The Masters' Select Funds
Semiannual Report
Masters' Select Equity Fund
Masters' Select International Fund
June 30, 1999
Litman/Gregory Fund Advisors, LLC
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CONTENTS
Letter to Shareholders 2
Portfolio Fit 5
The Masters' Select Concept 5
SERVICE DIRECTORY Masters' Select Equity Fund Review 6
FUND INFORMATION Interview: Spiros "Sig" Segalas 10
To request a prospectus, financial report,
IRA application or information, call Equity Fund Stock Highlights 12
1-800-656-8864,
24 hours a day, seven days a week. Equity Fund Portfolio Summary 16
ADVISOR SERVICES Masters' Select International Fund Review 19
Registered Investment Advisors,
broker/dealers and financial professionals Interview: Mark Yockey 22
may call 1-925-253-5213 for advisor services.
International Fund Stock Highlights 24
EXISTING SHAREHOLDER INQUIRIES
To request action on your existing account, International Fund Portfolio Summary 27
contact the transfer agent, NFDS, at
1-800-960-0188 from 9:00 a.m. to 6:00 p.m. Statements of Assets and Liabilities 30
eastern time, Monday through Friday.
Statements of Operations 31
MAIL CORRESPONDENCE TO:
Masters' Select Funds Statements of Changes in Net Assets 32
c/o NFDS
P.O. Box 419922 Financial Highlights 34
Kansas City, MO 64141-6922
Notes to Financial Statements 35
OVERNIGHT ADDRESS:
Masters' Select Funds
c/o NFDS
330 W. 9th Street
Kansas City, MO 64105
1-816-843-8468
24-Hour Automated Information
1-800-960-0188
For automated reporting of daily prices,
account balances and transaction activity,
call 1-800-960-0188, 24 hours a day, seven
days a week. Please have your Fund number
(see below) and account number ready to
access your investment information.
PUBLISHED DAILY PRICE QUOTATIONS
Daily net asset value per share of each Fund
is reported in mutual fund quotations tables
of major newspapers in alphabetical order as
follows:
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Transfer Agent
Abbreviation Symbol Cusip Fund Number
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MstrSeltEq MSEFX 576417109 305
MstrSeltInt MSILX 576417208 306
The Masters' Select Funds Semiannual Report June 30, 1999
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Dear Fellow Shareholder:
It was a great first half of 1999 for both Masters' Select Equity and Masters'
Select International.
When we started Masters' Select, we believed that the combination of some of our
favorite stock pickers focusing on their highest-conviction stock picks was a
great idea. We believed that the concept put into practice would result in
index-beating long-term performance. We are gratified that so far Masters'
Select International has significantly outperformed all of its index benchmarks
since its inception, and that Masters' Select Equity has bested its custom index
benchmark by a wide margin and is only a fraction behind its long-term (but more
large-cap-oriented) benchmark. We think this is quite an accomplishment, as few
active managers have beaten their benchmarks during this period, which has been
dominated by stocks of mega-sized companies and Internet companies. This
long-term performance is of greater relevance than the fact that both Funds did
well in the first half of 1999. The performance is particularly impressive when
we drill down and examine how that performance has been delivered. Of the 11
managers currently responsible for the two Funds, nine have beaten their index
benchmarks (this is after allocating all the Funds' expenses). In a more
multidimensional stock market environment we believe that Masters' will do even
better.
After almost three years of Masters' experience, we've formed some opinions as
to why both Funds are doing well:
CONCENTRATION: Focusing only on each manager's highest-conviction stock picks is
part of the basic foundation of these Funds. So far the concept appears to be
working. Of our 11 managers (across two Funds), 10 also run more-diversified
public mutual funds. As a group the performance of our managers for Masters' has
been significantly better (since inception) than the weighted average of the
returns for their more-diversified funds.
LONG-TERM ORIENTATION: There are lots of short-term performance pressures in
today's mutual fund world. Short-termism is a negative distraction for many fund
managers. They know that if they don't do well over the short-term, they may
lose assets--or worse. This short-term pressure tempts some stock pickers to
make decisions that are inconsistent with maximizing long-term returns. Our
multimanager structure means that no single manager has to worry about his or
her short-term performance impact on the Fund. Moreover, we have stressed
repeatedly with our managers that we expect superior long-term returns but are
not worried about short-term volatility and will not evaluate them based on
short-term performance. We seek to build a partnership with our managers that
gives them every advantage to do well. Knowing that they can focus on the long
term and ignore all short-term concerns is, we believe, a big advantage.
A good example is the situation David Herro (Masters' Select International)
faced last year. Observing the meltdown in Asia and the emerging markets, Herro
identified several companies that he knew to be fundamentally strong with
growing businesses, despite the macro collapse. He was extremely confident that
these stocks were
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enormously undervalued because of the massive sell-off in their markets. He
invested in such stocks as Giordano and Woong Jin Publishing, recognizing the
uncertainty of the timing of any turnaround. But he believed there was huge
upside potential that was worth waiting for. He also knew that market psychology
could continue to deteriorate and take prices lower. Over the short term, his
portion of the portfolio was dragged down as these stocks declined further in
value. In fact, Herro's performance was the worst of the five Masters'
International managers last year. His stocks began to rebound last September,
however, and have increased significantly on the upside since then. Over that
time he is the Fund's number one manager and is now significantly ahead of the
international indexes. This is the type of conviction and patience that we
believe makes for good long-term returns.
ASSET SIZE: We strongly believe that the small asset base with which each of our
Masters' stock pickers works is a significant advantage. Our plans to close (to
new investors) Masters' Select Equity at $750 million and Masters' Select
International at $1 billion will help lock in this advantage. At a $750 million
Equity Fund portfolio, our large-cap managers will be running only $150 million
and our small-cap managers only $75 million. At a $1 billion international
portfolio, our core international managers will be running about $220 million,
and our small-cap manager will run $100 million. These are extremely small sums
in today's financial world.
QUALITY OF THE MASTERS' STOCK PICKERS: The bottom line is that nine of 11 of our
stock pickers (nine of 12 if we include Jean-Marie Eveillard, whom we replaced
eight months ago) have beaten their index benchmarks. We think this speaks to
the quality of our stock pickers.
DEVELOPMENTS AND COMMENTS
As longtime participants in the mutual fund industry, we have become
increasingly disturbed by the lack of patience on the part of many fund
investors. With lots of fund choices, daily performance updates, media exposure
of short-term winners and losers, and fund supermarkets and online convenience,
investors are constantly tempted to sell and buy. It's akin to having a remote
control and a hundred channels from which to choose. Some investors fund-surf
like couch potatoes channel-surf. This troubles us, because over the short-term
stock prices are driven by psychology more than fundamentals. But over the long
run, the business success of individual companies will drive stock returns.
(Remember the famous Benjamin Graham quote: "In the short run the market is a
voting machine but in the long run it is a weighing machine.") Psychology is
difficult to predict correctly. It can turn on a dime or drive excesses.
Business fundamentals, on the other hand, are driven by factors such as
management quality, competitiveness of the product, the size of the market, and
barriers to competitive entry. We believe that good stock pickers can add value
by obsessively focusing on getting an edge in assessing these fundamental
factors. Our "Master" stock pickers focus on the knowable--things that they have
a high probability of assessing correctly. They are disciplined in not allowing
speculative elements to enter into
The Masters' Select Funds Semiannual Report June 30, 1999
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their decision-making process. Predicting market psychology is a speculative
element. On the other hand, many fund investors seem to believe that recent
short-term performance is a good predictor of future performance (it's not), so
they chase hot funds and sell funds that have been in a short-term slump.
According to several studies, most mutual fund investors don't do as well as the
average fund, because they have a tendency to chase hot performance--too late.
With Masters' we are trying to do everything we can to deliver a performance
edge. That includes attracting long-term shareholders who believe in the
Masters' concept and will stay committed to it for a reasonable time. So far as
we can tell, most of our shareholders meet this standard, although some clearly
don't. After Masters' Select Equity slumped for several months in mid-1998, we
experienced small but steady redemptions starting in October. Interestingly, the
timing coincided almost exactly with a powerful trend of outperformance for
Masters' Select Equity that has continued (the Fund is up 63.9% since the
October 8 market bottom versus 45.9% for the Wilshire 5000 Index). Some of these
investors had been invested for only a few months (in some instances, a few
days). This short-term money can be disruptive to the long-term orientation of
our "Masters." To protect our long-term shareholders, we have decided to add a
redemption fee to deter investors who don't have a long-term commitment from
buying shares in Masters' Select Funds. The fee will apply to new investments
and will be 2% on shares held less than six months. All fees paid will go back
into the Funds to the full benefit of the remaining shareholders. The redemption
fee will be implemented within the next few months.
We appreciate the confidence and trust that your investment in the Masters'
Select Funds represents. Along with our "Master" managers, we are totally
committed to making this a successful venture for all shareholders.
Sincerely,
/s/ Ken Gregory
Ken GregoryLitman/Gregory Fund Advisors, LLC
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As we go to print we are saddened to report the sudden and untimely death of our
friend and colleague, Bruce Bee. We have every confidence that the team at Bee &
Associates will continue to competently manage their 10% portion of the Masters'
Select International portfolio as we consider our options for the long-term
management of that portion of the Fund. We will notify our shareholders
immediately once our plans are finalized.
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PORTFOLIO FIT
As with all equity funds, Masters' Select Equity and Masters' Select
International are appropriate for investors with a long-term time horizon, who
are willing to ride out occasional periods when the Funds' net asset values
decline. Within that context we created the Funds to be used as core equity and
core international fund holdings. Although performance in each specific down
market will vary, we purposely set the allocations to each manager with the
objective of keep ing risk about equal to that of their overall benchmarks. At
the same time, we wanted enough exposure to small-caps and growth stocks to
attempt to deliver good performance in a bull market. In the end the focus on
the highest-conviction stocks of a group of very distinguished managers with
superior track records is what we believe makes the Funds ideal core equity and
core international fund holdings.
THE MASTERS' SELECT CONCEPT
In constructing the Masters' Select Funds, our goal was to design funds that
would isolate the stock-picking skills of a group of highly regarded managers
and also serve as core equity fund holdings for almost any long-term investor
seeking domestic or international stock market exposure. To meet this objective,
we designed the Funds with both risk and return in mind, placing particular
emphasis on the following factors.
1 First, only investment managers we believe to have exceptional long-term
performance in their respective specialties were chosen to manage each
Fund's portfolio.
2 Second, and of equal importance, each stock picker runs a very focused
portfolio of not more than 15 of his or her favorite stocks. We believe
that most stock pickers have an unusually high level of conviction in only
a small number of stocks and that a portfolio limited to these stocks will,
on average, outperform over a market cycle.
