The Masters' Select Funds
Annual Report
Masters' Select Equity Fund
Masters' Select International Fund
December 31, 1997
LITMAN/GREGORY FUND ADVISORS, LLC
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Contents
Letter to Shareholders 2
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Portfolio Fit 4
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The Masters' Select Concept 4
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Masters' Select Equity Review 5
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Interview: Jean-Marie Eveillard 7
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Equity Fund Stock Highlights 9
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Equity Fund Portfolio Summary 12
Ticker symbols: ............................................
MSEFX (Masters' Select Equity Fund)
MSILX (Masters' Select International Fund) Masters' Select International Review 15
We are listed in the Wall Street Journal, ............................................
Los Angeles Times, USA Today,
New York Times, Chicago Tribune, Interview: Dan Jaworski 17
San Francisco Chronicle ............................................
and others.
International Fund Stock Highlights 20
Our listings read MstrSeltEq and MstrSeltInt. ............................................
Shareholder information phone number:
1-800-960-0188 International Fund Portfolio Summary 23
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To access account information
24 hours a day via touch-tone telephone, Auditor's Report 26
please note the following: ............................................
Masters' Select Equity Fund number: 305 Statement of Assets and Liabilities 27
Masters' Select International Fund number: 306 ............................................
Account number:
Second set of digits on your Statement of Operations 28
account statement ............................................
Your personal identification number: Statement of Changes in Net Assets 29
Last four digits of Social Security ............................................
or Taxpayer ID number
Financial Highlights 30
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Notes to Financial Statements 31
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Address:
Regular Delivery: Overnight Delivery:
Masters' Select Funds Masters' Select Funds
P.O. Box 419922 1004 Baltimore
Kansas City, MO 64141-6922 Kansas City, MO 64105
The Masters' Select Funds Annual Report December 31, 1997
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Dear Fellow Shareholder:
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Masters' Select is now one year old, and it was quite a first year. While it's
true that the objectives for our Fund are long-term, it is still satisfying to
have closed out a successful year. There were a number of highlights:
First and foremost, Masters' Select Equity performed well, returning 29.1% for
the fiscal year ended December 31, 1997 (more on this later).
Second, the asset base grew substantially. As we write this, total net assets
are at $334 million. This asset growth helped us spread the Fund's overhead
costs among more shareholders, lowering the average expenses per share. It also
helped us reach breakpoints in the fee schedules charged by our vendors and gave
us leverage to renegotiate some of these agreements. The end result was a drop
in expenses. We started the Fund with expenses capped at 1.75% and actually
finished the year with net expenses of 1.44%.
Third, we benefited from a huge amount of media coverage, including stories in
the Wall Street Journal, Barron's, Money, Kiplinger's Personal Finance, New York
Times, Morningstar Investor, Fortune, Business Week, Los Angeles Times, Chicago
Tribune and San Francisco Chronicle as well as on CNBC and CNNfN. There were
lots of highlights. In the December issue of Money magazine we were picked as
one of the five best new funds of 1997. And in January 1998, Morningstar
Investor's publisher, Catherine Voss Sanders, selected Masters' Select Equity
for 50% of the assets of a portfolio she was asked to put together for an
article in the Chicago Tribune. Why does all this matter? Because we are not
actively marketing the Funds, media exposure helps get the word out so we can
build the asset base. This helps us achieve the critical mass we need to lower
expenses. Of course, we will stick to our commitment to close the fund at
between $500 million and $750 million in assets (for Masters' Select Equity;
$600 million and $1 billion for Masters' Select International). This will keep
the individual asset bases of each manager small and flexible.
Finally, we launched Masters' Select International on December 1. As we write
this, net assets are at $64 million.
With one year behind us, we'd like to take this opportunity to remind you that
the primary objective of Masters' Select Equity and Masters' Select
International is superior long-term performance. Short-term performance is of
less concern. We believe that a disciplined, patient approach to investing is a
critical element to achieving long-term success. It's what allows our stock
pickers to act on their convictions even in periods when market psychology may
temporarily lead to a disconnect between underlying company fundamentals and
stock performance. This long-term approach is particularly important given each
manager's mandate to run a concentrated portfolio of his or her
highest-conviction stocks. For each individual manager, we believe that this
concentration will result in superior long-term performance made up of shorter
periods of out-of-sync performance on both the upside and the downside. Patience
drawn from a high level of conviction should allow each stock picker to tough
out temporary periods of underperformance. We believe that the Funds as a whole
will deliver smoother performance than each individual manager's portfolio
because of their overall diversification.
continued
2
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Though the subadvisor/portfolio managers are doing the stock picking, we at
Litman/Gregory Fund Advisors play the role of overseeing the Funds and the
"Masters" and we have ultimate responsibility for the performance of the Funds.
We track each manager's performance; watch for unintended portfolio
concentrations, duplicated holdings and other portfolio-related issues; and also
work hard at doing everything we can to lower Fund operating expenses. In
addition, we are focusing more heavily on taxes. For Masters' Select Equity,
1997 was not a particularly great year for tax efficiency. First, since we were
in our first year, we did not have the benefit of any long-term capital gains,
so all our gains were short term. Second, it was a very strong year for the
stock market, and all the "Masters" held stocks that experienced huge
appreciation, justifying sale. Going forward we will attempt to do what we can
to make the Fund more tax-efficient. For example, we will seek to emphasize tax
minimization techniques such as taking losses if-and only if-there is another
security that the manager believes is equally attractive.
With all of this said, it is hard to know for sure how tax-efficient our Fund
will be. We suspect that it will be somewhere around average. Our ultimate goal
and hope is to generate high enough long-term returns so that, even after paying
taxes, the after-tax return is superior. We are counting on the Masters' Select
concept to get us there. After one year with Masters' Select Equity, we are
encouraged.
In this report you will find a performance review, accompanying discussion, and
a portfolio breakout for each fund. In addition, each manager has profiled one
of his or her holdings. Finally, we have an interview with Jean-Marie Eveillard
(Masters' Select Equity) and Dan Jaworski (Masters' Select International).
We appreciate your continued confidence and will continue to put forth our
maximum effort on behalf of all shareholders of the Masters' Select Funds.
Ken Gregory
President, Litman/Gregory Fund Advisors
The Masters' Select Funds Annual Report December 31, 1997
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Portfolio Fit
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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.
The Masters' Select
Concept
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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.
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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.
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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.
4
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Masters' Select Equity Review
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Masters' Select Equity returned 29.1% during its first year of operations.
Because Masters' Select Equity owns small-, mid-and large-caps, as well as
growth and value stocks, there is no perfect performance benchmark. Over the
long term, our goal is to outperform the U.S. stock market broadly represented
by the Wilshire 5000. The Wilshire Index is weighted to big-cap stocks and
closely tracks the S&P 500. However, our Fund also has some small-company
exposure that is not included in the S&P. In our assessment, the Lipper Growth
Fund Index is probably the best overall mutual fund benchmark for the Fund. We
show the Lipper Small Cap Fund Index for a small-cap benchmark, since we have
some small-cap exposure.
12 months (and inception)
Masters' Select Equity Fund .............29.1%
Wilshire 5000 Index .........................31.3%
Lipper Growth Fund Index ...............28.1%
Lipper Small Cap Fund Index ......15.1%
Over short periods of time, the Fund's asset allocation will influence returns.
Because of the focus of our subadvisors, we expect that Masters' Select Equity
will normally have about 10% of its assets in overseas markets and 20% in
small-cap stocks. This was the case during 1997. Over the past year, a global
equity index 10% weighted to foreign stocks (Morgan Stanley Europe, Australasia,
Far East Index), 20% weighted to small-cap U.S. stocks (Russell 2000) and 70%
weighted to the large U.S. companies (S&P 500) returned 28.0%. We are pleased to
have outperformed this benchmark, which mirrors our asset allocation.
In our previous report, we mentioned that huge cash inflows resulted in a
material "cash drag" on our performance in 1997 during January, a generally
strong month for stocks. After becoming more fully invested (though cash was
still over 10% at the end of January) our relative performance was even better:
February 1, 1997, through December 31, 1997:
Masters' Select Equity Fund .........................25.5%
Wilshire 5000 Index .............................24.6%
Lipper Growth Fund Index ...................21.7%
Lipper Small Cap Fund Index ........12.5%
Global Equity Index* .......................22.4%
*70% S&P 500 Index, 20% Russell 2000 Index, 10% Morgan Stanley Europe,
Australasia, Far East Index
The Masters' Select Funds Annual Report December 31, 1997
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With an eye to the future, perhaps our biggest concern is that investors'
expectations may not be realistic. Stock market returns over the past 15 years
have been exceptionally high. And this bull run has been capped off by the
highest cumulative three-year S&P 500 return in more than 70 years. We are
concerned that recent history will lead some investors to consider 20% and 30%
returns as the norm. These investors will be severely disappointed.
