Conseco Fund Group
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Annual Report
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December 31, 1997
Equity
Fund
Asset
Allocation
Fund
Fixed
Income
Fund
CSAR 12/97
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<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
TABLE OF CONTENTS
PAGE
Report from the President................................................. 1
CONSECO FUND GROUP
Statement of Assets and Liabilities as of December 31, 1997............... 2
Statement of Operations for the year ended December 31, 1997.............. 3
Statement of Changes in Net Assets for the year ended December 31, 1997... 4
EQUITY FUND
Report from the Equity Fund Adviser....................................... 5
Schedule of Investments in Securities as of December 31, 1997............. 6
ASSET ALLOCATION FUND
Report from the Asset Allocation Adviser.................................. 8
Schedule of Investments in Securities as of December 31, 1997............. 9
FIXED INCOME FUND
Report from the Fixed Income Adviser...................................... 12
Schedule of Investments in Securities as of December 31, 1997............. 13
Notes to Financial Statements............................................. 16
Report of Independent Accountants......................................... 20
Board of Trustees and Fund Service Providers.............................. 21
This report is for the information of shareholders of the Conseco Fund Group.
It is authorized for distribution to other persons only when preceded or
accompanied by a current prospectus which contains more
complete information, including charges and expenses.
<PAGE>
Report from CONSECO FUND GROUP
the President 1997 Annual Report
================================================================================
Dear Shareholder,
Financial market conditions can't get much better than what we've seen over the
last few years, and 1997 carried on this recent tradition in grand form. The
economy grew by about 4 percent, while inflation and unemployment approached 30
year lows. Most stock market indexes, although temporarily unnerved by yet
another October surprise, were able to close the year within spitting distance
of their all-time highs. And after hitting a yield of 7.18% in April, the
benchmark 30-year Treasury bond managed to end the year yielding 5.92%.
While these events were no doubt significant, they were overshadowed by the
Southeast Asian financial crisis. The first signs of crisis developed last
summer as the Malaysian, Indonesian and Thailand currencies and financial
markets began to deteriorate. Other countries also felt the contagion effects,
including the United States. In response, the U.S. and the International
Monetary Fund have initiated the process to loan funds to several at-risk
countries.
This has resulted in an increase in the volatility of the U.S. financial
markets. It is also expected that U.S. domestic economic activity will be
dampened as foreign demand for U.S. products shrinks, and as we import cheaper
foreign goods. In our opinion, the impact of the Asian crisis on the U.S.
economy has virtually eliminated the need for the Federal Reserve Board to
tighten monetary policy and, if the economy were to weaken significantly, may
even allow the Fed to ease.
Financial crisis. Market volatility. They are the inevitable by-products of a
market system. They are to be expected, even relished, because they dictate that
markets temporarily ignore security fundamentals. They create opportunity. Since
our investment philosophy is based on the long term, this means that we can take
advantage of short term market mis-pricings. Conseco Capital Management's
history shows that our clients and shareholders have received excellent returns
because of our disciplined strategy of investing in what we believe are
thoroughly researched, undervalued securities. In this period of market
volatility, we intend to continue to invest for the long term by vigorously
implementing our investment discipline on both the equity and fixed income
fronts.
As part of our continued commitment to providing you with a wide variety of
quality investment options, Conseco Fund Group is pleased to announce the
offering of three new mutual funds: The Conseco High Yield Fund, the Conseco
International Fund and the Conseco 20 Fund. The Conseco High Yield Fund is a
mirror image of the high yield portfolio managed by Conseco Capital Management.
The Conseco International Fund invests primarily in equity securities based
outside of the U.S., and is subadvised by AMR Investments, Inc. The Conseco 20
Fund highlights Conseco Capital Management's in-depth research, resulting in a
fund comprised of approximately 20 of what we believe are our best equity
recommendations.
In addition -- each of our funds -- new and existing, now offers four classes of
shares: A, B, C and Y (institutional). Combined with a money market fund in A, B
and C classes, the Conseco Fund Group is pleased to offer a total of 27
investment choices.
We thank you for your past commitment to our investment discipline, and we will
strive to achieve the continued recognition of its importance and value. We look
forward to serving you in the future.
Sincerely,
Maxwell E. Bublitz, CFA
President & CEO
Conseco Capital Management, Inc.
1
<PAGE>
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STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Asset Fixed
Equity Allocation Income
Fund Fund Fund
=================================================================================================================
<S> <C> <C> <C>
ASSETS:
Investments in securities at value (cost: $62,009,842;
$12,779,910; $20,746,520, respectively) ........................... $66,838,014 $13,351,015 $21,042,531
Accrued interest and dividends ...................................... 45,035 119,423 335,577
Receivable for securities sold ...................................... 546,806 98,216 736,448
Receivable for shares sold .......................................... 42,719 32,539 5,326
Receivable from Conseco, Inc. and subsidiaries ...................... -- 98,750 104,034
Cash................................................................. 694,287 294,974 760,855
Organizational costs................................................. 75,721 75,721 75,721
- -----------------------------------------------------------------------------------------------------------------
Total assets..................................................... 68,242,582 14,070,638 23,060,492
=================================================================================================================
LIABILITIES AND NET ASSETS:
Payable to Conseco, Inc. and subsidiaries............................ 208,099 -- --
Accrued expenses..................................................... 40,178 38,515 44,838
Distributions payable................................................ 2,001,650 815,405 250,228
Payable for shares redeemed.......................................... 20,513 10,426 --
Payable for securities purchased..................................... 761,513 93,637 736,200
- -----------------------------------------------------------------------------------------------------------------
Total liabilities................................................ 3,031,953 957,983 1,031,266
- -----------------------------------------------------------------------------------------------------------------
Net assets....................................................... $65,210,629 $13,112,655 $22,029,226
=================================================================================================================
Net assets consist of:
Paid in capital...................................................... $58,713,491 $12,395,023 $21,685,963
Accumulated undistributed net investment income...................... 4,831 6,516 9,027
Accumulated undistributed net realized gains on investments.......... 1,664,135 140,011 38,225
Net unrealized appreciation on investments........................... 4,828,172 571,105 296,011
- -----------------------------------------------------------------------------------------------------------------
Net assets....................................................... $65,210,629 $13,112,655 $22,029,226
=================================================================================================================
Net asset value, redemption price and offering price per share:
Class A Shares:
Shares outstanding................................................. 440,528 100,187 15,148
Net assets......................................................... $ 4,876,355 $ 1,075,505 $ 153,444
Net asset value and redemption price per share..................... $11.07 $10.73 $10.13
Maximum sales charge per share (5 percent of offering price)....... .58 .56 .53
Maximum offering price per share................................... $11.65 $11.29 $10.66
Class Y Shares:
Shares outstanding................................................. 5,418,986 1,116,698 2,154,327
Net assets......................................................... $60,334,274 $12,037,150 $21,875,782
Net asset value, redemption price and offering price per share..... $11.13 $10.78 $10.15
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Asset Fixed
Equity Allocation Income
Fund Fund Fund
===================================================================================================================
<S> <C> <C> <C>
Investment income:
Interest.............................................................. $ 37,625 $ 383,995 $ 1,173,009
Dividends............................................................. 409,988 52,606 --
- -------------------------------------------------------------------------------------------------------------------
Total investment income........................................... 447,613 436,601 1,173,009
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees.............................................. 286,410 63,605 58,632
Transfer agent fee - Class A shares................................... 58,334 39,628 32,017
Transfer agent fee - Class Y shares................................... 34,720 34,842 34,849
