BRAZOS MUTUAL FUNDS
Report From Management
July 7, 1997
Dear Fellow Shareholders, Clients and Friends:
As a follow-up to our prior letters, we are delighted to present
a very positive mid-year report. We trust that you will find
this report helpful, not only in terms of the performance of your
monies, but also as it relates to the investment philosophy and
approach employed by the Brazos funds.
For some time, we have been referring to this equity market as
the NIKE market. This term characterizes the nature and strength
of the equity market as it has shown significant resilience and
strength in the face of numerous problems - in other words, it
has shown "No Fear". Investing opportunities have been plentiful
and the slogan of "Just Do It" has served investors well.
The key driving forces behind this bull market are as follows:
low inflation; modest economic growth; low interest rates; and
significant liquidity both in the corporate and individual
sectors. These ingredients have historically resulted in high
valuation of earnings and a very strong equity environment. Keen
observers of history have not been surprised to see this scenario
play out again.
As we reach the year's mid-point, we are very pleased with the
Brazos Mutual Funds. First, it has been gratifying to be of help
to so many friends, old and new clients, individuals,
foundations, and ERISA plans. We have been comforted knowing
that we are truly providing an important service. Second, the
funds have been remarkably well received. The interest expressed
by so many shareholders has exceeded our expectations by a
meaningful measure. Third, as shareholders and co-investors, we
are certainly delighted with the performance results for both of
our funds. The following table highlights the performance
relative to appropriate benchmarks. We believe that these returns
put Brazos in a particularly favorable light relative to other
Small Cap Growth and Real Estate Securities mutual funds.
SINCE
QUARTER ENDING QUARTER ENDING INCEPTION
MARCH 31, 1997 JUNE 30, 1997 (12-31-96-6-30-97)
---------------------------------------------------
BRAZOS SMALL CAP GROWTH * 2.0% 25.0% 27.5%
Russell 2000 -5.2% 16.2% 10.2%
NASDAQ Industrials -8.3% 16.2% 6.6%
BAZOS REAL ESTATE SEC * 4.4% 7.0% 11.8%
NAREIT Equity Index 1.0% 5.0% 5.7%
Wilshire REIT Index .7% 4.7% 5.7%
<PAGE>
BRAZOS MUTUAL FUNDS
Report From Management - (continued)
The creation and launching of two mutual fund portfolios has been
quite an exciting experience for John McStay Investment Counsel.
While we have thanked our associates before, we would like to do
so once again. We are confident that we have employed the very
best "partners" for the Brazos funds. Particularly, we would
want to acknowledge the Philadelphia law firm of Stradley,
Ronon, Stevens and Young, LLP which has been responsible for all
of our legal work. The accounting effort has been performed by
Coopers and Lybrand L.L.P. and the role of the
administrator/custodian and distributor is ably performed by
Rodney Square Management Corporation, a subsidiary of Wilmington
Trust Company in Wilmington, Delaware. We continue to thank each
of you for your wise counsel and effort on behalf of our
shareholders.
As we proceed into the second half, we do so with a positive
view. While our investment approach focuses primarily on a
bottom-up research effort, we will be aware of the forces
impacting the market at large. Specifically, special attention
will be given to monitoring the following factors that will
impact the capital markets. These include: corporate earnings;
low inflation reports; continued budget deficit progress; modest
economic growth statistics; long-term interest rates at seven
percent or below; and continued strong cash flow into mutual
funds.
As you are aware, these funds were created as no-load funds and
with the shareholders' best interest in mind. When we address
you as fellow shareholders, that is exactly what we mean as each
employee of John McStay Investment Counsel is an investor in both
Brazos portfolios. Your interest and our interest are directly
aligned!
We thank you for the confidence that you have expressed in our
team.
Sincerely,
/s/John McStay
John McStay Investment Counsel
* Past performance is not indicative of future results.
Investment returns and principal values may fluctuate, so that,
when redeemed, shares may be worth more or less than their
original value. Returns are higher due to the maintenance of the
portfolios' expenses by John McStay Investment Counsel.