There are two factors that drive stock market returns: (1) companies' earnings
growth and (2) the multiples (P/E) at which those earnings are priced. The
reason we have experienced such high returns over the past 15 years is mostly
due to a huge expansion in the multiple. This was driven mostly by a big decline
in interest rates. Back in the early 80s, interest rates peaked in the
mid-teens. As we write this, they are under 6%. They can go lower but not too
much lower. This means stocks won't have the tailwind of big multiple expansion.
Instead, stock prices will be driven mostly by earnings growth. Over the past 50
years, earnings of large U.S. companies have grown at an average annual rate of
just over 6%. The highest level of earnings growth over a 10-year period has
been just 11%. Aware of this historical backdrop, we believe it is likely that
U.S. stocks will deliver returns over the next three to eight years somewhere
between 5% and 12% on an annualized basis. In any given year, returns might be
higher or lower, but on average this is the range we expect. Somewhere along the
way, we will have a bear market. Stocks could decline 15% to 30% or even more.
But in the end they will recover, as they have throughout history.
One source of optimism is the potential for foreign stocks and smaller
companies. Foreign stocks have lagged the S&P 500 by almost 25% annually over
the past three years. And small companies have lagged by almost 9% annually over
the same period. Changes occurring around the world suggest improved
competitiveness in many foreign industries. The global economy is creating more
competitive pressure, and this is resulting in a more intense focus on
shareholder value and profitability on the part of more and more foreign
companies. This is leading to more U.S.-style restructuring. Ultimately, we
believe that these changes will result in a period of higher returns overseas.
In the U.S., smaller companies tend to go through extended periods during which
their stocks outperform or underperform stocks of big companies. Given recent
severe underperformance, we suspect that smaller companies could well be due for
some catch-up over the next few years (though we have no strong feelings about
the near term). If we are right about foreign stocks and small-caps, our
diversification in these areas (even though it is not the majority of our
portfolio) should prove to be a tailwind, not a headwind.
Within this environment, we believe that the isolated stock picking approach
brought to you by Masters' Select Equity and implemented by our six "Master"
stock pickers has a good chance of improving on the long-term returns that the
markets will offer. With one year under our belt, we are very encouraged by the
enthusiasm of our stock pickers and the results of the group. We hope you are as
well.
6
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An Interview with Jean-Marie Eveillard
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Jean-Marie Eveillard manages
approximately 20% of Masters Select Equity.
You are one of the veteran portfolio managers in the fund industry. How did you
first develop your interest in the investment business?
In 1962, my last year at a French business school, I worked for a month at a
financial magazine, liked what I saw and, upon graduation, joined a bank as a
securities analyst. Ever since, the appeal to me of the investment business has
been the "intellectual exercise" side of it. Things got even better later on,
once I gained freedom of action. To think, to act, to see the results in
numbers, there is a simplicity to it which can hardly be found in other
occupations.
You've been in New York since 1978. How did you end up in the U.S.?
I first came to New York (the financial mecca) in 1968, stayed a few years,
moved to Paris, was professionally unhappy there and was given the opportunity
to come back to New York in late 1978 and run the then $15 million SoGen
International Fund.
Your credentials as a value investor are well established. How did you develop
your investment philosophy?
I read Benjamin Graham on my first trip to New York. It was new to me, since
there were-and still are-few "value" investors in Europe. Ben Graham's writing
featured caution ("margin of safety"), humility (the future is uncertain) and
order (intrinsic value), which all appealed to me.
Can you describe your stock-picking process including your key stock selection
criteria?
The process is haphazard. My associates and I go through an enormous amount of
research reports and annual reports every day, investigate a tiny fraction, and
sometimes the investigation leads to a decision to buy. We have no fixed
criteria. Basically,
The Masters' Select Funds Annual Report December 31, 1997
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we look for a large discrepancy between our assessment of the value of the
company as a business (with a great reluctance to make rosy forecasts) and the
price to be paid for the security. We consider a variety of measures but focus
mostly on price-to-earnings, price-to-cash flow and price-to-free cash flow. At
times we look at enterprise value to EBITDA (earnings before interest, taxes,
depreciation and amortization). This backs out cash on the balance sheet and
looks at the remaining value of the company. Generally, we look for exceptional
values not only on a relative basis but at least on a quasi-absolute basis.
Warren Buffett said he would rather own a good business at a fair price than a
fair business at a good price. We tend to own both.
You worked on your own until 1986 and since then have been building an
investment team. Who are the senior members of your team and what are their
roles?
Elizabeth Tobin joined us in 1986, Charles de Vaulx in 1987 and Ignatius
Chithelen in 1993 (another three associates came in the past year). I make the
ultimate decision, but when they come to me with an investment idea-which either
I asked them to look into or they developed themselves-I will have questions but
I'm not about to redo their work. So there are many securities we own where most
of the work has been done by them, not by me. Therefore, the role of the senior
associates is considerable.
There are growing concerns about the eventual ripple effects of Asia's meltdown.
Has this had any impact on your investment decisions?
Having been on the side of caution for almost 20 years (not a very good side in
a bull market), I'm a perpetual worrywart. Yes, the quick turn in Asia from a
"miracle" to a "mirage" is troubling. In particular, the monetary authorities'
obvious desire to protect foreign creditors demonstrates the inherent fragility
of the world's financial system. So caution may at last be in order, and risk
may gain some respect. We realize that there have probably been investment
opportunities created in Asia outside of Japan (while at the same time new risks
for the U.S., Europe and Japan). Though we are working hard to unearth these
opportunities, so far we've been unable to come up with much in the types of
high-quality business we favor that also offer adequate liquidity.
At a stock-picking level, how do today's values compare with past periods?
Not well in the U.S. Better in Europe (for smaller companies) and in Japan.
However, in Japan, there are still too many instances of destruction of capital
by managements oblivious to shareholders' interests.
You have maintained about half your portion of the Masters' portfolio in foreign
stocks. Is it difficult to maintain your conviction given the general
outperformance of U.S. companies?
It was psychologically painful in 1997. But, historically, we have been patient
investors.
With respect to the Masters' portfolio, has your mandate to focus on not more
than your 15 highest-conviction ideas required any adjustments in your
investment approach?
In our funds, we own many (probably too many) securities, to some extent because
of our bias toward smaller, thinly traded stocks. So, yes, I had to make an
adjustment. But I have come to enjoy greater concentration. It helps focus the
mind. So I'm grateful for the experience.
8
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Masters' Select Equity Fund Stock Highlights
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Hewlett-Packard (HWP), Shelby Davis
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Hewlett-Packard, in our opinion, deserves to be ranked among the top-tier
multi-national franchise companies. For more than 30 years, the company has
compounded sales and earnings at 15% or more by managing a diverse technology
base, entering new markets (such as digital photography) and focusing on
in-depth research and broad-scale marketing, good balance sheet management and
conservative accounting. Not all divisions grow every quarter or every year, but
this very diversity and scale provide investors with quality and safety within a
rapidly growing and changing technology landscape. The stock sells for below a
market P/E, way below the P/Es of consumer franchise stocks, and has growth
prospects superior to most.
Buderus, Jean-Marie Eveillard
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Buderus is a German company engaged mostly in the mundane and mature business of
heating products (boilers), which provide some 80% of profits. Most (75%) of the
demand for boilers is from replacement and renovation activity; the rest is new
construction. The company is the largest in Europe and the only one with its own
distribution network. More than 70% of revenues are in Germany, but sales have
been increasing in other European countries.
In Europe boilers are not a commodity product: Buderus's return on equity is
about 20%. The business generates a lot of cash. After recently selling an
unrelated division, the company sits on about DM 500 million in net cash.
Buderus may make acquisitions in Europe (it has successfully done so in the
past) and would consider buying back shares once legal restrictions are lifted
in Germany, possibly next year.
Earnings are conservatively stated, even by German standards. The growth in
earnings has been steady and moderate in the past few years (in spite of
unfavorable economic conditions in Germany), and the outlook may be for about 7%
growth.
In continental Europe today, one sometimes comes across the stocks of good (but
not exciting) companies at valuations that are about half the valuation of the
average U.S. company. That is the case with Buderus, where enterprise value
(market capitalization minus net cash) is less than five times EBITDA
(essentially pretax cash flow). And that ignores unrelated real estate worth at
least a few hundred million DM.
The Masters' Select Funds Annual Report December 31, 1997
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General Cable Corporation (GCN),
Foster Friess
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General Cable Corporation illustrates your Friess research team's discovery
process and how it identifies opportunities not readily apparent at first
glance. General Cable is in the "mundane" business of manufacturing and
distributing wire and cable products to retailers, distributors and OEMs,
serving the needs of transmission of voice, data, video and control signals, as
well as electric current. The company maintains 15 manufacturing facilities and
five distribution centers in the U.S. With 11,000 "SKUs," or different types of
wire and cable, the company is able to use this network to meet an extremely
broad base of connectivity and transmission needs.
