Chip Mason
CEO, Legg Mason, Inc.

I will start by saying a few things about Legg Mason. My job, other than to be a warm-up for the main event, which is you're to get to hear Bill speak, is to give you a little overview of Legg Mason, and then we're going to have some questions and answers.

The first thing I need to discuss is a forward looking statement which we have on everything now, and giving you the disclaimers. The contents of this presentation may contain forward looking statements, and there are securities laws about this.

Our whole company has been arranged around the concept of balance. What made us successful was that we weren't a singular business, and we weren't a singular asset manager. We had many capabilities in asset management as we did throughout the company, and therefore when the really bad markets came, although we suffered from them, we never really went down. Our earnings continued to be strong and in fact last year, which was certainly the last year of the bad period, we had record results which was attributable to our balance.

The cover of our Annual Report, which was about balance, shows that we manage money in over 65 countries throughout the world, so we've accomplished a lot of the things we were attempting to do.

We're a diversified financial company. We're headquartered in Baltimore. We've been in business for over a century. We have approximately 5200 employees, 1400 financial advisors in 140-some offices. There are 68 million shares, and 71 million would be outstanding on a fully diluted basis.

We are in three businesses. Those businesses are asset management, which has become our largest business, securities brokerage business, which is large, and we have a strong capital markets business. That's part of the diversification I talked about with balance.

Over the last 10 to 15 years we basically took the business and turned it around. During this period, our securities brokerage company operated probably in the upper limits of the best in the business. So it's not that the business deteriorated, it's that the asset management, investment advisory business expanded dramatically and we did extremely well in that business.

21% of our business in 1990 was asset management, and 54% was security brokerage, so we were principally a security brokerage firm. By the last quarter, 60% of the business revenues come from asset management, and obviously the brokerage business during that period has declined, and now represents about 29% of our business.

Now let's discuss the actual numbers, but I'm not as concerned about you getting the numbers as getting the concept. We took the last five years and the first two quarters of this year, and we deducted the top of the bull market, which was March of 2000, and we also deducted the quarter that was 9/11, because of the abnormalities of that, and we kept everything else in to get a trending of where the business and the earnings of the company are going. We had a range between 32 and 42 cents per quarter in earnings in 1999, and by 2001 that had gotten to 55 to 61 as the low and high, and then 66 and 71 last year. So far this year is 83 and 93. So what you can see is the trending of our profitability, which has been very strong over the last four or five years, and has obviously helped our shareholders because of the price of the stock.

In terms of stockholders equity, I can remember when our equity was almost nonexistent, and I can remember when we went public, and that meant we actually did have some real capital that was locked into the business. And I can remember in 1993, which was roughly 10-1/2 years ago, we had $181 million as the capital in the company, and today that stands at $1.395 billion. Passing $1 billion was for me a considerable occasion.

In terms of our asset size we have had a growth rate of roughly 31% over the last ten years, and 22% over the last five years which has been much tougher, because as many of you know certainly the equity side has gone sideways to down, depending on when you looked at it. This growth rate is very strong, as I'll show you in a minute, by industry standards, but we had $13 billion of total assets under management in 1993, and as of the last quarter we reported in September 2003, we had $237 billion under management.

We have always been a very strong institutional asset gatherer. It has been where we've tended to be successful consistently, and has given us that underlying business which helped us so much in those rougher markets. When other parts of our asset management side weren't performing as well, the fact that this continued to do well helped us immensely. 68% of our assets are with institutions, 21% with mutual funds, and 11% with wealth management or high net worth individuals.

If you take it on a revenue basis, you get a little different look at it, but still it becomes a lot more diversified, a lot more equal, a lot more balanced, as it does when you get to profitability. We have attempted to and successfully balanced the business, which was critical to what we were trying to do.

We are in three fundamental phases in the asset management business: wealth management, large institutions, and mutual funds. We designed it that way. We have basically stayed out of a lot of the businesses that were talked about today. We have some hedge fund assets that are mixed into maybe Brandywine, or Western Asset, but as a percentage of our business it's miniscule. It's a business that thus far we have chosen not to go into, but rather we've decided to stay in the basic businesses and continue to build those strongly.

When we compare every public company that is in the asset management business by looking at the growth rates that they have had in their assets under management since the end of 1999, and our growth in assets has far outstripped the entire industry, and actually have begun to accelerate relative to the industry recently.

Let's talk about the Legg Mason funds, which is certainly the reason most of you are here. Ten of the 21 Legg Mason funds perform in the top quartile of their respective Lipper categories over the 12 months ended September 2003. What is much more important is that 81% of the assets performed in the top quartile1, which is really what the issue is. I would say that would be among the best that you're going to find.