3 Third, even though each manager's portfolio is focused, the overall Funds
are well diversified by style, industry and number of stocks. Given the
diversification across styles, we don't expect the Funds to top the charts
in any single period. We are shooting for superior performance over a full
market cycle, counting on the Funds' structure and the managers' talent to
get us there.
The Masters' Select Funds Semiannual Report June 30, 1999
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MASTERS' SELECT EQUITY FUND REVIEW
Masters' Select Equity had an outstanding first half, beating all its benchmarks
by a wide margin. More important than this short-term success is the performance
of your Fund since its inception on December 31, 1996. Since that time your Fund
has pulled away from the Global Equity Index, beating it by 8.74%. At a time
when index funds are widely touted, we're happy to report this level of success.
The Global Equity Index is a blended index we created to reflect the market cap
and asset class exposure structured into your Fund; it includes a 70% weighting
in the S&P 500 Index, a 20% weighting in the Russell 2000 Index (a small-company
index) and a 10% weighting in the Morgan Stanley Capital International Europe,
Australasia and Far East (MSCI EAFE) Index (foreign stocks). Your Fund has three
managers who invest mostly in mid- and large-cap stocks (60% of the portfolio),
two who invest mostly in small-cap stocks and are benchmarked against the
Russell 2000 (20% of the portfolio) and one who is global and invests in
companies of all sizes (20% of the portfolio). We believe that this mix of
managers and styles should be benchmarked against an appropriate index and
therefore we began reporting on this blended index in the Fund's first year.
Since Inception
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Cumulative Average
Year Total Annual
to Date 12 Months Return Total Return
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Masters' Select Equity Fund 21.73% 22.58% 80.59% 26.72%
Global Equity Index* 10.99% 16.92% 71.84% 24.18%
Wilshire 5000 Index 11.88% 19.60% 81.34% 26.88%
Lipper Growth Fund Index 11.89% 21.64% 80.08% 26.53%
Lipper Small Cap Fund Index 9.43% 1.92% 16.70% 6.37%
Past performance is no guarantee of future results, and investors may have a
gain or loss when they sell shares. All returns assume reinvestment of dividends
and capital gains. Indexes are unmanaged, do not incur fees and cannot be
invested indirectly. Inception date of Fund is December 31, 1996.
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Since inception, your Fund is less than 1% (less on an annualized basis) behind
the Wilshire 5000, a more large-cap-oriented index. We seek to beat this index
over a full market cycle. Over most of the Fund's life, the stock market has
been dominated by stocks of large companies, with small-caps lagging
significantly behind. Still, Masters' Select is in a near dead heat with the
Wilshire 5000, which has only 8% of its assets in small companies. Excluding
Masters' Select's first month of existence, when it was not close to being fully
invested, it has outperformed the Wilshire 5000 by more than 3% (more than 1% on
an annualized basis).
The performance of Masters' larger- and smaller-cap managers relative to
appropriate indexes helps underscore the degree of their stock-picking success.
CUMULATIVE TOTAL RETURN SINCE INCEPTION - AS OF JUNE 30, 1999
LARGE-CAP
Masters' Large-Cap Managers 113.89%
S&P 500 Index 92.87%
SMALL-CAP
Masters' Small-Cap Managers 62.01%
Russell 2000 Index 30.03%
Past performance is no guarantee of future results, and investors may have a
gain or loss when they sell shares. All returns assume reinvestment of dividends
and capital gains. Indexes are unmanaged, do not incur fees and cannot be
invested in directly. The returns for the Masters' managers are an equally
weighted average of the managers' cumulative returns since inception. Though the
percentage of the Fund's assets allocated to each manager drifts slightly over
time, equally weighting the performance of the large- and small-cap managers
should be a very close approximation of the actual performance if it had been
calculated based on the daily asset levels of each manager. Large-cap managers
are Mason Hawkins, Sig Segalas, Shelby Davis and Robert Sanborn (since 11/1/98).
Small-cap managers are Foster Friess and Dick Weiss. Inception date is December
31, 1996.
Not only is the magnitude of the outperformance impressive, but so is the
breadth. The Masters' portfolios of five of the six current managers have
outperformed their benchmarks over the life of the Fund. The only one that has
not has trailed the index by less than 1%. In a period when so few managers are
beating their benchmarks, the Masters' structure, at least so far, seems to have
contributed to significantly improving the odds in favor of investors.
We believe that the combination of skilled managers focusing on a few of their
highest-conviction stocks is a powerful concept. The concentration seems to be
adding to performance as the Masters' managers continue to widen the gap between
their own funds and their Masters' performance.
The Masters' Select Funds Semiannual Report June 30, 1999
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As noted in our quarterly report, in February we decided to increase the
flexibility of our two small-cap managers, Foster Friess and Dick Weiss, by
allowing them to increase their exposure to mid-cap companies ($1.4 billion to
$10 billion in market cap). Each can now invest up to 50% of his portfolio in
mid-cap companies. Our decision was intended to allow the Fund to benefit from
the managers' highest-conviction ideas in an expanded range. Both Friess and
Weiss do research on small- and mid-cap companies. Irrespective of this
increased flexibility, we have told both managers that we will continue to
benchmark their performances against the Russell 2000. Now, however, if there is
a mid-cap company they are extremely enthusiastic toward, they can buy it. Since
we increased their flexibility, they have not bought mid-cap names. In fact,
some of our other managers have added some small-cap names, so the Fund is
currently more small-cap oriented than it has been for most of its life. Please
see page 16 for a breakout of our asset class and market cap exposure.
CUMULATIVE TOTAL RETURN SINCE INCEPTION - AS OF JUNE 30, 1999
Masters' Select Equity Fund 80.59%
Weighted average of Managers' funds 65.85%
Past performance is no guarantee of future results, and investors may have a
gain or loss when they sell shares. All returns assume reinvestment of dividends
and capital gains. Weighted average of managers' funds equals the cumulative
total return earned by the unaffiliated no-load funds managed by the managers
multiplied by the percentage of Masters' assets allocated to each manager. There
may be differences among these funds with regard to charges, expenses and
investment policies that affect performance. Inception date is December 31,
1996.
As of this writing, we remain concerned about the richly priced S&P 500 and the
expectations of investors. Financial market history is full of stories about
investors being seduced into extrapolating stretches of strong performance far
into the future. Unfortunately, most high-return periods are, sooner rather than
later, followed by periods of less exciting or even poor returns. The good news,
in our opinion, is that in the United States the broad market (small-caps,
mid-caps and value stocks) is in a reasonable value range, unlike the richly
priced large-cap growth sector. The impact of technology on productivity, and
low inflation on economic stability, seem likely to continue for awhile,
suggesting that the period of high valuations might be around for a while
longer. Regardless of how the market plays out in the short term, we take
comfort in knowing that the broader market offers better value. This will have
no impact on short-term performance, but over the long term we view this as an
advantage, given our stock pickers' flexibility to focus on the best
stock-picking opportunities they can find.
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For the most part, the Masters' story is playing out as we hoped it would. Just
as we preached the importance of a long-term focus after a disappointing 1998,
however, we do the same after an exceptional first half of 1999. Masters' Select
Equity will not deliver superior performance in every reporting period. There
will inevitably be times when some of our managers slip up and the market
environment works against us. That was the case in 1998, when an extreme
large-cap growth environment worked against our somewhat less large-cap and
somewhat value-biased Fund. So patience will matter from time to time. We
believe that the advantages of the Masters' structure will result in superior
performance over the long term-a record toward which we are continuously
working.
Please see the introduction to this report for a more general discussion and
important developments with respect to the Masters' Funds. In addition, turn to
the following pages for an interview with Sig Segalas (one of the Fund's
managers) and stock descriptions by each manager.
The Masters' Select Funds Semiannual Report June 30, 1999
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[Photo of Spiros "Sig" Segalas]
An Interview with Spiros "Sig" Segalas
Sig Segalas manages approximately 20% of the Masters' Select Equity Fund.
WHAT FIRST ATTRACTED YOU TO THE BUSINESS OF STOCK PICKING?
My initial interest in the stock market developed while I was in high school.
Being a Greek immigrant, my father was uncomfortable reading English. One of my
daily chores was to update him on the price of a few stocks he owned. I was
immediately hooked. The thought of learning how to pick stocks fascinated me.
Also, being very much involved in sports, I loved to compete. I can't think of
any other profession that captures the spirit of competition to the extent
investing does. There is nothing subjective about our business. You either
perform or you don't.
HOW DID YOUR INVESTMENT PHILOSOPHY DEVELOP?
As a junior analyst, I was initially asked to follow the machinery and
electronics industries. The differences between these industries were startling.
The machinery group was heavily influenced by macro trends while in technology,
innovation and strategic positioning are the keys to the success of a company.
It became obvious to me that the first step in finding those companies likely to
become productive investments is identifying those that have some control over
their destinies.
CAN YOU DESCRIBE THE KEY ELEMENTS OF YOUR STOCK PICKING DISCIPLINE?
The key element in stock picking is to first stack the odds in your favor by
monitoring a universe of securities that can achieve superior absolute and
relative earnings growth. To do this, one must look for distinguishing
characteristics such as superior management, a strong brand name, unique
marketing competence, or productive research and development. From this
universe, a stock must be reasonably priced vis a vis its growth prospects in
order to get into the portfolio.
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YOU'VE BUILT A GREAT LONG-TERM RECORD AT HARBOR CAPITAL APPRECIATION. WHAT
FACTORS HAVE BEEN MOST IMPORTANT IN DRIVING YOUR SUCCESS?
The success of Harbor Capital Appreciation can be attributed to maintaining
confidence in our investment style and not allowing the whims of Wall Street to
sidetrack us. However, the most important factor is our team of highly motivated
analysts which has contributed to the results.
WHAT ARE YOUR MOST IMPORTANT SOURCES OF INFORMATION?
By far, our most important source of information is our in-house research.
HOW MUCH OF YOUR RESEARCH DO YOU DO YOURSELF AND IN WHAT WAYS DO YOU RELY ON
OTHER MEMBERS OF YOUR TEAM?
Although I participate regularly in meetings with company managements and other
research meetings, I rely enormously on our research team.
OVER THE PAST FEW YEARS, LARGE CAP GROWTH STOCKS HAVE HAD A GREAT RUN. DO YOU
THINK INVESTORS HAVE BECOME TOO ENTHUSIASTIC OR DO THE PROSPECTS FOR THESE
COMPANIES JUSTIFY CURRENT PRICES?
Some large cap growth stocks are undoubtedly overvalued. Our challenge has
always been to own the right stocks. There are many large cap growth stocks that
continue to have exciting potential and it is our job to own these securities in
our portfolios. We believe we can continue to outperform both large- and
small-cap growth managers over time as we have done in the past.
