 | |
| | | | | | | | | |
Net assets consist of: | | | | | | | | |
| | Accumulated paid-in-capital applicable to: | | | | | | | | |
| | | 3,482 Primary Class shares outstanding | | | | | | $ | 38,798 | |
| | | 563 Financial Intermediary Class shares outstanding | | | | | | | (2,109 | ) |
| | | 880 Institutional Class shares outstanding | | | | | | | 10,485 | |
| | Undistributed net investment income | | | | | | | 255 | |
| | Undistributed net realized gain on investments | | | | | | | 2,087 | |
| | Unrealized appreciation/depreciation of investments | | | | | | | 6,638 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 56,154 | |
| | | | | | | | | |
Net Asset Value Per Share: | | | | | | | | |
| | Primary Class | | | | | | | $11.41 | |
| | | | | | | | | |
| | Financial Intermediary Class | | | | | | | $11.40 | |
| | | | | | | | | |
| | Institutional Class | | | | | | | $11.37 | |
| | | | | | | | | |
| |
See notes to financial statements.
40 Annual Report to Shareholders
Statement of Operations
Balanced Trust
For the Year Ended March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | | |
| |
Investment Income: | | | | | | | | |
| | Dividends | | $ | 478 | A | | | | |
| | Interest | | | 983 | | | | | |
| | | | | | | | | |
| | | | Total income | | | | | | $ | 1,461 | |
Expenses: | | | | | | | | |
| | Management fee | | | 442 | | | | | |
| | Distribution and service fees: | | | | | | | | |
| | | Primary Class | | | 281 | | | | | |
| | | Financial Intermediary Class | | | 40 | | | | | |
| | Audit and legal fees | | | 43 | | | | | |
| | Custodian fees | | | 46 | | | | | |
| | Directors’ fees and expenses | | | 16 | | | | | |
| | Registration fees | | | 57 | | | | | |
| | Reports to shareholders | | | 47 | | | | | |
| | Transfer agent and shareholder servicing expense: | | | | | | | | |
| | | Primary Class | | | 51 | | | | | |
| | | Financial Intermediary Class | | | 18 | | | | | |
| | | Institutional Class | | | 2 | | | | | |
| | Other expenses | | | 44 | | | | | |
| | | | | | | | | |
| | | | 1,087 | | | | | |
| | Less: Fees waived | | | (117 | ) | | | | |
| | Compensating balance credits | | | (1 | ) | | | | |
| | | | | | | | | |
| | Total expenses, net of waivers and compensating | | | | | | | | |
| | | balance credits | | | | | | | 969 | |
| | | | | | | | | |
Net Investment Income | | | | | | | 492 | |
Net Realized and Unrealized Gain on Investments: | | | | | | | | |
| | Realized gain on investments | | | 4,044 | | | | | |
| | Change in unrealized appreciation/depreciation of investments | | | 488 | | | | | |
| | | | | | | | | |
| Net Realized and Unrealized Gain on Investments | | | 4,532 | |
| |
Change in Net Assets Resulting From Operations | | | | | | $ | 5,024 | |
| |
See notes to financial statements.
| |
| A | Net of foreign taxes withheld of $7. |
Annual Report to Shareholders 41
Statement of Changes in Net Assets
Balanced Trust
(Amounts in Thousands)
| | | | | | | | | | | |
| | | For the Years Ended |
| | | |
| | | 3/31/06 | | 3/31/05 |
| |
Change in Net Assets: | | | | | | | | |
| Net investment income | | $ | 492 | | | $ | 522 | |
| Net realized gain on investments | | | 4,044 | | | | 3,738 | |
| Change in unrealized appreciation/(depreciation) of investments | | | 488 | | | | (1,815 | ) |
| |
| Change in net assets resulting from operations | | | 5,024 | | | | 2,445 | |
| Distributions to shareholders: | | | | | | | | |
| | From net investment income: | | | | | | | | |
| | | Primary Class | | | (248 | ) | | | (274 | ) |
| | | Financial Intermediary Class | | | (208 | ) | | | (289 | ) |
| | | Institutional Class | | | (44 | ) | | | (9 | ) |
| | From net realized gain on investments: | | | | | | | | |
| | | Primary Class | | | (1,947 | ) | | | (709 | ) |
| | | Financial Intermediary Class | | | (772 | ) | | | (392 | ) |
| | | Institutional Class | | | (407 | ) | | | (10 | ) |
| Change in net assets from Fund share transactions: | | | | | | | | |
| | | Primary Class | | | 1,257 | | | | (1,846 | ) |
| | | Financial Intermediary Class | | | (15,757 | ) | | | (361 | ) |
| | | Institutional Class | | | 9,331 | | | | 123 | |
| |
| Change in net assets | | | (3,771 | ) | | | (1,322 | ) |
Net Assets: | | | | | | | | |
| Beginning of year | | | 59,925 | | | | 61,247 | |
| |
| End of year | | $ | 56,154 | | | $ | 59,925 | |
| |
| Undistributed net investment income | | $ | 255 | | | $ | 253 | |
| |
See notes to financial statements.
42 Annual Report to Shareholders
Financial Highlights
Balanced Trust
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | $ | 11.15 | | | $ | 10.99 | | | $ | 9.36 | | | $ | 10.97 | | | $ | 11.64 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment income | | | .07 | | | | .08 | | | | .10 | | | | .13 | | | | .11 | |
| | Net realized and unrealized gain/(loss) on investments | | | .88 | | | | .37 | | | | 1.66 | | | | (1.57 | ) | | | .02 | |
| | | |
| | Total from investment operations | | | .95 | | | | .45 | | | | 1.76 | | | | (1.44 | ) | | | .13 | |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net investment income | | | (.08 | ) | | | (.08 | ) | | | (.13 | ) | | | (.10 | ) | | | (.11 | ) |
| | From net realized gain on investments | | | (.61 | ) | | | (.21 | ) | | | — | | | | (.07 | ) | | | (.69 | ) |
| | | |
| | Total distributions | | | (.69 | ) | | | (.29 | ) | | | (.13 | ) | | | (.17 | ) | | | (.80 | ) |
| | | |
| Net asset value, end of year | | $ | 11.41 | | | $ | 11.15 | | | $ | 10.99 | | | $ | 9.36 | | | $ | 10.97 | |
| | | |
| Total return | | | 8.68 | % | | | 4.02 | % | | | 19.03 | % | | | (13.20 | )% | | | .89 | % |
Ratios to Average Net Assets:A | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | 2.07 | % | | | 2.02 | % | | | 1.96 | % | | | 2.03 | % | | | 2.02 | % |
| | Expenses net of waivers, if any | | | 1.85 | % | | | 1.85 | % | | | 1.85 | % | | | 1.85 | % | | | 1.85 | % |
| | Expenses net of all reductions | | | 1.85 | % | | | 1.85 | % | | | 1.85 | % | | | 1.85 | % | | | 1.85 | % |
| | Net investment income | | | .64 | % | | | .70 | % | | | .94 | % | | | 1.37 | % | | | 1.04 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 23.0 | % | | | 42.4 | % | | | 42.1 | % | | | 29.5 | % | | | 55.4 | % |
| | Net assets, end of year (in thousands) | | $ | 39,734 | | | $ | 37,602 | | | $ | 38,936 | | | $ | 32,914 | | | $ | 36,308 | |
| |
See notes to financial statements.
| |
| A | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
Annual Report to Shareholders 43
Financial Intermediary Class:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | $ | 11.13 | | | $ | 11.00 | | | $ | 9.37 | | | $ | 10.96 | | | $ | 11.64 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment income | | | .11 | | | | .13 | | | | .15 | | | | .20 | | | | .17 | |
| | Net realized and unrealized | | | | | | | | | | | | | | | | | | | | |
| | | gain/(loss) on investments | | | .89 | | | | .36 | | | | 1.66 | | | | (1.58 | ) | | | .01 | |
| | | |
| | Total from investment operations | | | 1.00 | | | | .49 | | | | 1.81 | | | | (1.38 | ) | | | .18 | |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net investment income | | | (.12 | ) | | | (.15 | ) | | | (.18 | ) | | | (.14 | ) | | | (.17 | ) |
| | From net realized gain on investments | | | (.61 | ) | | | (.21 | ) | | | — | | | | (.07 | ) | | | (.69 | ) |
| | | |
| | Total distributions | | | (.73 | ) | | | (.36 | ) | | | (.18 | ) | | | (.21 | ) | | | (.86 | ) |
| | | |
| Net asset value, end of year | | $ | 11.40 | | | $ | 11.13 | | | $ | 11.00 | | | $ | 9.37 | | | $ | 10.96 | |
| | | |
| Total return | | | 9.24 | % | | | 4.53 | % | | | 19.52 | % | | | (12.72 | )% | | | 1.35 | % |
Ratios to Average Net Assets:A | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | 1.54 | % | | | 1.47 | % | | | 1.44 | % | | | 1.46 | % | | | 1.48 | % |
| | Expenses net of waivers, if any | | | 1.35 | % | | | 1.35 | % | | | 1.35 | % | | | 1.35 | % | | | 1.35 | % |
| | Expenses net of all reductions | | | 1.35 | % | | | 1.35 | % | | | 1.35 | % | | | 1.35 | % | | | 1.35 | % |
| | Net investment income | | | 1.09 | % | | | 1.21 | % | | | 1.46 | % | | | 1.88 | % | | | 1.55 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 23.0 | % | | | 42.4 | % | | | 42.1 | % | | | 29.5 | % | | | 55.4 | % |
| | Net assets, end of year (in thousands) | | $ | 6,417 | | | $ | 21,695 | | | $ | 21,812 | | | $ | 20,182 | | | $ | 26,463 | |
| |
See notes to financial statements.
44 Annual Report to Shareholders
Financial Highlights — Continued
Balanced Trust — Continued
Institutional Class:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | | $11.13 | | | $ | 11.01 | | | $ | 9.38 | | | $ | 10.98 | | | $ | 11.64 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment income | | | .19 | | | | .17 | | | | .17 | | | | .22 | | | | .19 | |
| | Net realized and unrealized gain/(loss) on investments | | | .81 | | | | .36 | | | | 1.68 | | | | (1.59 | ) | | | .03 | |
| | | |
| | Total from investment operations | | | 1.00 | | | | .53 | | | | 1.85 | | | | (1.37 | ) | | | .22 | |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net investment income | | | (.15 | ) | | | (.20 | ) | | | (.22 | ) | | | (0.16 | ) | | | (.19 | ) |
| | From net realized gain on investments | | | (.61 | ) | | | (.21 | ) | | | — | | | | (.07 | ) | | | (.69 | ) |
| | | |
| | Total distributions | | | (.76 | ) | | | (.41 | ) | | | (.22 | ) | | | (.23 | ) | | | (.88 | ) |
| | | |
| Net asset value, end of year | | | $11.37 | | | $ | 11.13 | | | $ | 11.01 | | | $ | 9.38 | | | $ | 10.98 | |
| | | |
| Total return | | | 9.25 | % | | | 4.86 | % | | | 19.87 | % | | | (12.58 | )% | | | 1.68 | % |
Ratios to Average Net Assets:A | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | 1.22 | % | | | 1.17 | % | | | 1.12 | % | | | 1.17 | % | | | 1.21 | % |
| | Expenses net of waivers, if any | | | 1.10 | % | | | 1.10 | % | | | 1.10 | % | | | 1.10 | % | | | 1.10 | % |
| | Expenses net of all reductions | | | 1.10 | % | | | 1.10 | % | | | 1.10 | % | | | 1.10 | % | | | 1.10 | % |
| | Net investment income | | | 1.45 | % | | | 1.47 | % | | | 1.68 | % | | | 2.14 | % | | | 1.79 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 23.0 | % | | | 42.4 | % | | | 42.1 | % | | | 29.5 | % | | | 55.4 | % |
| | Net assets, end of year (in thousands) | | $ | 10,003 | | | $ | 628 | | | $ | 499 | | | $ | 341 | | | $ | 391 | |
| |
See notes to financial statements.
Annual Report to Shareholders 45
Management’s Discussion of Fund Performance
Financial Services Fund
Total returns for the Financial Services Fund (“Fund”) for various periods ended March 31, 2006, are presented below, along with those of some comparative indices:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Average Annual Total Returns |
| | | | | | | Through March 31, 2006 |
| | | First | | | | |
| | | Quarter | | One | | Three | | Five | | Since |
| | | 2006 | | Year | | Years | | Years | | InceptionA |
| |
| Financial Services Fund | | | | | | | | | | | | | | | | | | | | |
| | Primary Class | | | +5.23% | | | | +17.22% | | | | +20.68% | | | | +12.30% | | | | +9.62% | |
| | Financial Intermediary Class | | | +5.54% | | | | +18.16% | | | | +21.60% | | | | +13.16% | | | | +10.46% | |
Lipper Financial Services Fund IndexB | | | +4.79% | | | | +17.56% | | | | +20.67% | | | | +8.48% | | | | +7.69% | |
S&P 500 Financial IndexB | | | +3.25% | | | | +17.42% | | | | +18.96% | | | | +6.56% | | | | +7.14% | |
S&P 500 Stock Composite IndexB | | | +4.21% | | | | +11.73% | | | | +17.22% | | | | +3.97% | | | | +3.04% | |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary Class please visit www.leggmasonfunds.com; for the Financial Intermediary Class please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. Performance figures for periods longer than one year represent average annual returns. | |
For the 12-months ending March 31, 2006, the S&P 500 returned a positive 11.73%, with each quarter showing a gain. This gain was achieved despite a year marked by rising interest rates, inverted yield curve, the retirement of Alan Greenspan, rapidly rising energy prices and two powerful storms that lowered gross domestic product substantially in the quarter that ended calendar year 2005. Fueling the market gains were the double-digit earnings per share gains reported by the S&P 500 companies for 2005.
For the fiscal year ended March 31, 2006, the Legg Mason Financial Services Fund’s primary shares returned a positive 17.2%. This compares very favorably with the 11.7% return for the S&P 500 and almost equal to the 17.4% return for the S&P 500 Financials Index and the 17.6% return for the Lipper Financial Services Fund Index. The Fund’s
| |
| A | The inception date for both the Primary and Financial Intermediary Classes is November 16, 1998. Index returns are for periods beginning November 30, 1998. |
| |
| B | See Glossary of Index Definitions on page 112. It is not possible to invest in an index. |
46 Annual Report to Shareholders
Management’s Discussion of Fund Performance — Continued
performance was stronger in the beginning of the year than toward the end of the year as we reached our 15th interest rate increase. In the current interest rate environment, investors viewed brokers and insurance companies’ stocks more favorably than bank stocks. With close to 60% of the Fund weighted in mid- and small-size regional banks, it was difficult to beat the financial indexes. During the fiscal year the Fund experienced eight takeovers with premiums ranging from 7% to the current market value to as high as 30%, helping performance. The best performers for the year were: First State Bancorporation, up 58.5%, Cascade Bancorp, up 54.6%, First Fidelity, up 47.9% and Assurant, Inc., up 47.3%. The worst performers, which detracted from performance were: The Bank Holdings, down 14.1%,Wainwright Bank & Trust Company, down 7.3%, First Keystone Corp, down 5.2% and Bancorp Rhode Island, Inc., down 5.1%.
Amy L. LaGuardia, CFA
April 20, 2006
DJIA 11,342.89
Annual Report to Shareholders 47
Expense Example
Financial Services Fund
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary and Financial Intermediary Class shares, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.
| | | | | | | | | | | | | | |
| | | | | | | Expenses PaidA |
| | | Beginning | | Ending | | During the |
| | | Account | | Account | | Period |
| | | Value | | Value | | 10/1/05 to |
| | | 10/1/05 | | 3/31/06 | | 3/31/06 |
| |
| Primary Class: | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,089.60 | | | $ | 11.72 | |
| | Hypothetical (5% return before expenses) | | | 1,000.00 | | | | 1,013.71 | | | | 11.30 | |
| Financial Intermediary Class: | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,094.50 | | | $ | 7.83 | |
| | Hypothetical (5% return before expenses) | | | 1,000.00 | | | | 1,017.45 | | | | 7.54 | |
| |
| A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amount shown as “Expenses Paid” is equal to the annualized expense ratio of 2.25% and 1.50% for the Primary Class and Financial Intermediary Class respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182) and divided by 365. |
48 Annual Report to Shareholders
Performance Information
Financial Services Fund
The graphs on the following pages compare the Fund’s total returns to the S&P 500 Stock Composite Index and the Lipper Financial Services Fund Index. The graphs illustrate the cumulative total return of an initial $10,000 investment in the Primary Class and an initial $1,000,000 investment in the Financial Intermediary Class, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing each securities market index do not include any transaction costs associated with buying and selling securities in the indices or other administrative expenses. Both the Fund’s results and the indices’ results assume reinvestment of all dividends and distributions.
Total return measures investment performance in terms of appreciation or depreciation in a fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.
