[LOGO OMITTED]
MET WEST
METROPOLITAN WEST
METROPOLITAN WEST FUNDS
TOTAL RETURN BOND FUND
LOW DURATION BOND FUND
SEMI-ANNUAL REPORT
(Unaudited)
[GRAPHIC OMITTED]
September 30, 1997
<PAGE>
October 28, 1997
METROPOLITAN WEST FUNDS
Dear Shareholder,
We are pleased to enclose the semi-annual report for the Metropolitan West Low
Duration and Total Return Bond Funds for the period ending September 30, 1997.
From the inception of the Funds on March 31, 1997, i.e., 6 days after the
Federal Reserve raised short term interest rates, through September 30, 1997 the
interest rate environment has been favorable to bond investors. Yields on
two-year Treasury securities have fallen from 6.41% on March 31, 1997 to 5.78%
at month-end September. Ten-year Treasury yields have fallen from 6.91% to 6.11%
over the same period. This downward move of 63 and 80 basis points,
respectively, has had a positive impact on the Net Asset Values of our Funds.
The Low Duration Bond Fund Net Asset Value closed at 10.17 and the Total Return
Bond Fund Net Asset Value closed at 10.43.
In addition, performance versus our benchmark indices was also strong. The Low
Duration Bond Fund has returned an absolute 4.88% for the 6-month period versus
the Merrill Lynch 1-3 Year U.S. Treasury Index* return of 4.21% over the same
period. The Total Return Bond Fund returned 7.76% while the Lehman Aggregate
Index* performance for the same period was 7.14%.
We welcome all of our new shareholders to the Funds and appreciate your
support and confidence in our style of fixed income management. The portfolio
managers of Metropolitan West Asset Management, LLC, (the adviser to the Funds)
led by Tad Rivelle, Laird Landmann and Stephen Kane are pleased with their
initial efforts to create high quality, highly diversified portfolios.
As always, our philosophy is to maintain open and frequent communications with
our shareholders. Feel free to contact us at (310) 446-7727 if you have any
comments, questions or suggestions.
Sincerely,
/S/Scott Dubchansky
Scott Dubchansky
President & Trustee
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. SHARE PRICES AND RETURNS
WILL FLUCTUATE AND WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL INVESTMENT. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST.
U.S. TREASURY BONDS UNLIKE MUTUAL FUNDS ARE INSURED DIRECT OBLIGATIONS OF THE
U.S. GOVERNMENT THAT OFFER A FIXED RATE OF RETURN. *UNMANAGED INDICES.
THE METROPOLITAN WEST FUNDS ARE DISTRIBUTED BY FPS BROKER SERVICES, INC.
TO BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS. DFU 11/97
1
<PAGE>
TOTAL RETURN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- --------------------------------------------------------------------------------
BONDS--86.68%
ASSET BACKED--1.02%
$150,000 Household Affinity Credit Card Master
Trust I 1994-2 B, 7.200%, 12/15/99 $ 150,765
---------
CORPORATES--32.11%
Banks--9.89% 300,000 Advanta National Bank, 6.020%, 11/13/97 299,791
250,000 Capital One Bank, 8.125%, 03/01/00 259,777
500,000 MBNA Corp. (FRN) (MTN), 6.069%, 06/17/02 499,161
400,000 Skandinavinska Enskilda Banken (FRN),
6.781%, 06/29/49 406,770
---------
1,465,499
---------
Brokerage 400,000 Lehman Brothers Holdings, Inc. (FRN) (MTN),
Services--4.26% 6.319%, 03/17/07 401,840
230,000 Salomon, Inc. (FRN) (MTN),
6.075%, 04/05/99 229,118
---------
630,958
---------
Electric
Utilities--8.66% 300,000 Alabama Power Co., 9.000%, 12/01/24 332,227
400,000 Arkansas Power & Light Co.,
8.750%, 03/01/26 417,123
500,000 Long Island Lighting Co.,
8.900%, 07/15/19 532,752
---------
1,282,102
---------
Industrial--4.26% 350,000 Cemex S.A., 10.750%, 07/15/00 376,496
250,000 RJR Nabisco, Inc., 8.300%, 04/15/99 255,107
---------
631,603
---------
Sovereign--2.19% 339,500 Republic of Argentina (FRN),
6.750%, 03/31/05 324,053
---------
Telecommunications 400,000 GTE Corp., 8.500%, 04/01/17 421,492
--2.85% ---------
TOTAL CORPORATES 4,755,707
---------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2
<PAGE>
TOTAL RETURN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- --------------------------------------------------------------------------------
MORTGAGE-BACKED--27.90%
Non-Agency $ 168,622 Blackrock Capital Finance L.P.