Reports - printing.................................................... 11,107 11,107 11,107
Administration fee.................................................... 86,552 23,055 34,161
Audit fees............................................................ 19,889 19,889 19,889
Director fees and expenses............................................ 12,898 12,898 12,898
Legal fees............................................................ 26,852 26,852 26,852
Amortization of organizational costs.................................. 18,536 18,536 18,536
Custody fees.......................................................... 16,824 15,683 9,063
Distribution and service fees related to Class A shares............... 9,508 2,149 1,984
Other................................................................. 24,030 24,030 24,030
- -------------------------------------------------------------------------------------------------------------------
Total expenses.................................................... 605,660 292,274 284,018
===================================================================================================================
Less expense reductions:
Custody fee credits (note 2).......................................... (16,824) (15,683) (9,063)
Fees waived and/or charged to subsidiaries of Conseco, Inc. (note 3).. (146,054) (159,044) (170,451)
- -------------------------------------------------------------------------------------------------------------------
Total expense reductions.......................................... (162,878) (174,727) (179,514)
- -------------------------------------------------------------------------------------------------------------------
Net expenses...................................................... 442,782 117,547 104,504
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Net investment income............................................. 4,831 319,054 1,068,505
- -------------------------------------------------------------------------------------------------------------------
Net realized gains on sales of investments.............................. 8,301,910 994,075 317,897
Net change in unrealized appreciation of investments.................... 4,828,172 571,105 296,011
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains on investments........................ 13,130,082 1,565,180 613,908
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations.............................. $13,134,913 $ 1,884,234 $ 1,682,413
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
================================================================================
STATEMENT OF CHANGES IN NET ASSETS For
the year ended December 31, 1997
<TABLE>
<CAPTION>
Asset Fixed
Equity Allocation Income
Fund Fund Fund
======================================================================================================================
<S> <C> <C> <C>
Changes from operations:
Net investment income................................................... $ 4,831 $ 319,054 $ 1,068,505
Net realized gains on sales of investments.............................. 8,301,910 994,075 317,897
Net change in unrealized appreciation of investments.................... 4,828,172 571,105 296,011
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations.......................... 13,134,913 1,884,234 1,682,413
- ----------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
Class A shares.......................................................... -- (15,040) (14,860)
Class Y shares.......................................................... -- (297,498) (1,044,618)
- ----------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net investment income.......... -- (312,538) (1,059,478)
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders of net capital gains:
Class A shares.......................................................... (497,491) (66,425) (1,949)
Class Y shares.......................................................... (6,140,284) (787,639) (277,723)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders of net capital gains............ (6,637,775) (854,064) (279,672)
- ----------------------------------------------------------------------------------------------------------------------
Capital share transactions:
Net proceeds from sales of shares....................................... 65,432,881 12,406,174 22,099,349
Net asset value of shares issued from reinvestment of dividends
and distributions..................................................... -- 118,954 437,535
Cost of shares redeemed................................................. (6,752,740) (163,455) (884,271)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from capital share transactions.......... 58,680,141 12,361,673 21,652,613
- ----------------------------------------------------------------------------------------------------------------------
Total net increase in net assets.................................... 65,177,279 13,079,305 21,995,876
- ----------------------------------------------------------------------------------------------------------------------
Net assets, beginning of period........................................... 33,350 33,350 33,350
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (including accumulated undistributed net
investment income of $4,831, $6,516 and $9,027, respectively)........... $65,210,629 $13,112,655 $22,029,226
======================================================================================================================
Share data:
Class A shares:
Sold.................................................................. 455,408 100,694 14,325
Issued in reinvestment of dividends and distributions................. -- 293 144
Redeemed.............................................................. (16,547) (2,468) (989)
- ----------------------------------------------------------------------------------------------------------------------
Net increase........................................................ 438,861 98,519 13,480
======================================================================================================================
Class Y Shares:
Sold.................................................................. 5,992,638 1,115,405 2,195,219
Issued in reinvestment of dividends and distributions................. -- 11,424 43,371
Redeemed.............................................................. (575,320) (11,798) (85,930)
- ----------------------------------------------------------------------------------------------------------------------
Net increase........................................................ 5,417,318 1,115,031 2,152,660
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
Report from the
Conseco Equity Fund Adviser
As we look back at 1997, we are able to draw a few insights on what is in store
for 1998. While the first three quarters exhibited strong growth and favorable
market conditions, the fourth quarter proved to be most eventful in terms of
future effects on market performance.
The fourth quarter began with much anxiety related to market strength,
sustainability of corporate profits, and increasing volatility in Asian currency
markets. Anxieties peaked on October 27th when the Dow Jones Industrial Average
dropped 554 points (7.2%), the largest single point decline ever, surrounding
fears of asset deflation in Asian markets. Despite a relatively good series of
earnings reports and economic releases throughout the balance of the quarter,
including low inflation and 25-year-low unemployment levels, concerns about the
Asian influence prevailed.
Following the market plunge, much of the capital previously invested in
Asia-Pacific markets sought safety in the U.S. market through purchases of S&P
500 futures contracts. As a result, the S&P 500 Index gained ground, with stocks
of the largest 20 companies in the marketplace outperforming nearly everything
in sight. However, virtually all other stocks remained at October 27th levels or
drifted even lower. Due to the strong fourth quarter move of the largest company
stocks, the S&P 500 finished the year up 33.36%, outperforming the returns of
90% of all actively managed funds, as well as the Russell 2000 Small Stock
Index, which returned 22.36%. This is the fourth straight year that the market
has seen this kind of divergence.
In terms of sector performance, strong returns were realized in interest
rate-sensitive areas (financial and utilities) and in defensive stocks (food
retailers and consumer staples). These sectors benefited from the strong rally
in the bond market and from the influx of invested dollars coming from
technology and energy sectors, which turned in some of the fourth quarter's
worst returns. Our underweighting in financial, utilities and staples and our
larger weightings in technology and energy explain why the fourth quarter was a
difficult one for us.
Despite these problems, many of our stocks enjoyed good earnings reports and
persevered during a time of high market volatility. Perhaps most rewarding was
the announcement that IBM/Tivoli bought Software Artistry for $24.50 per share
in cash. After establishing our position as Software Artistry's largest
shareholder, we were prematurely rewarded with a 200% return for our
shareholders over the holding period.
We expect a cautionary tone to prevail over the market in 1998; as such, we
intend to increase our focus on earnings stories with strong balance sheets and
cashflow generation. We will also look for yield as a component of total return
whenever possible. In addition, we will watch for opportunities in technology
and energy given the aggressive sell-off in these sectors in late 1997.
Our investment strategy continues to rely on a bottom-up approach to stock
selection. Through extensive research of the companies in which we invest, our
goal is to discover good growth stories in stocks that still trade at reasonable
valuations. We are committed to a long-term reliance on this strategy, and
remain hopeful that it will serve our shareholders well in the upcoming year.
Thomas J. Pence, CFA
Vice President
Portfolio Manager
Conseco Capital Management, Inc.
