Fund Objective

The objective of this Fund is to achieve capital growth, principally through investment in securities of smaller US companies.

View on Past Performance

The Legg Mason US Smaller Companies fund posted strong second quarter results, up 6.26% in sterling terms versus a benchmark gain of 2.09% for the Russell 2000 index in sterling terms. In addition to outperforming the Russell 2000 for the second quarter of 2007, the fund also outperformed it for the year-to-date, one-year and three-year time periods.Over the three-month period, both sector allocation and individual stock selection proved positive, especially within the industrial products and industrial services sectors. Examples included Schnitzer Steel Industries, which rose over 17% in sterling terms for the period, and Chaparral Steel, which rose over 20% in sterling terms.Elsewhere, the Fund's exposure to stocks within the natural resources sector also proved positive. Financials, however, were flat for the period. In terms of fund activity, the manager is still buying on short-term dips, which typically do not yield the sort of absolute value that it would ideally prefer. The manager's goal is to be fully invested, but with purchase decisions becoming harder and harder, it has not found it easy.

Future Expectations

What's new for 2007 is that larger companies have emerged in the short run as market leaders, though the margin of outperformance versus small-cap both year-to-date and for the one-year period ended June 30 is not enormous. Within small-cap, there has been a move toward larger, arguably higher-quality companies that's distinct from the generally better returns achieved by more speculative issues in 2006.Like the Rolling Stones rock band, the current bull market just keeps going and going and going, almost automatic in its overall upwards movement, its success seemingly taken for granted, with so many investors sure that the big hits will not fade away. As value investors, prone to a cautious, if not pessimistic temperament, this blissful confidence on the part of certain observers makes the manager sceptical.

Fund Details