Mortgage-Backed 1997-R2 AP (FRN), 4.760%, 10/25/35 $ 167,532
--16.24% 127,854 Citicorp Mortgage Securities, Inc.
1992-20 A4, 7.500%, 01/25/07 128,791
164,326 Collateralized Mortgage Obligation
Trust 57 D, 9.900%, 02/01/19 180,136
2,725,302 DLJ Mortgage Acceptance Corp.
1994-Q8 IIS (IO), 1.871%, 05/25/24 115,978
500,000 GE Capital Mortgage Services, Inc.
1994-6 A11, 6.500%, 04/25/24 448,290
300,000 Independent National Mortgage Corp.
1995-N A5, 7.500%, 10/25/25 304,731
11,080,802 Nomura Asset Securities Corp.
1994-4A 2IO (IO), 1.394%, 09/25/24 327,161
221,452 Northwestern Acceptance Corp. I A 2,
13.324%, 02/20/18 244,583
163,955 Residential Funding Mortgage Securities I
1993-S42 A10, 8.300%, 10/25/08 162,290
224,378 Resolution Trust Corp. 1995-2 B6 (FRN),
6.684%, 05/25/29 214,438
470,590 Structured Mortgage Asset Residential
Trust 1991-7 I (IO), 14.313%, 12/25/22 111,765
---------
2,405,695
---------
U.S. Agency Mortgage-
Backed--11.66% 140,629 Fannie Mae 1997-37 Z, 9.000%, 06/18/27 140,949
1,495,136 Freddie Mac 1164 O (IO), 6.391%, 11/15/06 230,251
227,786 Freddie Mac 1552 Q,
13.750%, 10/15/22 247,401
95,942 Freddie Mac 1433 SE, 10.150%, 11/15/22 98,437
375,000 Freddie Mac 1950 SM,
15.400%, 04/15/27 362,051
300,000 Freddie Mac 1951 SD,
16.500%, 04/15/27 297,243
350,000 Freddie Mac 1963 SB,
15.600%, 06/15/27 350,656
---------
1,726,988
---------
TOTAL MORTGAGE-BACKED 4,132,683
---------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
TOTAL RETURN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENTS--25.65%
U.S. Agency
- --0.93% $ 600,000 Fannie Mae, 0.000%, 10/09/19 $ 137,786
-----------
U.S. Treasury
- --24.72% 370,000 U.S. Treasury Notes, 6.500%, 05/31/02 377,284
879,000 U.S. Treasury Notes, 5.750%, 08/15/03 865,816
1,050,000 U.S. Treasury Notes, 8.125%, 08/15/19 1,249,829
1,125,000 U.S. Treasury Notes, 6.750%, 08/15/26 1,168,243
-----------
3,661,172
-----------
TOTAL U.S. GOVERNMENTS 3,798,958
-----------
TOTAL BONDS
(Cost $12,631,514) 12,838,113
-----------
CASH EQUIVALENTS--14.30%
Commercial 424,000 American Bankers Insurance Group,
Paper--14.30% 5.800%, 10/09/97 423,454
500,000 Cox Communications, Inc.,
5.700%, 10/24/97 498,179
400,000 CSX Corp., 5.700%, 11/03/97 397,910
450,000 Occidental Petroleum Corp.,
5.700%, 10/21/97 448,575
350,000 Whirlpool Corp., 5.680%, 10/23/97 348,785
-----------
TOTAL CASH EQUIVALENTS
(Cost $2,116,903) 2,116,903
-----------
TOTAL INVESTMENTS--100.98%
(Cost $14,748,417*) 14,955,016
-----------
LIABILITIES, LESS CASH
AND OTHER ASSETS--(0.98)% (144,561)
-----------
NET ASSETS--100.00% $14,810,455
===========
Notes:
* Cost for Federal income tax purposes is $14,748,417 and net unrealized
appreciation consists of:
Gross unrealized appreciation $260,969
Gross unrealized depreciation (54,370)
--------
Net unrealized appreciation 206,599
========
(FRN): Floating rate note -- The rate disclosed is that in effect at
September 30, 1997.