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited) May 31, 1997
MARKET VALUE
SHARES (NOTES 2)
------ ------------
COMMON STOCK - 96.9%
BASIC RESOURCES (NON-ENERGY) - 0.2%
Sinter Metals, Inc. (A Shares)*......... 1,000 $ 36,875
-----------
BUSINESS SERVICES - 8.9%
Abacus Direct Corp.*.................... 7,200 187,200
ABR Information Services, Inc.*......... 5,600 179,900
Airnet Systems, Inc. *.................. 5,600 94,500
CBT Group Plc*.......................... 5,900 321,550
Paychex, Inc............................ 9,150 336,262
Precision Response Corp.*............... 4,900 112,088
Sykes Enterprises, Inc.*................ 7,500 186,562
TeleTech Holdings, Inc.*................ 8,800 203,500
-----------
TOTAL BUSINESS SERVICES........................... 1,621,562
-----------
CONSUMER DURABLES - 7.5%
Furniture Brands International, Inc.*... 11,900 185,937
Herman Miller, Inc...................... 10,500 375,375
HON Industries, Inc..................... 6,500 315,250
International Multifoods Corp........... 7,000 197,750
SPX Corp................................ 4,900 292,163
-----------
TOTAL CONSUMER DURABLES........................... 1,366,475
-----------
CONSUMER MERCHANDISING - 10.2%
Action Performance Companies, Inc.*..... 5,500 132,344
Claire's Stores, Inc.................... 7,600 146,300
Coldwater Creek, Inc.*.................. 10,000 170,000
Cort Business Services Corp.*........... 12,800 355,200
Filene's Basement Corp.*................ 31,500 196,875
General Nutrition Companies, Inc.*...... 14,000 325,500
Global DirectMail Corp.*................ 5,500 130,625
Renters Choice, Inc.*................... 9,500 182,875
Westpoint Stevens, Inc.*................ 6,100 231,038
-----------
TOTAL CONSUMER MERCHANDISING...................... 1,870,757
-----------
CONSUMER SERVICES - 7.0%
Bristol Hotel Co.*...................... 3,100 113,925
Cellstar Corp.*......................... 3,000 107,625
DeVry, INC.*............................ 10,100 279,012
Doubletree Corp.*....................... 4,700 210,325
FelCor Suite Hotels, Inc................ 1,700 63,325
Interstate Hotels Co.*.................. 2,000 52,500
Patriot American Hospitality, Inc....... 6,800 147,050
Prime Hospitality Corp.*................ 5,400 100,575
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited) - continued May 31, 1997
MARKET VALUE
SHARES (NOTES 2)
------ ------------
Sylvan Learning Systems, Inc.*.......... 5,700 $ 204,488
-----------
TOTAL CONSUMER SERVICES........................... 1,278,825
-----------
ELECTRONIC TECHNOLOGY - 10.0%
ADC Telecommunications, Inc.*........... 10,500 359,625
DuPont Photomasks, Inc.*................ 2,100 113,925
Etec Systems, Inc.*..................... 2,500 111,250
Plexus Corp.*........................... 3,600 135,900
Sanmina Corp.*.......................... 4,000 231,750
Tekelec*................................ 6,500 227,500
Unitrode Corp.*......................... 11,200 555,800
Waters Corp.*........................... 3,200 103,200
-----------
TOTAL ELECTRONIC TECHNOLOGY....................... 1,838,950
-----------
ENERGY - 10.2%
Barrett Resources Corp.*................ 4,400 147,400
BJ Services Co.*........................ 9,800 541,450
Nabors Industries, Inc.*................ 8,800 197,450
National-Oilwell, Inc.*................. 4,900 237,038
Newfield Exploration Co.*............... 13,700 294,550
Pogo Producing Co....................... 4,000 160,000
Smith International, Inc.*.............. 5,500 288,062
-----------
TOTAL ENERGY...................................... 1,865,950
-----------
FINANCIAL - 2.1%
FirstMerit Corp......................... 3,700 169,738
Peoples Heritage Financial Group, Inc... 1,800 59,625
Westamerica Bancorporation.............. 2,400 163,800
-----------
TOTAL FINANCIAL................................... 393,163
-----------
HEALTHCARE PRODUCTS - 3.0%
Jones Medical Industries, Inc........... 10,200 365,925
Serologicals, Corp.*...................... 9,800 187,425
-----------