5
<PAGE>
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EQUITY FUND
SCHEDULE OF INVESTMENTS IN SECURITIES
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
COMMON STOCKS (95.36% of total investments)
Apparel and Accessory Stores (3.12%)
60,600 The Finish Line, Inc. - Class A (a) $ 795,375
47,500 Goody's Family Clothing, Inc. (a). 1,291,406
-----------
2,086,781
-----------
Business Services (12.11%)
65,350 Affiliated Computer
Services, Inc. - Class A (a)..... 1,719,522
45,000 Autodesk, Inc...................... 1,665,000
39,700 DataWorks Corporation (a).......... 789,038
44,150 First Data Corporation............. 1,291,387
38,600 Rent-Way, Inc. (a)................. 714,100
59,600 Renter's Choice, Inc. (a).......... 1,221,800
37,450 Sotheby's Holdings, Inc. - Class A. 692,825
-----------
8,093,672
-----------
Chemicals and Allied Products (1.39%)
22,500 The B.F. Goodrich Company.......... 932,344
-----------
Communications by Phone,
Television, Radio, Cable (6.09%)
96,000 Brightpoint, Inc. (a).............. 1,332,000
50,650 Cincinnati Bell, Inc............... 1,570,150
80,800 LCC International, Inc. (a)........ 1,171,600
-----------
4,073,750
-----------
Depository Institutions (6.31%)
43,500 John Alden Financial Corporation... 1,044,000
44,000 Norwest Corporation................ 1,699,500
13,200 U.S. Bancorp....................... 1,477,575
-----------
4,221,075
-----------
Durable Goods - Wholesale (6.11%)
73,550 IKON Office Solutions, Inc......... 2,068,594
33,600 Pomeroy Computer
Resources, Inc. (a).............. 596,400
57,400 Watsco, Inc........................ 1,417,062
-----------
4,082,056
-----------
Eating and Drinking Places (1.56%)
45,500 ShowBiz Pizza Time, Inc. (a)....... 1,046,500
-----------
Electric, Gas, Water, Cogeneration,
Sanitary Services (4.54%)
89,500 Kinder Morgan
Energy Partners, L.P............. 3,031,813
-----------
Electrical Equipment,
Except Computers (2.86%)
28,750 Comverse Technology, Inc. (a)...... 1,121,250
47,800 Exar Corporation (a)............... 788,700
-----------
1,909,950
-----------
Food Stores (1.62%)
42,600 Casey's General Stores, Inc........ 1,080,975
-----------
General Merchandise Stores (3.11%)
70,950 Family Dollar Stores, Inc.......... 2,079,722
-----------
Health Services (2.81%)
28,500 Prime Medical Services, Inc. (a)... 393,656
56,700 Quorum Health Group, Inc. (a)...... 1,481,287
-----------
1,874,943
-----------
Home Furniture and
Equipment Stores (2.28%)
39,450 Tandy Corporation.................. 1,521,291
-----------
Hotels, Other Lodging Places (2.97%)
44,810 Fairfield Communities, Inc (a)..... 1,982,843
-----------
Industrial, Commercial Machinery,
Computers (4.16%)
48,850 EMC Corporation (a)................ 1,367,759
37,100 Lexmark International
Group, Inc. - Class A (a)........ 1,409,800
-----------
2,777,559
-----------
Measuring Instruments, Photo Goods,
Watches (10.86%)
36,700 Analogic Corporation............... 1,394,600
43,550 DENTSPLY International, Inc........ 1,328,275
42,250 Sola International, Inc. (a)....... 1,373,125
26,700 STERIS Corporation (a)............. 1,288,275
49,800 Waters Corporation (a)............. 1,873,725
-----------
7,258,000
-----------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
EQUITY FUND
SCHEDULE OF INVESTMENTS IN SECURITIES -- (CONTINUED)
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
Non-Durable Goods Wholesale (2.68%)
19,050 Chemed Corporation ................ $ 789,384
51,225 U.S. Office Products Company (a)... 1,005,291
-----------
1,794,675
-----------
Oil and Gas Extraction (7.51%)
18,250 B.J. Services Company (a).......... 1,312,859
49,790 Enron Oil & Gas Company............ 1,054,926
23,150 Ocean Energy, Inc.(a).............. 1,141,584
31,300 Transocean Offshore, Inc........... 1,508,269
-----------
5,017,638
-----------
Paper and Allied Products (2.76%)
23,050 Schweitzer-Manduit
International, Inc............... 858,612
10,900 St. Joe Corporation................ 986,450
-----------
1,845,062
-----------
Personal Services (1.48%)
22,100 H&R Block, Inc..................... 990,356
-----------
Railroad Transportation (2.55%)
53,600 Kansas City Southern
Industries, Inc.................. 1,701,800
-----------
Security and Commodity Brokers (3.61%)
12,350 Franklin Resources, Inc............ 1,073,678
31,150 The John Nuveen Company............ 1,090,250
8,800 New England Investment
Companies, L.P................... 251,900
-----------
2,415,828
-----------
Stone, Clay, Glass, Concrete (2.87%)
66,800 Department 56, Inc. (a)............ 1,920,500
-----------
Total stocks
(cost - $58,910,402)............... 63,739,133
-----------
COMMERCIAL PAPER (4.64% of total investments)
Depository Institutions
3,100,000 UBS Financial, 6.5%,
due 01/02/98..................... 3,098,881
-----------
Total commercial paper
(cost - $3,099,440)................ 3,098,881
-----------
Total investments in securities
(cost - $62,009,842)............... $66,838,014
===========
- ----------
(a) Non-dividend paying common stock.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
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Report from the
Conseco Asset Allocation Fund Adviser
The Asset Allocation Fund is a balanced portfolio which invests in a combination
of equity, fixed income and cash. The strategy of the Asset Allocation Fund
through 1997 continued to highlight our growth equity style, which represented
roughly 60% of the portfolio's assets.
The fourth quarter began with much anxiety about the strength in the market over
the summer, the sustainability of corporate profits and the increasing
volatility of Asian currency markets. All fears reached a fever pitch on October
27th when the Dow dropped 554 points (7.2%), recording the largest single point
decline ever on fears of asset deflation in Asian markets. The performance of
the market following the sell-off was typical of what we saw earlier in the
year, with the index stocks outperforming the broader market as hoards of
capital previously invested in Asia-Pacific markets sought safe haven in the
U.S. market. The result of all this was that the S&P 500 Index gained while
virtually everything else stayed at October 27th levels or drifted even lower.
In fact, because of its strong fourth quarter move relative to the broader
market, the S&P 500 finished the year up 33.36%, outstripping the returns of 90%
of all actively managed funds and the Russell 2000 Small Stock Index which
returned 22.36%. This is the fourth straight year that we have seen this kind of
divergence.
In terms of sector performance on the stock side, the strong returns were
realized in interest rate-sensitive areas (financial and utilities) and in
defensive stocks (food retailers and consumer staples). These sectors benefited
from the strong rally in the bond market and from the influx of invested dollars
coming from technology and energy sectors, which turned in some of the fourth
quarter's worst returns. Our underweighting in financials, utilities and staples
and our larger weightings in technology and energy explain why the fourth
quarter was a difficult one for us.
Going forward, we remain hopeful that 1998 will be rewarding to investors such
as us who utilize a bottom-up approach in finding good growth stories in stocks
that still trade at reasonable valuations. In fact, if 1998 earnings on S&P 500
companies ultimately grow in line with current expectations of 7 to 9%, then we
would expect to see an increase in multiples for stocks which can generate
earnings growth in the 18 to 20% range.
The balance of the portfolio, approximately 40%, consists of bonds and cash. At
year end, roughly 38.3% of this 40% was invested in securities with investment
grade ratings and 61.7% was invested in high yield. Our fixed income discipline
of investing in those securities which, through our own fundamental research, we
consider to be undervalued, resulted in several investment ideas. In the
industrial sector, our energy analyst, Upender Rao, recommended investing in
several oil drilling companies including Parker Drilling (B1/B+), the fourth
largest drilling company in the United States, and Pride Petroleum (Ba3/BB-),
the third largest. As rig rates doubled in 1997, earnings accelerated,
substantially improving the financial statements of both companies. Upender
expects to see an upgrade over a twelve to eighteen month time frame.
Depending on valuation in the equity market, we may take the opportunity to
reallocate a portion of the portfolio to fixed income if we see pressure on
earnings or negative earnings surprises. Until the financial crisis in Asia
subsides, we expect to see sustained low levels of interest rates. Eventually,
as investors return their focus to economic fundamentals, we still expect to see
interest rates remain low, which should bode well for the valuation of financial
assets.
Thomas J. Pence, CFA Gregory J. Hahn, CFA
Vice President Senior Vice President
Portfolio Manager Portfolio Manager
Conseco Capital Management, Inc. Conseco Capital Management, Inc.
