STEIN ROE MUTUAL FUNDS
SEMIANNUAL REPORT
DEC. 31, 1998
PICTURE OF GLOBE
STEIN ROE FIXED INCOME FUND
TAXABLE BOND FUND
INSTITUTIONAL CLIENT HIGH YIELD FUND
LOGO: STEIN ROE MUTUAL FUNDS
Sensible Risks. Intelligent Investments.(SM)
<PAGE>
Contents
- --------------------------------------------------------------------------------
Performance................................................................... 1
How the Institutional Client High Yield Fund has done over time
Questions & Answers........................................................... 2
Interview with the portfolio manager and summary of investment activity
Institutional Client High Yield Fund
Portfolio of Investments...................................................... 4
A complete list of investments with market values
Financial Statements.......................................................... 8
Statements of assets and liabilities, operations and changes in net assets
Notes to Financial Statements.................................................14
Financial Highlights..........................................................16
Selected per-share data
Must be preceded or accompanied by a prospectus.
<PAGE>
Among the ways to evaluate a fund's historical performance is to look at the
cumulative return percentage, the average annual total return percentage or the
growth of a hypothetical $10,000 investment. Below we compare the returns of
each of the Stein Roe bond funds with each fund's unmanaged benchmark and its
peer group.
Each performance figure includes changes in a fund's share price,
reinvestment of dividends (net investment income) and capital gains, if any (the
taxable profits a fund earns when it sells bonds that have grown in value).
<TABLE>
<CAPTION>
CUMULATIVE SIX-MONTH AND AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Life
6 Months 1 Year of Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STEIN ROE INSTITUTIONAL CLIENT HIGH YIELD FUND -1.69% 4.92% 9.77%
Merrill Lynch High-Yield Master II Index -1.55% 3.66% 8.87%
Lipper High Current Yield Fund Average -4.73% -0.44% 6.77%
Number of Funds in Peer Group 286 246 171
</TABLE>
Investment Comparison
- --------------------------------------------------------------------------------
COMPARISON of change in value of a $10,000 investment.
COMPARISON of change in value of a $10,000 investment.
Institutional Merrill Lynch
Client High-Yield
High-Yield Master II
Fund Index
2/14/97 10000 10000
3/31/97 9900 10160
6/31/97 10548 10642
9/30/97 11102 11059
12/31/97 11353 11344
3/31/98 12076 11660
6/30/98 12119 11854
9/30/98 11383 11430
12/31/98 11912 11758
Past performance is no guarantee of future results. Share price and investment
return will vary, so you may have a gain or loss when you sell shares. An
expense limitation of .50% is currently in effect for Institutional Client High
Yield Fund, which began operating on Feb. 14, 1997. Returns would have been
lower without the limitation. Total return includes changes in share price and
reinvestment of income and capital gains distributions. Each index shown above
is an unmanaged group of fixed-income securities that differs from the
composition of each Stein Roe fund; they are not available for direct
investment. Source of Lipper data: Lipper, Inc., a monitor of mutual fund
performance.
<PAGE>
Questions & Answers
- --------------------------------------------------------------------------------
An interview with Steve Lockman, Portfolio Manager
of Stein Roe Institutional Client High Yield Fund and SR&F High Yield Portfolio
FUND DATA
INVESTMENT OBJECTIVE:
Seeks high current income and capital appreciation by investing principally
in high yield, high-risk, medium- and lower-quality debt securities.
Q: HOW DID THE FUND PERFORM FOR THE FIRST HALF OF FISCAL 1999?
A: Institutional Client High Yield Fund faced a challenging environment marked
by unusually high levels of volatility, especially in higher-risk bonds affected
by developments overseas. For the six-month period ended Dec. 31, 1998, the Fund
posted a total return of -1.69%. We preserved capital to a greater extent than
the average fund in the Lipper high current yield fund category, which returned
- -4.73% for the same period. The Fund's SEC yield as of Dec. 31, 1998, was 9.20%.
Q: WHAT FACTORS AFFECTED THE FUND'S TOTAL RETURN?
A: To maximize high income potential, the Fund had a modest position in
higher-risk debt issued in emerging markets. While all types of high yield
securities declined substantially in value this past summer after Russia
defaulted on its obligations, emerging market debt suffered the most. We
outperformed the average of our peers for the six-month period because the
Fund's exposure to this high-risk category was lower than most comparable mutual
funds.
