STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
Financial Statements for the Year Ended
December 31, 1998
[LOGO]
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STANDISH, AYER & WOOD INVESTMENT TRUST
February 25, 1999
Dear Standish, Ayer and Wood Investment Trust Shareholder:
We are writing to provide you with a review of developments at Standish, Ayer &
Wood, as they relate to the activities of the Investment Trust.
The financial markets had a wild year in 1998. Following the disarray in Asia
and, more directly, the de facto Russian default in mid-August, a large part of
the world's financial markets simply shut down. Many sectors of the U.S. markets
were paralyzed. Spurred by a second easing of monetary policy by the Federal
Reserve in mid-October, the markets reopened and staged a dramatic recovery.
Performance within subsets of the major asset classes varied greatly. Bonds
generally produced positive returns, but less liquid issues with any degree of
perceived credit risk underperformed. Emerging market securities were
eviscerated during the third quarter spasm and recovered only partially in the
fourth. By far the best returns in the U.S. equity markets were registered by a
relatively narrow group of higher price/earnings ratio, larger capitalization
stocks. The disparity in return between the larger cap stocks and smaller cap
stocks, as measured by the Standard & Poor's 500 and the Russell 2000 indexes
was an astounding 31%!
While some funds managed by Standish did well relative to their benchmarks and
most funds produced good absolute returns, too many underperformed their
benchmarks in 1998. In bonds, our holdings of corporate credits and mortgages
underperformed U.S. Treasury securities, the latter representing a significant
portion of the major indexes. In equities, our preference for lower
price/earnings ratios led to an overweighting in mid cap stocks that suffered
relative to larger cap stocks with significantly higher valuations.
We have expended considerable time and effort trying to learn the correct
lessons from 1998. We have determined that much of the underperformance was
generic to our style and that 1998 was an aberrant year, with valuation on
holiday in many sectors. We are deeply committed to the view that valuation is
extremely important in making investment judgments. We are dedicated to our
philosophy and unalterably convinced that our strategy of buying securities that
are inexpensive relative to their fundamentals is an excellent path to
sustainable excess returns over the long term.
Notwithstanding the chaotic markets, we are pleased that Standish has benefited
from extraordinary stability of both our clients and our professional team. At
the end of 1998, total assets under management for our clients were $46.2
billion, compared with $39.3 billion at the end of 1997. We have experienced
growth in virtually all asset categories, especially equities. The Standish
Funds increased assets from $5.7 billion to $6.5 billion during the year, with
about 75% of the growth representing additions from existing clients.
The Standish team has also grown significantly, from 232 members at the
beginning of 1998 to 276 members at the end of the year. Our 97 investment
officers have average investment experience of 15 years. Fifty-six officers have
advanced degrees (typically an MBA) and 65 have some advanced professional
accreditation (virtually all Chartered Financial Analysts). There have been no
changes in the 24 individuals (all with CFAs) who own Standish, Ayer & Wood.
1
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At the end of 1998, the Standish Board of Directors elected four new associate
directors: Susan Coan, one of the key managers in our taxable client group;
David Horsfall, head of our large bond trading operation; Phil Leonardi, a major
contributor to expanding our equity assets; and Jennifer Pline, who holds major
responsibilities for serving large, fixed income clients. We have elected 13 new
vice presidents and 17 new assistant vice presidents of Standish, Ayer & Wood.
In this environment, there are no shortages of challenges and opportunities. Our
first priority remains to produce superior long-term investment performance for
our clients. We believe we have the investment disciplines and the professional
team to achieve that goal. In those asset classes in which our returns were
subpar in 1998, we have a special impetus to produce superior results in the
future. With our portfolios attractively priced compared to the relevant
benchmarks, we see potential for significant excess return when the markets
become more focused on investment value.
We believe that we are in partnership with our clients. We would like to assure
you of our dedication to fulfilling your needs while expressing our great
appreciation for your confidence in Standish.
Sincerely yours,
/s/ Ted Ladd /s/ George Noyes
Edward H. Ladd, Chairman George W. Noyes, President
2
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
Management Discussion and Analysis
1998 was remarkable year in the bond markets. Benchmark short rates fell around
the globe as the developed world's central bankers sensed the threat of
inflation dissipating with each passing quarter. These falling short rates
allowed long rates to fall to new historic lows. The Fund's focus on global high
yield sectors kept us from matching the gains of the developed world's
government bond markets, however. Fears that slowing growth might mean weaker
profits kept corporate bonds, especially lower quality corporates, from earning
their coupon in 1998, in spite of another record year in the equity markets.
Emerging country debt was especially hard-hit by the combination of low
commodity prices, fear of slowing global growth, and contagion from those
countries such as Russia and Brazil which have practiced poor economic and
financial management. The result was that few non-government portfolios
outperformed a portfolio of U.S. Treasury bonds or German bunds. For the year,
the Fund returned 0.86% compared to 8.67% for the Fund's benchmark, the Lehman
Brothers Aggregate Index. Indices more reflective of the Fund's performed not
nearly as well, however: the Lehman Brothers High Yield Index returned 1.87% and
the J.P. Morgan Emerging Market Bond Index returned -14.34%.
Following the severe volatility during the fourth quarter of 1997, spread sector
markets generally stabilized through the first seven months of 1998. The Fund's
performance versus the Aggregate was basically neutral for the first half of the
year. All of 1998's underperformance versus the high-quality Lehman Aggregate
Index occurred in the third quarter, particularly in the month of August. On
August 17, Russia defaulted on its domestic debt and floated its currency. (The
Fund had no exposure to Russian debt or currency). The ensuing six weeks were
among the most volatile the fixed income markets have ever experienced, as a
massive global delevering process was precipitated by the time it stabilized in
October. This effect even trickled down to off-the-run U.S. Treasuries, driving
their spreads to on-the-run Treasuries dramatically wider. As in late 1997, the
Fund had been reducing its emerging markets allocation prior to the
destabilizing event, this time from a high of 33% in February to around 24% at
the beginning of August, deploying the proceeds into the U.S. high yield and
commercial mortgage market. However, given the magnitude of the actual event,
our moves were insufficient to avoid significant market value deterioration.
The extreme valuation levels in many sectors produced by the panic selling and
forced liquidations in the third quarter created the base for a substantial
rally in the fourth quarter. The Fund added emerging markets exposure as well as
high grade corporate and mortgage exposure during the period to capitalize on
the expected rebound. In December, based on our expectations that Brazil would
have difficulty retaining investor confidence due to its fiscal imprudence, we
began reducing emerging markets again, redeploying the proceeds to domestic high
yield securities, where the near term risk and return expectations were more
favorable. The emerging markets exposure that remains is fairly conservative and
relatively insensitive to the events in Brazil.