Annual Report to Shareholders 49
Growth of a $10,000 Investment — Primary Class
Periods Ended March 31, 2006
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +17.22% | | | | +17.22% | |
| | Five Years | | | +78.62% | | | | +12.30% | |
| | Life of Class* | | | +96.84% | | | | +9.62% | |
| |
| * Inception date: November 16, 1998 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
| |
| A | Index return is for the period beginning May 31, 2001. |
50 Annual Report to Shareholders
| | |
| | Performance Information — Continued | |
| |
| | Growth of a $1,000,000 Investment — Financial Intermediary ClassB | |
| |
| |  | |
| | Periods Ended March 31, 2006 | |
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +18.16% | | | | +18.16% | |
| | Five Years | | | +85.59% | | | | +13.16% | |
| | Life of Class* | | | +108.23% | | | | +10.46% | |
| |
| * Inception date: November 16, 1998 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
| |
| B | On July 31, 2004, Class A shares of the Fund were renamed Financial Intermediary Class shares. Class A shares were subject to a maximum initial sales charge of 4.75%. The Financial Intermediary Class does not have an initial sales charge. The returns shown do not reflect the imposition of an initial sales charge. |
| |
| C | Index returns are for periods beginning November 30, 1998. |
Annual Report to Shareholders 51
Portfolio Composition (As of March 31, 2006)D
(As a percentage of the portfolio)
Top Ten Holdings (As of March 31, 2006)
| | | | | |
| | | % of |
| Security | | Net Assets |
| |
| StanCorp Financial Group, Inc. | | | 3.1% | |
| RLI Corp. | | | 3.1% | |
| Brown & Brown, Inc. | | | 3.0% | |
| North Fork Bancorporation, Inc. | | | 2.9% | |
| Glacier Bancorp, Inc. | | | 2.8% | |
| Commerce Bancshares, Inc. | | | 2.8% | |
| Assurant, Inc. | | | 2.5% | |
| Texas Regional Bancshares, Inc. | | | 2.4% | |
| First State Bancorporation | | | 2.3% | |
| Fiserv, Inc. | | | 2.3% | |
| |
| D | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
52 Annual Report to Shareholders
Performance Information — Continued
Selected Portfolio Performance E
| | | | | |
| Strongest performers for the year ended March 31, 2006F |
| |
| 1. | | First State Bancorporation | | +58.5% |
| 2. | | Cascade Bancorp | | +54.6% |
| 3. | | Fidelity Bankshares, Inc. | | +47.9% |
| 4. | | Assurant, Inc. | | +47.3% |
| 5. | | Brown & Brown, Inc. | | +45.1% |
| 6. | | RLI Corp. | | +40.1% |
| 7. | | AmericanWest Bancorporation | | +37.4% |
| 8. | | Gold Banc Corporation, Inc. | | +32.3% |
| 9. | | Philadelphia Consolidated Holding Corp. | | +32.1% |
| 10. | | Glacier Bancorp, Inc. | | +30.1% |
| |
| | | | | |
| Weakest performers for the year ended March 31, 2006F |
| |
| 1. | | The Bank Holdings | | -14.1% |
| 2. | | Wainwright Bank & Trust Company | | -7.3% |
| 3. | | First Keystone Corporation | | -5.2% |
| 4. | | Bancorp Rhode Island, Inc. | | -5.1% |
| 5. | | TD Banknorth, Inc. | | -3.3% |
| 6. | | Summit Bank Corporation | | -3.0% |
| 7. | | Northrim BanCorp Inc. | | -2.2% |
| 8. | | TCF Financial Corporation | | -2.0% |
| 9. | | SunTrust Banks, Inc. | | +4.1% |
| 10. | | Cascade Financial Corporation | | +4.7% |
Portfolio Changes
| | | |
| Securities added during the 1st quarter 2006 | | Securities sold during the 1st quarter 2006 |
| | | |
| American Safety Insurance Holdings, Ltd. | | Brooke Corporation |
| ASTA Funding, Inc. | | Community Capital Bancshares, Inc. |
| Bank of America Corporation | | EnCana Corp. |
| Epic Bancorp | | First State Financial Corporation |
| Hanover Insurance Group Inc. | | GB&T Bancshares, Inc. |
| Highbury Financial Inc. | | MBNA Corporation |
| Sound Federal Bancorp, Inc. | | |
| Sovereign Bancorp, Inc. | | |
| Western Sierra Bancorp | | |
| |
| E | Individual security performance is measured by the change in the security’s price; for stocks, dividends are assumed to be reinvested at the time they were paid. |
| |
| F | Securities held for the entire year. |
Annual Report to Shareholders 53
Portfolio of Investments
Financial Services Fund
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Common Stocks and Equity Interests — 96.9% |
| Financials — 94.6% |
| Banks — 38.7% |
| | Cascade Bancorp | | | 45 | | | $ | 1,330 | |
| | Cascade Financial Corporation | | | 50 | | | | 950 | |
| | Commerce Bancshares, Inc. | | | 37 | | | | 1,899 | |
| | Cullen/Frost Bankers, Inc. | | | 20 | | | | 1,075 | |
| | Fidelity Bankshares, Inc. | | | 40 | | | | 1,345 | |
| | First Financial Bankshares, Inc. | | | 20 | | | | 766 | |
| | First State Bancorporation | | | 60 | | | | 1,593 | |
| | Glacier Bancorp, Inc. | | | 63 | | | | 1,941 | |
| | Greater Bay Bancorp | | | 40 | | | | 1,110 | |
| | Harbor Florida Bancshares, Inc. | | | 40 | | | | 1,515 | |
| | IBERIABANK Corporation | | | 25 | | | | 1,414 | |
| | Mercantile Bankshares Corporation | | | 38 | | | | 1,442 | |
| | Mid-State Bancshares | | | 35 | | | | 1,030 | |
| | North Fork Bancorporation, Inc. | | | 70 | | | | 2,018 | |
| | Northrim BanCorp Inc. | | | 40 | | | | 960 | |
| | Summit Bank Corporation | | | 59 | | | | 889 | |
| | SunTrust Banks, Inc. | | | 20 | | | | 1,455 | |
| | TCF Financial Corporation | | | 50 | | | | 1,287 | |
| | Texas Regional Bancshares, Inc. | | | 55 | | | | 1,622 | |
| | The Bank Holdings | | | 5 | | | | 95 | A |
| | The Bank Holdings — warrants | | | 1 | | | | 8 | |
| | Wainwright Bank & Trust Company | | | 92 | | | | 958 | |
| | | | | | | | | |
| | | | | | | | 26,702 | |
| | | | | | | | | |
| Commercial Banks — 17.0% |
| | AmericanWest Bancorporation | | | 50 | | | | 1,324 | A |
| | Bancorp Rhode Island, Inc. | | | 20 | | | | 698 | |
| | Bank of America Corporation | | | 28 | | | | 1,254 | |
| | Commercial Bankshares Incorporated | | | 20 | | | | 706 | |
| | Epic Bancorp | | | 50 | | | | 728 | |
| | First Keystone Corporation | | | 34 | | | | 677 | |
| | First Security Group Inc. | | | 25 | | | | 276 | |
| | Gateway Financial Holdings Inc. | | | 51 | | | | 866 | |
| | Gold Banc Corporation, Inc. | | | 50 | | | | 916 | |
| | Leesport Financial Corporation | | | 2 | | | | 52 | |
| | Riverview Bancorp, Inc. | | | 51 | | | | 1,356 | |
54 Annual Report to Shareholders
Portfolio of Investments — Continued
Financial Services Fund — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Financials — Continued |
| Commercial Banks — Continued |
| | Summit Bancshares, Inc. | | | 40 | | | $ | 771 | |
| | Sussex Bancorp | | | 32 | | | | 461 | |
| | TD Banknorth, Inc. | | | 25 | | | | 719 | |
| | Zions Bancorporation | | | 12 | | | | 986 | |
| | | | | | | | | |
| | | | | | | | 11,790 | |
| | | | | | | | | |
| Diversified Financial Services — 7.2% |
| | ASTA Funding, Inc. | | | 25 | | | | 832 | |
| | Financial Federal Corporation | | | 23 | | | | 659 | |
| | Highbury Financial Inc. | | | 150 | | | | 999 | A |
| | J.P. Morgan Chase & Co. | | | 28 | | | | 1,165 | |
| | SLM Corporation | | | 25 | | | | 1,298 | |
| | | | | | | | | |
| | | | | | | | 4,953 | |
| | | | | | | | | |
| Insurance — 28.6% |
| | American Equity Investment Life Holding Company | | | 100 | | | | 1,434 | |
| | American Safety Insurance Holdings, Ltd. | | | 50 | | | | 836 | A |
| | AmerUs Group Co. | | | 25 | | | | 1,506 | |
| | Assurant, Inc. | | | 35 | | | | 1,724 | |
| | Brown & Brown, Inc. | | | 62 | | | | 2,058 | |
| | CRM Holdings, Ltd. | | | 100 | | | | 1,145 | A |
| | Hanover Insurance Group Inc. | | | 22 | | | | 1,153 | |
| | Hilb, Rogal and Hamilton Company | | | 30 | | | | 1,237 | |
| | Lincoln National Corporation | | | 25 | | | | 1,365 | |
| | Old Republic International Corporation | | | 69 | | | | 1,500 | |
| | Philadelphia Consolidated Holding Corp. | | | 45 | | | | 1,536 | A |
| | RLI Corp. | | | 37 | | | | 2,120 | |
| | StanCorp Financial Group, Inc. | | | 40 | | | | 2,164 | |
| | | | | | | | | |
| | | | | | | | 19,778 | |
| | | | | | | | | |
Annual Report to Shareholders 55
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Financials — Continued |
| Savings and Loan Companies — 3.1% |
| | Citizens First Bancorp, Inc. | | | 15 | | | $ | 427 | |
| | United Financial Corp. | | | 29 | | | | 651 | |
| | Willow Grove Bancorp, Inc. | | | 60 | | | | 1,063 | |
| | | | | | | | | |
| | | | | | | | 2,141 | |
| | | | | | | | | |
| Information Technology — 2.3% |
| Commercial Services and Supplies — 2.3% |
| | Fiserv, Inc. | | | 37 | | | | 1,575 | A |
| | | | | | | | | |
Total Common Stock and Equity Interests
(Identified Cost — $44,777) | | | 66,939 | |
| |
| Repurchase Agreements — 3.2% |
| Bank of America 4.75%, dated 3/31/06, to be repurchased at $1,111 on 4/3/06 (Collateral: $1,135 Federal Home Loan Bank notes, 4.75%, due 8/8/07, value $1,138) | | $ | 1,110 | | | | 1,110 | |
| J.P. Morgan Chase & Co. 4.70%, dated 3/31/06, to be repurchased at $1,111 on 4/3/06 (Collateral: $1,130 Fannie Mae notes, 4.75%, due 8/10/07, value $1,134) | | | 1,111 | | | | 1,111 | |
| | | | | | | | | |
| Total Repurchase Agreements (Identified Cost — $2,221) | | | 2,221 | |
| |
| Total Investments — 100.1% (Identified Cost — $46,998) | | | 69,160 | |
| Other Assets Less Liabilities — (0.1)% | | | (98 | ) |
| | | | | |
Net Assets — 100.0% | | | | | | $ | 69,062 | |
| | | | | | | | | |
See notes to financial statements.
56 Annual Report to Shareholders
Statement of Assets and Liabilities
Financial Services Fund
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | |
| |
Assets: | | | | | | | | |
| | Investment securities at market value (Identified Cost — $44,777) | | | | | | $ | 66,939 | |
| | Short-term securities at value (Identified Cost — $2,221) | | | | | | | 2,221 | |
| | Cash | | | | | | | 1 | |
| | Receivable for fund shares sold | | | | | | | 32 | |
| | Dividends and interest receivable | | | | | | | 55 | |
| | | | | | | | | |
| | | Total assets | | | | | | | 69,248 | |
Liabilities: | | | | | | | | |
| | Payable for fund shares repurchased | | $ | 23 | | | | | |
| | Accrued management fee | | | 60 | | | | | |
| | Accrued distribution fee | | | 49 | | | | | |
| | Accrued expenses | | | 54 | | | | | |
| | | | | | | | | |
| | | Total liabilities | | | | | | | 186 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 69,062 | |
| | | | | | | | | |
Net assets consist of: | | | | | | | | |
| | Accumulated paid-in-capital applicable to: | | | | | | | | |
| | | 3,849 Primary Class shares outstanding | | | | | | $ | 38,435 | |
| | | 623 Financial Intermediary Class shares outstanding | | | | | | | 5,325 | |
| | Accumulated net investment loss | | | | | | | (17 | ) |
| | Undistributed net realized gain on investments | | | | | | | 3,157 | |
| | Unrealized appreciation/depreciation of investments | | | | | | | 22,162 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 69,062 | |
| | | | | | | | | |
Net Asset Value Per Share: | | | | | | | | |
| | Primary Class | | | | | | | $15.29 | |
| | | | | | | | | |
| | Financial Intermediary Class | | | | | | | $16.39 | |
| | | | | | | | | |
| |
See notes to financial statements.
Annual Report to Shareholders 57
Statement of Operations
Financial Services Fund
For the Year Ended March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | | |
| |
Investment Income: | | | | | | | | |
| | Dividends | | $ | 1,219 | A | | | | |
| | Interest | | | 119 | | | | | |
| | | | | | | | | |
| | | | Total income | | | | | | $ | 1,338 | |
Expenses: | | | | | | | | |
| | Management fees | | | 677 | | | | | |
| | Distribution and service fees: | | | | | | | | |
| | | Primary Class | | | 569 | | | | | |
| | | Financial Intermediary Class | | | 27 | | | | | |
| | Audit and legal fees | | | 42 | | | | | |
| | Custodian fees | | | 37 | | | | | |
| | Directors’ fees and expenses | | | 19 | | | | | |
| | Registration fees | | | 32 | | | | | |
| | Reports to shareholders | | | 37 | | | | | |
| | Transfer agent and shareholder servicing expense: | | | | | | | | |
| | | Primary Class | | | 32 | | | | | |
| | | Financial Intermediary Class | | | 3 | | | | | |
| | Other expenses | | | 39 | | | | | |
| | | | | | | | | |
| | | | 1,514 | | | | | |
| | | Less: Fees waived | | | (72 | ) | | | | |
| | | Compensating balance credits | | | — | B | | | | |
| | | | | | | | | |
| | | | Total expenses, net of waivers | | | | | | | 1,442 | |
| | | | | | | | | |
Net Investment Loss | | | | | | | (104 | ) |
Net Realized and Unrealized Gain on Investments: | | | | | | | | |
| | Realized gain on investments | | | 8,887 | | | | | |
| | Change in unrealized appreciation/depreciation of investments | | | 2,106 | | | | | |
| | | | | | | | | |
| Net Realized and Unrealized Gain on Investments | | | 10,993 | |
| |
Change in Net Assets Resulting From Operations | | | | | | $ | 10,889 | |
| |
See notes to financial statements.
| |
| A | Net of foreign taxes withheld of $1. |
58 Annual Report to Shareholders
Statement of Changes in Net Assets
Financial Services Fund
(Amounts in Thousands)
| | | | | | | | | | | |
| | | For the Years Ended |
| | | |
| | | 3/31/06 | | 3/31/05 |
| |
Change in Net Assets: | | | | | | | | |
| Net investment loss | | $ | (104 | ) | | $ | (256 | ) |
| Net realized gain on investments | | | 8,887 | | | | 7,735 | |
| Change in unrealized appreciation/(depreciation) of investments | | | 2,106 | | | | (2,951 | ) |
| |
| Change in net assets resulting from operations | | | 10,889 | | | | 4,528 | |
| Distributions to shareholders: | | | | | | | | |
| | From net realized gain on investments: | | | | | | | | |
| | | Primary Class | | | (5,235 | ) | | | (7,893 | ) |
| | | Financial Intermediary Class | | | (941 | ) | | | (1,550 | ) |
| Change in net assets from Fund share transactions: | | | | | | | | |
| | | Primary Class | | | (1,127 | ) | | | 2,972 | |
| | | Financial Intermediary Class | | | (1,808 | ) | | | 36 | |
| |
| Change in net assets | | | 1,778 | | | | (1,907 | ) |
Net Assets: | | | | | | | | |
| Beginning of year | | | 67,284 | | | | 69,191 | |
| |
| End of year | | $ | 69,062 | | | $ | 67,284 | |
| |
| Accumulated net investment loss | | $ | (17 | ) | | $ | (8 | ) |
| |
See notes to financial statements.
Annual Report to Shareholders 59
Financial Highlights
Financial Services Fund
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | $ | 14.32 | | | $ | 15.44 | | | $ | 11.20 | | | $ | 12.51 | | | $ | 11.02 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment loss | | | (.04 | ) | | | (.07 | ) | | | (.08 | ) | | | (.08 | ) | | | (.09 | ) |
| | Net realized and unrealized gain/(loss) on investments | | | 2.44 | | | | 1.10 | | | | 4.58 | | | | (1.23 | ) | | | 1.58 | |
| | | |
| | Total from investment operations | | | 2.40 | | | | 1.03 | | | | 4.50 | | | | (1.31 | ) | | | 1.49 | |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net realized gain on investments | | | (1.43 | ) | | | (2.15 | ) | | | (.26 | ) | | | — | | | | — | |
| | | |
| | Total distributions | | | (1.43 | ) | | | (2.15 | ) | | | (.26 | ) | | | — | | | | — | |
| | | |
| Net asset value, end of year | | $ | 15.29 | | | $ | 14.32 | | | $ | 15.44 | | | $ | 11.20 | | | $ | 12.51 | |
| | | |
| Total return | | | 17.22 | % | | | 6.89 | % | | | 40.27 | % | | | (10.47 | )% | | | 13.52 | % |
Ratios to Average Net Assets:A | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | 2.36 | % | | | 2.38 | % | | | 2.35 | % | | | 2.46 | % | | | 2.44 | % |
| | Expenses net of waivers, if any | | | 2.25 | % | | | 2.25 | % | | | 2.25 | % | | | 2.25 | % | | | 2.25 | % |
| | Expenses net of all reductions | | | 2.25 | % | | | 2.25 | % | | | 2.25 | % | | | 2.25 | % | | | 2.25 | % |
| | Net investment income | | | (.27 | )% | | | (.50 | )% | | | (.58 | )% | | | (.64 | )% | | | (.69 | )% |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 24.8 | % | | | 28.3 | % | | | 29.6 | % | | | 38.2 | % | | | 28.9 | % |
| | Net assets, end of year (in thousands) | | $ | 58,859 | | | $ | 56,139 | | | $ | 57,398 | | | $ | 40,367 | | | $ | 45,473 | |
| |
See notes to financial statements.
| |
| A | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
60 Annual Report to Shareholders
Financial Highlights — Continued
Financial Services Fund — Continued
Financial Intermediary Class (formerly Class A shares):
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | $ | 15.14 | | | $ | 16.10 | | | $ | 11.58 | | | $ | 12.84 | | | $ | 11.22 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment income | | | .11 | | | | .04 | | | | .03 | | | | .01 | | | | .02 | |
| | Net realized and unrealized gain/(loss) on investments | | | 2.57 | | | | 1.15 | | | | 4.75 | | | | (1.27 | ) | | | 1.60 | |
| | | |
| | Total from investment operations | | | 2.68 | | | | 1.19 | | | | 4.78 | | | | (1.26 | ) | | | 1.62 | |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net realized gain on investments | | | (1.43 | ) | | | (2.15 | ) | | | (.26 | ) | | | — | | | | — | |
| | | |
| | Total distributions | | | (1.43 | ) | | | (2.15 | ) | | | (.26 | ) | | | — | | | | — | |
| | | |
| Net asset value, end of year | | $ | 16.39 | | | $ | 15.14 | | | $ | 16.10 | | | $ | 11.58 | | | $ | 12.84 | |
| | | |
| Total return | | | 18.16 | % | | | 7.65 | % | | | 41.37 | % B | | | (9.81 | )% B | | | 14.44 | % B |
Ratios to Average Net Assets:A | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | 1.58 | % | | | 1.59 | % | | | 1.55 | % | | | 1.65 | % | | | 1.64 | % |
| | Expenses net of waivers, if any | | | 1.50 | % | | | 1.50 | % | | | 1.50 | % | | | 1.50 | % | | | 1.50 | % |
| | Expenses net of all reductions | | | 1.50 | % | | | 1.50 | % | | | 1.50 | % | | | 1.50 | % | | | 1.50 | % |
| | Net investment income | | | .47 | % | | | .24 | % | | | .17 | % | | | .12 | % | | | .07 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 24.8 | % | | | 28.3 | % | | | 29.6 | % | | | 38.2 | % | | | 28.9 | % |
| | Net assets, end of year (in thousands) | | | $10,203 | | | | $11,145 | | | | $11,793 | | | | $9,154 | | | | $9,960 | |
| |
See notes to financial statements.
| |
| B | Excluding sales charge applicable to Class A shares. Sales charges were eliminated beginning July 31, 2004. |
Annual Report to Shareholders 61
Management’s Discussion of Fund Performance
U.S. Small-Capitalization Value Trust
Total returns for the U.S. Small-Capitalization Value Trust (“Fund”) for various periods ended March 31, 2006, are presented below, along with those of some comparative indices:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Average Annual Total Returns |
| | | First | | | | Through March 31, 2006 |
| | | Quarter | | | | Three | | Five | | Since |
| | | 2006 | | One Year | | Years | | Years | | InceptionA |
| |
| U.S. Small-Cap Value Trust | | | | | | | | | | | | | | | | | | | | |
| | Primary Class | | | +7.48% | | | | +12.63% | | | | +26.45% | | | | +14.81% | | | | +8.39% | |
| | Institutional Class | | | +7.75% | | | | +13.81% | | | | +27.89% | | | | +16.05% | | | | +9.64% | |
Russell 2000 IndexB | | | +13.94% | | | | +25.85% | | | | +29.53% | | | | +12.59% | | | | +8.18% | |
Russell 2000 Value IndexB | | | +13.51% | | | | +23.77% | | | | +30.75% | | | | +16.24% | | | | +11.28% | |
Russell 1000 Value IndexB | | | +5.93% | | | | +13.31% | | | | +21.77% | | | | +7.79% | | | | +6.55% | |
S&P 500 Stock Composite IndexB | | | +4.21% | | | | +11.73% | | | | +17.22% | | | | +3.97% | | | | +3.80% | |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the Primary Class please visit www.leggmasonfunds.com; for the Institutional Class please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. Performance figures for periods longer than one year represent average annual returns. | |
Over the last 12 months the U.S. equity markets experienced strong gains. Performance accelerated during the first quarter of this year as the small-cap segment continued to dominate returns. However, small-cap growth returns exceeded value with the Russell 2000 Growth IndexB advancing 27.8% versus 23.8% for the Russell 2000 Value. The smallest stocks also did well as the Russell MicrocapB rose 26.5%. The Russell 1000 Value returned 13.3% and the S&P 500 climbed 11.7%. This strong rally occurred despite rising energy prices, interest rate increases, periods of yield curve inversion and geopolitical concerns.