8
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
ASSET ALLOCATION FUND
SCHEDULE OF INVESTMENTS IN SECURITIES
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
COMMON STOCKS (56.90% of total investments)
Apparel and Accessory Stores (1.91%)
7,250 The Finish Line, Inc. - Class A (a) $ 95,156
5,900 Goody's Family Clothing, Inc.(a)... 160,406
-----------
255,562
-----------
Business Services (7.32%)
8,100 Affiliated Computer Services, Inc. -
Class A (a)...................... 213,131
5,300 Autodesk, Inc...................... 196,100
4,550 DataWorks Corporation (a).......... 90,431
5,450 First Data Corporation............. 159,413
4,550 Rent-Way, Inc. (a)................. 84,175
7,400 Renter's Choice, Inc. (a).......... 151,700
4,500 Sotheby's Holdings, Inc. - Class A. 83,250
-----------
978,200
-----------
Chemicals and Allied Products (.81%)
2,600 The B.F. Goodrich Company.......... 107,738
-----------
Communications by Phone, Television,
Radio, Cable (3.69%)
11,850 Brightpoint, Inc. (a).............. 164,419
5,900 Cincinnati Bell, Inc............... 182,900
10,000 LCC International, Inc. (a)........ 145,000
-----------
492,319
-----------
Depository Institutions (2.67%)
5,350 John Alden Financial Corporation... 128,400
5,900 Norwest Corporation................ 227,887
-----------
356,287
-----------
Durable Goods - Wholesale (3.80%)
9,100 IKON Office Solutions, Inc......... 255,937
4,400 Pomeroy Computer
Resources, Inc. (a).............. 78,100
7,000 Watsco, Inc........................ 172,812
-----------
506,849
-----------
Eating and Drinking Places (.93%)
5,400 ShowBiz Pizza Time, Inc. (a)....... 124,200
-----------
Electric, Gas, Water, Cogeneration,
Sanitary Services (2.61%)
10,300 Kinder Morgan Energy
Partners, L.P.................... 348,913
-----------
Electrical Equipment,
Except Computers (1.77%)
3,450 Comverse Technology, Inc. (a)...... 134,550
6,200 Exar Corporation (a)............... 102,300
-----------
236,850
-----------
Food Stores (.92%)
4,850 Casey's General Stores, Inc........ 123,069
-----------
General Merchandise Stores (1.92%)
8,750 Family Dollar Stores, Inc.......... 256,484
-----------
Health Services (1.67%)
3,400 Prime Medical Services, Inc. (a).. 46,963
6,750 Quorum Health Group, Inc. (a)...... 176,344
-----------
223,307
-----------
Home Furniture and
Equipment Stores (1.33%)
4,600 Tandy Corporation.................. 177,388
-----------
Hotels, Other Lodging Places (1.83%)
5,525 Fairfield Communities, Inc. (a).... 244,481
-----------
Industrial Commercial Machinery,
Computers (2.52%)
6,150 EMC Corporation (a)................ 168,740
4,400 Lexmark International
Group, Inc. - Class A (a)........ 167,200
-----------
335,940
-----------
Measuring Instruments,
Photo Goods, Watches (6.61%)
4,550 Analogic Corporation............... 172,900
5,150 DENTSPLY International, Inc........ 157,075
5,050 Sola International, Inc. (a)....... 164,125
3,250 STERIS Corporation (a)............. 156,813
6,150 Waters Corporation (a)............. 231,394
-----------
882,307
-----------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
================================================================================
ASSET ALLOCATION FUND
SCHEDULE OF INVESTMENTS IN SECURITIES -- (CONTINUED)
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
Non-Durable Goods Wholesale (1.61%)
2,300 Chemed Corporation -
Diversified Operation............ $ 95,306
6,075 U.S. Office Products Company (a)... 119,222
-----------
214,528
-----------
Oil and Gas Extraction (4.58%)
2,150 B.J. Services Company (a).......... 154,666
6,190 Enron Oil & Gas Company............ 131,151
2,850 Ocean Energy, Inc (a).............. 140,541
3,850 Transocean Offshore, Inc........... 185,521
-----------
611,879
-----------
Paper and Allied Products (1.77%)
3,050 Schweitzer-Manduit
International, Inc............... 113,612
1,350 St. Joe Corporation................ 122,175
-----------
235,787
-----------
Personal Services (1.41%)
4,200 H&R Block, Inc..................... 188,213
-----------
Railroad Transportation (1.57%)
6,600 Kansas City Southern
Industries, Inc.................. 209,550
-----------
Security and Commodity Brokers (1.95%)
1,500 Franklin Resources, Inc............ 130,406
3,700 The John Nuveen Company............ 129,500
-----------
259,906
-----------
Stone, Clay, Glass, Concrete (1.70%)
7,900 Department 56, Inc. (a)............ 227,125
-----------
Total common stocks
(cost - $7,031,626)................ 7,596,882
-----------
PREFERRED STOCK (2.55% of total investments)
Communication by Phone,
Television, Radio, Cable
12,000 Intermedia
Communication, Inc., 7% PFD ..... 340,500
-----------
Total preferred stock
(cost $300,000).................... 340,500
-----------
PREFERRED STOCK - CONVERTIBLE
(2.32% of total investments)
Electric, Gas, Water, Cogeneration,
Sanitary Services
6,000 The AES Corporation Trust II,
5.5% CUM CVT PFD................. 309,750
-----------
Total preferred stock -
convertible (cost $300,000)........ 309,750
-----------
CORPORATE BONDS (38.23% of total investments)
Auto Repair and Parking (3.20%)
$400,000 Amerco - MTN, 7.47%,
due 01/15/27..................... 427,224
-----------
Business Services (.76%)
100,000 Computervision Corporation,
11.375%, due 08/15/99............ 101,125
-----------
Communication by Phone, Television,
Radio, Cable (1.62%)
240,000 Cencall Communications, 10.125%,
due 01/15/04..................... 216,600
-----------
Crude, Petroleum and Natural Gas (3.90%)
500,000 Triton Energy LTD, 9.25%,
due 04/15/05..................... 520,048
-----------
Depository Institutions (1.66%)
200,000 Centura Bank Capital Trust I,
8.845%, due 06/01/27(b)
Cost - $200,000,
Acquired - 05/29/97.............. 221,742
-----------
Durable Goods - Wholesale (2.86%)
375,000 Cellstar Corporation, 5.0%,
due 10/15/02 (b)
Cost - $295,463,
Acquired - 12/11/97 &12/12/97 ... 276,563
100,000 Pioneer Standard Electronics, Inc.,
8.5%, due 08/01/06............... 106,120
-----------
382,683
-----------
Electric, Gas, Water, Cogeneration,
Sanitary Services (3.37%)
450,000 CMS Energy Corporation,
7.875%, due 11/15/04............... 450,083
-----------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
ASSET ALLOCATION FUND
SCHEDULE OF INVESTMENTS IN SECURITIES -- (CONTINUED)
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
Home Furniture and Equipment Stores (3.47%)
$500,000 MacSaver Financial Services,
7.875%, due 08/01/03............. $ 462,903
-----------
Lumber and Wood Products,
Except Furniture (3.90%)
500,000 West Fraser Mill, 7.25%,
due 09/15/02 (b)
Cost - $499,920;
Acquired - 01/06/97.............. 521,027
-----------
Mining - Metal and Ores (3.13%)
500,000 Echo Bay Mines, 11.00%,
due 04/01/27..................... 417,500
-----------
Non-Depository Credit Institutions (2.27%)
300,000 MCN Financing VI, 6.85%,
due 10/28/99 (b)
Cost - $300,000;
Acquired - 06/04/97.............. 303,084
-----------
Oil and Gas Extraction (6.48%)
300,000 Parker Drilling Corporation,
9.75%, due 11/15/06.............. 324,750
500,000 Pride Petroleum Services, Inc.,
9.375%, due 05/01/07............. 540,000
-----------
864,750
-----------
Stone, Clay, Glass, Concrete (1.61%)
$200,000 USG Corporation, 9.25%,
due 09/15/01..................... 215,114
-----------
Total corporate bonds
(cost - $5,148,284)................ 5,103,883
-----------
Total investments in securities
(cost - $12,779,910)............... $13,351,015
===========
- ----------
(a) Non-dividend paying common stock
(b) Restricted under Rule 144A of the Securities Act of 1933.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
================================================================================
Report from the
Conseco Fixed Income Fund Adviser
1997 was characterized by favorable market conditions throughout much of the
year. However, increased volatility brought dramatic changes to the fixed income
markets, especially in the fourth quarter.
