The Masters' Select Funds
Semiannual Report
Masters' Select Equity Fund
Masters' Select International Fund
June 30, 1998
LITMAN/GREGORY FUND ADVISORS, LLC
- ---------------------------------
<PAGE>
Service Directory
Fund Information
To request a prospectus, financial report, IRA
application or information, call 1-800-656-8864,
24 hours a day, seven days a week.
Existing Shareholder Inquiries
To request action on your existing account contact
the transfer agent, NFDS, at 1-800-960-0188
from 9:00 a.m. to 6:00 p.m. Eastern time,
Monday through Friday.
Mail correspondence to:
Masters' Select Funds
c/o NFDS
P.O. Box 419922
Kansas City, MO 94141-6922
Overnight address:
Masters' Select Funds
c/o NFDS
330 W. 9th Street
Kansas City, MO 64105
1-816-843-8468
24-Hour Automated Information
1-800-960-0188
For automated reporting of daily prices, account
balances and transaction activity call 1-800-960-0188,
24-hours a day, seven days a week. Please have
your Fund number (see below) and account number
ready to access your investment information.
Published Daily Price Quotations
Daily net asset value per share of each Fund is
reported in mutual fund quotations tables of major
newspapers in alphabetical order as follows:
Transfer Agent
Abbreviation Symbol Cusip Fund Number
----------------------------------------------------
MstrSeltEq MSEFX 576417109 305
MstrSeltInt MSILX 576417208 306
<PAGE>
Contents
Letter to Shareholders .................................................... 2
Portfolio Fit ............................................................. 3
The Masters' Select Concept ............................................... 3
Masters' Select Equity Fund Review ........................................ 4
Master Profile: Mason Hawkins ............................................. 7
Equity Fund Stock Highlights .............................................. 9
Equity Fund Portfolio Summary ............................................. 12
Masters' Select International Fund Review ................................. 15
Interview: Helen Young Hayes .............................................. 17
International Fund Stock Highlights ....................................... 20
International Fund Portfolio Summary ...................................... 23
Statements of Assets and Liabilities ...................................... 26
Statements of Operations .................................................. 27
Statements of Changes in Net Assets ....................................... 28
Financial Highlights ...................................................... 30
Notes to Financial Statements ............................................. 31
<PAGE>
Dear Fellow Shareholder:
...............
The beat rolled on during the first six months of 1998 as the U.S. and European
stock markets continued their surges. Stocks in other parts of the world
retreated. In the United States, the stocks of larger companies continued to
deliver much higher returns than those of smaller companies. Both Masters'
Select Funds participated in the good times. For a detailed update on each Fund,
see pages 4 and 15 for Masters' Select Equity Fund and Masters' Select
International Fund, respectively.
Both Funds were the subject of positive exposure in the financial media. Of
particular note, Masters' Select Equity Fund was selected by Money magazine
(6/98) as one of the Money 100, the periodical's list of its favorite 100 funds.
This list was culled from a larger universe of 1,600 funds. Masters' Select
Equity was also one of 11 out of the group that was profiled at length by Money.
The asset base of both Funds grew substantially during the first half of 1998.
As of this writing, Masters' Select Equity's total assets have grown to $433
million. For some time we have publicly indicated that we expect to close the
Fund at between $500 million and $750 million in assets. With assets now
approaching $500 million, we do not expect to close the Fund at the low end of
the range. Over the next few months, however, we will determine and inform you
of the asset level at which the Fund will close. Whether the closing will happen
quickly we have no way of knowing, but we will make an announcement in plenty of
time for investors to get into the Fund. After the Fund closes, existing
shareholders will still be able to add to their accounts; but we are committed
to performance, so if heavy cash inflows jeopardize the managers' ability to
execute the "Select" concept, we will consider temporarily closing the Fund to
new investment from existing shareholders.
Masters' Select International Fund has also experienced healthy cash inflows
and, as of this writing, total assets are at $110 million. This Fund will also
ultimately close, but probably not in the next year.
Asset growth has continued to drive down expenses. It is likely we will see a
reduction in the expense ratio for Masters' Select Equity this year (compared
with 1997). And Masters' Select International's expenses are accruing at a level
significantly below our expense cap. As mentioned in the 1997 Annual Report, as
of April 1 we voluntarily reduced the International Fund's investment management
fee by 10 basis points (0.10%), effectively reducing the management fee to a
flat 1%.
We appreciate the confidence and trust that your investment in the Masters'
Select Funds represents. Along with our "Master" managers, we are totally
committed to making this a successful venture for all shareholders.
Ken Gregory
President, Litman/Gregory Fund Advisors
2
<PAGE>
Portfolio Fit
...............
As with all equity funds, Masters' Select Equity and Masters' Select
International are appropriate for investors with a long-term time horizon, who
are willing to ride out occasional periods when the Fund's net asset values
decline. Within that context, we created the Funds to be used as core equity and
core international fund holdings. Although performance in each specific down
market will vary, we purposely set the allocations to each manager with the
objective of keeping risk about equal to that of their overall benchmarks. At
the same time, we wanted enough exposure to small-caps and growth stocks to
attempt to deliver good performance in a bull market. In the end, the focus on
the highest-conviction stocks of a group of very distinguished managers with
superior track records is what we believe makes the Funds ideal core equity and
core international fund holdings.
The Masters' Select
Concept
...............
In constructing the Masters' Select Funds, our goal was to design funds that
would isolate the stock-picking skills of a group of highly regarded managers
and also serve as core equity fund holdings for almost any long-term investor
seeking domestic or international stock market exposure. To meet this objective,
we designed the Funds with both risk and return in mind, placing particular
emphasis on the following factors.
1 First, only investment managers we believe to have exceptional long-term
performance in their respective specialties were chosen to manage each
Fund's portfolio.
...............
2 Second, and of equal importance, each stock picker runs a very focused
portfolio of not more than 15 of his or her favorite stocks. We believe
that most stock pickers have an unusually high conviction level in only a
small number of stocks and that a portfolio limited to these stocks will,
on average, outperform over a market cycle.
...............
3 Third, even though each manager's portfolio is focused, the overall funds
are well diversified by style, industry and number of stocks. Given the
diversification across styles, we don't expect the Funds to top the charts
in any single period. We are shooting for superior performance over a full
market cycle, counting on the Funds' structure and the managers' talent to
get us there.
<PAGE>
Masters' Select Equity Fund Review
...............
Masters' Select Equity Fund returned 14.1% during the first half of 1998. As
we've mentioned in the past, there is no ideal short-term benchmark for the
Masters' Select Equity Fund portfolio because of the Fund's diversification.
Over the long term, we seek to outperform the Wilshire 5000 Index, which is
representative of the performance of the entire U.S. stock market. It is a
capitalization-weighted index, so larger companies have a proportionally larger
weight. Thus the index is heavily influenced by the performance of the large-cap
sector. Over the long term, we also seek to outperform the Lipper Growth Fund
Index, a composite of large-cap-oriented U.S. stock funds. Over shorter time
periods (five years or less), we measure our performance against a global equity
index we have created. This index mirrors the asset class weights likely to
persist in our Fund given our mandates to the portfolio managers. Though the
weights will vary somewhat over time, we expect the following typical portfolio
mix for Masters' Select Equity Fund:
o 70% mid- and large-cap U.S. stocks
o 20% small-cap U.S. stocks
o 10% foreign stocks
The chart below tracks the performance of your Fund for the six-month and 12-
month periods ended June 30, 1998, and also since inception.
Average Annual Returns--For the period ended June 30, 1998
Six Months One Year Since Inception (12/31/96)
14.10% 27.77% 29.50%
Masters' Select Equity Fund
15.48% 28.88% 31.98%
Wilshire 5000 Index
15.57% 28.27% 29.90%
Lipper Growth Fund Index
6.45% 15.52% 14.50%
Lipper Small Cap Fund Index
14.80% 24.93% 29.26%
Global Equity Index
Through the first six months of the year, we lagged the bigger-cap benchmarks
because of our small-cap holdings and also because some of the Fund's foreign
exposure was in the Pacific Rim. Since inception we have slightly lagged these
same large-cap-oriented benchmarks. We have delivered a higher return than the
Global Equity benchmark, however.
In past reports we have mentioned the cash drag we experienced in the Fund's
first month (January 1997), when large cash inflows resulted in very sizable,
atypical cash holdings. In our previous report, we tracked the Fund's
performance since that first month. As the following chart shows, since the
Fund's first month it has bested the Lipper Growth Fund Index and the Global
Equity Index by a comfortable margin. The large-cap-driven Wilshire 5000 still
edges out Masters' Select Equity, however.
4
<PAGE>
Annual Returns--February 1, 1997, through June 30, 1998
Total Returns Average Annual Return
43.17% 28.83%
Masters' Select Equity Fund
43.91% 29.30%
Wilshire 5000 Index
40.64% 27.22%
Lipper Growth Fund Index
19.76% 13.57%
Lipper Small Cap Fund Index
40.74% 27.28%
Global Equity Index
To say that the first 18 months in the life of Masters' Select was an unusual
period for the financial markets would be an understatement. Measured by the
performance of the S&P 500 Index, large-cap U.S. stocks returned around 50% over
this period. Neither the Lipper Small Cap Fund Index nor the Lipper
International Fund Index returned half as much. Those with short memories might
be tempted to extrapolate these performance relationships to eternity. But
familiarity with financial market history teaches that runs like this don't last
forever. For example, 15 years ago it was the small-cap sector that was just
finishing up an incredibly dominating run. And 10 years ago, international
stocks finished a five-year run during which they significantly out-performed
other equity asset classes. Not surprisingly, the popularity of each equity
asset class was far higher at the end of its run than at the beginning. That is
certainly the case today with large-cap U.S. stocks.