TOTAL HEALTHCARE PRODUCTS......................... 553,350
-----------
HEALTHCARE SERVICES - 4.4%
CRA Managed Care, Inc.*................. 1,000 45,750
National Surgery Centers, Inc.*......... 2,800 107,800
OccuSystems, Inc.*...................... 2,200 57,750
Parexel International Corp.*............ 6,000 197,250
Teva Pharmaceutical Industries Ltd...... 5,000 300,000
United Wisconsin Services, Inc.......... 2,500 89,062
-----------
TOTAL HEALTHCARE SERVICES......................... 797,612
-----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC SMALL CAP GROWTH PORTFOLIO
Schedule of Investments (Unaudited) - continued May 31, 1997
MARKET VALUE
SHARES (NOTES 2)
------ ------------
MEDIA - 12.5%
Cinar Films, Inc.*...................... 11,800 $ 300,900
Clear Channel Communications, Inc.*..... 10,600 560,475
Heftel Broadcasting Corp. (A Shares)*... 4,800 237,600
Outdoor Systems, Inc.*.................. 15,200 503,500
TMP Worldwide, Inc.*.................... 8,100 162,000
Universal Outdoor Holdings, Inc.*....... 16,400 533,000
-----------
TOTAL MEDIA....................................... 2,297,475
-----------
TECHNOLOGY SERVICES/SOFTWARE - 18.6%
Affiliated Computer Services, Inc.*..... 7,600 201,400
Analysts International Corp............. 6,500 235,625
BDM Intl., Inc.*........................ 13,500 351,000
CIBER, Inc.*............................ 8,000 331,000
Complete Business Solutions, Inc.*...... 12,100 214,775
Computer Horizons Corp.*................ 4,500 250,875
Computer Task Group, Inc................ 1,700 103,913
Information Management Resources, Inc.*. 7,000 245,875
Keane, Inc.*............................ 9,300 524,288
National Instruments Corp.*............. 500 16,561
Pure Atria Corp.*....................... 26,400 422,400
SunGard Data Systems, Inc.*............. 6,600 280,500
U.S. Robotics Corp.*.................... 2,800 235,200
-----------
TOTAL TECHNOLOGY SERVICES/SOFTWARE................ 3,413,412
-----------
TRADITIONAL HEAVY INDUSTRY - 2.3%
TETRA Technologies, Inc.*............... 10,000 200,000
Watts Industries, Inc. (A Shares)....... 9,000 223,875
-----------
TOTAL TRADITIONAL HEAVY INDUSTRY.................. 423,875
-----------
TOTAL COMMON STOCK (COST $14,910,449)................. 17,758,281
-----------
MUTUAL FUNDS - 1.9%
Scudder Managed Cash Fund (Cost $357,000)...357,000 357,000
-----------
TOTAL INVESTMENTS (COST $15,267,449)+ - 98.8%.............. 18,115,281
-----------
OTHER ASSETS AND LIABILITIES, NET - 1.2%................... 216,482
-----------
NET ASSETS - 100.0%........................................ $ 18,331,763
-----------
*Non-income producing security.
+The cost for Federal income tax purposes. At May 31, 1997, net
unrealized appreciation was $2,847,832. This consisted of aggregate
gross unrealized appreciation in which there was an excess of market
value over tax cost of $3,035,604, and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over market value of $187,772.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Schedule of Investments (Unaudited) May 31, 1997
MARKET VALUE
SHARES (NOTES 2)
------ ------------
COMMON STOCK - 97.5%
APARTMENTS - 19.6%
Apartment Investment & Management Co.... 20,400 $ 568,650
Avalon Properties, Inc.................. 23,100 635,250
Bay Apartment Communities, Inc.......... 20,100 708,525
Camden Property Trust................... 11,800 346,625
Columbus Realty Trust................... 25,800 567,600
Equity Residential Properties Trust..... 9,800 463,050
Essex Property Trust, Inc............... 20,600 610,275
Gables Residential Trust................ 22,100 552,500
Irvine Apartment Communities............ 2,700 75,938
Post Properties, Inc.................... 3,900 155,025
Security Capital Atlantic, Inc.......... 20,700 452,812
Security Capital Pacific Trust.......... 13,400 298,150
Summit Properties, Inc.................. 30,100 605,762
-----------
TOTAL APARTMENTS..................................... 6,040,162
-----------
HEALTHCARE - 4.3%
Alexandria Real Estate Equities, Inc.... 17,200 378,400
