THE MASTERS' SELECT FUNDS
SEMI-ANNUAL REPORT
THE MASTERS' SELECT EQUITY FUND
THE MASTERS' SELECT INTERNATIONAL FUND
JUNE 30, 2000
Litman/Gregory Fund Advisors, LLC
www.mastersselectfunds.com
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THE MASTERS' SELECT CONCEPT
OBJECTIVE
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In constructing the Masters' Select Funds, our goal was to design funds that
would isolate the stock-picking skills of a group of highly regarded portfolio
managers. 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 stock-pickers we believe to be exceptionally skilled 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 (a more diversified portfolio) over a market cycle.
3. Third, even though each manager's portfolio is focused, we seek ways to
diversify each of our funds. With the Equity and International Funds, we
have done this by including managers with differing investment styles and
market cap orientations. With the Value Fund, we have selected managers who
each take a unique approach to assessing companies and defining value.
4. Finally, we believe that excessive asset growth results in diminished
performance. We have committed to close each of the Masters' Select Funds
to new investors at levels that we believe will preserve the managers'
ability to effectively implement the "select" concept.
PORTFOLIO FIT
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As with all equity funds, Masters' Select Funds 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
Masters' Select Equity and Masters' Select International Funds to be used as
core equity and international fund holdings. We created Masters' Select Value
Fund for investors who seek additional, dedicated value exposure in their
portfolios. Although performance in each specific down market will vary, we
purposely set the allocations to each manager with the objective of keeping risk
about equal to the funds' overall benchmarks. 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 portfolio
holdings.
The Masters' Select Funds
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CONTENTS
Letter to Shareholders 2
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Masters' Select Equity Fund -
Equity Fund Review 4
Interview: Bill Miller 8
Managers 12
Equity Fund Stock Highlights 13
Equity Fund Schedule of Investments 18
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Masters' Select International Fund -
International Fund Review 20
Interview: Dan Jaworski 24
Managers 27
International Fund Stock Highlights 28
International Fund Schedule
of Investments 32
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Statements of Assets and Liabilities 34
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Statements of Operations 35
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Statement of Changes in Net Assets -
Equity Fund 36
International Fund 37
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Financial Highlights
Equity Fund 38
International Fund 39
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Notes to Financial Statements 40
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This report is intended for shareholders of the Funds and may not be used as
sales literature unless preceded or accompanied by a current prospectus for the
Masters' Select Funds.
Past performance is not a guarantee of future results. Share price and returns
will fluctuate, and investors may have a gain or loss then they redeem shares.
Statements and other information in this report are dated and are subject to
change. Litman/Gregory Fund Advisors, LLC has ultimate responsibility for the
Funds' performance due to its responsibility to oversee its investment managers
and recommend their hiring, termination and replacement.
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Dear Fellow Shareholder:
Financial markets were highly volatile during the first half of 2000. Through it
all both Masters' Select Equity and Masters' Select International soundly beat
their benchmarks.
We are happy to report the continued success of the Masters' Select concept. The
idea of bringing together multiple, highly skilled sub-advisors in a single
fund, and giving each a mandate to invest in only their highest conviction
stocks is playing out as we had hoped. The logic behind the concept is based on
our view that some stock-pickers can add value relative to passive indexes, and
believing that, it does not require a big leap of faith to believe that those
same managers are likely to perform better over a full market cycle if they
invest in their ten or fifteen highest conviction ideas (rather than, say their
fifty or one hundred top ideas). It is a simple, intelligent approach to
benefiting from active management, but one that we believe is unique to our
funds in the no-load world.
As both Masters' Select Funds continue to add to their track records, we hope
that shareholders will see the value of viewing Masters' Select Equity and
Masters' Select International as core domestic and international holdings. The
trend in the fund industry has been for investors to hold funds for shorter and
shorter time periods. We believe this is often the result of investors chasing
recent hot performance at the expense of funds whose short-term performance is
steady but not chart-topping. Besides the fact that it is extremely difficult to
performance chase successfully, it may also accelerate recognition of taxable
gains. We believe that holding core equity fund positions for the long-term is
the most reliable way to achieve good long-term performance - assuming the fund
delivers good returns. Sometimes this philosophy is not so easy to implement in
the real world because the factors that make a fund attractive are subject to
change. For example, the manager might leave, the fund may get too big, or
performance may slump, triggering doubts. There are several reasons why we
believe Masters' Select Funds can serve as ideal core holdings:
* We believe the reputation of our funds' stock pickers, as highly skilled,
is well deserved. And we believe their skill, coupled with their focus on
their highest conviction ideas, increases the odds of superior long-term
returns.
* The fact that there are multiple sub-advisors means that the funds are not
reliant on any one individual.
* Litman/Gregory Fund Advisors is monitoring each sub-advisor, which we
believe should increase the shareholders' confidence in the long-term
potential of the fund. Litman/Gregory has extensive experience evaluating
equity managers.
* The exposure to multiple stock picking styles and sub-advisors should
reduce the odds that the funds will radically underperform appropriate
benchmarks over short time periods - a factor that tempts shareholders to
give up on a fund. Having said that, it is likely that there will be times
during which the funds will underperform their benchmarks. Our goal
continues to be to outperform over a full market cycle.
* We are closing both funds at very low asset levels. We believe this will
help to avoid any performance drag due to a bloated asset base.
2 The Masters' Select Funds
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We believe the Masters' Select approach is an intelligent way to access active
management and, importantly, one that can give investors the confidence to stick
with the funds as long-term core holdings. We continue to work at building the
funds' shareholder base with long-term investors, and we discourage short-term
investors who assume that their investment will produce a quick and significant
payoff. Long-term investors provide the stability that increases the funds'
chances for superior long-term performance.
Though most of the expected added value of the Masters' Select Funds comes from
the basic concept, we continue to be highly focused on doing the little things
that can add additional value at the margin. We watch the funds' overhead
closely and continue to see expenses move lower. We've passed on savings in
management fees in the form of non-recoverable expense waivers every time we've
been able to negotiate favorable contracts with our sub-advisors, and we are
committed to lowering the management fee when we reach our closing level so that
incremental asset growth from existing shareholders or appreciation will result
in a further expense ratio reduction. And, we maintain our commitment to provide
you with high quality communications. We encourage you to visit our website at
www.mastersselectfunds.com for updated data and information.
The first part of this year saw continued positive media coverage for the funds.
Some of the stories that appeared in the year's first half included: Kiplinger's
Personal Finance (20 Great Funds to Own Now), Money Magazine (The Best 100 Funds
and How to Use Them), The Financial Times (Different Routes to Stay Ahead),
Investors Business Daily (Masters' Select Equity Fund Hires Top Talent), and
wordlyinvestor.com (Masters of Their Universe), among others. This media
exposure is helpful in growing our asset base, which serves to push overhead
down, thereby lowering our per share expense ratio. Our hope is that these new
shareholders will share in our long-term approach to investing. Of course, we
maintain our commitment to close our funds at levels that we believe will
preclude any asset-based performance drag. In fact we've publicly promised to
close Masters' Select Equity at $750 million in assets and Masters' Select
International at $1 billion.
Our next report will include coverage of our third fund, Masters' Select Value
Fund, that we launched on June 30. Four premier value stock pickers manage the
fund. Two, Mason Hawkins and Bill Miller are also on the Masters' Select Equity
team. The other two are Bill Nygren who manages Oakmark Select and Larry
Sondike, long-time associate of Michael Price and manager of Mutual Shares Fund.
If you are interested in holding a dedicated value fund, please see our website
or call (800) 960-0188.
As always, we will continue to put forth our maximum effort to reward the
confidence you have placed in the Masters' Select Funds.
Sincerely,
/s/ Ken Gregory
Ken Gregory
Fund Summary 3
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MASTERS' SELECT EQUITY FUND REVIEW
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Masters' Select Equity Fund delivered strong relative returns in the first half
of the year, beating all its benchmarks. The difficulty of beating passive
indexes has been covered at length in the financial press. Because it is
difficult we're pleased to have beaten all our benchmarks since inception,
including the Custom Index, the most relevant benchmark, by over 2.5% per year.
COMPARISON CHART
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Masters' Select Wilshire Lipper Multi-Cap Custom
Equity Fund 5000 Index Core Fund Index Equity Index
----------- ---------- --------------- ------------
31-Dec-96 $10,000 $ 10,000 $ 10,000 $ 10,000
31-Jan-97 $10,290 $ 10,535 $ 10,474 $ 10,443
28-Feb-97 $10,320 $ 10,530 $ 10,443 $ 10,466
31-Mar-97 $9,860 $ 10,065 $ 10,057 $ 10,070
30-Apr-97 $10,210 $ 10,504 $ 10,405 $ 10,502
31-May-97 $10,920 $ 11,248 $ 11,107 $ 11,251
30-Jun-97 $11,530 $ 11,765 $ 11,526 $ 11,764
31-Jul-97 $12,790 $ 12,669 $ 12,402 $ 12,547
31-Aug-97 $12,500 $ 12,193 $ 12,061 $ 12,019
30-Sep-97 $13,560 $ 12,912 $ 12,724 $ 12,724
31-Oct-97 $12,850 $ 12,482 $ 12,246 $ 12,217
30-Nov-97 $12,740 $ 12,891 $ 12,454 $ 12,584
31-Dec-97 $12,911 $ 13,129 $ 12,627 $ 12,791
31-Jan-98 $12,845 $ 13,200 $ 12,698 $ 12,908
28-Feb-98 $13,925 $ 14,161 $ 13,605 $ 13,834
31-Mar-98 $14,415 $ 14,870 $ 14,243 $ 14,486
30-Apr-98 $15,081 $ 15,047 $ 14,397 $ 14,616
31-May-98 $14,557 $ 14,646 $ 14,002 $ 14,275
30-Jun-98 $14,732 $ 15,160 $ 14,395 $ 14,697
31-Jul-98 $14,579 $ 14,828 $ 14,102 $ 14,364
31-Aug-98 $11,850 $ 12,518 $ 11,906 $ 12,176
30-Sep-98 $12,210 $ 13,336 $ 12,471 $ 12,873
31-Oct-98 $13,140 $ 14,328 $ 13,322 $ 13,843
30-Nov-98 $13,883 $ 15,231 $ 14,036 $ 14,647
31-Dec-98 $14,834 $ 16,205 $ 14,988 $ 15,482
31-Jan-99 $15,304 $ 16,801 $ 15,485 $ 15,971
28-Feb-99 $14,572 $ 16,192 $ 14,888 $ 15,327
31-Mar-99 $15,413 $ 16,817 $ 15,358 $ 15,868
30-Apr-99 $16,955 $ 17,623 $ 15,985 $ 16,646
30-May-99 $16,736 $ 17,237 $ 15,806 $ 16,340
30-Jun-99 $18,059 $ 18,129 $ 16,581 $ 17,186
31-Jul-99 $17,589 $ 17,548 $ 16,216 $ 16,767
31-Aug-99 $17,304 $ 17,385 $ 15,933 $ 16,591
30-Sep-99 $16,898 $ 16,930 $ 15,536 $ 16,290
31-Oct-99 $17,365 $ 18,007 $ 16,324 $ 17,086
30-Nov-99 $17,728 $ 18,610 $ 16,850 $ 17,592
31-Dec-99 $18,758 $ 20,023 $ 18,103 $ 18,874
31-Jan-00 $18,471 $ 19,192 $ 17,589 $ 18,030
29-Feb-00 $18,354 $ 19,622 $ 18,266 $ 18,435
31-Mar-00 $20,115 $ 20,787 $ 19,437 $ 19,526
30-Apr-00 $19,880 $ 19,704 $ 18,715 $ 18,777
31-May-00 $19,254 $ 19,017 $ 18,065 $ 18,243
30-Jun-00 $19,866 $ 19,857 $ 18,831 $ 18,947
The hypothetical $10,000 investment at Fund inception includes changes in share
price and reinvestment of dividends and capital gains. The Wilshire 5000, Lipper
Multi-Cap Core and Custom Equity Indexes are unmanaged, do not incur fees or
expenses, and can not be invested in directly.