(IO): Interest only
(MTN): Medium term note
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- --------------------------------------------------------------------------------
BONDS--74.46%
ASSET BACKED SECURITIES--0.85%
$ 78,359 Contimortgage Home Equity Loan Trust
1994-4 A6, 8.270%, 12/15/24 $ 81,887
384,243 Olympic Automobile Receivables Trust
1994-B A2, 6.850%, 06/15/01 387,974
------------
469,861
------------
CORPORATES--38.02%
Banks--11.88% 500,000 Advanta National Bank (FRN),
5.880%, 10/10/97 499,949
1,400,000 Advanta National Bank, 6.020%, 11/13/97 1,398,948
900,000 Capital One Bank, 8.125%, 02/27/98 907,966
675,000 Capital One Bank, 8.125%, 03/01/00 701,398
100,000 First USA Bank, 6.125%, 10/30/97 99,998
1,000,000 Kansallis-Osake-Pankki (FRN),
7.830%, 09/30/43 1,030,800
825,000 MBNA Corp. (FRN) (MTN),
6.039%, 09/13/01 824,107
1,100,000 Skandinavinska Enskilda Banken (FRN),
6.781%, 06/29/49 1,118,617
------------
6,581,783
------------
Brokerage 1,600,000 Lehman Brothers Holdings, Inc.
Services--6.31% (FRN) (MTN), 6.319%, 03/17/07 1,607,360
100,000 Salomon, Inc. (FRN) (MTN),
6.700%, 12/01/98 100,141
1,800,000 Salomon, Inc. (FRN) (MTN),
6.200%, 02/15/99 1,791,332
------------
3,498,833
------------
Electric Utilities
- --3.44% 600,000 Arkansas Power & Light Co.,
8.750%, 03/01/26 625,685
1,200,000 Long Island Lighting Co.,
8.900%, 07/15/19 1,278,606
------------
1,904,291
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- --------------------------------------------------------------------------------
CORPORATES (CONTINUED)
Finance--2.16% $ 500,000 AT&T Capital Corp. (MTN),
5.850%, 01/05/99 $ 498,903
100,000 Heller Financial Corp. (FRN) (MTN),
5.720%, 04/21/99 99,824
600,000 Taubman Realty Group, Ltd. (FRN) (MTN),
6.619%, 07/26/99 600,779
------------
1,199,506
------------
Industrial
- --4.93% 1,400,000 Cemex S.A., 10.750%, 07/15/00 1,505,984
1,000,000 RJR Nabisco, Inc., 7.625%, 09/01/00 1,023,705
100,000 Valassis Inserts, Inc., 9.375%, 03/15/99 103,235
100,000 Westinghouse Credit Corp. (MTN),
9.040%, 06/01/98 101,666
------------
2,734,590
------------
Insurance--0.18% 100,000 American Bankers Insurance Group
(FRN) (MTN), 6.400%, 04/12/00 100,954
------------
Sovereign--5.35% 1,164,000 Republic of Argentina (FRN),
6.750%, 03/31/05 1,111,038
1,750,000 Republic of Finland, 9.625%, 04/01/28 1,850,842
------------
2,961,880
------------
Telecommunications
- --3.77% 1,600,000 GTE Corp., 8.500%, 04/01/17 1,685,968
400,000 Tele-Communications, Inc. (MTN),
7.140%, 02/03/98 401,697
------------
2,087,665
------------
TOTAL CORPORATES 21,069,502
------------
MORTGAGE-BACKED--30.52%
Non-Agency Mortgage-
Backed--17.03% 674,488 Blackrock Capital Finance L.P.