Healthcare Realty Trust, Inc............ 28,700 746,200
Omega Healthcare Investors, Inc......... 6,500 212,875
-----------
TOTAL HEALTHCARE.................................... 1,337,475
-----------
HOTELS - 12.3%
FelCor Suite Hotels, Inc................ 5,500 204,875
Host Marriott Corp. *................... 38,400 676,800
Innkeepers USA Trust.................... 50,700 709,800
Patriot American Hospitality, Inc....... 45,900 992,588
Prime Hospitality Corp.*................ 16,700 311,037
Starwood Lodging Trust.................. 23,400 871,650
-----------
TOTAL HOTELS........................................ 3,766,750
-----------
INDUSTRIAL - 11.6%
Bedford Property Investors, Inc......... 31,800 596,250
CenterPoint Properties Corp............. 31,700 951,000
Liberty Property Trust.................. 21,200 508,800
Meridian Industrial Trust............... 27,300 627,900
Weeks Corp.............................. 28,500 897,750
-----------
TOTAL INDUSTRIAL.................................... 3,581,700
-----------
MANUFACTURED HOMES - 3.2%
Chateau Communities, Inc................ 4,700 123,375
Manufactured Home Communities, Inc...... 12,900 283,800
Sun Communities, Inc.................... 17,700 577,463
-----------
TOTAL MANUFACTURED HOMES............................ 984,638
-----------
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Schedule of Investments (Unaudited) - continued May 31, 1997
MARKET VALUE
SHARES (NOTES 2)
------ ------------
NET LEASE - 4.6%
Franchise Finance Corporation of America 27,600 $ 665,850
TriNet Corporate Realty Trust, Inc...... 22,800 746,700
-----------
TOTAL NET LEASE..................................... 1,412,550
-----------
OFFICE -25.3%
Arden Realty Group, Inc................. 26,200 677,925
Beacon Properties Corp.................. 32,000 992,000
Brandywine Realty Trust................. 25,800 522,450
Cali Realty Corp........................ 27,800 823,575
CarrAmerica Realty Corp................. 21,500 610,062
Cousins Properties, Inc................. 700 18,725
Duke Realty Investments, Inc............ 16,600 632,875
Great Lakes REIT, Inc................... 31,100 482,050
Highwoods Properties, Inc............... 39,600 1,197,900
Prentiss Properties Trust............... 43,200 1,015,200
Reckson Associates Realty Corp.......... 22,200 499,500
Spieker Properties, Inc................. 8,000 295,000
-----------
TOTAL OFFICE........................................ 7,767,262
-----------
RETAIL - 8.0%
Bradley Real Estate, Inc................ 12,800 241,600
CBL & Associates Properties, Inc........ 29,600 703,000
Developers Diversified Realty Corp...... 3,900 145,275
Excel Realty Trust, Inc................. 5,200 134,550
JP Realty, Inc.......................... 17,500 452,812
Regency Realty Corp..................... 10,900 287,488
The Macerich Co......................... 18,400 496,800
-----------
TOTAL RETAIL........................................ 2,461,525
-----------
STORAGE - 8.6%
Shurgard Storage Centers, Inc........... 10,700 299,600
Sovran Self Storage, Inc................ 23,700 687,300
Storage Trust Realty.................... 29,200 730,000
Storage USA, Inc........................ 24,100 918,813
-----------
TOTAL STORAGE....................................... 2,635,713
-----------
TOTAL COMMON STOCK (COST $29,758,065).............. 29,987,775
-----------
MUTUAL FUNDS - 1.8%
Scudder Managed Cash Fund (COST $549,000) 549,000 549,000
-----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS/JMIC REAL ESTATE SECURITIES PORTFOLIO
Schedule of Investments (Unaudited) - continued May 31, 1997
MARKET VALUE
SHARES (NOTES 2)
------ ------------
U.S. TREASURY OBLIGATIONS - 1.6%
U.S. Treasury Bill, 4.27%, 06/05/97
(COST $499,781 500,000 $ 499,781
-----------
TOTAL INVESTMENTS (COST $30,806,846)+ - 100.9% 31,036,556
-----------
OTHER ASSETS AND LIABILITIES, NET - (0.9)%............ (266,145)
-----------
NET ASSETS - 100.0%................................... $ 30,770,411
-----------
*Non-income producing security.