PERFORMANCE AS OF JUNE 30, 2000
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Average
3 Year Annual
2000 12 Month Average Annual Total Return
Return Return Total Return Since Inception
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Masters' Select Equity 5.91% 10.01% 19.89% 21.68%
Custom Equity Index(1) 0.39% 10.25% 17.22% 20.03%
Wilshire 5000 Index(2) -0.84% 9.52% 19.06% 21.66%
Lipper Multi-Cap Core Index(3) 4.00% 13.54% 17.77% 19.82%
1. The Custom Equity Index is composed of a 70% weighting in the S&P 500
Index, a 20% weighting in the Russell 2000 Index, and a 10% weighting in
the MSCI EAFE Index.
2. The Wilshire 5000 Index measures the performance of all U.S. headquartered
equity securities with readily available pricing data.
3. The Lipper Multi-Cap Core Fund Index measures the performance of mutual
funds that invest in a variety of market capitalization ranges, without
concentrating 75% or more of their equity assets in any one market
capitalization range over an extended period of time.
4. Inception Date of Masters' Select Equity Fund is 12/31/96.
4 The Masters' Select Funds
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In benchmarking the performance of Masters' Select Equity, as we've often
stated, we believe the Custom Equity Index (70% S&P 500, 20% Russell 2000, 10%
MSCI EAFE Index) is the best benchmark because it roughly approximates the
fund's expected long-term average asset allocation, based on the investment
approach of each manager and the mandate we've given them. Other benchmarks,
like the Wilshire 5000 are important in comparing performance over a full market
cycle but may not be good benchmarks over short periods during which certain
sectors of the market may significantly outperform. For example, Masters' Select
Equity will tend to be somewhat smaller-cap on average than the Wilshire 5000,
so this will be an advantage to the fund during periods when small-caps
outperform and a disadvantage during periods when small-caps underperform (as
they have for most of the fund's 3.5 year life).
MANAGERS' OWN FUNDS
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Another benchmark that we watch closely is the weighted average of the managers'
own funds. We believe our requirement that each manager run a highly
concentrated portfolio (no more than 15 stocks) that represents their highest
conviction ideas should deliver higher returns over a market cycle than the more
diversified fund portfolios they run. We continue to be highly encouraged by the
fact that this belief is playing out loud and clear. Masters' Select Equity has
outperformed a weighted average composite of the managers' own funds by a
sizable margin. Moreover, somewhat to our surprise, the fund has outperformed
the weighted average of the managers' own funds in each and every year. (Note:
in calculating the managers' funds weighted performance we give each fund's
performance the same weight as its manager's target weight in the Masters'
portfolio.) This performance is depicted in the chart below:
MASTERS' SELECT EQUITY FUND VS MANAGERS' OWN FUNDS
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION
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Managers' Own Funds 16.92%
Masters' Select Equity Fund 21.68%
Managers' own funds return equals the total return earned by unaffiliated
no-load funds managed by each the managers multiplied by the target percentage
of Masters' assets allocated to each manager. This individual funds that are
included in this composite were changed in Novmeber 1998 and April 2000 to
reflect the change of portfolio managers in Masters' Select Equity Fund. There
may be differences among these funds with regard to charges, expenses, and
investment policies that affect perfomance.
Fund Summary 5
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DIVERSIFICATION WORKS
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In past reports we discussed the oddity of the stock market's recent
performance, especially its 1998 relative returns. This period was characterized
by very strong performance in the stocks of a handful of very large growth
companies while the rest of the market performed very poorly. During this period
the style and market-cap diversification inherent in Masters' Select Equity did
not add value and the fund returned "only" 14.90% in 1998. In our annual report
for that year, we lamented that the market's performance was not typical and
wrote about the importance of diversification over time given the historical
fact that no stock-picking style or market-cap segment has consistently
outperformed. Since that time the Fund's diversified structure has paid off.
During 1999, large growth stocks continued to perform, but unlike the previous
period, they were not alone. Our small-cap managers delivered very strong
returns in an environment that was friendlier to small caps. Our exposure to
these areas drove Masters' Select Equity to index-beating returns in 1999. As
for this year, the stock market has not been dominated by any one style or
market cap group. This has played to the fund's stock picking strength as four
of six managers are beating their benchmarks by wide margins. With the
performance of the last 18 months, the fund has more than overcome its difficult
1998, when its diversification was a performance drag. We continue to believe
the fund's style and market-cap diversification will pay off over the long run.
Once again, the evidence is supportive of our premise. Even taking into account
the large-cap dominated 1998, the fund has out-returned all its benchmarks over
three years and has even beaten the larger-cap S&P 500 (a bit of a surprise
given large-cap dominance over much of this time period).
BILL MILLER'S ADDITION TO THE MASTERS' SELECT TEAM
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During the first half of 2000, Masters' Select Equity replaced sub-advisor
Robert Sanborn with Bill Miller. As we discussed in our quarterly letter, this
move was triggered by changes in Sanborn's role at his firm including his
removal as manager of the Oakmark Fund. This raised issues that led us to
conclude that shareholders would be best served by a change. Over the prior year
we had already done extensive due diligence on Miller and his team, and we were
already discussing his involvement in Masters' Select Value. Miller is best
known as the manager of Legg Mason Value Trust, the only fund to beat the S&P
500 for nine consecutive years. We believe the impact of Miller's addition will
be to reduce or eliminate the fund's slight value bias at times. Though most of
the stocks Miller has owned over his career would be considered value holdings
by most investors, he has also owned stocks that many would consider growth
stocks, though he's arrived at his decision to invest in them by using value
criteria. Specifically, his willingness to consider technology stocks
differentiates him from many value investors. The bottom-line is that when
Miller finds better value in growth oriented stocks he will probably have more
exposure to these stocks, eliminating the fund's value bias. When the reverse is
true the fund will retain a slight value bias. Miller's stock picking approach
is outlined in our recently mailed prospectus and is also available on our
website at www.mastersselectfunds.com.
A secondary and one-time impact of the Miller change was tax-positive portfolio
turnover. The liquidation of Sanborn's portfolio resulted in a recognized loss
that will offset a portion of the fund's recognized gains in the 2000 tax year.
6 The Masters' Select Funds
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RETURN OUTLOOK
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We believe it is critically important for investors to have realistic
expectations with respect to potential investment returns and risk. Moreover, we
believe we have an obligation to the shareholders we hope to build long-term
relationships with to provide our viewpoints without bias. In that spirit we'd
like to discuss our expectations for stock market returns. We continue to expect
the stock market to deliver much lower returns, on average, than we've
experienced over most of the last twenty years. This period was characterized by
a huge decline in interest rates that justified higher stock prices relative to
company earnings (higher P/Es). Most of the huge move in stock prices over this
period was clearly a function of the interest rate decline. However, in recent
years growth stocks have surged largely based on optimism about the impact of
technology on the economy and growth opportunities in the technology sector. We
are at a point where growth stock prices are extremely high relative to earnings
and seem to already reflect a near best-case scenario. So, even if one believes
in a new economic era, it is still difficult to justify expectations for
anything more than barely double-digit returns for stocks, because to achieve
higher returns will require sustained higher P/E ratios - an unlikely occurrence
in our opinion.
So far this year, the slightly negative returns in the broad market indexes are
consistent with our thinking. The good news is that while growth stocks seem to
price in lots of optimism, much of the rest of the market seems reasonably
priced with some bargains to be found. Though the fund continues to hold
positions in the growth sector, including technology stocks, it has material
exposure to the more reasonably priced market segments - including small-cap,
mid-cap and value stocks.
With respect to Masters' Select Equity, our optimism is based on our confidence
in the skill of our stock pickers and their ability to cherry pick their highest
conviction ideas for the Masters' Select Equity portfolio. However, regardless
of their skill, the overall stock market environment will be a material
influence on the performance of your fund. In a bear market (say, a 20% decline)
it is not likely that the fund will deliver positive returns. On the other hand,
if the broad market surprises us on the upside, we believe this will provide a
tailwind for the fund's absolute returns. Though returns will vary from year to
year, we don't think it is likely that the broad market will deliver much more
than a 10% return over the next five years. And, the number could be lower with
a possible bear market along the way. Though this may seem discouraging given
the experiences of most investors over the past two decades, the good news is
that in an expected low inflation environment, we believe this return is likely
to be significantly better than the return offered by cash or bonds and should
allow for net growth after taxes and inflation. Naturally, we hope and expect to
do better than the market indexes and though there are obviously no guarantees,
we believe the structure of Masters' Select Equity gives us reason to be
optimistic.
Please see the following pages for stock profiles from each of the fund's
managers. In addition, learn more about Bill Miller by reading the following
interview.
Fund Summary 7
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AN INTERVIEW WITH BILL MILLER [PHOTO OF BILL MILLER]
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Bill Miller manages approximately 20% of the Masters' Select Equity Fund.
HOW DID YOUR INVESTMENT PHILOSOPHY DEVELOP?
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I've always believed in learning from the best. In the early 1970's Ben Graham
was the intellectual leader of the security analysis field. I also admired how
Warren Buffett had survived and prospered during the difficult period from the
late 1960s to the early 1970s. Graham and Buffett's focus on valuation was
consistent with my sense of wanting to buy things at the biggest possible
discount to underlying value.
CAN YOU BRIEFLY DESCRIBE THE KEY ELEMENTS OF YOUR STOCK PICKING DISCIPLINE?
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Our general methodology begins with analyzing stock factors and ends with
evaluating the future prospects of a business and valuing those prospects. We
begin by looking at accounting-based factors such as low P/E, low price-to-book,
and low price-to-cash flow ratios. We look at anything that appears cheap
statistically and we use computer screens to identify a universe of names to
investigate more deeply. We adjust accounting metrics for the underlying
economic reality.
We try to understand what a company does and what its competitive advantage is.
Most important, we try to understand the long-term economic model of the
business. How much capital does it require to operate? What returns are normal
in the industry? Where is the company positioned in the industry? Can its
management execute in a way to deliver the business model?
We use a multi-variate approach in analyzing stocks in all sectors in order to
build a margin of safety into the research process. We evaluate companies using
a variety of valuation methodologies such as discounted cash flow, peer group
analysis, private market value analysis, sum-of-the parts valuation and other
approaches which help to identify the important variables that represent value
in a business. We assign higher discounts rates for certain industries and
sectors such as technology in order to incorporate the higher level of
uncertainty sometimes present in those businesses. Because we do not know which
valuation methodology is the best indicator of underlying value at a company, we
try to evaluate companies from as many different approaches as possible and look
at the central tendency or average of the results that are produced.
We are long-term investors. Our turnover rate has been running between 15 and 20
percent a year, implying a holding period longer than 5 years. We look at
whether a company is undervalued over a much longer time period than the average
investor. "Undervalued" implies that you will earn an excess return over your
forecast time horizon. We are very patient and will own a company as long as we
8 The Masters' Select Funds
<PAGE>
are confident of the business value and of management's ability to execute the
strategies they have outlined. As long as we trust management, believe it's
dealing with us in a fair way, and the value is there, we will hold the stock.
AS YOU RESEARCH COMPANIES, WHAT ARE YOUR MOST IMPORTANT SOURCES OF INFORMATION?
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We (our research team) use the same sources everyone else does: company
financial reports, conference calls, meetings with company management,
investment conferences, Wall Street analyst meetings and reports, trade shows
and trade journals, and information we glean from industry contacts and from
investors we've come to know over the years.
YOU'VE GAINED NOTICE AS THE ONLY MUTUAL FUND MANAGER TO BEAT THE S&P 500 FOR
NINE CONSECUTIVE YEARS. WHAT FACTORS HAVE BEEN MOST IMPORTANT TO YOUR SUCCESS?
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The success that I've had is more properly thought of as the success that flows
from a team effort driven by an intense desire to generate good returns for
shareholders by employing a disciplined valuation methodology. When we say we
are value investors, both of those words are important to us - value and
investing. Many people who call themselves value investors do not value
businesses, they evaluate stocks primarily on historical relationships between
price and accounting based stock factors. Second, they don't invest in
businesses, they trade stocks, usually based on historical valuation metrics.
What captures people's attention when they look at our portfolio are names such
as Dell, AOL, Gateway and Nokia - stocks that are now being bought mostly by
growth investors. (Note: As I write this only one of these stocks is in my
Masters' Select portfolio.) We bought these things when they were really cheap.