As we enter 1999, we are cautiously optimistic about spread markets. We believe
that the U.S. economy is still sound and that the creditworthiness of corporates
remains high. The strong resumption of inflows into pure high yield mutual funds
is reassuring, providing a sound base of liquidity for new issuance and the
secondary market. We are less positive on emerging markets, with commodity
prices low, Brazil's problems not yet addressed, and numerous economic questions
regarding China still to be answered. Nevertheless, we are confident we can
construct a global opportunistic portfolio that seeks to capitalize on the
inherent value present in credit sectors globally while mitigating as many of
the risks as possible.
Sincerely yours,
/s/ Dolores S. Driscoll
Dolores S. Driscoll
3
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
Comparison of Change in Value of $100,000 Investment in
Standish Diversified Income Fund and the Lehman Aggregate Index
[The following table was originally a line chart in the printed material.]
Diversified Lehman Aggregate
Income Fund Index
----------- -----
Inception 6/2/1997 100000 100000
Jun-1997 101500 101190
Jul-1997 104400 103922
Aug-1997 103950 103039
Sep-1997 106049 104546
Oct-1997 103919 106080
Nov-1997 105238 106568
Dec-1997 106200 107644
Jan-1998 107546 109022
Feb-1998 108271 108935
Mar-1998 110189 109305
Apr-1998 110346 109874
May-1998 109978 110912
Jun-1998 109770 111855
Aug-1998 100285 113914
Sep-1998 102526 116580
Oct-1998 101877 115962
Nov-1998 107831 116623
Dec-1998 107115 116973
4
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Fund
Statement of Assets and Liabilities
December 31, 1998
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<TABLE>
<S> <C> <C>
Assets
Investment in Standish Diversified Income Portfolio ("Portfolio"), at
value (Note 1A) $ 41,640,480
Deferred organization cost (Note 1D) 12,361
Prepaid Expenses 159
-------------
Total assets 41,653,000
Liabilities
Distributions payable $ 1,182,931
Accrued accounting and transfer agent fees 2,169
Accrued trustees' fees and expenses (Note 3) 1,290
Accrued expenses and other liabilities 9,270
------------
Total liabilities 1,195,660
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Net Assets $ 40,457,340
=============
Net Assets consist of:
Paid-in capital $ 44,612,272
Accumulated net realized loss (2,054,593)
Distributions in excess of net investment income (81,654)
Net unrealized depreciation (2,018,685)
-------------
Total Net Assets $ 40,457,340
=============
Shares of beneficial interest outstanding 2,126,684
=============
Net Asset Value, offering and redemption price per share
(Net Assets/Shares outstanding) $ 19.02
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Fund
Statement of Operations
Year Ended December 31, 1998
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<TABLE>
<S> <C> <C>
Investment Income (Note 1B)
Interest income allocated from Portfolio $3,508,678
Dividend income allocated from Portfolio (net of withholding taxes, $152) 88,060
Expenses allocated from Portfolio 0
-----------
Net investment income allocated from Portfolio 3,596,738
Expenses
Accounting and transfer agent fees 26,065
Registration fees 15,696
Legal and audit services 12,681
Trustees' fees and expenses (Note 3) 4,587
Amortization of organization cost (Note 1D) 3,610
Insurance expense 339
Miscellaneous 6,000
------------
Total expenses 68,978
Deduct:
Reimbursement of fund operating expenses (Note 3) (68,978)
------------
Net expenses 0
-----------
Net investment income 3,596,738
-----------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) allocated from Portfolio on:
Investment security transactions $(2,251,186)
Financial futures contracts 27,651
Written options transactions 88,012
Foreign currency transactions and forward foreign currency exchange contracts (81,185)
------------
Net realized loss (2,216,708)
Change in unrealized appreciation (depreciation) allocated from Portfolio on:
Investment securities (1,876,416)
Financial futures contracts 8,285
Written options 275,214
Foreign currency and forward foreign currency exchange contracts (47,844)
------------
Change in net unrealized depreciation (1,640,761)
-----------
Net realized and unrealized loss on investments (3,857,469)
-----------
Net Decrease in Net Assets from Operations $ (260,731)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Fund
Statements of Changes in Net Assets
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<TABLE>
<CAPTION>
For the period June 2, 1997
Year Ended (commencement of operations)
December 31, 1998 to December 31, 1997
------------------- ----------------------------
<S> <C> <C>
Increase (decrease) in Net Assets
From Investment Operations
Net investment income $ 3,596,738 $ 744,805
Net realized gain (2,216,708) 132,118
Change in net unrealized depreciation (1,640,761) (377,924)
------------- ------------
Net increase (decrease) in Net Assets from
Investment Operations (260,731) 498,999
------------- ------------
Distributions to Shareholders (Note 2)
From net investment income (3,585,033) (678,973)
From net realized gain -- (129,194)
------------- ------------
Total distributions to shareholders (3,585,033) (808,167)
------------- ------------
Fund Share (principal) Transactions (Note 5)
Net proceeds from sale of shares 26,356,500 27,390,426
Value of shares issued to shareholders in payment
of distributions declared 1,262,115 454,376
Cost of shares redeemed (10,713,175) (137,970)
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Increase in Net Assets from Fund share
transactions 16,905,440 27,706,832
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Total Increase in Net Assets 13,059,676 27,397,664
Net Assets
At beginning of year 27,397,664 --
------------- ------------
At end of year (including distributions in excess
of net invesment income of $81,654 and
undistributed net investment income of
$64,032, respectively) $ 40,457,340 $27,397,664
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Fund
Financial Highlights
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<TABLE>
<CAPTION>
For the period
June 2, 1997
(commencement of
Year Ended operations) to
December 31, 1998 (1) December 31, 1997 (1)
-------------------- --------------------
<S> <C> <C>
Net Asset Value, Beginning of Year $ 20.51 $ 20.00
-------- --------
Investment Operations:
Net investment income * 1.70 0.98
Net realized and unrealized gain (loss) on investments (1.52) 0.26
-------- --------
Total from investment operations 0.18 1.24
-------- --------
Less distributions declared to shareholders:
From net investment income (1.67) (0.63)
From net realized gain on investments -- (0.10)
-------- --------
Total distributions to shareholders (1.67) (0.73)
-------- --------
Net Asset Value, End of Year $ 19.02 $ 20.51
======== ========
Total Return 0.86% 6.20%
Ratios/Supplemental Data
Expenses (to average daily net assets)* (2) 0.00% 0.00%+
Net investment income (to average daily net assets)* 8.40% 8.07%+
Net assets, end of Year (000 omitted) $40,457 $27,398
- ---------------------
* The investment adviser voluntarily agreed not to impose its advisory fee on
the Portfolio and reimbursed the Fund and the Portfolio for their operating
expenses. If these voluntary actions had not been taken, the Fund's net
investment income per share and the ratios would have been:
Net investment income per share $ 1.51 $ 0.74
Ratios (to average daily net assets):
Expenses (2) 0.91% 1.96%+
Net investment income 7.49% 6.11%+
</TABLE>
(1) Calculated based on average shares outstanding.
(2) Includes the Fund's share of Standish Diversified Income Portfolio's
allocated expenses.
+ Computed on an annualized basis.
The accompanying notes are an integral part of the financial statements.