General Cable's diverse product offerings wouldn't imply a unique opportunity at
first blush. However, your research team's contacts with customers and
competitors revealed that the company's "Power of One" strategy initiative,
which provides customers with a one-stop-shopping solution, was leading to
sharply increased sales at the same time raw material costs and supply
challenges were rapidly abating. With sales figures rising into triple-digit
territory at some of GCN's top 20 customers, and Canadian sales pacing up 40%,
CEO Steve Rabinowitz credits the Power of One program, along with exceptional
customer service and education, for their tremendous acceleration in business.
Coupled with management's highly successful cost reduction programs, the sales
successes have translated into substantially higher earnings for your company.
First purchased for your portfolio in May 1997, your shares of General Cable
have climbed to a recent $37 from your average cost of $26, for a 42% return in
the past eight months. During this same period, as the Wall Street analyst
community has discovered the acceleration arising in the company's prospects,
consensus earnings estimates for your company have risen to $2.21 per share for
the December 1997 year, up from $2.10 per share last summer. This has driven the
stock higher, and your Friess research team is grateful to have discovered this
opportunity early enough to garner these gains. Looking forward, we expect
earnings in 1998 to again exceed analysts' estimates.
Seagram Company, Ltd. (VO),
Mason Hawkins
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Southeastern Asset Management's investment process focuses on four key
variables: the quality and competitiveness of the corporate enterprise, the
caliber of the company's management, the firm's financial flexibility and the
stock's discount from our appraisal of the business's intrinsic value. Our
newest holding, Seagram Company, Ltd., meets these criteria for investment. Its
management and directors own 34% of the company and have a long history of
astute capital deployment. Under the current leadership of CEO Edgar Bronfman
Jr., the company has made three significant acquisitions: Martell cognac,
Tropicana juice products, and the MCA entertainment company. When measured in
terms of growth and cash returns on purchase price, the first two investments
have proved to be excellent. While the jury is still out on MCA, the price paid
was low compared with our analysis of the value received. Recently, Seagram has
become an aggressive purchaser of its shares. This capital allocation decision
at these dis-
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counted levels will significantly aid in building corporate worth per share.
Seagram's liquor, juice and entertainment divisions each possess high market
share and name-brand recognition, are global in scope, have huge barriers to
entry, are noncyclical in nature, exhibit growing demand and have high returns
on invested capital. Additionally, Seagram has little net debt and at current
prices sells at less than 60% of our appraised value.
Dole Food Company, Inc. (DOL),
Sig Segalas
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Dole Food Company is an intriguing situation with significant upside potential.
The perception of this company as a commodity banana producer has not caught up
with the reality of it as a fresh and packaged branded food company growing
earnings at a healthy double-digit rate. Management's focus is on increasing
returns on assets. To that end Dole spun off its real estate development and
resort management division in December 1995 and divested/closed a number of
non-core, underperforming businesses including juices, dried fruit and nuts, and
agricultural properties. Growth opportunities include value-added products such
as precut salads which are growing at double-digit rates with high margins, and
geographic expansion into Europe. In addition, banana consumption continues to
grow globally, and Dole should be able to grow its share of the market
profitably. At 13 times 1998 EPS projections and an estimated growth rate of
better than 15%, we don't believe that the multiple reflects the company's solid
prospects, and we expect the shares to appreciate to $60 or so over the
intermediate term.
Foodmaker (FM), Richard Weiss
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Following an E. coli problem in the early 1990s, Foodmaker has regained its spot
as one of the fastest-growing fast food chains. The restaurants, known as
Jack-In-The-Box (JIB), are benefiting from a superlative ad campaign, which has
rebuilt brand equity, as well as the recovery of their key California and Texas
markets.
The primary competitive advantage of JIB is that its target market is primarily
adults, rather than children, thereby enabling it to largely avoid the "burger
wars" between McDonald's, Burger King and Wendy's. The differentiating factor
for JIB is higher-quality food and a unique menu varying from hamburgers to
tacos to chicken teriyaki rice bowls. The company has long had a policy of
emphasizing new products to help drive comps and maintain its consumer image for
innovative products, and this has continued throughout its difficult period.
The basic case for the stock revolves around comp sales and new units.
Currently, JIB is comping at a very high 6% to 7% rate and has been doing it for
almost two years. Interestingly, these comp sales return the company to the same
growth pattern it exhibited prior to the E. coli issue. This same issue also
curtailed store expansion for several years. As a result, JIB is now an
undeveloped system with tremendous expansion potential. Most estimates peg store
expansion at a 10% annual rate which, coupled with comp gains of 3% to 4% will
lead to 15% or more earnings growth. Selling at a 35% discount to our private
value and a P/E of 14 or so, the stock has the potential for both P/E and
earnings expansion.
The Masters' Select Funds Annual Report December 31, 1997
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Masters' Select Equity Fund Portfolio Summary
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Portfolio Composition (12/31/97)
As reflected below, your Fund is well diversified in terms of industry exposure
and market capitalization exposure. Masters' Select holds 77 securities,
exclusive of cash equivalents.
Mid-Caps .....................16.7%
Large-Caps ...................37.5%
Convertible Bonds .............1.2%
Foreign ......................17.3%
Cash and Other ................7.7%
Small-Caps ...................19.6%
Schedule of lnvestments as of December 31, 1997
<TABLE>
<CAPTION>
Industry Shares Held Market Value Portfolio %
<S> <C> <C> <C> <C>
Common Stocks (91.07%)
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Basic Industries
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Carter Holt Harvey Limited Forest and Paper Products 1,650,000 $2,548,471 0.86%
General Cable Corporation Wire & Cable 64,200 2,323,238 0.78%
Industrias Penoles S.A. DE C.V. Metals & Mining 825,000 3,731,182 1.26%
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8,602,891 2.90%
Business Services
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*ChoicePoint, Inc. Fraud Prevention/Risk Mgt. 22,300 1,064,825 0.36%
Manpower Inc. Temporary Labor 115,000 4,053,750 1.37%
Secom Security Services 60,000 3,832,427 1.29%
Waste Management, Inc. Waste Management Services 280,000 7,700,000 2.59%
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16,651,002 5.61%
Conglomerate
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Philips Electronics, NV Electronics, Software, Recording 90,000 5,445,000 1.83%
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Consumer Products
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Archer-Daniels-Midland Co. Food Processing 91,810 1,991,129 0.67%
*Autozone Inc. Auto & Truck Parts 141,400 4,100,600 1.38%
Dole Food Company, Inc Food Processing 158,900 7,269,675 2.45%
Fuji Photo Film Co., Ltd., ADR Photo Film and Processing 70,000 2,688,438 0.91%
Interface, Inc. Floor and Wall Coverings 80,900 2,330,931 0.79%
*Linens 'N Things Housewares 52,500 2,290,313 0.77%
Masco Building Materials 78,100 3,973,338 1.34%
*Motorcar Parts & Accessories Auto & Truck Parts 55,000 914,375 0.31%
Seagram Company, Ltd. Beverages 215,000 6,947,188 2.34%
*Twinlab Corporation Nutritional Supplements 50,000 1,243,750 0.42%
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33,749,737 11.38%
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12
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<CAPTION>
Schedule of lnvestments as of December 31, 1997 (continued)
Industry Shares Held Market Value Portfolio %
<S> <C> <C> <C> <C>
Consumer Services
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*Foodmaker, Inc. Restaurants 140,000 2,108,750 0.71%
McDonald's Corporation Restaurants 91,600 4,373,900 1.47%
*Showbiz Pizza Time, Inc. Restaurants 80,000 1,850,000 0.62%
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8,332,650 2.80%
Durables
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Buderus AG Boilers and Heating Systems 8,500 3,808,333 1.28%
Kuhlman Corporation Electrical Transformers 76,900 3,008,713 1.01%
Zero Corporation Electrical & Electronic Cmpnts. 115,000 3,406,875 1.15%
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10,223,921 3.44%
Energy
- ---------------------------------------------------------------------------------------------------------------
Cabot Oil & Gas Corporation Oil & Gas Exploration 115,000 2,235,313 0.75%
Global Industries, Ltd. Oil Well Services 126,000 2,145,938 0.72%
Halliburton Company Oil Well Services 69,200 3,594,075 1.21%
*Harken Energy Corporation Oil & Gas Exploration 280,000 1,960,000 0.66%
Helmerich and Payne, Inc. Drilling Services & Exploration 30,000 2,036,250 0.69%
San Juan Basin Royalty Trust Oil & Gas Leases 375,000 3,468,750 1.17%
*Swift Energy Company Oil & Gas Exploration 85,000 1,790,313 0.60%
- ---------------------------------------------------------------------------------------------------------------
17,230,639 5.80%
Finance