We've made 30 or 40 times on our money in both Dell and AOL. Most investors
rarely hold companies long enough to make 30 or 40 times their money. They're
lucky if they make 50, 100 or 200 percent. You usually get very large returns
only if you actually invest in companies as opposed to trading them. We don't
spend a lot of time trying to guess stock price action. We spend our time trying
to value businesses. Because what we do is dynamic valuation, our models are
updated every quarter, or more often as we get more fundamental data. We're
always trying to figure out the underlying business value and the intrinsic
value of a company. We are also patient and are willing to hold onto a company
that may be ahead of itself in the near term but which our research indicates is
significantly undervalued over the long-term.
(Note: In answering this question Bill asked that we use an excerpt of an
interview published in the book WIZARDS OF WALL STREET by Kirk Kazanjian which
was published by Prentice Hall earlier this year. Two of the other "Wizards" are
also managers of Masters' Select Equity - Chris Davis and Sig Segalas.)
Fund Summary 9
<PAGE>
YOU ARE ALSO KNOWN AS ONE OF THE FEW SO-CALLED VALUE INVESTORS WILLING TO
ANALYZE TECHNOLOGY RELATED COMPANIES. WHEN AND WHY DID YOU BEGIN LOOKING AT TECH
RELATED COMPANIES AND HOW DO YOU ATTEMPT TO VALUE THEIR FUTURE PROSPECTS GIVEN
THE RAPIDLY CHANGING COMPETITIVE ENVIRONMENT IN WHICH THESE COMPANIES OPERATE?
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We look for companies that are inexpensive regardless of the industry or sector.
It's purely coincidental that we happen to have found some of the best values in
technology. IBM was the first major technology purchase we made when it got
extremely undervalued in 1994. The work we did on IBM helped us understand
various aspects of the technology sector. Few value investors have traditionally
done much work in technology. Tech has been the purview of growth investors.
With many value investors not participating in this space, valuations can get
well below where they might settle if value investors were active in the area.
In 1996, when we analyzed Dell Computer, the consensus view was that the economy
was going into recession. Investors had sold tech stocks down to levels that
looked to us to offer opportunity. Most value people at the time were buying
paper, steel, and aluminum companies, which were also depressed in price. When
we did the valuation work on those companies, we concluded they were not
terribly attractive or mispriced by the market. Their business fundamentals were
poor and were likely to remain so. On the other hand, when we looked at Dell,
trading at around $1-2 on a split-adjusted basis, we saw a company that had a
superior business model, excellent competitive advantages, growing at 25 to 30
percent a year, earning 30 percent on invested capital, and trading at five
times earnings. Why would we ever buy a paper company at five times what they
hope to earn if paper prices go up if we can buy a terrific company at five
times today's earnings? When we got further into the detail of the business, it
looked to us that the market had systematically misunderstood Dell's long-term
potential. Historically, personal computer companies traded between 6 and 12
times earnings. Even when value investors were buying PC companies, they would
buy at 5 or 6 times earnings, and sell when they got to 12 times earnings
because that was the peak multiple these companies historically had attained.
When we analyzed Dell, we concluded it was worth at least 25 times earnings,
notwithstanding that the market had not historically valued the industry that
highly. We thought it was worth about five times what the market thought it was
worth. It turned out we were too conservative in our valuation analysis.
The economics of technology businesses have not been well studied by value
investors. Although products cycles are short and many technologies change
rapidly, the market share of the leading companies often far exceeds that of
companies outside of technology. Microsoft, Intel, and Cisco (none of which we
own) have market shares in excess of 80%, levels never achieved by great
companies such as Coca-Cola and Nike. Technology markets often exhibit "winner
take all" or "winner take most" characteristics, which result in far higher
justifiable valuations than if the market were more competitive or fragmented.
10 The Masters' Select Funds
<PAGE>
THE TECHNOLOGY SECTOR EXPERIENCED A HUGE POSITIVE RUN UNTIL STUMBLING IN THE
SPRING. DO YOU THINK INVESTORS BECAME TOO ENTHUSIASTIC? IN GENERAL, DO THE
PROSPECTS FOR MOST TECH RELATED COMPANIES JUSTIFY THEIR PRICES?
--------------------------------------------------------------------------------
I think investors became too enthusiastic about technology during the first
quarter. In the 12 months ending early March, the Nasdaq was up over 100 percent
while the Dow barely budged. We believe that represented the peak in tech
valuation relative to the rest of the market.
It appears that many (not all) of the most visible, important technology
companies have expectations about future growth built into their stock prices
that may be quite difficult to achieve.
HOW ATTRACTIVE ARE TODAY'S STOCK PICKING OPPORTUNITIES COMPARED WITH OTHER
POINTS IN TIME IN YOUR CAREER?
--------------------------------------------------------------------------------
During the past 20 years or so that I've been managing money, the market has
been in a secular bullish phase with overall returns roughly twice that of the
long-term average. During that time there have been several periods which
represented extremely attractive buying opportunities: summer 1982, summer 1984,
fall 1987, fall 1990 and fall 1998. The market is not as compellingly cheap as
it was at those times, but it is not as expensive as the pessimists appear to
believe. Today's market doesn't represent an extreme in either direction and we
expect returns from here to approximate long-term norms or low double digits.
WHAT ARE YOUR PRIMARY CONCERNS WITH RESPECT TO TODAY'S INVESTMENT CLIMATE?
--------------------------------------------------------------------------------
The main issue today is what level of interest rates does it take to slow the US
economy to levels that don't re-ignite inflation. The Fed has done a wonderful
job during Alan Greenspan's tenure in promoting the long expansion. The main
risks to the investing climate are higher short-term interest rates or a secular
rise in inflation.
YOU HAVE ALWAYS BEEN A BELIEVER IN CONCENTRATED INVESTING BUT MASTERS' IS EVEN
MORE CONCENTRATED THAN THE FLAGSHIP FUND YOU RUN, LEGG MASON VALUE. IS THERE
ANYTHING YOU DO DIFFERENTLY IN RUNNING THE VERY CONCENTRATED MASTERS PORTFOLIO?
--------------------------------------------------------------------------------
No, the challenge is the same. We have the same issue in any investment
portfolio - how do you generate the best long-term returns for shareholders
given the parameters of the portfolio.
Fund Summary 11
<PAGE>
MASTERS' SELECT EQUITY FUND MANAGERS
--------------------------------------------------------------------------------
The following table provides a description of the six investment managers.
TARGET ASSET MARKET STOCK-PICKING
MANAGER FIRM ALLOCATION CAPITALIZATION STYLE
--------------------------------------------------------------------------------
Shelby Davis Selected 20% Mostly large Growth at a
and Chris Advisors companies reasonable price
Davis
--------------------------------------------------------------------------------
Foster Friess Friess & 10% Small and mid- High earnings
and team Associates sized companies growth
--------------------------------------------------------------------------------
Mason Southeastern 20% All sizes, may Value
Hawkins Asset have up to 50%
Management foreign stocks
--------------------------------------------------------------------------------
Bill Miller Legg Mason 20% Mostly large Eclectic,
Fund Adviser and mid-sized may invest in
companies traditional value
stocks or
growth stocks
--------------------------------------------------------------------------------
Sig Segalas Jennison 20% Mostly large High earnings
Associates companies growth
--------------------------------------------------------------------------------
Dick Weiss Strong Capital 10% Small and Growth at a
Management mid-sized reasonable
companies price
--------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
--------------------------------------------------------------------------------
As reflected in this chart, your Fund is well diversified in terms of market
capitalization. The Fund holds 73 securities, exclusive of cash equivalents.
Large-Caps 50.70%
Mid-Caps 22.60%
Small-Caps 15.20%
Cash Equivalent 6.90%
Foreign Securities 4.60%
Market Capitalization:
Small-Cap < $1.4 billion
Mid-Cap $1.4-$10.0 billion
Large-Cap > $10.0 billion
12 The Masters' Select Funds
<PAGE>
MASTERS' SELECT EQUITY FUND STOCK HIGHLIGHTS
--------------------------------------------------------------------------------
ATLANTIC COAST AIRLINES HOLDINGS - FOSTER FRIESS
You can tell things are looking up for Atlantic Coast Airlines Holdings by the
robust earnings forecasts it enjoys. Still, your Friess team's research shows
that Wall Street might be too conservative in evaluating how significantly the
regional carrier is poised to take off.
Nasdaq-listed Atlantic Coast Airlines Holdings is the holding company of
Atlantic Coast Airlines, which operates 89 aircraft under the United Express
name as a United Airlines regional carrier in the East and Midwest. Its new
subsidiary, Atlantic Coast Jet, is set to start flying out of New York's La
Guardia Airport by the end of July as part of the Delta Connections program,
with four jets in place and orders for another 45 jets by the end of 2002.
Atlantic Coast flies mostly out of the Washington-Dulles Airport, United's
eastern hub. After a relatively slow start in the first half of 2000 due to
aggressive competition from U.S. Airways, Wall Street expects the company to
grow earnings 48 percent in the September quarter and 128 percent in the
December quarter, resulting in 35 percent growth for the calendar year. Analysts
predict 27 percent earnings growth in 2001.
The U.S. Airways September schedule shows it reducing service at
Washington-Dulles, and the proposed merger between United and U.S. Airways
promises to lower Atlantic Coast's competition even further. The Atlantic Coast
Jet subsidiary also could see business grow as a result of the merger as Delta
uses its leverage to pursue the resulting opportunities in the Northeast.
These opportunities are independent of the aggressive growth strategies both
Atlantic Coast Airlines and Atlantic Coast Jet have already developed. Revenue
grew 20 percent to $347 million in 1999. This year's March-quarter revenue
jumped 27 percent to $92 million. During the June quarter, Atlantic Coast
Airlines launched new service from Columbia, S.C. to Chicago. Your Friess team
bought this growth potential for just over 12 times 2001 estimated earnings.
COSTCO - CHRISTOPHER DAVIS
Costco is a perfect example of a great company selling at a fair price - or in
the jargon of today's market, a growth company at a value price. The company
operates as a membership warehouse retailer, which has the benefit of virtually
eliminating shrinkage (shoplifting). Unlike companies such as Walmart, Costco
tends to attract an upscale customer base of small-business owners who generally
spend more per visit. Costco has compounded earnings at almost 20% for over a
decade by growing sales at existing stores and opening new stores. On a
comparable store basis, the company routinely grows sales at a powerful 5-10%
clip, although this has been somewhat higher in recent years and is now
Fund Summary 13
<PAGE>
returning to the more normal ranges. The company is also accelerating new store
build out and expects to add 30-40 new stores per year on a base of 305. In the
US, management believes that they could easily double the store count before
approaching saturation. Internationally, the opportunities are more open-ended.
They enjoy a very profitable UK operation (their London store alone does $200
million of volume), an excellent business in Mexico and Canada, and are
experimenting in Japan and Taiwan.
The company is led by CEO Jim Sinegal, whose drive and focus has created an
amazingly disciplined corporate culture (just visit one of their stores to see
what I mean). A few statistics of note: the company does not allow a mark-up of
more than 14% on anything in their stores but still posts EBIT (earnings before
interest and taxes) margins of 3.3%; the company pays their store managers about
twice the competitive average; the average Costco does $100 million of volume
versus about $52 million for the competition, generating $750 of sales per
square foot vs. Sam's Club (a Walmart subsidiary) at $450; and, most
importantly, on average customers will save about 30% on a market basket of
goods ranging from fresh groceries to general merchandise.
Recently, the company announced slightly disappointing quarterly earnings and
some slowing over the next three to five quarters. Importantly, this
disappointment is not the result of deteriorating fundamentals. Rather it is the
result of a number of short term factors; including the expenses for opening so
many new stores, the continued build out of their efficient operating
infrastructure, somewhat higher labor costs, and declining comps from the
extraordinary low-teens to a more sustainable 5-8%. Nevertheless, given general
market skittishness, investors decided to sell first and ask questions later,
driving the shares down over 50% from their high of $601/2 to a low of $26 per
share. While the price has recently recovered somewhat to $32, this first-class
growth company still sells only 24 times this year (FY August 2000) earnings of
$1.36 and about 21 times FY 2001 of $1.55. If we were to add back in the costs
of new store openings and investment spending in markets like Japan, the
earnings would be even higher.
EASTMAN KODAK - BILL MILLER
Eastman Kodak is the world's largest producer of conventional film and a leader
in medical imaging, digital photography and motion picture film. Kodak has one
of the most recognized brand names and controls the number one market position
in nearly every business it participates in. It is the low cost producer in
photographic output and has the lowest customer acquisition cost in digital
photography.