8
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Fund
Notes to Financial Statements
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(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Diversified Income Fund (the "Fund") is a separate
diversified investment series of the Trust.
The Fund invests all of its investable assets in an interest of the
Standish Diversified Income Portfolio (the "Portfolio"), a subtrust of
Standish, Ayer & Wood Master Portfolio (the "Portfolio Trust"), which is
organized as a New York trust, and has the same investment objective as
the Fund. The value of the Fund's investment in the Portfolio reflects the
Fund's proportionate interest in the net assets of the Portfolio
(approximately 100% at December 31, 1998). The performance of the Fund is
directly affected by the performance of the Portfolio. The financial
statements of the Portfolio are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of the financial statements. The preparation
of financial statements in accordance with generally accepted accounting
principles 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.
A. Investment security valuations
The Fund records its investment in the Portfolio at value. The method by
which the Portfolio values its securities is discussed in Note 1A of the
Portfolio's Notes to Financial Statements, which are included elsewhere in
this report.
B. Securities transactions and income
Securities transactions are recorded as of the trade date. The Fund's net
investment income consists of the Fund's pro rata share of the net
investment income of the Portfolio, less all actual and accrued expenses
of the Fund determined in accordance with generally accepted accounting
principles.
C. Federal taxes
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
The Fund elected to defer to its fiscal year ending December 31, 1999
losses of $603,207 recognized during the period from November 1, 1998 to
December 31, 1998, which expire in 2006.
At December 31, 1998, the Fund, for federal income tax purposes, had a
capital loss carryover of $1,365,591, which expires in 2006, which will
reduce the Fund's taxable income arising from future net realizable gain
on investments, if any, to the extent permitted by the Internal Revenue
Code and thus will reduce the amount of distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability
for federal income tax.
D. Deferred organization expense
Costs incurred by the Fund in connection with its organization and initial
registration are being amortized on a straight-line basis through May
2002. These costs were paid for by the investment adviser and will be
reimbursed by the Fund.
E. Other
All net investment income and realized and unrealized gains and losses of
the Portfolio are allocated pro rata among the respective investors in the
Portfolio.
9
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Fund
Notes to Financial Statements
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(2) Distributions to Shareholders:
The Fund's dividends from short-term and long-term capital gains, if any,
after reduction of capital losses will be declared and distributed at
least annually, as will dividends from net investment income. In
determining the amounts of its dividends, the Fund will take into account
its share of the income, gains or losses, expenses, and any other tax
items of the Portfolio. Dividends from net investment income and capital
gains distributions, if any, are reinvested in additional shares of the
Fund unless a shareholder elects to receive them in cash. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. The differences are primarily due to differing treatments for
foreign currency, forward foreign currency exchange contracts, options and
financial futures transactions. Permanent book and tax basis differences
relating to shareholder distributions will result in reclassifications
between paid-in capital, undistributed net investment income and
accumulated net realized gain (loss).
(3) Investment Advisory Fee:
The Fund does not directly pay any investment advisory fees, but
indirectly bears its pro rata share of the compensation paid by the
Portfolio to Standish International Management Company, L.P. ("SIMCO") for
such services. See Note 2 of the Portfolio's Notes to Financial Statements
which are included elsewhere in this report. For the year ended December
31, 1998, SIMCO voluntarily agreed to limit the operating expenses of the
Fund and its pro rata share of expenses allocated from the Portfolio
(excluding brokerage commissions, taxes and extraordinary expenses) to
0.00% of the Fund's average daily net assets. Pursuant to this agreement,
SIMCO voluntarily reimbursed the Fund for $68,978 of operating expenses
for the year ended December 31, 1998. The Trust pays no compensation
directly to its trustees who are affiliated with the investment adviser or
to its officers, all of whom receive remuneration for their services to
the Trust from SIMCO. Certain of the trustees and officers of the Trust
are limited partners or officers of SIMCO.
(4) Investment Transactions:
Increases and decreases in the Fund's investment in the Portfolio for the
year ended December 31, 1998 aggregated $26,399,305 and $12,282,331,
respectively.
(5) Shares of Beneficial Interest:
The Declaration of Trust permits the trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the period June 2, 1997
(commencement of
For the Year Ended operations)
December 31, 1998 to December 31, 1997
--------------------------- ----------------------------
<S> <C> <C>
Shares sold 1,277,800 1,320,752
Shares issued to shareholders in payment of
distributions declared 63,709 22,092
Shares redeemed (550,939) (6,730)
--------------------------- ----------------------------
Net increase 790,570 1,336,114
=========================== ============================
</TABLE>
At December 31, 1998, three shareholders were record owners of
approximately 48%, 17% and 15%, respectively, of the Fund's total
outstanding shares.
10
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Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Diversified Income Fund:
In our opinion, the accompanying statement of assets and liabilities 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
Standish, Ayer & Wood Investment Trust: Standish Diversified Income Fund (the
"Fund"), at December 31, 1998, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated therein, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (herein referred to as "financial
statements") are the responsibility of the Fund's 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 generally
accepted auditing standards which 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 provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 18, 1999
11
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Portfolio
Schedule of Investments - December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (1) (Note 1A)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BONDS AND NOTES -- 92.1%
Asset Backed -- 10.2%
Delta Funding Home Equity Loan 1997-2 M1 7.240% 06/25/2027 750,000 $ 756,559
GE Capital Mortgage 1996 HE3 8.250% 09/25/2026 359,139 374,739
Green Tree Financial Corp. 1997-6 B2 Non-ERISA 7.750% 01/15/2029 875,000 771,777
IMC Home Equity Loan 1998-1 M1 Non-ERISA 7.030% 06/20/2029 375,000 373,242
Newcourt Rec Asset Lease 98-2D 7.210% 09/15/2007 400,000 398,500
Oakwood Mortgage 1998-A B2 144A Non-ERISA 8.735% 05/15/2028 450,000 384,539
Oakwood Mortgage Investments 1997-D B1 Non-ERISA 7.325% 02/15/2028 425,000 397,109
Vanderbilt Mortgage Financial 1996-C B2 8.000% 11/07/2026 400,000 386,625
Vanderbilt Mortgage Financial 1997-D 1B2 7.550% 12/07/2027 425,000 396,578
--------------
Total Asset Backed (Cost $4,408,257) 4,239,668
--------------
Collateralized Mortgage Obligations -- 1.1%
GE Capital Mortgage Services Inc.
1994-1 B3 144A Non-ERISA 6.500% 01/25/2024 256,988 215,037
GE Capital Mortgage Services Inc.