- ---------------------------------------------------------------------------------------------------------------
ACE Limited Insurance 48,700 4,699,550 1.58%
American Express Company Financial Services 58,400 5,212,200 1.76%
*Amresco, Inc. Mortgage Banking 79,700 2,391,000 0.81%
BankAmerica Corporation Banking 54,200 3,956,600 1.33%
Chase Manhattan Corporation Banking 47,500 5,201,250 1.75%
General Reinsurance Corporation Insurance 21,700 4,600,400 1.55%
MBNA Corporation Banking 129,900 3,576,576 1.20%
Morgan Stanley,Dean Witter,Discover Investment Services 69,600 4,115,100 1.39%
Washington Mutual, Inc. Savings & Loan 52,500 3,348,516 1.13%
Wells Fargo & Company Banking 17,900 6,075,931 2.05%
- ---------------------------------------------------------------------------------------------------------------
43,177,123 14.55%
Health Care & Pharmaceuticals
- ---------------------------------------------------------------------------------------------------------------
*Gilead Sciences, Inc. Biotechnology 50,000 1,918,750 0.65%
Pfizer, Inc. Pharmaceuticals 54,000 4,026,375 1.36%
AmeriPath, Inc. Laboratory Services 113,000 1,928,063 0.65%
*Cooper Companies Health Care Products 56,100 2,293,088 0.77%
Hooper Holmes, Inc. Examination Services 85,800 1,249,463 0.42%
- ---------------------------------------------------------------------------------------------------------------
11,415,739 3.85%
Hotels
- ---------------------------------------------------------------------------------------------------------------
CDL Hotels International Ltd. Hotels & Resorts 12,802,326 3,717,284 1.25%
Hilton Hotels Hotels & Resorts 140,100 4,167,975 1.40%
*Host Marriott Corporation Hotels & Motels 350,000 6,868,750 2.31%
- ---------------------------------------------------------------------------------------------------------------
14,754,009 4.96%
Media
- ---------------------------------------------------------------------------------------------------------------
Edipresse, S.A. Publishing 12,500 3,627,156 1.22%
*GC Companies, Inc. Motion Picture Theaters 62,500 2,960,938 1.00%
Independent Press Comm., Ltd. Newspaper Publishing 600,000 2,787,120 0.94%
Knight-Ridder, Inc. Newspapers & Information Srvcs. 145,000 7,540,000 2.54%
News Corporation Limited, ADR Broadcasting, Motion Pict., Publ.340,000 7,586,250 2.56%
*US West Inc. Broadcasting & Cable TV 280,000 8,085,000 2.72%
Walt Disney Company Entertainment & Broadcasting 46,800 4,636,125 1.56%
- ---------------------------------------------------------------------------------------------------------------
37,222,589 12.54%
</TABLE>
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
Schedule of lnvestments as of December 31, 1997 (continued)
<TABLE>
<CAPTION>
Industry Shares Held Market Value Portfolio %
<S> <C> <C> <C> <C>
Technology
- ---------------------------------------------------------------------------------------------------------------
*Cisco Systems, Inc. Computer Networks 60,150 3,357,121 1.13%
Compaq Computer Corp. Computer Hardware 74,600 4,210,237 1.42%
*Data General Corporation Computer Hardware 90,000 1,569,375 0.53%
Dell Computer Corporation Computer Hardware 39,400 3,310,831 1.12%
*Electro Scientific Industries Electronic Instruments 49,000 1,877,312 0.63%
Hewlett-Packard Company Computer Hardware 150,400 9,400,000 3.17%
IBM Computer Hardware 56,300 5,886,868 1.98%
*NCR Corporation Information Services 125,000 3,476,562 1.17%
*Rational Software Corporation Software 227,600 2,617,400 0.88%
*Rayovac Corporation Batteries 40,000 770,000 0.26%
*Sybase, Inc. Software 130,000 1,734,687 0.58%
*THQ Inc. Software 80,000 1,835,000 0.62%
Technitrol, Inc. Electronic Instruments 60,000 1,800,000 0.61%
Telxon Corporation Computer Neworks 100,000 2,400,000 0.81%
Texas Instruments Semiconductors 62,100 2,794,500 0.94%
- ---------------------------------------------------------------------------------------------------------------
47,039,893 15.85%
Telecommunications
- ---------------------------------------------------------------------------------------------------------------
*360 Degree Communications Co. Wireless Voice & Data Services 375,000 7,570,312 2.55%
*'rial Communications, Inc. Wireless Communications 242,000 1,731,812 0.58%
*ICG Communications, Inc. Network & Satellite Services 60,000 1,646,250 0.55%
- ---------------------------------------------------------------------------------------------------------------
10,948,374 3.68%
Transportation
- ---------------------------------------------------------------------------------------------------------------
Burlington Northern Santa Fe Railroads 38,100 3,540,917 1.19%
*Rural/Metro Corporation Emergency Transportation 60,000 2,025,000 0.69%
- ---------------------------------------------------------------------------------------------------------------
5,565,917 1.88%
Total Common Stocks (cost $247,480,100) $270,359,484 91.07%
Convertible Bonds (1.19%) PAR VALUE Market Value Portfolio%
- ---------------------------------------------------------------------------------------------------------------
Scandinavian Broadcasting
System S.A. @ 7.25% due 8/1/05 Media $3,500,000 $3,530,625 1.19%
- ---------------------------------------------------------------------------------------------------------------
Total Convertible Bonds (cost $3,366,194) $3,530,625 1.19%
U.S. Treasury Obligation (1.59%)
- ---------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank 4.90%, 1/02/98 $4,735,000 4,734,355 1.59%
- ---------------------------------------------------------------------------------------------------------------
Total U.S. Treasury Obligations (cost $4,734,355) $4,734,355 1.59%
Repurchase Agreement (7.33%)
- ---------------------------------------------------------------------------------------------------------------
State Street Bank and Trust Co. $21,752,000 at 5.25%
(Agreement dated December 31, 1997; to be repurchased at
$21,758,344 on 1/02/98; collateralized by $22,145,000 U.S.
Treasury Notes due 11/30/99) (Value $22,200,363) $21,752,000 21,752,000 7.33%
- ---------------------------------------------------------------------------------------------------------------
Total Repurchase Agreement (cost $21,752,000) $21,752,000 7.33%
Total Investments (cost $277,332,649) $300,376,464 101.18%
Liabilities in Excess of Cash and Other Assets (3,500,653) (1.18%)
- ---------------------------------------------------------------------------------------------------------------
Total Net Assets $296,875,811 100.00%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Indicates non-income-producing security.
See Notes to Financial Statements
14
<PAGE>
Masters' Select International Review
- ----------
There is not much one can or should conclude from one month of performance. With
that introduction, the following summarizes the performance for the Masters'
Select International Fund for the month of December (Fund launch was December
1):
December 1, 1997, through December 31, 1997
- --------------------------------------------------------------------------------
-1.2% Masters' Select International Fund
- --------------------------------------------------------------------------------
Morgan Stanley Europe, Australasia, Far East Index 0.9%
- --------------------------------------------------------------------------------
Lipper International Fund Index 0.8%
- --------------------------------------------------------------------------------
With many foreign markets in turmoil recently, some investors might think the
timing particularly poor for the launch of an international fund. However, when
market psychology with respect to a segment of the global markets makes it a
poor time to market a fund, it often coincides with a good time to invest. We
are encouraged about the prospects for foreign markets for several reasons:
1. Performance has been poor in many foreign markets in recent years. Over the
past 10 years, the Morgan Stanley Europe, Australasia, Far East Index (analagous
to the S&P 500 of the non-U.S. developed world) has returned only 6.2% annually
versus 18% for the S&P 500. But it is important to note that U.S. domination has
not always been the case. Over the five years prior to the 10 years mentioned,
foreign stocks beat out U.S. stocks by almost 20% per year. With respect to
emerging markets as a group, cumulative returns over the past four years are
negative. But over the previous five years, they compounded at a rate of over
32% per year. There are good reasons why U.S. stocks have outperformed recently.
And it is true that some countries have severe problems. But at a stock-picking
level (and even at a market level) we believe that there are now more bargains
to be found internationally than in the United States.
2. A competitive global economy and dynamic global capital markets are forcing
many companies to focus much more heavily on shareholder value. This leads to
better management decisions driven by a desire to expand profitability. There
are numerous companies in Europe undergoing U.S.-style restructuring to improve
efficiency, lower costs and spin off unprofitable businesses. The need to
compete for capital is also driving more companies to do a better job of
disclosing information to investors. Outside of Europe, market declines in Latin
America a few year ago served as a catalyst for similar change. Now we believe
that the same thing will happen in Asia and that these trends will continue and
broaden as companies are forced to play by capital market rules. This is what
global investors demand, and, as many Asian companies have recently learned, the
"capital market vigilantes" punish those who don't obey the rules of the game.
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
3. At a macro level, we also believe that countries will pursue reforms, which
will make for a more friendly business climate. This will be a slow and
sometimes frustrating process, but over time the potential for change is
significant. For many foreign-domiciled companies, we believe an improved
competitive position and increased profitability will be the end result of these
macro and micro changes. We don't believe that stock prices fully reflect the
potential.