Kodak trades at 10 times 2000 (estimated) earnings per share and about 20 times
free cash flow. Kodak's stock has been a notable laggard in the last several
years of strong stock market returns. Investors have been concerned that Kodak's
large conventional film business will be cannibalized by the emerging digital
photography market. We believe conventional film will continue to grow at about
4% per year in units, while digital, where Kodak has a strong position, will
continue its explosive growth.
14 The Masters' Select Funds
<PAGE>
We believe free cash flow will grow at 20% per year and that over the next 5
years Kodak could generate half its current market capitalization in free cash.
The company is an active acquirer of its shares, and we expect repurchases to
accelerate if the stock remains at current levels. We believe Kodak is currently
worth close to $100 per share.
INGRAM MICRO - DICK WEISS
Ingram Micro is the world's largest distributor of information technology (IT)
products. Although the company has had to deal with razor-thin margins and the
possibility of being disintermediated, the company's future is improving. Prior
to 1998, IT distributors had largely fueled their growth on the back of the
explosive expansion in PC sales. However, the success of Dell Computer's direct
sales model forced its competitors to rethink their use of distributors.
Consequently, PC manufacturers began to reduce the level and terms of rebates
offered to distributors like Ingram Micro. These reductions put pressure on many
of the smaller distributors, who relied on the rebates to generate as much as
two-thirds of their gross margins. In an effort to sustain the level of unit
sales required to maintain their rebates, many distributors slashed their prices
to boost volume. The result was a collapse in the industry pricing structure.
Ingram was not immune from the turmoil and saw its stock decline $50 to $12 per
share in 1999.
Our rationale for owning the stock at its current level is threefold. First, the
price war is over as the third, fourth, fifth and sixth players in the industry
have either exited or are near bankruptcy. The new less competitive environment
has helped stabilize pricing. Second, the bankrupt companies accounted for as
much as $8 billion in industry sales, which will most likely flow to the two
remaining survivors, Ingram Micro and Tech Data, in what has become an oligopoly
like environment. Third, Ingram Micro has installed a new management team that
has been more aggressive in controlling costs, leading to greater confidence in
our earnings per share estimates of $1.00 in 2000 and $1.45 in 2001.
In conclusion, we believe Ingram Micro represents a good value at 12 times
earnings. In light of the changes taking place, the company appears capable of
growing its earnings at a sustainable rate of 15% over the long-term with
substantially higher growth in the next year or two. Beyond its traditional
growth, Ingram Micro is benefiting from the trend of all companies - both
internet and traditional alike - to outsource large segments of their logistical
effort.
MERRILL LYNCH - SIG SEGALAS
We believe Merrill Lynch (Merrill) is an extremely attractive stock. Merrill
underperformed its archrivals last year because it lacked a strong technology
investment banking group. Although this is an important weakness Merrill needs
to correct, the valuation disparity between Morgan Stanley Dean Witter, Goldman
Sachs and Merrill is too wide. We believe Merrill will show the best earnings
Fund Summary 15
<PAGE>
per share growth this year of any broker, will beat consensus by the widest
margin of any broker, and assuming stable markets will show the highest earnings
per share growth of any large cap financial stock. There are also several
strategic developments, which offer more earnings upside and could make Merrill
an excellent stock for the nest several years.
We believe Merrill has the opportunity for significant cost reductions. At its
recent investor conference, Merrill announced its intention to increase its
pre-tax margin from 19% to 24% over the next several years. The company's
non-compensation expenses are way out of line with its competitors, and the
company should cut at least five points from this ratio. Merrill is focused on
the cost issue. Tom Patrick was recently named CFO. Patrick was CFO in the early
1990's and successfully oversaw a cost reduction program. Stan O'Neal, the most
recent CFO, now heads the US Private Client operation at Merrill and has changed
its management structure. We expect a major cost reduction announcement by the
end of the year.
Merrill has shown excellent momentum in its retail division. The launch of its
Internet product was a huge success, and we believe the company has the best
on-line brokerage platform in the market right now. Merrill is also emphasizing
its new Unlimited Advantage platform. This is a recurring revenue, fee based
product that is a better value proposition to the retail customer and adds
stability to the company's earnings. Merrill has attracted more new assets than
Charles Schwab has in the last two quarters. This reversed a multi-year trend of
Schwab garnering more assets than Merrill.
Although it is very early in the game, Merrill has the lead in international
asset management and retail brokerage. It remains unclear how to serve this
market with the right balance of physical and on-line presence. However, Merrill
has a rapidly growing retail presence internationally, has proven its ability to
develop successful on-line products, and the company has announced a partnership
with HSBC to address the mass market.
Merrill Lynch is trading at a little more than 14 times our 2000 earnings
estimate. Given the opportunities for cost reductions, the strong momentum in
its retail platform, and our forecast for more than 30% earnings per share
growth this year, we remain enthusiastic about the stock.
WASTE MANAGEMENT - MASON HAWKINS
We have committed a meaningful amount of our capital to Waste Management
because:
* The company has the best landfill and collection of assets in the industry;
assets that are impossible to duplicate in today's environmentally
conscious society;
* Waste Management is a dominant operator in all of its regional markets;
* The industry's economics are good and improving with limited supply and
growing demand;
* The industry has become an oligopoly with most markets having only one
primary competitor, creating an environment for firm pricing;
16 The Masters' Select Funds
<PAGE>
We believe that significant cost savings and revenue opportunities remain from
the merger of the old Waste Management and USA Waste. CEO Maury Myers has
assembled an excellent, ownership-motivated management team that we are
confident can capture the revenue and cost opportunities inherent in Waste
Management's business franchise. We think the net cash earnings over the next
twelve months should be over $2.50 per share; and, in three years, after-tax
free flow could exceed $4.50. Our corporate appraisal of Waste Management is
double the share price and can be expected to grow materially over the next few
years.
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 HEREIN ARE THOSE OF THE PORTFOLIO MANAGERS AT THE
TIME COMMENTARIES ARE MADE AND MAY NOT BE REFLECTIVE OF CURRENT CONDITIONS.
Fund Summary 17
<PAGE>
MASTERS' SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 2000 (UNAUDITED)
SHARES VALUE
------ ------------
COMMON STOCKS: 93.1%
BUSINESS & Information Services: 6.6%
350,000 Galileo International, Inc. $ 7,306,250
44,000 Getty Images, Inc.* 1,632,125
550,000 Republic Services, Inc. - Class A 8,800,000
755,000 Waste Management, Inc.* 14,345,000
------------
32,083,375
------------
CONGLOMERATES: 2.7%
117 Berkshire Hathaway, Inc. - Class A* 6,294,600
147,000 Tyco International Ltd. 6,964,125
------------
13,258,725
------------
CONSUMER PRODUCTS: 6.3%
210,000 Black & Decker Corp. 8,255,625
100,000 Eastman Kodak Co. 5,950,000
36,000 General Motors Corp. 2,090,250
150,000 Guess?, Inc.* 2,100,000
54,400 Kenneth Cole Productions, Inc. - Class A* 2,176,000
225,000 Lear Corp.* 4,500,000
285,200 Masco Corp. 5,151,425
------------
30,223,300
------------
CONSUMER SERVICES: 3.8%
255,000 Costco Wholesale Corp.* 8,422,969
190,000 Jack in the Box, Inc.* 4,678,750
96,500 Kohl's Corp. 5,367,812
------------
18,469,531
------------
ENERGY: 5.9%
160,000 Grant Pride, Inc.* 4,000,000
2,000,000 Harken Energy Corp.* 1,250,000
1,379,900 Pioneer Natural Resources Co. 17,593,725
220,000 Spinnaker Exploration Co. 5,644,375
------------
28,488,100
------------
FINANCE: 15.6%
283,200 American Express Co. $ 14,761,800
225,000 Bank One Corp. 5,976,562
214,300 Citigroup 12,911,575
218,000 Household International, Inc. 9,060,625
67,900 Merrill Lynch & Co., Inc. 7,808,500
160,000 MGIC Investment Corp. 7,280,000
47,000 Morgan Stanley Dean Witter & Co. 3,912,750
59,200 Transatlantic Holdings, Inc. 4,958,000
300,000 Washington Mutual, Inc. 8,662,500
------------
75,332,312
------------
HEALTHCARE: 5.4%
84,000 American Home Products Corp. 4,935,000
155,000 Coventry Health Care, Inc.* 2,068,281
215,000 Health Management Association, Inc. -
Class A* 2,808,437
26,400 Idexx Laboratories, Inc.* 604,725
105,000 Orthodontic Centers of America, Inc.* 2,375,625
174,400 Pfizer, Inc. 8,371,200
200,000 Triad Hospitals, Inc.* 4,856,250
------------
26,019,518
------------
HOTELS & Motels: 5.1%
1,410,000 Hilton Hotels Corp. 13,218,750
310,100 Marriott International, Inc. - Class A 11,182,981
------------
24,401,731
------------
MEDIA: 2.7%
99,000 America Online, Inc.* 5,222,250
85,000 Reader's Digest Association, Inc. (The) 3,378,750
40,900 Univision Communications, Inc.* 4,233,150
------------
12,834,150
------------
18 The Masters' Select Funds
<PAGE>
MASTERS' SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 2000 (UNAUDITED) - (CONTINUED)
SHARES VALUE
------ ------------
TECHNOLOGY - HARDWARE & Equipment: 20.1%
89,000 Apple Computer, Inc. $ 4,658,594
112,300 Cisco Systems, Inc.* 7,134,559
123,700 Fairchild Semiconductor Corp. 5,009,850
175,000 Gateway, Inc.* 9,931,250
120,300 Hewlett Packard Company 15,022,463
50,000 International Business Machines Corp. 5,478,125
76,000 LSI Logic Corp.* 4,113,500
141,500 LTX Corp.* 4,948,078
130,400 Nokia Corp. Sponsored ADR 6,511,850
35,000 Richardson Electronics Ltd. 561,094
53,000 Seagate Technology, Inc.* 2,915,000
116,700 Texas Instruments 8,015,831
825,000 UCAR International, Inc.* 10,776,562
70,000 Veeco Instruments, Inc. 5,138,437
100,000 Zoran Corp. 6,593,750
------------
96,808,943
------------
TECHNOLOGY - SOFTWARE & Services: 6.2%
160,500 Acxiom Corp.* 4,483,969
50,000 Computer Associates
International, Inc. 2,559,375
52,300 Dendrite International, Inc.* 1,743,878
295,000 General Magic, Inc.* 2,410,703
235,000 Ingram Micro, Inc. - Class A 4,097,813
92,000 Lexmark International Group, Inc.* 6,187,000
170,000 Mentor Graphics Corp.* 3,368,125
75,000 Tellabs, Inc.* 5,135,156
------------
29,986,019
------------
TELECOMMUNICATIONS: 8.3%
103,000 EMC Corp.* 7,924,563
132,400 Global Crossing Ltd.* 3,487,913
77,400 NTL, Inc.* 4,636,744
144,700 Qwest Communications International, Inc.* 7,189,781
180,000 Vodafone Airtouch Plc ADR 7,458,750
200,000 Worldcom, Inc. 9,181,250
------------
39,879,001
------------
TRANSPORTATION: 4.4%
110,000 Atlantic Coast Airlines Holdings, Inc.* $ 3,489,063
361,000 FedEx Corp.* 13,718,000
105,000 Seacor Smit, Inc.* 4,062,188
------------
21,269,251
------------
TOTAL COMMON STOCKS
(cost $394,765,852) 449,053,956
------------
PRINCIPAL
AMOUNT
----------
SHORT-TERM INVESTMENT: 0.6%
$2,973,000 American Express Credit
Corporate 6.880%, 7/03/00
(cost $2,973,000) 2,973,000
------------
REPURCHASE AGREEMENTS: 6.2%
2,890,000 State Street Bank Trust &
Co., 6.60%, 6/30/00, due 7/03/00,
[collateral: $2,920,000 Federal
Home Loan Bank Notes, 7.000%,
due 8/28/01, value $2,978,400]
(proceeds $2,891,590) 2,890,000
26,785,000 State Street Bank & Trust
Co., 5.75%, 6/30/00, due 7/03/00,
[collateral: $26,733,000
U.S. Treasury Notes, 6.375%,
due 8/15/00, value $27,331,425]
(proceeds $26,797,834) 26,785,000
------------
TOTAL REPURCHASE AGREEMENTS
(cost $29,675,000) 29,675,000
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $427,413,852): 99.9% 481,701,956
Other Assets less Liabilities: 0.1% 718,299
------------
NET ASSETS: 100.0% $482,420,255
============
See accompanying Notes to Financial Statements.