The Fund's performance benefited from the fact that among domestic
corporate bonds, we steered away from companies affected by Asian economic
turmoil. We were also underweighted in industries whose cash flow was dependent
on commodity prices and the overall health of the U.S. economy. Our positioning
in non-cyclical businesses helped preserve principal as the high yield market
began to recover this past autumn.
Q: WHAT HAPPENED IN THE MARKET?
A: At the beginning of the period, the high yield market performed well,
reflecting favorable equity markets in July and early August. Then in
mid-August, international economic troubles began to affect the performance of
U.S. companies, affecting the U.S. equity and high yield bond markets. Quite a
change took place. The result was one of the largest months of declines that the
high yield market has seen in years. Performance continued to decline in
September.
Q: HOW DID YOU ADJUST THE PORTFOLIO IN RESPONSE TO MARKET ACTIVITY?
A: When high yield bonds underperformed Treasuries in August, we adopted a more
conservative investment approach. We upgraded the quality of the portfolio by
selling zero coupon and lower-rated securities and moved into higher-quality
securities and cash. By doing this, we avoided poor performance and defaults in
several issues. By October, market circumstances caused many investors to fear
high default rates. But we did not believe market conditions would fall to such
depths. Interest rates had declined, corporate earnings were stronger than
expected and the economy appeared to be stabilizing. We believed a turnaround in
the high yield market was more likely, so we then increased our investments in
high yield bonds, reducing our cash position. This worked well. The market took
off in November and December as institutional investors displayed renewed
confidence in higher risk debt.
Q: DID YOU MAKE ANY OTHER CHANGES TO THE PORTFOLIO'S COMPOSITION?
A: We increased our position in bonds rated BBB this past summer when we
believed they were priced at attractive levels.
Q: HOW IMPORTANT IS THE TELECOMMUNICATIONS SECTOR FOR THE HIGH YIELD MARKET?
A: Telecommunications and Internet companies continue to be among the largest
issuers in the high yield market. Although we invest aggressively in these
areas, we maintain a slightly underweight position compared to the Merrill Lynch
High Yield Master II Index because of the ever-present volatility in the sector.
In that area, we've concentrated on owning companies that have relatively strong
stocks as a way to ensure that we were getting quality companies in industries
where many offerings are small or overvalued. We stick with companies that have
experienced management, raise a substantial amount of capital through equity
rather than debt offerings and are capable of accommodating expansion.
<PAGE>
Q: WAS IT DIFFICULT TO BUY AND SELL BONDS GIVEN THE VOLATILITY THIS SUMMER?
A: Lack of liquidity did affect how bonds traded throughout the past six months.
Investor dollars flowed out of the high yield market rapidly in August and
September. We spent a lot of time focusing on trades that would allow us to
maximize total return by taking advantage of price movement. It did not take a
lot to move these bonds based on supply and demand because that relationship was
already so tight. We are concerned that liquidity will continue to be a problem
with many issues. Consequently, we carefully examine investor demand for any
bond issued by a smaller, less liquid issuer. Most of the bonds in the portfolio
are of larger, more liquid issuers.
Q: WHAT DO YOU EXPECT GOING FORWARD?
A: We intend to invest in bonds issued by relatively solid companies with steady
cash flows. If the economy slows, these companies have better prospects for
meeting their debt obligations than companies with weak cash flows. We plan to
maintain a lower-than-average percentage of holdings in telecommunications
because the sector remains volatile, and in metals and mining bonds because of
low commodity prices. We think the potential return on these investments has
been increasing, but they are still not at levels attractive enough for us to
purchase. First quarter 1999 earnings reports could provide substantial guidance
for the market. With yields now several hundred percentage points more than
comparable maturity Treasuries -- the highest income advantage since the early
1990s -- we believe the potential rewards of the high-risk debt market remain
compelling for income-oriented investors who can carefully navigate the
potential pitfalls of the U.S. economy.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. Total
return includes changes in share price and reinvestment of income and capital
gains distributions, if any. Portfolio holdings are as of 12/31/98 and are
subject to change. Investing in high yield bonds involves greater credit risks
than investing in higher-quality bonds. The Merrill Lynch High Yield Master II
Index is an unmanaged group of bonds that differs from the composition of any
Stein Roe fund; it is not available for direct investment. The Adviser currently
limits expenses to .50% of average net assets, subject to termination upon 30
days' notice to the Fund. Absent this limit, the Fund's total return would have
been less. Investing in high yield bonds involves greater credit and other risks
not associated with investing in higher-quality securities. Foreign investments
involve market, political, accounting and currency risks not associated with
other investments. Emerging markets investments involve market, political and
currency risks not associated with investments in more developed markets.