Equity Asset Class Return Cycles
1995 through 1983 1984 through 1988 1994 through present
1,421.0% 46.4% 88.6%
Small Caps(1)
231.1% 360.8% 50.0%
Foreign Stocks(3)
172.8% 203.4% 169.2%
Large-Caps(3)
Global Equity Index
(1) Data for the period 1975 through 1983 is taken from the Stocks, Bonds,
Bills and Inflation Yearbook published by Ibbotson Associates. Used with
permission. (C)1998 Ibbostson Associates, Inc. All rights reserved.
[Certain portions of this work were derived from copyrighted works of Roger
G. Ibbotson and Rex Sinquefield.] Later periods are based on the Russell
2000 Index.
(2) Morgan Stanley Capital International Europe, Australasia and Far East Index
(MSCI EAFE).
(3) S&P 500 Index.
As of this writing, small-caps appear to be as undervalued as they were in late
1990. They followed with a strong three-year run. Moreover, over the next year
small companies' earnings are forecasted to grow at twice the rate expected for
the larger S&P 500 companies.* So there is reason to be optimistic about the
potential for small-caps going forward. We are not overly bullish, however,
despite fundamentals that look strong relative to large-caps. Over the
short-term, we can't help but be cautious because of the overvaluation of the
large-cap sector. This overvaluation
*Institutional Broker Estimate System (IBES), May 1998
<PAGE>
may be fueling a feeling of acrophobia toward the stock market in general. When
investors sense risk in the stock market, they usually fear the volatile
small-cap sector. Still we suspect that small companies' fundamental appeal may
be getting so strong relative to large companies' that they could at least keep
pace, even in a nervous environment.
Does the overvaluation of the S&P 500 foreshadow a big market decline? With no
reliable crystal ball, we are unable to answer this question with certainty.
That said, our view is that the incredibly supportive low-inflation/interest
rate environment leaves stocks as the only game in town for investors unwilling
to accept 5% returns. So with the rate environment likely to remain friendly, we
don't think a deep sustained bear market is likely. There is not much margin for
error in the U.S. stock market, however, and this makes the risk of a short 10%
to 20% correction higher than it would otherwise be. Our expectation for the
next few years is a much more moderate return environment than we have seen over
the short life of Masters' Select Equity Fund. Single-digit annualized returns
for the S&P 500 would not surprise us.
Returns in international markets have been mixed this year. Europe is evolving
through a period of historic change that is leading to a more competitive
business environment. European stock markets have been surging, and though they
now appear overvalued we believe there is much more positive change to come and
that this will be the catalyst for further growth in stock prices. The Pacific
Basin is clearly going through a difficult period that is likely to result in
widespread recession. More than ever, patience and selective stock picking are
required. Your Fund has a few select positions in these markets (total Asian
exposure including Australia and New Zealand is approximately 8%). It is worth
noting that some of your foreign exposure is in companies with a large U.S.
presence, such as Seagram Company, Ltd., and News Corporation Limited. Combined,
these two holdings make up close to one-third of the Fund's foreign holdings.
We've discussed the impact of equity asset classes because, over short and
intermediate time periods, asset class performance will have a big impact on the
Fund's returns. But the performance of our Fund is not dependent on the
correctness of this asset class analysis. Over the long term, our Fund will
excel or not on the basis of the stock-picking skills of its six managers. Given
the group of managers and their focused approach, we believe that this is reason
for optimism.
6
<PAGE>
Master Profile:
Mason Hawkins
...............
Following is a profile of one of the "Master" managers who runs your Fund. It is
an excerpt from the article originally entitled "What It Takes to Be a Guru"
from the June 1995 issue of the No-Load Fund Analyst. Mason Hawkins manages
approximately 20% of the Masters' Select Equity Fund.
Mason Hawkins was exposed to value investing early and often. His dad gave him
The Intelligent Investor and Security Analysis when he was in high school; he
read parts of Security Analysis twice as an undergraduate, twice in graduate
school and twice again for the CFA program. This gave him the tools to determine
corporate intrinsic worth and the principle of the margin of safety created by
buying businesses at 50% of their value. After he graduated from college, he
looked for a position with a value-oriented firm and ended up working for Cy
Norman.
Hawkins has not deviated from the value investing tradition, but he doesn't just
look for cheap stocks. Rather he looks for businesses in which he wants to be a
partner. He emphatically states that he is not buying pieces of paper, but is
becoming a business owner. His philosophy has not changed over time, but his
years of investing have been a continuous learning process and what he calls "a
very interesting journey." The 1973/74 market gave him an appreciation for how
inefficient the market assessment of corporate value can be in the short run.
Toward the end of that bear market, he was fully invested and very frustrated
that there wasn't more cash to pick up the many opportunities.
Understanding his strengths and weaknesses has been critical to Hawkins's
success. If he can't understand it, he can't value it. And if he can't value it,
he can't buy it for $.50 on the $1.00. Hawkins also wants to be able to assess
management, and if he can't explain the business, he can't determine the
viability of their plans for the company. This hard-and-fast rule means
Hawkins's universe does not include technology, biotechnology, metals, highly
regulated businesses or highly capital-intensive businesses. At times this
excludes pieces of the world that are doing really well, but Hawkins sticks to
what he knows, follows his criteria carefully and uses common sense.
<PAGE>
Hawkins says he also has an ability to look management in the eye, ask them how
they are going to allocate capital, and make a "seat-of-the-pants" judgment call
on their character and integrity. This is one area where experience has made him
a lot better. "If you find the right business with the right people, you need
only two or three businesses a year to be very successful." This is the reason
Hawkins works so hard to understand and know the management of the companies he
buys. Quality, not quantity, is the key to Hawkins's record, and he is confident
enough in his ability to pick good businesses that he doesn't need to buy 100 of
them just in case. Hawkins firmly believes that a concentrated portfolio
increases the probability of success.
The business operations side of the equation has not been a problem for Hawkins.
Growth has meant just "moving the decimal place." There have been no major
employee changes over the past five years. Hawkins has minimal administrative
duties and leaves the analysts free to analyze stocks. Hawkins remains deeply
involved in stock picking, but his role has evolved to include what he calls
cheerleading. He views his success as "our success" and says there is no pride
of authorship.
The team's goal now is simply to perpetuate their record. That record, built on
the foundation of Hawkins's obsessive drive for excellence and willingness to
stick to his approach regardless of short-term market vicissitudes, is
outstanding. Because of his concentrated portfolio, his numbers are occasionally
out of sync with those of his peers, but long-term returns have smoked the
competition.
8
<PAGE>
Masters' Select Equity Fund Stock Highlights
...............
American Express, Shelby Davis
...............
American Express (AXP) remains one of our favorite holdings. This first-class
company has one of the most powerful, attractive franchise and brand names in
the world, a global presence with outstanding growth opportunities
internationally, high returns on capital and strong free cash flow. Management
has done an outstanding job of creating value for shareholders by reenergizing
its core businesses and has used the company's free cash flow to aggressively
repurchase shares. AXP has two wonderful core businesses, both of which are very
well positioned for long-term growth. Travel-related services, which represent
two-thirds of earnings, have attractive franchises in consumer and corporate
charge and credit cards. The company's 42 million upscale consumer and business
cardholders charge more than $200 billion annually on their cards, several times
greater than the nearest competitor, generating very favorable returns for AXP.
As economies expand around the world, consumer wealth and spending grows and
cards are accepted at more merchant locations, AXP's card earnings should
substantially increase over time. The second excellent business, American
Express Financial Advisors (AEFA), consists of 9,000 financial planners who
manage almost $200 billion for 2 million customers. As 75 million American baby
boomers increasingly seek investment advice and save for their retirements,
AEFA's broad product array, which includes mutual funds, annuities and life
insurance products, positions the company for robust growth in assets under
management and profits. At less than 20 times 1999 expected earnings and at a
15% discount to the market multiple, we find American Express to be a compelling
value.
Edipresse, Jean Marie Eveillard
...............
Edipresse is a family-controlled publishing company with a virtual monopoly in
the French-speaking part of Switzerland, where it publishes the top four dailies
and two magazines. Over the past few years, the company has expanded its
operations to Spain (where it acquired magazine publishing operations at very
reasonable prices) as well as Portugal and Poland. The company's goal is to
achieve a 50/50 sales split between Switzerland and other countries by the year
2000.
Near term, Edipresse should benefit from the recovering Swiss economy, which is
finally showing signs of growth after seven years of stagnation. Higher
advertising spending in the Swiss domestic market and continued strength in
Spain and Portugal will ensure revenue growth this year. Due to the extremely
conservative accounting principles used by the company, however, where
significant development costs for new titles are expensed as incurred rather
than capitalized, earnings are expected to decline in 1998 while new magazines
are being launched. In essence, the very profitable Swiss business is financing
the development of new ventures outside of Switzerland.
Because there is no earnings momentum, the stock is valued at a 25% to 30%
discount to its European and American peers. This looks like a well-managed
growth situation at a value price. The company also owns real estate properties
and has valuable minority interests in a variety of unrelated businesses (movie
theaters, kiosks) which are not reflected in the stock price. The real estate
alone has an insurance value of $150 million, which compares with a market
capitalization of $350 million for the entire company.
<PAGE>
Jones Apparel Group, Foster Friess
...............
Jones Apparel Group, a New York-based manufacturer of moderate to upscale
women's apparel, has surged 29.4% this year in your portfolio. Sales of its
Lauren line of clothing has exceeded all Wall Street analysts' expectations.
Sold through fine department store chains like Macy's, Bloomingdale's, Dillard's
and May's, Jones Apparel Group has been well known for its career and casual
lines of clothing with the Jones & Co, Jones New York and Evan-Picone labels.