* Non-income producing security.
Schedule of Investments 19
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND REVIEW
--------------------------------------------------------------------------------
Masters' Select International continued to deliver very strong performance
relative to its benchmarks during the first half of 2000. As depicted below, for
the year to date, trailing twelve months and since inception, the fund has
outperformed all of its benchmarks by a sizable margin. According to mutual fund
data firm Morningstar, Masters' Select International's return was in the top 12%
of foreign stock funds for the twelve months ended June 30, 2000. This follows
1999 performance when the fund performed in the top 13% of foreign stock funds
(this also per Morningstar).*
COMPARISON CHART
Masters' Select MSCI AC World
International Fund MSCI EAFE Free (ex US)
------------------ --------- ------------
1-Dec-97 $10,000 $10,000 $10,000
31-Dec-97 $ 9,880 $10,087 $10,107
31-Jan-98 $ 9,910 $10,548 $10,407
28-Feb-98 $10,990 $11,225 $11,115
31-Mar-98 $11,680 $11,571 $11,491
30-Apr-98 $11,930 $11,662 $11,562
31-May-98 $11,770 $11,605 $11,337
30-Jun-98 $11,360 $11,693 $11,288
31-Jul-98 $11,440 $11,811 $11,396
31-Aug-98 $ 9,400 $10,348 $ 9,785
30-Sep-98 $ 9,140 $10,030 $ 9,584
31-Oct-98 $ 9,870 $11,075 $10,587
30-Nov-98 $10,580 $11,643 $11,155
31-Dec-98 $11,040 $12,101 $11,533
31-Jan-99 $11,665 $12,065 $11,522
28-Feb-99 $11,534 $11,778 $11,277
31-Mar-99 $12,129 $12,269 $11,833
30-Apr-99 $13,107 $12,766 $12,438
30-May-99 $12,562 $12,108 $11,873
30-Jun-99 $13,369 $12,581 $12,448
31-Jul-99 $13,591 $12,954 $12,713
31-Aug-99 $13,520 $13,002 $12,786
30-Sep-99 $13,702 $13,134 $12,853
31-Oct-99 $14,488 $13,626 $13,339
30-Nov-99 $16,537 $14,099 $13,867
31-Dec-99 $19,321 $15,365 $15,200
31-Jan-00 $19,373 $14,389 $14,375
29-Feb-00 $21,857 $14,779 $14,763
31-Mar-00 $21,991 $15,356 $15,318
30-Apr-00 $20,170 $14,551 $14,463
31-May-00 $19,518 $14,196 $14,093
30-Jun-00 $20,273 $14,754 $14,693
The hypothetical $10,000 investment at Fund inception includes changes in share
price and reinvestment of dividends and capital gains. The MSCI All Countries
Free (ex U.S.) and MSCI EAFE Indexes are unmanaged, do not incur fees or
expenses, and can not be invested in directly.
After this report the Fund will cease to report the results of the MSCI EAFE
Index, as the primary benchmark index has been changed to the MSCI All Countries
Free (ex U.S.) Index. The Advisor believes that this index provides a better
long term match with the asset allocation of the Fund.
PERFORMANCE THROUGH JUNE 30, 2000
--------------------------------------------------------------------------------
Average
Annual
2000 12 Month Total Return
Return Return Since Inception(3)
------ ------ ---------------
Masters' Select International Fund 4.93% 51.65% 31.46%
MSCI All Countries World Free -3.33% 18.10% 16.06%
(ex US) Index(1)
Lipper International -4.11% 23.64% 17.01%
Fund Index(2)
1. The MSCI All Countries World Free (ex US) index is a broad based index that
measures the performance of common equities in 46 developed and emerging
market countries.
2. The Lipper International Fund Index measures the performance of the 30
largest mutual funds in the international equity fund objective, as
determined by Lipper Analytical Services.
3. Indexes are unmanaged, do not incur fees or expenses and can not be
invested in directly.
4. The inception date of Masters' Select International Fund is December 1,
1997.
* Moringstar percentile rankings are based on a total population of 476
international stock mutual funds.
20 The Masters' Select Funds
<PAGE>
Comparing our managers' performance for Masters' Select International to the
performance of the more diversified funds they run is also a measure of the
success of the Masters' Select concept. That is because we believe the
portfolios run for Masters' Select International, with their focus on a small
number of each manager's highest conviction ideas, will deliver higher returns
over a market cycle than the same manager's more diversified fund portfolio.
Measuring this performance is a bit tricky for Masters' Select International
because not all the managers have run mutual funds during their tenure on our
fund. Currently Ted Tyson and the Mastholm team don't run their own public fund.
And Dan Jaworski didn't until he was recently hired to run Marshall
International, replacing Templeton. So we created a benchmark that weights the
monthly performance of the managers who run their own funds and compare it to a
benchmark of the same managers' performance for Masters (after all fees). Each
manager's performance is weighted in the benchmark and the Masters' performance
calculation, based on their target asset weighting in Masters' Select
International (adjusting for the fact that not all managers are included in the
calculation). As has been the case with Master's Select Equity, the managers'
returns for Masters' Select International are indeed supportive of the value of
concentration. As depicted in the following chart, the managers have, on
average, returned almost 3% more per year for your Masters' portfolio.
MASTERS' SELECT INTERNATIONAL MANAGERS VS MANAGERS' OWN FUNDS
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION
--------------------------------------------------------------------------------
Managers' Own Funds 28.83%
Managers' Weighted 31.63%
Masters' Performance
Managers' own funds return equals the total return earned by unaffiliated
no-load funds managed by each the managers multiplied by the target percentage
of Masters' assets allocated to each manager. Not all Masters' managers manage
unaffiliated funds. This individual funds that are included in this composite
were changed in May 1998, May 1999 and October 1999 to reflect the change of
portfolio managers in Masters' Select International Fund or the change in a fund
managed by a Masters' manager. There may be differences among these funds with
regard to charges, expenses, and investment policies that affect performance.
DEVELOPMENTS
--------------------------------------------------------------------------------
The most newsworthy development during the first half of the year was the
decision to increase the allocation to Ted Tyson and his Mastholm team to 20% of
the portfolio. Mastholm's allocation was previously 10% because they took over
that portion of the portfolio after Bruce Bee's death. At 10%, Bee's allocation
was lower than the other Masters' managers because he was a dedicated small-cap
manager. We decided to increase Tyson's weighting to make it equal to the other
managers because he is an all-cap manager, not a dedicated small -cap manager
like Bee. We are implementing Mastholm's increased allocation as we get new cash
flow into the fund. As of June 30 Mastholm's allocation of fund assets was up to
16%. Normally we don't expect to make adjustments to the portfolio allocations
targeted to each manager, but this was an unusual case.
Fund Summary 21
<PAGE>
Early in the year the fund benefited from it's growthy profile as growth stocks
continued to perform well. Though not a pure growth fund, several of our sub-
advisors were heavily invested in technology and telecommunications stocks at
the beginning of the year. Over time we expect the average style profile of the
fund to range from somewhat growthy to more of a blend
(growth-at-a-reasonable-price) portfolio, however, at any point in time the fund
will hold stocks representing growth, blend and value and a variety of market
-caps. As the first half of the year progressed, the technology and
telecommunications sectors came under pressure and the fund suffered. However,
it did not suffer as much as many pure growth international funds, partly
because of the value holdings of David Herro and some obscure names in Tyson's
portfolio that performed well. In addition, several managers began to reduce
their tech and telecom exposure during the second quarter, which helped to
mitigate the downside during the sell-off in these sectors. By the end of the
second quarter the fund's tech and telecom exposure was 37% as compared to 51%
at the beginning of the year. Energy, consumer products and finance picked up
most of the difference. Masters' Select International is now somewhat less
aggressively postured than it was at the beginning of the year, and it remains
well diversified in terms of total stocks held and country exposure.
On the operations side, we continue to be very pleased with our progress on the
expense front. Our efforts to manage the fund's overhead, coupled with steady
asset growth, have resulted in a current expense accrual rate of 1.14% compared
to 1999's full year expense ratio of 1.29%. This is a very competitive expense
level for a foreign stock fund. According to Morningstar Principia Pro, the
average expense ratio for foreign stock funds is significantly higher at 1.70%.
LOOKING FORWARD
--------------------------------------------------------------------------------
The enthusiasm of our stock pickers is a bit contagious. They can be
characterized as ranging from slightly to very optimistic about the long-term
outlook though several are more cautious short-term. In general, we are
encouraged by continued company restructuring, a strengthening profit
orientation among foreign firms, and the growing technology investment in many
parts of the world. In our opinion these changes are the primary reason for
optimism in many foreign markets, with continued positive change essential to
achieving good market returns over the next few years. Regardless of the market
dynamics, as always, we believe the Masters' Select stucture will increase the
odds of market beating returns over the long run, by allowing our managers to
cherry pick their most compelling ideas. Lest we sound too optimistic we must
point out that many markets, including Europe in particular, have had strong
moves in recent years. As is the case in the U.S., we believe it is unlikely
that returns will be as high as has been experienced in recent years. In
particular 1999 should be viewed as a pleasant anomaly and investors should not
expect it to be repeated. Indeed one of our concerns is that Masters' Select
International, because of its sizable 1999 return, may attract naive investors
who don't take the time to understand this fund and whose return expectations
are unrealistic. We believe Masters' Select International will post very
competitive returns relative to appropriate benchmarks and other international
22 The Masters' Select Funds
<PAGE>
funds over a market cycle. So far the fund's performance has given us reason to
remain very enthusiastic. However, it is not realistic to expect this or any
equity oriented mutual fund to compound long-term returns at the 31.46% annual
rate that Masters' Select International has achieved through its first 31
months.
For more information on the Fund's holdings read each manager's stock profile on
the following pages as well as the information outlining the fund's
diversification by region, market-cap and industry segment. In addition, for
more insights see the following interview with one of our managers, Dan
Jaworski.
Fund Summary 23
<PAGE>
AN INTERVIEW WITH DAN JAWORSKI [PHOTO OF DAN JAWORSKI]
--------------------------------------------------------------------------------
Dan Jaworski manages approximately 20% of the Masters' Select International
Fund.
HOW ATTRACTIVE ARE TODAY'S STOCK PICKING OPPORTUNITIES RELATIVE TO OTHER POINTS
IN TIME IN YOUR CAREER?
--------------------------------------------------------------------------------
Market valuations are higher today than they have been in some time. We have
experienced one of the greatest bull markets in history, so generally speaking,
there may not be as much upside in the near term. We believe that we are closer
to the middle innings than the early innings as far as the appreciation
potential for many stocks. However, regardless of the environment, there are
always stock picking opportunities. We continue to adhere to our investment
approach of investing in financially strong companies that possess sustainable
competitive advantages, lead their industries globally, and are selling at
attractive valuation levels relative to their peers.
YOUR PORTFOLIO BENEFITED FROM THE BIG RETURNS DELIVERED BY TECHNOLOGY AND
TELECOM STOCKS LAST YEAR AND EARLY THIS YEAR. ARE THERE STILL VERY ATTRACTIVE
OPPORTUNITIES IN THESE SECTORS?
--------------------------------------------------------------------------------
Yes. This is clearly a structural area of growth. The whole realm of wireless is
benefiting from increased penetration rates and functionality in moving from a
mechanism of voice to data. This will continue over the next decade and many
companies will benefit from this build out. So, with information and
communications technology at the core of the new era of innovation, we continue
to like the fundamentals of technology and telecom stocks. In this dynamic
environment, however, separating the winners from the losers is critical. Two
names that we believe will continue to benefit from this wireless expansion that
we currently hold are Comverse Technology, an Israeli telecom company, and
Nokia, the Finnish handset provider. Both companies are global market share
leaders that have superior management that generate excellent returns.
HOW DO YOU BALANCE THE OPPORTUNITY AND RISK IN THE STOCKS IN THESE SECTORS WHEN
THEY SELL AT VERY HIGH MULTIPLES BUT OFFER THE POSSIBILITY OF VERY HIGH RATES OF
EARNINGS GROWTH?