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Portfolio of Investments at December 31, 1998
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Principal Market
LONG-TERM OBLIGATIONS (94.2%) Amount Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE AND MILITARY TECHNOLOGY (7.7%)
BE Aerospace 9.500% 11/1/08 (a)..................................................... $ 750 $ 786
Derlan Manufacturing (Yankee Issue) 10.000% 1/15/07................................. 1,000 800
Dyncorp 9.500% 3/1/07............................................................... 500 495
L-3 Communications
10.375% 5/1/07 Series B.......................................................... 500 550
8.000% 8/1/08 (a)................................................................ 1,000 1,008
Newport News Shipbuilding 9.250% 12/1/06............................................ 1,195 1,264
United Defense Industries 8.875% 11/15/07........................................... 1,500 1,515
----------
6,418
AUTOMOTIVE (1.6%)
Hayes Wheels International Series B 9.125% 7/15/07.................................. 500 520
Penda Series B 10.750% 3/1/04....................................................... 800 792
----------
1,312
BUILDING AND CONSTRUCTION (2.6%)
Beazer Homes USA 8.875% 4/1/08...................................................... 1,000 957
PYCSA Panama 10.280% 12/15/12 (a)................................................... 1,500 1,233
----------
2,190
BUSINESS SERVICES (3.2%)
Outdoor Systems 8.875% 6/15/07...................................................... 750 803
Penhall Acquisition 12.000% 08/1/06 (a)............................................. 1,000 940
Rental Service 9.000% 5/15/08....................................................... 1,000 970
----------
2,713
CABLE AND MEDIA (6.5%)
Adelphia Communications 8.3750% 02/1/08 (a)......................................... 1,500 1,552
Chancellor Media 8.000% 11/1/08 (a)................................................. 1,500 1,530
Garden State Newspapers 8.750% 10/1/09.............................................. 1,000 1,000
Perry-Judd 10.625% 12/15/07......................................................... 1,000 1,047
Young Broadcasting 10.125% 2/15/05.................................................. 250 263
----------
5,392
CHEMICALS (1.2%)
Biovail Corporation International 10.875% 11/15/05 (a).............................. 1,000 1,010
COAL MINING (1.8%)
AEI Resources 11.500% 12/15/06 (a).................................................. 1,500 1,485
COMPUTER EQUIPMENT (1.8%)
Axia 10.750% 07/15/08............................................................... 1,500 1,519
CONTAINERS (0.4%)
BWAY Series B 10.250% 4/15/07 ...................................................... 350 368
COSMETICS AND PERSONAL CARE PRODUCTS (1.2%)
Chattem 8.875% 4/1/08 (a)........................................................... 1,000 1,025
FOOD AND BEVERAGES (1.2%)
Pepsi-Gemex Series B (Yankee Issue) 9.750% 3/30/04.................................. 1,000 965
HEALTH SERVICES AND EQUIPMENT (6.0%)
Dynacare (Yankee Issue) 10.750% 1/15/06............................................. 2,000 2,000
Insight Health Services Series B 9.625% 6/15/08..................................... 1,750 1,689
Leiner Health Products 9.625% 7/1/07................................................ 500 520
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SR&F High Yield Portfolio CONTINUED
- ---------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH SERVICES AND EQUIPMENT (CONTINUED)
Mediq Zero Coupon (Yield to Maturity 5.810%) 6/1/09................................. $1,850 $ 832
----------
5,041
HOSPITALS AND NURSING HOME CARE (2.4%)
Tenet Healthcare 8.625% 1/15/07..................................................... 750 780
Universal Hospital Services 10.250% 3/1/08.......................................... 1,415 1,259
----------
2,039
HOTELS AND ENTERTAINMENT (10.9%)
Boyd Gaming 9.500% 7/15/07.......................................................... 750 750
Empress Entertainment 8.125% 7/1/06................................................. 1,500 1,500
Hard Rock Hotels 9.250% 4/1/05...................................................... 1,500 1,500
Premier Parks
9.250% 4/1/06.................................................................... 250 259
9.750% 1/15/07................................................................... 250 271
Zero Coupon (Yield to Maturity 4.939%) 4/1/08.................................... 1,750 1,186
Prime Hospitality Series B 9.750% 4/1/07............................................ 1,490 1,520
Speedway Motorsports 8.500% 8/15/07................................................. 2,000 2,110
----------
9,096
INTERNET SERVICES (4.4%)
Concentric Network 12.750% 12/15/07................................................. 1,000 1,020
ICG Services Zero Coupon (Yield to Maturity 4.884%) 5/1/08.......................... 2,250 1,162
Psinet 10.000% 2/15/05.............................................................. 1,500 1,485
----------
3,667
LEISURE PRODUCTS (1.0%)
Boyds Collection 9.000% 5/15/08 (a)................................................. 750 802
OIL AND GAS (1.2%)
Gulf Canada Resources 8.375% 11/15/05............................................... 1,000 1,004
Paper (0.5%)
Indah Kiat Finance 10.000% 7/1/07................................................... 500 270
Specialty Paperboard (Fibermark) 9.375% 10/15/06.................................... 50 152
----------
422
PRINTING AND PUBLISHING (4.2%)
Big Flower Press 8.625% 12/1/08 (a)................................................. 1,500 1,500
World Color Press 8.375% 11/15/08 (a)............................................... 2,000 2,010
----------
3,510
RESTAURANTS (0.3%)
AFC Enterprises 10.250% 5/15/07..................................................... 250 261