4. With respect to Asia, as we write this, we have no strong opinions about when
the meltdown might end or how much farther it might go. However, with a number
of markets down 70%, 80% and more (in U.S. dollar terms), we believe it is
highly likely that the worst-case scenario is more than reflected in stock
prices. We know that markets are anticipatory and don't discount the same
problem twice. So, though the economic fallout is sure to intensify, the
prospects for the markets and in particular for certain select stocks are likely
to be quite good for patient investors with reasonably long time horizons. We
make no predictions about the next few months or even the next year. But extend
the time horizon out two, three or four years, and we believe that upside
potential from today's depressed price levels is likely to be significant. This
is especially true given the potential for positive macro and company-level
change. As we write this, our five "Masters" have invested more in Europe than
in Asia (9.5% in Asia ex-Japan, 4.9% in Japan, plus 4.1% in Australia/New
Zealand). However, if opportunities arise, we could see somewhat higher
exposure.
We believe that the Masters' Select concept is ideally suited to take advantage
of the accelerating changes taking place in many parts of the world. By
combining the efforts of five highly skilled and proven stock pickers, and
mandating that they focus on only a small number of their favorite stocks, we
ensure selectivity. Moreover, since we believe that the Masters' Select concept
is ultimately about isolating superior stock-picking skill in as pure a form as
possible, we think it is particularly suited to foreign markets. This is
because, in our view, many foreign stocks are less intensively researched than
their U.S. counterparts, resulting in more potential for good stock pickers to
add value.
As we write this, Masters' Select International already has $64 million in
assets. This has resulted in a reduction in our expense ratio so that we are now
comfortably below our expense cap. Further asset growth will continue to lower
expenses. And to further aid the reduction in expenses, beginning April 1 we are
waiving a portion of the investment management fee we charge the Fund. As of
that date, we will waive 0.1% of our fee, reducing the effective management fee
from 1.1% to a flat 1%. This reduction will be of indefinite duration, but at
least for the rest of 1998.
16
<PAGE>
An Interview with Dan Jaworski
- ----------
Dan Jaworski manages approximately 22.5% of the Master's Select International
Fund.
What first attracted you to the investment management business?
When I was in college, I began investing a small portion of my scholarship
money. I'll never forget purchasing an option on Cray Research and watching a
$100 investment grow to $1,000 and then expire worthless. It was probably my
most valuable lesson on risk management. From that point on, I knew what I
wanted to do for a living.
How did you happen to end up with a focus on foreign markets?
Growing up, my father worked as a scientist with the U.S. government. He
traveled extensively abroad. Even then I recognized that there were significant
opportunities outside of the U.S. When I graduated from business school, not
many investment firms had international investment expertise, and that seemed an
obviously good place to focus my career.
You recently founded BPI Global Asset Management. Can you tell our shareholders
about your relevant work history, about BPI and your role?
My international investment career began directly after graduate school, when I
went to work with the Principal Financial Group in Des Moines, Iowa, working in
their international portfolio management group, part of a small two-member team.
Three months after I arrived, the team shrunk to one member, and I became the
lead portfolio manager of Principal's international product in December 1988.
This included the Princor World Fund, which I ran until April 1993. At that
time, I was hired by Lazard Freres in New York as a portfolio manager. It didn't
take long to realize that I was much more effective as part of a smaller
investment team, and a little under two years later, I was hired by STI
(SunTrust Inc.) Capital Management to launch and head up their international
investment
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
group. This included managing the STI Classic International Fund from February
1995 through April 1997, when I left the firm. At that time, along with my
partners, we were presented with the opportunity to pursue our dream of building
our own investment firm. I was approached by BPI Financial Corporation, a
publicly traded Canadian firm and former client when I was at Lazard (we had
portfolio management responsibility for BPI's international fund, which is
distributed in Canada). BPI Global Asset Management is the result.
My role really has not changed significantly since my days at the Principal
Group. I am the portfolio manager of our firm's international investment product
and am responsible for purchasing and selling all securities in those
portfolios. I leave running the business and our other investment products in
the hands of my partners.
Are there key members of your investment staff whom shareholders should know
about?
We are building a talented research support staff here at BPI. I'm pleased that
the entire group has stayed intact since our days at STI. Most significant is
Pablo Salas, our backup portfolio manager and emerging market research
specialist. Pablo has over 10 years of investment management experience, and we
have worked together for the past six years.
Can you describe the key elements of your investment philosophy and how they
were developed?
I believe I truly benefited from developing my investment approach without much
oversight. Back in the late 80s, most international managers were top-down
country allocators focusing on interest and inflation rates, currencies and then
companies. Being an economics major in my undergraduate studies, predicting
things like interest rates had limited appeal. Our process is driven by our
stock picking, not country selection. We take into consideration the dramatic
changes occurring in the competitive global economy. As trade barriers fall, we
believe that companies with strategic, sustainable competitive advantages are
poised to benefit most. So we identify the most successful companies in each
industry worldwide. These companies must have demonstrated a history of high
profit-ability compared with their industry peer group. They must have a strong
balance sheet and management with a shareholder orientation. In addition to a
strong business, these companies must offer an attractive valuation to their
global industrial peer group. After identifying superior companies selling at a
discount, our analysis continues with two primary goals. First we seek to
identify any structural issue that may affect the company negatively going
forward. Second, we avoid buying companies near the top of their business cycle.
If we decide to buy a stock, we do so with strict buy and sell targets.
What is your objective when you meet with company management? How important is
this step to your overall investment process?
Company visits or calls are used to assess three things: the current business
conditions, the sustainability of previously identified competitive advantages
the company currently enjoys and the company's orientation to minority
shareholders. Our assessment of these three issues is absolutely critical to our
investment process.
18
<PAGE>
In general, foreign markets have underperformed the U.S. since 1993. How do you
assess the opportunities in foreign markets (in general) versus the U.S., given
a three-year horizon?
Foreign markets' underperformance actually is presenting us with interesting
opportunities to buy world-leading, high- quality companies that have become
more attractive on a valuation basis than their U.S. counterparts. Royal Bank of
Canada and Zeneca (U.K. drugs) are two examples of firms with strong upside and
attractive valuations compared with U.S. counterparts. Given a three-year
horizon, international investors should benefit greatly from these valuation
differences reversing or at least becoming more in line.
With respect to the overall investment climate, what are your biggest concerns?
Underestimation by the investment community of the potential impact of the Asian
economic slowdown on corporate profitability.
What risks and opportunities do you see resulting from the meltdown in Asia?
Because banks and property companies make up such a disproportionate amount of
the Asian market indexes, predicting the turnaround in those markets is a
difficult task. However, we believe that systematic and indiscriminate selling
by investors creates excellent opportunities for individual stock pickers. An
example of a company we are keeping our eye on for possible purchase is Vtech, a
Hong Kong-based firm that is the world leader in electronic learning toys (my
baby daughter received three for Christmas) and a major producer of the 900MHz
cordless phone under their own brand name and on an OEM basis. It's a leader,
it's cheap and it has a good balance sheet. Once conditions normalize in Asia,
it has substantial upside.
Many European markets have performed well in recent years. What are the keys to
continued good returns?
Investors in Europe have benefited from an increasing shareholder orientation.
Companies have become more focused on reducing expenses and delivering higher
returns to their shareholders. Whereas U.S. companies have held this orientation
for quite some time, European companies, with their more recent adoption of
building shareholder value, may continue to deliver improved earnings from their
efforts. If successful, this will ultimately drive stock prices.
How do you apply your discipline when selecting stocks in the Masters' Select
International "concentrated" portfolio?
I am extremely excited to be working on the Masters' Select International Fund.
This fund gives me the opportunity to focus on the companies in whose business
and management I have my highest level of conviction and, of these, the stocks
which I believe have the highest return potential.
For the Masters' Fund, we rank our internal holdings on a grid of expected
return and quality. With a focused portfolio, we allow only those names that
have strong upside, strong balance sheets and very high conviction on the
business to be a significant holding for the account. For companies with
substantial upside but a higher risk profile, we have limited the exposure to
what we feel is a prudent level.
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
Masters' Select International Fund Stock Highlights
- ----------
Stratec Holding, Bruce Bee
- ----------
Swiss-based Stratec is a leading supplier in Europe and Latin America of
orthopedic products, with a focus on devices for the treatment of bone fractures
and on artificial joints. This well-managed company has a solid market share in
the European countries where it now sells and has opportunities for further
expansion worldwide. In the past two years, Stratec has increased its product
offerings through acquisitions and internal research. With these new products
and markets, the company should be able to expand its margins and earnings.
We feel that the potential of new products and new markets is not properly
reflected in the price of Stratec shares. Because its products are not yet sold
in the U.S. and the company is relatively small, Stratec is not well known to
U.S. investors. If it were, the valuation would be higher. Stratec trades about
20 times 1998 earnings. Two of its U.S. competitors, Stryker and Biomet, both of
which have similar products to Stratec, trade above 25 times 1998 earnings. The
average P/E for the sector in the U.S. is 25, and we think Stratec has prospects
that are significantly better than average. As Stratec continues to be
successful in growing its business and controlling its costs, we think more
investors will become aware of the company and the valuation will increase.