--------------------------------------------------------------------------------
Our key objective is to determine which companies justify their high multiples
and can sustain them. We are always attracted to companies that are experiencing
rapid growth and have an improving earnings profile. Quite often the street
underestimates the operating leverage of these companies. Part of our job is to
determine if the investment community has underestimated the company's earnings
outlook. We also focus very keenly on what we believe are the competitive
advantages of each company and whether we believe they are sustainable. For
example, Nokia , we believe has several sustainable advantages over its
competitors. First is its economy of scale when ordering parts for the handsets.
Nokia has negotiated favorable contracts for large amounts of components while
24 The Masters' Select Funds
<PAGE>
others are scrambling to obtain vital parts. The component suppliers are going
to make sure that their biggest customer is satisfied with their products and
service. Another, and more important advantage is the brand name that Nokia has
built. As the mobile phone becomes as common as a watch, branding of the product
based on reliability and style becomes a key barrier that others find hard to
duplicate.
YOUR INVESTMENT PROCESS COMPARES GLOBAL COMPANIES ACROSS INDUSTRIES. ARE THERE
OTHER SECTORS OR INDUSTRIES WHERE YOU ARE FINDING COMPELLING OPPORTUNITIES AT A
STOCK PICKING LEVEL?
--------------------------------------------------------------------------------
We have come back to the drug industry again. This is an area that we liked for
a long time but had been out of until recently. The primary concern we had with
many of the drug companies was the sufficiency of their new product pipelines to
offset looming patent expirations. Additionally, their valuations were
relatively high. Now we think the balance of those variables has improved for
some drug companies. Also, generic drug companies stand to benefit significantly
from the large number of brand products losing patent protection over the next
few years. Novartis and Teva are two pharmaceutical companies we own in Masters'
Select International. (See the discussion of Teva in this report.)
WHAT ABOUT REGIONS OR COUNTRIES? ARE OPPORTUNITIES CONCENTRATED IN ANY AREAS?
--------------------------------------------------------------------------------
No, not really. No nation has a monopoly on any particular product or service.
As is typical, the portfolio we run for Masters remains fairly diverse
geographically. Although some uncertainty remains in Japan, that country has
virtually transformed its financial system, an essential step to its sustained
recovery. European markets continue along a positive trend, and many emerging
markets appear to be putting their recent difficulties well behind them.
WHAT ARE YOUR PRIMARY CONCERNS WITH RESPECT TO TODAY'S INVESTMENT CLIMATE?
--------------------------------------------------------------------------------
Clearly fears of inflation have become more prominent in recent months,
particularly as petroleum prices have extended their march upward. We believe,
however, that most of the impact from these price hikes has already been felt.
Rising oil prices have perhaps restored a more normal inflationary picture,
after an anomalous period with virtually no inflation. So far, though, inflation
has not reached a level that is problematic for the global economy. The
longer-term concerns are the same as they have always been - valuations,
interest rates. These are things we can't control if you are an investor and you
want to put money in equities. Despite these concerns, we believe the types of
businesses that we focus on have very strong futures.
Fund Summary 25
<PAGE>
DURING THE ALMOST THREE YEARS YOU HAVE PARTICIPATED IN MASTERS' SELECT
INTERNATIONAL, HAS YOUR APPROACH TO RUNNING THE PORTFOLIO EVOLVED?
--------------------------------------------------------------------------------
Our investment discipline has definitely not changed. We continue to search for
superior businesses selling at attractive valuations. We do recognize, however,
that most of the market returns have come from select industries over the last
several years. Accordingly, we have been concentrating the portfolio in the
areas of the market that we believe offer the best potential to generate returns
for shareholders of the Fund. At present, we have identified leading
pharmaceutical companies, global cellular providers, and select technology names
that offer attractive upside from their current levels.
26 The Masters' Select Funds
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND MANAGERS
--------------------------------------------------------------------------------
The following table provides a description of the five investment managers.
TARGET ASSET MARKET STOCK-PICKING
MANAGER FIRM ALLOCATION CAPITALIZATION STYLE
--------------------------------------------------------------------------------
Helen Young Janus Capital 20% All sizes but Growth at a
Hayes Corporation mostly large reasonable
companies price
--------------------------------------------------------------------------------
David Herro Harris Associates 20% All sizes Value
--------------------------------------------------------------------------------
Dan Jaworski BPI Global Asset 20% Mostly large Eclectic, may
Management companies invest in
traditional
value stocks
or growth
stocks
--------------------------------------------------------------------------------
Ted Tyson Mastholm Asset 20% All sizes High earnings
Management growth
--------------------------------------------------------------------------------
Mark Yockey Artisan Partners 20% All sizes but Growth at a
mostly large reasonable
companies price
--------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
--------------------------------------------------------------------------------
BY ASSET CLASS
Developed Country Large-Cap 58.6%
Emerging Markets 16.6%
Developed Country Small-Cap 16.3%
Cash Equivalents 8.5%
Market Capitalization:
Small-Cap < $800 Million
Large-Cap > $800 Million
BY INDUSTRY
% of
Net
Assets
------
Telecommunications 17.0%
Technology 16.5%
Consumer Products 16.2%
Finance 10.2%
Cash and Equivalents 8.5%
Basic Industries 5.0%
Health Care & Pharmaceutical 5.0%
Energy 4.8%
Consumer Services 4.4%
Business Services 4.0%
Media 3.4%
Capital Goods 2.7%
Hotels 1.5%
Transportation 0.8%
-----
Total 100.0%
=====
Fund Summary 27
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND STOCK HIGHLIGHTS
--------------------------------------------------------------------------------
NOKIA - HELEN YOUNG HAYES
Janus began following Nokia in 1993, long before it became the global leader in
wireless handset and infrastructure equipment. At the time, handset sales
accounted for only 10% of this Finnish company's revenues. Rubber boots, tires,
computers, TVs and paper made up the rest. But it was Nokia's wireless handset
design that first caught the attention of one of our research analysts.
Not long after we began researching Nokia, its operations were streamlined in
order to capitalize on its handset division. Although wireless was still in its
infancy, we invested in the company because we were convinced it had the
potential to become the century's next behavior-changing technology, placing
Nokia in a sweet spot. As we anticipated, cellular penetration quickly climbed
overseas, however, it wasn't until mid-1998 that penetration in the U.S. really
started to take off. While we continued to monitor this growth through
proprietary, hands-on research, it was apparent that cellular use was expanding
rapidly.
Today, as a supplier of equipment that enables us to utilize wireless
technology, Nokia is out in front. Its steady introduction of products with
functionality well ahead of competitive offerings bodes well for the stock. In
addition the market continues to expand. Nokia projects that one billion mobile
phones will be in use worldwide by 2002, crossing the much-anticipated benchmark
a full year ahead of earlier estimates. As a leader in an expanding market, we
remain optimistic about the prospects for the company and the stock price.
CANADIAN HUNTER EXPLORATION - TED TYSON
Canadian Hunter Exploration is a mid-sized energy exploration and production
company based in the province of Alberta, Canada. The company is relatively new
to the capital markets, having been a wholly owned subsidiary of the Canadian
conglomerate Noranda until December 1998. However, it has an extremely
experienced management and the company has been in the business and finding and
producing energy since 1973.
Exports of natural gas from Canada to the United States have soared over the
past several years as more and more U.S. electric utilities bring natural
gas-fired plants on stream. By some estimates, over three quarters of all new
electric generating capacity built over the past three years has been gas-fired.
Exports have been helped more recently by a significant expansion in pipeline
capacity with major new pipelines connecting markets in California and the Upper
Midwest to producers in Canada.
28 The Masters' Select Funds
<PAGE>
Canadian Hunter is particularly well positioned for growth in this environment.
It has been increasing production volume over 20% per year which should continue
for some time. It is the lowest-cost producer of natural gas in North America at
$1.08/mcfe against an industry average of $1.76/mcfe. It also has the highest
amount of exposure to natural gas of any Canadian energy company at just over
81% of total production. This is important as we are much more confident over
the medium term about the outlook for natural gas prices to remain firm as
opposed to oil and other refined products.
Canadian Hunter currently trades at 3.8 times cash flow, while industry
comparables trade at an average of 5 to 6 times cash flow. With a high level of
production growth and significant cash generation we believe that Canadian
Hunter will quickly close the discount it currently trades at relative to
similar companies in its industry.
GRANADA GROUP - MARK YOCKEY
We look for companies, of all sizes, that we believe are positioned for strong,
sustainable growth in industries or themes that we think are compelling. We also
look for strong management teams that have a U.S. approach to increasing
shareholder value. This stock selection process led us to Granada.
In the media and hospitality industries, U.K.-based Granada Group welcomes
comparison. On its home turf, it has leading positions in media, hotels,
foodservice and consumer rentals. Internationally, it operates the highly
regarded Meridian hotel chain.
Consistent with its history of growth through merger and acquisition, the
company is about to merge with Compass, the world's leading provider of catering
services to the industrial and commercial companies. The new entity will become
one of the largest hospitality/leisure companies in Europe. And the synergies
are compelling, including significant cost savings and efficiencies through
global procurement. This coupled with the fact that the Compass merger has been
misunderstood by the markets leads us to believe the stock price is undervalued
and offers significant long-term growth potential.
More importantly, Granada recently announced the spin-off of 20% of its media
business, Granada Media, with the expectation that the remainder of the business
will be spun off in the next six to twelve months. We believe that this spin-off
creates two excellent vehicles for growth: Granada for media and Compass for
catering. It also clarifies the true value of the media assets and enables both
companies to be more focused on their separate media and hospitality growth
plans. Through acquisition, the company hopes to become one of the dominant
media companies in the U.K. with content creation, broadcasting, including
digital cable services as well as pay TV, internet and broadband services.
Lastly, we think highly of Granada's management team - its vision and financial
controls - and project sustainable earnings growth in the low teens in the years
to come.
Fund Summary 29
<PAGE>
HOUSE OF FRASER - DAVID HERRO
House of Fraser ("House") is one of Britain's largest department store chains
operating 58 stores in major cities throughout the country. The stores trade
under the names "Army & Navy", "Arnotts", "Barkers", "David Evans", "Dickens and
Jones", "Frasers", "House of Frasers" and others.
New management was brought in around three years ago to fix a company that was
tussled around because of numerous corporate battles. Without the distraction of
corporate activity new management set out to make "House" both a highly
profitable and desirable place to shop retail group. They initiated a complete
supply chain re-engineering, developed private label brands, moved the stores
up-scale while making the company's balance sheet more optimal.
The results have been very positive!
Same store sales have grown in an environment in which retail sales have been
stagnant. And, profitability has greatly improved as the combination of cost
savings and better inventory management has increased margins. At the same time,
they have instituted customer loyalty programs as well as hastened store
refurbishments to maintain the positive momentum on the top line.
Though this company is clearly emerging as an industry leader, it trades at just
over 7 times next year's earnings. Furthermore, with many of its new sales and
profit initiatives just getting underway, profit growth should be double-digit
over the next 3-5 years. We think given all of what's been accomplished and how
this company is positioned for the future, there is a potential for over 100%
upside from its current price of 49 pence.
TEVA PHARMACEUTICAL INDUSTRIES - DAN JAWORSKI
Teva Pharmaceutical Industries, headquartered in Israel, is a fully integrated
pharmaceutical company producing drugs in all major therapeutic categories. Teva
is the largest producer of branded as well as generic human pharmaceuticals in
Israel. Through its wholly owned subsidiary, Teva Pharmaceuticals USA, the
company is also one of the three largest U.S. generic drug companies. In
aggregate, 80% of Teva's revenues are generated outside of Israel.
As one of the world's largest generic drug manufacturers, Teva is well
positioned to capitalize on the huge wave of patent expirations over the next
few years. The company currently has 52 generic drug applications pending before
the FDA with the brand equivalents currently generating in excess of $14 billion
in sales. Teva is also making significant progress with innovative products,
such as Copaxone. Used for the treatment of Multiple Sclerosis, Copaxone is
Teva's first branded innovative drug and became the company's top product in
1999. Copaxone has achieved a 25% market share in the U.S. and has obtained
approval in several other markets. In addition to Copaxone, the company is also
30 The Masters' Select Funds
<PAGE>
proceeding with the development of innovative drugs for the treatment of
Parkinson's disease and Alzheimer's disease. Teva also acquired two
complementary companies in 1999. We believe the integration of
Massachusetts-based Copley Pharmaceutical and the Canadian company Novopharm
Ltd. will fortify the company's generic pipeline and create synergies in several
areas.