Although absolute returns were solid, relative performance for the U.S. Small-Capitalization Value Trust for the past year were disappointing as returns lagged the Russell 2000
| |
| A | The inception date of the Primary Class is June 15, 1998. The inception date of the Institutional Class is June 19, 1998. Index returns are for periods beginning May 31, 1998. |
| |
| B | See Glossary of Index Definitions on page 112. It is not possible to invest in an index. |
62 Annual Report to Shareholders
Management’s Discussion of Fund Performance — Continued
Value Index. Over this period, the Fund’s primary class returned 12.6% versus 23.8% for the Russell 2000 Value. A large portion of the lagging performance occurred in the quarter ending 3/31/06, where the Fund significantly lagged as many of the top-performing stocks for the quarter had no earnings, low earnings and/or momentum characteristics. Our valuation discipline precludes us from having exposure to small-cap stocks with these characteristics, even when they are part of the index. The largest detracting areas of performance in the past year were capital goods, energy, auto manufacturers, and utilities. The largest contributors in the past year were media, retail, and bank holdings.
Henry F. Otto
Steven M. Tonkovich
April 20, 2006
DJIA 11,342.89
Annual Report to Shareholders 63
Expense Example
U.S. Small-Capitalization Value Trust
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested on October 1, 2005, and held through March 31, 2006.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.
| | | | | | | | | | | | | | |
| | | | | | | Expenses PaidA |
| | | Beginning | | Ending | | During the |
| | | Account | | Account | | Period |
| | | Value | | Value | | 10/1/05 to |
| | | 10/1/05 | | 3/31/06 | | 3/31/06 |
| |
| Primary Class | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,067.70 | | | $ | 10.31 | |
| | Hypothetical (5% return before expenses) | | | 1,000.00 | | | | 1,014.96 | | | | 10.05 | |
| Institutional Class | | | | | | | | | | | | |
| | Actual | | $ | 1,000.00 | | | $ | 1,073.80 | | | $ | 5.07 | |
| | Hypothetical (5% return before expenses) | | | 1,000.00 | | | | 1,020.04 | | | | 4.94 | |
| |
| A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amount shown as “Expenses Paid” is equal to the annualized expense ratio of 2.00% and 0.98% for the Primary Class and Institutional Class respectively, multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (182) and divided by 365. |
64 Annual Report to Shareholders
Performance Information
U.S. Small-Capitalization Value Trust
The graphs on the following pages compare the Fund’s total returns to that of a closely matched broad-based securities market index. The graphs illustrate the cumulative total return of an initial $10,000 investment in the Primary Class and an initial $1,000,000 investment in the Institutional Class, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing the securities market index do not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions.
Total return measures investment performance in terms of appreciation or depreciation in a fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.
Annual Report to Shareholders 65
Growth of a $10,000 Investment — Primary Class
Periods Ended March 31, 2006
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +12.63% | | | | +12.63% | |
| | Five Years | | | +99.52% | | | | +14.81% | |
| | Life of Class* | | | +87.28% | | | | +8.39% | |
| |
| * Inception date: June 15, 1998 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
| |
| A | Index returns are for periods beginning May 31, 1998. |
66 Annual Report to Shareholders
Performance Information — Continued
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended March 31, 2006
| | | | | | | | | | |
| | | Cumulative | | Average Annual |
| | | Total Return | | Total Return |
| |
| | One Year | | | +13.81% | | | | +13.81% | |
| | Five Years | | | +110.52% | | | | +16.05% | |
| | Life of Class* | | | +104.61% | | | | +9.64% | |
| |
| * Inception date: June 19, 1998 |
| |
| | |
| | The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. | |
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
| |
| B | Index returns are for periods beginning June 30, 1998. |
Annual Report to Shareholders 67
Portfolio Composition (As of March 31, 2006)C
(As a percentage of the portfolio)
Top Ten Holdings (As of March 31, 2006)
| | | | | |
| | | % of |
| Security | | Net Assets |
| |
| AmerUs Group Co. | | | 1.6% | |
| IndyMac Bancorp, Inc. | | | 1.5% | |
| Borders Group, Inc. | | | 1.2% | |
| SkyWest, Inc. | | | 1.2% | |
| UICI | | | 1.2% | |
| The Commerce Group, Inc. | | | 1.1% | |
| Jack in the Box Inc. | | | 1.0% | |
| Burlington Coat Factory Warehouse Corporation | | | 1.0% | |
| Downey Financial Corp. | | | 1.0% | |
| Convergys Corporation | | | 1.0% | |
| |
| C | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
68 Annual Report to Shareholders
Performance Information — Continued
Selected Portfolio Performance E
| | | | | |
| Strongest performers for the year ended March 31, 2006F |
| |
| 1. | | The Anderson’s Inc. | | +154.5% |
| 2. | | United Industrial Corporation | | +107.9% |
| 3. | | Ameron International Corporation | | +107.5% |
| 4. | | OmniVision Technologies, Inc. | | +99.3% |
| 5. | | Charming Shoppes, Inc. | | +82.9% |
| 6. | | Group 1 Automotive, Inc. | | +81.4% |
| 7. | | Argonaut Group, Inc. | | +67.5% |
| 8. | | Advanta Corp. | | +66.7% |
| 9. | | Atrion Corporation | | +63.9% |
| 10. | | Universal Forest Products, Inc. | | +63.8% |
| |
| | | | | |
| Weakest performers for the year ended March 31, 2006F |
| |
| 1. | | Stoneridge, Inc. | | -55.5% |
| 2. | | Handleman Company | | -48.0% |
| 3. | | Sanderson Farms, Inc. | | -47.5% |
| 4. | | Pomeroy IT Solutions, Inc. | | -44.0% |
| 5. | | Dominion Homes, Inc. | | -41.8% |
| 6. | | CONMED Corporation | | -36.4% |
| 7. | | Chiquita Brands International, Inc. | | -36.2% |
| 8. | | Oriental Financial Group Inc. | | -35.7% |
| 9. | | ExpressJet Holdings, Inc. | | -34.8% |
| 10. | | Blyth, Inc. | | -32.6% |
| |
| D | Portfolio changes are not reported for U.S. Small-Cap due to the Fund’s high volume of trading. |
| |
| E | Individual security performance is measured by the change in the security’s price; for stocks, dividends are assumed to be reinvested at the time they were paid. |
| |
| F | Securities held for the entire year. |
Annual Report to Shareholders 69
Portfolio of Investments
U.S. Small-Capitalization Value Trust
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Common Stocks and Equity Interests — 97.3% |
| Auto and Transportation — 6.8% |
| | Aftermarket Technology Corp. | | | 39 | | | $ | 873 | A |
| | Alamo Group Inc. | | | 8 | | | | 186 | |
| | American Axle & Manufacturing Holdings, Inc. | | | 74 | | | | 1,268 | |
| | ArvinMeritor, Inc. | | | 141 | | | | 2,105 | |
| | Asbury Automotive Group Inc. | | | 48 | | | | 947 | A |
| | Bandag, Incorporated | | | 16 | | | | 678 | |
| | Bandag, Incorporated — Class A | | | 12 | | | | 415 | |
| | Bristow Group, Inc. | | | 17 | | | | 538 | A |
| | Commercial Vehicle Group, Inc. | | | 12 | | | | 235 | A |
| | ExpressJet Holdings, Inc. | | | 109 | | | | 811 | A |
| | Featherlite, Inc. | | | 11 | | | | 55 | A |
| | Lear Corporation | | | 5 | | | | 96 | |
| | Mesa Air Group Inc. | | | 61 | | | | 701 | A |
| | Modine Manufacturing Company | | | 4 | | | | 106 | |
| | Navistar International Corporation | | | 60 | | | | 1,649 | A |
| | Polaris Industries Inc. | | | 12 | | | | 644 | |
| | R & B, Inc. | | | 11 | | | | 117 | A |
| | Republic Airways Holdings Inc. | | | 38 | | | | 557 | A |
| | SCS Transportation, Inc. | | | 14 | | | | 416 | A |
| | SkyWest, Inc. | | | 111 | | | | 3,258 | |
| | Stoneridge, Inc. | | | 6 | | | | 30 | A |
| | Supreme Industries, Inc. | | | 14 | | | | 106 | |
| | Swift Transportation Co., Inc. | | | 53 | | | | 1,141 | A |
| | TRW Automotive Holdings Corp. | | | 22 | | | | 517 | A |
| | Wabash National Corporation | | | 23 | | | | 458 | |
| | Werner Enterprises, Inc. | | | 12 | | | | 220 | |
| | | | | | | | | |
| | | | | | | | 18,127 | |
| | | | | | | | | |
| Consumer Discretionary — 24.1% |
| | American Greetings Corporation | | | 89 | | | | 1,926 | |
| | Big 5 Sporting Goods Corporation | | | 17 | | | | 331 | |
| | BJ’s Wholesale Club, Inc. | | | 65 | | | | 2,058 | A |
| | Blyth, Inc. | | | 54 | | | | 1,141 | |
| | Books-A-Million, Inc. | | | 10 | | | | 113 | |
70 Annual Report to Shareholders
Portfolio of Investments — Continued
U.S. Small-Capitalization Value Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Consumer Discretionary — Continued |
| | Borders Group, Inc. | | | 132 | | | $ | 3,337 | |
| | Brown Shoe Company, Inc. | | | 37 | | | | 1,926 | |
| | Burlington Coat Factory Warehouse Corporation | | | 60 | | | | 2,745 | |
| | Cadmus Communications Corporation | | | 17 | | | | 306 | |
| | Carriage Services, Inc. | | | 36 | | | | 173 | A |
| | CBRL Group, Inc. | | | 23 | | | | 1,001 | |
| | CEC Entertainment Inc. | | | 5 | | | | 161 | A |
| | Charming Shoppes, Inc. | | | 4 | | | | 61 | A |
| | Chromcraft Revington, Inc. | | | 11 | | | | 148 | A |
| | Columbia Sportswear Company | | | 14 | | | | 768 | A |
| | Convergys Corporation | | | 144 | | | | 2,615 | A |
| | CSS Industries, Inc. | | | 22 | | | | 720 | |
| | Duratek, Inc. | | | 12 | | | | 271 | A |
| | EarthLink, Inc. | | | 159 | | | | 1,515 | A |
| | Ethan Allen Interiors Inc. | | | 46 | | | | 1,929 | |
| | Finlay Enterprises, Inc. | | | 18 | | | | 186 | A |
| | Flexsteel Industries, Inc. | | | 11 | | | | 157 | |
| | Frisch’s Restaurants, Inc. | | | 6 | | | | 122 | |
| | Furniture Brands International, Inc. | | | 106 | | | | 2,588 | |
| | Genesco Inc. | | | 38 | | | | 1,489 | A |
| | Global Imaging Systems, Inc. | | | 1 | | | | 23 | A |
| | Group 1 Automotive, Inc. | | | 47 | | | | 2,215 | |
| | Handleman Company | | | 46 | | | | 439 | |
| | Hartmarx Corporation | | | 35 | | | | 309 | A |
| | Hastings Entertainment, Inc. | | | 21 | | | | 128 | A |
| | IKON Office Solutions, Inc. | | | 160 | | | | 2,283 | |
| | InfoSpace, Inc. | | | 28 | | | | 785 | A |
| | Jack in the Box Inc. | | | 64 | | | | 2,797 | A |
| | JAKKS Pacific, Inc. | | | 35 | | | | 923 | A |
| | Journal Register Company | | | 54 | | | | 661 | |
| | K-Swiss Inc. | | | 14 | | | | 413 | |
| | Kellwood Company | | | 20 | | | | 634 | |
| | Kenneth Cole Productions, Inc. | | | 11 | | | | 291 | |
| | Landry’s Restaurants, Inc. | | | 7 | | | | 251 | |
| | Lenox Group, Inc. | | | 24 | | | | 314 | A |
Annual Report to Shareholders 71
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Consumer Discretionary — Continued |
| | Lithia Motors, Inc. | | | 22 | | | $ | 750 | |
| | Mity Enterprises, Inc. | | | 5 | | | | 96 | A |
| | Navigant International, Inc. | | | 31 | | | | 381 | A |
| | New York & Company, Inc. | | | 10 | | | | 145 | A |
| | Opinion Research Corporation | | | 5 | | | | 29 | A |
| | Outlook Group Corp. | | | 3 | | | | 33 | |
| | P & F Industries, Inc. | | | 1 | | | | 16 | A |
| | Pacific Sunwear of California, Inc. | | | 12 | | | | 270 | A |
| | PC Connection, Inc. | | | 14 | | | | 83 | A |
| | Perry Ellis International, Inc. | | | 7 | | | | 161 | A |
| | PETCO Animal Supplies, Inc. | | | 42 | | | | 992 | A |
| | Pre-Paid Legal Services, Inc. | | | 2 | | | | 53 | |
| | Q.E.P. Co., Inc. | | | 2 | | | | 26 | A |
| | Rent-A-Center, Inc. | | | 64 | | | | 1,648 | A |
| | REX Stores Corporation | | | 22 | | | | 337 | A |
| | Russell Corporation | | | 66 | | | | 909 | |
| | Ryan’s Restaurant Group Inc. | | | 85 | | | | 1,226 | A |
| | Schiff Nutrition International, Inc. | | | 11 | | | | 65 | A |
| | Scholastic Corporation | | | 30 | | | | 800 | A |
| | Sonic Automotive, Inc. | | | 59 | | | | 1,630 | |
| | Spectrum Brands, Inc. | | | 40 | | | | 860 | A |
| | Stage Stores, Inc. | | | 55 | | | | 1,629 | |
| | Stanley Furniture Company, Inc. | | | 16 | | | | 480 | |
| | Steinway Musical Instruments, Inc. | | | 7 | | | | 229 | A |
| | Strattec Security Corporation | | | 7 | | | | 254 | A |
| | Tandy Brands Accessories, Inc. | | | 5 | | | | 54 | |
| | Tempur-Pedic International Inc. | | | 85 | | | | 1,196 | A |
| | The Timberland Company | | | 39 | | | | 1,325 | A |
| | The Yankee Candle Company, Inc. | | | 18 | | | | 484 | |
| | Tuesday Morning Corporation | | | 12 | | | | 284 | |
| | Tupperware Corporation | | | 79 | | | | 1,633 | |
| | United Auto Group, Inc. | | | 57 | | | | 2,460 | |
| | Valassis Communications, Inc. | | | 5 | | | | 141 | A |
| | Vertrue Incorporated | | | 15 | | | | 644 | A |
| | Water Pik Technologies, Inc. | | | 19 | | | | 527 | A |
72 Annual Report to Shareholders
Portfolio of Investments — Continued
U.S. Small-Capitalization Value Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Consumer Discretionary — Continued |
| | Westaff, Inc. | | | 12 | | | $ | 46 | A |
| | Wilsons The Leather Experts Inc. | | | 36 | | | | 140 | A |
| | Zale Corporation | | | 82 | | | | 2,310 | A |
| | | | | | | | | |
| | | | | | | | 64,599 | |
| | | | | | | | | |
| Consumer Staples — 3.7% |
| | Chiquita Brands International, Inc. | | | 73 | | | | 1,228 | |
| | Del Monte Foods Company | | | 148 | | | | 1,751 | |
| | Ingles Markets, Incorporated | | | 5 | | | | 94 | |
| | Nash-Finch Company | | | 12 | | | | 347 | |
| | NBTY, Inc. | | | 51 | | | | 1,155 | A |
| | Packaging Dynamics Corporation | | | 3 | | | | 43 | |
| | Ruddick Corporation | | | 84 | | | | 2,049 | |
| | Sanderson Farms, Inc. | | | 11 | | | | 242 | |
| | Schweitzer-Mauduit International, Inc. | | | 22 | | | | 535 | |
| | Smart & Final Inc. | | | 41 | | | | 664 | A |
| | Universal Corporation | | | 52 | | | | 1,897 | |
| | | | | | | | | |
| | | | | | | | 10,005 | |
| | | | | | | | | |
| Energy — 2.5% |
| | Brigham Exploration Company | | | 24 | | | | 214 | A |
| | Encore Acquisition Company | | | 36 | | | | 1,116 | A |
| | Forest Oil Corporation | | | 2 | | | | 89 | A |
| | Mariner Energy Inc. | | | 2 | | | | 40 | A |
| | Stone Energy Corporation | | | 54 | | | | 2,361 | A |
| | The Houston Exploration Company | | | 41 | | | | 2,171 | A |
| | The Oilgear Company | | | 2 | | | | 24 | A |
| | TransMontaigne Inc. | | | 75 | | | | 731 | A |
| | | | | | | | | |
| | | | | | | | 6,746 | |
| | | | | | | | | |
| Financials — 35.1% |
| | 21st Century Insurance Group | | | 65 | | | | 1,032 | |
| | ACE Cash Express, Inc. | | | 18 | | | | 441 | A |
| | Advanta Corp. | | | 15 | | | | 501 | |
| | Affirmative Insurance Holdings, Inc. | | | 7 | | | | 89 | |
| | Alfa Corporation | | | 49 | | | | 841 | |
Annual Report to Shareholders 73
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Financials — Continued |
| | American Equity Investment Life Holding Company | | | 47 | | | $ | 680 | |
| | American Financial Group, Inc. | | | 31 | | | | 1,286 | |
| | American National Bankshares Inc. | | | 10 | | | | 225 | |
| | Ameris Bancorp | | | 18 | | | | 410 | |