The first three quarters of 1997 were distinguished by a strong, healthy
economy, low inflation levels and a general trend toward declining interest
rates. Relative value in the fixed income markets was difficult to distinguish
as spreads to Treasuries remained very narrow in many sectors, including
corporate and mortgage-backed securities. Investors typically demand larger
spreads over U.S. Treasury bonds in order to compensate for perceived higher
risk levels. Federal Reserve policy stayed tight as Alan Greenspan remained the
vigilant watchdog over inflation. The budget deficit continued to narrow as a
result of lower rates and fiscal discipline from Congress. However, the focus of
the financial markets shifted away from domestic economic fundamentals in the
fourth quarter.
In the fourth quarter, currencies in Thailand, Malaysia and Indonesia
deteriorated, throwing their financial markets into turmoil. Because the world's
economies are linked, the impact of this turmoil spread quickly throughout
Southeast Asia. As we move into 1998, we expect the crisis to have a significant
impact on economic growth in other countries, including the United States. This
phenomenon has already caused dramatic changes in the general fundamentals of
our domestic fixed income market, creating significantly larger spreads to
Treasuries in the Yankee sector which have, in turn, spilled over to the
corporate sector.
Because the Asian financial crisis has taken center stage, the fundamental
analysis of certain Yankee securities has less meaning in terms of short term
performance. Because our investment horizon is based on the long term, our plan
is to maintain a small exposure in the Yankee sector investing in securities
such as Hutchison Wampoa (A3/A+), a Hong Kong-based financial conglomerate with
significant operations in the United States. Our Yankee analyst, Upender Rao,
views Korea as having the best opportunity for credit improvement during 1998
given the support of the International Monetary Fund and their willingness to
implement changes in their financial system.
The level of interest rates declined because of the financial crisis: the
ten-year U.S. Treasury yield was 5.74% at year-end and the thirty-year U.S.
Treasury yield was 5.92%. With this dramatic decline in interest rates, we
reduced our exposure to mortgage-backed securities, due to the higher risk of
increased pre-payment activity. With higher pre-payments, the security returns
more principal, forcing the investor to reinvest the proceeds at lower interest
rates.
Nolan Smith, our municipal bond specialist, has recommended the taxable
municipal sector due to consistent spreads over U.S. Treasuries, which have
performed better than the corporate sector. We plan to direct proceeds to this
sector, given its performance relative to the rest of the market. At this point,
we have discovered only a few bonds meeting our investment criteria of offering
good relative value.
Our bank and finance analyst, Rob Cook, feels company fundamentals in the
Broker-Dealer sector are currently strong, making these bonds attractive
investments. Within this sector, we invested in Salomon Smith Barney (A2/A).
With the acquisition of Salomon Brothers by Travelers (A2/A), the credit has
been upgraded by the rating agencies and we expect operating fundamentals to
continue to improve.
Our fixed income investment strategy continues to emphasize investing in those
securities we believe are undervalued. Most importantly, we conduct thorough
research before investing in any security. Our long-term strategies coupled with
our extensive knowledge of each investment we select enable us to look forward
with confidence as we continue to invest for the future.
Gregory J. Hahn, CFA
Senior Vice President
Portfolio Manager
Conseco Capital Management, Inc.
12
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
FIXED INCOME FUND
SCHEDULE OF INVESTMENTS IN SECURITIES
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
ASSET BACKED (4.94% of total investments)
$466,748 Green Tree Rec Equip, 6.75%,
due 02/19/18................... $ 466,674
116,901 Lehman FHA Title I Loan Trust,
6.78%, due 03/25/08............ 117,610
139,894 Midland Realty Acceptance
Corporation, 7.315%,
due 08/25/28................... 143,818
100,000 National Car Rental Financing LTD,
6.8%, due 04/20/00............. 100,963
210,774 New York City Tax Lien, 6.91%,
due 05/25/05................... 210,939
-----------
Total asset backed
(cost - $1,036,991).............. 1,040,004
-----------
CORPORATE BONDS (62.18% of total investments)
Auto Repair and Parking (4.40%)
575,000 Amerco Inc., 7.47%,
due 01/15/27................... 614,135
200,000 Amerco Inc., 7.44%,
due 10/02/06................... 209,632
100,000 Amerco-MTN, 6.71%,
due 10/15/08..................... 101,836
-----------
925,603
-----------
Business Services (.96%)
200,000 Computervision Corporation,
11.375%, 08/15/99.............. 202,250
-----------
Communication by Phone, Television,
Radio, Cable (1.49%)
300,000 News America Holdings,
7.75%, due 01/20/24............ 312,549
-----------
Chemicals and Allied Products (1.47%)
300,000 Smith International, Inc.,
7.0%, due 09/15/07............. 309,335
-----------
Depository Institutions (8.63%)
450, 000 Dao Heng Bank Ltd, 7.75%,
due 01/24/07 (b)
Cost - $444,493; Acquired -
01/16/97 & 07/30/97............ 390,819
650,000 Morgan Stanley Fin PLC, 8.03%,
due 02/25/17................... 713,386
350,000 Republic NY Cap II-Stops, 7.53%,
due 12/04/26................... 367,899
100,000 Hutchison Whampoa Finance, 7.45%,
due 08/01/17 (b)
Cost - $92,520;
Acquired 10/23/97.............. 88,750
250,000 St. Paul Bancorp, 7.125%,
due 02/15/04 .................. 254,961
-----------
1,815,815
-----------
Durable Goods - Wholesale (2.02%)
400,000 Pioneer Standard Electronics,
8.5%, due 08/01/06............. 424,481
-----------
Electric, Gas, Water, Cogeneration,
Sanitary Services (11.02%)
500,000 Avon Energy Partners Holdings,
6.73%, due 12/11/02 (b)
Cost - $500,000;
Acquired -12/05/97............. 504,140
500,000 CMS Energy Corporation, 7.375%,
due 11/15/00 (b)
Cost - $499,585;
Acquired - 11/04/97............ 499,980
300,000 Long Island Lighting Corporation,
7.50%, due 03/01/07............ 313,813
250,000 Salton Sea Funding, 8.30%,
due 05/30/11................... 273,382
250,000 Tata Electric Company, 7.875%,
due 08/19/07 (b)
Cost - $240,393;
Acquired -08/29/97............. 216,315
250,000 Trench Electric & Trench Inc.,
10.25%, due 12/15/07 (b)
Cost - $250,000;
Acquired - 12/11/97............ 255,000
250,000 USA Waste Services, Inc., 7.0%,
due 10/01/04................... 256,000
-----------
2,318,630
-----------
Fire, Marine and Casualty Insurance (.95%)
200,000 Horace Mann Educators, 6.625%,
due 01/15/06................... 200,379
-----------
Home Furniture and Equipment Stores (2.20%)
500,000 Macsaver Financial Services,
7.875%, due 08/01/03........... 462,903
-----------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
================================================================================
FIXED INCOME FUND
SCHEDULE OF INVESTMENTS IN SECURITIES -- (CONTINUED)
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
Life Insurance (2.44%)
$300,000 Delphi Financial, 8.0%,
due 10/01/03................... $ 297,506
200,000 Delphi Funding LLC, 9.31%,
due 03/25/27................... 215,962
-----------
513,468
-----------
Lumber and Wood Products,
Except Furniture (3.47%)
700,000 West Fraser Mill, 7.25%,
due 09/15/02 (b)
Cost - $695,920;
Acquired - 01/06/97 &
04/30/97....................... 729,437
-----------
Mining - Metals and Ores (1.70%)
300,000 Echo Bay Mines, 11.0%,
due 04/01/27................... 250,500
150,000 Pohang Iron & Steel Company,
7.125%, due 11/01/06........... 106,220
-----------
356,720
-----------
Natural Gas Transmission and
Distribution (1.34%)
250,000 Southwest Gas Company, 9.75%,
due 06/15/02................... 282,253
-----------
Non-Depository Credit Institutions (5.11%)
700,000 MCN Financing VI, 6.85%,
due 10/28/99 (b)
Cost - $700,000;
Acquired - 06/04/97............ 707,196
350,000 Safeco Capital Trust I, 8.07%,