Late in 1996 Jones signed an agreement with Polo Ralph Lauren to design and
manufacture a better-priced line of clothing under the Lauren label. After some
initial success in early 1997, sales accelerated late last year and culminated
in December 1997 earnings results of 23(cent) vs. 15(cent), up 53%, and further
growth in March 1998 of 37(cent) vs. 28(cent), up 32%. In May, Jones New York
(JNY) announced an expansion of the licensing agreement with Polo to create a
new clothing line for 16 to 25 year olds called "Ralph by Ralph Lauren."
Despite the surge in JNY stock price, the stock still trades at only 20 times
1999 earnings per share (EPS) estimates of over $1.75 per share, with revenues
in 1999 expected to approach almost $2 billion.
Host Marriott, Mason Hawkins
...............
Host Marriott is a lodging company owning arguably the finest collection of
full-service hotels in the United States, the vast majority of which are located
in supply-constrained urban and resort destinations. The company's full-service
Marriott and Ritz-Carlton assets tend to be larger, difficult-to-build hotels
with multiple demand generators. All of the properties historically have been
affiliated with Marriott International brands. Host Marriott recently announced
its intention to expand into non-Marriott full-service and luxury brands
including Four Seasons, Hyatt and Swisshotel. In addition, Host Marriott is
selectively developing new full-service properties and exploring four- and
five-star acquisition opportunities in Asia.
The company has pursued a strategy of acquiring unique, strong brand-affiliated
properties at substantial discounts to replacement costs in high
barrier-to-entry submarkets. In addition, Host Marriott benefits from the
Marriott International reservation system. Host's properties consistently have
outperformed their peer group by approximately 33% on a per-room basis; and we
believe that the company is well positioned to outperform the industry through
all phases of the real estate cycle. Despite its higher-quality assets, stronger
operating performance and attractive pipeline of acquisition and development
opportunities, Host Marriott sells at a substantial discount to publicly traded
competitors and our conservative appraisal of $30 per share.
10
<PAGE>
WorldCom, Spiros Segalas
...............
Through a series of acquisitions, WorldCom (WCOM) has become the most formidable
telecom service company in the world. Because it owns local facilities,
WorldCom's customers can completely bypass the local phone monopolies by hooking
up to its long-distance operations. This gives the company an enormous economic
advantage and puts it in an enviable position to capitalize on continued telecom
deregulation in both the United States and Europe. In addition, the WorldCom-MCI
combination will derive nearly 30% of its revenues from the rapidly growing,
high-margin data and Internet services, where it is the world's leading provider
of such service. Even after the divestiture of MCI's Internet assets, required
by regulators to approve the merger, WorldCom will still be the largest Internet
backbone service company in the world through its Uunet Technologies unit.
WorldCom, with the merger of MCI, also stands to reap significant savings in
telecommunications costs, SG&A and capital expenditures.
We believe that WorldCom is a uniquely attractive stock at current levels of
around $46. Over the next several years, revenues should grow in the high teens,
and EPS significantly faster. We estimate earnings to grow from $0.90 per share
this year to close to $3.00 in 2000. As one of the fastest-growing big-cap
companies, WorldCom's stock should command a premium multiple and prove to be a
highly rewarding investment.
ADAC Laboratories, Dick Weiss
...............
ADAC is the market leader in nuclear medicine imaging systems, with a 42% share
in the United States. Approximately half of the company's sales come from an
imaging modality called Molecular Coinci-dence Detection (MCD). MCD reduces the
number of unnecessary surgeries in cancer patients by enabling physicians to
make more-accurate and timely diagnoses. This technology is only one-third the
cost of traditional PET scans.
The catalysts for better stock performance are twofold. First, the Heath Care
Financing Administration (HCFA) recently announced Medicare reimbursement for
MCD scans for lung cancer. Medicare will reimburse $1,980 per procedure versus
no reimbursement in the past, accelerating the market for such machines. We also
expect HCFA reimbursement to be extended to additional indications such as
colorectal, head-and-neck and ovarian cancer over the next 12 months.
Second, ADAC's healthcare information systems and radiation therapy planning
divisions are improving due to new product introductions and the recent
divestiture of an unprofitable division. At the current price of $22.56, the
stock is trading at only 13 times 1999 EPS despite an impressive 20% growth
rate. We believe that the stock will trade to $30 (18 times our 1999 estimate of
$1.70) once MCD sales accelerate in the second half of 1998. Our private market
value estimate is $35.
<PAGE>
Masters' Select Equity Fund Portfolio Summary
...............
Portfolio Composition (6/30/98)
As reflected below, your Fund is well diversified in terms of industry exposure
and market capitalization exposure. Masters' Select Equity holds 76 securities,
exclusive of cash equivalents.
Large-Caps 44.5%(3)
Mid-Caps 17.1%(2)
Foreign 15.7%
Small-Caps 13.2%(1)
Cash and Other 8.5%
Convertible Bonds 1.0%
(1) Market Capitalization less than $1 billion
(2) Market Capitalization greater than $1 billion and less than $5 billion
(3) Market Capitalization greater than $5 billion
Schedule of Investments as of June 30, 1998
<TABLE>
<CAPTION>
INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
Common Stocks
- --------------------------------------------------------------------------------------------------------------------
Basic Industries
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Carter Holt Harvey Ltd. Forest and Paper Products 3,250,000 $2,841,112 0.70%
Industrias Penoles S.A. de C.V. Metals and Mining 1,485,000 4,710,088 1.15%
- --------------------------------------------------------------------------------------------------------------------
7,551,200 1.85%
Business Services
- --------------------------------------------------------------------------------------------------------------------
Manpower Inc. Temporary Labor 135,000 3,872,813 0.95%
Waste Management, Inc. Waste Disposal 332,200 11,627,000 2.85%
Secom Co. Ltd. Security Services 85,000 4,924,061 1.21%
- --------------------------------------------------------------------------------------------------------------------
20,423,874 5.01%
Conglomerate
- --------------------------------------------------------------------------------------------------------------------
Philips Electronics N.V. Electronics, Software, Recording 90,000 7,650,000 1.88%
Consumer Products
- --------------------------------------------------------------------------------------------------------------------
* Ann Taylor Stores Corporation Apparel 138,400 2,932,350 0.72%
Dole Food Company, Inc. Food Processing 110,500 5,490,469 1.34%
* Jones Apparel Group, Inc. Apparel 100,000 3,656,250 0.90%
Masco Corporation Building Materials 78,100 4,725,050 1.16%
Seagram Company, Ltd. Beverages 215,000 8,801,562 2.16%
Stride Rite Corporation Shoes 230,000 3,464,375 0.85%
* Suiza Foods Corporation Food Processing 59,700 3,563,343 0.87%
* Tommy Hilfiger Corporation Apparel 27,200 1,700,000 0.42%
* Twinlab Corporation Nutritional Supplements 100,000 4,378,125 1.07%
- --------------------------------------------------------------------------------------------------------------------
38,711,524 9.49%
Consumer Services
- --------------------------------------------------------------------------------------------------------------------
Applebee's International, Inc. Restaurants 135,000 3,024,844 0.74%
* Brinker International, Inc. Restaurants 116,000 2,233,000 0.55%
* Foodmaker, Inc. Restaurants 170,000 2,868,750 0.70%
McDonald's Corporation Restaurants 128,600 8,873,400 2.18%
- --------------------------------------------------------------------------------------------------------------------
16,999,994 4.17%
</TABLE>
*Non-income producing securities.
12
<PAGE>
Schedule of Investments as of June 30, 1998 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
<S> <C> <C> <C>
Durables
- --------------------------------------------------------------------------------------------------------------------
Buderus AG Boilers and Heating Systems 12,500 $6,238,737 1.53%
General Cable Corporation Wire and Cable 96,300 2,780,663 0.68%
Zero Corporation Electrical and Electronics 150,000 4,256,250 1.05%
- --------------------------------------------------------------------------------------------------------------------
13,275,650 3.26%
Energy
- --------------------------------------------------------------------------------------------------------------------
Cabot Oil & Gas Corporation Oil and Gas Exploration 125,000 2,500,000 0.61%
* Global Industries Ltd. Oil Well Services 115,000 1,937,031 0.48%
Halliburton Company Oil Well Services 110,200 4,910,788 1.20%
* Harken Energy Corporation Oil and Gas Exploration 545,000 2,622,812 0.64%
Pogo Producing Company Oil and Gas Exploration 110,000 2,763,750 0.68%
San Juan Basin Royalty Trust Oil and Gas Leases 635,000 4,802,187 1.18%
- --------------------------------------------------------------------------------------------------------------------
19,536,568 4.79%
Finance
- --------------------------------------------------------------------------------------------------------------------
American Express Company Financial Services 59,400 6,771,600 1.66%
* Amresco Inc. Mortgage Banking 79,700 2,316,281 0.57%
BankAmerica Corporation Banking 54,200 4,684,913 1.15%
Citicorp Banking 41,600 6,208,800 1.52%
General RE Corporation Insurance 35,700 9,049,950 2.22%
Merrill Lynch & Co. Inc. Financial Services 71,400 6,586,650 1.61%
* Morgan Stanley Dean Witter & Co. Financial Services 69,600 6,359,700 1.56%
Nichido Fire & Marine Insurance Insurance 925,000 4,850,112 1.19%
Washington Mutual, Inc. Savings and Loan 120,300 5,221,772 1.28%
Wells Fargo & Co. Banking 20,900 7,712,100 1.89%
- --------------------------------------------------------------------------------------------------------------------
59,761,878 14.65%
Health Care and Pharmaceuticals
- --------------------------------------------------------------------------------------------------------------------
* ADAC Laboratories Medical Instruments and Equip. 100,000 2,256,250 0.55%
American Home Products Corporation Pharmaceuticals 115,000 5,951,250 1.46%
* Cooper Companies, Inc. Health Care Products 56,100 2,044,144 0.50%
* Gilead Sciences Inc. Biotechnology 70,000 2,244,375 0.55%
Hooper Holmes Inc. Examination Services 58,600 1,230,600 0.30%
Mylan Laboratories Biotechnology and Drugs 117,500 3,532,344 0.87%
Schering Plough Corporation Pharmaceuticals 71,300 6,532,863 1.60%
- --------------------------------------------------------------------------------------------------------------------
23,791,826 5.83%
Hotels
- --------------------------------------------------------------------------------------------------------------------
CDL Hotels International, Limited Hotels and Resorts 16,102,326 4,779,988 1.17%
* Host Marriott Corporation Hotels and Resorts 510,000 9,084,375 2.23%
- --------------------------------------------------------------------------------------------------------------------
13,864,363 3.40%
Media
- --------------------------------------------------------------------------------------------------------------------
* CBS Corporation Broadcasting 174,000 5,524,500 1.35%
Edipresse S.A. Publishing 15,250 4,199,465 1.03%
* GC Companies, Inc. Motion Picture Theaters 62,500 3,242,188 0.79%
Independent Press Communications, Ltd. Newspaper Publishing 835,000 4,062,503 1.00%
* MediaOne Group, Inc. Multimedia 280,000 12,302,500 3.02%
News Corporation Limited, ADR Multimedia 340,000 10,922,500 2.68%
- --------------------------------------------------------------------------------------------------------------------
40,253,656 9.87%
</TABLE>
*Non-income producing securities.