Top 5 of their respective Lipper categories for the 12 months were the Focus Trust which was first in large cap growth, Maryland Tax Free Income Trust, which was the top municipal fund for Maryland, the Opportunity Trust which was second in mid-cap core, and the Special Investment Trust which was fifth in mid-cap core. All of those are spectacular when you look at the hundreds and the thousands of funds that are out there.

Let's talk a minute about the Value Trust. The Value Trust is the only equity fund in existence to have outperformed the S&P 5002 for each of the past 12 consecutive years. I'm not going to comment on this year because I don't want to jinx anything. But it is 12 years, and it is phenomenal, and no one has to our knowledge ever done that. I think it's a tribute to Bill and his team.

It posted the following results. They're ranked 17th out of 456 funds for the one-year period, with an annual return of 43.02% versus the 24.70% of the group. They're ranked 1st out of 77, for the ten-year period, with an annual return of 16.5% versus 9.83%, and they are ranked 1st out of 22 funds since the inception of the Value Trust, which was in April of 1982. They are the number one fund, and they had an annual return since that period of 16.8% versus 12.7%. All of those are spectacular numbers, and as you know, are very hard to repeat. But they are by far the best in their group and in their field.

Legg Mason Value Trust Averaged Annualized Returns and Ranking as of 9/30/03 1-Yr 5-Yr 10-Yr Since  Inception *   Total Returns      Legg Mason Value Trust      Lipper Multi-Cap Value Funds   Lipper Ranking      Legg Mason Value Trust 43.02 % 24.70 %  # 17 (456)  8.20 % 5.55 %  # 58 (221)  16.50 % 9.83 %  # 1 (77)  16.80 % 12.71 % # 1 (22)  * Date of Value Trust Inception: 04/16/1982 Source: Lipper Analytics Service      Lipper rankings are based on total returns.

Another disclaimer has to get into this, and that obviously is that past performance does not speak about future performance, and I hope all of you know that.

And last but not least, let's look at how we have grown on the world scene. In 1996 we were 138th in the world, and we've risen as the end of 2002 to 51st.

Hopefully you've gained out of these statistics an understanding that we put in a lot of time, a lot of effort, and a lot of precise thinking. Our view has been that you seek out the best there are, and you let them run the money. One of the things that I've told our people for years is, "Do not mess with the process." If we have and want to keep the best managers there are, you need to let them manage the money, regardless of what your opinion is. It's their job to run the money, and if you start overseeing and start picking at what they're doing, the best people will leave.

The thing I'm most proud of that we've done over the period of time is that basically we haven't had people leave. That's been true in Western Asset, it's been true at Bill's group, it's been true virtually as you go through the various companies, Batterymarch, Brandywine, and the Private Capital. We have consistently held people, in my opinion, because of the way we deal with them, and because of the fact that we make sure they are free to run the money the way they believe the money should be run. In my opinion if you change that you'll start losing some of the best people.

Any time you try and take a group of people who are highly talented, and very competent at what they do, and begin trying to tell them what to do when you don't even do it, you can almost be assured of what the results are going to be. Our goal has always been to keep the best people. I'm very biased in this, but I do believe we have the best managers in the country, and I'd like it to stay that way.

Are there any questions?

Q: What affect will the continuing war on terrorism have on our economy?

A: I don't know. Everybody's got their opinion, not only on what affect it will have on this country, but I have tried to analyze what would you have done had the question come to you on terrorism. How would you have responded and reacted? And I have to say, if I were told that, "If you go after the terrorists you may keep them from coming to the United States again," I might have gone after them. I think that we're in a very unique spot now, due to the fact that we are in Iraq, and this is becoming more embroiled as to whether we should pull out or not, and I'm not trying to say what I think we should do per se, but I think that our pulling out would tend to show weakness, from the standpoint of terrorists, and that would concern me, and at that point I would think that the markets would probably react fairly negatively out of concern. We have lived in a society in the United States that has been virtually free of terrorism, and I'm not so sure how well we'd hold up. A friend of mine who had a fairly major role in a past administration in the defense area, said to me, "It's been very interesting. People have all these opinions on what should or shouldn't be done. In Washington, we had 2 people riding around in a car with a high powered rifle, and they literally took the entire city of Washington DC, everything within 50 miles, and scared everybody to death. They wouldn't come out of their houses. They would fill their car with gasoline by kneeling on the cement and holding their hand up and putting the gas in the car." His point was, "Can you imagine what would happen if we ever really started experiencing terrorist attacks." So I would think it would be a negative issue.

Q: What is the possibility that Legg Mason might be bought out or be merged with another financial institution?