| | AmerUs Group Co. | | | 69 | | | | 4,157 | |
| | Anchor BanCorp Wisconsin, Inc. | | | 41 | | | | 1,228 | |
| | Argonaut Group, Inc. | | | 28 | | | | 1,012 | A |
| | Arrow Financial Corporation | | | 4 | | | | 120 | |
| | Asset Acceptance Capital Corp. | | | 28 | | | | 541 | A |
| | BancFirst Corporation | | | 18 | | | | 787 | |
| | BancorpSouth, Inc. | | | 47 | | | | 1,138 | |
| | Bristol West Holdings Inc. | | | 28 | | | | 529 | |
| | California First National Bancorp | | | 7 | | | | 97 | |
| | Camden National Corporation | | | 12 | | | | 457 | |
| | Capital Title Group, Inc. | | | 4 | | | | 32 | |
| | Cash America International, Inc. | | | 30 | | | | 907 | |
| | Ceres Group, Inc. | | | 69 | | | | 381 | A |
| | Chemical Financial Corporation | | | 40 | | | | 1,307 | |
| | Chittenden Corporation | | | 7 | | | | 188 | |
| | Citizens Banking Corporation | | | 19 | | | | 497 | |
| | CNA Surety Corporation | | | 45 | | | | 744 | A |
| | Columbia Banking System, Inc. | | | 24 | | | | 800 | |
| | Community Bank System, Inc. | | | 31 | | | | 683 | |
| | Community Trust Bancorp, Inc. | | | 25 | | | | 839 | |
| | Corus Bankshares, Inc. | | | 36 | | | | 2,152 | |
| | Delphi Financial Group, Inc. | | | 41 | | | | 2,104 | |
| | Deluxe Corporation | | | 67 | | | | 1,753 | |
| | Direct General Corporation | | | 40 | | | | 685 | |
| | Donegal Group Inc. — Class A | | | 6 | | | | 144 | |
| | Donegal Group Inc. — Class B | | | 3 | | | | 65 | |
| | Downey Financial Corp. | | | 39 | | | | 2,625 | |
| | Electro Rent Corporation | | | 3 | | | | 46 | A |
| | F.N.B. Corporation | | | 46 | | | | 783 | |
| | FBL Financial Group, Inc. | | | 56 | | | | 1,919 | |
| | First Bancorp | | | 7 | | | | 161 | |
74 Annual Report to Shareholders
Portfolio of Investments — Continued
U.S. Small-Capitalization Value Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Financials — Continued |
| | First Commonwealth Financial Corporation | | | 21 | | | $ | 306 | |
| | First Community Bancshares, Inc. | | | 11 | | | | 339 | |
| | First Financial Corporation | | | 0.2 | | | | 6 | |
| | First Financial Holdings, Inc. | | | 19 | | | | 599 | |
| | First Financial Service Corporation | | | 5 | | | | 161 | |
| | First M&F Corporation | | | 5 | | | | 188 | |
| | First Mutual Bancshares, Inc. | | | 6 | | | | 154 | |
| | First Place Financial Corp. | | | 6 | | | | 161 | |
| | First United Corporation | | | 8 | | | | 187 | |
| | Firstbank Corporation | | | 1 | | | | 27 | |
| | FirstFed Financial Corp. | | | 26 | | | | 1,561 | A |
| | Flagstar Bancorp, Inc. | | | 42 | | | | 639 | |
| | Flushing Financial Corporation | | | 32 | | | | 566 | |
| | FNB Corp. | | | 7 | | | | 140 | |
| | FNB Corporation | | | 12 | | | | 407 | |
| | FNB Financial Services Corporation | | | 12 | | | | 186 | |
| | Franklin Bank Corporation | | | 10 | | | | 194 | A |
| | Fremont General Corporation | | | 107 | | | | 2,305 | |
| | German American Bancorp | | | 10 | | | | 134 | |
| | Great American Financial Resources, Inc. | | | 39 | | | | 764 | |
| | Greater Bay Bancorp | | | 13 | | | | 372 | |
| | Greene County Bancshares, Inc. | | | 0.4 | | | | 11 | |
| | Hanover Insurance Group Inc. | | | 23 | | | | 1,216 | |
| | Harleysville Group Inc. | | | 15 | | | | 430 | |
| | Harrington West Financial Group, Inc. | | | 8 | | | | 124 | |
| | HMN Financial, Inc. | | | 6 | | | | 209 | |
| | Horace Mann Educators Corporation | | | 40 | | | | 744 | |
| | IBERIABANK Corporation | | | 6 | | | | 332 | |
| | IndyMac Bancorp, Inc. | | | 97 | | | | 3,966 | |
| | Infinity Property & Casualty Corporation | | | 40 | | | | 1,665 | |
| | Integra Bank Corporation | | | 5 | | | | 107 | |
| | International Bancshares Corporation | | | 14 | | | | 407 | |
| | Interpool, Inc. | | | 13 | | | | 257 | |
| | Intersections Inc. | | | 17 | | | | 193 | A |
| | Irwin Financial Corporation | | | 5 | | | | 89 | |
Annual Report to Shareholders 75
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Financials — Continued |
| | ITLA Capital Corporation | | | 7 | | | $ | 352 | |
| | John H. Harland Company | | | 50 | | | | 1,981 | |
| | Lakeland Financial Corporation | | | 6 | | | | 262 | |
| | LandAmerica Financial Group, Inc. | | | 31 | | | | 2,130 | |
| | MAF Bancorp, Inc. | | | 28 | | | | 1,215 | |
| | MainSource Financial Group, Inc. | | | 9 | | | | 161 | |
| | MBT Financial Corp. | | | 2 | | | | 39 | |
| | Meadowbrook Insurance Group, Inc. | | | 48 | | | | 334 | A |
| | Merchants Bancshares, Inc. | | | 4 | | | | 103 | |
| | National Western Life Insurance Company | | | 4 | | | | 906 | |
| | NBT Bancorp Inc. | | | 30 | | | | 694 | |
| | NCO Group, Inc. | | | 59 | | | | 1,406 | A |
| | North Central Bancshares, Inc. | | | 3 | | | | 99 | |
| | North Valley Bancorp | | | 11 | | | | 202 | |
| | Northrim BanCorp Inc. | | | 8 | | | | 194 | |
| | Nymagic, Inc. | | | 8 | | | | 239 | |
| | OceanFirst Financial Corp. | | | 12 | | | | 285 | |
| | Odyssey Re Holdings Corp. | | | 101 | | | | 2,187 | |
| | Ohio Casualty Corporation | | | 55 | | | | 1,748 | |
| | Old Point Financial Corporation | | | 2 | | | | 46 | |
| | Oriental Financial Group Inc. | | | 26 | | | | 370 | |
| | PAB Bankshares, Inc. | | | 14 | | | | 266 | |
| | Parkvale Financial Corporation | | | 9 | | | | 243 | |
| | PennFed Financial Services, Inc. | | | 1 | | | | 25 | |
| | Penns Woods Bancorp, Inc. | | | 5 | | | | 178 | |
| | Peoples Bancorp Inc. | | | 19 | | | | 570 | |
| | PFF Bancorp, Inc. | | | 27 | | | | 906 | |
| | Presidential Life Corporation | | | 33 | | | | 844 | |
| | ProCentury Corp. | | | 12 | | | | 169 | |
| | Provident Bankshares Corporation | | | 24 | | | | 881 | |
| | Renasant Corporation | | | 15 | | | | 550 | |
| | Republic Bancorp, Inc. | | | 119 | | | | 1,431 | |
| | Republic First Bancorp, Inc. | | | 12 | | | | 177 | A |
| | S&T Bancorp, Inc. | | | 8 | | | | 293 | |
| | Safety Insurance Group, Inc. | | | 27 | | | | 1,214 | |
76 Annual Report to Shareholders
Portfolio of Investments — Continued
U.S. Small-Capitalization Value Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Financials — Continued |
| | Sierra Bancorp | | | 6 | | | $ | 160 | |
| | Simmons First National Corporation | | | 8 | | | | 250 | |
| | Southwest Bancorp, Inc. | | | 11 | | | | 236 | |
| | StanCorp Financial Group, Inc. | | | 14 | | | | 758 | |
| | Sterling Financial Corporation | | | 23 | | | | 663 | |
| | Stewart Information Services Corporation | | | 29 | | | | 1,342 | |
| | Susquehanna Bancshares, Inc. | | | 6 | | | | 162 | |
| | SWS Group, Inc. | | | 8 | | | | 199 | |
| | Taylor Capital Group, Inc. | | | 6 | | | | 218 | |
| | Texas United Bancshares, Inc. | | | 3 | | | | 72 | |
| | The Commerce Group, Inc. | | | 57 | | | | 2,991 | |
| | The Midland Company | | | 9 | | | | 306 | |
| | The Phoenix Companies, Inc. | | | 19 | | | | 315 | |
| | Timberland Bancorp, Inc. | | | 6 | | | | 180 | |
| | Triad Guaranty Inc. | | | 20 | | | | 936 | A |
| | TriCo Bancshares | | | 14 | | | | 384 | |
| | Trustmark Corporation | | | 63 | | | | 2,003 | |
| | UICI | | | 84 | | | | 3,115 | |
| | Unico American Corporation | | | 5 | | | | 50 | A |
| | United Bankshares, Inc. | | | 18 | | | | 685 | |
| | United Community Financial Corp. | | | 29 | | | | 355 | |
| | United Fire & Casualty Company | | | 7 | | | | 214 | |
| | United Security Bancshares, Inc. | | | 6 | | | | 155 | |
| | Washington Banking Company | | | 5 | | | | 86 | |
| | Washington Federal, Inc. | | | 31 | | | | 739 | |
| | West Coast Bancorp | | | 13 | | | | 363 | |
| | World Acceptance Corporation | | | 23 | | | | 616 | A |
| | WSFS Financial Corporation | | | 4 | | | | 251 | |
| | Yadkin Valley Bank and Trust Company | | | 6 | | | | 90 | |
| | | | | | | | | |
| | | | | | | | 94,126 | |
| | | | | | | | | |
| Health Care — 2.2% |
| | America Service Group Inc. | | | 15 | | | | 193 | A |
| | Apria Healthcare Group Inc. | | | 79 | | | | 1,816 | A |
| | Atrion Corporation | | | 2 | | | | 142 | |
Annual Report to Shareholders 77
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Health Care — Continued |
| | CONMED Corporation | | | 15 | | | $ | 282 | A |
| | Kindred Healthcare, Inc. | | | 28 | | | | 699 | A |
| | LifePoint Hospitals, Inc. | | | 14 | | | | 423 | A |
| | Magellan Health Services, Inc. | | | 43 | | | | 1,756 | A |
| | Molina Healthcare Inc. | | | 5 | | | | 164 | A |
| | National Home Health Care Corp. | | | 12 | | | | 126 | |
| | RehabCare Group, Inc. | | | 10 | | | | 196 | A |
| | | | | | | | | |
| | | | | | | | 5,797 | |
| | | | | | | | | |
| Materials — 6.6% |
| | Ameron International Corporation | | | 15 | | | | 1,062 | |
| | Bluegreen Corporation | | | 36 | | | | 480 | A |
| | Building Materials Holding Corporation | | | 47 | | | | 1,682 | |
| | Cytec Industries Inc. | | | 15 | | | | 894 | |
| | Ennis Business Forms, Inc. | | | 2 | | | | 33 | |
| | Georgia Gulf Corporation | | | 19 | | | | 491 | |
| | Gibraltar Industries Inc. | | | 38 | | | | 1,130 | |
| | Gold Kist Inc. | | | 38 | | | | 482 | A |
| | GrafTech International Ltd. | | | 42 | | | | 257 | A |
| | Hercules Incorporated | | | 149 | | | | 2,062 | A |
| | Key Tronic Corporation | | | 5 | | | | 20 | A |
| | Lennox International Inc. | | | 17 | | | | 517 | |
| | NewMarket Corporation | | | 5 | | | | 214 | |
| | NN Inc. | | | 1 | | | | 7 | |
| | Northwest Pipe Company | | | 2 | | | | 56 | A |
| | Olin Corporation | | | 66 | | | | 1,417 | |
| | PolyOne Corporation | | | 122 | | | | 1,134 | A |
| | Silgan Holdings Inc. | | | 30 | | | | 1,205 | |
| | The Anderson’s Inc. | | | 7 | | | | 556 | |
| | The Timken Company | | | 12 | | | | 400 | |
| | Universal Forest Products, Inc. | | | 20 | | | | 1,276 | |
| | Worthington Industries, Inc. | | | 117 | | | | 2,343 | |
| | | | | | | | | |
| | | | | | | | 17,718 | |
| | | | | | | | | |
78 Annual Report to Shareholders
Portfolio of Investments — Continued
U.S. Small-Capitalization Value Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Miscellaneous — N.M. |
| | Hawkins, Inc. | | | 4 | | | $ | 56 | |
| | | | | | | | | |
| Producer Durables — 4.5% |
| | AGCO Corporation | | | 120 | | | | 2,487 | A |
| | Beazer Homes USA, Inc. | | | 5 | | | | 322 | |
| | Briggs & Stratton Corporation | | | 67 | | | | 2,359 | |
| | Cohu, Inc. | | | 17 | | | | 363 | |
| | Craftmade International, Inc. | | | 9 | | | | 174 | |
| | Dominion Homes, Inc. | | | 4 | | | | 39 | A |
| | Ducommun Incorporated | | | 8 | | | | 171 | A |
| | ElkCorp | | | 26 | | | | 881 | |
| | Kennametal Inc. | | | 7 | | | | 428 | |
| | Orbital Sciences Corporation | | | 20 | | | | 313 | A |
| | Photronics, Inc. | | | 23 | | | | 430 | A |
| | Ryder System, Inc. | | | 18 | | | | 788 | |
| | Sigmatron International, Inc. | | | 5 | | | | 45 | A |
| | Standard Pacific Corp. | | | 1 | | | | 27 | |
| | Standex International Corporation | | | 25 | | | | 791 | |
| | Summa Industries | | | 7 | | | | 73 | |
| | Superior Essex Inc. | | | 23 | | | | 575 | A |
| | United Industrial Corporation | | | 20 | | | | 1,200 | |
| | WCI Communities, Inc. | | | 4 | | | | 106 | A |
| | WesBanco, Inc. | | | 15 | | | | 479 | |
| | | | | | | | | |
| | | | | | | | 12,051 | |
| | | | | | | | | |
| Technology — 4.4% |
| | Applix, Inc. | | | 6 | | | | 43 | A |
| | Bell Microproducts Inc. | | | 23 | | | | 140 | A |
| | CallWave, Inc. | | | 15 | | | | 66 | A |
| | CIBER, Inc. | | | 68 | | | | 436 | A |
| | Competitive Technologies, Inc. | | | 1 | | | | 2 | A |
| | Dataram Corporation | | | 11 | | | | 64 | |
| | Dynamics Research Corporation | | | 12 | | | | 183 | A |
| | Hi-Shear Technology Corporation | | | 3 | | | | 9 | A |
| | Hutchinson Technology Incorporated | | | 32 | | | | 965 | A |
Annual Report to Shareholders 79
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Technology — Continued |
| | Innovative Solutions and Support, Inc. | | | 8 | | | $ | 104 | A |
| | InterVideo Inc. | | | 21 | | | | 225 | A |
| | Intervoice, Inc. | | | 42 | | | | 361 | A |
| | Journal Communications, Inc. | | | 33 | | | | 405 | |
| | Lecroy Corporation | | | 13 | | | | 199 | A |
| | OmniVision Technologies, Inc. | | | 80 | | | | 2,410 | A |
| | Pomeroy IT Solutions, Inc. | | | 16 | | | | 136 | A |
| | Sensient Technologies Corporation | | | 84 | | | | 1,522 | |
| | SYNNEX Corporation | | | 38 | | | | 709 | A |
| | TESSCO Technologies Incorporated | | | 8 | | | | 139 | A |
| | TSR, Inc. | | | 7 | | | | 39 | |
| | United Online, Inc. | | | 117 | | | | 1,506 | |
| | Westell Technologies, Inc. | | | 73 | | | | 299 | A |
| | Western Digital Corporation | | | 86 | | | | 1,679 | A |
| | Wireless Telecom Group, Inc. | | | 40 | | | | 117 | |
| | | | | | | | | |
| | | | | | | | 11,758 | |
| | | | | | | | | |
| Utilities — 7.4% |
| | Atmos Energy Corporation | | | 62 | | | | 1,622 | |
| | Cleco Corporation | | | 22 | | | | 496 | |
| | Commonwealth Telephone Enterprises, Inc. | | | 23 | | | | 806 | |
| | Duquesne Light Holdings Inc. | | | 103 | | | | 1,699 | |
| | EnergySouth, Inc. | | | 6 | | | | 200 | |
| | Great Plains Energy Incorporated | | | 56 | | | | 1,574 | |
| | Green Mountain Power Corporation | | | 1 | | | | 17 | |
| | HickoryTech Corporation | | | 14 | | | | 115 | |
| | Iowa Telecommunications Services Incorporated | | | 14 | | | | 258 | |
| | New Jersey Resources Corporation | | | 9 | | | | 407 | |
| | Nicor Inc. | | | 9 | | | | 336 | |
| | North Pittsburgh Systems, Inc. | | | 2 | | | | 37 | |
| | Northeast Utilities | | | 26 | | | | 504 | |
| | Peoples Energy Corporation | | | 61 | | | | 2,188 | |
| | Puget Energy, Inc. | | | 66 | | | | 1,391 | |
| | South Jersey Industries, Inc. | | | 34 | | | | 933 | |
| | TALK America Holdings, Inc. | | | 54 | | | | 464 | A |
80 Annual Report to Shareholders
Portfolio of Investments — Continued
U.S. Small-Capitalization Value Trust — Continued
| | | | | | | | | | |
| | | Shares/Par | | Value |
| |
| Utilities — Continued |
| | The Laclede Group, Inc. | | | 8 | | | $ | 282 | |
| | Vectren Corporation | | | 30 | | | | 781 | |
| | Westar Energy, Inc. | | | 40 | | | | 839 | |
| | WGL Holdings Inc. | | | 81 | | | | 2,455 | |
| | WPS Resources Corporation | | | 51 | | | | 2,530 | |
| | | | | | | | | |
| | | | | | | | 19,934 | |
| | | | | | | | | |
Total Common Stock and Equity Interests
(Identified Cost — $197,661) | | | 260,917 | |
| |
| Repurchase Agreements — 2.6% |
| Bank of America 4.75%, dated 3/31/06, to be repurchased at $3,425 on 4/3/06 (Collateral: $3,485 Federal Home Loan Bank notes, 4.75%, due 8/8/07, value $3,493) | | $ | 3,424 | | | | 3,424 | |
| J.P. Morgan Chase & Co. 4.70%, dated 3/31/06, to be repurchased at $3,424 on 4/3/06 (Collateral: $3,483 Fannie Mae notes, 4.75%, due 8/10/07, value $3,496) | | | 3,423 | | | | 3,423 | |
| | | | | | | | | |
| Total Repurchase Agreements (Identified Cost — $6,847) | | | 6,847 | |
| |
| Total Investments — 99.9% (Identified Cost — $204,508) | | | 267,764 | |
| Other Assets Less Liabilities — 0.1% | | | 294 | |
| | | | | |
Net Assets — 100.0% | | | | | | $ | 268,058 | |
| | | | | | | | | |
See notes to financial statements.