RETAIL (5.6%)
Cole National Group 9.875% 12/31/06................................................. 200 207
Holmes Products Series B 9.875% 11/15/07 ........................................... 1,000 940
Marsh Supermarket Series B 8.875% 8/1/07............................................ 1,000 1,050
MTS 9.375% 5/1/05................................................................... 1,500 1,462
Westpoint Stevens 7.875% 6/15/08.................................................... 1,000 1,008
----------
4,667
RUBBER, PLASTIC AND RELATED MATERIALS (1.8%)
Key Plastics Series B 10.250% 3/15/07............................................... 500 467
Tekni-Plex 9.250% 3/1/08............................................................ 1,000 1,045
----------
1,512
SANITARY SERVICES (1.1%)
Allied Waste 7.625% 1/1/06 (a)...................................................... 900 909
</TABLE>
<PAGE>
SR&F High Yield Portfolio CONTINUED
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (13.5%)
<S> <C> <C>
Focal Communications Series B
Zero Coupon (Yield to Maturity 5.967%) 2/15/08................................... $2,500 $ 1,350
Level 3 Communications
9.125% 5/1/08.................................................................... 1,000 993
Zero Coupon (Yield to Maturity 5.181%) 12/1/08 (a)............................... 1,000 582
McLeodusa 9.500% 11/1/08 (a)........................................................ 1,000 1,065
MGC Communications Series B 13.000% 10/1/04......................................... 1,000 660
Metromedia Fiber Networks 10.000% 11/15/08 (a)...................................... 1,500 1,541
Metronet Communications (Yankee Issue)
12.000% 8/15/07.................................................................. 1,000 1,087
Zero Coupon (Yield to Maturity 5.307%) 6/15/08................................... 1,000 613
Nextlink Communications 9.625% 10/1/07.............................................. 1,250 1,216
Optel Series B 11.500% 7/1/08....................................................... 1,200 1,176
Viatel 11.250% 4/15/08.............................................................. 1,000 1,000
----------
11,283
Telephone (5.0%)
Allegiance Telecom Series B
Zero Coupon (Yield to Maturity 5.870%) 2/15/08................................... 1,500 720
BTI Telecom 10.500% 9/15/07 ........................................................ 1,000 740
Comtel Brasileira (Yankee Issue) 10.750% 9/26/04 (a)................................ 250 195
Esprit Telecom Group (Yankee Issue) 11.500% 12/15/07................................ 1,000 1,035
ITC Deltacom 9.750% 11/15/08 (a).................................................... 500 520
Knology Holdings
Zero Coupon (Yield to Maturity 5.840%) 10/15/07.................................. 2,000 920
----------
4,130
Textile and Apparel (2.5%)
Pillowtex Series B 9.000% 12/15/07 ................................................. 750 772
William Carter Series A 10.375% 12/1/06............................................. 1,200 1,308
----------
2,080
Transportation and Transportation Equipment (3.9%)
Atlas Air 9.375% 11/15/06 (a)....................................................... 2,000 2,000
Coach USA Series B 9.375% 7/1/07.................................................... 500 515
Holt Group 9.750% 1/15/06 (a)....................................................... 1,000 700
----------
3,215
Utilities (0.7%)
Calenergy 9.500% 9/15/06............................................................ 500 555
----------
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $80,918)................................................................ 78,590
----------
- ---------------------------------------------------------------------------------------------------------------------
Number of
PREFERRED STOCK (0.5%) Units
- ---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.1%)
Viatel Series A 10.000%............................................................. 1 55
TELEPHONE (0.4%)
21st Century Telecom Group 13.750% ................................................. 1 361
----------
TOTAL PREFERRED STOCK
(Cost basis $518)................................................................... 416
----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SR&F High Yield Portfolio CONTINUED
- ---------------------------------------------------------------------------------------------------------------------
Number Market
WARRANTS (0.3%) of Warrants Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTERNET SERVICES (0.2%)
Concentric Network Warrants 12/15/07 (a)............................................ 1 $ 140
TELECOMMUNICATIONS (0.1%)
Metronet Communications Warrants 8/15/07 (a)........................................ 1 42
MGC Communications Warrants 10/01/04 (a)............................................ 1 31
----------
73
TELEPHONE (0.0%)
Allegiance Telecom Warrants 2/3/08 (a).............................................. 2 3
Knology Holdings Warrants 10/15/07 (a).............................................. 2 4
21st Century Telecommunications Warrants 2/15/10 (a)................................ 1 15
----------
22
TOTAL WARRANTS
(Cost $- )....................................................................... 235
----------
- ---------------------------------------------------------------------------------------------------------------------
Principal
SHORT-TERM OBLIGATION (3.0%) Amount
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (3.0%)
Associates Corp. of North America 5.080% 1/4/99
(Amortized cost $2,474).......................................................... $ 2,475 2,474
----------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.0%)
(Cost basis $83,808) (b)......................................................... 81,715