1996-11 B3 Non-ERISA 7.500% 07/25/2026 243,969 222,698
--------------
Total Collateralized Mortgage Obligations (Cost $440,968) 437,735
--------------
Convertible Corporate Bonds -- 3.4%
Exide Corp. 144A 2.900% 12/15/2005 460,000 257,600
Integrated Health 5.750% 01/01/2001 500,000 442,500
Tenet Healthcare Corp. 6.000% 12/01/2005 850,000 714,000
--------------
Total Convertible Corporate Bonds (Cost $1,461,929) 1,414,100
--------------
Corporate -- 47.6%
Bank Bonds -- 2.8%
Bank United Corp. Notes 8.875% 05/01/2007 200,000 205,564
First Palm Beach Notes 10.350% 06/30/2002 100,000 103,382
GS Escrow Corp. 144A Notes 7.125% 08/01/2005 400,000 394,128
GS Escrow Corp. 144A Senior Notes 7.000% 08/01/2003 375,000 369,857
Webster Financial Capital 144A Notes 9.360% 01/29/2027 100,000 105,460
--------------
1,178,391
--------------
Financial -- 11.5%
Amresco Inc. Corp. Senior Sub Notes 9.875% 03/15/2005 175,000 122,500
Carramerica REIT Notes 6.875% 03/01/2008 350,000 331,233
Citibank N.A. Nassau Branch CD 10.350% 03/29/1999 350,000 350,000
Conseco Finance Trust Cap. Notes 8.796% 04/01/2027 700,000 640,324
Conseco Finance Trust II 8.700% 11/15/2026 75,000 67,937
Constitution Capital Trust 144A 9.150% 04/15/2027 175,000 204,482
Franchise Fin Corp. REIT Notes 8.250% 10/30/2003 350,000 345,989
Fresenius Medical Capital Trust Notes 7.875% 02/01/2008 60,000 599,400
Harborside Health Step Up Senior NC'03 0.000% 08/01/2008 750,000 352,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
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Standish, Ayer & Wood Investment Trust
Standish Diversified Income Portfolio
Schedule of Investments - December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (1) (Note 1A)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial (continued)
Imperial Credit Capital Trust(a) 10.250% 06/14/2002 50,000 $ 38,000
Kaufman & Broad Home Corp. Senior Notes 7.750% 10/15/2004 300,000 298,140
Markel Capital Trust I Notes 8.710% 01/01/2046 175,000 168,892
Matrix Capital Corp. Notes 11.500% 09/30/2004 300,000 267,081
Ocwen Financial Capital Notes 11.875% 10/01/2003 150,000 133,500
Ocwen Financial Capital Notes 10.875% 08/01/2027 50,000 40,000
Phoenix Re-Insurance Corp. Capital Notes 8.850% 02/01/2027 175,000 153,522
Pindo Deli Financial Notes 10.250% 10/01/2002 850,000 501,500
Tanger REIT Senior Notes 7.875% 10/24/2004 200,000 185,648
--------------
4,800,648
--------------
Industrial Bonds -- 33.3%
Ackerley Group Inc. 144A Senior Sub Notes 9.000% 01/15/2009 75,000 76,313
Adelphia Communications Senior Notes 9.250% 10/01/2002 300,000 316,500
Allied Waste Industries 144A Notes 7.375% 01/01/2004 125,000 125,625
Allied Waste Industries 144A Notes 7.625% 01/01/2006 175,000 176,313
Allied Waste Industries 144A Notes 7.875% 01/01/2009 100,000 101,250
Building Materials Corp. Senior Notes 8.000% 10/15/2007 300,000 298,500
Chattem Inc. Senior Sub Notes 8.875% 04/01/2008 425,000 437,750
Colt Telecom Group PLC Senior Step Up Notes 0.000% 12/15/2006 350,000 292,250
Conmed Corp. Notes 9.000% 03/15/2008 175,000 175,000
CSX Corp. Medium Term Notes 6.800% 12/01/2028 350,000 351,309
Extendicare Health Sevices Senior Notes 9.350% 12/15/2007 484,000 464,035
Ferrellgas Corp. Notes 9.375% 06/15/2006 200,000 198,000
Flag Limited Senior Notes 8.250% 01/30/2008 600,000 588,000
Genesis Multicare Senior Sub Notes 9.000% 08/01/2007 175,000 161,000
Grove Worldwide Senior Notes 0.000% 05/01/2009 175,000 73,500
Grove Worldwide Senior Sub Notes 9.250% 05/01/2008 125,000 112,500
Guandong Enterprises 144A Senior Notes NCL 8.875% 05/22/2007 825,000 396,000
Harrahs Operating Co. Inc. Senior Sub Notes 7.875% 12/15/2005 400,000 400,000
Horseshoe Gaming LLC Notes 9.375% 06/15/2007 250,000 257,500
Mcleod USA Senior Step Up Notes 0.000% 03/01/2007 675,000 516,375
News America Inc. Deb Notes 7.300% 04/30/2028 400,000 410,148
Nextlink Communications 144A Notes 10.750% 11/15/2008 800,000 818,000
NVR Inc. Senior Notes 8.000% 06/01/2005 500,000 493,750
Optel Inc. Senior Notes 11.500% 07/01/2008 450,000 441,000
Panavision Inc. Step Up Sub Notes 0.000% 02/01/2006 450,000 247,500
Paxson Communications Senior Notes 11.625% 10/01/2002 250,000 253,125
Premier Parks Inc. Senior Notes 9.250% 04/01/2006 50,000 52,125
Premier Parks Inc. Step Up Senior Notes 0.000% 04/01/2008 150,000 102,000
Prime Succession Acq Co. Senior Sub Notes 10.750% 08/15/2004 400,000 394,820
Revlon Worldwide Senior Notes 0.000% 03/15/2001 800,000 452,000
Rose Hills Co. Senior Sub Notes 9.500% 11/15/2004 125,000 118,750
RSL Communications PLC Notes 0.000% 03/01/2008 625,000 356,250
Salem Communications Corp. Senior Sub Notes 9.500% 10/01/2007 425,000 440,938
Sinclair Broadcast Senior Sub 144A Notes 8.750% 12/15/2007 325,000 328,250
Smithfield Foods Inc. Senior Sub Notes 7.625% 02/15/2008 300,000 301,500
Southland Corp. Deb Notes 4.500% 06/15/2004 300,000 249,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Diversified Income Portfolio
Schedule of Investments - December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (1) (Note 1A)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Bonds (continued)
TCI Communications Inc. 7.125% 02/15/2028 350,000 $ 381,312
Texaco Capital Corp. Notes 9.750% 03/15/2020 275,000 379,805
Time Warner Inc. Notes 6.625% 05/15/2029 350,000 356,111
UPM-Kymmene Corp. 144A Notes 7.450% 11/26/2027 350,000 332,906
USA Waste Services Inc. Senior Notes 7.000% 07/15/2028 400,000 408,576
Westinghouse Electric Deb Notes 8.625% 08/01/2012 500,000 579,300
Winstar Communications Senior Sub Step Up Notes 0.000% 10/15/2005 500,000 361,875
Worldcom Inc. Senior Notes 6.950% 08/15/2028 75,000 80,650
--------------
13,857,411
--------------
Total Corporate (Cost $21,247,947) 19,836,450
--------------
Government/Other -- 23.1%
Argentina -- 0.9%
Cointel 144A Notes 10.375% 08/01/2004 575,000 385,250
--------------
Denmark -- 0.2%