due 07/15/37................... 368,301
-----------
1,075,497
-----------
Oil and Gas Extraction (2.02%)
200,000 Pride Petroleum Services, Inc.,
9.375%, due 05/01/07........... 216,000
200,000 Petrozuata Finance Inc. 8.22%,
due 04/01/17(b)
Cost - $200,000;
Acquired - 06/17/97............ 209,799
-----------
425,799
-----------
Paper and Allied Products (.50%)
100,000 Westvaco Corporation, 10.3%,
due 01/15/19................... 106,202
-----------
Petroleum Refining (4.01%)
278,000 Pennzoil Company, 9.625%,
due 11/15/99................... 293,832
400,000 Pennzoil Company, 10.625%,
due 06/01/01................... 423,232
100,000 USX Corporation, 9.375%,
due 02/15/12................... 125,762
-----------
842,826
-----------
Real Estate Investment Trusts (3.32%)
400,000 Chelsea GCA Realty Partnership,
7.25%, due 10/21/07............ 400,212
300,000 JDN Realty Corporation, 6.80%,
due 08/01/04................... 298,410
-----------
698,622
-----------
Security and Commodity Brokers (5.13%)
200,000 Paine Webber Group, 9.25%,
due 12/15/01................... 219,290
100,000 Salomon Inc., 6.5%, due 08/15/03 100,583
500,000 Salomon Inc., 6.25%, due 10/01/99 501,200
250,000 Salomon Inc., 7.30%, due 05/15/02 258,779
-----------
1,079,852
-----------
Total corporate bonds
(cost - $12,909,801)............. 13,082,621
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS (11.72% of total investments)
500,000 CMO Iroquois Trust, 7.0%,
due 12/15/06................... 503,885
186,635 Copelco Capital Funding Corp.,
1996, 6.34%, due 07/20/04...... 187,424
242,591 FHLMC Structured Pass Through,
7.63%, due 08/25/22............ 248,808
100,000 FNMA 7.0% Series 1994-63
Class PK, due 04/25/24......... 103,752
228,509 JP Morgan Commercial Mortgage,
6.47%, due 11/25/27............ 229,715
491,431 JP Morgan Comm Mortg Finc,
6.939%, due 01/02/12........... 497,881
500,000 Paine Webber Mtg Accept Corp CMO,
6.9%, due 01/02/12............. 513,615
178,153 Rural Housing Trust 1987-1,
7.33%, due 04/01/26............ 181,833
-----------
Total collateralized mortgage
obligations (cost - $2,421,171) 2,466,913
-----------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
FIXED INCOME FUND
SCHEDULE OF INVESTMENTS IN SECURITIES -- (CONTINUED)
December 31, 1997
Shares or
Principal
Amount Security Value
----------- --------- -------
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS (8.90% of total investments)
$1,018,439 FHLMC G00479, 9.0%,
due 04/01/25................... $ 1,091,543
216,264 FNMA 7.5% Pool 250307,
due 07/01/25................... 221,748
95,778 FNMA 7.0%, due 11/01/26.......... 96,684
450,000 U.S. Treasury Bond, 6.128%,
due 08/15/07................... 462,657
-----------
Total U.S. Government and
agency obligations
(cost - $1,846,449).............. 1,872,632
-----------
MUNICIPAL BONDS (7.51% of total investments )
Public Finance, Taxable (7.51%)
135,000 Augusta GA HSG Rehab Agy., 7.9%,
due 03/01/99................... 137,605
100,000 Doylestown PA Hosp Auth
Hosp Rev, 8.375%,
due 07/01/08................... 106,546
300,000 Fort Worth TX Higher Ed Fin Rev,
7.5%, due 10/01/06............. 305,055
600,000 Mississippi Hosp Equip Facs Auth,
9.10%, due 04/01/06............ 639,174
382,445 Philadelphia PA Auth Indl Dev,
6.488%, due 06/15/04........... 392,342
-----------
Total municipal bonds
(cost - $1,532,289).............. 1,580,722
-----------
DISCOUNTED COMMERCIAL PAPER
(4.75% of total investments)
Depository Institutions (4.75%)
$1,000,000 UBS Financial, 6.5%,
due 01/02/98................... 999,639
-----------
Total commercial paper
(cost - $999,819)................ 999,639
-----------
Total investments
in securities
(cost - $20,746,520)............. $21,042,531
===========
- ----------
(b) Restricted under Rule 144A of the Securities Act of 1933.
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. ORGANIZATION
Conseco Fund Group (the "Trust") is an open-end diversified management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as
a Massachusetts business trust on September 24, 1996. The Trust is a "series"
type of mutual fund which issues separate series of shares of beneficial
interest, each of which represents a separate diversified portfolio of
investments. The Trust consists of six series ("Funds"), three of which became
operational and available for sale January 13, 1998 as discussed in footnote 6.
Each Fund has its own investment objective and investment policies. At December
31, 1997 the operating Funds are the Equity Fund, Asset Allocation Fund and
Fixed Income Fund. The Trust's activities were limited to organizational matters
with no operating activities through January 1, 1997. The existing Funds became
operational and available for sale on January 2, 1997.
Each Fund has distinct investment objectives. The Equity Fund invests in
selected equity securities and other securities having the investment
characteristics of common stocks. The Asset Allocation Fund invests in several
asset classes including debt securities, equity securities and money market
instruments. The Fixed Income Fund invests primarily in investment grade debt
securities.
The Funds offer four classes of shares: Class A, Class B, Class C and Class
Y. Effective January 2, 1998, the Trust offered Class B and Class C shares as
discussed in footnote 7. Sales of Class A shares may be subject to a front-end
sales charge. Class Y shares are available with no sales charge to certain
institutional investors and qualifying individual investors. Prior to January 2,
1997, an affiliate, Conseco, Inc. ("Conseco"), held all of the outstanding
shares of Class A and Class Y of the Funds. The Funds are authorized to issue an
unlimited number of shares.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION, TRANSACTIONS,
AND RELATED INVESTMENT INCOME
The investments in each portfolio are valued at the close of regular trading
on the New York Stock Exchange on each business day. Investment transactions are
accounted for on the trade date (the date the order to buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
accrued daily. The cost of investments sold is determined on the specific
identification basis. All Funds may invest in U.S. dollar-denominated corporate
debt securities of domestic issuers, and the Asset Allocation Fund and Fixed
Income Fund may invest in debt securities of foreign issuers that may or may not
be U.S. dollar-denominated. The Trust does not hold any investments which are
restricted as to resale, except bonds with a cost of $1,295,383 and market value
of $1,322,416 held by the Asset Allocation Fund and bonds with a cost of
$3,622,911 and market value of $3,601,436 held by the Fixed Income Fund, all of
which are eligible for resale under Rule 144A of the Securities Act of 1933.
These securities represent 10.09% of the Asset Allocation Fund and 16.35% of the
Fixed Income Fund. These securities may be resold to qualified institutional
buyers in transactions exempt from registration.
In each Fund of the Trust, securities which are traded on stock exchanges are
valued at the last sale price as of the close of business on the day the
securities are being valued, or lacking any sales, at the mean between the
closing bid and asked prices. Securities traded in the over-the-counter market
are valued at the mean between the bid and asked prices or yield equivalent as
obtained from one or more dealers that make markets in the securities. Fund
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market,
and it is expected that for debt securities this ordinarily will be the
over-the-counter market. Securities for which market quotations are not readily
available are valued at fair value as determined under policies approved by the
Board of Trustees of the Trust. Debt securities with maturities of sixty (60)
days or less are valued at amortized cost.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from the Fixed Income Fund will be declared and distributed
monthly. Dividends from the Equity Fund and the Asset Allocation Fund will be
declared and distributed quarterly. However, the Trustees may decide to declare
dividends at other intervals.