+The cost for Federal income tax purposes. At May 31, 1997, net
unrealized appreciation was $229,710. This consisted of aggregate
gross unrealized appreciation in which there was an excess of market
value over tax cost of $682,681, and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over market value of $452,971.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Statement of Assets and Liabilities (Unaudited) May 31, 1997
SMALL CAP REAL ESTATE
GROWTH SECURITIES
PORTFOLIO PORTFOLIO
--------- ------------
ASSETS:
Investments in securities, at market
(identified cost$15,267,449 and $30,806,846,
respectively) (Note 2) .................... $18,115,281 $31,036,556
Cash....................................... 785 1,178
Receivable for investment securities sold.. 282,756 577,311
Receivable for Fund shares sold............ - 465,345
Dividends and interest receivable.......... 4,526 21,504
Deferred organization and offering costs
(Note 2)................................... 45,613 45,613
Due from Adviser........................... 1,723 -
Other assets............................... 2,191 2,191
----------- -----------
Total assets............................. 18,452,875 32,149,698
----------- -----------
LIABILITIES:
Payable for investment securities purchased 72,263 1,111,136
Payable for Fund shares redeemed........... - 200,000
Due to Adviser (Note 4).................... - 17,983
Other accrued expenses (Note 4)............ 48,849 50,168
----------- -----------
Total liabilities........................ 121,112 1,379,287
----------- -----------
Net Assets, at market value................ $18,331,763 $30,770,411
=========== ===========
NET ASSETS CONSIST OF:
Capital paid in............................ $15,770,899 $30,267,233
Undistributed net investment income (loss). (15,517) 136,286
Accumulated net realized gain (loss)....... (271,451) 137,182
Net unrealized appreciation of investments. 2,847,832 229,710
----------- -----------
Net Assets, for 1,537,493 and 2,928,133
shares outstanding,respectively........... $18,331,763 $30,770,411
=========== ===========
NET ASSET VALUE, offering and redemption
price per share($18,331,763\1,537,493 and
$30,770,411\2,928,133 outstanding shares
of beneficial interest,no par value,
respectively).............................. $11.92 $10.51
====== ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Statements of Operations for the Period December 31, 1996+ through May 31, 1997
(Unaudited)
SMALL CAP REAL ESTATE
GROWTH SECURITIES
PORTFOLIO PORTFOLIO
--------- ------------
INVESTMENT INCOME:
Dividends.................................. $ 9,646 $ 196,947
Interest................................... 25,678 52,059
---------- -----------
Total investment income ................. 35,324 249,006
---------- -----------
EXPENSES:
Advisory fee (Note 4)..................... 33,893 51,832
Administration fee (Note 4)............... 13,534 14,939
Accounting fee (Note 4)................... 18,740 18,740
Custodian fee (Note 4).................... 8,258 8,909
Transfer Agent fee (Note 4)............... 15,876 15,878
Trustees' fees and expenses (Note 4)...... 1,932 1,932
Amortization of organization and
offering expenses (Note 2).............. 15,737 15,737
Registration fees......................... 1,195 1,590
Reports to shareholders................... 6,684 6,689
Legal..................................... 5,117 5,117
Audit..................................... 6,987 6,987
Other.................................... 1,807 1,807
---------- -----------
Total expenses before fee waivers........ 129,760 150,157
Advisory fee waived (Note 4)............. (33,893) (51,832)
Administration fee waived (Note 4)....... (4,051) (4,051)
Accounting fee waived (Note 4)........... (5,610) (5,610)
Transfer agent fee waived (Note 4)....... (3,750) (3,750)
Reimbursement from Adviser (Note 4)... (31,615) (12,923)
----------- -----------
Total expenses, net................... 50,841 71,991
----------- -----------
Net investment income (loss)............. (15,517) 177,015
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investment
transactions............................. (271,451) 137,182
Net unrealized appreciation of
investments during the period........... 2,847,832 229,710
----------- -----------
Net gain on investments.................. 2,576,381 366,892
----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS:........................... $2,560,864 $543,907
=========== ===========
+ Commencement of Operations.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Statement of Changes in Net Assets
SMALL CAP REAL ESTATE
GROWTH SECURITIES
PORTFOLIO PORTFOLIO
---------- -------------
FOR THE PERIOD DECEMBER 31, 1996+
Through May 31, 1997 (UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss)............. $ (15,517) $ 177,015
Net realized gain (loss) on investment
transactions............................ (271,451) 137,182
Net unrealized appreciation
of investments during the period....... 2,847,832 229,710
----------- ------------
Net increase in net assets resulting
from operations........................ 2,560,864 543,907
----------- ------------
Distributions to shareholders from:
Net investment income ($0.00 and $0.05
per share, respectively)............. - (40,729)
----------- ------------
Increase in net assets from Fund share
transactions (Note 5).................... 15,720,899 30,217,233
----------- ------------
Total increase in net assets............. 18,281,763 30,720,411
NET ASSETS:
Beginning of period..................... 50,000 50,000
----------- ------------
End of period........................... $18,331,763 $30,770,411
=========== ============
+ Commencement of operations.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Financial Highlights
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements. They should be read in conjunction with the financial statements
and notes thereto.