<PAGE>
Schedule of Investments as of June 30, 1998 (continued)
<TABLE>
<CAPTION>
INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
<S> <C> <C> <C>
Technology
- --------------------------------------------------------------------------------------------------------------------
* Apple Computer Computer Hardware 101,500 $2,914,953 0.71%
* Ciena Corporation Communications Equipment 95,300 6,629,306 1.62%
* Cisco Systems, Inc. Computer Networks 89,050 8,200,948 2.01%
* Dell Computer Corporation Computer Hardware 61,900 5,743,159 1.41%
* Electro Scientific Industires Inc. Electronic Instruments 100,000 3,165,625 0.78%
Hewlett-Packard Company Computer Hardware 104,100 6,232,988 1.53%
International Business Machines Corp. Computer Hardware 56,300 6,463,944 1.58%
* NCR Corporation Information Services 155,000 5,037,500 1.24%
* Novellus Systems, Inc. Semiconductors 47,000 1,678,781 0.41%
* Rational Software Corporation Software 358,500 5,478,328 1.34%
* Rayovac Corporation Batteries 73,000 1,656,188 0.41%
* Sybase, Inc. Software 88,500 616,734 0.15%
Telxon Corporation Computer Networks 56,200 1,812,450 0.44%
Texas Instruments Incorporated Semiconductors 208,500 12,158,156 2.98%
* UCAR International Inc. Electronic Instruments 336,100 9,809,919 2.41%
* USCS International Inc. Software 67,500 1,409,063 0.35%
- --------------------------------------------------------------------------------------------------------------------
79,008,042 19.37%
Telecommunications
- --------------------------------------------------------------------------------------------------------------------
* Aerial Communications Inc. Wireless Communications 300,000 1,856,250 0.45%
* WorldCom Inc. Communications Services 194,500 9,402,859 2.31%
- --------------------------------------------------------------------------------------------------------------------
11,259,109 2.76%
Transportation
- --------------------------------------------------------------------------------------------------------------------
Burlington Northern Santa Fe Corp. Railroads 38,100 3,740,944 0.92%
* FDX Corporation Express Mail and Freight 160,000 10,040,000 2.46%
Skywest, Inc. Airline 25,000 700,000 0.17%
* Yellow Corporation Trucking 130,000 2,421,250 0.59%
- --------------------------------------------------------------------------------------------------------------------
16,902,194 4.14%
Total Common Stocks (cost $320,996,390) 368,989,878 90.47%
Convertible Bonds PAR VALUE
- --------------------------------------------------------------------------------------------------------------------
Scandanavian Broadcasting
Systems, S.A. @ 7.25% due 8/1/05 (cost $3,522,126) $3,650,000 3,964,813 0.97%
- --------------------------------------------------------------------------------------------------------------------
Repurchase Agreements
- --------------------------------------------------------------------------------------------------------------------
State Street Bank and Trust Co. $26,126,000 at 5.1%
(agreement dated 6/30/98; to be repurchased at
$26,129,701 on 7/1/98; collateralized by
$18,235,000 in U.S. Treasury Notes due 11/15/15;
value $26,662,998) (cost $26,126,000) 26,126,000 26,126,000 6.41%
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations
- --------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association Discount Note
5.75%, 7/1/98 (cost $6,230,000) 6,230,000 6,230,000 1.53%
- --------------------------------------------------------------------------------------------------------------------
Total Investments in Securities (cost $356,874,516) 405,310,691 99.38%
Cash and Other Assets 2,542,678 0.62%
- --------------------------------------------------------------------------------------------------------------------
Total Net Assets $407,853,369 100.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Non-income-producing securities.
See Notes to Financial Statements.
14
<PAGE>
Masters' Select International Fund Review
...............
Over the seven-month life of Masters' Select International Fund, Europe has been
the one and only place to be for international investors. While Europe
experienced a huge first half, just about every other investable market in the
world other than the United States and Canada was in the red. Our experience was
similar. The European portion of our portfolio delivered high returns, while the
remaining 20% to 25% of the portfolio struggled to stay in the black and was a
drag on the Fund's performance.
Our Fund's 15% return during the first half of the year was close to, but
slightly behind, its benchmarks. Since the Fund's inception on December 1, 1997,
it lags its benchmarks, primarily due to emerging markets exposure.
Returns
Six months ended June 30, 1998 Since inception (December 1, 1997)
15.00% 13.60%
Masters' Select International Fund
15.90% 16.90%
Morgan Stanley Europe, Australasia and Far East Index
15.80% 16.70%
Lipper International Fund Index
Looking forward, driven by the changing landscape, our stock pickers continue to
be bullish with respect to opportunities in Europe. Company-level restructuring
is the primary reason for this enthusiasm. (See the interview with Helen Young
Hayes later in this report.) Of course, the move to a single currency is the
paramount change at the macro level. Other macro-level changes add to the
positive environment. Much of this evolution is the result of global competition
that is driving a rationalization of the economy at all levels. With the need to
fund pensions, stimulate entrepreneurial activity, reduce unemployment and
encourage a U.S.-style "equity culture," there is reason to be optimistic about
the outlook for European equity markets.
Positive change is inevitable in the rest of the world as well. As of this
writing, however, much of Asia is experiencing recession. Moreover, the problems
are severe enough to suggest that risks remain high. For example, in the "crisis
economies," heavy corporate debts raise the issue of survival for many
companies. Massive wealth destruction, high debt levels, capital flight and
social stresses contribute to an overall climate that is not likely to clear for
a while. Japan is a key player in how things play out, because a healthy rather
than a sickly Japan constitutes a big positive swing. Unfortunately, Japan has
had a bad record of following through on encouraging statements in recent years.
The leadership seems to be incapable of taking the painful action needed to
restore health to the banking sector (writing off bad loans). In addition,
reforms to stimulate consumer demand have progressed slowly. The troubles of the
rest of the
<PAGE>
region are serving as catalysts for positive change in Japan and also some of
the developing countries, but the speed and magnitude of change is still in
question.
Despite the uncertain outlook for Asia in the near term, the type of devastation
we've seen creates buying opportunities at the stock-picking level. We'd like to
remind shareholders that the Masters' Select International Fund's stock pickers
have no mandate to have any exposure in Asia or any particular part of the
world. Indeed, one of our managers is 100% invested in Europe. The Asian
companies that are represented in your portfolio are not there because of a
top-down bet on a regional recovery. Rather, they are in the portfolio because
your stock pickers have found opportunities in a few select stocks of sound
companies. They believe that the prices of these companies' stocks are overly
depressed because of the macro environment. Though it may require some patience,
the managers believe that there is unusually high appreciation potential in
these holdings.
All of this big-picture rambling is offered to provide some background. But at
the end of the day, this Fund, like Masters' Select Equity, is about stock
picking. It will succeed or fail based on the stock-picking skills of its
managers. We believe that the historic change we are seeing around the world
provides a good platform for stock-picking opportunities. This is because change
creates new opportunities as new stories with uncertain outcomes must be
analyzed. Likewise, market and economic devastation along the lines we are
seeing in Asia and some other emerging markets also creates opportunities.
Regardless of the environment, this is and will be a portfolio built stock by
stock. We believe that our group of stock pickers, with their research
capabilities, their patient and long-term approach and their high level of
confidence, is well suited for the challenge.
16
<PAGE>
An Interview with
Helen Young Hayes
Helen Young Hayes manages
approximately 22.5% of the
Masters' Select International Fund.
What first attracted you to the business of stock picking?
Prior to graduating from Yale, I was recruited by a number of different
companies. After interviewing with several of them, I found investment
management to be the most exciting and challenging position available. So I
accepted a position as a research analyst. After a few years in the industry,
Janus offered me a position.
How did your involvement in foreign markets come about?
When I first arrived at Janus, they needed an analyst to follow several
international stocks, and I accepted the position for a number of reasons.
First, foreign investing gave me an excellent chance to hone my analytical
skills. Additionally, I like to travel, and covering foreign companies allowed
me to visit different regions and learn about various cultures and people.
Can you describe the key elements of your investment philosophy and how they
evolved?
I have several elements that I look for in each investment, but some of the key
attributes include a great management team, a strong product line and a solid
business franchise. I look not only for companies with superior earnings growth
potential, but I also look for strong free cash flows. More important, I want a
savvy management team that understands how to use this excess capital to further
improve shareholder value.
Overall, my research approach is no different than Janus's as a whole, and
international investing has been a part of our culture since the company was
founded in 1970. At Janus we believe that the earnings growth of individual
companies ultimately determines the price of their stock. For this reason our
research is geared toward fully understanding the underlying earnings potential
for each investment. This process is even more critical in an international
setting, because foreign markets tend to be less
<PAGE>
efficient than in the United States. There, intensive research can uncover
growth opportunities that are not widely recognized by the international
investment community.
