<PAGE> 1
[METROPOLITAN WEST LOGO BLACK]
[METROPOLITAN WEST LOGO RED]
METROPOLITAN WEST FUNDS
TOTAL RETURN BOND FUND
LOW DURATION BOND FUND
ALPHATRAK 500 FUND
SEMI-ANNUAL REPORT
(Unaudited)
[DINGBAT]
September 30, 1998
<PAGE> 2
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 and the Metropolitan West AlphaTrak 500
Fund, our new enhanced equity index fund, for the period ending September 30,
1998.
This period, in particular the weeks following Russia's decision to default on
its sovereign debt obligations, has been marked by extreme market volatility.
Russia's decision set in motion a series of events which led to a sharp decline
in equity valuations across the globe with a dramatic increase in perceived risk
associated with all credit sensitive fixed income products.
In the wake of investor flight from assets with exposure to the possibility of a
global financial meltdown, "panic" buying of United States Treasuries ensued.
This "flight to quality" rally caused Treasury prices to outperform all other
sectors of the bond market. Due to the large component of U.S. Governments in
the indices used by the Low Duration and Total Return Funds, these portfolios
lagged behind the dramatic price appreciation of the indices. Prospectively, we
would expect better performance relative to the benchmark indices as the markets
stabilize.
The beginning of the fourth quarter of 1998 has brought significantly reduced
investor fear of imminent market disaster. Equity markets have rebounded to
within 5% of their all time highs. Bond market investors have renewed their
interest in credit sensitive areas as the Federal Reserve has lowered the
Federal Funds rate three times to its current level of 4.75%. Looking forward,
investors with a long term horizon should be able to enhance their returns by
opportunistically increasing expose to high quality corporate and mortgage
securities.
This period also marks the first full quarter for the Metropolitan West
AlphaTrak 500 Fund. This Fund seeks to achieve a long term rate of return in
excess of the Standard & Poor's 500 Index*. This S & P Index consists of 500
stocks chosen by Standard & Poor's for market size, liquidity and industry group
representation. This Fund will recognize most gains (or losses) in each taxable
year and is most suitable for tax-deferred or non-taxable investors.
We look forward to communicating with you in the future. As always, please feel
free to contact us directly at 310-446-7727 if you have any comments, questions,
or suggestions.
Sincerely,
[/s/ Scott Dubchansky]
Scott Dubchansky
President and 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 index.
The Metropolitan West Funds are distributed by FPS Broker Services, Inc.
To be preceded or accompanied by a prospectus. DFU 11/98
- --------------------------------------------------------------------------------
1
<PAGE> 3
TOTAL RETURN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS--89.32%
CORPORATES--33.97%
Banks--16.03% $ 250,000 Capital One Bank, 8.13%, 03/01/00 $ 257,598
200,000 Capital One Bank, 7.35%, 06/20/00 205,056
500,000 Den norske Bank ASA (FRN),
5.92%, 08/29/49(2) 385,325
1,000,000 Den norske Bank ASA (FRN),
6.06%, 11/29/49(2) 745,000
1,000,000 Fokus Bank ASA (FRN),
6.26%, 03/29/49(2) 946,100
770,000 Hong Kong & Shanghai Bank (FRN),
6.06%, 08/29/49(2) 477,593
250,000 MBNA Corp. (FRN) (MTN),
6.24%, 02/06/01 250,401
1,500,000 MBNA Corp. (FRN) (MTN),
6.04%, 06/17/02 1,475,550
1,085,000 MBNA Corp. (FRN) (MTN),
6.29%, 05/23/03 1,088,464
600,000 Midland Bank PLC (FRN),
6.00%, 06/29/49(2) 428,730
1,300,000 Midland Bank PLC (FRN),
6.00%, 09/29/49(2) 927,940
400,000 Okobank (FRN), 6.19%, 09/29/49(2) 388,440
400,000 Skandinavinska Enskilda (FRN)
(MTN), 6.69%, 06/29/49(2) 390,170
500,000 Union Bank of Norway (FRN),
7.31%, 12/29/49(2) 502,825
-----------
8,469,192
-----------
Brokerage Services 800,000 Lehman Brothers Holdings, Inc.