A: I think I've had that question 100 times. As a public company, if somebody intends to acquire us, I can't do anything about that. Our stated desire has been to stay as we are. I think we've done that relatively well, and we think the positioning of the company for what we're trying to do is strong. We're not in a business where being part of somebody else is going to help us, at least I don't think so. My internal comment would be the same as external. I've told people internally - you don't want your employees worrying about things like this - that as long as we outperform the market, and as long as our stock continues to perform very well, I don't know any reason why we'd have to do anything. The stock has gone up something like 22% or 23% a year over the last ten years. Suppose you get a 20% premium - that's not even a year, so we've been pretty fortunate in staying as we are. My guess is we would continue to, but I don't control that other side.

Q: We've gotten a couple of questions about history and your personal perspective. One way to frame it would be, if you wouldn't mind, go back and describe phase one of the company's history, you started Mason and Company in 1962, through when you merged with Legg. What were the key issues that came up?

A: Starting the Value Trust was very key. To some extent going public was very key. The hiring of Bill Miller was very key. The acquiring of Western Asset was very key. These are just signpoints that put us in unique positions. When we acquired Western Asset in 1986, it had $3 billion under management. Today it's probably $130 billion or more, so that certainly was significant. We had done very well with the Value Trust, but when we hired Bill in 1980 or 1981, regardless of how strong you think your instincts are, in interviewing and seeing the assets and capabilities of people, there is no possible way that I could have figured that out. We've had a number of ten strikes.

But let me go back. The company from the Mason side was started in 1962. I was very young and didn't know any better. Therefore couldn't see the down sides nearly as well as I could see the up sides. The merger with Legg in 1970 was pretty critical, because they had a much larger capital base, and gave us the ability to stabilize the business.

Some of you would remember, but many of you don't, that we had a very negative stock market that went from 1969 to 1972. We had something then that they called the Tech Bubble. The Tech Bubble broke and we had the largest bankruptcy in the history of the United States, similar to what happened in March of 2000. Things happened in that same market cycle. But we then were working very hard on the brokerage side trying to make the brokerage side trying to make the brokerage business bigger and stronger, and we did that into the early 1980s. We went public, and then we began the movement toward asset management from the mid-80s through the mid-90s, where we kept shifting our emphasis and capital toward the asset management side, stabilizing the business dramatically. Certainly to some extent creating something that nobody else had done in the business, and putting us in the position we are today, which certainly allows us to go and play in the world markets, which is what we have been doing in the more recent years, attempting to run money literally all over the world, in different kinds of venues, which is where I think the future lies.

Q: We've had several questions about regulatory matters, mutual funds scandals, our involvement, etc.

A: The only thing I could say about our involvement is what we have said to the press, and that is that we have been subpoenaed by both the attorney general of New York and the SEC, and we are responding to those inquiries as everyone in the industry has. This is a pretty dramatic sweep that's going on, and we'll just have to see where it all goes. Almost every week there's a new revelation as to where they're headed and what they're looking at. We'll just know in time where that goes. That's really all I can say about that.

Q: Why do you continue to have lots of different names for all the different companies? Western, Legg Mason, Brandywine, etc.? Why not consolidate all of those under one name?

A: We sort of tried to do that one point, and in some cases we really tried to do it. We tried to market on a broad spectrum. What I found out is that, and it's probably the reason why some large asset management companies that are inside major institutions have had trouble operating. If you're out marketing three products as a marketing group, and you're getting a lot of business for one organization, and not a lot of business for another organization, the one getting a lot of business is very happy, and the one not getting a lot of business is convinced that you like the other one a lot better than you like me. Whatever you do, you never can get the problem solved.

What's happened in this situation is that we attempted to do it, we even tried a little bit on the foreign side. We do it in the sense that we jointly market in the 401K plans institutionally, but other than that we found out that it doesn't work. We find that the people on the bond side or the stock side, or the large cap or the small cap or the value versus something else, you can't get all those people happy with a singular marketing organization. As I watched many players try to merge all those, and there are a couple of them that have gone on in the last two years, they turned out to be failures because you can't take all those people and put them in one organization. I believe that one of the real secrets to what we've done that has worked, is that you allow them to continue to operate as a unit, and continue to basically determine where they think they ought to go.

Q: Relative to potentially adding other asset management firms, are you still looking for new acquisitions?

A: A lot less so. We have filled all the empty blocks. We try not to have our managers compete. Occasionally they will, but it will be because they started up a new product , or decided to go in another direction on something, but our goal has always been that this would be the domain where this manager, that would be the domain of that manager. To give you an example, the reason we acquired Batterymarch is we had no quantitative capability, and we wanted them to be our quant managers. It would be true in a lot of other examples. But we then don't buy somebody else to compete with them.

The other thing that we are still looking at going forward, although we're not specifically looking at anything now, is a principally European distribution capability, in what they call the unit trust, which is a mutual fund area. We're building that but it will take us 10 or 15 years. An acquisition of someone who's already on the ground in the UK and particularly in Germany would certainly aid us in our quest to be able to move a little faster.