What is your objective when you meet with company management? How important is
this step to your overall investment process?
I believe that meeting with management face-to-face is a critical part of the
research process. It gives me a chance to evaluate its strategy and goals and to
see how motivated the team is to meet these objectives. These meetings also give
me a chance to evaluate how competent the top levels of the company's management
team actually are. Finally, it allows me to find out if management's long-term
goals are aligned with mine, and to make sure that it's focused on improving
shareholder value.
In recent years your returns have been among the highest in your peer group.
What elements of your approach deserve the most credit for your performance?
I credit several factors for our superior performance, but the most important
element is stock selection. I've remained true to my discipline by investing in
companies with promising long-term earnings growth potential, and this approach
has proven very rewarding.
Additionally, we've bolstered our results by recognizing a number of investment
themes in the early stages of their development. One recent example is the
powerful long-term effects of European corporate restructuring. Several years
ago my research team and I found that many slow-growing European companies were
beginning to embrace the ideas of restructuring and shareholder value.
Recognizing how important these changes have been for companies here in the
United States, we realized that this trend could create a very strong wave of
investment possibilities across the European continent. Overall, these trends
continue to be an important catalyst for future gains across Europe.
Finally, I am fortunate to have the support of a tremendous research staff. My
team and I work diligently to uncover the best investment ideas, wherever they
may be around the world. This hard work and excellent research has been integral
to our long-term results.
As an investor who looks for opportunities in the United States and overseas,
where do you currently find the most compelling opportunities (inside or outside
the U.S.), assuming a reasonably long-term time horizon?
It's important to remember that I look at every investment opportunity from the
bottom up, meaning I build my portfolios on a stock-by-stock basis. I will add a
position only if I believe that it offers compelling long-term investment
potential. That said, we continue to find a host of interesting investment ideas
in Europe. As I mentioned previously, European companies are undergoing a
fundamental change in how they conduct business, and this process is still
several years behind their U.S. counterparts.
With respect to the overall investment climate, what are your biggest concerns?
Looking ahead, lower interest rates and modest inflation in both Europe and the
United States have created a favorable climate for equities. Currently, there
are some minor concerns that Asia's weakness could derail economic growth
elsewhere. The chances of this appear to be minimal, however, given the benefits
of restructuring and monetary convergence in Europe and the resilience of
consumer spending in the
18
<PAGE>
United States. I see little hope for a near-term improvement in Asia, however.
The recent breakdown of the yen versus the dollar highlights the currency risks
that continue to linger throughout the region. Unless the Japanese government
takes steps to prop up its failing economy, a Chinese devaluation remains a
significant risk for global markets. Even if the Japanese do act, there aren't
many signs of improvement in Asia, and the road to recovery is sure to be long
and difficult. Additionally, the shadow from the Far East has also extended
across Latin America, although longer-term prospects are better there so long as
market reforms continue.
You have not had any emerging markets exposure in the Masters' Select
International portfolio. Should we expect to see emerging markets exposure
anytime soon?
As I mentioned previously, all of my investment decisions are based on a
bottom-up approach, meaning that I closely analyze each investment opportunity
and select only those with the most compelling characteristics. Therefore, we've
been very underexposed to Asia for quite some time, because our research has
located more compelling ideas elsewhere in the world, particularly in Europe.
Given how negative the investment landscape is across many emerging markets, the
risk-versus-reward scenario has been raised considerably. Currently, the risk
premium for all emerging markets remains high. Unless we locate some very
compelling individual ideas with strong fundamentals that can overcome these
regional economic hurdles, I don't anticipate adding any positions in the near
term.
As you mentioned, you have captured high returns in Europe in recent years. Can
you expand on your outlook for Europe?
Economic expansion continues at a robust pace in Europe, supported by corporate
restructuring and lower interest rates. The approach of the Economic and
Monetary Union (EMU) has supported consumer confidence, driven mergers and
acquisitions, and provided companies with the economies of scale to invest in
new technology.
While optimism over the strength of the European expansion remains very strong,
future economic gains hinge on sound fiscal and monetary policy across the
continent. At the moment, we continue to find that deregulation, consolidation,
restructuring and technology are unlocking promising earnings momentum.
How do you apply your discipline when selecting stocks in the Masters' Select
International "concentrated" portfolio?
I apply the same principles for the Masters' Select International Fund that I
use across all my investments: I seek to maximize the potential returns for each
investment and, as a result, I search for long-term ownership ideas with strong
upside potential. These companies typically exemplify the traits that I look for
in all my companies: great management teams, dominant business franchises, an
excellent product line and strong earnings growth potential.
<PAGE>
Masters' Select International Fund Stock Highlights
...............
Orbotech, Ltd., Bruce Bee
...............
Orbotech, Ltd., is a leading provider of machine vision and imaging solutions
that increase manufacturing productivity in several industries. This Israeli
company is the leading producer of automated optical inspection equipment used
by the printed circuit board (PCB) industry. The company also provides
inspection equipment for manufacturers of flat panel displays, and other
products for the design and production of PCBs.
Orbotech systems help manufacturers increase yields by finding defects during
the manufacturing process. In the circuit board industry, the numbers of layers
per board increases as the width of connections decreases. These factors
increase the demand for inspection equipment. In addition, the constant pressure
to reduce PCB prices requires higher manufacturing yields, also driving the need
for Orbotech equipment.
Although a large percentage of Orbotech sales are to PCB manufacturers in Asia,
the currency devaluations there have actually reduced the overall production
costs and increased manufacturers' competitive positions. As a result, many
Asian manufacturers are seeing increasing orders and are generating the funds
necessary to purchase capital equipment such as that manufactured by Orbotech.
Although we expect some slowdown in capital equipment spending by PCB
manufacturers, it is not yet apparent in Orbotech's results. Core equipment
sales have grown sequentially every quarter since the third quarter of 1996, and
Orbotech's quarterly sales rate has actually doubled in that time period.
Orbotech's financial position is excellent: gross profit margins approach 50%;
operating margins are approximately 20%; and the company has consistently
achieved a return on shareholders' equity of approximately 25%. After earning
$2.52 per share in 1997, we expect Orbotech to increase EPS to $2.85 in 1998.
Selling at about 12.5 times 1998 earnings, with its 65% market share and a
customer base forced to increase the use of machine inspection, Orbotech
represents the kind of high-tech opportunity we are always seeking.
20
<PAGE>
Nokia Corporation, Dan Jaworski
...............
Nokia Corporation, headquartered in Finland, develops and manufactures mobile
phones, networks and systems for cellular and fixed networks. The company
operates in 45 countries and sells its products worldwide. It is the world's
second-largest mobile phone manufacturer, with a global market share of more
than 20%. Approximately 55% of the total revenues is from mobile handsets; 38%
is from network infrastructure. The company's three most important markets are
the United States, the United Kingdom and China, respectively. The company's
fundamentals are excellent, with accelerating handset growth, massive order
intake on the infrastructure side and rising operating margins. The demand for
the new 6100 series phone is greater than expected, as cellular penetration
worldwide continues to outpace estimates. The company's financial outlook
continues to be excellent, and we expect revenue growth of 25% and EPS growth of
20%. The company has no debt, producing a return on equity of 33% and generating
$1 billion of free cash flow per year.
Nokia is an excellent example of the type of high-quality, industry-leading
company in which our investment philosophy leads us to invest. The stock,
relative to its industry peers, is selling at a discount on both an earnings and
a cash flow basis. We believe that Nokia should trade at an industry multiple on
these measures due to its outstanding prospects.
Philips Electronics, Helen Young Hayes
...............
Based in the Netherlands, Philips is a diversified electronics conglomerate that
produces semiconductors, consumer electronics, components and mobile handsets.
Philips has also held a stake in the entertainment company Polygram, but
recently announced plans to spin off this underperforming business line.
The underlying story behind Philips is an impressive bid to restructure itself.
Its management team has followed a strategy of cost cutting and spinning off
underperforming businesses, helping to boost operating income, improve free cash
flow and pay down debt. Management recently announced plans to use cash flow to
repurchase shares, likely in 1999 after an expected change in Dutch law. We are
particularly upbeat on the sale of Polygram and the share repurchase plan, both
of which underscore management's commitment to shareholder value. Furthermore,
management has implemented tight internal controls while improving internal
communication and financial disclosure--all of which demonstrate a greater
shareholder focus.
Moving ahead, we are confident that Philips will maintain strong revenue growth,
particularly with the sale of Polygram and improving conditions in its other
geographies. The company continues to target double-digit growth rates, and we
are confident it can meet these goals.
<PAGE>
Cordiant Communications Group,
David Herro
...............
Cordiant Communications Group (CCG) is a United Kingdom-based holding company
for Bates Advertising World Wide as well as other smaller marketing companies.
It is currently our largest holding for our portion of Masters' Select
International. We are bullish on the stock because though it has one of the
highest-quality global networks (an important competitive point) in Bates World
Wide, it trades at a significant discount to its peers and is inexpensively
priced on an absolute basis.
CCG, being extremely strong in Europe and having one of the top networks in
Asia, sells at roughly 40% of its revenue and at just over five times its total
capitalization to its operating profit. Though it has been aggressively
expanding profitability (in the form of its operating margin) and has recently
announced a record increase in new billings, the above-value measures are
significantly below its peers, which tend to sell at 1 to 1.5 times revenues and
10 to 15 times total cap-to-operating profit. CCG is a high-quality company with
net cash on its balance sheet, owns 50% of one of the world's largest buyer of
media (Zenith) and is particularly strong in fast-growth regions for
advertising, such as Europe and Asia. We are very confident that either the
market will appreciate the value embedded in this company or a competitor will.