Annual Report to Shareholders 81
Statement of Assets and Liabilities
U.S. Small-Capitalization Value Trust
March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | |
| |
Assets: | | | | | | | | |
| | Investment securities at market value
(Identified Cost — $197,661) | | | | | | $ | 260,917 | |
| | Short-term securities at value (Identified Cost — $6,847) | | | | | | | 6,847 | |
| | Cash | | | | | | | 1 | |
| | Receivable for fund shares sold | | | | | | | 282 | |
| | Receivable for securities sold | | | | | | | 1,395 | |
| | Dividends and interest receivable | | | | | | | 313 | |
| | | | | | | | | |
| | | Total assets | | | | | | | 269,755 | |
Liabilities: | | | | | | | | |
| | Payable for fund shares repurchased | | $ | 559 | | | | | |
| | Payable for securities purchased | | | 653 | | | | | |
| | Accrued management fee | | | 177 | | | | | |
| | Accrued distribution fee | | | 181 | | | | | |
| | Accrued expenses | | | 127 | | | | | |
| | | | | | | | | |
| | | Total liabilities | | | | | | | 1,697 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 268,058 | |
| | | | | | | | | |
Net assets consist of: | | | | | | | | |
| | Accumulated paid-in-capital applicable to: | | | | | | | | |
| | | 15,993 Primary Class shares outstanding | | | | | | $ | 166,058 | |
| | | 2,252 Institutional Class shares outstanding | | | | | | | 31,814 | |
| | Accumulated net investment loss | | | | | | | (25 | ) |
| | Undistributed net realized gain on investments | | | | | | | 6,955 | |
| | Unrealized appreciation/depreciation of investments | | | | | | | 63,256 | |
| | | | | | | | | |
Net Assets | | | | | | $ | 268,058 | |
| | | | | | | | | |
Net Asset Value Per Share: | | | | | | | | |
| | Primary Class | | | | | | | $14.51 | |
| | | | | | | | | |
| | Institutional Class | | | | | | | $15.99 | |
| | | | | | | | | |
| |
See notes to financial statements.
82 Annual Report to Shareholders
Statement of Operations
U.S. Small-Capitalization Value Trust
For the Year Ended March 31, 2006
(Amounts in Thousands)
| | | | | | | | | | | | |
| |
Investment Income: | | | | | | | | |
| | Dividends | | $ | 3,968 | A | | | | |
| | Interest | | | 208 | | | | | |
| | | | | | | | | |
| | | | Total income | | | | | | $ | 4,176 | |
Expenses: | | | | | | | | |
| | Management fees | | | 2,058 | | | | | |
| | Distribution and service fees:
Primary Class | | | 2,343 | | | | | |
| | Audit and legal fees | | | 45 | | | | | |
| | Custodian fees | | | 85 | | | | | |
| | Directors’ fees and expenses | | | 33 | | | | | |
| | Registration fees | | | 37 | | | | | |
| | Reports to shareholders | | | 103 | | | | | |
| | Transfer agent and shareholder servicing expense: | | | | | | | | |
| | | Primary Class | | | 199 | | | | | |
| | | Institutional Class | | | 14 | | | | | |
| | Other expenses | | | 63 | | | | | |
| | | | | | | | | |
| | | | 4,980 | | | | | |
| | Less: Fees waived | | | (32 | ) | | | | |
| | Compensating balance credits | | | (1 | ) | | | | |
| | | | | | | | | |
| | Total expenses, net of waivers and compensating | | | | | | | | |
| | | balance credits | | | | | | | 4,947 | |
| | | | | | | | | |
Net Investment Loss | | | | | | | (771 | ) |
Net Realized and Unrealized Gain on Investments: | | | | | | | | |
| | Realized gain on investments | | | 20,770 | | | | | |
| | Change in unrealized appreciation/depreciation of investments | | | 11,437 | | | | | |
| | | | | | | | | |
| Net Realized and Unrealized Gain on Investments | | | 32,207 | |
| |
Change in Net Assets Resulting From Operations | | | | | | $ | 31,436 | |
| |
See notes to financial statements.
| |
| A | Net of foreign taxes withheld of $1. |
Annual Report to Shareholders 83
Statement of Changes in Net Assets
U.S. Small-Capitalization Value Trust
(Amounts in Thousands)
| | | | | | | | | | | |
| | | For the Years Ended |
| | | |
| | | 3/31/06 | | 3/31/05 |
| |
Change in Net Assets: | | | | | | | | |
| Net investment loss | | $ | (771 | ) | | $ | (818 | ) |
| Net realized gain on investments | | | 20,770 | | | | 30,922 | |
| Change in unrealized appreciation/(depreciation) of investments | | | 11,437 | | | | (7,166 | ) |
| |
| Change in net assets resulting from operations | | | 31,436 | | | | 22,938 | |
| Distributions to shareholders: | | | | | | | | |
| | From net realized gain on investments: | | | | | | | | |
| | | Primary Class | | | (26,565 | ) | | | (22,962 | ) |
| | | Institutional Class | | | (2,504 | ) | | | (1,094 | ) |
| Change in net assets from Fund share transactions: | | | | | | | | |
| | | Primary Class | | | (11,723 | ) | | | 17,719 | |
| | | Institutional Class | | | 20,346 | | | | 3,765 | |
| |
| Change in net assets | | | 10,990 | | | | 20,366 | |
Net Assets: | | | | | | | | |
| Beginning of year | | | 257,068 | | | | 236,702 | |
| |
| End of year | | $ | 268,058 | | | $ | 257,068 | |
| |
| Accumulated net investment loss | | $ | (25 | ) | | $ | (10 | ) |
| |
See notes to financial statements.
84 Annual Report to Shareholders
Financial Highlights
U.S. Small-Capitalization Value Trust
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | $ | 14.43 | | | $ | 14.52 | | | $ | 8.93 | | | $ | 11.73 | | | $ | 9.05 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment loss | | | (.06 | ) | | | (.05 | ) | | | (.07 | ) | | | (.06 | ) | | | (.06 | ) |
| | Net realized and unrealized gain/(loss) on investments | | | 1.77 | | | | 1.38 | | | | 5.75 | | | | (2.74 | ) | | | 2.74 | |
| | | |
| | Total from investment operations | | | 1.71 | | | | 1.33 | | | | 5.68 | | | | (2.80 | ) | | | 2.68 | |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net realized gain on investments | | | (1.63 | ) | | | (1.42 | ) | | | (.09 | ) | | | — | | | | — | |
| | | |
| | Total distributions | | | (1.63 | ) | | | (1.42 | ) | | | (.09 | ) | | | — | | | | — | |
| | | |
| Net asset value, end of year | | | $14.51 | | | $ | 14.43 | | | $ | 14.52 | | | $ | 8.93 | | | $ | 11.73 | |
| | | |
| Total return | | | 12.63 | % | | | 9.67 | % | | | 63.71 | % | | | (23.87) | % | | | 29.61 | % |
Ratios to Average Net Assets:A | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | 2.01 | % | | | 2.00 | % | | | 2.05 | % | | | 2.13 | % | | | 2.24 | % |
| | Expenses net of waivers, if any | | | 2.00 | % | | | 2.00 | % | | | 2.00 | % | | | 2.00 | % | | | 2.00 | % |
| | Expenses net of all reductions | | | 2.00 | % | | | 2.00 | % | | | 2.00 | % | | | 2.00 | % | | | 2.00 | % |
| | Net investment income | | | (.40) | % | | | (.39) | % | | | (.61) | % | | | (.52) | % | | | (.82) | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 30.9 | % | | | 46.7 | % | | | 44.3 | % | | | 61.0 | % | | | 32.1 | % |
| | Net assets, end of year (in thousands) | | $ | 232,061 | | | $ | 242,719 | | | $ | 226,351 | | | $ | 144,447 | | | $ | 182,201 | |
| |
See notes to financial statements.
| |
| A | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
Annual Report to Shareholders 85
Institutional Class:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended March 31, |
| | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net asset value, beginning of year | | $ | 15.59 | | | $ | 15.39 | | | $ | 9.36 | | | $ | 12.16 | | | $ | 9.30 | |
| | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | |
| | Net investment income/(loss) | | | — | B | | | .09 | | | | .05 | | | | .05 | | | | (.02 | ) |
| | Net realized and unrealized gain(loss) on investments | | | 2.03 | | | | 1.53 | | | | 6.07 | | | | (2.85 | ) | | | 2.88 | |
| | | |
| | Total from investment operations | | | 2.03 | | | | 1.62 | | | | 6.12 | | | | (2.80 | ) | | | 2.86 | |
| | | |
| Distributions: | | | | | | | | | | | | | | | | | | | | |
| | From net realized gain on investments | | | (1.63 | ) | | | (1.42 | ) | | | (.09 | ) | | | — | | | | — | |
| | | |
| | Total distributions | | | (1.63 | ) | | | (1.42 | ) | | | (.09 | ) | | | — | | | | — | |
| | | |
| Net asset value, end of year | | | $15.99 | | | $ | 15.59 | | | $ | 15.39 | | | $ | 9.36 | | | $ | 12.16 | |
| | | |
| Total return | | | 13.81 | % | | | 11.06 | % | | | 65.49 | % | | | (23.03 | )% | | | 30.75 | % |
Ratios to Average Net Assets:A | | | | | | | | | | | | | | | | | | | | |
| | Total expenses | | | .98 | % | | | .93 | % | | | .98 | % | | | 1.05 | % | | | 1.20 | % |
| | Expenses net of waivers, if any | | | .98 | % | | | .93 | % | | | .98 | % | | | 1.00 | % | | | 1.00 | % |
| | Expenses net of all reductions | | | .98 | % | | | .93 | % | | | .98 | % | | | 1.00 | % | | | 1.00 | % |
| | Net investment income | | | .66 | % | | | .69 | % | | | .41 | % | | | .50 | % | | | .18 | % |
| Supplemental Data: | | | | | | | | | | | | | | | | | | | | |
| | Portfolio turnover rate | | | 30.9 | % | | | 46.7 | % | | | 44.3 | % | | | 61.0 | % | | | 32.1 | % |
| | Net assets, end of year (in thousands) | | $ | 35,997 | | | $ | 14,349 | | | $ | 10,351 | | | $ | 5,589 | | | $ | 5,529 | |
| |
See notes to financial statements.
86 Annual Report to Shareholders
Notes to Financial Statements
Legg Mason Investors Trust, Inc.
(Amounts in Thousands)
1. Organization and Significant Accounting Policies:
The Legg Mason Investors Trust, Inc. (“Corporation”), consisting of American Leading Companies Trust (“American Leading Companies”), Balanced Trust (“Balanced Trust”), Financial Services Fund (“Financial Services”) and U.S. Small-Capitalization Value Trust (“U.S. Small-Cap”) (each a “Fund”), is registered under the Investment Company Act of 1940, as amended (“1940 Act”), as an open-end, diversified investment company.
Each Fund offers Primary Class and Institutional Class shares. The Institutional Class of Financial Services is not currently active. American Leading Companies, Balanced Trust and Financial Services also offer an additional class of shares: Financial Intermediary Class. The Financial Intermediary Class of American Leading Companies is not currently active. The Financial Intermediary Class of Financial Services was formerly known as Class A. The income and expenses of the Funds are allocated proportionately to each class of shares based on daily net assets, except for Rule 12b-1 distribution and service fees, which are charged only on Primary Class and Financial Intermediary Class shares, and transfer agent and shareholder servicing expenses, which are determined separately for each class.
Preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements:
Security Valuation
Equity securities traded on national securities exchanges are valued at the last quoted sales price, except securities traded on the Nasdaq Stock Market, Inc. (“NASDAQ”) which are valued in accordance with the NASDAQ Official Closing Price. Over the counter securities are valued at the mean between the latest bid and asked prices as furnished by dealers who make markets in such securities or by independent pricing service. Fixed income securities for which market quotations are readily available are valued at current market value.
Each Fund’s securities are valued on the basis of available market quotations or, lacking such quotations, at fair value as determined under policies approved by and under the general oversight of the Board of Directors. In determining fair value, all relevant qualitative and quantitative factors available are considered. These factors are subject to change over time and are reviewed periodically. The Fund may use fair value pricing instead of market quotations to value one or more securities if the Fund believes that, because of special circumstances, doing so would more accurately reflect the prices the Fund would expect to realize on the current sale of those securities. Further, because of the inherent uncertainty of valuation, those estimated values may differ significantly from quoted or published values or from the values that would have been used had a ready market for the investments existed,
Annual Report to Shareholders 87
and the differences could be material. At March 31, 2006, there were no fair valued securities for any of the Funds.
Security Transactions
Security transactions are recorded on the next business day after trade date. Realized gains and losses from security transactions are reported on an identified cost basis for both financial reporting and federal income tax purposes.
For the year ended March 31, 2006, investment transactions (excluding short-term investments and U.S. government securities) were:
| | | | | | | | | |
| | | Purchases | | Proceeds From Sales |
| |
| American Leading Companies | | | $141,449 | | | $ | 102,810 | |
| Balanced Trust | | | 9,553 | | | | 15,357 | |
| Financial Services | | | 16,023 | | | | 23,855 | |
| U.S. Small-Cap | | | 79,019 | | | | 102,494 | |
Transactions in U.S. government securities for Balanced Trust were purchases of $3,814 and proceeds from sales of $6,652. There were no transactions in U.S. government securities for the other Funds.
Foreign Currency Translation
Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars using currency exchange rates determined prior to the close of trading on the New York Stock Exchange, usually at 2:00 p.m. Eastern time. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are included with the net realized and unrealized gain or loss on investment securities.
Repurchase Agreements
The Funds may engage in repurchase agreement transactions. Under the terms of a typical repurchase agreement, a fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and a fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. This arrangement results in a fixed rate of return that is not subject to market fluctuations during the fund’s holding period. The value of the collateral is at all times at least equal to the total amount of the repurchase obligation, including interest. In the event of counterparty default, a fund has the right to use the collateral to satisfy the terms of the repurchase agreement. However, there could be potential loss to the fund in the event the fund is delayed or
88 Annual Report to Shareholders
Notes to Financial Statements — Continued
Legg Mason Investors Trust, Inc. — Continued
prevented from exercising its right to dispose of the collateral securities, including the risk of a possible decline in the value of the collateral securities during the period in which the fund seeks to assert its rights. The Funds’ investment advisers review the value of the collateral and the creditworthiness of those banks and dealers with which the Funds enter into repurchase agreements to evaluate potential risks.
Compensating Balance Credits
The Funds have an arrangement with their custodian bank, whereby a portion of the custodian’s fee is paid indirectly by credits earned on the Funds’ cash on deposit with the bank. This deposit arrangement is an alternative to purchasing overnight investments.
Commission Recapture
American Leading Companies has entered into a directed brokerage agreement with State Street Bank. Under the agreement, State Street Bank will rebate to the Fund a percentage of commissions generated by the Fund. Such payments are included with realized gain/ (loss) on investment transactions. During the year ended March 31, 2006, American Leading Companies recaptured commissions of $25. No commissions were recaptured by Balanced Trust, Financial Services or U.S. Small Cap.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond premiums and discounts are amortized for financial reporting and federal income tax purposes. Dividend income is recorded on the ex-dividend date. Dividends from net investment income, if available, are determined at the class level and paid annually for American Leading Companies, Financial Services and U.S. Small-Cap, and quarterly for Balanced Trust. Distributions from net realized gains, which are calculated at the Fund level, are declared and paid annually in June, if available. An additional distribution may be made in December, to the extent necessary, in order to comply with federal excise tax requirements.
Other
In the normal course of business, the Funds enter into contracts that provide general indemnifications. Each Fund’s maximum exposure under these arrangements is dependent on claims that may be made against that Fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote.
2. Federal Income Taxes:
No provision for federal income or excise taxes is required since each Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its
Annual Report to Shareholders 89
taxable income and capital gains to its shareholders. Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gain distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements.