WHAT ARE YOUR PRIMARY CONCERNS WITH RESPECT TO THE GENERAL INVESTMENT CLIMATE?
I am concerned by the increasing speculation that has emerged in the market, as
exhibited by internet and other IPO stocks. I believe the risks are containable;
however, we may have to experience an uncomfortable correction to eliminate some
of the excesses.
HOW DOES RUNNING A VERY CONCENTRATED PORTFOLIO (THAT IS ALSO PART OF A BROADLY
DIVERSIFIED FUND) DIFFER FROM A MORE BROADLY DIVERSIFIED PORTFOLIO?
A concentrated portfolio forces one to crystallize his/her thinking. A portfolio
manager must own securities that he is extremely confident will perform well in
a relatively short period of time; i.e., 12-18 months. While one can't diversify
risk as easily as in a broadly diversified portfolio, prudence suggests some
diversity is necessary. In Masters' Select, we are invested in five different
economic sectors, with our greatest exposure being technology at approximately
45% of assets. The technology holdings are diversified among networking,
components, computers, and software.
The Masters' Select Funds Semiannual Report June 30, 1999
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MASTERS' SELECT EQUITY FUND STOCK HIGHLIGHTS
TRANSATLANTIC HOLDINGS, Christopher Davis
Transatlantic Holdings competes in the esoteric industry of reinsurance
essentially providing insurance to insurance companies. Insurance companies use
reinsurance to help smooth their results and prevent huge losses from any single
event. The largest purchaser of reinsurance worldwide is the global powerhouse
AIG - who happens to own 50% of Transatlantic Holdings. Starting at the top with
AIG's legendary CEO Hank Greenberg serving as Chairman of the Board, TRH's
management is among the best in the reinsurance industry. Furthermore, TRH is
able to follow in AIG's footsteps around the world. As a result, this relatively
small reinsurance company has the global expertise and infrastructure of a
company many times its size. As for valuation, we would note that legendary
investor Warren Buffett who has been in the reinsurance business for many years
through Berkshire Hathaway's subsidiary National Indemnity, recently made his
largest acquisition ever, buying General Reinsurance for 17 times earnings and
about 2.5 times premiums. TRH currently trades at less than 13 times our
estimate of 1999 earnings and less than two times premiums.
APPLE COMPUTER, Foster Friess
It's a familiar company, but Wall Street analysts still seem to have trouble
getting used to just how successful the turnaround at Apple Computer has been.
We purchased Apple in time to benefit from its June-quarter earnings
performance, which exceeded analyst expectations by 8 percent. Despite the
strong showing, we believe analysts continue to underestimate the enthusiasm
surrounding Apple's new generation of products.
Apple just upgraded the memory, speed and features of its uniquely styled iMac
personal computer and G3 professional series Desktop and Powerbook computers.
And, as the fourth and final offering in its core product lineup, the company
introduced iBook, a $1,599 laptop with more processing power than any other on
the market except the G3 Powerbook. Apple's new operating system with integrated
Internet and search capabilities promises to further add to the allure of its
hardware.
All this growth potential comes at a low price. We bought Apple at $50.45 a
share, less than 18 times consensus earnings estimates for 1999. On top of that,
the Apple management team is using $500 million of the $3.1 billion in cash it
had at the end of June to buy back outstanding stock. That should position Apple
well as it enters the December quarter, typically the strongest period of the
year for computer sales, with its four main products moving to market in volume.
We expect earnings to be well ahead of consensus estimates for $2.82 and $3.05 a
share in fiscal 1999 and 2000, respective.
* Apple was added to the Masters' portfolio July 7, 1999
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PIONEER NATURAL RESOURCES, Mason Hawkins
Pioneer Natural Resources is a relatively new company in the oil and natural gas
exploration and development arena. It was formed from the merger of Mesa
Petroleum and Parker and Parsley and the subsequent purchase of Chauvco. At 40%
of appraisal, Southeastern believes Pioneer's common stock has an opportunity to
triple over the next few years. The Company's 2.3 trillion cubic feet of natural
gas, 216 million barrels of proven oil reserves, 160 million barrels of natural
gas liquids, gas producing assets and exploration acreage, net of debt, are
conservatively valued at $28 per share in today's energy price environment.
Exploration success could materially add to the Company's intrinsic value. In
recent months Pioneer has successfully de-leveraged its balance sheet through
the sale of non-strategic assets and significantly lowered its cost of
production. Pioneer is led by the capable team of Chairman John Brumley, CEO
Scott Sheffield and Board Member and major shareholder, Richard Rainwater.
TIFFANY, Sig Segalas
Since its founding in 1837, Tiffany & Co. has become one of the world's premier
retailers of jewelry, tableware and accessories. The company has more than 100
stores worldwide and generates significant profits both in the U.S. and in Asian
markets.
Management in recent years has done an outstanding job of broadening Tiffany's
product line, particularly at the more affordable price points. As a result,
they have significantly broadened their market appeal to lower income families.
This has driven strong worldwide comparable store sales, which in turn has
resulted in strong financial results.
In 1998 sales grew at 15% and earnings per share at close to 25%. These results
were achieved in the face of very difficult conditions in Tiffany's Asian
markets.
Tiffany recently announced that in an effort to further broaden their market
reach globally, they would start to sell product on their website sometime in
1999-2000. This should eventually result in additional sales and profits in
those markets where opening a store may not be economically feasible.
The combination of a robust U.S. economy, the resumption of some economic growth
in their Asian markets, and the launch of their e-commerce website should allow
Tiffany's earnings to continue above average growth of around 20%. We anticipate
P/E multiple improvement as these strong results continue to unfold and as the
potential of the web for Tiffany is better understood.
The Masters' Select Funds Semiannual Report June 30, 1999
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MATTEL, INC., Robert Sanborn
We buy stocks in businesses that we understand, with management that is working
to grow and realize the long-term per share value of the enterprise, and, most
important, with market valuations that represent at least a forty percent
discount to what we estimate to be underlying, or intrinsic, value. At current
prices, Mattel (MAT) epitomizes our approach.
Historically, Mattel has demonstrated superior financial results. It has
consistently generated returns on assets in the mid-teens to twenty range, has
high and stable operating margins, and generates high free cash flow. These
results have been due to the Company's stable of powerful brand names (Barbie,
Fisher-Price, Magna Doodle, Hot Wheels, et. al.) and high market share (over
twenty percent) in a fragmented industry.
Mattel is in the midst of a major transition. It has finalized the acquisition
of The Learning Company (TLC), the pre-eminent children's software company, and
has announced a restructuring that will lower headcount and costs, and is on the
verge of launching its e-commerce initiative, Mattel.com. Mattel has
strategically transformed itself from a supplier of traditional toys to a
provider of a broad array of family entertainment products and services. With
the addition of TLC, American Girl, the Internet, and the products Mattel
develops jointly with Intel, Mattel will now have attractive offerings for
consumers moving into their teens and beyond. Mattel is the best positioned toy
company in the New Economy, and its e-commerce business, unlike many of the
household Net names, should soon have high margins and strong profitability. In
time, it will be feasible for all of Mattel's (and TLC's) software to be
downloaded on the Internet (with margins approaching 85%!). In my opinion, this
will ultimately be the best way for corporate America to exploit the net.
It is our conclusion that Mattel is an above average business. It has strong
franchise characteristics, very stable financial parameters, and a management
team that we like. Yet, at current prices, Mattel sells at a very modest 12.0 x
cash earnings, and only 8.0 x 2000 estimated EBITA (earnings before interest,
taxes, depreciation and amortization). Despite the Company's high margins,
Mattel sells at only 1.6 x sales (including debt). All of these represent
substantial discounts to the overall market.
14
<PAGE>
SEACOR SMIT, Dick Weiss
Seacor Smit operates a diversified fleet of marine vessels serving the oil and
gas industry worldwide and is a leading provider of oil spill response services.
CEO Charles Fabricant has displayed an historical knack for selling assets at
favorable prices in euphoric markets and maintaining financial flexibility to
purchase depressed assets at market troughs.
Seacor was able to weather the recent energy bear market by locking in long term
contracts on its fleet at attractive dayrates, selling older boats in early 1998
for cash, and by redeploying that cash into the construction of new anchor
handlers whose dayrates have actually increased in 1999, while rates for other
vessels continued to plummet. In addition, Seacor has strategically acquired
technology in the areas of marine logistics and communications as a means of
diversifying itself from the pure commodity crew boat business and secure equity
upside in these emerging industry developments.
Our rationale for buying Seacor Smit in May of 1999 at $50 centered around a
strong operating company with financially savvy management and no net debt which
is leveraged to increasing worldwide drilling activity driven by higher
commodity prices. Seacor's fleet experiences increased utilization and dayrates
as the rig count increases and a greater number of boats are needed to ferry
crew and supplies to offshore rigs. Capital expenditures by exploration and
production companies are expected to rise materially in the next 12 months as
the industry gains greater confidence in the sustainability of $18 oil prices
and North American deliverability constraints drive natural gas prices north of
$2.50.
Under a scenario of 80% utilization of its worldwide fleet (1998 peaked at 95%)
and $6,000 average dayrates (1998 peaked at $9,000) within the next 18-24
months, Seacor can post $5.00 of earnings and $8.00 of cash flow. At an 8.5
multiple of cash flow seen back in 1997, we get a $68 value for the base vessel
business coupled with a potentially conservative $5 value given to its logistics
and communications business, yielding a price target of $73 for CKH shares.
- --------------------------------------------------------------------------------
Neither the information contained herein nor any opinion expressed shall be
construed to constitute an offer to sell or a solicitation to buy any securities
mentioned herein. The views expressed herein are those of the portfolio managers
at the time commentaries are made and may not be reflective of current opinions.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
MASTERS' SELECT EQUITY FUND PORTFOLIO SUMMARY
PORTFOLIO COMPOSITION (6/30/99)
As reflected below, your Fund is well diversified in terms of industry exposure
and market capitalization exposure. Masters' Select Equity holds 79 securities,
exclusive of cash equivalents.