OTHER ASSETS, LESS LIABILITIES (2.0%)............................................... 1,663
----------
TOTAL NET ASSETS (100.0%)........................................................... $83,378
==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a)Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933.
These securities generally are issued only to qualified institutional
investors, and any resale must be in an exempt transaction, normally to other
qualified institutional investors. At December 31, 1998, the aggregate value
of the Portfolio's private placement securities was $21,620 (aggregate cost
$21,748), which represented 25.9% of net assets.
(b)At December 31, 1998, the cost of investments for financial reporting and
federal income tax purposes was identical. Net unrealized depreciation was
$2,093, consisting of gross unrealized appreciation of $1,561 and gross
unrealized depreciation of $3,654.
See accompanying Notes to Financial Statements.
<PAGE>
Stein Roe Institutional Client High Yield Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1998
(All amounts in thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in SR&F High Yield Portfolio, at value................................... $45,498
Receivable from investment adviser.................................................. 32
Cash................................................................................ 25
Other assets........................................................................ 8
---------
Total assets..................................................................... 45,563
---------
LIABILITIES
Dividends payable................................................................... 5
Accrued expenses payable............................................................ 11
---------
Total liabilities................................................................ 16
---------
Net assets....................................................................... $45,547
=========
ANALYSIS OF NET ASSETS
Paid-in capital..................................................................... $47,068
Net unrealized depreciation on investments.......................................... (821)
Accumulated net realized losses on investments ..................................... (700)
---------
Net assets....................................................................... $45,547
=========
Shares outstanding (unlimited number authorized).................................... 4,691
=========
Net asset value per share........................................................... $ 9.71
=========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
Stein Roe Institutional Client High Yield Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended December 31, 1998
(All amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest income allocated from SR&F High Yield Portfolio............................ $ 1,708
---------
EXPENSES
Expenses allocated from SR&F High Yield Portfolio................................... 113
Administrative fees................................................................. 28
Amortization of organization expenses............................................... 15
Accounting fees..................................................................... 13
SEC and state registration fees..................................................... 10
Transfer agent fees................................................................. 9
Audit and legal fees................................................................ 3
Trustees' fees...................................................................... 3
Printing and postage................................................................ 2
---------
Total expenses................................................................... 196
Reimbursement of expenses by investment adviser..................................... (102)
---------
Net expenses..................................................................... 94
---------
Net investment income............................................................ 1,614
---------
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS
Net realized losses on investments allocated from SR&F High Yield Portfolio......... (700)
Net change in unrealized appreciation or depreciation on investments................ (1,056)
---------
Net losses on investments........................................................ (1,756)
---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ $ (142)
=========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
Stein Roe Institutional Client High Yield Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
(All amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR
ENDED ENDED
DEC. 31, JUNE 30,
1998 1998
----------- ------------
<S> <C> <C>
OPERATIONS
Net investment income................................................... $ 1,614 $ 2,554
Net realized gains (losses) on investments (700) 1,702
Net change in unrealized appreciation or depreciation on investments.... (1,056) (45)
----------- -----------
Net increase (decrease) in net assets resulting from operations...... (142) 4,211
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income................................ (1,614) (2,554)
Distributions from net capital gains.................................... (1,401) (417)
----------- -----------
Total distributions to shareholders.................................. (3,015) (2,971)
----------- -----------
SHARE TRANSACTIONS
Subscriptions to fund shares............................................ 10,473 5,275
Value of distributions reinvested....................................... 3,074 2,968
----------- -----------
Net increase from share transactions................................. 13,547 8,243
----------- -----------
Net increase in net assets........................................... 10,390 9,483