Capita Group PLC, Helen Young Hayes
- ----------
Based in the United Kingdom, Capita is the leading provider of professional
outsourcing services in both the public and private sectors. Capita's services
include benefits and pensions administration, revenue collection, recruitment,
call centers, test centers, data centers and information technology (IT)
support.
Outsourcing is still in the early development stages in the U.K., and currently
accounts for only 4% of industry costs. Outsourcing, which allows an
organization or company to subcontract part of its workflow, is rapidly gaining
in popularity because it reduces costs and increases productivity. Historically,
government contracts have generated a majority of Capita's revenues, and this
area appears to be growing rapidly. The company's strong track record has been
instrumental in landing additional government contracts. For example, Capita was
recently commissioned to revamp the entire driving theory test for the U.K., and
its recommendations were so well received that the U.K. government hired Capita
to implement the program. In addition, the government is currently evaluating a
number of large outsourcing projects, including the possibility of outsourcing
the entire benefits agency.
Another competitive advantage is the company's ability to deliver outsourced
20
<PAGE>
solutions for an entire company. Its competitors focus primarily on IT
solutions. The company excels at finding solutions for clients with poorly run,
paper- and people-intensive functions. Capita steps in to revamp a particular
process, with the goal of increased cost savings, better productivity and
improved customer service.
Based on Capita's existing contracts and the potential opportunities we see in
the marketplace, we believe that the company's revenues should increase
subtantially in the next few years. Additionally, margins should continue to
expand as the company's contract mix becomes more focused on improving clients'
productivity. Going ahead, Capita enjoys solid recurring revenue streams and
tremendous long-term growth prospects.
JCG Holdings, David Herro
- ----------
JCG is a consumer finance company based in Hong Kong. Its emphasis is on making
short-term loans to people with steady incomes, as well as taxi drivers for the
finance of their businesses. JCG sells at around four times earnings and yields
over 12%.
Our criteria for stock selection stresses three things: valuation, whether
management is owner oriented and the degree of competitiveness of the company.
JCG delivers on all three accounts.
As mentioned, from a valuation perspective, the company is extremely cheap.
Currently, even given weakness and uncertainty in Hong Kong, we expect no major
diminution of earnings power for this company. They are extremely well
capitalized and have net cash on their balance sheet which should act to
maintain its high dividend yield. The company is majority owned and managed by
Public Bank of Malaysia, making management's economic interests aligned with
those of the owners. And, considering competitiveness, JCG is Hong Kong's leader
from both a cost and a market share perspective.
Even in tough economic times, JCG's careful underwriting has limited their loan
losses. Even though the share price has performed dismally, we remain convinced
that this stock will be a very strong contributor to your fund's performance
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
Royal Bank of Canada, Dan Jaworski
- ----------
Royal Bank of Canada is the country's largest and most profitable bank. With
over 1,400 branches nationwide, Royal Bank has a complete range of financial
services including investment banking, asset management, insurance and
brokerage. As a business the bank is attractive because of its high-quality loan
portfolio, excellent retail banking network, superior wealth management business
and a proven management team. We expect the company to grow its earnings and
dividends at least 12% for the next three years. This should be achievable from
3% to 5% loan growth, increased utilization of its distribution network and
efficiency improvements in operations. With less than 15% of Royal Bank's
revenues outside of Canada, the Asian turmoil should have limited impact on the
company's earnings. The management team has delivered a 19.7% return on equity
in 1997, the highest among Canadian banks and topping the 16% average result
from major U.S. banks.
Our process focuses on identifying high- quality companies that are undervalued
relative to similar companies in the same industry, regardless of location. At
the time of purchase, Royal Bank was selling at a significant discount to other
banks globally. The stock traded at a 25% discount on both an earnings and book
value basis compared with the major U.S. banks. We established our target price
based on the belief that the stock should trade at a slight discount, not 25%,
to the major U.S. banks. Our price targets reflect a 20% appreciation potential
from our original purchase price.
Novartis, Mark Yockey
- ----------
Created in 1996 from the merger of Ciba and Sandoz, Swiss-based Novartis
commands a widespread geographic presence with 41% of 1996 sales from the U.S.,
40% from Europe and 19% from Asia/Africa/Australia. Novartis is the number one
global life science company, is ranked number two in pharmaceuticals and has an
agrochemical division nearly twice the size of its nearest competitor.
With pharmaceutical sales expected to grow 10% annually, the company has minimal
exposure to product patent expiration, has seen solid existing product growth
and has a strong new product pipeline. Key introductions to combat hypertension,
migraines and breast cancer are expected in the near term. In addition, Novartis
also has an extensive array of research alliances.
The merger has left the balance sheet extremely strong, which should allow the
company the flexibility to make strategic moves. The company will have an
estimated $5 billion in net cash at year end 1997. With further cost-saving
possibilities ($1.2 billion over three years) and the resources to strengthen
its core businesses, Novartis is well positioned to leverage strong sector
fundamentals into strong earnings growth. We expect Novartis's EPS to grow at a
20% rate over the next three years and feel that the company is still modestly
valued as it sells at 20 times next year's earnings. We fully expect investors
to be attracted to Novartis's long-term earnings prospects.
22
<PAGE>
Masters' Select International Fund Portfolio Summary
- ----------
Portfolio Composition by Region
(12/31/97)
Latin America ...............................3.6%
Other(1) ....................................4.3%
Japan .......................................4.4%
Cash & Other Short-term Investments .........8.4%
Asia (ex-Japan)(2) .........................10.9%
Europe .....................................68.4%
Portfolio Composition by Asset Class
(12/31/97)
Cash & Other Short-term Investments .........8.4%
Emerging Markets ...........................12.7%(3)
Developed Markets Small-Cap ................21.3%(4)
Developed Markets Large-Cap ................57.6%(5)
(1) Primarily Canada
(2) Includes Australia (2.7%) and New Zealand (1.6%)
(3) Includes Hong Kong (4.4%) and Singapore (2.2%), which are not technically
emerging markets
(4) Market capitalization less than $800 million
(5) Market capitalization greater than $800 million
Schedule of Investments as of December 31, 1997
<TABLE>
<CAPTION>
SECTOR/Industry Shares Held Market Value Portfolio %
<S> <C> <C> <C> <C>
Long-term securities (91.65%)
- ---------------------------------------------------------------------------------------------------------------
Australia
- ---------------------------------------------------------------------------------------------------------------
Westpac Banking Corp. Finance/Commercial Bank 71,600 $458,066 1.00%
Brambles Industries LTD Transportation/Rail Car Rental 40,200 797,800 1.74%
- ---------------------------------------------------------------------------------------------------------------
1,255,866 2.74%
Austria
- ---------------------------------------------------------------------------------------------------------------
Bayer Hypotheken
& Wechsel Bank Finance/Commercial Bank 17,250 841,908 1.83%
Brazil
- ---------------------------------------------------------------------------------------------------------------
*Unio De Bancos
Brasilieros, GDR Finance/Commercial Bank 22,000 708,125 1.54%
Canada
- ---------------------------------------------------------------------------------------------------------------
Royal Bank of Canada Finance/Commercial Bank 14,500 768,500 1.67%
*Metronet Communications Telecommunications/Telecom Services 30,000 509,063 1.11%
- ---------------------------------------------------------------------------------------------------------------
1,277,563 2.78%
Denmark
- ---------------------------------------------------------------------------------------------------------------
Vest Wood Consumer Products/Home Furnishings 5,500 461,551 1.00%
Sydbank Finance/Commercial Bank 9,000 512,267 1.12%