Foreign 4.0%
Cash and Other 3.3%
Large-Caps 44.4%(3)
Mid-Caps 23.0%(2)
Small-Caps 25.3%(1)
1 Market capitalization < $1.4 billion
2 Market capitalization > $1.4 billion and < $10 billion
3 Market capitalization > $10 billion
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 - UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCKS (96.74%) INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
- ------------------------------------------------------------------------------------------------------------
BASIC MATERIALS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Geon Company Chemicals 60,000 $ 1,935,000 0.44%
- ----------------------------------------------------------------------------------------------------------
BUSINESS SERVICES
- ----------------------------------------------------------------------------------------------------------
* World Color Press, Inc. Printing 95,000 2,612,500 0.60%
* Getty Images, Inc. Visual Content 130,000 2,453,750 0.56%
Waste Management, Inc. Waste Disposal 228,000 12,255,000 2.80%
- ----------------------------------------------------------------------------------------------------------
17,321,250 3.96%
CAPITAL GOODS
- ----------------------------------------------------------------------------------------------------------
Lockheed Martin Corporation Aerospace 160,000 5,960,000 1.36%
Cooper Industries Construction Materials 80,000 4,160,000 0.95%
Martin Marietta Materials Construction Materials 40,000 2,360,000 0.54%
- ----------------------------------------------------------------------------------------------------------
12,480,000 2.85%
CONGLOMERATE
- ----------------------------------------------------------------------------------------------------------
Philips Electronics Electronics, Software 161,000 16,200,625 3.70%
* Berkshire Hathaway, Inc. Class A Insurance, Publishing, Furniture 117 8,061,300 1.84%
- ----------------------------------------------------------------------------------------------------------
24,261,925 5.54%
CONSUMER PRODUCTS
- ----------------------------------------------------------------------------------------------------------
Nike, Inc. Apparel 130,000 8,230,625 1.88%
Masco Corporation Building Materials 156,200 4,510,275 1.03%
Stanley Works Hardware 250,000 8,046,875 1.84%
Fortune Brands Housewares 160,000 6,620,000 1.51%
Brunswick Corp. Sporting Goods 255,000 7,108,125 1.62%
* Oakley, Inc. Sunglasses 300,000 2,137,500 0.49%
Philip Morris Companies, Inc. Tobacco 170,000 6,831,875 1.56%
Mattel, Inc. Toys 200,000 5,287,500 1.21%
- ----------------------------------------------------------------------------------------------------------
48,772,775 11.14%
</TABLE>
16
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 - UNAUDITED (continued)
<TABLE>
<CAPTION>
CONSUMER SERVICES INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
* Williams-Sonoma, Inc. Housewares 97,500 $3,394,219 0.78%
* Zale Corp. Jewelry 103,900 4,156,000 0.95%
Applebees International, Inc. Restaurants 85,000 2,571,250 0.59%
* CEC Entertainment, Inc. Restaurants 64,000 2,704,000 0.62%
* Foodmaker, Inc. Restaurants 108,000 3,064,500 0.70%
McDonald's Corporation Restaurants 151,000 6,238,186 1.43%
* NPC International, Inc. Restaurants 214,500 3,291,234 0.75%
* Charming Shoppes, Inc. Retail 300,000 1,823,438 0.42%
Gap, Inc Retail 73,500 3,702,563 0.85%
* Land's End, Inc. Retail 70,000 3,395,000 0.78%
Tiffany & Co. Retail 40,600 3,917,900 0.90%
* Bj's Wholesale Club, Inc. Specialty Foods 145,000 4,359,063 1.00%
- ----------------------------------------------------------------------------------------------------------
42,617,353 9.77%
ENERGY
- ----------------------------------------------------------------------------------------------------------
Cabot Oil & Gas Corporation Oil and Gas Exploration 166,000 3,091,750 0.71%
* Harken Energy Corporation Oil and Gas Exploration 1,300,000 2,112,500 0.48%
Pioneer Natural Resources Co. Oil & Gas 1,433,300 15,766,300 3.60%
* Precision Drilling Corp. Oil Well Services 74,700 1,423,969 0.33%
- ----------------------------------------------------------------------------------------------------------
22,394,519 5.12%
FINANCE
- ----------------------------------------------------------------------------------------------------------
Chase Manhattan Corp. Banking 86,400 7,484,400 1.71%
Citigroup Banking 76,800 3,648,000 0.83%
Wells Fargo & Company Banking 185,300 7,921,575 1.81%
Household International, Inc. Consumer Lending 75,000 3,553,125 0.81%
American Express Company Financial Services 94,400 12,283,800 2.81%
Morgan Stanley Dean
Witter Discover Financial Services 45,000 4,612,500 1.05%
Orion Capital Corp. Insurance 298,300 10,701,513 2.45%
Progressive Corp. Insurance 23,900 3,465,500 0.79%
Transatlantic Holding Insurance 59,200 4,436,300 1.01%
Washington Mutual, Inc. Savings & Loan 160,000 5,660,000 1.29%
- ----------------------------------------------------------------------------------------------------------
63,766,713 14.56%
HEALTH CARE & PHARMACEUTICALS
- ----------------------------------------------------------------------------------------------------------
* Ventana Medical Systems Equipment 105,000 2,024,531 0.46%
* Health Management Association Facilities 220,000 2,475,000 0.56%
American Home Products Corp. Pharmaceuticals 91,000 5,232,500 1.20%
- ----------------------------------------------------------------------------------------------------------
9,732,031 2.22%
HOTELS
- ----------------------------------------------------------------------------------------------------------
Host Marriott Corporation Hotels and Resorts 688,071 8,170,843 1.87%
* Promus Hotel Corp. Hotels and Motels 250,000 7,750,000 1.77%
- ----------------------------------------------------------------------------------------------------------
15,920,843 3.64%
MEDIA
- ----------------------------------------------------------------------------------------------------------
CBS Corp. Broadcasting 135,400 5,881,437 1.34%
* Univision Communications, Inc. Broadcasting 40,000 2,640,000 0.60%
Knight Ridder, Inc. Publishing 35,000 1,922,813 0.44%
- ----------------------------------------------------------------------------------------------------------
10,444,250 2.38%
</TABLE>
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 - UNAUDITED (continued)
<TABLE>
<CAPTION>
TECHNOLOGY INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
* Commscope, Inc. Communications Equipment 97,400 $ 2,995,050 0.68%
* Dell Computer Corporation Computer Hardware 138,200 5,109,081 1.17%
Hewlett Packard Company Computer Hardware 77,000 7,738,500 1.77%
International Business Machines Computer Hardware 80,000 10,340,000 2.36%
* Cisco Systems, Inc. Computer Networks 119,350 7,686,886 1.76%
* Convergys Corp. Computer Networks 134,000 2,579,500 0.59%
* UCAR International, Inc. Electronic Instruments 680,000 17,170,000 3.92%
Maxtor Corp. Hardware 380,000 1,905,938 0.44%
* Sandisk Corp. Hardware 68,000 3,057,875 0.70%
Eaton Corp. Instruments 80,000 7,360,000 1.68%
* Oak Industries, Inc. Instruments 60,000 2,621,250 0.60%
* Applied Materials, Inc. Semiconductors 68,900 5,089,988 1.16%
* Galileo Technology Limited Semiconductors 50,000 2,268,750 0.52%
* RF Micro Devices, Inc. Semiconductors 35,000 2,612,969 0.60%
Texas Instruments Semiconductors 89,600 12,992,000 2.97%
* Triquint Semiconductor, Inc. Semiconductors 99,700 5,667,322 1.29%
* Unitrode Corp. Semiconductors 160,000 4,590,000 1.05%
* Bisys Group, Inc. Services 40,000 2,341,250 0.53%
First Data Corp. Services 130,000 6,361,873 1.45%
* Cadence Design Systems, Inc. Software 80,600 1,027,650 0.23%
* Microsoft Software 72,400 6,525,050 1.49%
* Sterling Software, Inc. Software 155,000 4,136,563 0.95%
Verity, Inc. Software 72,000 3,899,250 0.89%
* EMC Corp. Storage Devices 64,500 3,547,500 0.81%
- ----------------------------------------------------------------------------------------------------------
129,624,245 29.61%
TELECOMMUNICATIONS
- ----------------------------------------------------------------------------------------------------------
* MCI Worldcom, Inc. Communications Services 88,000 7,570,750 1.73%
- ----------------------------------------------------------------------------------------------------------
TRANSPORTATION
- ----------------------------------------------------------------------------------------------------------
AMR Corporation Airline 59,400 4,054,050 0.93%
* FDX Corporation Express Mail and Freight 181,000 9,819,250 2.24%
* Seacor Smit, Inc. Water Transport 50,000 2,675,000 0.61%
- ----------------------------------------------------------------------------------------------------------
16,548,300 3.78%
TOTAL COMMON STOCKS (COST $328,713,563) 423,389,954 96.74%
REPURCHASE AGREEMENTS (2.96%) PAR VALUE
- ----------------------------------------------------------------------------------------------------------
State Street Bank and Trust Co. $10,910,000 at 4.4% $10,910,000 10,910,000 2.49%
(agreement dated 6/30/99; to be repurchased at
$10,911,333 on 7/1/99; collateralized by $8,520,000
in US Treasury Notes due 2/15/2019; cost $10,910,000,
value $11,150,311)
State Street Bank and Trust Co. $2,035,000 at 4.85% 2,035,000 2,035,000 0.47%
(agreement dated 6/30/99; to be repurchased at
$2,035,274 on 7/1/99; collateralized by $2,100,000
in US Treasury Notes due 2/15/2019; cost $2,035,000,
value $2,105,410)
- ----------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (COST $12,945,000) 12,945,000 2.96%
TOTAL INVESTMENTS (COST $341,658,563) 436,334,954 99.70%
CASH AND OTHER ASSETS, NET OF LIABILITIES 1,318,612 0.30%
- ----------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $437,653,566 100.00%
==========================================================================================================
</TABLE>
* Non-income-producing securities
See Notes to Financial Statements.
18
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND REVIEW
Masters' Select International had an outstanding first half of 1999. Of greater
importance, it has outperformed all of its benchmarks by a wide margin over its
full life of one year and seven months. We created the Custom International
Index to track the Fund against a benchmark that approximates the Fund's asset
allocation. This index is composed of the MSCI EAFE Index (80% weighting), the
MSCI EAFE Small Cap Index (10% weighting) and the MSCI Emerging Markets Free
Index (10% weighting).
PERFORMANCE THROUGH JUNE 30, 1999
Since Inception
------------------------
Cumulative Average
Year Total Annual
to Date 12 Months Return Total Return
------- --------- ------ ------------
Masters' Select International Fund 21.10% 17.68% 33.69% 20.20%
Lipper International Fund Index 6.90% 3.99% 21.37% 13.01%
MSCI EAFE Index 3.84% 7.46% 25.66% 15.52%
Custom International Index 7.71% 9.05% 22.31% 13.56%
Past performance is no guarantee of future results, and investors may have a
gain or loss when they sell shares.All returns assume reinvestment of dividends
and capital gains. Indexes are unmanaged, do not incur fees and cannot be
invested in directly. Inception date of the Fund is December 1, 1997.