As a result of our valuation work, we think the current upside in CCG is 75%,
representing one of the cheaper media plays in the world today.
MetroNet Communications, Mark Yockey
...............
MetroNet Communications is known as a CLEC, a competitive local exchange
carrier. Targeting high-volume users in business and government, this
facilities-based telecommunications company offers a faster, cheaper and
higher-quality alternative to Bell Canada.
Through rapid market penetration, we expect explosive growth in revenues--up to
30% a year for the next five years. MetroNet has the first-mover advantage in
this newly deregulated industry. It should benefit greatly--and quickly--from
pent-up demand. Growth should also be fostered by customer concentration; about
90% of the largest 750 Canadian businesses are headquartered in just 11 Canadian
cities. With its new network, MetroNet is well positioned as the highest-quality
low-cost producer.
MetroNet has a very strong management team. Because of stock option incentives,
this team is motivated to focus on enhancing shareholder value. At the current
stock price of $28.25, we believe the stock in Metronet is selling at a
substantial discount to our estimate of value.
22
<PAGE>
Masters' Select International Fund Portfolio Summary
Portfolio Composition by Region
(6/30/98)
Europe ..................................................... 72.9%
Latin America .............................................. 8.1%
Asia (ex-Japan) ............................................ 6.4%
North America .............................................. 4.9%
Australia/New Zealand ...................................... 4.0%
Japan ...................................................... 2.9%
Other ...................................................... 0.8%
Portfolio Composition by Asset Class
(6/30/98)
Developed Markets Large-Caps ................................ 60.4%(3)
Developed Markets Small-Caps ................................ 21.0%(2)
Emerging Markets ............................................ 14.7%(1)
Cash and Other Short-term Investments ....................... 3.9%
(1) Includes Hong Kong (3.0%) and Singapore (2.3%), which are not technically
emerging markets
(2) Market capitalization less than $800 million
(3) Market capitalization greater than $800 million
Schedule of Investments as of June 30, 1998
<TABLE>
<CAPTION>
SECTOR/INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
Argentina
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Quilmes Industrial Quinsa
Societe ADR Consumer Products/Beverages 80,000 $780,000 0.75%
- ------------------------------------------------------------------------------------------------------------------------
Australia
- ------------------------------------------------------------------------------------------------------------------------
Westpac Banking Corp. Finance/Commercial Bank 173,000 1,057,789 1.02%
Brambles Industries Ltd. Transportation/Commercial Svcs. 83,300 1,638,641 1.57%
- ------------------------------------------------------------------------------------------------------------------------
2,696,430 2.59%
Austria
- ------------------------------------------------------------------------------------------------------------------------
Bayerische Hypotheken-und
Wechsel-Bank AG Finance/Commercial Bank 24,250 1,538,274 1.48%
- ------------------------------------------------------------------------------------------------------------------------
Brazil
- ------------------------------------------------------------------------------------------------------------------------
Telerj Cellular S.A. Telecom/Cellular Phone Service 23,075,000 1,372,469 1.32%
Uniao de Bancos
Brasileiros S.A., GDR Finance/Commercial Bank 54,500 1,607,750 1.55%
* Usinas Siderurgicas
de Minas Gerais S.A. Basic Industries/Mining 330,000 1,683,455 1.62%
- ------------------------------------------------------------------------------------------------------------------------
4,663,674 4.49%
Canada
- ------------------------------------------------------------------------------------------------------------------------
* MetroNet Communications Corp. Telecom/Telecom Services 81,500 2,292,188 2.21%
Royal Bank of Canada Finance/Commercial Bank 44,100 2,662,538 2.56%
- ------------------------------------------------------------------------------------------------------------------------
4,954,726 4.77%
Denmark
- ------------------------------------------------------------------------------------------------------------------------
Sydbank A/S Finance/Commercial Bank 19,000 1,059,320 1.02%
Vest-Wood A/S Consumer Prod./Home Furnishings 11,500 1,121,625 1.08%
- ------------------------------------------------------------------------------------------------------------------------
2,180,945 2.10%
Finland
- ------------------------------------------------------------------------------------------------------------------------
Nokia Corp., Sponsored ADR Technology/Cellular Phones 49,725 3,608,170 3.47%
Nokia AB Technology/Cellular Phones 18,400 1,354,558 1.30%
- ------------------------------------------------------------------------------------------------------------------------
4,962,728 4.77%
</TABLE>
*Non-income producing securities.
<PAGE>
Schedule of Investments as of June 30, 1998 (continued)
<TABLE>
<CAPTION>
SECTOR/INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
France
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rhone-Poulenc S.A. Health Care/Pharmaceuticals 22,000 $1,240,882 1.19%
Elf Aquitaine S.A. Energy 9,551 1,342,830 1.29%
Cap Gemini S.A. Business Svcs./Information Services 8,884 1,396,000 1.34%
Banque Nationale de Paris Finance/Special Purpose Bank 25,000 2,042,774 1.96%
Alcatel Alsthom Telecom/Telecom Equipment 856 174,295 0.16%
AXA UAP Finance/Multiline Insurance 23,000 2,586,963 2.48%
- ------------------------------------------------------------------------------------------------------------------------
8,783,744 8.42%
Germany
- ------------------------------------------------------------------------------------------------------------------------
Rinol AG Durables/Building & Construction 20,000 870,554 0.84%
Porsche AG Transportation/Automobiles 675 1,946,270 1.87%
- ------------------------------------------------------------------------------------------------------------------------
2,816,824 2.71%
Hong Kong
- ------------------------------------------------------------------------------------------------------------------------
Giordano International Limited Consumer Products/Clothing 3,350,000 678,820 0.66%
Wing Hang Bank Ltd. Finance/Commercial Bank 546,000 729,362 0.70%
JCG Holdings Ltd. Finance/Diversified Financial Svcs. 6,253,000 1,735,151 1.67%
- ------------------------------------------------------------------------------------------------------------------------
3,143,333 3.03%
Ireland
- ------------------------------------------------------------------------------------------------------------------------
Allied Irish Banks PLC Finance/Banking 88,000 1,278,322 1.23%
- ------------------------------------------------------------------------------------------------------------------------
Israel
- ------------------------------------------------------------------------------------------------------------------------
* Orbotech, Ltd. Technology/Software 22,500 816,328 0.79%
- ------------------------------------------------------------------------------------------------------------------------
Italy
- ------------------------------------------------------------------------------------------------------------------------
Telecom Italia SpA Telecom/Telecom Services 230,000 1,693,851 1.63%
FILA Holdings ADR Consumer Prod./Athletic Footwear 138,800 2,082,000 2.00%
- ------------------------------------------------------------------------------------------------------------------------
3,775,851 3.63%
Japan
- ------------------------------------------------------------------------------------------------------------------------
Sony Corporation Technology/Electronics 5,700 490,556 0.47%
Amway Japan Cons. Prod./Multilevel Direct Selling 84,000 893,035 0.86%
Enix Corporation Consumer Products/Appliances 75,700 1,478,195 1.43%
- ------------------------------------------------------------------------------------------------------------------------
2,861,786 2.76%
Korea
- ------------------------------------------------------------------------------------------------------------------------
Woong Jin Publishing Company Media/Publishing 105,000 837,400 0.81%
- ------------------------------------------------------------------------------------------------------------------------
Mexico
- ------------------------------------------------------------------------------------------------------------------------
Panamerican Beverages, Inc. Consumer Products/Beverages 84,500 2,656,469 2.56%
- ------------------------------------------------------------------------------------------------------------------------
Netherlands
- ------------------------------------------------------------------------------------------------------------------------
Van Melle N.V. Consumer Products/Food 13,300 958,529 0.93%
Wolters Kluwer N.V. Media/Publishing 9,769 1,341,781 1.29%
European Vinyls Corporation Basic Industries/Chemicals 86,300 1,507,145 1.45%
Philips Electronics N.V. Technology/Electronics 26,429 2,223,273 2.14%
KLM Royal Dutch Airlines N.V. Transportation/Airlines 58,000 2,356,807 2.26%
- ------------------------------------------------------------------------------------------------------------------------
8,387,535 8.07%
New Zealand
- ------------------------------------------------------------------------------------------------------------------------
Fernz Corporation Limited Basic Industries/Chemicals 565,000 1,264,191 1.22%
- ------------------------------------------------------------------------------------------------------------------------
Norway
- ------------------------------------------------------------------------------------------------------------------------
* Norsk Lotteridrift ASA Consumer Svcs./Leisure & Gaming 215,000 729,337 0.70%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Non-income producing securities
24
<PAGE>
Schedule of Investments as of June 30, 1998 (continued)
<TABLE>
<CAPTION>
SECTOR/INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
Portugal
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investec-Consultoria
Internacional S.A. Media/Publishing 19,975 $919,651 0.88%
- ------------------------------------------------------------------------------------------------------------------------
Singapore
- ------------------------------------------------------------------------------------------------------------------------
Electronic Resources Ltd. Technology/Electronics 1,250,000 853,116 0.82%
Mandarin Oriental
International Limited Hotels 2,690,000 1,533,300 1.47%
- ------------------------------------------------------------------------------------------------------------------------
2,386,416 2.29%
Sweden
- ------------------------------------------------------------------------------------------------------------------------
Electrolux AB Consumer Products/Appliances 200,150 3,550,806 3.41%
Assa Abloy AB Basic Industries/Metal Processors 41,515 1,631,764 1.57%
- ------------------------------------------------------------------------------------------------------------------------
5,182,570 4.98%
Switzerland
- ------------------------------------------------------------------------------------------------------------------------
Stratec Holding AG Health Care/Medical Instruments 565 794,724 0.76%
PubliGroupe S.A. Business Svcs./Advertising Sales 2,800 869,048 0.84%
Credit Suisse Finance/Commercial Bank 5,800 1,292,676 1.24%
Novartis Health Care/Pharmaceuticals 3,209 5,348,686 5.14%
UBS AG Finance/Commercial Bank 6,000 2,234,696 2.15%
- ------------------------------------------------------------------------------------------------------------------------
10,539,830 10.13%
United Kingdom
- ------------------------------------------------------------------------------------------------------------------------
Victrex PLC Basic Industries/Chemicals 230,000 768,062 0.74%
JBA Holdings PLC Technology/Software 95,000 983,453 0.95%
Zeneca Group PLC Health Care/Pharmaceuticals 26,000 1,116,562 1.07%
Lloyds TSB Group PLC Finance/Money Centre Bank 85,258 1,193,649 1.15%
Cadbury Schweppes PLC Consumer Products/Beverages 80,000 1,238,917 1.19%
Whitbread PLC Consumer Prod./Brewing & Leisure 80,000 1,295,687 1.25%
* Saatchi & Saatchi PLC Business Svcs./Advertising Services 490,000 1,358,134 1.31%
General Electric Company PLC Durables/Manufacturing 200,000 1,724,800 1.66%
Capita Group PLC Business Svcs./Computer Services 199,731 1,724,981 1.66%
Cable & Wireless PLC Telecom/Cellular & Cable 172,400 1,747,288 1.68%
Rentokil Initial PLC Business Svcs./Consumer Services 252,416 1,816,488 1.75%
Siebe PLC Durables/Manufacturing 98,844 1,975,527 1.90%
Tomkins PLC Business Svcs./Diversified Operations 375,000 2,036,512 1.96%
Cordiant Communications Group Business Svcs./Advertising Services 1,236,000 2,734,468 2.63%
- ------------------------------------------------------------------------------------------------------------------------
21,714,528 20.90%
Total Common Stocks (cost $94,943,444) 99,870,892 96.06%
Repurchase Agreements PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------
State Street Bank and Trust Co. $2,461,000 at 5.1%
(agreement dated 6/30/98; to be
repurchased at $2,461,349 on 7/1/98;
collateralized by $1,725,000 in U.S. Treasury Notes
due 11/15/15; value $2,522,274) (cost $2,461,000) $2,461,000 2,461,000 2.37%
- ------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations
- ------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Mortgage
Discount Note 5.85%, 7/1/98 (cost $1,500,000) 1,500,000 1,500,000 1.44%
- ------------------------------------------------------------------------------------------------------------------------
Total Investments in Securities (cost $98,904,444) 103,831,892 99.87%
Cash and Other Assets 133,721 0.13%
- ------------------------------------------------------------------------------------------------------------------------
Total $103,965,613 100.00%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Non-income-producing securities.