Denmark Nykredit 7.000% 10/01/2026 472,000 75,669
--------------
EuroDollar -- 0.0%
Republic of Ecuador Registered PDI 3.813% 12/29/2049 12,699 5,119
--------------
France -- 1.1%
Remy Cointreau 144A ECU 10.000% 07/30/2005 450,000 459,543
--------------
Germany -- 2.9%
Colt Telecom Group PLC 144A Notes 7.625% 07/31/2008 725,000 427,353
Exide Holding Europe 144A Notes 9.125% 04/15/2004 400,000 235,181
Texon International PLC Senior Notes 10.000% 02/01/2008 240,000 115,191
United Mexican States 10.375% 01/29/2003 650,000 411,417
--------------
1,189,142
--------------
New Zealand -- 0.1%
Fletcher Challenge CVT 10.000% 04/30/2005 110,000 60,200
--------------
United Kingdom -- 1.5%
IPC Magazines 144A 0.000% 03/15/2008 200,000 177,855
William Hill Finance 10.625% 04/30/2008 275,000 468,533
--------------
646,388
--------------
Yankee Bonds -- 16.4%
Abitibi Consolidated Deb Notes 7.500% 04/01/2028 900,000 817,308
Asia Pulp And Paper Global Financial 144A CVT 2.000% 07/25/2000 125,000 88,750
Asia Pulp and Paper Global Financial Notes 11.750% 10/01/2005 125,000 82,500
Ecuador Bearer PDI(a) 3.250% 02/27/2015 1,075,077 433,390
Global Crossing Holding Ltd. Notes 9.625% 05/15/2008 400,000 420,000
Grupo Televisa S.A. 0.000% 05/15/2008 250,000 185,625
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Diversified Income Portfolio
Schedule of Investments - December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (1) (Note 1A)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ING Barings NV 0.000% 02/12/1999 725,000 $ 822,875
Peru FLIRB(a) 3.250% 03/07/2017 1,475,000 834,297
Petro Canada Senior Notes 7.000% 11/15/2028 350,000 345,142
Petroleos Mexicanos Notes 8.850% 09/15/2007 1,200,000 1,084,440
Petroleos Mexicanos Notes 9.250% 03/30/2018 50,000 41,000
Republic of Argentina(a) 14.250% 11/30/2002 200,000 194,000
Republic of Panama Notes 8.875% 09/30/2027 825,000 771,887
Royal Caribbean Cruise Senior Notes 7.500% 10/15/2027 500,000 495,257
TPSA Finance 144A Senior Notes 7.750% 12/10/2008 200,000 198,480
--------------
6,814,951
--------------
Total Government/Other (Cost $9,724,021) 9,636,262
--------------
U.S. Government Agency -- 0.8%
FHLMC 5.750% 07/15/2003 175,000 179,512
FNMA 6.000% 05/15/2008 150,000 158,343
--------------
Total U.S. Government Agency (Cost $338,357) 337,855
--------------
Non-Agency -- 0.9%
Pass Thru Securities -- 0.9%
Franchise Mortage Corp. 1997-A D 144A 8.140% 04/15/2019 350,000 362,469
--------------
Total Non-Agency (Cost $363,891) 362,469
--------------
U.S. Treasury Obligations -- 5.0%
Treasury Bonds -- 0.2%
U.S. Treasury Bond 8.125% 08/15/2019 50,000 66,774
--------------
Treasury Notes -- 4.8%
U.S. Treasury Note 6.625% 04/30/2002 1,450,000 1,534,506
U.S. Treasury Note 6.625% 05/15/2007 350,000 393,586
U.S. Treasury Note 5.875% 11/15/1999 75,000 75,773
--------------
2,003,865
--------------
Total U.S. Treasury Obligations (Cost $2,070,605) 2,070,639
--------------
TOTAL BONDS AND NOTES (COST $40,055,975) 38,335,178
--------------
<CAPTION>
Shares
---------
<S> <C> <C>
PREFERRED STOCKS -- 2.9%
El Paso Electric Co. 139 14,873
Equity Office Properties Trust 144A CVT 8,000 305,000
Fuji JGB Inv. L.L.C. Pfd Step Up 144A(a) 525,000 380,625
Global Crossing PIK Pfd 144A 4,000 380,000
Paxson Communications 12.5% Pfd PIK 142 124,960
--------------
TOTAL PREFERRED STOCKS (COST $1,336,004) 1,205,458
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Diversified Income Portfolio
Schedule of Investments - December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Security Shares (Note1A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS -- 0.0%
Financial -- 0.0%
Equity Office Properties Warrants 2,750 $ 550
--------------
TOTAL WARRANTS (COST $2,200) 550
--------------
Contract
Size (1)
---------------
PURCHASED OPTIONS -- 1.0%
BTP 6.75% Put, Strike Price 107.69, 2/7/00 1,325,000,000 --
Fujibank 9.87% Call, Strike Price 6.37, 2/26/99 4,500 9
JPY Put/USD Call, Strike Price 155.00, 6/15/99 450,000 495
JPY Put/USD Call, Strike Price 150.00, 6/9/99 500,000 800
JGB 3.00% Put, Strike Price 110.00, 6/2/99 121,425,000 47,720
DEM Put/USD Call, Strike Price 1.85, 2/17/99 975,000 --
BRL Put/USD Call, Strike Price 1.35, 9/9/99 2,080,000 227,760
UST 6.125% Call, Strike Price 110.43, 1/22/99 5,000 9,063
UST 5.500% Call, Strike Price 104.391, 2/25/99 9,000 18,352
UST 5.625% Call, Strike Price 108.125, 4/23/99 4,500 4,781
UST 5.625% Call, Strike Price 110.25, 4/9/99 5,000 2,188
UST 5.625% Call, Strike Price 110.00, 4/9/99 8,000 3,875
UST 5.625% Put, Strike Price 99.258, 2/1/99 10,000 313
UST 5.625% Call, Strike Price 103.422, 2/1/99 10,000 31,100
UST 6.125% Call, Strike Price 110.9375, 2/10/99 10,000 20,000
JPY Put, Strike Price 116.95, 12/24/99 600,000 26,100
UST 6.125% Call, Strike Price 113.438, 5/31/99 5,000 13,594
DBR 5.25% Call, Strike Price 110.76, 12/15/99 1,000,000 5,880
--------------
TOTAL PURCHASED OPTIONS (COST $881,864) 412,030
--------------
SHORT-TERM INVESTMENTS -- 3.3%
Repurchase Agreements -- 3.3%
Prudential-Bache Repurchase Agreement, dated 12/31/98, due 1/4/99, with a
maturity value of $1,399,001 and an effective yield of 3.95%, collateralized by
U.S. Government Agency Obligations with rates ranging from 6.18% to 7.77%,
maturity dates ranging from 10/01/26 to 12/01/28 and an aggregate market value
of $1,426,741. 1,398,387
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,398,387) 1,398,387
--------------
TOTAL INVESTMENTS-- 99.3% (COST $43,674,430) $ 41,351,603
Other Assets, Less Liabilities-- 0.7% 288,984
--------------
NET ASSETS-- 100% $ 41,640,587
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Diversified Income Portfolio
Schedule of Investments - December 31, 1998
- --------------------------------------------------------------------------------
Notes to Schedule of Investments:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933.