1997-R2 AP (FRN), 4.760%, 10/25/35 670,130
543,312 Capstead Securities Corp. IV 1992-11 IB,
7.875%, 08/25/22 555,629
1,278,543 Citicorp Mortgage Securities, Inc.
1992-20 A4, 7.500%, 01/25/07 1,287,915
253,150 Citicorp Mortgage Securities, Inc.
1994-3 A12, 9.000%, 02/25/24 251,845
15,297,866 DLJ Mortgage Acceptance Corp.
1994-Q8 IIS (IO), 1.871%, 05/25/24 651,016
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- --------------------------------------------------------------------------------
MORTGAGE-BACKED (CONTINUED)
Non-Agency $ 959,626 Northwestern Acceptance Corp. I A 2,
Mortgage-Backed 13.324%, 02/20/18 $ 1,059,859
(continued) 1,029,895 Resolution Trust Corp. 1992-C6 B,
7.700%, 07/25/24 1,037,413
1,289,159 Ryland Acceptance Corp. IV 28 1,
11.500%, 12/25/16 1,401,860
592,528 Ryland Mortgage Securities Corp.
1993-3 2E, 6.713%, 08/25/08 594,039
1,554,759 Ryland Mortgage Securities Corp.
III 1992-D 1A (FRN), 7.963%, 09/25/22 1,584,153
341,117 SLH Mortgage Trust 1990-1 G,
9.600%, 03/25/21 346,571
------------
9,440,430
------------
U.S. Agency
Mortgage-Backed 176,000 Fannie Mae 1993-202 SJ,
--13.49% 9.000%, 11/25/23 170,423
1,500,000 Fannie Mae 1993-206 SD,
10.000%, 11/25/23 1,454,532
703,145 Fannie Mae 1997-37 Z, 9.000%, 06/18/27 704,745
1,495,136 Freddie Mac 1164 O (IO),
6.391%, 11/15/06 230,251
941,108 Freddie Mac 1933 V, 8.000%, 11/15/25 946,773
300,000 Freddie Mac 1950 SM,
16.500%, 04/15/27 297,243
650,000 Freddie Mac 1963 SB,
15.600%, 06/15/27 651,219
460,749 Freddie Mac Gold 21 SG, 9.386%, 10/25/23 467,356
617,868 Freddie Mac Gold 41 ZB, 8.250%, 04/25/24 614,933
91,634 Government National Mortgage Association
1996-20 G, 7.500%, 08/20/19 93,443
556,264 Government National Mortgage Association
Pool 2286, 8.500%, 09/20/26 578,514
92,394 Government National Mortgage Association
Pool 2326, 8.500%, 11/20/26 96,090
1,125,670 Government National Mortgage Association
Pool 2345, 8.500%, 12/20/26 1,170,696
------------
7,476,218
------------
TOTAL MORTGAGE-BACKED 16,916,648
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENTS--5.07%
U.S. Treasury $2,500,000 U.S. Treasury Notes, 6.500%, 05/31/02 $ 2,549,220
- --5.07% 250,000 U.S. Treasury Notes, 6.750%, 08/15/26 259,609
-----------
2,808,829
-----------
TOTAL BONDS
(Cost $40,928,140) 41,264,840
-----------
CASH EQUIVALENTS--24.58%
Commercial 700,000 American Bankers Insurance Group,
Paper--24.58% 5.720%, 10/16/97 698,332
1,645,000 Boston Scientific Corp.,
5.760%, 10/17/97 1,640,789
800,000 Cox Communications, Inc.,
5.700%, 10/24/97 797,087
1,000,000 CSX Corp., 5.700%, 11/03/97 994,775
1,500,000 Green Tree Financial Corp.,
5.680%, 10/27/97 1,493,847
900,000 Houston Industries, Inc.,
5.730%, 10/09/97 898,854
430,000 Kerr-McGee Credit Corp.,
5.800%, 10/24/97 428,407
2,200,000 Levi Strauss & Co., 5.750%, 11/14/97 2,184,539
1,500,000 Occidental Petroleum Corp.,
5.700%, 10/21/97 1,495,250
1,500,000 Texas Utilities Co., 5.720%, 10/15/97 1,496,663
1,500,000 Whirlpool Corp., 5.700%, 11/12/97 1,490,025
-----------
TOTAL CASH EQUIVALENTS
(Cost $13,618,568) 13,618,568
-----------
TOTAL INVESTMENTS--99.04%
(Cost $54,546,708*) 54,883,408
-----------
CASH AND OTHER ASSETS,
LESS LIABILITIES--0.96% 533,825
-----------
NET ASSETS--100.00% $55,417,233
===========
Notes :
* Cost for Federal income tax purposes is $54,546,708 and net unrealized
appreciation consists of:
Gross unrealized appreciation $410,691
Gross unrealized depreciation (73,991)
--------
Net unrealized appreciation 336,700
========
(FRN): Floating rate note -- The rate disclosed is that in effect at
September 30, 1997.