Distributions during the years ended March 31, 2006 and 2005, were characterized as follows for tax purposes:
| | | | | | | | | | | | | | | | | |
| | | American | | |
| | | Leading | | Balanced |
| | | Companies | | Trust |
| | | | | |
| | | Year Ended | | Year Ended |
| | | 3/31/06 | | 3/31/05 | | 3/31/06 | | 3/31/05 |
| |
| Ordinary income | | $ | 91 | | | $ | 390 | | | $ | 568 | | | $ | 572 | |
| Long-term capital gains | | | — | | | | — | | | | 3,058 | | | | 1,111 | |
| | | | | | | | | | | | | | | | | |
| Total distributions | | $ | 91 | | | $ | 390 | | | $ | 3,626 | | | $ | 1,683 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Financial | | U.S. |
| | | Services | | Small-Cap |
| | | | | |
| | | Year Ended | | Year Ended |
| | | 3/31/06 | | 3/31/05 | | 3/31/06 | | 3/31/05 |
| |
| Ordinary income | | $ | 60 | | | $ | 521 | | | $ | 2,208 | | | $ | 5,482 | |
| Long-term capital gains | | | 6,116 | | | | 8,922 | | | | 26,861 | | | | 18,574 | |
| | | | | | | | | | | | | | | | | |
| Total distributions | | $ | 6,176 | | | $ | 9,443 | | | $ | 29,069 | | | $ | 24,056 | |
| | | | | | | | | | | | | | | | | |
The tax basis components of net assets at March 31, 2006, were:
| | | | | | | | | | | | | | | | | |
| | | American | | | | | | |
| | | Leading | | Balanced | | Financial | | U.S. |
| | | Companies | | Trust | | Services | | Small-Cap |
| |
| Unrealized appreciation | | $ | 297,618 | | | $ | 8,137 | | | $ | 22,633 | | | $ | 69,842 | |
| Unrealized depreciation | | | (9,398 | ) | | | (1,499 | ) | | | (471 | ) | | | (6,586 | ) |
| | | | | | | | | | | | | | | | | |
| Net unrealized appreciation/depreciation | | | 288,220 | | | | 6,638 | | | | 22,162 | | | | 63,256 | |
| Undistributed ordinary income | | | 561 | | | | 312 | | | | 193 | | | | 394 | |
| Undistributed long-term capital gains | | | 13,474 | | | | 2,047 | | | | 2,964 | | | | 6,561 | |
| Other temporary differences | | | (36 | ) | | | (17 | ) | | | (17 | ) | | | (25 | ) |
| Paid-in capital | | | 496,887 | | | | 47,174 | | | | 43,760 | | | | 197,872 | |
| | | | | | | | | | | | | | | | | |
| Net assets | | $ | 799,106 | | | $ | 56,154 | | | $ | 69,062 | | | $ | 268,058 | |
| | | | | | | | | | | | | | | | | |
90 Annual Report to Shareholders
Notes to Financial Statements — Continued
Legg Mason Investors Trust, Inc. — Continued
The difference between book and tax basis unrealized appreciation is primarily due to the tax deferral of wash sale losses.
The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. During the year ended March 31, 2006, American Leading Companies utilized $9,278, of capital loss carry forwards to offset current year realized gains.
For financial reporting purposes, capital accounts and distributions to shareholders are adjusted to reflect the tax character of permanent book/tax differences. For the year ended March 31, 2006, the Funds recorded the following permanent reclassifications. Reclassification are primarily due to the tax treatment of net operating losses, gain/(loss) on foreign currency transactions, and reclassifications of gains/losses on paydown securities and commission recapture transactions. Results of operations and net assets were not affected by these reclassifications.
| | | | | | | | | | | | | | | | | |
| | | American | | | | | | |
| | | Leading | | Balanced | | Financial | | U.S. |
| | | Companies | | Trust | | Services | | Small-Cap |
| |
| Undistributed net investment income | | $ | (6 | ) | | $ | 10 | | | $ | 95 | | | $ | 756 | |
| Accumulated realized gain/(loss) | | | 6 | | | | (10 | ) | | | (95 | ) | | | (756 | ) |
At March 31, 2006, the cost of investments for federal income tax purposes was $501,779 for American Leading Companies, $47,275 for Balanced Trust, $46,998 for Financial Services and $204,508 for U.S. Small-Cap.
3. Transactions With Affiliates:
American Leading Companies has an investment advisory and management agreement with Legg Mason Capital Management, Inc. (“LMCM”). Pursuant to the agreement, LMCM provides American Leading Companies with investment advisory, management and administrative services for which the Fund pays a fee, computed daily and payable monthly, at an annual rate of the Fund’s average daily net assets.
On January 1, 2006, the advisory fee rate structure paid by American Leading Companies to LMCM was revised as follows:
| | | | | | | | | |
| | | | | Year Ended |
| Fee rate prior to 1/1/06 | | Fee rate as of 1/1/06 | | March 31, 2006 |
| | | | | |
| Advisory | | Advisory | | | | Management Fee |
| Fee | | Asset Breakpoint | | Fee | | Asset Breakpoint | | Waived |
| |
| 0.75% | | up to $1 billion | | 0.70% | | up to $2 billion | | $— |
| 0.65% | | in excess of $1 billion | | 0.65% | | in excess of $2 billion | | |
Annual Report to Shareholders 91
Balanced Trust, Financial Services and U.S. Small-Cap have management agreements with Legg Mason Fund Adviser, Inc. (“LMFA”). Pursuant to their respective agreements, LMFA provides these Funds with management and administrative services for which these Funds pay a fee, computed daily and payable monthly, at an annual rate of each Fund’s average daily net assets.
The following chart summarizes the management fees for each of the Funds:
| | | | | | | | | |
| | | | | | | Year Ended |
| | | | | | | March 31, 2006 |
| | | | | | | |
| | | Management | | | | Management Fee |
| Fund | | Fee | | Asset Breakpoint | | Waived |
| |
| Balanced Trust | | | 0.75% | | | all asset levels | | $70 |
| Financial Services | | | 1.00% | | | up to $100 million | | |
| | | | 0.75% | | | $100 million – $1 billion | | 54 |
| | | | 0.65% | | | in excess of $1 billion | | |
| U.S. Small-Cap | | | 0.85% | | | up to $100 million | | |
| | | | 0.75% | | | $100 million – $1 billion | | — |
| | | | 0.65% | | | in excess of $1 billion | | |
LMCM and LMFA have voluntarily agreed to waive their fees in any month to the extent a Fund’s expenses (exclusive of taxes, interest, brokerage and extraordinary expenses) exceed during that month certain annual rates of that Fund’s average daily net assets until August 1, 2006.
The following chart summarizes the expense limitations for each of the Funds:
| | | | | | | | | | | | | |
| | | | | Financial | | |
| | | Primary Class | | Intermediary Class | | Institutional Class |
| Fund | | Expense Limitation | | Expense Limitation | | Expense Limitation |
| |
| American Leading Companies | | | 1.95% | | | | N/A | | | | 0.95% | |
| Balanced Trust | | | 1.85% | | | | 1.35% | | | | 1.10% | |
| Financial Services | | | 2.25% | | | | 1.50% | | | | N/A | |
| U.S. Small-Cap | | | 2.00% | | | | N/A | | | | 1.00% | |
Barrett Associates, Inc. (“Barrett”), serves as investment adviser to Financial Services. Barrett is responsible for the actual investment activity of the Fund. LMFA pays Barrett a fee for its services, computed daily and payable monthly, at an annual rate of 60% of the fee received by LMFA.
Bartlett & Co. (��Bartlett”) serves as investment adviser to Balanced Trust. Bartlett is responsible for the actual investment activity of the Fund. LMFA pays Bartlett a fee for its
92 Annual Report to Shareholders
Notes to Financial Statements — Continued
Legg Mason Investors Trust, Inc. — Continued
services, computed daily and payable monthly, at an annual rate equal to 66 2/3 % of the fee received by LMFA.
Brandywine Asset Management, LLC (“Brandywine”) serves as investment adviser to U.S. Small-Cap. Brandywine is responsible for the actual investment activity of the Fund. LMFA pays Brandywine a fee for its services, computed daily and payable monthly, at an annual rate equal to 58.8% of the fee received by LMFA. Effective May 1, 2006, Brandywine Asset Management, LLC changed its name to Brandywine Global Investment Management, LLC.
On December 1, 2005, Legg Mason Investor Services, LLC (“LMIS”) replaced Legg Mason Wood Walker, Inc. (“Legg Mason”) as distributor for the Fund. The compensation arrangements between the Fund and LMIS are identical to the previous arrangements between the Fund and Legg Mason. LMIS receives an annual distribution fee and an annual service fee based on each Fund’s Primary Class’s (and with respect to Financial Services and Balanced Trust, Financial Intermediary Class’s) average daily net assets, computed daily and payable monthly as follows:
| | | | | | | | | | | | | | |
| | | | | | | Year Ended |
| | | | | | | March 31, 2006 |
| | | | | | | |
| | | | | | | Distribution and |
| | | Distribution | | Service | | Service Fees |
| Fund | | Fee | | Fee | | Voluntarily Waived |
| |
| American Leading Companies | | | | | | | | | | | | |
| | Primary Class | | | 0.75% | | | | 0.25% | | | $ | — | |
| Balanced Trust | | | | | | | | | | | | |
| | Primary Class | | | 0.50% | | | | 0.25% | | | | 36 | |
| | Financial Intermediary Class | | | N/A | | | | 0.25% | | | | 11 | |
| Financial Services | | | | | | | | | | | | |
| | Primary Class | | | 0.75% | | | | 0.25% | | | | 18 | |
| | Financial Intermediary Class | | | N/A | | | | 0.25% | | | | — | |
| U.S. Small-Cap | | | | | | | | | | | | |
| | Primary Class | | | 0.75% | | | | 0.25% | | | | 32 | |
For the year ended March 31, 2006, American Leading Companies paid $22 in brokerage commissions to LMIS, its affiliates or Legg Mason. No brokerage commissions were paid to LMIS, its affiliates or Legg Mason by Balanced Trust, Financial Services, or U.S. Small-Cap.
LMFA serves as administrator to American Leading Companies under an administrative services agreement with LMCM. For LMFA’s services to American Leading Companies, LMCM (not the Fund) pays LMFA a fee, calculated daily and payable monthly, of 0.05% of the average daily net assets of the Fund.
LM Fund Services, Inc. (“LMFS”), a registered transfer agent, has an agreement with the Funds’ transfer agent to assist it with some of its duties. For this assistance, the transfer agent paid LMFS the following amounts during the year ended March 31, 2006: American
Annual Report to Shareholders 93
Leading Companies, $120; Balanced Trust, $15; Financial Services, $11; and U.S. Small-Cap, $49.
LMCM, LMFA, Barrett, Bartlett, Brandywine, LMIS, and LMFS are wholly owned subsidiaries and corporate affiliates of Legg Mason, Inc.
4. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in a $400 million line of credit (“Credit Agreement”) to be used for temporary or emergency purposes. Pursuant to the Credit Agreement, each participating Fund is liable only for principal and interest payments related to borrowings made by that Fund. Borrowings under the Credit Agreement bear interest at a rate equal to the prevailing federal funds rate plus the federal funds rate margin. The Funds made no borrowings under the Credit Agreement during the year ended March 31, 2006.
5. Fund Share Transactions:
At March 31, 2006, there were 250,000, 375,000, 125,000, and 50,000 shares authorized at $.001 par value for the Primary Classes of American Leading Companies, Balanced Trust, Financial Services and U.S. Small-Cap, respectively. At March 31, 2006, there were 100,000, 125,000, 225,000 and 100,000 shares authorized at $.001 par value for the Financial Intermediary classes of American Leading Companies, Balanced Trust, Financial Services and U.S. Small-Cap, respectively. At March 31, 2006, there were 250,000, 125,000, 125,000 and 50,000 shares authorized at $.001 par value for the Institutional Classes of
94 Annual Report to Shareholders
Notes to Financial Statements — Continued
Legg Mason Investors Trust, Inc. — Continued
American Leading Companies, Balanced Trust, Financial Services and U.S. Small-Cap, respectively. Share transactions are detailed below:
| | | | | | | | | | | | | | | | | | |
| | | American Leading Companies Trust |
| | | |
| | | Primary Class | | Institutional Class |
| | | | | |
| | | Year Ended | | Year Ended |
| | | 3/31/06 | | 3/31/05 | | 3/31/06 | | 3/31/05 |
| |
| Shares: | | | | | | | | | | | | | | | | |
| | Sold | | | 5,760 | | | | 4,111 | | | | 1,352 | | | | 315 | |
| | Reinvestment of Distributions | | | — | | | | 10 | | | | 4 | | | | 8 | |
| | Repurchased | | | (4,883 | ) | | | (3,667 | ) | | | (676 | ) | | | (204 | ) |
| | | | | | | | | | | | | | | | | |
| | Net Change | | | 877 | | | | 454 | | | | 680 | | | | 119 | |
| | | | | | | | | | | | | | | | | |
| Amount: | | | | | | | | | | | | | | | | |
| | Sold | | $ | 135,444 | | | $ | 84,872 | | | $ | 32,073 | | | $ | 6,670 | |
| | Reinvestment of Distributions | | | — | | | | 205 | | | | 91 | | | | 177 | |
| | Repurchased | | | (113,661 | ) | | | (74,742 | ) | | | (16,541 | ) | | | (4,252 | ) |
| | | | | | | | | | | | | | | | | |
| | Net Change | | $ | 21,783 | | | $ | 10,335 | | | $ | 15,623 | | | $ | 2,595 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balanced Trust |
| | | |
| | | | | Financial | | |
| | | Primary Class | | Intermediary Class | | Institutional Class |
| | | | | | | |
| | | Year Ended | | Year Ended | | Year Ended |
| | | 3/31/06 | | 3/31/05 | | 3/31/06 | | 3/31/05 | | 3/31/06 | | 3/31/05 |
| |
| Shares: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sold | | | 1,048 | | | | 748 | | | | 116 | | | | 105 | | | | 1,327 | | | | 14 | |
| | Reinvestment of Distributions | | | 190 | | | | 86 | | | | 85 | | | | 60 | | | | 40 | | | | 2 | |
| | Repurchased | | | (1,129 | ) | | | (1,003 | ) | | | (1,587 | ) | | | (200 | ) | | | (543 | ) | | | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Change | | | 109 | | | | (169 | ) | | | (1,386 | ) | | | (35 | ) | | | 824 | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sold | | $ | 11,918 | | | $ | 8,260 | | | $ | 1,313 | | | $ | 1,179 | | | $ | 15,040 | | | $ | 159 | |
| | Reinvestment of Distributions | | | 2,139 | | | | 955 | | | | 957 | | | | 662 | | | | 451 | | | | 18 | |
| | Repurchased | | | (12,800 | ) | | | (11,061 | ) | | | (18,027 | ) | | | (2,202 | ) | | | (6,160 | ) | | | (54 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Change | | $ | 1,257 | | | $ | (1,846 | ) | | $ | (15,757 | ) | | $ | (361 | ) | | $ | 9,331 | | | $ | 123 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Annual Report to Shareholders 95
| | | | | | | | | | | | | | | | | | |
| | | Financial Services Fund |
| | | |
| | | | | Financial |
| | | Primary Class | | Intermediary Class |
| | | | | |
| | | Year Ended | | Year Ended |
| | | 3/31/06 | | 3/31/05 | | 3/31/06 | | 3/31/05 |
| |
| Shares: | | | | | | | | | | | | | | | | |
| | Sold | | | 283 | | | | 325 | | | | 24 | | | | 17 | |
| | Reinvestment of Distributions | | | 346 | | | | 531 | | | | 20 | | | | 42 | |
| | Repurchased | | | (701 | ) | | | (652 | ) | | | (157 | ) | | | (56 | ) |
| | | | | | | | | | | | | | | | | |
| | Net Change | | | (72 | ) | | | 204 | | | | (113 | ) | | | 3 | |
| | | | | | | | | | | | | | | | | |
| Amount: | | | | | | | | | | | | | | | | |
| | Sold | | $ | 4,208 | | | $ | 4,861 | | | $ | 370 | | | $ | 261 | |
| | Reinvestment of Distributions | | | 5,094 | | | | 7,705 | | | | 312 | | | | 643 | |
| | Repurchased | | | (10,429 | ) | | | (9,594 | ) | | | (2,490 | ) | | | (868 | ) |
| | | | | | | | | | | | | | | | | |
| | Net Change | | $ | (1,127 | ) | | $ | 2,972 | | | $ | (1,808 | ) | | $ | 36 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | U.S. Small-Cap Value Trust |
| | | |
| | | Primary Class | | Institutional Class |
| | | | | |
| | | Year Ended | | Year Ended |
| | | 3/31/06 | | 3/31/05 | | 3/31/06 | | 3/31/05 |
| |
| Shares: | | | | | | | | | | | | | | | | |
| | Sold | | | 1,984 | | | | 2,509 | | | | 2,081 | | | | 342 | |
| | Reinvestment of Distributions | | | 1,848 | | | | 1,585 | | | | 165 | | | | 71 | |
| | Repurchased | | | (4,656 | ) | | | (2,868 | ) | | | (914 | ) | | | (166 | ) |
| | | | | | | | | | | | | | | | | |
| | Net Change | | | (824 | ) | | | 1,226 | | | | 1,332 | | | | 247 | |
| | | | | | | | | | | | | | | | | |
| Amount: | | | | | | | | | | | | | | | | |
| | Sold | | $ | 28,071 | | | $ | 35,707 | | | $ | 31,880 | | | $ | 5,200 | |
| | Reinvestment of Distributions | | | 25,913 | | | | 22,470 | | | | 2,504 | | | | 1,094 | |
| | Repurchased | | | (65,707 | ) | | | (40,458 | ) | | | (14,038 | ) | | | (2,529 | ) |
| | | | | | | | | | | | | | | | | |
| | Net Change | | $ | (11,723 | ) | | $ | 17,719 | | | $ | 20,346 | | | $ | 3,765 | |
| | | | | | | | | | | | | | | | | |
96 Annual Report to Shareholders
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Legg Mason Investors Trust, Inc. and
Shareholders of American Leading Companies Trust, Balanced Trust,
Financial Services Fund and U.S. Small-Capitalization Value Trust:
In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of American Leading Companies Trust, Balanced Trust, Financial Services Fund and U.S. Small-Capitalization Value Trust (comprising Legg Mason Investors Trust, Inc., hereafter referred to as the “Funds”) at March 31, 2006, the results of their operations, the changes in their net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The statements of changes in net assets for the year ended March 31, 2005 and the financial highlights for each of the four years in the period ended March 31, 2005 were audited by other auditors whose report dated May 13, 2005 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Baltimore, Maryland
May 19, 2006
Annual Report to Shareholders 97
Change in Independent Registered Public Accounting Firm:
On May 12, 2005 the Fund, by action of its Board of Directors approved the engagement of PricewaterhouseCoopers LLP as the independent registered public accounting firm to audit the Fund’s financial statements for the fiscal year ending March 31, 2006, effective upon the resignation of Ernst & Young LLP (“E&Y”).
On June 6, 2005, E&Y resigned as the Fund’s independent registered public accounting firm. The reports of the financial statements audited by E&Y for the Funds for fiscal years ended December 31, 2004 and 2003 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. For the fiscal years 2003 and 2004 and through June 6, 2005 there were no disagreements between the Funds and E&Y on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of E&Y, would have caused it to make reference to the subject matter of the disagreements in connection with its report on the financial statements.