The explanation for your Fund's good performance was, quite simply, effective
stock picking. During the first half of 1999, performance was not the result of
large exposure to the hot stock markets of Asia, Japan and parts of Latin
America. In fact, your Fund's exposure to Japan peaked at 6.7%, far below the
benchmark's allocation. Exposure to Asia ex-Japan was only 8.1% at its peak, and
exposure to Mexico, the hottest market in Latin America, was zero. Your Fund's
largest exposure during the first half was to Europe. The return on the European
stock index was slightly negative in dollar terms in the first half. The Fund's
regional exposure at June 30, 1999, is illustrated in the Schedule of
Investments beginning on page 27.
Over the life of the Fund, the high returns relative to the indexes and the
average international mutual fund have been the result of good performance by
all five managers. The following table breaks down the cumulative
(non-annualized) performance of our managers relative to their benchmarks from
the Fund's inception through June 30, 1999. Three of the four "core
international" managers beat the index individually as well as beating it as a
group. Our lone small-cap manager has handily outperformed the MSCI EAFE Small
Cap Index over the life of the Fund.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
CUMULATIVE TOTAL RETURN SINCE INCEPTION - AS OF JUNE 30, 1999
Masters' "core international managers 38.91%
MSCI EAFE Index 25.66%
Past performance is no guarantee of future results, and investors may have a
gain or loss when they sell shares. All returns assume reinvestment of dividends
and capital gains. Indexes are unmanaged, do not incur fees and cannot be
invested in directly. The returns for the Masters' managers are an equally
weighted average of the managers' returns since inception. Though the percentage
of the Fund's assets allocated to each manager drifts slightly over time,
equally weighting the cumulative performance of the core international should be
a very close approximation of the actual performance if it had been calculated
based on the daily asset levels of each manager. Core international managers are
Helen Young Hayes, David Herro, Dan Jaworski and Mark Yockey.
Our Masters' managers have also outperformed over the life of the Fund when
compared with their own funds. Four of our five managers run public mutual
funds. The weighted average performance of these four managers for Masters'
compared with the weighted average performance of their own funds is impressive.
The cumulative (non-annualized) performance of our managers relative to their
own publicly available funds from our Fund's inception through June 30, 1999,
was as follows:
We believe that the magnitude of our managers' performance relative to
benchmarks and the breadth of their performance (four out of five outperforming)
make quite a convincing argument in support of the Masters' concept of skilled
stock pickers focusing only on their highest-conviction stocks.
CUMULATIVE TOTAL RETURN SINCE INCEPTION - AS OF JUNE 30, 1999
Weighted average Masters' performance 40.3%
Weighted average of managers' funds 34.7%
Past performance is no guarantee of future results, and investors may have a
gain or loss when they sell shares. All returns assume reinvestment of dividends
and capital gains. Weighted average of managers' funds equals the cumulative
total return earned by the unaffiliated no-load funds managed by the managers
multiplied by the percentage of Masters' assets allocated to each manager. There
may be differences among these funds with regard to charges, expenses and
investment policies that affect performance. Bruce Bee's Masters' performance
and the performance of his publicly traded fund is included since April 1, 1998,
which coincides with the date he began managing the public fund.
20
<PAGE>
LOOKING FORWARD
There continue to be reasonably attractive stock-picking opportunities around
the world. Other than Europe, much of the world's markets have not performed
well in recent years, so valuations are not excessive. Many of the emerging
markets are showing signs of recovery. Japan continues to struggle, but positive
change is slowly occurring. And though European markets have been very strong
over the past few years, most of our stock pickers continue to like the
prospects of selected companies, especially in light of the opportunities
brought on by the euro and corporate restructuring. That said, stocks fluctuate
over the short-term, and there are plenty of risks that could temporarily upset
the apple cart. Longer-term investors should understand the importance of riding
out these periods to achieve good long-term returns.
Although we are gratified by the excellent performance of Masters' Select
International, we must point out that we don't expect things to always be this
good. Our goal is to build a superior long-term record, outperforming index fund
alternatives and the Fund's peer group. So far that has been the case in
convincing fashion; however, we expect to build this long-term performance with
some detours along the way, including some periods of mediocre or poor
performance. Hopefully, our multimanager structure will minimize these periods,
but they will happen, as they do with all good funds. We believe that our
shareholders should expect good long-term performance from us and superior
performance more often than not, but you must also recognize that there will be
dips along the way. As always, we will work to get every edge to meet our
long-term performance goals.
Please see the introduction to this report for a more general discussion and
important developments with respect to the Masters' Funds. In addition, turn to
the following pages for an interview with Mark Yockey (one of the Fund's
managers) and stock descriptions by each manager.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
[PHOTO OF MARK YOCKEY]
An Interview with Mark Yockey
Mark Yockey manages approximately 22.5% of the Masters' Select
International Fund.
WHAT FIRST ATTRACTED YOU TO THE BUSINESS OF STOCK PICKING?
I have always been interested in understanding how businesses work. In addition,
my experience studying abroad in college led to an interest in travel and
foreign cultures. Portfolio management allows me to combine these two interests.
HOW DID YOUR INVESTMENT PHILOSOPHY DEVELOP?
Early in my investment career, I became convinced that growth stocks offer the
best long-term return potential for overseas investors. My interest in how
businesses work, as opposed for example to global politics, led to my bottom-up
approach. Finally, the thematic element of my process developed over time as a
way to focus my research efforts efficiently.
CAN YOU DESCRIBE THE KEY ELEMENTS OF YOUR STOCK PICKING DISCIPLINE?
I look for companies, of all sizes, that I believe are positioned for strong,
sustainable growth in industries or themes that we think are compelling. We also
look for management teams that are incented with equity and have a U.S. approach
to increasing shareholder value.
YOU'VE BUILT A GREAT LONG-TERM RECORD AT ARTISAN INTERNATIONAL AND BEFORE THAT
AT UNITED INTERNATIONAL GROWTH. WHAT FACTORS HAVE BEEN MOST IMPORTANT IN DRIVING
YOUR SUCCESS?
First and foremost, I have always been committed to my investment philosophy. I
believe that long-term success is not only influenced by an investor's ability
to develop a value-added investment approach but also their discipline to stick
to it. My willingness to travel has also been an important factor in my success.
Through first-hand observation of business operations and economic regions I am
able to obtain critical investment information that
22
<PAGE>
I would otherwise have a difficult time understanding from a distance, such as
the quality of management, investment climate and market trends.
WHAT ARE YOUR MOST IMPORTANT SOURCES OF INFORMATION?
Basically, anything that Wall Street doesn't look at. Many of our best ideas
come from company managements or empirical observations. When seeking out
investments, I look for companies that are well run and focused. Ultimately,
this boils down to the competence of management so I travel extensively with my
team, meeting with management and observing businesses first-hand
HOW MUCH OF YOUR RESEARCH DO YOU DO YOURSELF AND IN WHAT WAYS DO YOU RELY ON
OTHER MEMBERS OF THE TEAM?
I have always taken a team approach to investing. At least two members of my
team are actively involved in the research of every company that we consider for
investment and we travel together when we are looking for new ideas and
confirming existing beliefs. While I ultimately make all buy and sell decisions
in the portfolio, my team is an invaluable component of the investment process.
MOST OF YOUR HOLDINGS FOR MASTERS' SELECT INTERNATIONAL HAVE BEEN COMPANIES
DOMICILED IN EUROPE. WHAT'S BEHIND YOUR CONTINUED OPTIMISM WITH RESPECT TO STOCK
PICKING OPPORTUNITIES IN EUROPE?
The structural changes occurring in Europe right now continue to offer unique
investment opportunities and long-term potential. For this reason and more, we
continue to be positive on Europe, especially in the financial and telecom
sectors and we intend to maintain our emphasis in this region for the
foreseeable future.
YOU CURRENTLY HAVE NO HOLDINGS IN ASIA, IS ANYTHING ON YOUR RADAR YET?
We have been following Asia closely and are beginning to see some meaningful
reforms in Japan. We confirmed this belief on a recent trip to Japan and added
to our holdings when we returned. However, while we are slowly beginning to add
names to our portfolios we will remain cautious and highly selective in this
area until we are convinced that the Asian economies can support sustained
growth.
HOW ATTRACTIVE ARE TODAY'S OPPORTUNITIES, AT A STOCK PICKING LEVEL, COMPARED TO
OTHER POINTS IN TIME IN YOUR CAREER?
I can say, without hesitation, that this is the best stock-picking environment
that I have ever seen. The U.S. economy is strong, as evidenced by low
inflation, low interest rates and strong consumer confidence and this strength
has translated into global strength and opportunities. Coupled with the changes
in Europe and the recovery in Asia, this leads to enormous potential.
WHAT ARE YOUR PRIMARY CONCERNS WITH RESPECT TO THE GENERAL INVESTMENT CLIMATE?
My primary concern is that the U.S. growth rate will lead to higher interest
rates worldwide.
HOW DOES RUNNING A VERY CONCENTRATED PORTFOLIO (THAT IS ALSO PART OF A BROADLY
DIVERSIFIED FUND) DIFFER FROM A MORE BROADLY DIVERSIFIED PORTFOLIO?
When running a concentrated portfolio you have to be willing to accept
significantly more volatility in the short-term. The Masters' Select Fund, of
course, addresses this issue with multiple managers.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND STOCK HIGHLIGHTS
HUNG HING PRINTING GROUP, Bruce Bee
Hung Hing Printing Group Ltd. was founded in Hong Kong in 1950 as a small
printing shop for office stationary. The Company's business evolved to include
the printing of paper packaging materials used primarily by toy manufacturers
headquartered in Hong Kong exporting throughout the world. From the beginning,
Hung Hing built manufacturing facilities in mainland China to supply packaging
materials to mainland enterprises. The Company has been quoted on the Hong Kong
stock exchange since 1992.
Today, the Company is a major printing and packaging company with approximately
three million square feet of manufacturing space in Hong Kong and mainland
China. Hung Hing has nearly 1,000 customers and has developed long-term
relationships with multinational consumer product companies such as Colgate,
Coca-Cola, Hasbro, Nestle, and Kellog. In 1997, the U.S. investment bank Goldman
Sachs purchased approximately 10% of Hung Hing Printing at a price slightly
above the current share quote. The meltdown in Asia in 1997 and 1998 severely
impacted the price of Hung Hing common shares, but had little impact on the
operating results of the Company. During 1997 and 1998 the Company reported
higher sales, earnings, earnings per share, and dividends. In the seven years
ended March 31, 1999 Hung Hing's revenues, net profits, and dividends have grown
at average annual compound rates of 13.4%, 18%, and 41% respectively.
With substantial manufacturing capacity in place serving an increasing number of
international brand name customers selling to China's emerging consumer market,
we believe Hung Hing's outlook remains very favorable. At recent price levels,
Hung Hing's stock was available at approximately 7x Earnings Per Share, less
than 1.5x Book Value Per Share, and has a Dividend Yield of 7.5%. With a return
on shareholders' equity consistently above 20%, and having repurchased shares
throughout the turmoil in the Asian markets, we are very encouraged by the
shareholder orientation of Hung Hing's management and expect continued favorable
developments over the next several years.