FOR THE PERIOD DECMBER 31, 1996*
THROUGH MAY 31, 1997
(UNAUDITED)
--------------------------------
SMALL CAP GROWTH PORTFOLIO
NET ASSET VALUE - BEGINNING OF PERIOD..... $10.00
------
INVESTMENT OPERATIONS:
Net investment loss..................... (0.01)
Net realized and unrealized gain on
investments.......................... 1.93
------
Total from investment operations.... 1.92
------
NET ASSET VALUE - END OF PERIOD.......... $11.92
======
TOTAL RETURN***.......................... 19.20%
Ratios (to average net assets)/
Supplemental Data Expenses +............ 1.35%**
Net investment income................... (0.41)%**
Portfolio turnover rate.................. 304.23%**
Average commission rate paid............. $0.0569
Net assets at end of period ($000 omitted) $18,332
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUTAL FUNDS
Financial Highlights - continued
FOR THE PERIOD DECEMBER 31, 1996*
THROUGH MAY 31,1997
(UNAUDITED)
--------------------------------
REAL ESTATE SECURITIES PORTFOLIO
NET ASSET VALUE - BEGINNING OF PERIOD.... $10.00
------
INVESTMENT OPERATIONS:
Net investment income................... 0.10
Net realized and unrealized gain on
investments.......................... 0.46
------
Total from investment operations..... 0.56
------
DISTRIBUTIONS:
From net investment income.............. (0.05)
------
NET ASSET VALUE - END OF PERIOD.......... $10.51
======
TOTAL RETURN***.......................... 5.60%
Ratios (to average net assets)
/Supplemental Data:
Expenses++.............................. 1.25%**
Net investment income................... 3.07%**
Portfolio turnover rate.................. 95.81%**
Average commission rate paid............. $0.0632
Net assets at end of period (000 omitted) $30,770
* Commencement of operations.
** Annualized.
*** Unannualized.
+ The Adviser has voluntarily agreed to waive a portion of its advisory
fees and to assume expenses otherwise payable by the Portfolio (if
necessary) in order to keep the annual expense ratio from exceeding 1.35%
of its average daily net assets. In addition the Administrator,
Accounting Agent and Transfer Agent have agreed to waive a portion of
their fees. Without the assumption of and waivers of expenses the
annualized ratio of expenses to average daily net assets would have been
3.45% for the period ended May 31, 1997.
++ The Adviser has voluntarily agreed to waive a portion of its advisory
fees and to assume expenses otherwise payable by the Portfolio (if
necessary) in order to keep the annual expense ratio from exceeding 1.25%
of its average daily net assets. In addition the Administrator,
Accounting Agent and Transfer Agent have agreed to waive a portion of
their fees. Without the assumption of and waivers of expenses the
annualized ratio of expenses to average daily net assets would have been
2.61% for the period ended May 31, 1997.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
BRAZOS MUTUAL FUNDS
Notes to Financial Statements (Unaudited) May 3, 1997
1.DESCRIPTION OF THE FUND. The Brazos Mutual Funds (the "Fund" )
is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a diversified, open-end
management investment company established as a Delaware
business trust. The Declaration of Trust, dated October 28,
1996, permits the Trustees to establish separate series or
"Portfolios," each of which may issue separate classes of
shares. The authorized shares of beneficial interest of the
Fund are currently divided into two Portfolios, the
BRAZOS/JMIC Small Cap Growth Portfolio ("Small Cap Growth
Portfolio") and the BRAZOS/JMIC Real Estate Securities
Portfolio ("Real Estate Securities Portfolio")(each, a
"Portfolio" and collectively, the "Portfolios"). Each
Portfolio currently consists of a single class of shares. The
investment objective of the Small Cap Growth Portfolio is to
provide maximum capital appreciation, consistent with
reasonable risk to principal, by investing primarily in small
capitalization companies. The investment objective of the
Real Estate Securities Portfolio is to provide a balance of
income and appreciation (with reasonable risk to principal) by
investing primarily in equity securities of companies which
are principally engaged in the real estate industry.
Because the Real Estate Securities Portfolio may invest a
substantial portion of its assets in Real Estate Investment
Trusts ("REITs"), the Portfolio may also be subject to certain
risks associated with direct investments in REITs. REITs may
be affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants.
Furthermore, REITs are dependent upon specialized management
skills, have limited diversification and are, therefore,
subject to risks inherent in financing a limited number of
projects. REITs depend generally on their ability to generate
cash flow to make distributions to shareholders and certain
REITs have self-liquidation provisions by which mortgages held
may be paid in full and distributions of capital returns may
be made at any time. In addition, the performance of a REIT
may be affected by its failure to qualify for tax-free, pass-
through of income under the Internal Revenue Code or its
failure to maintain exemption from registration under the 1940
Act.
2.SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of
the significant accounting policies of the Fund:
SECURITY VALUATION. Each Portfolio's securities, except short-
term investments with remaining maturities of 60 days or less,
use the last quoted trading price as the market value. For
listed securities, the Portfolios use the price quoted by the
exchange on which the security is primarily traded. Unlisted
securities and listed securities which have not been traded on
the valuation date or for which market quotations are not
readily available are valued at the average between the last
price asked and the last price bid. Short-term investments
with remaining maturities of 60 days or less are valued at
amortized cost, which approximates market value, unless the
Fund's Board of Trustees determines that this does not
represent fair value. The value of all other securities is
determined in good faith under the direction of the Board of
Trustees.