See Notes to Financial Statements.
<PAGE>
Statements of Assets and Liabilities--June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
Assets
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in securities at market value
(cost of $356,874,516 and $98,904,444) $405,310,691 $103,831,892
Cash 44,868 --
Foreign currencies at value 104,125 21,453
Receivables:
Fund shares sold 1,061,798 190,654
Income receivable 418,475 263,932
Investment securities sold 6,385,814 479,470
Unrealized gain on forward exchange contracts 727,767 --
Deferred organizational costs 73,188 33,514
Prepaid expenses 70,091 29,594
----------------------------------------------------------------------------------------------
Total assets 414,196,817 104,850,509
Liabilities
- -------------------------------------------------------------------------------------------------------
Payables:
Cash overdraft -- 245,349
Fund shares repurchased 433,073 51,329
Investment securities purchased 5,456,561 457,716
Investment advisory fees 356,781 83,671
Accrued expenses 97,033 46,831
----------------------------------------------------------------------------------------------
Total liabilities 6,343,448 884,896
Net Assets $407,853,369 $103,965,613
- -------------------------------------------------------------------------------------------------------
Composition of Net Assets
- -------------------------------------------------------------------------------------------------------
Paid-in capital $338,143,653 $ 95,928,602
Undistributed net investment income 239,882 639,128
Accumulated net realized gains 20,303,749 2,470,231
Net unrealized appreciation 49,166,085 4,927,652
----------------------------------------------------------------------------------------------
Net Assets $407,853,369 $103,965,613
- -------------------------------------------------------------------------------------------------------
Number of shares, $0.01 par value, issued
and outstanding (unlimited shares authorized) 30,180,607 9,151,889
----------------------------------------------------------------------------------------------
Net Asset Value per Share $ 13.51 $ 11.36
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
Statements of Operations--For the period January 1, 1998 to June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
Investment Income
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income
Dividend income
(net of foreign taxes of $91,653 and $114,624) $1,823,523 $1,098,795
Interest income 887,859 160,811
-----------------------------------------------------------------------------------------------
Total income 2,711,382 1,259,606
Expenses
Advisory fees 1,973,234 445,573
Transfer agent fees 127,280 44,631
Custodian fees 102,189 97,744
Administration fees 90,832 20,256
Registration fees 69,397 9,224
Shareholder reporting fees 18,442 9,917
Legal fees 5,980 2,480
Trustees fees 9,914 3,720
Insurance fees 24,623 1,537
Amortization of deferred organizational costs 10,570 3,745
Miscellaneous expenses 21,238 5,611
Audit fees 19,830 5,951
-----------------------------------------------------------------------------------------------
Total expenses 2,473,529 650,389
Less: waiver and expenses paid indirectly 2,029 29,911
-----------------------------------------------------------------------------------------------
Net expenses 2,471,500 620,478
-----------------------------------------------------------------------------------------------
Net investment income 239,882 639,128
Realized and Unrealized Gains (Losses)
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss):
Investments 19,242,764 2,589,824
Foreign currency transactions 935,493 (119,593)
-----------------------------------------------------------------------------------------------
Net realized gain 20,178,257 2,470,231
Net unrealized appreciation (depreciation) on:
Investments 25,393,725 5,354,111
Foreign currency transactions (19,550) 306
-----------------------------------------------------------------------------------------------
Net unrealized appreciation 25,374,175 5,354,417
-----------------------------------------------------------------------------------------------
Net realized and unrealized gains 45,552,432 7,824,648
Net increase in net assets resulting from operations $45,792,314 $8,463,776
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
Statements of Changes in Net Assets--Equity Fund
<TABLE>
<CAPTION>
For the period from For the period from
January 1, 1998 to January 1, 1997 to
June 30, 1998* December 31, 1997
Increase (Decrease) in Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income $239,882 $243,648
Net realized gain (loss) 20,178,257 23,912,283
Net unrealized appreciation (depreciation) 25,374,175 23,791,910
------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 45,792,314 47,947,841
Distributions to shareholders:
From net investment income -- (243,648)
From net realized gains -- (23,786,791)
------------------------------------------------------------------------------------------------
Total distributions -- (24,030,439)
Fund share transactions:
Proceeds from shares sold 98,566,228 279,009,548
Net asset value of shares issued
on reinvestment of distributions -- 23,567,971
Cost of shares redeemed (33,380,984) (29,719,110)
------------------------------------------------------------------------------------------------
Net increase from Fund share transactions 65,185,244 272,858,409
------------------------------------------------------------------------------------------------
Net increase in net assets 110,977,558 296,775,811
Net Assets
- --------------------------------------------------------------------------------------------------------
Beginning of period 296,875,811 100,000
------------------------------------------------------------------------------------------------
End of period $407,853,369 $296,875,811
------------------------------------------------------------------------------------------------
Change in Shares
- --------------------------------------------------------------------------------------------------------
Shares sold 7,707,941 25,633,556
Shares issued on reinvestment of distributions -- 1,962,362
Shares redeemed (2,590,756) (2,542,496)
------------------------------------------------------------------------------------------------
Net increase in shares 5,117,185 25,053,422
------------------------------------------------------------------------------------------------
</TABLE>
*Unaudited
See Notes to Financial Statements.
28
<PAGE>
Statements of Changes in Net Assets--International Fund
<TABLE>
<CAPTION>
For the period from For the period from
January 1, 1998 to December 1, 1997+ to
June 30, 1998* December 31, 1997
Increase (Decrease) in Net Assets
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income $639,128 $14,157
Net realized gain (loss) 2,470,231 (26,104)
Net unrealized appreciation (depreciation) 5,354,417 (426,765)
-------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 8,463,776 (438,712)
Distributions to shareholders:
From net investment income -- --
From net realized gains -- --
-------------------------------------------------------------------------------------------------
Total distributions -- --
Fund share transactions:
Proceeds from shares sold 53,330,288 46,890,251
Net asset value of shares issued -- --
on reinvestment of distributions
Cost of shares redeemed (3,762,615) (517,375)
-------------------------------------------------------------------------------------------------
Net increase from Fund share transactions 49,567,673 46,372,876
-------------------------------------------------------------------------------------------------
Net increase in net assets 58,031,449 45,934,164
Net Assets
- ---------------------------------------------------------------------------------------------------------
Beginning of period 45,934,164 --
-------------------------------------------------------------------------------------------------
End of period $103,965,613 $45,934,164
-------------------------------------------------------------------------------------------------
Change in Shares
- ---------------------------------------------------------------------------------------------------------
Shares sold 4,837,840 4,700,772
Shares issued on reinvestment of distributions -- --
Shares redeemed (334,181) (52,542)
-------------------------------------------------------------------------------------------------
Net increase in shares 4,503,659 4,648,230
-------------------------------------------------------------------------------------------------
</TABLE>
*Unaudited.
+The Masters' Select International Fund commenced operations on December 1,
1997.
See Notes to Financial Statements.