CHINA TELECOM, Helen Young Hayes
Finding the best companies before they become market darlings often involves
uncovering information that others overlook. The task is even more challenging
when the prospective company is in China, perhaps one of the most opaque
financial markets in the world. And when the company is a player in a rapidly
changing industry like telecommunications, it can become nearly impossible.
We recognized that deregulation of Mainland China's Telecommunications industry
was inevitable. Thanks to our far-reaching knowledge of the global
telecommunications industry, we also believed that wireless was almost certain
to emerge as the most profitable mode of communication in Asia.
24
<PAGE>
These facts led us to China Telecom, a wireless company created in 1997 through
the privatization of government-controlled cellular assets. We knew that this
virtual monopoly, situated in one of the fastest growing industries and
economies in the world, had the potential to become a tremendous growth story.
While we were impressed by the company's rapidly expanding subscriber base and
outstanding operating metrics, we were also intrigued by several intangibles
that weren't immediately evident in the data. We anticipated the company's
recent announcement that it would drop installation fees to zero within two
years, news that forced other investors to quickly revise their revenue and
earnings projections for the company. We also recognized that the company's
practice of charging a service premium relative to Unicom, a rapidly emerging
competitor, represented brand strength--an extremely powerful asset in any newly
competitive market. Perhaps even more surprising was the fact that the company's
CEO was extremely sensitive to creating and preserving shareholder value, a
startling trait for a company operating from within one of the world's last true
bastions of communist control. In short, we discovered that China Telecom was
much more than another telecom deregulation play--and that China itself has come
a long way since the days of Chairman Mao.
ROYAL DOULTON PLC, David Herro
Royal Doulton is a U.K. based company that manufactures and distributes fine
china tableware and giftware. The company spun-out of Pearson PLC about four
years ago and though it had an extremely strong brand name and very valuable
distribution channels, was poorly managed.
We have been purchasing Royal Doulton because under new management, the company
has regained focus and is beginning to take advantage of its strengths. It has
aggressively lowered costs, narrowed its product range, freed up working capital
and has elevated its marketing efforts. The Royal Doulton brand name is number
one in its category in the United Kingdom, Canada and Australia, and has a great
opportunity in the USA.
Currently, the company is trading at 60% of its sales and 5.5 times its
operating profit. In the future, we feel Royal Doulton should be trading
somewhere near 150% of its sales and 12-14 times its operating profit, giving
the investment huge upside.
Besides the recovery story, there is great growth potential in both the giftware
sector, which is highly profitable, and in expanding tableware in areas which
they are under exposed such as Europe and the USA. All in all, in the next two
to four years, we feel the company is worth at least double its current share
price of 128p.
STMICROELECTRONICS, Dan Jaworski
STMicroelectronics- headquartered in the Netherlands, is a global semiconductor
company. The company designs, manufactures, and markets an extensive range of
semiconductor integrated circuits (IC) and discrete devices used in a wide
variety of microelectronic applications. Its customers include
telecommunications systems (25%of revenues), computer systems (26%), consumer
products (21%), automobile products (12%), and industrial automation systems
(16%). The company conducts business worldwide with Europe representing 42% of
sales, the US 22%, Japan 5%, and the rest of the world 31%.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
The company currently ranks as the ninth largest semiconductor manufacturer in
the world. However, it has a world leadership position in 78% of the products it
manufacturers. These products include dedicated and mixed signal IC, power, and
non-volatile memories. The company is not involved in the commodity DRAM market.
STM continues to focus its efforts on developing proprietary products that
afford both higher margins and resiliency against industry cycles. This
strategic approach has lead to a focus on developing "system-on-a-chip" products
that are becoming smaller with greater complexity. The growth rate of these
products is expected to exceed 20% for the next five years.
The company is expected to grow revenues by 15% and earnings by 25% both this
year and next. The company has proven that it can maintain gross margins in the
38-42% range over a semiconductor cycle. The margin is expected to be at the top
of this range as the cycle begins to accelerate into next year. Pretax margins
are expected to rise from12.5% to 16% as capacity utilization rates increase and
general expenses remain constant. The company is free cash flow positive and is
expected to generate over $400 million of cash next year. The balance sheet is
very strong with interest coverage over 5 times while generating a ROE of +15%.
STMicroelectronics is an excellent example of the type of high quality,
industry-leading company our investment philosophy leads us to invest in. The
stock, relative to its industry peers (Texas Instruments, Linear Tech, Xilinx,
and Motorola), is selling at a 25% - 30% discount on an earnings basis. We
believe that STMicroelectronics should trade at an industry multiple on this
measure due to the outstanding prospects of the company.
GROUPE DANONE, Mark Yockey
Groupe Danone is the largest food manufacturer in France, and the third largest
food group in Europe. It also has a significant presence in the U.S. with Dannon
yogurt and Evian bottled water, two premier brands enjoying national
distribution. Danone operates in three primary businesses; dairy, beverages and
biscuits. Their brands enjoy strong market share with yogurt and bottled water
claiming the number one or two positions in most of its markets. In addition,
sales growth has been strong, particularly in the beverage business. Danone's
annual bottled water sales are growing over 10% worldwide, including 30% in the
U.S. and 40% in the Far East.
The factors contributing to the strength and growth of the business are the
reasons why we first became interested in the stock. Strategically, the company
has chosen to focus on these three core divisions, while shedding its lower
margin divisions, containers, grocery and, perhaps, brewing. The company's
emphasis on increased brand awareness has also strengthening its selling power
and has enabled it to capitalize on consumer trends towards healthier
lifestyles. We expect these factors and a strong management team who is focused
on increasing shareholder value to lead to strong expansion of sales and
earnings in coming years.
Finally, at 11X 1999E EBITDA, we believe that the stock price does not
adequately reflect the company's current profitability or potential.
- --------------------------------------------------------------------------------
Neither the information contained herein nor any opinion expressed shall be
construed to constitute an offer to sell or a solicitation to buy any securities
mentioned herein. The views expressed herein are those of the portfolio managers
at the time commentaries are made and may not be reflective of current opinions.
26
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND PORTFOLIO SUMMARY
Portfolio Composition by Region Portfolio Composition by Asset Class
(6/30/99) (6/30/99)
Cash and Other Investments 5.0% Cash and Other Investments 5.0%
Australia/New Zealand 2.9% Emerging Markets 16.7%(1)
Israel 3.0% Developed Country Small-Caps 17.0%(2)
Japan 3.7% Developed Country Large-Caps 61.3%(3)
Latin America 6.1%
Asia (ex-Japan) 7.5%
Canada 7.7%
United Kingdom 15.5%
Europe (ex-UK) 48.6%
1 Includes Hong Kong (6.0%) and Singapore (1.5%), which are not technically
emerging markets
2 Market capitalization < $800 million
3 Market capitalization > $800 million
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 - UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCKS (95.00%) SECTOR/INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARGENTINA
- -------------------------------------------------------------------------------------------------------------
Quilmes Industrial Quinsa Consumer Products 175,500 $2,171,813 1.82%
- -------------------------------------------------------------------------------------------------------------
AUSTRALIA
- -------------------------------------------------------------------------------------------------------------
Brambles Industries Limited Transportation 84,000 2,210,022 1.85%
- -------------------------------------------------------------------------------------------------------------
BRAZIL
- -------------------------------------------------------------------------------------------------------------
* Telecomunicacoes Brasileiras S.A. Telecommunications 21,600 1,948,050 1.63%
Uniao De Bancos Brasilieros S.A. Finance 76,500 1,840,781 1.54%
- -------------------------------------------------------------------------------------------------------------
3,788,831 3.17%
CANADA
- -------------------------------------------------------------------------------------------------------------
* Danier Leather Inc. Consumer Products 145,000 738,540 0.62%
* Rogers Communications Telecommunications 76,291 1,234,961 1.03%
BCE Inc. Telecommunications 40,000 1,955,857 1.64%
AT & T Canada, Inc. Telecommunications 81,500 5,221,094 4.37%
- -------------------------------------------------------------------------------------------------------------
9,150,452 7.66%
FINLAND
- -------------------------------------------------------------------------------------------------------------
Nokia Corp Technology 36,000 3,154,402 2.64%
Nokia Corp Sponsored ADR Technology 48,650 4,454,516 3.73%
- -------------------------------------------------------------------------------------------------------------
7,608,918 6.37%
FRANCE
- -------------------------------------------------------------------------------------------------------------
* STMicroelectronics Technology 41,200 2,858,250 2.39%
Cap Gemini Business Services 13,423 2,108,774 1.76%
Chargeurs Consumer Products 24,500 1,363,815 1.14%
Groupe Danone Consumer Services 9,400 2,422,498 2.03%
AXA UAP Finance 15,000 1,829,244 1.53%
- -------------------------------------------------------------------------------------------------------------
10,582,581 8.85%
</TABLE>
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 - UNAUDITED (continued)
<TABLE>
<CAPTION>
GERMANY SECTOR/INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mannesmann AG Basic Industries 75,272 $11,227,875 9.39%
Porsche AG Transportation 491 1,154,016 0.97%
- -------------------------------------------------------------------------------------------------------------
12,381,891 10.36%
HONG KONG
- -------------------------------------------------------------------------------------------------------------
Hung Hing Printing Business Services 1,615,000 666,100 0.56%
China Telecom Telecommunications 576,000 1,599,876 1.34%
Giordano International Limited Consumer Products 3,720,000 2,637,074 2.20%
JCG Holdings Limited Finance 4,753,000 2,266,659 1.90%
- -------------------------------------------------------------------------------------------------------------
7,169,709 6.00%
IRELAND
- -------------------------------------------------------------------------------------------------------------
* Saville Systems PLC Technology 105,000 1,525,781 1.28%
- -------------------------------------------------------------------------------------------------------------
ISRAEL
- -------------------------------------------------------------------------------------------------------------
* Orbotech Limited Technology 18,000 928,125 0.78%
* Comverse Technology Technology 35,250 2,659,172 2.22%