TOTAL NET ASSETS
Beginning of period..................................................... 35,157 25,674
----------- -----------
End of period........................................................... $45,547 $35,157
=========== ===========
ANALYSES OF CHANGES IN SHARES OF BENEFICIAL INTEREST
Subscriptions to fund shares ........................................... 1,078 503
Issued in reinvestment of distributions................................. 313 282
----------- -----------
Net increase in fund shares.......................................... 1,391 785
Shares outstanding at beginning of period............................... 3,300 2,515
----------- -----------
Shares outstanding at end of period..................................... 4,691 3,300
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1998
(All amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at market value (cost $83,808).......................................... $ 81,715
Accrued interest receivable.......................................................... 1,716
-----------
Total assets...................................................................... 83,431
-----------
LIABILITIES
Payable to investment adviser........................................................ 37
Cash overdraft....................................................................... 7
Other liabilities.................................................................... 9
-----------
Total liabilities................................................................. 53
-----------
Net assets applicable to investors' beneficial interests.......................... $ 83,378
===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended December 31, 1998
(All amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest income...................................................................... $ 3,410
----------
EXPENSES
Management fees...................................................................... 188
Accounting fees...................................................................... 13
Audit and legal fees................................................................. 8
Trustees' fees....................................................................... 2
Other................................................................................ 15
----------
Total expenses.................................................................... 226
----------
Net investment income............................................................. 3,184
----------
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS
Net realized losses on investments................................................... (1,715)
Net change in unrealized appreciation or depreciation on investments................. (2,466)
----------
Net losses on investments ........................................................ (4,181)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................. $ (997)
==========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
(All amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DEC. 31, JUNE 30,
1998 1998
--------------------------------
OPERATIONS
<S> <C> <C>
Net investment income $ 3,184 $ 5,000
Net realized gains (losses) on investments (1,715) 3,084
Net change in unrealized appreciation or depreciation on investments (2,466) (176)
------------- -------------
Net increase (decrease) in net assets resulting from operations (997) 7,908
------------- -------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 22,406 40,432
Withdrawals (16,518) (9,126)
------------- -------------
Net increase from transactions in investors' beneficial interests 5,888 31,306
------------- -------------
Net increase in net assets 4,891 39,214
TOTAL NET ASSETS
Beginning of period..................................................... 78,487 39,273
------------- -------------
End of period........................................................... $ 83,378 $ 78,487
============= =============
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
Stein Roe Institutional Client High Yield Fund (the "Fund") is a series of Stein
Roe Trust (the "Trust"), an open-end management investment company organized as
a Massachusetts business trust. The Fund invests substantially all of its assets
in SR&F High Yield Portfolio (the "Portfolio"), which seeks a high level of
current income and capital growth by investing primarily in high yield,
high-risk, medium- and lower-quality debt securities.
The Portfolio is a series of SR&F Base Trust, a Massachusetts common law
trust organized under an Agreement and Declaration of Trust dated August 23,
1993. The Portfolio commenced operations on November 1, 1996. The Portfolio
allocates income, expenses, realized and unrealized gains and losses to each
investor on a daily basis, based on their respective percentage of ownership. At
December 31, 1998, Stein Roe High Yield Fund and Stein Roe Institutional Client
High Yield Fund owned 45.4% and 54.6%, respectively, of the Portfolio.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of the Fund and
Portfolio. These policies are in conformity with generally accepted accounting
principles, which require management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on trade date. Interest income,
including discount accretion and premium amortization, is recorded daily on the
accrual basis. Realized gains or losses from investment transactions are
reported on an identified cost basis.
Securities purchased on a when-issued or delayed delivery basis may be
settled a month or more after the transaction date. The values of such
securities are subject to market fluctuations during this period. There were no
when-issued or delayed delivery purchase commitments as of December 31, 1998.