These securities may be resold in transactions exempt from registration.
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FLIRB - Front Loaded Interest Reduction Bond
CVT - Convertible
DBR - Deutsche Bundes Republik
JGB - Japanese Government Bond
UST - United States Treasury
BRL - Brazilian Real
BTP - British Pound
DEM - German Mark
JPY - Japanese Yen
USD - United States Dollar
(1) Denominated in United States currency except for foreign country specific
bonds which are denominated in their respective local currency.
(a) Variable Rate Security; rate indicated is as of 12/31/98.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Statement of Assets and Liabilities
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at value (Note 1A) (identified cost, $43,674,430) $ 41,351,603
Interest receivable 701,405
Unrealized appreciation on forward foreign currency exchange contracts (Note 5) 41,591
Deferred organization costs (Note 1E) 4,059
Receivable for investments sold 2,680
Miscellaneous receivable 41,327
Prepaid expenses 1,404
-------------
Total assets 42,144,069
Liabilities
Unrealized depreciation on forward foreign currency exchange contracts (Note 5) $ 22,913
Accrued trustees' fees and expenses (Note 2) 1,571
Options written, at value (premiums received $734,074) (Note 5) 451,834
Accrued accounting and custody fees 6,580
Accrued expenses and other liabilities 20,584
------------
Total liabilities 503,482
-------------
Net Assets (applicable to investors' beneficial interests) $ 41,640,587
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Statement of Operations
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income (Note 1C)
Interest income $3,508,686
Dividend income (net of foreign withholding taxes of $152) 88,060
-----------
Total income 3,596,746
Expenses
Investment advisory fee (Note 2) $ 214,014
Accounting and custody fees 71,692
Legal and audit services 23,289
Trustees' fees and expenses (Note 2) 5,672
Insurance expense 3,068
Amortization of organization expense (Note 1E) 1,194
Miscellaneous 733
------------
Total expenses 319,662
Deduct:
Waiver of investment advisory fee (Note 2) (214,014)
Reimbursement of operating expenses (Note 2) (105,648)
------------
Total waiver of investment advisory fee and reimbursement of operating
expenses (319,662)
------------
Net expenses 0
-----------
Net investment income 3,596,746
-----------
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Investment securities transactions $(2,251,191)
Financial futures contracts 27,651
Written options transactions 88,012
Foreign currency transactions and forward foreign currency exchange
contracts (81,185)
------------
Net realized loss (2,216,713)
Change in unrealized appreciation (depreciation)
Investment securities (1,876,418)
Financial futures contracts 8,285
Written options 275,214
Foreign currency and forward foreign currency exchange contracts (47,843)
------------
Change in net unrealized appreciation (depreciation) (1,640,762)
-----------
Net realized and unrealized loss (3,857,475)
-----------
Net Decrease in Net Assets from Operations $ (260,729)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
June 2, 1997
Year Ended (commencement of operations)
December 31, 1998 to December 31, 1997
-------------------- ----------------------
<S> <C> <C>
Increase (decrease) in Net Assets
From Investment Operations
Net investment income $ 3,596,746 $ 744,809
Net realized gain (loss) (2,216,713) 132,120
Change in net unrealized depreciation (1,640,762) (377,925)
------------- ------------
Net increase (decrease) in Net Assets
from Investment Operations (260,729) 499,004
------------- ------------
Capital Transactions
Contributions 26,399,305 27,429,704
Withdrawals (12,282,331) (144,366)
------------- ------------
Increase in Net Assets resulting from
capital transactions 14,116,974 27,285,338
------------- ------------
Total Increase in Net Assets 13,856,245 27,784,342
------------- ------------
Net Assets
At beginning of year 27,784,342 --
------------- ------------
At end of year $ 41,640,587 $27,784,342
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Supplemental Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
June 2, 1997
(commencement of
Year Ended operations)
December 31, 1998 to December 31, 1997
----------------- --------------------
<S> <C> <C>
Ratios:
Expenses (to average daily net assets)* 0.00% 0.00%+
Net investment income (to average daily net assets)* 8.40% 8.07%+
Portfolio Turnover 145% 25%
Net assets, end of year (000s omitted) $ 41,641 $27,784
- -------------------------------------------------------
* The investment adviser voluntarily agreed not to impose its investment
advisory fee and reimbursed the Portfolio for all of its operating
expenses for the year ended December 31, 1998 and for the period ended
December 31, 1997. If these voluntary actions had not been taken, the
ratios would have been:
Ratios (to average daily net assets):
Expenses 0.75% 1.50%+
Net investment income 7.65% 6.57%+
</TABLE>
+ Computed on an annualized basis.
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies:
Standish, Ayer & Wood Master Portfolio (the "Portfolio Trust") was
organized as a master trust fund under the laws of the State of New York
on January 18, 1996 and is registered under the Investment Company Act of
1940, as amended, as an open-end, management investment company. Standish
Diversified Income Portfolio (the "Portfolio") is a separate diversified
investment series of the Portfolio Trust.
At December 31, 1998 there is one Fund invested in the Portfolio. The
value of the Fund's investment in the Portfolio reflects the Fund's
proportionate interest in the net assets of the Portfolio. The
proportionate interest at December 31, 1998 is 99.9%.
The following is a summary of significant accounting policies followed by
the Portfolio in the preparation of the financial statements. The
preparation of financial statements in accordance with generally accepted
accounting principles 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.
A. Investment security valuations
Securities for which quotations are readily available are valued at the
last sale price, or if no sale, at the closing bid price in the principal
market in which such securities are normally traded. Securities (including
restricted securities) for which quotations are not readily available are
valued primarily using dealer-supplied valuations or at their fair value
as determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Portfolio are valued on an amortized cost basis. If
the Portfolio acquires a short-term instrument with more than sixty days
remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost
based upon the value on such date unless the trustees determine during
such sixty-day period that amortized cost does not represent fair value.
B. Repurchase agreements
It is the policy of the Portfolio to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the
Portfolio to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income
Securities transactions are recorded as of the trade date. Interest income
is determined on the basis of interest accrued. Dividend income is
recorded on the ex-dividend date. Realized gains and losses from
securities sold are recorded on the identified cost basis.
D. Income Taxes
The Portfolio is treated as a partnership for federal tax purposes. No
provision is made by the Portfolio for federal or state taxes on any
taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since some of the
Portfolio's investors are regulated investment companies that invest all
or substantially all of their assets in the Portfolio, the Portfolio
normally must satisfy the source of income and diversification
requirements applicable to regulated investment companies (under the
Internal Revenue Code) in order for its investors to satisfy them. The
Portfolio allocates at least annually among its investors each investor's
distributive share of the Portfolio's net investment income, net realized
capital gains, and any other items of income, gain, loss deduction or
credit.