- -------------------------------------------------------------------------------------------------------------
3,587,297 3.00%
ITALY
- -------------------------------------------------------------------------------------------------------------
Industria Macchine Automatiche SpA Basic Industries 115,300 778,870 0.65%
FILA Holdings SpA Consumer Products 203,000 2,397,938 2.01%
- -------------------------------------------------------------------------------------------------------------
3,176,808 2.66%
JAPAN
- -------------------------------------------------------------------------------------------------------------
Takeda Chemicals Industries Basic Industries 30,000 1,391,254 1.16%
Fujitsu Limited Technology 67,000 1,348,640 1.13%
* NTT Mobile Communications Telecommunications 125 1,678,102 1.40%
- -------------------------------------------------------------------------------------------------------------
4,417,996 3.69%
NETHERLANDS
- -------------------------------------------------------------------------------------------------------------
Van Melle Consumer Products 16,000 1,026,727 0.86%
Koninklijke Ahold NV Consumer Services 71,000 2,444,558 2.05%
Wolters Kluwer Media 44,076 1,753,820 1.47%
Getronics NV Technology 14,081 542,229 0.45%
Phillips Electronic Technology 6,136 2,281,423 1.91%
* United International Holdings, Inc. Telecommunications 26,880 1,818,600 1.52%
- -------------------------------------------------------------------------------------------------------------
9,867,357 8.26%
NEW ZEALAND
- -------------------------------------------------------------------------------------------------------------
Fernz Corp. Basic Industries 440,000 1,271,951 1.06%
- -------------------------------------------------------------------------------------------------------------
NORWAY
- -------------------------------------------------------------------------------------------------------------
* Norsk Lotteridrift Consumer Services 275,000 872,407 0.73%
- -------------------------------------------------------------------------------------------------------------
PANAMA
- -------------------------------------------------------------------------------------------------------------
Banco Latinoamericano Finance 50,500 1,350,875 1.13%
- -------------------------------------------------------------------------------------------------------------
PORTUGAL
- -------------------------------------------------------------------------------------------------------------
Investec Consultadoria Internacional S.A. Media 30,000 909,983 0.76%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 - UNAUDITED (continued)
<TABLE>
<CAPTION>
SINGAPORE SECTOR/INDUSTRY SHARES HELD MARKET VALUE PORTFOLIO %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mandarin Oriental International Limited Hotels 2,090,000 $1,839,200 1.54%
- -------------------------------------------------------------------------------------------------------------
SPAIN
- -------------------------------------------------------------------------------------------------------------
Telefonica S.A. Telecommunications 45,113 2,177,817 1.82%
- -------------------------------------------------------------------------------------------------------------
SWEDEN
- -------------------------------------------------------------------------------------------------------------
Assa Alboy Basic Industries 166,060 1,834,896 1.53%
Nobel Biocare Health Care 70,000 1,030,746 0.86%
- -------------------------------------------------------------------------------------------------------------
2,865,642 2.39%
SWITZERLAND
- -------------------------------------------------------------------------------------------------------------
UBS AG Finance 7,000 2,088,612 1.75%
Roche Holdings AG Health Care 170 1,746,897 1.46%
Synthes Stratec Holding AG Health Care 4,350 1,381,840 1.16%
PubliGroupe S.A. Business Services 1,650 901,871 0.75%
- -------------------------------------------------------------------------------------------------------------
6,119,220 5.12%
UNITED KINGDOM
- -------------------------------------------------------------------------------------------------------------
* Standard Chartered Finance 166,000 2,702,923 2.26%
Cordiant Communications Group Business Services 936,000 2,574,521 2.15%
Royal Doulton PLC Consumer Products 1,175,000 2,444,764 2.05%
Racal Electronics Technology 390,000 2,375,961 1.99%
Tomkins PLC Business Services 484,971 2,102,198 1.76%
Capita Group PLC Business Services 195,057 2,018,466 1.69%
Securicor Business Services 200,000 1,760,672 1.47%
Saatchi & Saatchi PLC Business Services 465,000 1,572,924 1.32%
Victrex PLC Basic Industries 330,000 946,696 0.79%
- -------------------------------------------------------------------------------------------------------------
18,499,125 15.48%
TOTAL COMMON STOCKS (COST $91,243,384) 113,545,676 95.00%
REPURCHASE AGREEMENTS (1.80%) PAR VALUE
- -------------------------------------------------------------------------------------------------------------
State Street Bank and Trust Co. $2,157,000 at 4.4% $2,157,000 2,157,000 1.80%
(agreement dated 6/30/99; to be repurchased at $2,157,264
on 7/1/99; collateralized by $1,690,000 in US Treasury Notes
due 2/15/2019; cost $2,157,000, value $2,211,740)
US TREASURY OBLIGATIONS (2.00%)
- -------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Mortgage Discount Note 2,400,000 2,400,000 2.00%
4.60%, 7/1/99 (cost $2,400,000)
- -------------------------------------------------------------------------------------------------------------
TOTAL SHORT TERM INVESTMENTS (COST $4,557,000) 4,557,000 3.80%
TOTAL INVESTMENTS (COST $95,800,384) 118,102,676 98.80%
CASH AND OTHER ASSETS, NET OF LIABILITIES 1,436,267 1.20%
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $119,538,943 100.00%
=============================================================================================================
</TABLE>
* Non-income-producing securities
See Notes to Financial Statements.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999 - UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS EQUITY FUND INTERNATIONAL FUND
----------- ------------------
<S> <C> <C>
Investments in securities, at value (cost
of $341,658,563 and $95,800,384) $436,334,954 $118,102,676
Cash, including foreign currencies, at
value (cost of $0 and $235,358) 308,669 259,942
Receivables:
Fund shares sold 300,916 160,318
Investment income 413,069 289,770
Investment securities sold 8,093,420 2,732,703
Unrealized gain on forward exchange contracts -- 171,753
Deferred organizational costs 51,873 25,963
Prepaid expenses 16,591 7,684
------------ ------------
Total assets 445,519,492 121,750,809
LIABILITIES
Payables:
Fund shares redeemed 100,166 13,506
Investment securities purchased 7,206,058 1,999,754
Investment advisory fees 409,348 104,974
Unrealized loss on forward exchange contracts 238 10,627
Accrued expenses and other 150,116 83,005
------------ ------------
Total liabilities 7,865,926 2,211,866
NET ASSETS $437,653,566 $119,538,943
============ ============
COMPOSITION OF NET ASSETS
Paid-in capital $286,553,967 $ 96,036,581
Undistributed net investment income 751,921 266,985
Undistributed net realized gains 55,671,525 773,771
Net unrealized appreciation 94,676,153 22,461,606
------------ ------------
NET ASSETS $437,653,566 $119,538,943
------------ ------------
Number of shares, $0.01 par value, issued
and outstanding (unlimited shares authorized) 26,488,162 9,013,809
------------ ------------
NET ASSET VALUE PER SHARE $ 16.52 $ 13.26
============ ============
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED ON JUNE 30, 1999 - UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME EQUITY FUND INTERNATIONAL FUND
----------- ------------------
<S> <C> <C>
Income
Dividend income
(net of foreign taxes of $33,859 and $97,860) $ 2,524,161 $ 868,375
Interest income 422,050 121,200
------------ ------------
Total income 2,946,211 989,575
Expenses Advisory fees 2,222,492 577,764
Transfer agent fees 118,445 17,829
Accounting fees 47,171 41,333
Custodian fees 58,435 55,229
Administration fees 96,845 25,274
Registration fees 25,445 17,808
Shareholder reporting 38,595 8,545
Professional Fees 19,595 16,827
Trustees fees 7,421 7,421
Insurance 11,946 2,946
Amortization of deferred organizational costs 10,570 3,745
Miscellaneous expenses 22,607 6,482
------------ ------------
Total expenses 2,679,567 781,203
Less: Advisory fees waived 40,674 52,546
Expenses paid indirectly 12,425 6,067
------------ ------------
Net expenses 2,626,468 722,590
============ ============
NET INVESTMENT INCOME 319,743 266,985
REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gain (loss):
Investments 49,335,725 8,289,772
Foreign currency transactions (895,815) (1,283,797)
------------ ------------
Net realized gain 48,439,910 7,005,975
Net unrealized appreciation on:
Investments 31,264,500 12,858,819
Foreign currency transactions 901,758 206,533
------------ ------------
Net unrealized appreciation 32,166,258 13,065,352
============ ============
NET REALIZED AND UNREALIZED GAINS 80,606,168 20,071,327
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 80,925,911 $ 20,338,312
============ ============
</TABLE>
See Notes to Financial Statements.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS - EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months For the year ended
INCREASE (DECREASE) IN NET ASSETS ended June 30, 1999* December 31, 1998
-------------------- -----------------
<S> <C> <C>
Net investment income $ 319,743 $ 1,110,694
Net realized gain 48,439,910 7,401,690
Net unrealized appreciation 32,166,258 38,717,985
------------- -------------
Net increase in net assets from operations 80,925,911 47,230,369
Distributions to shareholders:
From net investment income -- (716,884)
From net realized gains -- (257,199)
------------- -------------
Total distributions -- (974,083)
Fund share transactions:
Proceeds from shares sold 33,328,328 152,586,067
Net asset value of shares issued on
reinvestment of distributions -- 963,287
Cost of shares redeemed (82,058,560) (91,223,564)
------------- -------------
Net increase (decrease) from Fund share transactions (48,730,232) 62,325,790
============= =============
NET INCREASE IN NET ASSETS 32,195,679 108,582,076
NET ASSETS
Beginning of period 405,457,887 296,875,811
============= =============
End of period $ 437,653,566 $ 405,457,887
============= =============
CHANGE IN SHARES
Shares sold 2,270,423 12,130,365
Shares issued on reinvestment of distributions -- 76,118
Shares redeemed (5,654,607) (7,397,559)
============= =============
NET INCREASE (DECREASE) (3,384,184) 4,808,924
------------- -------------
</TABLE>
* Unaudited
See Notes to Financial Statements.
32
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS - INTERNATIONAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months For the year ended
ended June 30, 1999* December 31, 1998
INCREASE (DECREASE) IN NET ASSETS -------------------- -----------------
<S> <C> <C>
Operations:
Net investment income $ 266,985 $ 763,812
Net realized gain (loss) 7,005,975 (6,214,611)
Net unrealized appreciation 13,065,352 9,823,019
------------- ------------
Net increase in net assets from operations 20,338,312 4,372,220
Distributions to shareholders:
From net investment income -- (769,458)
From net realized gains -- --
------------- ------------
Total distributions -- (769,458)
Fund share transactions:
Proceeds from shares sold 28,900,630 72,841,892
Net asset value of shares issued on
reinvestment of distributions -- 737,560
Cost of shares redeemed (24,920,277) (27,896,100)
------------- ------------
Net increase from Fund share transactions 3,980,353 45,683,352
============= ============
NET INCREASE IN NET ASSETS 24,318,665 49,286,114
NET ASSETS
Beginning of period 95,220,278 45,934,164
============= ============
End of period $ 119,538,943 $ 95,220,278
============= ============
CHANGE IN SHARES
Shares sold 2,346,238 6,729,487
Shares issued on reinvestment of distributions -- 68,609
Shares redeemed (2,026,938) (2,751,817)
============= ============
Net increase 319,300 4,046,279
------------- ------------
</TABLE>
* Unaudited
See Notes to Financial Statements.