(IO): Interest only
(MTN): Medium term note
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN WEST FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
(UNAUDITED)
TOTAL RETURN LOW DURATION
BOND FUND BOND FUND
------------ ------------
<S> <C> <C>
ASSETS:
Investments, at value (Cost $14,748,417 and
$54,546,708, respectively) (Note 2) $14,955,016 $54,883,408
Cash and cash equivalents (Note 2) 127,844 --
Dividends and interest receivable 186,418 552,842
Receivable for securities sold 322,774 --
Deferred organizational costs (Note 2) 34,076 34,076
Due from Adviser (Note 4) 16,889 --
Other assets 15,745 15,745
----------- -----------
Total assets 15,658,762 55,486,071
----------- -----------
LIABILITIES:
Payable for securities purchased 821,454 --
Due to Adviser -- 8,632
Accrued expenses 26,853 24,174
Other liabilities -- 36,032
----------- -----------
Total liabilities 848,307 68,838
----------- -----------
Net assets $14,810,455 $55,417,233
=========== ===========
NET ASSETS CONSIST OF:
Common stock, unlimited shares authorized, $0.01 par value,
1,420,431 and 5,451,362 shares outstanding, respectively $14,539,265 $54,980,468
Accumulated undistributed net realized gain on investments 64,591 100,065
Net unrealized appreciation on investments 206,599 336,700
----------- -----------
$14,810,455 $55,417,233
=========== ===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $10.43 $10.17
====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN WEST FUNDS
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997*
(UNAUDITED)
TOTAL RETURN LOW DURATION
BOND FUND BOND FUND
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 352,751 $ 1,235,664
----------- -----------
Total investment income 352,751 1,235,664
----------- -----------
EXPENSES:
Investment advisory fees (Note 4) 24,657 81,734
Transfer agent fees 7,546 8,384
Administration fees 15,719 17,466
Registration and filing fees 11,550 11,902
Reports to shareholders 2,836 2,927
Custodian fees 8,551 9,501
Accounting services 11,108 12,342
Pricing fees 1,106 3,073
Legal fees 4,567 4,830
Insurance expenses 4,132 4,132
Trustees' fees and expenses 4,111 4,347
Auditing and tax consulting fees 4,567 4,830
Amortization of organizational expenses (Note 2) 3,526 3,526
Miscellaneous expenses 3,654 3,864
----------- -----------
Total operating expenses 107,630 172,858
----------- -----------
Expenses waived and reimbursed (Note 4) (78,490) (74,096)
----------- -----------
Net expenses 29,140 98,762
----------- -----------
Net investment income 323,611 1,136,902
----------- -----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 64,591 100,065
Net change in unrealized appreciation
on investments 206,599 336,700
----------- -----------
Net realized and unrealized gain on investments 271,190 436,765
----------- -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 594,801 $ 1,573,667
=========== ===========
* The Funds commenced operations on March 31, 1997.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN WEST FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
TOTAL RETURN LOW DURATION
BOND FUND BOND FUND
------------------ ------------------
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
(UNAUDITED) (UNAUDITED)
------------------ ------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 323,611 $ 1,136,902
Net realized gain on investments 64,591 100,065
Net change in unrealized appreciation
on investments 206,599 336,700
------------ ------------
Net increase in net assets resulting
from operations 594,801 1,573,667
------------ ------------
DISTRIBUTIONS
Dividends to shareholders from net
investment income (323,611) (1,136,902)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 15,285,025 62,395,891