The other thing is we have a need for precedence, meaning assets based on everything but the United States. But it's not a big one. Somewhere we may decide to take a harder look at that product, which will probably more than likely come out of Europe.

Q: Continuing globally, a couple of questions about China, opportunities for investors, impact on the company, and also your thoughts on the current US deficit and issues related to global expansion.

A: China is doing so well it's unbelievable. SARS put almost a freeze in the Pacific. This is a critical issue. One of the problems that the Federal Reserve has is they constantly have to worry about what the US does, and how that will affect the Pacific and Europe. Whether it's going to really put them into a bind. So often when our decisions are being made, it's not a decision that we really need in the United States, but it's a decision that relates to what we need to do to stabilize another part of the world from an economic standpoint. There's been an amazing resurgence in the Pacific Rim. Since SARS died down it's been almost too hard to believe. In fact, so much so that China has gotten a little scary, they're growing so fast. They have an unlimited supply of labor. When you get into the Northern part of China there are hundreds of millions of people who might make $100 a year if they make that, so the ability for China to get labor is not a very difficult thing.

What's happened is once SARS slowed down, and they were able to ship products again - people wouldn't touch containers, people were afraid to do anything related to anything coming out of China - then China began to move very rapidly again, and as all of you know the manufacturing going there with the building of cars, the building of computers, can be done at much lower prices and shipped to another destination. It's creating these massive negative deficits in the United States.

I know some of you, at least, have read Warren Buffet's most recent article. He tends to have one every two weeks now. This is one is on deficits. And although his points I thought were interesting, and some of them are right, over the last 20 years when we've had these deficits, there has never been any proof that this really is harming the US economy in the way that we thought it was. Not that we should keep this up forever, and not that it should continue to go as it has, but unfortunately the rest of the world needs the US economy to continue to stay stable, and we're going to be fighting this problem for a lot of the years to come.

Q: Does Legg Mason foresee closing any of its mutual funds to new investors? Why or why not?

A: Except for the Royce Funds, the answer would be no. At least to my knowledge. You may see that in something like the Royce Fund because they deal in the small cap area, and maybe one of two of their fund at times gets so much cash that they wouldn't be able to in their opinion invest it correctly, although Mark would know that answer a lot better than I would.

Otherwise our funds are in areas where the market issues aren't that big. There's plenty of market capability out there to invest money without getting ourselves in a bind, so to my knowledge we're not looking at closing any funds, but the areas I could see that happen would tend to be in something like small caps.

Fetting: Just an update - Royce did close it's micro-cap fund as of November 1, 2003, and they have rarely but occasionally done that because of the very issues you talked about.

Q: Now that Sarbanes-Oxley has been in place for more than a year, what impact do you think it has had on the governance of US companies?

A: That's a hard one to read. Most companies are probably the way we are. The legal compliance group occupied about 30% of a floor, and now it occupies a floor. That's been basically what everybody has seen. Proliferation of lawyers has gone up dramatically, and I don't see that stopping. The law itself has a lot of good parts to it, and it has some bad parts to it. The problem with the law is that it was written and passed in 30 or 40 days, so there's a lot of abnormalties in it that I'm sure will be ironed out over the next year or two. But I don't see that changing. I do think that the laws have gotten tighter. The part of it that concerns me is that most of these rules and regulations are written by lawyers with virtually no industry input, and that always concerns me. For those of you, for example, who have worked in the research and investment banking business, the new rules on most of your viewpoints are hard to figure out what you should or shouldn't and can or cannot do. I attribute most of that to it being a very legalistic interpretation. Maybe in time it will work itself out.

Q: What are your thought about investing and where to allocate dollars going forward - equities, fixed income, etc.

A: Institutions have a different issue because very often they allocate money differently than you would as an individual, because what you're doing is trying to chart where you're going, and you're not an endowment fund or a pension fund that has to worry about current income or what the pensioners need. They tend to set their percentages that are not as keyed to the markets. So my comments are going to be pertain to individual investors.

Individuals should in my opinion be very weighted to equities right now. There is and there will be some risk. We had a 21% or better increase in earnings in the September quarter, and the economy itself is widespread, it's gaining momentum. The issue has been jobs, but the likelihood that jobs is going to remain an issue is not very high, and there is already a sign that the job situation has turned around. I know Bill and others believe strongly that next year you're going to see a major improvement in jobs. Equities appear to be the place you ought to be.

Stocks move rapidly, yes, they always do when you come off a 3-year low market that is just labored and gone down for 3 years. The first ride up is always much quicker and much larger, bigger, quicker, faster, whatever you want to say, than you would have anticipated. It always looks as thought the market has gotten ahead of itself. But actually earning are rising pretty rapidly, which would all speak to buy equities, and until something dramatic happens, I don't know why you wouldn't be shifting most of your assets toward the equity side.

Thank you very much.