22
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Notes to Financial Statements
- --------------------------------------------------------------------------------
E. Deferred Organizational Expenses
Costs incurred by the Portfolio in connection with its organization and
initial registration are being amortized, on a straight-line basis through
May 2002.
(2) Investment Advisory Fee:
The investment advisory fee paid to Standish Investment Management
Company, L.P. ("SIMCO") for overall investment advisory services is paid
monthly at the annual rate of 0.50% of the Portfolio's average daily net
assets. For the year ended December 31, 1998, SIMCO voluntarily agreed to
limit the Portfolio's operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses) to 0.00% of the Portfolio's average
daily net assets. Pursuant to this agreement, SIMCO voluntarily waived
$214,014 of its investment advisory fee and reimbursed the Portfolio for
its operating expenses of $105,648. The Portfolio Trust pays no
compensation directly to its trustees who are affiliated with SIMCO or to
its officers, all of whom receive remuneration for their services to the
Portfolio Trust from SIMCO. Certain of the trustees and officers of the
Portfolio Trust are limited partners or officers of SIMCO.
(3) Purchases and Sales of Investments:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------- ------------
<S> <C> <C>
U.S. Government Securities $15,939,430 $15,808,612
============= ============
Investments (non-U.S. Government Securities) $56,461,511 $37,360,705
============= ============
</TABLE>
(4) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1998, as computed on a federal
income tax basis, were as follows:
Aggregate Cost $43,760,225
==================
Gross unrealized appreciation 659,686
Gross unrealized depreciation (3,068,308)
------------------
Net unrealized depreciation $(2,408,622)
==================
(5) Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The nature,
risks and objectives of these investments are set forth more fully in
Parts A and B of the Portfolio Trust's registration statement.
The Portfolio trades the following financial instruments with off-balance
sheet risk:
23
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Notes to Financial Statements
- --------------------------------------------------------------------------------
Options
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before a
certain date. The Portfolio may use options to seek to hedge against risks
of market exposure and changes in security prices and foreign currencies,
as well as to seek to enhance returns. Writing puts and buying calls tend
to increase the Portfolio's exposure to the underlying instrument. Buying
puts and writing calls tend to decrease the Portfolio's exposure to the
underlying instrument, or hedge other Portfolio investments. Options, both
held and written by the Portfolio, are reflected in the accompanying
Statement of Assets and Liabilities at market value. The underlying face
amount at value of any open purchased options is shown in the schedule of
investments. This amount reflects each contract's exposure to the
underlying instrument at period end. Losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparties do not perform under
the contracts terms.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised
or are closed are added to or offset against the proceeds or amount paid
on the transaction to determine the realized gain or loss. Realized gains
and losses on purchased options are included in realized gains and losses
on investments securities, except purchased options on foreign currency
which are included in realized gains and losses on foreign currency
transactions. If a put option written by the Portfolio is exercised, the
premium reduces the cost basis of the securities purchased by the
Portfolio. The Portfolio, as a writer of an option, has no control over
whether the underlying securities may be sold (call) or purchased (put)
and as a result bears the market risk of an unfavorable change in the
price of the security underlying the written option. A summary of such
transactions for the year ended December 31, 1998 is as follows.
<TABLE>
<CAPTION>
Written Put Option Transactions
---------------------------------------------------------------------------------------------
Number of
Contracts Premiums
----------------- ------------------
<S> <C> <C>
Outstanding, beginning of period ................. 5 $ 21,453
Options written .................................. 16 179,979
Options exercised ................................ (1) (2,700)
Options expired .................................. (4) (36,968)
Options closed ................................... (9) (103,079)
----------------- ------------------
Outstanding, end of period ....................... 7 $ 58,685
================= ==================
<CAPTION>
Written Call Option Transactions
---------------------------------------------------------------------------------------------
Number of
Contracts Premiums
----------------- ------------------
<S> <C> <C>
Outstanding, beginning of period ................. 4 $ 5,930
Options written .................................. 12 81,768
Options expired .................................. (3) (8,422)
Options closed ................................... (6) (19,368)
----------------- ------------------
Outstanding, end of period ....................... 7 $ 59,908
================= ==================
<CAPTION>
Written Cross Currency Option Transactions
---------------------------------------------------------------------------------------------
Number of
Contracts Premiums
----------------- ------------------
<S> <C> <C>
Outstanding, beginning of period ................. 3 $ 28,698
Options written .................................. 6 612,500
Options closed ................................... (3) (28,698)
----------------- ------------------
Outstanding, end of period ....................... 6 $ 612,500
================= ==================
</TABLE>
24
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Notes to Financial Statements
- --------------------------------------------------------------------------------
Futures Contracts
The Portfolio may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices at
a fixed price on a future date. Pursuant to margin requirements, the
Portfolio deposits either in cash or securities an amount equal to a
certain percentage of the contract amount. Subsequent payments are made or
received by the Portfolio each day, dependent on the daily fluctuations in
the value of the underlying security, and are recorded for financial
statement purposes as unrealized gains or losses by the Portfolio. There
are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily
corresponds with the value of their underlying instruments or index, which
may not correlate with changes in value of the hedged investments. Buying
futures tends to increase the Portfolios exposure to the underlying
instrument, while selling futures tends to decrease the Portfolio's
exposure to the underlying instrument or hedge other investments. In
addition, there is the risk that the Portfolio may not be able to enter
into a closing transaction because of an illiquid secondary market. Losses
may arise if there is an illiquid secondary market or if the
counterparties do not perform under the contract's terms. The Portfolio
enters into financial futures transactions primarily to seek to manage its
exposure to certain markets and to changes in securities prices and
foreign currencies. Gains and losses are realized upon the expiration or
closing of the futures contracts. There were no outstanding futures
contracts at December 31, 1998.
Forward currency exchange contracts
The Portfolio may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Portfolio primarily to protect the value of the Portfolio's foreign
securities from adverse currency movements. Unrealized appreciation and
depreciation of forward currency exchange contracts is included in the
Statement of Assets and Liabilities.