98 Annual Report to Shareholders
Directors and Officers
The table below provides information about each of the Corporation’s directors and officers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its affiliates. The mailing address of each director and officer is 100 Light Street, c/o Legal and Compliance Department, 23rd Floor, Baltimore, Maryland 21202.
| | | | | | | | | | | |
| |
| | | Term of | | |
| | | Office | | |
| | | and | | |
| Name, (Year of | | Length | | Number of Funds | | |
| Birth) and Position | | of Time | | in Fund | | Other | | Principal Occupation(s) |
| with Corporation | | ServedA | | Complex Overseen | | Directorships Held | | During the Past Five Years |
| |
| INDEPENDENT DIRECTORS:B |
| |
Hearn, Ruby P. (1940)
Director | | | Since 2004 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios. | | None | | Senior Vice President Emerita of The Robert Wood Johnson Foundation (non-profit) since 2001. Formerly: Senior Vice President of The Robert Wood Johnson Foundation (1996-2001). |
| |
Lehman, Arnold L. (1944)
Lead Independent Director | | | Since 1993 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios. | | None | | Director of The Brooklyn Museum of Art since 1997; Trustee of American Federation of Arts since 1998. Formerly: Director of The Baltimore Museum of Art (1979-1997). |
| |
Masters, Robin J.W.
(1955)
Director | | | Since 2002 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios. | | Chairman of the Board of Directors of Cap-a-Laige Ltd. (management company for charitable trust); Director of Cheyne Capital International Limited (investment advisory firm); Director of Cheyne Property Holdings Limited (real estate). | | Retired. Director of Bermuda SMARTRISK (non-profit) since 2001. Formerly: Chief Investment Officer of ACE Limited (insurance) (1986-2000). |
| |
McGovern, Jill E. (1944)
Director | | | Since 1993 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios. | | None | | Chief Executive Officer of The Marrow Foundation (non-profit) since 1993. Formerly: Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990). |
| |
Mehlman, Arthur S. (1942)
Director | | | Since 2002 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios; Director/Trustee of the Royce Family of Funds consisting of 23 portfolios. | | Director of Municipal Mortgage & Equity, LLC. | | Retired. Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002). |
| |
Annual Report to Shareholders 99
| | | | | | | | | | | |
| |
| | | Term of | | |
| | | Office | | |
| | | and | | |
| Name, (Year of | | Length | | Number of Funds | | |
| Birth) and Position | | of Time | | in Fund | | Other | | Principal Occupation(s) |
| with Corporation | | ServedA | | Complex Overseen | | Directorships Held | | During the Past Five Years |
| |
O’Brien, G. Peter (1945)
Director | | | Since 1999 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios; Director/Trustee of the Royce Family of Funds consisting of 23 portfolios. | | Director of Technology Investment Capital Corp. | | Retired. Trustee Emeritus of Colgate University; Board Member, Hill House, Inc. (residential home care). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999). |
| |
Rowan, S. Ford (1943)
Director | | | Since 2002 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios. | | None | | Consultant, Rowan & Blewitt Inc. (management consulting); Chairman, National Center for Critical Incident Analysis, National Defense University, since 2004; Director of Santa Fe Institute (scientific research institute) since 1999. |
| |
Tarola, Robert M. (1950)
Director | | | Since 2004 | | | Director/Trustee of all Legg Mason funds consisting of 20 portfolios. | | None | | Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals) since 1999. Formerly: Chief Financial Officer of MedStar Health, Inc. (healthcare) (1996-1999); Partner, Price Waterhouse, LLP (accounting and auditing) (1984-1996). |
| |
| INTERESTED DIRECTORS:C |
| |
Curley Jr., John F. (1939)
Chairman and Director | | | Since 1993 | | | Chairman and Director/Trustee of all Legg Mason funds consisting of 20 portfolios. | | None | | Chairman of the Board of all Legg Mason Funds. Formerly: Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood Walker, Incorporated (1982-1998); Director of Legg Mason Fund Adviser, Inc. (1982-1998) and Western Asset Management Company (1986-1998) (each a registered investment adviser). |
| |
Fetting, Mark R. (1954)
President and Director | | President since 2001 and Director since 2002 | | President and Director/Trustee of all Legg Mason funds consisting of 20 portfolios; Director/Trustee of the Royce Family of Funds consisting of 23 portfolios. | | None | | Senior Executive Vice President of Legg Mason, Inc., Director and/or officer of various Legg Mason, Inc. affiliates since 2000. Formerly: Division President and Senior Officer of Prudential Financial Group, Inc. and related companies, including fund boards and consulting services to subsidiary companies (1991-2000); Partner, Greenwich Associates; Vice President, T. Rowe Price Group, Inc. |
| |
100 Annual Report to Shareholders
Directors and Officers — Continued
| | | | | | | | | | | |
| |
| | | Term of | | |
| | | Office | | |
| | | and | | |
| Name, (Year of | | Length | | Number of Funds | | |
| Birth) and Position | | of Time | | in Fund | | Other | | Principal Occupation(s) |
| with Corporation | | ServedA | | Complex Overseen | | Directorships Held | | During the Past Five Years |
| |
| EXECUTIVE OFFICERS:D |
| |
Karpinski, Marie K. (1949)
Vice President and Chief Financial Officer | | | Since 1993 | | | Vice President and Chief Financial Officer of all Legg Mason funds consisting of 20 portfolios. | | None | | Vice President and Chief Financial Officer, since 2006 of all Legg Mason Funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc. and Western Asset Funds, Inc.; Treasurer and Principal Financial and Accounting Officer of Western Asset Income Fund (2001-present), Western Asset Premier Bond Fund (2001-present), Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (2003-present), and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (2004-present). Treasurer of all Legg Mason Funds (1986-2006). |
| |
Merz, Gregory T. (1958)
Vice President and Chief Legal Officer | | | Since 2003 | | | Vice President and Chief Legal Officer of all Legg Mason funds consisting of 20 portfolios. | | None | | Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993-2002). |
| |
Olmert, Amy M. (1963)
Vice President and Chief Compliance Officer | | | Since 2004 | | | Vice President and Chief Compliance Officer of all Legg Mason funds consisting of 20 portfolios. | | None | | Senior Vice President of Legg Mason, Inc. since 2004. Chief Compliance Officer of Western Asset Funds, Inc., Western Asset Income Fund, Western Asset Premier Bond Fund, Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund, and Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2, since 2004. Formerly: Managing Director, Deutsche Asset Management (1997-2004). |
| |
Annual Report to Shareholders 101
| | | | | | | | | | | |
| |
| | | Term of | | |
| | | Office | | |
| | | and | | |
| Name, (Year of | | Length | | Number of Funds | | |
| Birth) and Position | | of Time | | in Fund | | Other | | Principal Occupation(s) |
| with Corporation | | ServedA | | Complex Overseen | | Directorships Held | | During the Past Five Years |
| |
Hughes, Wm. Shane
(1968)
Treasurer | | | Since 2006 | | | Treasurer of Legg Mason Equity Funds consisting of 13 portfolios. | | None | | Treasurer, Legg Mason Equity Funds, since 2006. Assistant Vice President of Legg Mason & Co., LLC and Manager, Funds Accounting, since 2005. Formerly: Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002-2005) and Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (1997-2005). Assistant Treasurer Legg Mason Equity Funds (1999-2006). |
| |
Wachterman, Richard M.
(1947)
Secretary | | | Since 2004 | | | Secretary of all Legg Mason funds consisting of 20 portfolios. | | None | | Associate General Counsel of Legg Mason, Inc. since 2004. Formerly: Managing Director, Victory Capital Management, Inc. (investment management) (1993-2003). |
| |
ADDITIONAL INFORMATION ABOUT THE CORPORATION’S DIRECTORS
AND OFFICERS IS CONTAINED IN THE STATEMENT OF ADDITIONAL
INFORMATION, AVAILABLE WITHOUT CHARGE UPON REQUEST BY
CALLING 1-800-822-5544 OR ON THE
SECURITIES AND EXCHANGE COMMISSION’S
WEBSITE (http://www.sec.gov).
| |
| A | Directors of the Funds serve a term of indefinite length until their resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act. Officers of the Funds are elected to serve until their successors are elected and qualified. |
| |
| B | Each of the Independent Directors serves on the standing committees of the Board of Directors, which include the Audit Committee (chair: Arthur Mehlman), the Nominating Committee (co-chairs: Peter O’Brien and Jill McGovern), and the Independent Directors Committee (chair: Arnold Lehman). |
| C | Mr. Curley and Mr. Fetting are considered to be interested persons (as defined in the 1940 Act) of the Funds by virtue of being both employees of Legg Mason, Inc. the principal underwriter of the Funds, and as owners of common stock of Legg Mason, Inc. |
| D | Officers of the Funds are interested persons (as defined in the 1940 Act). |
102 Annual Report to Shareholders
Board Consideration of Legg Mason American Leading Companies Trust’s Investment Advisory and Management Agreement
At its November 2005 meeting, the Board of Directors (the “Board”), including all of the Independent Directors, approved the continuation of the Investment Advisory and Management Agreement between Legg Mason Capital Management, Inc. (the “Adviser”) and Legg Mason Investors Trust, Inc. on behalf of Legg Mason American Leading Companies Trust (“American Leading Companies Trust”) (the “Agreement”). In voting to approve the continuation of the Agreement, the Board considered whether continuance would be in the best interest of American Leading Companies Trust, an evaluation largely based on the nature and quality of the services provided under the Agreement and the overall fairness of the Agreement to American Leading Companies Trust. In considering the Agreement, the Board did not identify any single factor or item of information as all-important or controlling. Based on its evaluation of all material factors, including those described below, the Board concluded that the terms of the Agreement are reasonable and fair and that the continuation of the Agreement is in the best interest of American Leading Companies Trust.
Prior to the Board action, the Independent Directors met as a committee to consider its recommendation as to continuance of the Agreement. As part of the process to consider the Agreement, legal counsel to American Leading Companies Trust requested certain information from the Adviser on behalf of the Independent Directors, and in response, the Adviser provided an extensive report that addressed specific factors designed to inform the Board’s consideration of the Agreement. Counsel also provided the Independent Directors and the Board with a memorandum detailing their responsibilities pertaining to the continuance of the Agreement.
The Independent Directors obtained a report on investment performance and expenses from an independent provider of investment company data and retained an independent consultant to assist them in their review and analysis of the Agreement. The Board also drew upon its long association with the Adviser and its personnel, its periodic meetings with the portfolio manager and other employees of the Adviser, and the Board members’ familiarity with the Adviser’s culture, and the manner in which it has sought to strengthen and enhance itself.
With respect to the nature, scope and quality of the services provided, the Board considered the experience and commitment of the Adviser’s personnel and its efforts to build and support a strong service team. The Board also considered the nature and quality of the Adviser’s investment process. In assessing performance, the Board compared American Leading Companies Trust’s returns to the average of appropriate Lipper categories, a specified benchmark index and a peer group of investment companies pursuing similar strategies, all over multiple time periods. The Board also considered American Leading Companies Trust’s performance in the context of the risk undertaken by the portfolio manager. The Board noted American Leading Companies Trust’s performance record and
Annual Report to Shareholders 103
the measures that the Adviser was taking in an effort to maintain attractive long-term performance. The Board also considered the level of service provided by the Adviser and its affiliates to American Leading Companies Trust, including oversight of the transfer agent, the custodian, and preparation of regulatory filings. The Board considered the Adviser’s procedures for executing portfolio transactions for American Leading Companies Trust. The Board also reviewed the Adviser’s report on its policies and procedures for the selection of brokers and dealers and on obtaining research from brokers.
In determining whether the terms of the Agreement are reasonable and fair, the Board considered the terms and fee structure of the Agreement. In that connection, the Board considered the costs to the Adviser in providing services to American Leading Companies Trust and profitability for the Adviser and its affiliates from their overall association with American Leading Companies Trust. The Board reviewed information about the advisory fee schedule and overall expense ratio of American Leading Companies Trust and comparable fee schedules and expense ratios of a peer group of funds. In considering whether any economies of scale experienced by the Adviser in providing services to American Leading Companies Trust were shared with American Leading Companies Trust, the Board further noted that American Leading Companies Trust’s advisory fee structure provides for a reduction of the effective fee rate as asset levels increase; and that the Adviser agreed to a lower fee rate at certain asset levels. Finally, the Board considered other benefits accruing to the Adviser and its affiliates by virtue of their relationship to American Leading Companies Trust.
After an evaluation of all material factors, including those in the foregoing discussion, the Board concluded that the continuation of the Agreement is in the best interest of American Leading Companies Trust.
104 Annual Report to Shareholders
Board Consideration of Legg Mason Balanced Trust’s Investment Advisory and Management Agreement and Sub-Advisory Agreement
At its November 2005 meeting, the Board of Directors (the “Board”), including all of the Independent Directors, approved the continuation of the Management Agreement between Legg Mason Fund Adviser, Inc. (the “Adviser”) and Legg Mason Investors Trust, Inc. on behalf of Legg Mason Balanced Trust (“Balanced Trust”) and the Sub-Advisory Agreement between the Adviser and Bartlett & Co. (the “Sub-Adviser”) (each an “Agreement”). In voting to approve the continuation of each Agreement, the Board considered whether continuance would be in the best interest of Balanced Trust, an evaluation largely based on the nature and quality of the services provided under each Agreement and the overall fairness of each Agreement to Balanced Trust. In considering each Agreement, the Board did not identify any single factor or item of information as all-important or controlling. Based on its evaluation of all material factors, including those described below, the Board concluded that the terms of each Agreement are reasonable and fair and that the continuation of each Agreement is in the best interest of Balanced Trust.
Prior to the Board action, the Independent Directors met as a committee to consider its recommendation as to continuance of each Agreement. As part of the process to consider each Agreement, legal counsel to Balanced Trust requested certain information from the Adviser and the Sub-Adviser on behalf of the Independent Directors, and in response, the Adviser and the Sub-Adviser provided extensive reports that addressed specific factors designed to inform the Board’s consideration of each Agreement. Counsel also provided the Independent Directors and the Board with a memorandum detailing their responsibilities pertaining to the continuance of each Agreement.
The Independent Directors obtained a report on investment performance and expenses from an independent provider of investment company data and retained an independent consultant to assist them in their review and analysis of each Agreement. The Board also drew upon its long association with the Adviser, the Sub-Adviser and their personnel, its periodic meetings with the portfolio manager and other employees of the Adviser and the Sub-Adviser, and the Board members’ familiarity with the Adviser’s and the Sub-Adviser’s culture and the manner in which they have sought to strengthen and enhance themselves.
With respect to the nature, scope and quality of the services provided, the Board considered the experience and commitment of the Adviser’s and the Sub-Adviser’s personnel and their efforts to build and support a strong service team. The Board also considered the nature and quality of the Adviser’s and the Sub-Adviser’s investment process. In assessing performance, the Board compared Balanced Trust’s returns to the average of an appropriate Lipper category, a specified benchmark index and a peer group of investment companies pursuing similar strategies, all over multiple time periods. The Board also considered Balanced Trust’s performance in the context of the risk undertaken by the portfolio manager. The Board noted Balanced Trust’s performance record and the measures that the Adviser and the Sub-Adviser were taking in an effort to achieve attractive long-term
Annual Report to Shareholders 105
performance. The Board also considered the level of service provided by the Adviser to Balanced Trust, including oversight of the transfer agent, the custodian, and preparation of regulatory filings. The Board considered the Adviser’s and the Sub-Adviser’s procedures for executing portfolio transactions for Balanced Trust. The Board also reviewed the Sub-Adviser’s report on its policies and procedures for the selection of brokers and dealers and on obtaining research from brokers.
In determining whether the terms of each Agreement are reasonable and fair, the Board considered the terms and fee structure of each Agreement. In that connection, the Board considered the costs to the Adviser and the Sub-Adviser in providing services to Balanced Trust and profitability for the Adviser and its affiliates from their overall association with Balanced Trust. The Board reviewed information about the advisory fee schedule and overall expense ratio of Balanced Trust and comparable fee schedules and expense ratios of a peer group of funds. Although Balanced Trust had not yet grown to a size where any potential economies of scale might become apparent, the Board satisfied itself that the fees paid by Balanced Trust at its current asset level are appropriate and noted that the Adviser has voluntarily waived fees for Balanced Trust. Finally, the Board considered other benefits accruing to the Adviser, the Sub-Adviser and their affiliates by virtue of their relationship to Balanced Trust.
After an evaluation of all material factors, including those in the foregoing discussion, the Board concluded that the continuation of each Agreement is in the best interest of Balanced Trust.
106 Annual Report to Shareholders
Board Consideration of Legg Mason Financial Services Fund’s Investment Advisory and Management Agreement and Sub-Advisory Agreement
At its November 2005 meeting, the Board of Directors (the “Board”), including all of the Independent Directors, approved the continuation of the Investment Advisory and Management Agreement between Legg Mason Fund Adviser, Inc. (the “Adviser”) and Legg Mason Investors Trust, Inc. on behalf of Legg Mason Financial Services Fund (“Financial Services Fund”) and the Sub-Advisory Agreement between the Adviser and Barrett Associates, Inc. (the “Sub-Adviser”) (each an “Agreement”). In voting to approve the continuation of each Agreement, the Board considered whether continuance would be in the best interest of Financial Services Fund, an evaluation largely based on the nature and quality of the services provided under each Agreement and the overall fairness of each Agreement to Financial Services Fund. In considering each Agreement, the Board did not identify any single factor or item of information as all-important or controlling. Based on its evaluation of all material factors, including those described below, the Board concluded that the terms of each Agreement are reasonable and fair and that the continuation of each Agreement is in the best interest of Financial Services Fund.
Prior to the Board action, the Independent Directors met as a committee to consider its recommendation as to continuance of each Agreement. As part of the process to consider each Agreement, legal counsel to Financial Services Fund requested certain information from the Adviser and the Sub-Adviser on behalf of the Independent Directors, and in response, the Adviser and the Sub-Adviser provided extensive reports that addressed specific factors designed to inform the Board’s consideration of each Agreement. Counsel also provided the Independent Directors and the Board with a memorandum detailing their responsibilities pertaining to the continuance of each Agreement.
The Independent Directors obtained a report on investment performance and expenses from an independent provider of investment company data and retained an independent consultant to assist them in their review and analysis of each Agreement. The Board also drew upon its long association with the Adviser, the Sub-Adviser and their personnel, its periodic meetings with the portfolio manager and other employees of the Adviser and the Sub-Adviser, and the Board members’ familiarity with the Adviser’s and the Sub-Adviser’s culture and the manner in which they have sought to strengthen and enhance themselves.