The fundamental outlook for Teva appears robust. We expect the company's
outstanding generic pipeline, rising proprietary sales, growing sales of active
ingredients, and acquisition synergies to drive strong, balanced earnings growth
going forward. At its current share price, Teva is still undervalued relative to
its industry peers both on an earnings and cash flow basis. We believe Teva
should trade at the industry average, thus creating the opportunity for share
price out-performance.
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 HEREIN ARE THOSE OF THE PORTFOLIO MANAGERS AT THE
TIME COMMENTARIES ARE MADE AND MAY NOT BE REFLECTIVE OF CURRENT CONDITIONS.
Fund Summary 31
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 2000 (UNAUDITED)
SHARES VALUE
------ ------------
COMMON STOCKS: 91.4%
Argentina: 1.4%
361,400 Quilmes Industrial Quinsa Sponsored ADR 4,020,575
------------
AUSTRALIA: 2.4%
354,000 Australia & New Zealand
Banking Group Ltd. 2,712,001
2,098,000 Nufarm Ltd. 4,077,804
------------
6,789,805
------------
BELGIUM: 0.7%
78,800 Creyf's SA 2,091,405
------------
CANADA: 6.9%
163,000 AT & T Canada, Inc. ADR-Class B* 5,399,375
282,000 Baytex Energy Ltd.* 2,715,203
105,000 Canadian Hunter Exploration Ltd.* 2,231,250
120,000 Clearnet Communications* 3,352,500
36,500 Nortel Networks 2,491,125
113,177 Rogers Communications, Inc.* 3,225,545
------------
19,414,998
------------
FINLAND: 5.9%
314,500 Metso OYJ* 3,783,191
64,000 Nokia Corp. AB OY 3,265,839
194,600 Nokia Corp. Sponsored ADR 9,717,838
------------
16,766,868
------------
FRANCE: 6.1%
19,000 Alcatel 1,246,170
16,553 Cap Gemini S.A. 2,915,682
54,640 Chargeurs 3,129,890
36,500 Schneider Electric 2,543,799
7,950 S.O.I.T.E.C.* 1,859,518
36,000 Total Fina 5,519,696
------------
17,214,755
------------
GERMANY: 6.3%
42,100 Altana AG $ 3,376,203
31,650 Endemann!! Internet AG* 1,495,705
135,900 Jenoptik AG 3,898,801
128,600 Krones AG 3,744,621
791 Porsche AG Preferred 2,152,229
75,200 SER Systeme AG 3,051,223
------------
17,718,782
------------
HONG KONG: 4.8%
47,600 China Telecom Ltd Sponsored ADR* 8,463,875
6,713,000 JCG Holdings Limited 3,358,438
1,746,000 Legend Holdings 1,691,014
------------
13,513,327
------------
ISRAEL: 6.1%
138,500 Comverse Technology, Inc.* 12,884,828
80,000 Teva Pharmaceuticals Industries Ltd. 4,437,500
------------
17,322,328
------------
ITALY: 3.4%
492,600 FILA Holdings SpA Sponsored ADR* 5,203,088
3,034,000 Parmalat Finanziaria SpA 4,281,117
------------
9,484,205
------------
JAPAN: 5.1%
268 Nippon Telephone & Telegraph 3,561,378
78 NTT Mobile Communications 2,109,797
129,000 Tokyo Broadcasting 5,568,258
22,500 Tokyo Seimitsu Co., Ltd. 3,011,168
------------
14,250,601
------------
KOREA: 7.7%
124,100 Hite Brewery Co. 5,453,600
57,300 Samsung Electronics 16,344,809
------------
21,798,409
------------
32 The Masters' Select Funds
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 2000 (UNAUDITED) - (CONTINUED)
SHARES VALUE
------ ------------
NETHERLANDS: 5.9%
62,000 Equant NV* $ 2,666,000
46,661 Ing Groep NV 3,153,947
62,209 Koninklijke Philips Electronics NV 2,933,913
63,750 Unique International NV 1,527,640
53,760 United Globalcom, Inc. Class B* 2,514,960
77,000 VNU NV 3,976,996
------------
16,773,456
------------
NEW ZEALAND: 1.4%
3,700,000 Fletcher Challenge Ltd.* 3,922,614
------------
PANAMA: 1.3%
131,100 Banco Latinoamericano Class E 3,629,831
------------
SINGAPORE: 3.0%
341,560 DBS Group Holdings 4,390,638
6,314,800 Mandarin Oriental International Ltd. 4,199,342
------------
8,589,980
------------
SPAIN: 1.5%
190,695 Telefonica S.A. 4,096,273
------------
SWEDEN: 1.3%
182,666 Assa Abloy 3,665,746
------------
SWITZERLAND: 4.1%
25,100 ABB AG* 3,004,214
3,930 Novartis AG 6,225,170
1,200 Schw Rueckversicherungs 2,445,902
------------
11,675,286
------------
UNITED KINGDOM: 16.1%
195,057 Capita Group plc 4,772,425
423,400 Diageo plc 3,799,033
430,000 Granada Group plc 4,294,177
5,395,000 House Of Fraser 3,934,649
436,300 Lloyds TSB Group plc 4,119,432
763,000 Royal & Sun Alliance Insurance Group plc 4,952,784
3,096,100 Royal Doulton plc* 3,490,107
4,850,000 Somerfield plc 4,256,349
2,930,303 Vodafone Airtouch 11,838,354
------------
45,457,310
------------
TOTAL COMMON STOCKS
(cost $205,791,179) 258,196,554
------------
PRINCIPAL
AMOUNT VALUE
---------- ------------
SHORT-TERM INVESTMENTS: 7.6%
Repurchase Agreement: 4.7%
$13,129,000 State Street Bank &
Trust Co., 5.75%, 6/30/00, due
7/03/00, [collateral: $13,110,000
U.S. Treasury Notes, 6.375%, due
8/15/00, value $13,404,975]
(proceeds $13,135,291) $ 13,129,000
GOVERNMENT AGENCY OBLIGATION: 2.9%
8,300,000 Federal Home Loan
Mortgage Discount Note,
5.95%, 7/03/00 8,296,971
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $21,425,971) 21,425,971
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $227,217,150): 99.0% 279,622,525
------------
Other Assets less Liabilites: 1.0% 2,777,390
------------
NET ASSETS: 100.0% $282,399,915
============
See accompanying Notes to Financial Statements.
* Non-income producing security.
Schedule of Investments 33
<PAGE>
MASTERS' SELECT FUNDS TRUST
SCHEDULE OF ASSET AND LIABILITIES AT JUNE 30, 2000 (UNAUDITED)
International
Equity Fund Fund
------------- -------------
ASSETS
Investments in securities, at cost $ 427,413,852 $ 227,217,150
============= =============
Investments in securities, at value $ 481,701,956 $ 279,622,525
Cash, including foreign currencies at value
(cost of $3,953 and $242,414) 3,953 243,945
Receivables:
Securities sold 3,529,052 11,328,840
Fund shares sold 341,299 2,265,084
Dividends and interest 203,674 435,386
Foreign tax witheld 8,438 184,436
Unrealized gain on forward exchange contracts -- 332,757
Deferred organizational costs 30,527 18,401
Prepaid expenses 28,878 37,904
------------- -------------
Total assets 485,847,777 294,469,278
------------- -------------
LIABILITIES
Payables:
Securities purchased 2,686,961 11,578,417
Fund shares redeemed 181,697 134,642
Advisory fees 426,124 216,460
Accrued expenses 132,740 139,844
------------- -------------
Total liabilities 3,427,522 12,069,363
------------- -------------
NET ASSETS $ 482,420,255 $ 282,399,915
============= =============
Number of shares issued and outstanding
(unlimited number of shares authorized,
$0.01 par value) 31,676,263 14,415,916
------------- -------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 15.23 $ 19.59
============= =============
COMPONENTS OF NET ASSETS
Paid-in capital $ 361,683,179 $ 191,107,340
Accumulated net investment income (loss) (843,486) 1,240,735
Accumulated net realized gain on investments 67,293,106 37,295,336
Net unrealized appreciation on investments
and foreign currency 54,287,456 52,756,504
------------- -------------
Net assets $ 482,420,255 $ 282,399,915
============= =============
See accompanying Notes to Financial Statements.
34 The Masters' Select Funds
<PAGE>
MASTERS' SELECT FUNDS TRUST
SCHEDULE OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
International
Equity Fund Fund
------------ ------------
INVESTMENT INCOME
Income
Dividends (net of foreign tax withheld of
$4,601 and $250,959, respectively) $ 1,286,291 $ 2,113,494
Interest 684,076 548,421
------------ ------------
Total income 1,970,367 2,661,915
------------ ------------
Expenses
Advisory fees 2,503,140 1,429,400
Administration fees 84,500 48,195
Custody fees 23,232 66,724
Fund accounting fees 34,470 30,085
Transfer agent fees 93,616 30,337
Amortization of deferred organizational costs 10,600 3,755
Registration expense 12,468 13,609
Professional fees 29,192 21,066
Reports to shareholders 36,528 12,876
Trustee fees 7,266 7,458
Insurance expense 7,671 3,729
Miscellaneous 17,545 9,507
------------ ------------
Total expenses 2,860,228 1,676,741
Less: fees waived (44,895) (200,720)
Less: expenses paid indirectly (1,480) (1,084)
------------ ------------
Net expenses 2,813,853 1,474,937
------------ ------------
NET INVESTMENT INCOME (LOSS) (843,486) 1,186,978
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on investments
and foreign currency 42,563,200 37,083,636
Net unrealized depreciation on investments
and foreign currency (15,782,111) (29,013,131)
------------ ------------
Net realized and unrealized gain on
investments and foreign currency 26,781,089 8,070,505
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 25,937,603 $ 9,257,483
============ ============
See accompanying Notes to Financial Statements.
Statement of Operations 35
<PAGE>
MASTERS' SELECT EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
June 30, 2000+ December 31, 1999
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment loss $ (843,486) $ (490,430)
Net realized gain on investments
and foreign currency 42,563,200 90,855,318
Net unrealized appreciation (depreciation)
on investments and foreign currency (15,782,111) 7,559,672
------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 25,937,603 97,924,560
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income -- (453,126)
From net realized gain -- (72,845,649)
------------- -------------
Total distributions -- (73,298,775)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from net
change in outstanding shares (a) 7,236,077 19,162,903
------------- -------------
TOTAL INCREASE IN NET ASSETS 33,173,680 43,788,688
NET ASSETS
Beginning of period 449,246,575 405,457,887
------------- -------------
END OF PERIOD $ 482,420,255 $ 449,246,575
============= =============
(a) A summary of capital share transactions is as follows:
Six Months Ended Year Ended
June 30, 2000+ December 31, 1999
--------------------------- ----------------------------
Shares Value Shares Value
------------ ------------ ------------ -------------
Shares sold 3,527,390 $ 52,200,924 4,970,856 $ 73,906,691
Shares issued in
reinvestment
of distribution -- -- 5,062,626 71,775,849
Shares redeemed (3,088,872) (44,964,847) (8,668,083) (126,519,637)
------------ ------------ ------------ -------------
Net increase 438,518 $ 7,236,077 1,365,399 $ 19,162,903
============ ============ ============ =============
+ Unaudited.
See accompanying Notes to Financial Statements.
36 The Masters' Select Funds
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
June 30, 2000+ December 31, 1999
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income $ 1,186,978 $ 15,363
Net realized gain on investments
and foreign currency 37,083,636 10,874,679
Net unrealized appreciation (depreciation)
on investments and foreign currency (29,013,131) 72,373,381
------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 9,257,483 83,263,423
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income -- (353,934)
From net realized gain -- (4,038,447)
------------- -------------
Total distributions -- (4,392,381)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from
net change in outstanding shares (a) 53,785,009 45,266,103
------------- -------------
TOTAL INCREASE IN NET ASSETS 63,042,492 124,137,145
NET ASSETS
Beginning of period 219,357,423 95,220,278
------------- -------------
END OF PERIOD $ 282,399,915 $ 219,357,423
============= =============
Accumulated net investment income $ 1,240,735 $ 53,757
============= =============
(a) A summary of capital share transactions is as follows:
Six Months Ended Year Ended
June 30, 2000+ December 31, 1999
--------------------------- ----------------------------
Shares Value Shares Value
------------ ------------ ------------ -------------
Shares sold 5,702,588 $113,816,783 7,886,341 $ 110,540,261
Shares issued in
reinvestment
of distribution -- -- 274,383 4,296,677
Shares redeemed (3,033,478) (60,031,774) (5,108,427) (69,570,835)
------------ ------------ ------------ -------------
Net increase 2,669,110 $ 53,785,009 3,052,297 $ 45,266,103
============ ============ ============ =============
+ Unaudited.