<PAGE>
FEDERAL INCOME TAXES. Each Portfolio is treated as a separate
entity and intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of
1986 and to distribute all of its taxable income to its
shareholders. Therefore, no provision for federal income tax
is required.
The Portfolios are also subject to a nondeductible 4% excise tax
calculated as a percentage of certain undistributed amounts of
net investment income and net capital gains. The Portfolios
intend to distribute their net investment income and capital
gains as necessary to avoid this excise tax.
DISTRIBUTIONS TO SHAREHOLDERS. The Small Cap Growth Portfolio
will normally distribute substantially all of its net
investment income in an annual dividend. The Real Estate
Securities Portfolio will normally distribute substantially
all of its net investment income in quarterly dividends. Both
Portfolios will distribute any realized net capital gains
annually.
The Real Estate Securities Portfolio receives a majority of its
dividend income from REITs. For tax purposes, a portion of
these dividends may consist of capital gains and returns of
capital. Accordingly, the Portfolio's distributions to
shareholders may include a portion that may be a return of
capital received from the REITs, as well as a return of
capital attributed to distributions of other income for
financial reporting purposes. Distributions determined to be
returns of capital are not subject to current taxation. In
accordance with Statement of Position 93-2, Determination,
Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment
Companies ("SOP"), distributions representing a return of
capital for tax purposes are charged to capital paid in.
DEFERRED ORGANIZATION AND OFFERING COSTS. Organizational costs
have been capitalized by the Fund and are being amortized over
sixty months commencing with operations. In the event any of
the initial shares of the Fund are redeemed by any holder
thereof during the period that the Fund is amortizing
organizational costs, the redemption proceeds payable to the
holder thereof by the Fund will be reduced by the unamortized
organizational costs in the same ratio as the number of
initial shares being redeemed bears to the number of initial
shares outstanding at the time of redemption. Offering costs,
including initial registration costs, have been deferred and
will be charged to expense during the Fund's first year of
operation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. 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 at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
OTHER. Investment security transactions are accounted for on a
trade date basis. Each Portfolio uses the specific
identification method for determining realized gain and loss
on investments for both financial and federal income tax
reporting purposes.
<PAGE>
3.INVESTMENT SECURITIES. During the period ended May 31, 1997,
purchases and sales of investment securities (excluding short-
term investments) aggregated as follows:
<TABLE>
<CAPTION>
SMALL CAP GROWTH REAL ESTATE SECURITIES
PORTFOLIO PORTFOLIO
----------------- ---------------------
<S> <C> <C>
Purchases........ $ 25,101,940 $ 34,469,757
Sales............ 9,920,219 4,797,635
</TABLE>
4.ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund,
on behalf of each Portfolio, employs John McStay Investment
Counsel (the "Adviser"), an investment counseling firm founded
in 1983, to furnish investment advisory and other services to
the Fund. Under an Investment Advisory Agreement with the
Fund, dated November 25, 1996, the Adviser manages the
investment and reinvestment of the assets of the Portfolios.
The Adviser must adhere to the stated investment objectives
and policies of the Portfolios, and is subject to the control
and supervision of the Fund's Board of Trustees. For its
services under the Advisory Agreement, the Fund pays the
Adviser a monthly fee at the annual rate of 0.90% of the
average daily net assets of each Portfolio. The Adviser has
voluntarily agreed to keep operating expenses for the Small
Cap Growth Portfolio and Real Estate Securities Portfolio
(excluding taxes, extraordinary expenses, brokerage
commissions and interest) from exceeding an annual rate of
1.35% and 1.25%, respectively, of each Portfolio's average
daily net assets. The Fund will not reimburse the Adviser for
any advisory fees that are waived or Portfolio expenses that
the Adviser may bear on behalf of a Portfolio.