- --5.59% (FRN) (MTN), 6.29%, 03/17/07(2) 784,880
1,000,000 Merrill Lynch Co, Inc. 6.50%,
07/15/18 976,800
1,000,000 Merrill Lynch Co, Inc. 6.75%,
06/01/28 962,689
230,000 Salomon Smith Barney Holdings,
Inc. (FRN) (MTN), 5.58%, 04/05/99 230,146
-----------
2,954,515
-----------
Electric Utilities 300,000 Alabama Power Co., 9.00%,
12/01/24(2) 331,000
- --2.48% 400,000 Arkansas Power & Light Co.,
8.75%, 03/01/26(2) 450,014
500,000 Long Island Lighting Co.,
8.90%, 07/15/19(2) 530,481
-----------
1,311,495
-----------
Finance--0.74% 400,000 AT&T Capital Corp. (FRN) (MTN),
6.12%, 12/05/00 392,440
-----------
Industrial--5.38% 900,000 Cemex S.A., 10.75%, 07/15/00 887,490
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
2
<PAGE> 4
TOTAL RETURN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATES (CONTINUED)
$ 390,000 Cemex S.A., 8.50%, 08/31/00 $ 369,447
600,000 La Quinta Inns (MTN), 7.11%,
10/17/01 628,445
250,000 RJR Nabisco, Inc., 8.30%,
04/15/99 251,103
100,000 RJR Nabisco, Inc., 8.00%,
01/15/00 100,482
600,000 RJR Nabisco, Inc., 8.00%,
07/15/01 607,446
-----------
2,844,413
-----------
Sovereign--3.75% 2,491,000 Republic of Argentina (FRN),
6.19%, 03/31/05(2) 1,983,459
-----------
TOTAL CORPORATES 17,955,514
-----------
MORTGAGE-BACKED--21.95%(3)
Non-Agency 99,222 Blackrock Capital Finance L.P.
Mortgage-Backed 1997-R2 AP 144A (FRN),
- --14.51% 7.22%, 12/25/35 104,024
5,144 Citicorp Mortgage Securities,
Inc. 1992-20 A4, 7.50%, 01/25/07 5,130
120,288 Collateralized Mortgage
Obligation Trust 57 D, 9.90%,
02/01/19 130,275
2,205,708 DLJ Mortgage Acceptance Corp.
1994-Q8 IIS (IO), 1.83%, 05/25/24 100,042
500,000 GE Capital Mortgage Services,
Inc. 1994-6 A11, 6.50%, 04/25/24 488,260
475,286 GE Capital Mortgage Services,
Inc. 1998-10 1A6, 7.00%, 05/25/28 478,182
300,000 Independent National Mortgage
Corp. 1995-N A5, 7.50%, 10/25/25 308,568
7,643,216 Nomura Asset Securities Corp.
1994-4A 2IO (IO), 1.21%, 09/25/24 209,906
1,131,454 OCWEN Residential MBS Corp.
1998-R2 AP 144A, 5.32%, 11/25/34 1,139,770
163,955 Residential Funding Mortgage
Securities I 1993-S42 A10,
8.30%, 10/25/08 182,452
549,263 Residential Funding Mortgage
Securities I 1993-S45 A15,
6.50%, 12/25/23 567,251
679,262 Resolution Trust Corp. 1994-C1 F,
8.00%, 06/25/26 706,645
184,672 Resolution Trust Corp. 1995-2 B6,
6.75%, 05/25/29 186,389
2,500,000 Ryland Mortgage Securities Corp.
III 1992-A 1C, 8.26%, 03/29/30 2,553,515
282,799 Ryland Mortgage Securities Corp.
1991-18 4A, 14.00%, 11/25/31 300,103
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
TOTAL RETURN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE-BACKED (CONTINUED)
$ 150,000 Structured Asset Securities Corp.