At December 31, 1998, the Portfolio held the following forward foreign
currency and cross currency exchange contracts:
Forward Foreign Currency Contracts
<TABLE>
<CAPTION>
Local U.S. $ U.S. $
Principal Contract Market Aggregate U.S. $ Unrealized
Contracts to Deliver Amount Value Date Value Face Amount Gain/(Loss)
---------------------------- -------------- ------------------ ------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
British Pound Sterling ..... 296,347 5/10/99 490,924 489,564 (1,360)
German Deutsche Mark ....... 2,005,002 2/12 - 3/09/99 1,206,466 1,204,601 (1,865)
Danish Krone ............... 552,128 5/06/99 87,322 87,279 (43)
European Currency Unit ..... 450,000 4/30/99 530,925 537,525 6,600
Greek Drachma .............. 5,874,220 4/22/99 20,595 18,971 (1,624)
Hong Kong Dollar ........... 437,360 10/14/99 55,887 55,000 (887)
Japanese Yen ............... 58,265,280 1/11/99 516,027 495,108 (20,919)
New Zealand Dollar ......... 118,306 2/22/99 62,244 62,785 541
------------------- ---------------------- --------------------
$ 2,970,390 $ 2,950,833 $ (19,557)
=================== ====================== ====================
</TABLE>
25
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Notes to Financial Statements
- --------------------------------------------------------------------------------
Forward Foreign Currency Contracts -- Continued
<TABLE>
<CAPTION>
Local U.S. $ U.S. $
Principal Contract Market Value Aggregate U.S. $ Unrealized
Contracts to Receive Amount Value Date Face Amount Gain/(Loss)
---------------------------- -------------- ------------------ ------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
German Deutsche Mark ....... 2,160,887 2/17 - 3/09/99 1,299,726 1,319,371 (19,645)
Hong Kong Dollar ........... 218,680 10/14/99 27,944 26,686 1,258
Japanese Yen ............... 58,265,280 1/11/99 516,027 480,000 36,027
------------------- ---------------------- --------------------
$ 1,843,697 $ 1,826,057 $ 17,640
=================== ====================== ====================
</TABLE>
Forward Foreign Cross Currency Contracts
<TABLE>
<CAPTION>
U.S. $
U.S.$ U.S. $ Contract Unrealized
Contracts to Deliver Market Value In Exchange For Market Value Value Date Gain/(Loss)
--------------------------- --------------- ---------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Greek Drachma.............. 49,265 German Deutsche Mark 48,109 4/22/99 (1,156)
Greek Drachma.............. 82,322 German Deutsche Mark 80,080 4/22/99 (2,242)
Greek Drachma.............. 98,910 German Deutsche Mark 96,217 4/22/99 (2,693)
German Deutsche Mark....... 128,189 Greek Drachma 138,125 4/22/99 9,936
German Deutsche Mark....... 128,189 Greek Drachma 137,678 4/22/99 9,489
Greek Drachma.............. 131,271 German Deutsche Mark 128,189 4/22/99 (3,082)
Greek Drachma.............. 169,689 German Deutsche Mark 160,161 4/22/99 (9,528)
German Deutsche Mark....... 256,378 Greek Drachma 276,249 4/22/99 19,871
---------------- ---------------- ----------------
$ 1,044,213 $ 1,064,808 $ 20,595
================ ================ ================
</TABLE>
(6) Delayed Delivery Transactions:
The Portfolio may purchase securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transactions. The price of the underlying securities
and the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. The Portfolio instructs its
custodian to segregate securities having a value at least equal to the
amount of the purchase commitment.
At December 31, 1998, the Portfolio did not have any delayed delivery
transactions.
26
<PAGE>
Standish, Ayer & Wood Master Portfolio
Standish Diversified Income Portfolio
Notes to Financial Statements
- --------------------------------------------------------------------------------
(7) Concentration of Risk:
The Portfolio invests in low rated (non-investment grade) and comparable
quality unrated high yield securities. Investments in high yield
securities are accompanied by a greater degree of credit risk and the risk
tends to be more sensitive to economic conditions than higher rated
securities. The risk of loss due to default of an issuer may be
significantly greater for holders of high yield securities, because such
securities are generally unsecured and are often subordinated to other
creditors of the issuer.
There are certain additional considerations and risks associated with
investing in foreign securities and currency transactions that are not
inherent with investments of domestic origin. The Portfolio's investment
in emerging market countries may involve greater risks than investments in
more developed markets and the price of such investments may be volatile.
These risks of investing in foreign and emerging markets may include
foreign currency exchange rate fluctuations, perceived credit risk,
adverse political and economic developments and possible adverse foreign
government intervention.
27
<PAGE>
Independent Auditors' Report
To the Trustees of Standish, Ayer & Wood Master Portfolio and Investors of
Standish Diversified Income Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the supplemental data present
fairly, in all material respects, the financial position of Standish
Diversified Income Portfolio, at December 31, 1998, the results of its
operations, the changes in its net assets and the supplemental data for
the periods indicated therein, in conformity with generally accepted
accounting principles. These financial statements and supplemental data
(herein referred to as "financial statements") are the responsibility of
the Portfolio's 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 generally accepted auditing
standards which 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 December 31, 1998, by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 18, 1999
28
<PAGE>
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29
<PAGE>
[This page intentionally left blank]
30
<PAGE>
[LOGO] Standish Funds(R)
One Financial Center
Boston, MA 02111-2662
(800) 729-0066
www.standishfunds.com
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish, Ayer & Wood Investment Trust
form N-SAR for the year ended December 31, 1998
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> Standish Diversified Income Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 43,674,430
<INVESTMENTS-AT-VALUE> 41,351,603
<RECEIVABLES> 745,412
<ASSETS-OTHER> 47,054
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42,144,069
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 503,482
<TOTAL-LIABILITIES> 503,482
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,402,311
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 238,276
<NET-ASSETS> 41,640,587
<DIVIDEND-INCOME> 88,060
<INTEREST-INCOME> 3,508,686
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 3,596,746
<REALIZED-GAINS-CURRENT> (2,216,713)
<APPREC-INCREASE-CURRENT> (1,640,762)
<NET-CHANGE-FROM-OPS> (260,729)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 13,856,245
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 214,014
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 319,662
<AVERAGE-NET-ASSETS> 42,842,134
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish, Ayer & Wood Investment Trust
form N-SAR for the period ended December 31, 1998
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 17
<NAME> Standish Diversified Income Fund Series
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 41,640,480
<RECEIVABLES> 0
<ASSETS-OTHER> 12,520
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 41,653,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,195,660
<TOTAL-LIABILITIES> 1,195,660
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 44,612,272
<SHARES-COMMON-STOCK> 2,126,684
<SHARES-COMMON-PRIOR> 1,336,114
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (81,654)
<ACCUMULATED-NET-GAINS> (2,054,593)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,018,685)
<NET-ASSETS> 40,457,340
<DIVIDEND-INCOME> 88,060
<INTEREST-INCOME> 3,508,678
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 3,596,738
<REALIZED-GAINS-CURRENT> (2,216,708)
<APPREC-INCREASE-CURRENT> (1,640,761)
<NET-CHANGE-FROM-OPS> (260,731)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,585,033
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,277,800
<NUMBER-OF-SHARES-REDEEMED> (550,939)
<SHARES-REINVESTED> 63,709
<NET-CHANGE-IN-ASSETS> 13,059,676
<ACCUMULATED-NII-PRIOR> 64,032
<ACCUMULATED-GAINS-PRIOR> 4,724
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 68,978
<AVERAGE-NET-ASSETS> 42,811,176
<PER-SHARE-NAV-BEGIN> 20.51
<PER-SHARE-NII> 1.70
<PER-SHARE-GAIN-APPREC> (1.52)
<PER-SHARE-DIVIDEND> (1.67)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.02
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