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
1/1/99- 1/1/98- 1/1/97**- 1/1/99- 1/1/98- 12/1/97***
6/30/99^ 12/31/98 12/31/97 6/30/99^ 12/31/98 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.57 $ 11.84 $ 10.00 $ 10.95 $ 9.88 $ 10.00
-------- -------- -------- -------- ------- -------
Income (loss) from investment operations
Net investment income 0.01 0.03 0.03 0.03 0.08 --
Net realized and unrealized gain (loss) 2.94 1.73 2.90 2.28 1.08 (0.12)
-------- -------- -------- -------- ------- -------
Total from investment operations 2.95 1.76 2.93 2.31 1.16 (0.12)
-------- -------- -------- -------- ------- -------
Less distributions
From net investment income -- (0.02) (0.03) -- (0.09) --
From net realized gains -- (0.01) (1.06) -- -- --
-------- -------- -------- -------- ------- -------
Total distributions -- (0.03) (1.09) -- (0.09) --
======== ======== ======== ======== ======= =======
NET ASSET VALUE, END OF PERIOD $ 16.52 $ 13.57 $ 11.84 $ 13.26 $ 10.95 $ 9.88
======== ======== ======== ======== ======= =======
Total return 21.73% 14.90% 29.11% 21.10% 11.74% (1.20)%
Net assets at end of period (in 000's) $437,654 $405,458 $296,876 $119,539 $95,222 $45,934
-------- -------- -------- -------- ------- -------
Ratio of expenses to average net assets 1.30%+* 1.38%+ 1.47%+ 1.38%++* 1.55%++ 1.77%++*
-------- -------- -------- -------- ------- -------
Ratio of net investment income to
average net assets 0.16%* 0.30% 0.12% 0.50%* 0.87% 0.42%*
-------- -------- -------- -------- ------- -------
Portfolio turnover rate 50.29% 135.41% 145.11% 55.52% 73.59% 0.00%
-------- -------- -------- -------- ------- -------
</TABLE>
^ Unaudited.
* Annualized
** Operations commenced December 31, 1996.
+ Includes custody fees paid indirectly which amount to 0.00%, 0.01% and
0.03%, respectively, of average net assets for the six months ended
June 30, 1999 and the years ended December 31, 1998 and 1997,
respectively.
*** Operations commenced December 1, 1997.
++ Includes custody fees paid indirectly which amount to 0.00%, 0.01% and
0.06%, respectively, of average net assets for the six months ended
June 30, 1999 and the periods ended December 31, 1998 and 1997,
respectively.
See Notes to Financial Statements.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS.
1. ORGANIZATION
The Masters' Select Funds Trust (the "Trust") was organized as a Delaware
business trust on August 1, 1996 and is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end management investment company. The
Trust consists of two separate series: the Masters' Select Equity Fund and the
Masters' Select International Fund (each a "Fund" and collectively the "Funds").
The Masters' Select Equity Fund is a growth fund that seeks to increase the
value of your investment over the long-term by using the combined talents and
favorite stock picking ideas of six highly regarded portfolio managers.
The Masters' Select International Fund invests primarily in foreign companies.
It seeks to increase the value of your investment over the long-term by using
the combined talents and favorite stock-picking ideas of five highly regarded
international portfolio managers.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Funds.
Security Valuation -- Portfolio securities that are listed or admitted to
trading on an exchange, Nasdaq National Market System, or
over-the-counter-market are valued at the last sales price or, if there has been
no sale that day, at the mean between the closing bid and asked prices.
Securities 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
reporting 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.
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, and 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 Exchange Contracts. The Funds may utilize forward foreign currency
exchange contracts ("forward contracts") under which it is obligated to exchange
currencies at specific future dates and at specified rates, and is subject to
the risks of foreign exchange fluctuations. All commitments are
"marked-to-market" daily and any resulting unrealized gains or losses are
included as unrealized appreciation (depreciation) on foreign currency
denominated assets and liabilities. The Funds record realized gains or losses at
the time the forward contract is settled. Counter parties to these forward
contracts are major U.S. financial institutions.
Federal Income Taxes -- The Funds intend to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies. Accordingly,
no provisions for federal income taxes are required.
Security Transactions and Related Income -- Security transactions are accounted
for on the date the security is purchased or sold (trade date). Dividend income
is recognized on the ex-dividend date and interest income is recognized on the
accrual basis. Purchase discounts and premiums on securities held by the Funds
are accreted and amortized to maturity using the effective interest method.
Realized gains and losses on securities sold are determined under the identified
cost method.
It is the Trust's policy to take possession of securities as collateral under
repurchase agreements and to determine on a daily basis that the value of such
securities is sufficient to cover the value of the repurchase agreements.
Deferred Organization Costs -- Organization costs are amortized on a straight
line basis over a period of sixty months commencing with a Fund's operations.
Distributions -- Distributions to shareholders are recorded on the ex-dividend
date.
Accounting Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities on the date of financial statements and the amounts of income and
expense during the reporting period. Actual results could differ from those
estimates.
Other -- Under terms of the Trust's Custodial Agreement, the Funds may earn
credits, based on custody cash balances, to be applied to custodian fees. For
the six months ended June 30, 1999, the credits were $12,425 and $6,607 for
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
(the "Agreement") with Litman/Gregory Fund Advisors, LLC (the "Advisor"). Under
the terms of the Agreement, the Funds pay a fee to the Advisor equal to 1.10% of
the average daily net assets of the Funds. For the year ending December 31,
1999, the Advisor has contractually agreed to waive 0.02% of its fee calculated
on the average daily net assets of the Masters' Select Equity Fund and 0.10% of
its fee calculated on the average daily net assets of the Masters' Select
International Fund.
The Trust, on behalf of the Funds, has also entered into an Administration
Agreement with Investment Company Administration, L.L.C. (the "Administrator").
Under its terms, the Funds pay a fee, payable monthly based on the value of the
total average net assets of the Trust at an annual rate of 0.10% of the first
$100 million of such net assets, 0.05% of the next $150 million, 0.025% of the
next $250 million and 0.0125% thereafter, subject to a minimum fee of $40,000
per Fund.
Affiliated entities of the Trust received net commissions on sales of the Funds'
portfolio securities for the six months ended June 30, 1999, of $14,420 and $0
for the Masters' Select Equity Fund and Masters' Select International Fund,
respectively.
Each unaffiliated Trustee is compensated by the Trust at the rate of $10,000 per
year.
4. PURCHASES AND SALES OF SECURITIES
The cost of security purchases and the proceeds from security sales, other than
short-term investments, for the six months ended June 30, 1999, were as follows:
EQUITY INTERNATIONAL
FUND FUND
------------ -----------
Purchases $194,317,638 $56,474,505
Sales 245,390,739 55,885,772
The Masters' Select Funds Semiannual Report June 30, 1999
<PAGE>
At June 30, 1999, 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 $341,852,656 $95,761,391
============ ===========
Gross Unrealized Appreciation $109,463,839 $25,613,269
Gross Unrealized Depreciation (14,981,541) (3,271,984)
------------ -----------
Net Unrealized Appreciation $94,482,298 $22,341,285
============ ===========
The International Fund has a capital loss carryforward of $4,971,788, which is
available to offset future capital gains. This carryforward expires in 2006. At
December 31, 1998, the International Fund had deferred capital losses occurring
subsequent to October 31, 1998 of $986,777. For tax purposes, such losses will
be reflected in the year ending December 31, 1999.
5. OFF-BALANCE-SHEET RISK
The Funds have been parties to financial instruments with off-balance-sheet
risk, primarily forward exchange contracts, in order to minimize the impact on
the Funds from adverse changes in the relationship between the U.S. dollar and
foreign currencies. These instruments involve market risk in excess of the
amount recognized on the Statement of Assets and Liabilities. Risks arise from
the possible inability of counter parties to meet the terms of their contracts,
future movement in currency values and contract positions that are not exact
offsets. The contract amount indicates the extent of the Funds' involvement in
such currencies.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Funds' net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract. At June 30,
1999, the Funds had the following forward exchange contracts outstanding:
MASTERS' SELECT EQUITY FUND
NET UNREALIZED LOSS ON OFFSETTING FORWARD EXCHANGE CONTRACTS ($238)
================================================================================
Masters' Select International Fund
<TABLE>
<CAPTION>
IN EXCHANGE FOR SETTLEMENT UNREALIZED
DATE GAIN (LOSS)
CONTRACTS TO BUY
<S> <C> <C> <C>
27,190 British Pound Sterling U.S. $42,837 7/07/99 $ 22
116,500,000 Japanese Yen 956,564 7/26/99 53
165,957,522 Japanese Yen 1,370,613 7/05/99 2,334
--------
2,409
CONTRACTS TO SELL
716,514 British Pound Sterling U.S. $1,137,681 7/01/99 8,268
688,244 Hong Kong Dollar 88,707 7/02/99 4
359,810 Hong Kong Dollar 46,375 7/02/99 2
1,136,965 Hong Kong Dollar 146,526 7/05/99 -
83,500,000 Japanese Yen 769,621 7/12/99 78,189
116,500,000 Japanese Yen 1,039,807 7/26/99 73,190
1,717,269 Swiss Franc 1,114,097 7/01/99 9,691
--------
169,344
UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 171,753
--------
CONTRACTS TO BUY
1,660,454 European Dollar U.S. $1,726,208 7/01/99 (9,031)
138,262 European Dollar 142,921 7/02/99 (373)
170,462 European Dollar 176,924 7/01/99 (1,190)
27,190 British Pound Sterling 42,870 7/06/99 (11)
83,500,000 Japanese Yen 691,454 7/12/99 (22)
--------
UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS (10,627)
--------
NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS $161,126
========
</TABLE>
36
<PAGE>
6. Line of Credit
The Trust has an unsecured $15,000,000 line of credit with the custodian;
borrowings under this arrangement bear interest at the federal funds rate plus
0.50% per annum. At June 30, 1999, the Trust has no outstanding borrowings. As
compensation for holding available the lending commitment, the Trust pays a
0.08% per annum fee on the unused portion of the commitment which is allocated
among the Funds based on their relative net assets. The fee is payable quarterly
in arrears. For the six months ended June 30, 1999, the commitment fees were
$4,719 and $1,233 for the Masters' Select Equity Fund and the Masters' Select
International Fund, respectively.
- --------------------------------------------------------------------------------
Web Site www.MastersSelectFunds.com
We are in the process of developing a Masters' Select Web site. Look for it
later in the summer at MastersSelectFunds.com. We will have information postings
for shareholders as well as for advisors.
We thank you for your continued confidence and will continue to work hard to
make Masters' Select a rewarding investment experience.
The Masters' Select Funds Semiannual Report June 30, 1999