- ---------------------------------------------------------------------------------------------------------------
973,818 2.12%
France
- ---------------------------------------------------------------------------------------------------------------
ELF Aquataine Energy/Exploration 9,551 1,110,858 2.42%
AXA Finance/Multiline Insurance 10,700 827,946 1.80%
*Dexia France Finance/Special-Purpose Bank 6,300 729,600 1.59%
- ---------------------------------------------------------------------------------------------------------------
2,668,404 5.81%
</TABLE>
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
Schedule of lnvestments as of December 31, 1997 (continued)
<TABLE>
<CAPTION>
SECTOR/Industry Shares Held Market Value Portfolio %
<S> <C> <C> <C> <C>
Germany
- ---------------------------------------------------------------------------------------------------------------
*Pfeiffer Vacuum, ADR Durables/Machinery 2,850 79,800 0.17%
Rinol Durables/Building & Construction 14,000 396,898 0.86%
- ---------------------------------------------------------------------------------------------------------------
476,698 1.03%
Hong Kong
- ---------------------------------------------------------------------------------------------------------------
Founder Hong Kong Ltd. Finance/Investment Holding Company 1,040,000 634,146 1.38%
JCG Holdings Finance/Diversified Financial Server1,643,000 689,088 1.50%
Wing Hang Bank Ltd. Finance/Commercial Bank 245,000 698,735 1.52%
- ---------------------------------------------------------------------------------------------------------------
2,021,969 4.40%
Israel
- ---------------------------------------------------------------------------------------------------------------
*Comverse Technology Technology/Computer Integrated Sys 17,800 691,975 1.51%
Italy
- ---------------------------------------------------------------------------------------------------------------
FILA Holdings, ADR Consumer Products/Athletic Footwear 49,000 986,125 2.15%
*Telecom Italia Telecommunications/Telecom Services 148,000 945,393 2.06%
- ---------------------------------------------------------------------------------------------------------------
1,931,518 4.21%
Japan
- ---------------------------------------------------------------------------------------------------------------
Canon Inc. Business Services/Office Equipment 24,000 558,781 1.22%
Amway Japan Consumer Products/Direct Selling 3,600 689,285 1.50%
Enix Corp. Consumer Products/Appliances 40,000 765,873 1.67%
- ---------------------------------------------------------------------------------------------------------------
2,013,939 4.39%
Mexico
- ---------------------------------------------------------------------------------------------------------------
Panamerican Beverages Consumer Products/Beverages 29,600 965,700 2.10%
Netherlands
- ---------------------------------------------------------------------------------------------------------------
European Vinyls Corp. Basic Industries/Chemicals 30,000 665,795 1.45%
Van Melle Consumer Products/Food 6,200 443,370 0.97%
Phillips Electronic Conglomerate/Electronics 18,052 1,082,595 2.36%
- ---------------------------------------------------------------------------------------------------------------
2,191,760 4.78%
New Zealand
- ---------------------------------------------------------------------------------------------------------------
Fernz Corp. Basic Industries/Chemicals 285,000 736,409 1.60%
Norway
- ---------------------------------------------------------------------------------------------------------------
*Norsk Lotteridrift Consumer Services/Leisure & Gaming 92,500 375,721 0.82%
Scibsted ASA Media/Newspaper Publishing 45,000 770,736 1.68%
- ---------------------------------------------------------------------------------------------------------------
1,146,457 2.50%
Portugal
- ---------------------------------------------------------------------------------------------------------------
*Investec Media/Multimedia Publishing 14,775 437,510 0.95%
Singapore
- ---------------------------------------------------------------------------------------------------------------
Mandarin Oriental Intn'l. Hotels/Investment & Management 1,347,000 902,490 1.96%
Electronic Resources Ltd. Technology/Electronics 110,750 112,360 0.24%
- ---------------------------------------------------------------------------------------------------------------
1,014,850 2.20%
</TABLE>
24
<PAGE>
Schedule of lnvestments as of December 31, 1997 (continued)
<TABLE>
<CAPTION>
SECTOR/Industry Shares Held Market Value Portfolio %
<S> <C> <C> <C> <C>
Sweden
- ---------------------------------------------------------------------------------------------------------------
Assab Alloy Basic Industries/Metal Processors 41,515 1,098,018 2.39%
Electrolux AB Consumer Products/Appliances 15,637 1,085,151 2.36%
Skandia Forsakrings Finance/Multiline Insurance 14,800 698,069 1.52%
Ericsson Tel. Telecom/Telecommunications 30,303 1,139,239 2.48%
*Netcom Systems Telecom/Telecom Services 26,600 571,204 1.25%
- ---------------------------------------------------------------------------------------------------------------
4,591,681 10.00%
Switzerland
- ---------------------------------------------------------------------------------------------------------------
Publicgroupe Business Services/Advertising Sales 1,775 387,507 0.84%
Credit Suisse Finance/Commercial Bank 4,700 726,937 1.58%
Union Bank of Switzerland Finance/Commercial Bank 540 780,509 1.70%
Norvartis Health Care/Medical Drugs 1,345 2,181,529 4.75%
Stratec Holding Health Care/Medical Instruments 325 435,943 0.95%
Danzas Holding Transportation/Warehousing & Dist. 2,500 491,035 1.07%
*Sairgroup Transportation/Airlines 295 403,778 0.88%
- ---------------------------------------------------------------------------------------------------------------
5,407,238 11.77%
United Kingdom
- ---------------------------------------------------------------------------------------------------------------
Capita Group, PLC Business Srvcs./Outsourcing Srvcs. 199,731 1,217,096 2.65%
Cordiant Comm. Group Business Srvcs./Advertising Srvcs. 720,000 1,300,860 2.83%
Rentokil Initial Business Srvcs./Environmental Srvcs. 252,416 1,117,038 2.43%
*Saatchi & Saatchi Business Srvcs./Advertising Services 450,000 805,646 1.75%
Tomkins Business Srvcs./Diversified Operations150,000 709,560 1.54%
Whitbread Consumer Prod./Brewing & Leisure 48,500 712,172 1.55%
General Electric Company Durables/Manufacturing 75,000 485,975 1.06%
Siebe Durables/Manufacturing 57,398 1,126,601 2.45%
HSBC Holdings Finance/Money Centre Bank 11,500 298,442 0.65%
Lloyds TSB Group Finance/Money Centre Bank 85,258 1,109,171 2.42%
Sedgewick Group Finance/Insurance Brokerage 100,000 233,235 0.51%
Zeneca Group Health Care/Medical Drugs 24,900 881,991 1.92%
Regent Inns Hotels/Hotels & Restaurants 78,500 421,622 0.92%
Vodafone Group Telecom/Cellular Comm. 45,000 325,215 0.71%
- ---------------------------------------------------------------------------------------------------------------
10,744,624 23.39%
Total Long-term Securities (cost $42,524,470) $42,098,012 91.65%
U.S. Treasury Obligation (9.57%) par value Market Value Portfolio %
- ---------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Mortgage Discount Note 6% 1/02/98 $4,400,000 $4,399,267 9.57%
- ---------------------------------------------------------------------------------------------------------------
Total U.S. Treasury Obligations (cost $4,399,267) $4,399,267 9.57%
Repurchase Agreement (11.10%)
- ---------------------------------------------------------------------------------------------------------------
State Street Bank and Trust Co. $5,098,000 at 5.25%
(Agreement dated December 31, 1997; to be repurchased
at $5,099,487 on 1/02/98; collateralized by $5,195,000
U.S. Treasury Notes due 11/30/99) (Value $5,207,988) $5,098,000 $5,098,000 11.10%
- ---------------------------------------------------------------------------------------------------------------
Total Repurchase Agreement (cost $5,098,000) $5,098,000 11.10%
Total Investments (cost $52,021,737) $51,595,279 112.32%
Liabilities in Excess of Cash and Other Assets ($5,661,115) (12.32%)
- ---------------------------------------------------------------------------------------------------------------
Total Net Assets $45,934,164 100.0%
</TABLE>
*Non-income-producing securities.
See Notes to Financial Statements
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
Auditor's Report
- ----------
To the Board of Trustees and Shareholders of Masters' Select Funds Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Masters' Select Equity Fund and Masters'
Select International Fund, separate series of Masters' Select Funds Trust (the
"Trust") as of December 31, 1997, and the related statements of operations, the
statements of changes in net assets, and the financial highlights for the
respective periods then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Master's Select Equity Fund and Master's Select International Fund as of
December 31,1997, the results of their operations, the changes in their net
assets and the financial highlights for the periods indicated in conformity with
generally accepted accounting principles.