Shares issued in reinvestment of dividends
and distributions 161,532 802,837
Cost of shares redeemed (957,292) (8,268,260)
------------ ------------
Net increase in net assets resulting from capital
share transactions 14,489,265 54,930,468
------------ ------------
Net increase in net assets 14,760,455 55,367,233
Net assets at beginning of period 50,000 50,000
------------ ------------
Net assets at end of period (including
undistributed net investment income
of $0 and $0, respectively) $ 14,810,455 $ 55,417,233
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN WEST FUNDS
FINANCIAL HIGHLIGHTS
THE TABLE BELOW SETS FORTH FINANCIAL DATA FOR ONE SHARE OF
CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD PRESENTED.
TOTAL RETURN LOW DURATION
BOND FUND BOND FUND
------------------ ------------------
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1997* SEPTEMBER 30, 1997*
(UNAUDITED) (UNAUDITED)
------------------ ------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
------ ------
Income from Investment Operations:
Net investment income 0.34 0.31
Net realized and unrealized gain on investments 0.43 0.17
------ ------
Total from Investment Operations 0.77 0.48
------ ------
Less Distributions:
Dividends from net investment income (0.34) (0.31)
------ ------
Total Distributions (0.34) (0.31)
------ ------
Net Asset Value, End of Period $10.43 $10.17
====== ======
Total Return (not annualized) 7.76% 4.88%
Ratios/Supplemental Data:
Net Assets, end of period (in thousands) $14,810 $55,417
Ratio of Expenses to Average Net Assets
Before expense reimbursement 2.40%+ 1.02%+
After expense reimbursement 0.65%+ 0.58%+
Ratio of Net Income to Average Net Assets
Before expense reimbursement 5.46%+ 6.24%+
After expense reimbursement 7.21%+ 6.68%+
Portfolio Turnover Rate 112% 110%
Average Commission Rate Paid n/a n/a
<FN>
* The Funds commenced operations on March 31, 1997.
+ Annualized
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
METROPOLITAN WEST FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. SUMMARY OF ORGANIZATION
The Metropolitan West Funds (the "Trust") is an open-end management
investment company organized as a Delaware business trust on December 9, 1996
under the Investment Company Act of 1940, as amended. The Trust currently
consists of three separate diversified portfolios (each a "Fund" and
collectively, the "Funds"): Metropolitan West Total Return Bond Fund (the
"Total Return Bond Fund"), Metropolitan West Low Duration Bond Fund (the "Low
Duration Bond Fund") and the Metropolitan West Short-Term Investment Fund
(the "Short-Term Investment Fund"). The Total Return Bond Fund and Low
Duration Bond Fund commenced investment operations on March 31, 1997. The
Short-Term Investment Fund was not operational at September 30, 1997.
The Total Return Bond Fund seeks to maximize long-term total return. The Fund
invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of two to eight years. The
dollar-weighted average maturity will exceed its portfolio duration.
The Low Duration Bond Fund and Short-Term Investment Fund seek to maximize
current income, consistent with preservation of capital. Capital appreciation
is a secondary consideration of the Funds. The Funds invest in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of one to three years in the Low Duration Bond Fund and up to one
year in the Short-Term Investment Fund. The dollar-weighted average maturity
for each Fund will exceed its portfolio duration.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds, except for the Short-Term Investment Fund, in the
preparation of their financial statements in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures. Actual results could differ from those estimates.