The following table summarizes the advisory fees for the
period ended May 31, 1997:
<TABLE>
<CAPTION>
GROSS ADVISER ADVISER ADVISER
FEE FEE WAIVED REIMBURSEMENT
------------- ----------- -------------
<S> <C> <C> <C>
Small Cap Growth Portfolio.......... $33,893 $(33,893) $(31,615)
Real Estate Securities Portfolio.... 51,832 (51,832) (12,923)
</TABLE>
Rodney Square Management Corporation ("RSMC"), a wholly owned
subsidiary of Wilmington Trust Company ("WTC"), which is
wholly owned by Wilmington Trust Corporation, a publicly held
bank holding company, provides administration services to the
Fund. For administration services provided, RSMC receives an
annual administration fee from the Fund equal to the greater
of: (1) a minimum annual fee of $32,500 for each of the first
two single-class Portfolios plus $15,000 for any additional
Portfolio, or second or additional class of a Portfolio; or
(2) an asset-based fee, equal to a percentage of the average
daily net assets of the Fund, on a Fund-wide basis, according
to the following schedule: 0.15% of the first $50 million in
assets; plus 0.10% of assets between $50 million and $200
million; plus 0.07% of assets in excess of $200 million. Each
Portfolio shares in its pro-rata portion of the Fund's fee.
For the period ended May 31, 1997, RSMC fees for
administration services for the Small Cap Growth Portfolio and
Real Estate Securities Portfolio were $13,534 and $14,939,
respectively, of which $4,051 and $4,051, respectively, were
waived.
RSMC determines the net asset value per share of the Portfolios
and provides accounting services to the Portfolios. For
accounting services provided RSMC receives an annual fee of
$45,000 per Portfolio, plus an asset-based fee, equal to a
percentage of the average daily net assets of each Portfolio,
according to the following schedule: 0.03% of assets between
$50 million and $100 million; plus 0.02% of assets in excess
of $100 million. For the period ended May 31, 1997, RSMC fees
for accounting services for the Small Cap Growth Portfolio and
Real Estate Securities Portfolio were $18,740 per Portfolio,
of which $5,610 per Portfolio was waived.
RSMC also serves as Transfer and Dividend Paying Agent for the
Fund pursuant to a Transfer Agent Agreement with the Fund,
dated December 31, 1996. WTC serves as Custodian of the
assets of the Fund.
Pursuant to a Distribution Agreement with the Fund dated December
31, 1996, Rodney Square Distributors, Inc. ("RSD"), a wholly-
owned subsidiary of WTC, assists in securing purchasers for
shares of the Fund. RSD also directly, or through its
affiliates, provides investor support services. RSD receives
no compensation for distribution of shares of the Fund, except
for reimbursement of out-of-pocket expenses.
Certain trustees and officers of the Fund are also officers of
the Fund's Investment Adviser. Such trustees and officers are
paid no fees by the Fund for serving as trustees or officers
of the Fund.
5.FUND SHARES. At May 31, 1997, there were an unlimited number
of shares of beneficial interest, no par value, authorized.
The following table summarizes the activity in shares of each
Portfolio:
FOR THE PERIOD DECEMBER 31, 1996+
THROUGH MAY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SMALL CAP REAL ESTATE
GROWTH PORFOLIO SECURITIES PORTFOLIO
--------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold.............. 1,602,113 $16,440,937 3,037,492 $31,377,401
Shares issued to
shareholders in
reinvestment of
distributions............ - - 3,780 39,844
Shares redeemed.......... (69,620) (720,038) (118,139) (1,200,012)
--------- ----------- -------- ----------
Net increase............. 1,532,493 $15,720,899 2,923,133 $30,217,233
=========== ===========
Shares outstanding:
Beginning of period...... 5,000 5,000
--------- ---------
End of period............ 1,537,493 2,928,133
========= =========
</TABLE>
<FOOTNOTE>
+Commencement of Operations.
</FOOTNOTE>
<PAGE>
[BACK COVER]
TRUSTEES
--------
JOHN H. MASSEY
DAVID M. REICHERT
DAN L. HOCKENBROUGH
OFFICERS
--------
DAN L. HOCKENBROUGH
Chairman of the Board,
President and Treasurer
TRICIA A. HUNDLEY
Vice President, Secretary and
Compliance Officer
CUSTODIAN
---------
WILMINGTON TRUST COMPANY
1100 N. MARKET
WILMINGTON, DELAWARE 19890
COUNSEL
-------
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PENNSYLVANIA 19103
AUDITORS
---------
COOPERS & LYBRAND L.L.P.
2400 ELEVEN PENN CENTER
PHILADELPHIA, PENNSYLVANIA 19103
[FRONT COVER]
BRAZOS MUTUAL FUNDS (APPEARS VERTICALLY ON THE FRONT COVER)
SEMI-ANNUAL
MAY 31, 1997
BRAZOS
------
JMIC SMALL CAP
GROWTH PORTFOLIO
JMIC REAL ESTATE
SECURITIES PORTFOLIO
------
INVESTMENT ADVISER
------------------
JOHN MCSTAY
INVESTMENT COUNSEL
5949 SHERRY LANE
SUITE 1560
DALLAS, TEXAS 75225
BZ10