/s/ McGladry & Pullen LLP
New York, New York
February 13, 1998
26
<PAGE>
Statements of Assets and Liabilities-December 31, 1997
EQUITY INTERNATIONAL
FUND FUND
Assets
- --------------------------------------------------------------------------------
Investments in securities at
market value
(cost of $277,332,649 and $52,021,737) $300,376,464 $51,595,279
Cash 6,431 94,373
Receivables:
Fund shares sold 2,085,638 1,226,000
Income receivable 276,391 2,492
Investment securities sold 3,486,845 --
Unrealized gain on forward exchange contracts (Note 5) 768,186 --
Deferred organizational costs 83,759 37,259
Prepaid registration expense 26,644 22,886
----------------------------------------------------------------------------
Total assets 307,110,358 52,978,289
Liabilities
- --------------------------------------------------------------------------------
Payables:
Fund shares repurchased 236,293 97,625
Investment securities purchased 9,635,728 6,815,792
Unrealized loss on forward exchange contracts (Note 5) 20,014 76,727
Accrued expenses 342,512 53,980
----------------------------------------------------------------------------
Total liabilities 10,234,547 7,044,124
Net Assets 296,875,811 45,934,164
- --------------------------------------------------------------------------------
Composition of Net Assets
- --------------------------------------------------------------------------------
Paid-in capital 272,958,409 46,360,929
Accumulated undistributed net realized gains 125,492 --
Net unrealized appreciation (depreciation) 23,791,910 (426,765)
----------------------------------------------------------------------------
Net Assets $296,875,811 $45,934,164
- --------------------------------------------------------------------------------
Number of shares, $0.01 par value, issued
and outstanding (unlimited shares authorized) 25,063,422 4,648,230
----------------------------------------------------------------------------
Net Asset Value per Share $11.84 $9.88
- --------------------------------------------------------------------------------
See Notes to Financial Statements
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
For the period from For the period from
1/1/97 to 12/31/97 12/1/97 to 12/31/97
<S> <C> <C>
Investment Income
- ------------------------------------------------------------------------------------------------------------
Income:
Dividend income
(net of foreign taxes of $63,688 and $263 respectively) $2,031,131 $2,386
Interest income 1,156,881 69,082
------------------------------------------------------------------------------------------------------
Total income 3,188,012 71,468
Expenses:
Advisory fees (Note 3) 2,247,185 35,638
Transfer agent fees 213,177 5,694
Custodian fees 149,761 8,596
Administration fees (Note 3) 149,572 1,644
Registration fees 68,688 3,069
Shareholder reporting fees 39,328 1,644
Professional fees 52,920 1,397
Trustees fees (Note 3) 29,102 617
Insurance fees 23,210 --
Amortization of deferred organizational costs 21,316 621
Miscellaneous expenses 17,122 411
------------------------------------------------------------------------------------------------------
Total expenses 3,011,381 59,331
------------------------------------------------------------------------------------------------------
Less: expenses paid indirectly (Note 2) (67,017) (2,020)
Net expenses 2,944,364 57,311
------------------------------------------------------------------------------------------------------
Net investment income 243,648 14,157
Realized and Unrealized Gains (Losses)
- ------------------------------------------------------------------------------------------------------------
Net realized gain (loss):
Investments 23,510,656 --
Foreign currency transactions 401,627 (26,104)
------------------------------------------------------------------------------------------------------
Net realized gain (loss) 23,912,283 (26,104)
Net unrealized appreciation (depreciation) on:
Investments 23,043,815 (426,458)
Foreign currency transactions 748,095 (307)
------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) 23,791,910 (426,765)
Net realized and unrealized gains (losses) 47,704,193 (452,869)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations $47,947,841 ($438,712)
</TABLE>
See Notes to Financial Statements
28
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
For the period from For the period from
1/1/97 to 12/31/97 12/1/97 to 12/31/97
<S> <C> <C>
Increase (Decrease) in Net Assets
- ------------------------------------------------------------------------------------------------------------
Operations:
Net investment income $243,648 $14,157
Net realized gain (loss) 23,912,283 (26,104)
Net unrealized appreciation (depreciation) 23,791,910 (426,765)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations $47,947,841 (438,712)
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 279,009,548 46,890,251
Net asset value of shares issued on
reinvestment of distributions 23,567,971 --
Cost of shares redeemed (29,719,110) (517,375)
Net increase from Fund share transactions 272,858,409 46,372,876
------------------------------------------------------------------------------------------------------
Net increase in net assets $296,775,811 $45,934,164
Net Assets
- ------------------------------------------------------------------------------------------------------------
Beginning of period 100,000 --
------------------------------------------------------------------------------------------------------
End of period $296,875,811 $45,934,164
Change in Shares
- ------------------------------------------------------------------------------------------------------------
Shares sold 25,633,556 4,700,772
Shares issued on reinvestment of distributions 1,962,362 --
Shares redeemed (2,542,496) (52,542)
------------------------------------------------------------------------------------------------------
Net increase 25,053,422 4,648,230
</TABLE>
See Notes to Financial Statements
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
Financial Highlights-For a share outstanding throughout the period
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
For the period from For the period from
1/1/97 to 12/31/97 12/1/97 to 12/31/97
<S> <C> <C>
Net asset value, beginning of period $10.00 $10.00
---------------------------------------------------
Income from investment operations
Net investment income 0.03 0.00
Net realized and unrealized gain 2.90 (0.12)
---------------------------------------------------
Total from investment operations $2.93 (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 $11.84 $9.88
---------------------------------------------------
Total return 29.11% (1.20%)
---------------------------------------------------
Net assets at end of period (in 000s) $296,876 $45,934
---------------------------------------------------
Ratio of expenses to average net assets+ 1.47% 1.77%*
---------------------------------------------------
Ratio of net investment income to average net assets 0.12% 0.42%*
---------------------------------------------------
Portfolio turnover rate 145.11% 0.00%
---------------------------------------------------
Average commission rate paid per share $.0372 $.0148
---------------------------------------------------
</TABLE>
* Annualized
The Masters' Select Equity Fund commenced operations on December 31,
1996.
The Masters' Select International Fund commenced operations on December
1, 1997.
+ Includes custody fees paid indirectly which amount to 0.03% and 0.06%,
respectively, of average net assets.
See Notes to Financial Statements
<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 primarily invests in U.S.
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 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.
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 ask 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 ask 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. Counterparties to these forward
contracts are major financial institutions.
Federal Income Taxes-The Funds intend to qualify as a regulated investment
company by complying with the appropriate provisions of the Internal Revenue
Code, 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 60 months commencing with the first full month after the
Funds' commencement of operations.
Distributions-Distributions to shareholders are recorded on the ex-dividend
date.
Accounting Estimates-The preparation of financial
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
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 the 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 fiscal year ended December 31, 1997, said credits were $67,017 and $2,020
for the Masters' Select Equity Fund and Masters' Select International Fund,
respectively.
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 an annual 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. The Advisor has agreed to reimburse 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 are
guaranteed by the Advisor for at least the first year of each Fund's operations.
After that, it 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 Funds at an annual rate of 0.10% of the first $100 million of such
net assets, 0.05% of next $150 million, 0.025% of next $250 million and 0.0125%
thereafter, subject to an annual minimum fee of $40,000 per Fund.
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 fiscal year ended December 31, 1997, were as
follows:
EQUITY INTERNATIONAL
FUND FUND
- --------------------------------------------------------------------------------
Purchases 490,734,904 42,524,470
Sales 263,411,571 --
- --------------------------------------------------------------------------------
At December 31, 1997, 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 $277,423,098 $52,021,737
Unrealized appreciation 30,471,587 932,963
Unrealized depreciation (7,518,220) (1,359,421)
Net unrealized appreciation (depreciation) 22,953,367 (426,458)
- --------------------------------------------------------------------------------
5. Off-Balance-Sheet Risk
The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund 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 Fund's 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 Fund's 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 December
31, 1997, the Funds had the following forward exchange contracts outstanding:
32
<PAGE>
Masters' Select Equity Fund
IN EXCHANGE FOR SETTLEMENT UNREALIZED
DATE GAIN (LOSS)
Contracts to Sell
- --------------------------------------------------------------------------------
1,646,000 Swiss Francs U.S. $1,147,969 1/8/98 $ 20,398
327,000 Swiss Francs 233,480 6/10/98 5,562
2,984,000 Deutsche Marks 1,765,578 1/15/98 105,366
956,000 Deutsche Marks 551,795 6/17/98 15,331
241,623,000 Japanese Yen 2,133,416 1/29/98 275,103
113,535,000 Japanese Yen 965,165 6/24/98 72,663
4,827,000 New Zealand Dollars 3,055,540 4/3/98 273,111
-----------------------------------------------------------------------------
$767,534
Contracts to Buy
- --------------------------------------------------------------------------------
113,000 Deutsche Marks U.S. $ 62,218 1/15/98 652
-----------------------------------------------------------------------------
Unrealized gain on forward exchange contracts $768,186
Contracts to Sell
- --------------------------------------------------------------------------------
427,000 Swiss Francs U.S. $ 286,270 1/8/98 ($ 6,240)
648,000 Swiss Francs 450,360 6/10/98 (1,295)
1,087,000 Deutsche Marks 592,297 1/15/98 (12,479)
-----------------------------------------------------------------------------
Unrealized loss on forward exchange contracts ($20,014)
Net unrealized gain on forward exchange contracts $748,172
Masters' Select International Fund
IN EXCHANGE FOR SETTLEMENT UNREALIZED
DATE GAIN (LOSS)
Contracts to Buy
- --------------------------------------------------------------------------------
2,948,814 French Francs U.S. $ 493,368 1/30/98 ($ 3,410)
1,553,168 British Pounds 2,593,767 1/6/98 (42,862)
10,977 British Pounds 18,194 1/2/98 (166)
66,421 British Pounds 109,828 1/7/98 (768)
1,149,925 Dutch Gilders 570,507 1/5/98 (3,385)
895,478 Dutch Gilders 445,822 1/2/98 (4,133)
430,500 Swedish Kronas 55,529 1/2/98 (1,309)
12,735,108 Swedish Kronas 1,622,411 1/5/98 (18,438)
1,076,853 Swedish Kronas 136,610 1/7/98 (984)
189,800 Singapore Dollars 112,976 1/7/98 (482)
254,466 New Zealand Dollars 148,481 1/5/98 (790)
-----------------------------------------------------------------------------
Net unrealized loss on forward exchange contracts ($76,727)
The Masters' Select Funds Annual Report December 31, 1997
<PAGE>
LITMAN/GREGORY FUND ADVISORS, LLC
- ---------------------------------
4 Orinda Way, Suite 230-D
Orinda, CA 94563
- ----------
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'
performances due to its responsibility to oversee its investment managers and
recommend their hiring, termination and replacement. First Fund Distributors,
Inc., Phoenix, AZ 85018.