<PAGE>
Financial Highlights--For a share outstanding throughout the period
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
For the For the For the For the
period from period from period from period from
1/1/98 to 1/1/97 to 1/1/98 to 12/1/97** to
6/30/98* 12/31/97 6/30/98* 12/31/97
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.84 $10.00 $9.88 $10.00
------------------------------------------------------------------------
Income from investment operations
Net investment income 0.01 0.03 0.07 --
Net realized and unrealized gain 1.66 2.90 1.41 (0.12)
------------------------------------------------------------------------
Total from investment operations 1.67 2.93 1.48 (0.12)
------------------------------------------------------------------------
Less distributions
From net investment income -- (0.03) -- --
From net realized gains -- (1.06) -- --
------------------------------------------------------------------------
Total distributions -- (1.09) -- --
------------------------------------------------------------------------
Net asset value, end of period $13.51 $11.84 $11.36 $9.88
------------------------------------------------------------------------
Total return 14.10% 29.11% 14.98% (1.20%)
------------------------------------------------------------------------
Net assets at end of period (in 000's) $407,853 $296,876 $103,966 $45,934
------------------------------------------------------------------------
Ratio of expenses to average net assets
(net of waiver) 1.37%+ 1.47% 1.54%+ 1.77%+
------------------------------------------------------------------------
Ratio of expenses to average net assets
(before waiver and expenses paid indirectly) 1.37%+ 1.47% 1.60%+ 1.77%+
------------------------------------------------------------------------
Ratio of net investment income to
average net assets
(net of waiver and expenses paid indirectly) 0.13%+ 0.12% 1.57%+ 0.42%+
------------------------------------------------------------------------
Portfolio turnover rate 45.48% 145.11% 22.81% 0.00%
------------------------------------------------------------------------
</TABLE>
The Masters' Select Equity Fund commenced operations on December 31, 1996.
* Unaudited.
** The Masters' Select International Fund commenced operations on December 1,
1997.
+ Annualized.
See Notes to Financial Statements.
30
<PAGE>
Notes to Financial Statements
...............
1. Organization
The Masters' Select Funds Trust (the "Trust") was organized as a Delaware
business trust on August 1, 1996 and is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end management investment company. The
Trust consists of two separate series: the Masters' Select Equity Fund and the
Masters' Select International Fund (each a "Fund" and collectively the "Funds").
The Masters' Select Equity Fund is a growth fund that seeks to increase the
value of your investment over the long-term by using the combined talents and
favorite stock picking ideas of six highly regarded portfolio managers.
The Masters' Select International Fund invests primarily in foreign companies.
It seeks to increase the value of your investment over the long-term by using
the combined talents and favorite stock-picking ideas of five highly regarded
international stock pickers. (portfolio managers)
2. Significant Accounting Policies
The following is a summary of the significant accounting policies followed by
the Funds.
Security Valuation--Portfolio securities that are listed or admitted to trading
on a U.S. exchange are valued at the last sales price on the principal exchange
on which the security is traded or, if there has been no sale that day, at the
mean between the closing bid and asked prices. Securities admitted to trading on
the NASDAQ National Market System and securities traded only in the U.S.
over-the-counter market are valued at the last sale price or, if there has been
no sale that day, at the mean between the closing bid and asked prices.
Securities and other assets for which market prices are not readily available
are valued at fair value as determined in good faith by the Board of Trustees.
Debt securities with remaining maturities of 60 days or less are valued at
amortized cost, unless the Board of Trustees determines that amortized cost does
not represent fair value. Cash and receivables are valued at their face amounts.
Foreign Currency Translation--The books and records of the Funds are maintained
in U.S. dollars. The value of securities, currencies and other assets and
liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
The Funds do not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Funds'
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities resulting from
changes in the exchange rates.
Forward Foreign Currency Exchange Contracts--The Funds may utilize forward
foreign currency exchange contracts ("forward contracts") under which they are
obligated to exchange currencies at specific future dates and at specified
rates, and are subject to the risks of foreign exchange fluctuations. All
commitments are "marked-to-market" daily and any resulting unrealized gains or
losses are included as unrealized appreciation (depreciation) on foreign
currency denominated assets and liabilities. The Funds record realized gains or
losses at the time the forward contract is settled. Counter parties to these
forward contracts are major U.S. financial institutions.
Federal Income Taxes--The Funds intends to qualify as a regulated investment
company by complying with the appropriate provisions of the Internal Revenue
Code of 1986, as amended. Accordingly, no provisions for Federal income taxes
are required.
Security Transactions and Related Income--Security transactions are accounted
for on the date the security is purchased or sold (trade date). Dividend income
is recognized on the ex-dividend date, and interest income is recognized on the
accrual basis. Purchase discounts and premiums on securities held by the Funds
are accreted and amortized to maturity using the effective interest method.
Realized gains and losses on securities sold are determined under the identified
cost method.
It is the Trust's policy to take possession of securities as collateral under
repurchase agreements and to determine on a daily basis that the value of such
securities is sufficient to cover the value of the repurchase agreements.
Deferred Organization Costs--Organization costs are amortized on a straight line
basis over a period of sixty months commencing with a Funds' operations.
Distributions--Distributions to shareholders are recorded on the ex-dividend
date.
Accounting Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities on
the date of financial statements and the amounts of income and expense during
the reporting period. Actual results could differ from those estimates.
Other--Under terms of the Trust's Custodial Agreement, the Funds may earn
credits, based on custody cash balances, to be applied to custodian fees. For
the six months ended June 30, 1998, said credits were $2,029 and $5,218 for the
Masters' Select Equity Fund and Masters' Select International Fund,
respectively.
<PAGE>
3. Management Fees and Transactions with Affiliates
The Trust, on behalf of the Funds, entered into an Investment Advisory Agreement
with Litman/Gregory Fund Advisors, LLC (the "Advisor"). Under the terms of the
agreement, the Trust pays a fee to the Advisor equal to 1.10% of the average
daily net assets of the Masters' Select Equity Fund and Masters' Select
International Fund. Effective April 1, 1998, the Advisor has voluntarily waived
0.10% of the portion of its fee calculated on the average daily net assets of
the Masters' Select International Fund. The Advisor has agreed to reimburse the
Trust for any ordinary operating expenses above 1.75% and 1.95% of the Masters'
Select Equity Fund and Masters' Select International Fund average net assets,
respectively. The Advisor reserves the right to be repaid by a Fund if expenses
subsequently fall below the specified limit in future years. These expense
limitation arrangements may be terminated at any time, subject to approval by
the Board of Trustees and prior notice to shareholders.
The Trust, on behalf of the Funds, has also entered into an Administration
Agreement with Investment Company Administration Corporation (the
"Administrator"). Under the terms of the Agreement, the Trust will pay an annual
fee, payable monthly and computed based on the value of the total average net
assets of the Trust at an annual rate of 0.10% of the first $100 million of such
net assets, 0.05% of the next $150 million, 0.025% of the next 250 million and
0.0125% thereafter, subject to a minimum fee of $40,000.
Each unaffiliated Trustee is compensated by the Trust at the rate of $10,000 per
year.
4. Purchases and Sales of Securities
The cost of security purchases and the proceeds from security sales, other than
short-term investments, for the six months ended June 30, 1998, were as follows:
EQUITY INTERNATIONAL
FUND FUND
- --------------------------------------------------------------------------------
Purchases $202,131,936 $66,441,746
Sales 147,708,754 16,489,903
- --------------------------------------------------------------------------------
At June 30, 1998, the aggregate unrealized appreciation and depreciation of
portfolio securities based on cost for federal income tax purposes, was as
follows:
EQUITY INTERNATIONAL
FUND FUND
- --------------------------------------------------------------------------------
Total tax cost $356,891,859 $98,904,444
Gross Unrealized Appreciation 63,180,293 11,324,680
Gross Unrealized Depreciation 14,761,461 6,397,232
- --------------------------------------------------------------------------------
Net Unrealized Appreciation $48,418,832 $4,927,448
- --------------------------------------------------------------------------------
32
<PAGE>
5. Off-Balance-Sheet Risk
The Funds have been parties to financial instruments with off-balance-sheet
risk, primarily forward exchange contracts, in order to minimize the impact on
the Funds from adverse changes in the relationship between the U.S. dollar and
foreign currencies. These instruments involve market risk in excess of the
amount recognized on the Statement of Assets and Liabilities. Risks arise from
the possible inability of counter parties to meet the terms of their contracts,
future movement in currency values and contract positions that are not exact
offsets. The contract amount indicates the extent of the Funds' involvement in
such currencies.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Funds' net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract. At June 30,
1998, the Masters' Select Equity Fund had the following forward exchange
contracts outstanding:
Masters' Select Equity Fund
IN EXCHANGE FOR SETTLEMENT GAIN (LOSS)
DATE
Contracts to Sell
- --------------------------------------------------------------------------------
2,682,000 Swiss Francs U.S. $ 1,868,671 9/10/98 $ 89,018
1,046,000 Swiss Francs 720,622 12/23/98 19,186
5,968,500 Deutsche Marks 3,329,426 9/17/98 10,520
1,099,000 Deutsche Marks 612,564 12/17/98 (1,651)
701,333,000 Japanese Yen 5,621,046 9/29/98 481,924
122,044,000 Japanese Yen 906,419 12/24/98 681
5,008,000 New Zealand Dollars 2,713,334 10/6/98 128,089
- --------------------------------------------------------------------------------
$727,767
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Litman/Gregory Fund Advisors, LLC Presorted First Class
- --------------------------------- US Postage
4 Orinda Way, Suite 230-D PAID
Orinda, CA 94563 Permit #3729
Oakland, CA
...............
This report is authorized for use when preceded or
accompanied by a prospectus for the Masters' Select Funds.
Read it carefully before investing. Past performance is not
a guarantee of future results. Share price and returns will
fluctuate, and investors may have a gain or loss when they
redeem shares. Statements and other information in this
report are dated and are subject to change. Litman/Gregory
Fund Advisors has ultimate responsibility for the Funds'
performance due to its responsibility to oversee its
investment managers and recommend their hiring, termination
and replacement. First Fund Distributors, Inc., Phoenix, AZ
85018.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