Dividends to shareholders from net investment income are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax differences relating to dividends
to shareholders may result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized and
unrealized gain (loss). Any taxable income or gain of the Trust remaining at
fiscal year end will be declared and distributed in the following year to the
shareholders of the Fund or Funds to which such gains are attributable. Taxable
income exceeds net book income by $180,696, $25,445 and $10,983 for the Equity
Fund, Asset Allocation Fund and Fixed Income Fund, respectively.
ORGANIZATIONAL COSTS
Costs incurred by the Funds in connection with their organization and public
offering of shares totaling $282,770 have been deferred and will be amortized
over a period of 5 years beginning with the initial date of sale of shares to
the public. The costs were advanced by Conseco, and were reimbursed by the
Funds. The proceeds of any redemption of the initial shares by any holder
thereof will be reduced by any unamortized organizational costs in the same
proportion as the number of initial shares being redeemed to the number of
initial shares outstanding at the time of such redemption.
FEDERAL INCOME TAXES
For federal income tax purposes, the Funds intend to qualify as regulated
investment companies under Subchapter M of the Internal Revenue Code by
distributing substantially all of their taxable income and net capital gain to
their shareholders annually and
16
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997
otherwise complying with the requirements for regulated investment companies.
Therefore, no provision has been made for federal income taxes.
CUSTODY FEES
The Funds receive credits from their custodian based on cash held by each
Fund at the custodian. These credits are used to reduce the custody fees payable
by each Fund. For the year ended December 31, 1997, such credits totaled
$16,824, $15,683 and $9,063 for the Equity Fund, Asset Allocation Fund and Fixed
Income Fund, respectively.
USE OF 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 and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results may differ from these estimates.
3. AGREEMENTS WITH SUBSIDIARIES
OF CONSECO
INVESTMENT ADVISORY AGREEMENT
Conseco Capital Management, Inc. (the "Adviser"), a wholly owned subsidiary
of Conseco, serves as investment adviser to the Funds pursuant to investment
advisory agreements. The Adviser supervises the Trust's management and
investment program, performs a variety of services in connection with management
and operation of the Funds and pays all compensation of officers and Trustees of
the Trust who are affiliated persons of the Adviser or the Trust. The total fees
incurred for such services for the year ended December 31, 1997, were $286,410,
$63,605 and $58,632 for the Equity Fund, Asset Allocation Fund and Fixed Income
Fund, respectively.
Under the investment advisory agreements, the Adviser receives an investment
advisory fee equal to an annual rate of .70% of the average daily net asset
value of the Equity Fund, .70% of the average daily net asset value of the Asset
Allocation Fund, and .45% of the average daily net asset value of the Fixed
Income Fund. The Adviser has voluntarily agreed to reduce its advisory fee with
respect to the Fixed Income Fund to .40% of such Fund's average daily net assets
until April 30, 1998. The Adviser also manages another registered investment
company and all of the invested assets of its parent company, Conseco, which
owns or manages several life insurance subsidiaries, and provides investment and
servicing functions to Conseco and affiliates. The Adviser has voluntarily
agreed to waive its investment advisory fee and/or reimburse the Funds to the
extent that the ratio of expenses to net assets on an annual basis for Class A
Shares exceeds: 1.50% for the Equity and Asset Allocation Funds and 1.25% for
the Fixed Income Fund; and for Class Y Shares exceeds: 1.00% for the Equity and
Asset Allocation Funds and .60% for the Fixed Income Fund. These voluntary
limits may be discontinued by the Adviser at any time after April 30, 1998.
ADMINISTRATION AGREEMENT
Conseco Services, LLC (the "Administrator"), a wholly owned subsidiary of
Conseco, supervises the preparation and filing of all documents required for
compliance by the Funds with applicable laws and regulations, supervises the
maintenance of books and records of the Funds and provides other general and
administrative services. For providing these services, the Administrator
receives compensation at the annual rate of 0.20% of the average daily net
assets of each Fund. The Administrator has voluntarily agreed to waive its fees
and/or reimburse the Funds to the extent that the ratio of expenses to net
assets on an annual basis exceeds 1.50% for Class A shares of the Equity and
Asset Allocation Funds and 1.25% for the Class A shares of the Fixed Income Fund
and 1.00% for Class Y shares of the Equity and Asset Allocation Funds and .60%
for Class Y shares of the Fixed Income Fund. The total fees incurred for such
services for the year ended December 31, 1997, were $86,552, $23,055 and $34,161
for the Equity Fund, Asset Allocation Fund and Fixed Income Fund, respectively.
DISTRIBUTION ARRANGEMENTS
Conseco Equity Sales, Inc. (the "Distributor"), a wholly owned subsidiary of
Conseco, serves as the principal underwriter for each Fund pursuant to an
Underwriting Agreement, initially approved by the Board of Trustees. The
Distributor is a registered broker-dealer and member of the National Association
of Securities Dealers, Inc. ("NASD"). Shares of each Fund will be continuously
offered and are sold by brokers, dealers and other financial intermediaries who
have executed selling agreements with the Distributor. The Distributor bears all
the expenses of providing services pursuant to the Underwriting Agreement
including the payment of the expenses relating to the distribution of
Prospectuses for sales purposes as well as any advertising or sales literature.
The Trust has adopted distribution and service plans (the "Plans"), dated
March 28, 1997, for Class A shares of each Fund in accordance with the
requirements of Rule 12b-1 under the 1940 Act and the requirements of the
applicable rules of the NASD regarding asset based sales charges.
Pursuant to the Plans, a Fund may compensate the Distributor for its
expenditures in financing any activity primarily intended to result in the sale
of Class A shares of the Fund and for maintenance and personal service provided
to existing Class A shareholders. The Equity Fund's Plan and the Asset
Allocation Fund's Plan authorize payments to the Distributor up to .50%, and the
Fixed Income Fund's Plan up to .65%, annually of each Fund's average daily net
assets attributable to its Class A shares. The Plans provide for periodic
payments by the Distributor to brokers, dealers and financial intermediaries for
providing shareholder services to accounts that hold Class A shares and for
promotional and other sales related costs. The Distributor has voluntarily
agreed to waive its fees and/or reimburse the Funds to the extent that the ratio
of expenses to net assets on an annual basis exceeds 1.50% for Class A shares of
17
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997
the Equity and Asset Allocation Funds and 1.25% for the Class A shares of the
Fixed Income Fund. The total fees incurred under the Plans for such services for
Class A shares for the year ended December 31, 1997, were $9,508, $2,149 and
$1,984 for the Equity Fund, Asset Allocation Fund and Fixed Income Fund,
respectively.
4. FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED
DECEMBER 31, 1997
----------------------------
ASSET FIXED
EQUITY ALLOCATION INCOME
CLASS A SHARES FUND FUND FUND
------ ---------- ------
Net asset value per share,
beginning of period........................ $10.00 $10.00 $10.00
Income from investment operations (a):
Net investment income (loss).............. (.04) .28 .66
Net realized gains and change in
unrealized appreciation on investments .. 2.33 1.43 .18
- --------------------------------------------------------------------------------
Total from investment operations ....... 2.29 1.71 .84
- --------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ..... -- (.27) (.58)
Distributions of net capital gains ....... (1.22) (.71) (.13)
- --------------------------------------------------------------------------------
Total distributions......................... (1.22) (.98) (.71)
- --------------------------------------------------------------------------------
Net asset value per share, end of period $11.07 $10.73 $10.13
================================================================================
Total return (b) (c)........................ 22.90% 17.19% 8.66%
================================================================================
Ratios/supplemental data (c):...............
Net assets, end of period..... ........... $4,876,355 $1,075,505 $153,444
Ratio of expenses to average net assets (b) 1.50% 1.50% 1.25%
Ratio of net investment income (loss) to
average net assets (b)................... (.35%) 2.50% 5.51%
- ----------
(a) Per share amounts presented are based on an average of monthly shares
outstanding during the year ended December 31, 1997.