SECURITY VALUATIONS
All securities are valued as of December 31, 1998. Long-term debt
securities are valued using market quotations if readily available at the time
of valuation. If market quotations are not readily available, they are valued at
a fair value using a procedure determined in good faith by the Board of
Trustees, which has authorized the use of market valuations provided by a
pricing service. Short-term debt securities with remaining maturities of 60 days
or less are valued at their amortized cost. Those with remaining maturities of
more than 60 days for which market quotations are not readily available are
valued by use of a matrix, prepared by the Adviser, based on quotations for
comparable securities. Other assets are valued by a method that the Board of
Trustees believes represents a fair value.
FUTURES CONTRACTS
The Portfolio may enter into U.S. Treasury security futures contracts to
either hedge against expected declines in the value of its securities or as a
temporary substitute for the purchase of individual bonds. Risks of entering
into futures contracts include the possibility that there may be an illiquid
market at the time the Portfolio seeks to close out a contract, and changes in
the value of the futures contract may not correlate with changes in the value of
the securities being hedged.
Upon entering into a futures contract, the Portfolio deposits cash or
securities with its custodian in an amount sufficient to meet the initial margin
requirement. Subsequent payments are made or received by the Portfolio equal to
the daily change in the contract value and are recorded as unrealized gains or
losses. The Portfolio recognizes a realized gain or loss when the contract is
closed or expires. The Portfolio did not enter into any futures contracts during
the six months ended December 31, 1998.
FEDERAL INCOME TAXES
No provision is made for federal income taxes, since (a) the Fund elects to
be taxed as a "regulated investment company" and makes such distributions to its
shareholders as to be relieved of all federal income tax under provisions of
current federal tax law; and (b) the Portfolio is treated as a partnership for
federal income tax purposes and all of its income is allocated to its owners
based on respective percentages of ownership.
DISTRIBUTIONS TO FUND SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly.
Capital gains distributions, if any, are distributed annually. Distributions in
excess of tax basis earnings are reported in the financial statements as a
return of capital. Permanent differences in the recognition or classification of
income between the financial statements and tax earnings are reclassified to
paid-in capital.
<PAGE>
Notes to Financial Statements CONTINUED
- --------------------------------------------------------------------------------
NOTE 3. PORTFOLIO COMPOSITION
The Portfolio invests primarily in high yield, high-risk medium- and
lower-quality debt securities. See the Portfolio's schedule of investments for
information regarding individual securities.
NOTE 4. TRUSTEES' FEES AND TRANSACTIONS WITH AFFILIATES
The Portfolio pays a monthly management fee and the Fund pays a monthly
administrative fee to Stein Roe & Farnham Incorporated (the "Adviser"), an
indirect, wholly-owned subsidiary of Liberty Financial Companies, Inc.
("Liberty"), for its services as investment adviser and manager.
The management fee for the Portfolio is computed at an annual rate of .50%
of the first $500 million of average daily net assets, and .475% thereafter. The
administrative fee for the Fund is computed at an annual rate of .15% of the
first $500 million of average daily net assets, and .125% thereafter.
The Adviser also provides fund accounting services.
The Adviser has agreed to reimburse the Fund to the extent that annual expenses
exceed .50% of average daily net assets. This commitment expires January 31,
2000, subject to earlier termination by the Adviser on 30 days' notice to the
Fund.
Transfer agent fees are paid to SteinRoe Services, Inc. (SSI), a direct,
wholly-owned subsidiary of Liberty. SSI has entered into an agreement with
Liberty Funds Services, Inc., an indirect, wholly-owned subsidiary of Liberty,
to act as subtransfer agent for the Fund.
Certain officers and trustees of the Trust are also officers of the Adviser.
Compensation is paid to trustees not affiliated with the Adviser. No
remuneration was paid to any other trustee or officer of the Trust.
NOTE 5. SHORT-TERM DEBT
To facilitate portfolio liquidity, the Fund and Portfolio maintain borrowing
arrangements under which they can borrow against portfolio securities. There
were no borrowings during the six months ended December 31, 1998.
NOTE 6. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales (other than short-term
obligations) for the Portfolio for the six months ended December 31, 1998, were
$101,891 and $89,028, respectively.