SECURITY VALUATION:
Fixed-income securities which are traded on a national securities exchange
will be valued at the last sale price or, if there was no sale on such day,
at the average of readily available closing bid and asked prices on such
exchange. However,
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities with a demand feature exercisable within one to seven days are
valued at par. Prices for fixed-income securities may be based on quotations
received from one or more market-makers in the securities, or on evaluations
from pricing services. Debt securities which mature in less than 60 days are
valued at amortized cost (unless the Board of Trustees determines that this
method does not represent fair value), if their original maturity was 60 days
or less or by amortizing the value as of the 61st day prior to maturity, if
their original term to maturity exceeded 60 days. Securities and other assets
for which market quotations are not readily available are valued at their
fair value as determined by the Adviser under guidelines established by and
under the general supervision and responsibility of the Board of Trustees.
MORTGAGE-RELATED SECURITIES:
The Funds may invest in mortgage pass-through securities which represent
interests in pools of mortgages in which payments of both principal and
interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the
issuer or guarantor of the securities). Mortgage pass-through securities
differ from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates.
Payment of principal and interest on some mortgage-related securities (but
not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA) or by agencies or instrumentalities of the U. S.
Government (in the case of securities guaranteed by FNMA or the FHLMC, which
are supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities created
by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers) may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
The Funds may also invest in Collateralized Mortgage Obligations (CMOs). CMOs
are debt obligations collateralized by residential or commercial mortgage
loans or residential or commercial mortgage pass-through securities. Interest
and prepaid principal are generally paid monthly. CMOs may be collateralized
by whole mortgage loans or private mortgage pass-through securities but are
more
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC or FNMA. The issuer of a series of CMOs may elect
to be treated for tax purposes as a Real Estate Mortgage Investment Conduit
("REMIC"). CMOs are structured into multiple classes, each bearing a
different stated maturity. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after shorter classes have
been retired. An investor may be partially protected against a sooner than
desired return of principal because of the sequential payments.
The Funds may invest in stripped mortgage-backed securities issued by the
U.S. Government, its agencies and instrumentalities. Stripped mortgage-backed
securities are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. In certain cases, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). During the six months ended
September 30, 1997, certain interest only securities were purchased as part
of the overall mortgage portfolio holdings. The yield to maturity on IOs is
sensitive to the rate of principal repayments (including prepayments) on the
related underlying mortgage assets, and principal payments may have a
material effect on yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Fund may not
fully recoup its initial investment in IOs. Such securities will be
considered liquid only if so determined in accordance with guidelines
established by the Trustees. The Funds also may invest in stripped
mortgage-backed securities that are privately issued. These securities will
be considered illiquid for purposes of each Fund's limit on illiquid
securities.
INVESTMENT INCOME AND SECURITIES TRANSACTIONS:
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily. Securities transactions are accounted for on the date
securities are purchased or sold. The cost of securities sold is determined
using the first-in-first-out method.
ORGANIZATION COSTS:
Organization costs are being amortized on a straight-line basis over five
years from each Fund's respective commencement of operations.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DISTRIBUTIONS TO SHAREHOLDERS:
Each Fund expects to declare dividends daily and pay them monthly to
shareholders. Distributions of net capital gains, if any, will be made at
least annually. The Board of Trustees may determine to declare dividends and
make distributions more or less frequently.
FEDERAL INCOME TAXES:
The Funds have elected and qualify to be treated as regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). Each Fund is taxed as a separate entity under Subchapter M and
must qualify on a separate basis. If so qualified, each Fund will not be
subject to federal income taxes on its net investment income and capital
gains, if any, realized during any fiscal year which it distributes to its
shareholders provided that at least 90% of its net investment income earned
in the fiscal year is distributed. All dividends from net investment income
together with distributions of short-term capital gains will be taxable as
ordinary income to the shareholders even though paid in additional shares.
Any net capital gains ("capital gains distributions") distributed to
shareholders are taxable as mid-term or long-term capital gains to the
shareholders regardless of the length of time a shareholder has owned his
shares. The Funds have complied and intend to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies. Therefore, no Federal income tax provision is required.