See accompanying Notes to Financial Statements.
Statement of Changes in Net Assets 37
<PAGE>
MASTERS' SELECT EQUITY FUND
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout each period
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -------------------------------
June 30, 2000+ 1999 1998 1997**
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 14.38 $ 13.57 $ 11.84 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.03) (0.01) 0.03 0.03
Net realized and unrealized gain on
investments and foreign currency 0.88 3.52 1.73 2.90
------- ------- ------- -------
Total from investment operations 0.85 3.51 1.76 2.93
------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment income -- (0.02) (0.02) (0.03)
From net realized gain -- (2.68) (0.01) (1.06)
------- ------- ------- -------
Total distributions -- (2.70) (0.03) (1.09)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 15.23 $ 14.38 $ 13.57 $ 11.84
======= ======= ======= =======
Total return 5.91%++ 26.45% 14.90% 29.11%
------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $ 482.4 $ 449.2 $ 405.5 $ 296.9
------- ------- ------- -------
Ratio of expenses to average net
assets before custody credits:
Before fees waived 1.26%* 1.28% 1.38% 1.47%
------- ------- ------- -------
After fees waived 1.24%* 1.26% 1.38% 1.47%
------- ------- ------- -------
Ratio of net investment income
(loss) to average net assets (0.37%)* (0.12%) 0.30% 0.12%
------- ------- ------- -------
Portfolio turnover rate 61.45%++ 116.42% 135.41% 145.11%
------- ------- ------- -------
</TABLE>
+ Unaudited.
* Annualized.
** Commenced operations on December 31, 1996.
++ Not Annualized.
See accompanying Notes to Financial Statements.
38 The Masters' Select Funds
<PAGE>
MASTERS' SELECT INTERNATIONAL FUND
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout each period
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -------------------- Period Ended**
June 30, 2000+ 1999 1998 December 31, 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 18.67 $ 10.95 $ 9.88 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.08 0.00^ 0.08 0.00^
Net realized and unrealized gain (loss)
on investments and foreign currency 0.84 8.13 1.08 (0.12)
------- ------- ------- -------
Total from investment operations 0.92 8.13 1.16 (0.12)
------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment income -- (0.03) (0.09) --
From net realized gain -- (0.38) -- --
------- ------- ------- -------
Total distributions -- (0.41) (0.09) --
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 19.59 $ 18.67 $ 10.95 $ 9.88
======= ======= ======= =======
Total return 4.93%++ 75.01% 11.74% (1.20%)++
------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $ 282.4 $ 219.4 $ 95.2 $ 45.9
------- ------- ------- -------
Ratio of expenses to average net
assets before custody credits:
Before fees waived 1.29%* 1.41% 1.63% 1.83%*
------- ------- ------- -------
After fees waived 1.14%* 1.29% 1.55% 1.83%*
------- ------- ------- -------
Ratio of net investment income
to average net assets 0.91%* 0.01% 0.87% 0.42%*
------- ------- ------- -------
Portfolio turnover rate 71.80%+ 100.00% 73.59% 0.00%
------- ------- ------- -------
</TABLE>
+ Unaudited.
* Annualized.
** Commenced operations on December 1, 1997.
^ Amount represents less than $0.01 per share.
++ Not Annualized.
See accompanying Notes to Financial Statements.
Financial Highlights 39
<PAGE>
MASTERS' SELECT FUNDS TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
The following is a summary of the significant accounting policies followed by
the Funds. These policies are in conformity with generally accepted accounting
principles.
A. SECURITY VALUATION. Investments in securities traded on a national
securities exchange or Nasdaq are valued at the last reported sales price
at the close of regular trading on each day that the exchanges are open for
trading. Securities traded on an exchange or Nasdaq for which there have
been no sales and other over-the-counter securities are valued at the mean
between the closing bid and asked prices. Securities for which market
prices are not readily available are valued at fair values as determined in
good faith by the Board of Trustees. Debt securities maturing within 60
days or less are valued at amortized cost unless the Board of Trustees
determines that amortized cost does not represent fair value.
B. FOREIGN CURRENCY TRANSLATION. The Funds' records 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 their net realized and unrealized
gains and losses on investments resulting from changes in foreign exchange
rates from the impact arising from changes in market prices. Such
fluctuations are included with net realized and unrealized gain or loss
from investments and foreign currency.
40 The Masters' Select Funds
<PAGE>
MASTERS' SELECT FUNDS TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Net realized foreign exchange gains and 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.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Funds may utilize forward
foreign currency exchange contracts ("forward contracts") under which they
are obligated to exchange currencies on specified future dates at specified
rates, and are subject to the risks of foreign exchange fluctuations. All
commitments are "marked-to-market" daily and any resulting unrealized gains
or losses are included as unrealized appreciation or 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.
D. FEDERAL INCOME TAXES. The Funds intend to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of their taxable income to their shareholders.
Accordingly, no provisions for federal income taxes are required.
E. SECURITY TRANSACTIONS, DIVIDEND INCOME AND DISTRIBUTIONS. Security
transactions are accounted for on the trade date. Realized gains and losses
on securities transactions are reported on an identified cost basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Purchase
discounts and premiums on securities held by the Funds are accreted and
amortized to maturity using the effective interest method.
F. REPURCHASE AGREEMENTS. 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, including recorded interest,
is sufficient to cover the value of the repurchase agreements.
G. DEFERRED ORGANIZATION COSTS. All of the expenses incurred by the Adviser in
connection with the organization and registration of each Fund's shares
will be borne by each Funds and are being amortized to expense on a
straight-line basis over a period of five years.
H. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity
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. Actual results could
differ from those estimates.
Notes to Financial Statements 41
<PAGE>
MASTERS' SELECT FUNDS TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
I. OTHER. Under terms of the Trust's Custodial Agreement, the Funds earn
credits on cash balances which are applied against custodian fees. For the
six months ended June 30, 2000, these credits totaled $1,480 and $1,084 for
Masters' Select Equity Fund and Masters' Select International Fund,
respectively.
NOTE 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 each Fund. For the six months ended June 30,
2000, the Advisor contractually agreed to waive 0.02% from its fee applicable to
the Masters' Select Equity Fund and 0.10% from its fee applicable to the
Masters' Select International Fund. Additionally, effective September 24, 1999,
the Advisor voluntarily waived an additional 0.055% from its fee applicable to
the Masters' Select International Fund. The Advisor has contractually agreed to
continue the 0.02% and the 0.155% waiver through December 31, 2000 for the
Masters' Select Equity Fund and the Masters' Select International Fund,
respectively. While under certain circumstances the Advisor has the right to
seek recoupment of expenses they have reimbursed to the Fund, the Advisor has
agreed not to seek recoupment of the management fees waived for the Funds.
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 monthly a fee based on the value of the total
average net assets of the Trust at an annual rate of 0.100% of the first $100
million of such net assets, 0.050% 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'
securities for the six months ended June 30, 2000 of $29,356 and $1,734 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.
42 The Masters' Select Funds
<PAGE>
MASTERS' SELECT FUNDS TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4 - PURCHASES AND SALES OF SECURITIES
--------------------------------------------------------------------------------
The cost of securities purchased and the proceeds from securities sold,
excluding short-term investments, for the six months ended June 30, 2000 were as
follows:
Fund Purchased Sales
---- ------------ ------------
Equity $265,391,330 $264,347,963
International 218,032,361 172,166,809
At June 30, 2000, the aggregate unrealized appreciation and depreciation of
securities, based on their cost for federal income tax purposes, was as follows:
Equity Fund International Fund
------------ ------------------
Total tax cost $427,413,852 $227,217,150
Gross unrealized appreciation $ 87,648,677 $ 58,045,486
Gross unrealized depreciation (33,360,573) (5,640,111)
Net unrealized appreciation $ 54,288,104 $ 52,405,375
NOTE 5 - OFF-BALANCE-SHEET RISK
--------------------------------------------------------------------------------
The Funds are parties to financial instruments with off-balance-sheet risk,
primarily forward contracts, in order to minimize the impact of adverse changes
in the relationship between the U.S. dollar and various foreign currencies.
These instruments involve market risk in excess of the amount recognized in the
Statement of Assets and Liabilities. Risks arise from the possible inability of
counter parties to meet the terms of their contracts, future adverse 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 specified rate at an agreed future date. Forward
contracts are reported in the financial statements at the Funds' net equity as
measured by the difference between the forward exchange rate at the reporting
date and the forward exchange rate on the date the contract is entered into. At
June 30, 2000, the Funds had the following forward contracts outstanding:
Notes to Financial Statements 43
<PAGE>
MASTERS' SELECT FUNDS TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
MASTERS' SELECT INTERNATIONAL FUND
In Exchange Settlement Unrealized
CONTRACTS TO BUY For Date Gain (Loss)
--------------------------------------------------------------------------------
100,601 British Pound Sterling U.S. $ 152,219 07/05/2000 $ 101
6,768,272 Swiss Francs 4,149,005 07/03/2000 31,801
3,202,608 Swiss Francs 1,963,225 07/04/2000 6,597
---------
38,499
---------
CONTRACTS TO SELL
--------------------------------------------------------------------------------
6,000,000 British Pound Sterling U.S. $9,096,061 10/10/2000 390,539
6,287,130 Euros 6,002,326 07/03/2000 (76,706)
1,980,211 Euros 1,890,508 07/04/2000 (7,328)
12,017,404 Swedish Krona 1,362,517 07/03/2000 (12,247)
---------
294,258
---------
Net unrealized gain on forward contracts $ 332,757
=========
NOTE 6 - LINE OF CREDIT
--------------------------------------------------------------------------------
The Trust has an unsecured $15,000,000 line of credit with its custodian.
Borrowings under this arrangement bear interest at the federal funds rate plus
0.50% per annum. At June 30, 2000, the Trust has no outstanding borrowings. As
compensation for holding available the lending commitment, the Trust pays a
0.10% 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, 2000, the commitment fees were
$4,047 and $2,310 for the Masters' Select Equity Fund and the Masters' Select
International Fund, respectively.
44 The Masters' Select Funds
<PAGE>
ADVISOR:
--------------------------------------------------------------------------------
Litman/Gregory Fund Advisors, LLC
4 Orinda Way, Suite 230-D
Orinda, CA 94563
DISTRIBUTOR:
--------------------------------------------------------------------------------
First Fund Distributors, Inc.
4455 E. Camelback Rd., Suite 261E
Phoenix, AZ 85018
TRANSFER AGENT:
--------------------------------------------------------------------------------
NFDS
P.O. Box 219922
Kansas City, MO 64121-9922
1-800-960-0188
For Overnight Delivery:
Masters' Select Funds
C/O NFDS
330 W. 9th Street
Kansas City, MO 64105
INVESTMENT PROFESSIONALS:
--------------------------------------------------------------------------------
Registered Investment Advisors, broker/dealers, and other
investment professionals may contact Fund Services at
1-925-253-5213.
PROSPECTUS:
--------------------------------------------------------------------------------
To request a prospectus, IRA application or information, call
1-800-656-8864, 24 hours a day, seven days a week.
SHAREHOLDER INQUIRIES:
--------------------------------------------------------------------------------
To request action on your existing account, contact the Transfer
agent, NFDS, at 1-800-960-0188, from 9:00 a.m. to 6:00 p.m. eastern
time, Monday through Friday.
24-HOUR AUTOMATED INFORMATION:
--------------------------------------------------------------------------------
For access to 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 in order to access your account information.
FUND INFORMATION:
--------------------------------------------------------------------------------
Fund Symbol CUSIP Fund Number
---- ------ ----- -----------
Equity Fund MSEFX 576417109 305
International Fund MSILX 576417208 306
Value Fund MSVFX 576417406 307
WEBSITE:
--------------------------------------------------------------------------------
www.mastersselectfunds.com