With respect to the nature, scope and quality of the services provided, the Board considered the experience and commitment of the Adviser’s and the Sub-Adviser’s personnel and their efforts to build and support a strong service team. The Board also considered the nature and quality of the Adviser’s and the Sub-Adviser’s investment process. In assessing performance, the Board compared Financial Services Fund’s returns to the average of an appropriate Lipper category, a specified benchmark index and a peer group of investment companies pursuing similar strategies, all over multiple time periods. The Board also considered Financial Services Fund’s performance in the context of the risk undertaken by the portfolio manager. The Board noted Financial Services Fund’s performance record and
Annual Report to Shareholders 107
the measures that the Adviser and the Sub-Adviser were taking in an effort to maintain attractive long-term performance. The Board also considered the level of service provided by the Adviser to Financial Services Fund, including oversight of the transfer agent, the custodian, and preparation of regulatory filings. The Board considered the Adviser’s and the Sub-Adviser’s procedures for executing portfolio transactions for Financial Services Fund. The Board also reviewed the Sub-Adviser’s report on its policies and procedures for the selection of brokers and dealers and on obtaining research from brokers.
In determining whether the terms of each Agreement are reasonable and fair, the Board considered the terms and fee structure of each Agreement. In that connection, the Board considered the costs to the Adviser and the Sub-Adviser in providing services to Financial Services Fund and profitability for the Adviser and its affiliates from their overall association with Financial Services Fund. The Board reviewed information about the advisory fee schedule and overall expense ratio of Financial Services Fund and comparable fee schedules and expense ratios of a peer group of funds. In considering whether any economies of scale experienced by the Adviser and the Sub-Adviser in providing services to Financial Services Fund were shared with Financial Services Fund, the Board further noted that Financial Services Fund’s advisory fee structure provides for a reduction of the effective fee rate as asset levels increase and that the Adviser has voluntarily waived fees for Financial Services Fund. Finally, the Board considered other benefits accruing to the Adviser, the Sub-Adviser and their affiliates by virtue of their relationship to Financial Services Fund.
After an evaluation of all material factors, including those in the foregoing discussion, the Board concluded that the continuation of each Agreement is in the best interest of Financial Services Fund.
108 Annual Report to Shareholders
Board Consideration of Legg Mason U.S. Small Capitalization Value Trust’s Investment Advisory and Management Agreement and Sub-Advisory Agreement
At its November 2005 meeting, the Board of Directors (the “Board”), including all of the Independent Directors, approved the continuation of the Management Agreement between Legg Mason Fund Adviser, Inc. (the “Adviser”) and Legg Mason Investors Trust, Inc. on behalf of Legg Mason U.S. Small Capitalization Value Trust (“Small-Cap Value Trust”) and the Sub-Advisory Agreement between the Adviser and Brandywine Global Investment Management, LLC (formerly: Brandywine Asset Management) (the “Sub-Adviser”) (each an “Agreement”). In voting to approve the continuation of each Agreement, the Board considered whether continuance would be in the best interest of Small-Cap Value Trust, an evaluation largely based on the nature and quality of the services provided under each Agreement and the overall fairness of each Agreement to Small-Cap Value Trust. In considering each Agreement, the Board did not identify any single factor or item of information as all-important or controlling. Based on its evaluation of all material factors, including those described below, the Board concluded that the terms of each Agreement are reasonable and fair and that the continuation of each Agreement is in the best interest of Small-Cap Value Trust.
Prior to the Board action, the Independent Directors met as a committee to consider its recommendation as to continuance of each Agreement. As part of the process to consider each Agreement, legal counsel to Small-Cap Value Trust requested certain information from the Adviser and the Sub-Adviser on behalf of the Independent Directors, and in response, the Adviser and the Sub-Adviser provided extensive reports that addressed specific factors designed to inform the Board’s consideration of each Agreement. Counsel also provided the Independent Directors and the Board with a memorandum detailing their responsibilities pertaining to the continuance of each Agreement.
The Independent Directors obtained a report on investment performance and expenses from an independent provider of investment company data and retained an independent consultant to assist them in their review and analysis of each Agreement. The Board also drew upon its long association with the Adviser, the Sub-Adviser and their personnel, its periodic meetings with the portfolio manager and other employees of the Adviser and the Sub-Adviser, and the Board members’ familiarity with the Adviser’s and the Sub-Adviser’s culture, and the manner in which they have sought to strengthen and enhance themselves.
With respect to the nature, scope and quality of the services provided, the Board considered the experience and commitment of the Adviser’s and the Sub-Adviser’s personnel and their efforts to build and support a strong service team. The Board also considered the nature and quality of the Adviser’s and the Sub-Adviser’s investment process. In assessing performance, the Board compared Small-Cap Value Trust’s returns to the average of appropriate Lipper categories, a specified benchmark index and a peer group of investment companies pursuing similar strategies, all over multiple time periods. The Board also considered Small-Cap Value Trust’s performance in the context of the risk undertaken by the
Annual Report to Shareholders 109
portfolio manager. The Board noted Small-Cap Value Trust’s performance record and the measures that the Adviser and the Sub-Adviser were taking in an effort to maintain attractive long-term performance. The Board also considered the level of service provided by the Adviser to Small-Cap Value Trust, including oversight of the transfer agent, the custodian, and preparation of regulatory filings. The Board considered the Adviser’s and the Sub-Adviser’s procedures for executing portfolio transactions for Small-Cap Value Trust. The Board also reviewed the Sub-Adviser’s report on its policies and procedures for the selection of brokers and dealers and on obtaining research from brokers.
In determining whether the terms of each Agreement are reasonable and fair, the Board considered the terms and fee structure of each Agreement. In that connection, the Board considered the costs to the Adviser and the Sub-Adviser in providing services to Small-Cap Value Trust and profitability for the Adviser and its affiliates from their overall association with Small-Cap Value Trust. The Board reviewed information about the advisory fee schedule and overall expense ratio of Small-Cap Value Trust and comparable fee schedules and expense ratios of a peer group of funds. In considering whether any economies of scale experienced by the Adviser and the Sub-Adviser in providing services to Small-Cap Value Trust were shared with Small-Cap Value Trust, the Board further noted that Small-Cap Value Trust’s advisory fee structure provides for a reduction of the effective fee rate as asset levels increase. The Board also compared Small-Cap Value Trust’s advisory fee schedule to the advisory fees charged by the Adviser and the Sub-Adviser to their other accounts managed in a similar style. In that connection, the Board considered the differences in the level of services provided and the differences in responsibility of the Adviser and the Sub-Adviser to Small-Cap Value Trust and to the other accounts. Finally, the Board considered other benefits accruing to the Adviser, the Sub-Adviser and their affiliates by virtue of their relationship to Small-Cap Value Trust.
After an evaluation of all material factors, including those in the foregoing discussion, the Board concluded that the continuation of each Agreement is in the best interest of Small-Cap Value Trust.
110 Annual Report to Shareholders
Glossary of Index Definitions
Dow Jones Industrial Average — A total return price-weighted average based on the price movements of 30 blue chip stocks, computed by reinvesting quarterly dividends on a daily basis.
Lehman Intermediate U.S. Government/Credit Bond Index — A total return index consisting of investment grade corporate debt issues as well as debt issues of U.S. government agencies and the U.S. Treasury. The debt issues all maintain maturities within a range of 1 to 10 years.
Lipper Balanced Fund Index — An index comprised of the 30 largest funds in the Lipper universe of 739 balanced funds.
Lipper Financial Services Fund Index — An index comprised of the 10 largest funds in the Lipper universe of 125 financial services funds.
Lipper Large-Cap Core Funds — Average of the 925 funds comprising the Lipper universe of large-cap core funds, defined as funds that invest at least 75% of their equity assets in companies with market capitalizations greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap core funds typically have an average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index.
Lipper Large-Cap Value Funds — Average of the 512 funds comprising the Lipper universe of large-cap value funds, defined as funds that invest at least 75% of their equity assets in companies with market capitalizations greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap value funds typically have a below average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index.
NASDAQ Composite Index — A market capitalization price-only index that tracks the performance of domestic common stocks traded on the regular NASDAQ market, as well as National Market System traded foreign common stocks and ADRs.
Russell Microcap Index — Measures the performance of the microcap segment, representing less than 3% of the U.S. equity market. The Russell Microcap Index includes the smallest 1,000 securities in the small-cap Russell 2000 Index and the next 1,000 securities below the index. As of the latest reconstitution, the average market capitalization was approximately $217.0 million; the median market capitalization was approximately $182.6 million. The largest company in the index had an approximate market capitalization of $539.5 million; the smallest company in the index has an approximate market capitalization of $54.8 million.
Russell 1000 Value Index — Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
Russell 2000 Growth Index — Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000 Index — An unmanaged index comprised of the 2,000 smallest companies of the 3,000 largest U.S. companies based on market capitalization.
Russell 2000 Value Index — Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
Annual Report to Shareholders 111
S&P Financial Index — A capitalization-weighted, price-only index representing 9 financial groups and 53 financial companies.
S&P 400 Mid-Cap Index — A market capitalization-weighted index, composed of 400 stocks, that is generally considered representative of mid-sized U.S. companies.
S&P 500 Stock Composite Index — A market capitalization-weighted index, composed of 500 widely held common stocks, that is generally considered representative of the U.S. stock market.
Fund Information 115
Investment Managers
| |
| For American Leading Companies Trust: |
| |
| Legg Mason Capital Management, Inc. |
| Baltimore, MD |
| |
| For Balanced Trust, Financial Services Fund, and U.S. Small-Cap Value Trust: |
| |
| Legg Mason Fund Adviser, Inc. |
| Baltimore, MD |
Investment Advisers
For American Leading Companies Trust:
| |
| Legg Mason Capital Management, Inc. |
| Baltimore, MD |
For Balanced Trust:
| |
| Bartlett & Co. |
| Cincinnati, OH |
For Financial Services Fund:
| |
| Barrett Associates, Inc. |
| New York, NY |
For U.S. Small-Cap Value Trust:
| |
| Brandywine Global Investment Management, LLC |
| Philadelphia, PA |
Board of Directors
| |
| John F. Curley, Jr., Chairman
Mark R. Fetting, President
Dr. Ruby P. Hearn
Arnold L. Lehman
Robin J.W. Masters
Dr. Jill E. McGovern
Arthur S. Mehlman
G. Peter O’Brien
S. Ford Rowan
Robert M. Tarola |
Officers
| |
| Marie K. Karpinski, Vice President and Chief Financial Officer
Gregory T. Merz, Vice President and Chief Legal Officer
Amy M. Olmert, Vice President and Chief Compliance Officer
Wm. Shane Hughes, Treasurer
Richard M. Wachterman, Secretary |
Transfer and Shareholder Servicing Agent
| |
| Boston Financial Data Services
Braintree, MA |
116 Fund Information
Custodian
| |
| State Street Bank & Trust Company
Boston, MA |
Counsel
| |
| Kirkpatrick & Lockhart Nicholson Graham LLP
Washington, DC |
Independent Registered Public Accounting Firm
| |
| PricewaterhouseCoopers LLP
Baltimore, MD |
About the Legg Mason Funds
| | | |
| |
Equity Funds
American Leading Companies Trust
Classic Valuation Fund
Growth Trust
Special Investment Trust
U.S. Small-Capitalization Value Trust
Value Trust
Specialty Funds
Balanced Trust
Financial Services Fund
Opportunity Trust
Global Funds
Emerging Markets Trust
Global Income Trust
International Equity Trust
Taxable Bond Funds
Core Bond Fund
High Yield Portfolio
Investment Grade Income Portfolio
Limited Duration Bond Portfolio
Tax-Free Bond Funds
Maryland Tax-Free Income Trust
Pennsylvania Tax-Free Income Trust
Tax-Free Intermediate-Term Income Trust | | Legg Mason, Inc., based in Baltimore, Maryland, has built its reputation, at least in part, on the success of the Legg Mason Funds, introduced in 1979. The primary purpose of our funds is to enable investors to diversify their portfolios across various asset classes and, consequently, enjoy the stability and growth prospects generally associated with diversification.
The success of our funds is contingent on the experience, discipline, and acumen of our fund managers. We believe the quality of our managers is crucial to investment success. Unlike many firms, which focus on a particular asset class or the fluctuations of the market, at Legg Mason we focus on providing a collection of top-notch managers in all the major asset classes.
Information about the policies and procedures that each Fund uses to determine how to vote proxies relating to its portfolio securities is contained in the Statement of Additional Information, available without charge upon request by calling 1-800-822-5544 or on the Securities and Exchange Commission’s (“SEC”) website (http://www.sec.gov). Information regarding how each Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is also available on the SEC’s website or through the Legg Mason Funds’ website at www.leggmasonfunds.com/about.
Each Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. You may obtain a free copy of each Fund’s portfolio holdings as filed on Form N-Q, by contacting each Fund at the appropriate phone number, address or website listed below. Additionally, each Fund’s Form N-Q is available on the SEC’s website (http://www.sec.gov) or may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. |
You should consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For a prospectus, which contains this and other information about any of the Legg Mason Funds, call your financial adviser, call 1-800-577-8589, or visit www.leggmasonfunds.com. Please read the prospectus carefully before investing.
| | | |
Legg Mason Funds
For Primary Class Shareholders
c/o BFDS
P.O. Box 55214
Boston, MA 02205-8504
800-822-5544
www.leggmasonfunds.com | | Legg Mason Investor Services- Institutional
For FI and I Class Shareholders
P.O. Box 17635
Baltimore, MD 21297-1635
888-425-6432
www.lminstitutionalfunds.com |
Legg Mason Investor Services, LLC, Distributor
A Legg Mason, Inc. Subsidiary
LMF-013 (3/06)
Item 2. Code of Ethics Applicable to Registrant’s Principal Executive Officer and Principal Financial Officer
| | (a) | | Legg Mason Investors Trust, Inc. (“Registrant”) has adopted a Code of Ethics, as defined in the instructions to Form N-CSR that applies to the Registrant’s President and Treasurer, which is designed to deter wrongdoing and to promote: |
| | • | | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| | • | | Full, fair, accurate, timely and understandable disclosure in reports and documents the Registrant files with, or submits to, the SEC or in other public communications made by the Registrant; |
| | • | | Compliance with applicable governmental laws, rules and regulations; |
| | • | | Prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code of Ethics; and |
| | • | | Accountability for adherence to the Code of Ethics. |
| | (b) | | No response required. |
| | (d) | | The Registrant has not granted a waiver, including an implicit waiver, from a provision of the Code of Ethics to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions during the period covered by this report. |
| | (f) | | A copy of the Code of Ethics is attached as Exhibit 12(a)(1) to this Form N-CSR. |
Item 3. Audit Committee Financial Expert
| | | | |
| (a) | (1) | | The Registrant’s Board of Directors have determined that the Registrant has at least one Audit Committee financial expert serving on its Audit Committee. |
| |
| (a) | (2) | | The Audit Committee’s financial experts are Mr. Arthur S. Mehlman and Mr. Robert M. Tarola. They are “independent” as defined in Form N-CSR Item 3(a)(2). |
Item 4. Principal Accounting Fees and Services
| | | | |
| | (a) | | Audit Fees |
| |
| | | | Ernst & Young LLP
Fiscal Year Ended March 31, 2005 – $95,200 |
| |
| | | | PricewaterhouseCoopers LLP
Fiscal Year Ended March 31, 2006 – $87,450 |
| |
| | (b) | | Audit-Related Fees |
| |
| | | | There were no additional fees billed to the Registrant during either of the last two fiscal years in addition to those disclosed in Item 4(a). |
| |
| | | | There were no fees billed to the Registrant for assurance and related services that required preapproval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. |
| |
| | (c) | | Tax Fees |
| |
| | | | Ernst & Young LLP
Fiscal Year Ended March 31, 2005 — $22,600 |
| |
| | | | PricewaterhouseCoopers LLP
Fiscal Year Ended March 31, 2006 — $4,200 |
| |
| | | | Services include preparation of federal and state income tax returns and preparation of excise tax returns. |
| |
| | | | There were no fees billed to the Registrant for tax services that required preapproval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. |
| |
| | (d) | | All Other Fees |
| |
| | | | There were no fees billed to the Registrant during either of the last two fiscal years in addition to those disclosed in Item 4(a) through Item 4(c) above. |
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| | | | There were no fees billed to the Registrant for services not included in Items 4(a) through 4(c) above that required preapproval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. |
| | | | |
| (e) | (1) | | The Audit Committee’s policy is to delegate to its chairperson the authority to preapprove items prior to the next meeting of the Committee. Such preapprovals are reported at the next quarterly meeting of the Audit Committee. |
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| | (2) | | There were no services provided to the Registrant that were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
| | | | |
| | | | There were no fees billed to the Registrant for services where pre-approval by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. |
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| | (f) | | The percentage of hours expended by the principal accountant’s engagement to audit the Registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountants’ full-time, permanent employees was zero. |
| |
| | (g) | | Non-Audit Fees for services rendered to Registrant or Registrant’s investment manager and any entity controlling, controlled by, or under common control with the investment manager. |
| |
| | | | Ernst & Young LLP
Fiscal Year Ended March 31, 2005 – $473,333 |
| |
| | | | PricewaterhouseCoopers LLP
Fiscal Year Ended March 31, 2005 – $302,596
Fiscal Year Ended March 31, 2006 – $277,065 |
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| | (h) | | The members of the Registrant’s Audit Committee have considered whether the non-audit services that were rendered by the Registrant’s principal accountant to the Registrant’s investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X are compatible with maintaining the principal accountant’s independence. |
Item 5. Audit Committee of Listed Registrants
The Registrant is not a listed issuer as defined in Rule 10A-3 under the Securities Exchange Act of 1934.
Item 6. Schedule of Investments
The schedule of investments in securities of unaffiliated issuers is included in the annual report.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
The Nominating Committee will accept recommendations for nominations from shareholders. Shareholders may forward recommendations to the Fund Secretary at 100 Light Street, 23rd Floor, Baltimore, Maryland 21202, Attn.: Fund Secretary.
Item 11. Controls and Procedures
| | (a) | | The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing date of this report, that the Registrant’s disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the SEC’s rule and forms and that information required to be disclosed by the Registrant in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Registrant’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. |
| | (b) | | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) during the Registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
Item 12. Exhibits
| | (a) | | File the exhibits listed below as part of this Form. |
| | (1) | | The Registrant’s Code of Ethics applicable to Registrant’s principal executive officer and principal financial officer is attached hereto. |
| | (2) | | Separate certifications for the Registrant’s chief executive officer and chief financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940 are attached hereto. |
| | (b) | | Separate certifications for the Registrant’s chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Legg Mason Investors Trust, Inc.
By: /s/ Mark R. Fetting
Mark R. Fetting
President, Legg Mason Investors Trust, Inc.
Date: June 2, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/ Mark R. Fetting
Mark R. Fetting
President, Legg Mason Investors Trust, Inc.
Date: June 2, 2006
By: /s/ Marie K. Karpinski
Marie K. Karpinski
Vice President and Chief Financial Officer, Legg Mason Investors Trust, Inc.
Date: June 1, 2006