CASH AND CASH EQUIVALENTS:
The Funds have defined cash and cash equivalents as cash in interest bearing
and non-interest bearing accounts.
3. SECURITIES TRANSACTIONS
PURCHASES AND SALES:
Investment transactions for the six months ended September 30, 1997,
excluding temporary short-term investments, were as follows:
PURCHASES PROCEEDS FROM SALES
----------- -------------------
Total Return Bond Fund $24,197,197 $11,176,308
Low Duration Bond Fund 78,055,909 34,881,874
The Funds invest excess cash in interest bearing deposits at The Bank of New
York.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT ADVISORY SERVICES
Under the Investment Advisory Agreement relating to the Funds, Metropolitan
West Asset Management, LLC (the "Adviser"), a registered investment adviser,
provides the Funds with investment management services. As compensation for
these services, the Adviser charges the Total Return Bond Fund and the Low
Duration Bond Fund a fee, computed daily and payable monthly, at an annual
rate of 0.55% and 0.48%, respectively, of each Fund's average daily net
assets. Certain officers and trustees of the Funds are also officers and
directors of the Adviser. All officers serve without direct compensation from
the Funds. Investment advisory fees and other transactions with affiliates,
for the six months ended September 30, 1997, were as follows:
EXPENSES
INVESTMENT VOLUNTARY WAIVED AND
ADVISORY EXPENSE ADVISORY REIMBURSED DUE FROM
FEE RATE LIMITATION FEES BY ADVISER ADVISER
--------- ----------- -------- ---------- ----------
Total Return Bond Fund 0.55% 0.65% $24,657 $78,490 $16,889
Low Duration Bond Fund 0.48 0.58 81,734 74,096 --
5. CAPITAL SHARE TRANSACTIONS:
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with a par value of $0.01 per share. Transactions in shares of
beneficial interest were as follows:
<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND LOW DURATION BOND FUND
------------------------ ------------------------
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
(UNAUDITED) (UNAUDITED)
------------------------ ------------------------
<S> <C> <C>
Increase in Fund shares:
Shares outstanding at
beginning of period 5,000 5,000
Shares sold 1,493,052 6,185,618
Shares issued through
reinvestment of dividends 15,597 79,294
Shares redeemed (93,218) (818,550)
--------- ---------
Net increase in Fund shares 1,415,431 5,446,362
--------- ---------
Shares outstanding at end of period 1,420,431 5,451,362
========= =========
</TABLE>
17
<PAGE>
BOARD OF TRUSTEES
Scott B. Dubchansky
Keith T. Holmes
Martin Luther King III
James M. Lippman
Daniel D. Villanueva
OFFICERS
Scott B. Dubchansky
Chairman of the Board, President and
Principal Executive Officer
Richard H. Schweitzer
Treasurer, Principal Accounting and Financial Officer
Edward Curiel
Secretary and Assistant Treasurer
ADVISER: AUDITORS:
Metropolitan West Asset Management, LLC Deloitte & Touche LLP
10880 Wilshire Boulevard, Suite 2020 1000 Wilshire Boulevard, Suite 1500
Los Angeles, CA 90024 Los Angeles, CA 90017
CUSTODIAN: DISTRIBUTOR:
The Bank of New York FPS Broker Services, Inc.
48 Wall Street 3200 Horizon Drive, P.O. Box 61503
New York, NY 10286 King of Prussia, PA 19406
TRANSFER AGENT: LEGAL COUNSEL:
FPS Services, Inc. Paul, Hastings, Janofsky & Walker LLP
3200 Horizon Drive, P.O. Box 61503 345 California Street, 29th Floor
King of Prussia, PA 19406 San Francisco, CA 94104
[Logo Omitted]
MET WEST
METROPOLITAN WEST
For Additional Information about the
Metropolitan West Funds call:
(310) 446-7727 or
(800) 241-4671 (toll-free)
THIS REPORT IS SUBMITTED FOR GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
FUNDS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE
FUNDS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS WHICH INCLUDES
DETAILS REGARDING THE FUNDS' OBJECTIVES, POLICIES, EXPENSES AND OTHER
INFORMATION.