(b) The Adviser, Administrator and Distributor have voluntarily agreed to waive
their fees and/or reimburse Fund expense to the extent that the ratio of
expenses to average net assets would exceed on an annual basis 1.50 percent
for the Equity and Asset Allocation Funds and 1.25 percent for the Fixed
Income Fund. These voluntary limits may be discontinued by the Adviser,
Administrator and Distributor at any time after April 30, 1998. If the
aforementioned agreements had not been in effect during the period, the
annualized ratio of expenses to average net assets would have been 4.85
percent for the Equity Fund, 12.44 percent for the Asset Allocation Fund and
13.67 percent for the Fixed Income Fund.
(c) Total return figures do not include sales loads; results would be lower if
sales charges were included.
FOR THE YEAR ENDED
DECEMBER 31, 1997
--------------------------------
ASSET FIXED
EQUITY ALLOCATION INCOME
CLASS Y SHARES FUND FUND FUND
------ ---------- ------
Net asset value per share,
beginning of period..................... $10.00 $10.00 $10.00
Income from investment operations (a):
Net investment income.................. -- .19 .68
Net realized gains and change in
unrealized appreciation on investments 2.35 1.58 .21
- --------------------------------------------------------------------------------
Total from investment operations .... 2.35 1.77 .89
- --------------------------------------------------------------------------------
Distributions:
Dividends from net investment income .. -- (.28) (.61)
Distributions of net capital gains .... (1.22) (.71) (.13)
- --------------------------------------------------------------------------------
Total distributions...................... (1.22) (.99) (.74)
- --------------------------------------------------------------------------------
Net asset value per share, end of period $11.13 $10.78 $10.15
================================================================================
Total return (b)......................... 23.50% 17.87% 9.18%
================================================================================
Ratios/supplemental data:
Net assets, end of period................ $60,334,274 $12,037,150 $21,875,782
Ratio of expenses to average net assets (b) 1.00% 1.00% .60%
Ratio of net investment income to
average net assets (b).................. .03% 2.76% 6.28%
- ----------
(a) Per share amounts presented are based on an average of monthly shares
outstanding during the year ended December 31, 1997.
(b) The Adviser and Administrator have voluntarily agreed to waive their fees
and/or reimburse Fund expense to the extent that the ratio of expenses to
average net assets would exceed on an annual basis 1.00 percent for the
Equity and Asset Allocation Funds and .60 percent for the Fixed Income Fund.
These voluntary limits may be discontinued by the Advisor and Administrator
at any time after April 30, 1998. If the aforementioned agreements had not
been in effect during the period, the annualized ratio of expenses to
average net assets would have been 1.24 percent for the Equity Fund, 2.14
percent for the Asset Allocation Fund and 1.44 percent for the Fixed Income
Fund.
ASSET FIXED
EQUITY ALLOCATION INCOME
FUND FUND FUND
------ ---------- ------
Supplemental data for all classes:
Net assets, end of period....... $65,210,629 $13,112,655 $22,029,226
Portfolio turnover rate......... 199.12% 506.64% 367.82%
Average commission rate paid (a) $.0584 $.0584 --
- ----------
(a) Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission.
18
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997
5. INVESTMENT TRANSACTIONS
Cost basis, gross unrealized appreciation and depreciation of investments at
December 31, 1997 for federal tax purposes are shown below:
ASSET FIXED
EQUITY ALLOCATION INCOME
FUND FUND FUND
------ --------- ------
Cost basis............................. $62,116,012 $12,793,791 $20,746,520
================================================================================
Gross unrealized appreciation.......... $ 6,855,043 $ 947,785 $ 473,266
Gross unrealized depreciation.......... (2,133,041) (390,561) (177,255)
- --------------------------------------------------------------------------------
Net unrealized appreciation............ $ 4,722,002 $ 557,224 $ 296,011
===============================================================================
The aggregate cost of purchases and the aggregate proceeds from sales of
investments for the year ended December 31, 1997, are shown below:
ASSET FIXED
EQUITY ALLOCATION INCOME
FUND FUND FUND
------ --------- ------
Purchases:
Investments, excluding U.S. government
securities and short-term investments $134,183,399 $61,475,036 $52,361,371
U.S. government securities............. -- 6,052,898 24,401,809
Sales:
Investments, excluding U.S. government
securities and short-term investments $83,574,907 $49,684,731 $33,351,040
U.S. government securities............. -- 6,057,363 23,983,336
6. NEW FUNDS
The Trust started three new funds with $100 of seed money on December 31,
1997. The Funds are the Conseco 20 Fund, Conseco High Yield Fund, and Conseco
International Fund. As of December 31, 1997 the new funds' activities have been
limited to organizational matters with no operating activities. The funds became
operational and available for sale on January 13, 1998.
Each fund has distinct investment objectives. The Conseco 20 Fund seeks
capital appreciation by investing in a limited number of equity securities. The
Fund is "non-diversified" under the 1940 Act and normally concentrates its
investments in a core position of approximately 20 common stocks believed to
have above-average growth prospects. The High Yield Fund seeks a high level of
current income, with a secondary objective of capital appreciation, by investing
primarily in lower-rated fixed-income securities. These securities are subject
to greater fluctuations in value and greater risk of loss of income and
principal due to default by issuer than are higher-rated securities. The
International Fund seeks long-term capital appreciation. The Fund seeks to
achieve its objective by investing all of its investable assets in the
International Equity Portfolio of the AMR Investment Services Trust, which
invests primarily in equity securities of issuers based outside the United
States.
7. NEW CLASSES
Commencing on January 2, 1998 the Trust will offer two new classes of shares:
Class B and Class C. Sales of Class B and Class C shares will be subject to a
contingent deferred sales charge (as a percentage of offering prices or net
asset value at the time of sale, whichever is less).
19
<PAGE>
================================================================================
To The Board of Trustees and Shareholders
Conseco Fund Group
We have audited the accompanying statement of assets and liabilities, including
the schedules of investments in securities, of the Conseco Fund Group
(comprising respectively, the Equity, Asset Allocation and Fixed Income Funds),
as of December 31, 1997, and the related statements of operations, changes in
net assets, and the financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian and brokers (or other auditing procedures
where confirmations from brokers were not received). An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Conseco Fund Group as of December
31, 1997 and the results of their operations, changes in their net assets and
financial highlights for the year then ended, in conformity with generally
accepted accounting principles.
Coopers & Lybrand
Indianapolis, Indiana
February 23, 1998
20
<PAGE>
CONSECO FUND GROUP
1997 Annual Report
================================================================================
BOARD OF TRUSTEES
William P. Daves, Jr.
Chairman of the Board
Consultant to insurance and healthcare industries. Director, President and
Chief Executive Officer, FFG Insurance Co.
Maxwell E. Bublitz
President
Chartered Financial Analyst. President and Director, Adviser.
Gregory J. Hahn
Chartered Financial Analyst. Senior Vice President, Adviser. Portfolio
Manager of the fixed income portion of the Asset Allocation and Fixed
Income Funds.
Harold W. Hartley
Retired. Chartered Financial Analyst. Previously, Executive Vice
President, Tenneco Financial Services, Inc.
Dr. R. Jan LeCroy
President, Dallas Citizens Council
Dr. Jesse H. Parrish
Former President, Midland College. Higher Education Consultant.
INVESTMENT ADVISER
Conseco Capital Management, Inc. -- Carmel, Indiana
DISTRIBUTOR
Conseco Equity Sales, Inc. -- Carmel, Indiana
TRANSFER AGENT
State Street Bank & Trust Company -- Boston, Massachusetts
CUSTODIAN
The Bank of New York -- New York, New York
INDEPENDENT PUBLIC ACCOUNTANTS
Coopers & Lybrand L.L.P. -- Indianapolis, Indiana
LEGAL COUNSEL
Kirkpatrick & Lockhart L.L.P. -- Washington, D.C.
21