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Stein Roe Institutional Client High Yield Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
<TABLE>
<CAPTION>
Six Months
Ended Year Period
December 31, Ended Ended
1997 June 30, June 30,
(Unaudited) 1998 1997(d)
-------------- ------------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................... $ 10.65 $ 10.21 $ 10.00
-------------- ------------------- ------------
Income From Investment Operations
Net investment income....................................... 0.44 0.88 0.33
Net realized and unrealized gains (losses) on investments... (0.63) 0.58 0.21
-------------- ------------------- ------------
Total from investment operations.......................... (0.19) 1.46 0.54
-------------- ------------------- ------------
Distributions
Net investment income....................................... (0.44) (0.88) (0.33)
Net realized gains.......................................... (0.31) (0.14) --
-------------- ------------------- -------------
Total distributions....................................... (0.75) (1.02) (0.33)
-------------- ------------------- -------------
Net Asset Value, End of Period................................. $ 9.71 $ 10.65 $ 10.21
============== =================== =============
Ratio of net expenses to average net assets (a)................ 0.50%(c) 0.50% 0.50%(c)
Ratio of net investment income to average net assets (b)....... 8.63%(c) 8.31% 8.76%(c)
Total return (b)............................................... (1.69%) 14.88% 5.48%
Net assets, end of period (000's).............................. $45,547 $35,157 $25,674
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no reimbursement
by the Adviser, this ratio would have been 1.05% for the six months ended
December 31, 1998, 1.28% for the year ended June 30, 1998, and 2.59% for the
period ended June 30, 1997.
(b) Computed giving effect to the Adviser's expense limitation undertaking.
(c) Annualized
(d) From commencement of operations on February 14, 1997.
- --------------------------------------------------------------------------------
SR&F High Yield Portfolio
<TABLE>
<CAPTION>
Six Months
Ended Year Period
Dec. 31, Ended Ended
1998 June 30, June 30,
select ratios (Unaudited) 1998 1997 (b)
-------------- -----------------------------------
<S> <C> <C> <C>
Ratio of net expenses to average net assets.............. 0.60%(a) 0.65% 0.89%(a)
Ratio of net investment income to average net assets..... 8.48%(a) 8.13% 8.24%(a)
Portfolio turnover rate.................................. 127% 426% 168%
</TABLE>
(a) Annualized
(b) From commencement of operations on November 1, 1996.
<PAGE>
Stein Roe Trust
- --------------------------------------------------------------------------------
TRUSTEES
John A. Bacon, Jr.
PRIVATE INVESTOR
William W. Boyd
CHAIRMAN AND DIRECTOR, STERLING PLUMBING
GROUP INC.
Lindsay Cook
SENIOR VICE PRESIDENT, LIBERTY FINANCIAL
COMPANIES, INC.
Douglas A. Hacker
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
UNITED AIRLINES
Janet Langford Kelly
SENIOR VICE PRESIDENT, SECRETARY AND GENERAL
COUNSEL, SARA LEE CORPORATION
Charles R. Nelson
VAN VOORHIS PROFESSOR OF POLITICAL ECONOMY,
UNIVERSITY OF WASHINGTON
Thomas C. Theobald
Managing Partner, WILLIAM BLAIR CAPITAL PARTNERS
OFFICERS
Thomas W. Butch, PRESIDENT
William D. Andrews, EXECUTIVE VICE PRESIDENT
Loren A. Hansen, EXECUTIVE VICE PRESIDENT
Hans P. Ziegler, EXECUTIVE VICE PRESIDENT
Gary A. Anetsberger, SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
Kevin M. Carome, VICE PRESIDENT,
ASSISTANT SECRETARY
Kevin Connaughton, VICE PRESIDENT
Timothy Jacoby, VICE PRESIDENT
Michael T. Kennedy, VICE PRESIDENT
Gail Knudsen, VICE PRESIDENT
Stephen F. Lockman, VICE PRESIDENT
Lynn C. Maddox, VICE PRESIDENT
Jane M. Naeseth, VICE PRESIDENT
Nicolette D. Parrish, VICE PRESIDENT,
ASSISTANT SECRETARY
Sharon Robertson, CONTROLLER
Heidi J. Walter, VICE PRESIDENT, SECRETARY
Janet B. Rysz, ASSISTANT SECRETARY
Scott E. Volk, TREASURER
Margaret O. Zwick, ASSISTANT TREASURER
AGENTS AND ADVISERS
Stein Roe & Farnham Incorporated
INVESTMENT ADVISER
State Street Bank and Trust Company
CUSTODIAN
SteinRoe Services Inc.
TRANSFER AGENT
Bell, Boyd & Lloyd
LEGAL COUNSEL TO THE TRUST
Ernst & Young LLP
INDEPENDENT PUBLIC AUDITORS
Stein Roe & Farnham
One South Wacker Drive
Chicago, IL 60606-1130
www.steinroe.com
Liberty Funds Distributor, Inc. 2/99