1995-3B 2A1, 6.50%, 01/28/24 $ 152,389
259,100 Structured Mortgage Asset
Residential Trust 1991-7 I (IO),
14.72%, 12/25/22 56,017
-----------
7,668,918
-----------
U.S. Agency 323,000 Fannie Mae 1992-200 MC,
Mortgage-Backed 7.50%, 08/25/22 320,174
- --7.44% 495,926 Fannie Mae 1993-189 SB,
6.36%, 10/25/23 487,942
13,820,064 Fannie Mae 1993-199 SD (IO),
0.86%, 10/25/23 297,961
467,744 Fannie Mae 1993-221 SD,
9.00%, 03/25/08 473,315
388,000 Fannie Mae 1993-251 C,
6.50%, 09/25/23 391,442
2,949,849 Fannie Mae 1994-56 TA,
6.50%, 04/25/17 138,230
3,000,000 Fannie Mae 1997-44 SB (IO),
2.09%, 06/25/08 180,411
1,071,614 Freddie Mac 1164 0 (IO),
6.36%, 11/15/06 97,154
661,600 Freddie Mac 1421 NB,
8.37%, 11/15/22 660,965
172,595 Freddie Mac 1482 MB,
7.59%, 03/15/23 173,027
5,680,589 Freddie Mac 1499 G,
7.00%, 02/15/19 262,386
227,786 Freddie Mac 1552 Q,
13.75%, 10/15/22 229,472
7,417,794 Freddie Mac 2030 ST (IO),
3.06%, 05/15/26 221,236
-----------
3,933,715
-----------
TOTAL MORTGAGE-BACKED 11,602,633
-----------
U.S. TREASURY NOTES--33.40%
1,300,000 U.S. Treasury Notes, 6.25%,
10/31/01 1,369,064
4,000,000 U.S. Treasury Notes, 7.25%,
05/15/04 4,568,752
680,000 U.S. Treasury Notes, 7.50%,
02/15/05 797,301
3,420,000 U.S. Treasury Notes, 6.63%,
05/15/07 3,941,553
900,000 U.S. Treasury Notes, 8.13%,
08/15/19 1,235,532
4,677,000 U.S. Treasury Notes, 6.75%,
08/15/26 5,743,945
-----------
17,656,147
-----------
TOTAL BONDS
(Cost $46,616,081) 47,214,294
-----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 6
TOTAL RETURN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS--10.80%
Commercial Paper $ 2,470,000 Ford Motor Credit Co. 5.52%,
- --10.50% 10/08/98 $ 2,467,349
325,000 Lockheed Martin Corp.
5.65%, 10/21/98 323,980
2,275,000 Lockheed Martin Corp.
5.67%, 10/21/98 2,267,834
494,000 Raytheon Co. 5.69%, 10/22/98 492,360
-----------
5,551,523
-----------
Money Market RIC 160,000 J P Morgan Institutional Prime
- --0.30% Money Market 160,000
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $5,711,523) 5,711,523
-----------
TOTAL INVESTMENTS--100.12%
(Cost $52,327,604)(1) 52,925,817
LIABILITIES, LESS CASH AND
OTHER ASSETS--(0.12%) (65,631)
-----------
NET ASSETS--100.00% $52,860,186
===========
</TABLE>
Notes:
(1) Cost for Federal income tax purposes is $52,327,604 and net unrealized
appreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $1,527,432
Gross unrealized depreciation (929,219)
----------
Net unrealized appreciation $ 598,213
==========
</TABLE>
(2) Security has an effective maturity date less than the stated maturity date
due to a call feature.
(3) Pass through securities backed by mortgage securities where payment is
periodically made will have an effective maturity date shorter than the
stated maturity date.
The following securities have been determined to be illiquid by the Fund's Board
of Trustees:
<TABLE>
<CAPTION>
DATE OF % OF
SECURITY PURCHASE COST TNA
- -------- -------- -------- ----
<S> <C> <C> <C>
DLJ Mortgage Acceptance Corp. 1994-Q8 IIS
(IO) 1.83%, 05/25/24 06/19/97 $120,254 0.23%
Nomura Asset Securities Corp. 1994-4A 2IO
(IO), 1.21%, 09/25/24 08/06/97 322,774 0.61
Structured Mortgage Asset Residential Trust
1991-7 I (IO), 14.72%, 12/25/22 06/25/97 117,773 0.22
-------- ----
$560,801 1.06%
======== ====
</TABLE>
(FRN): Floating rate note -- The rate disclosed is that in effect at September
30, 1998.
(IO): Interest only
(MTN): Medium term note
See accompanying notes to financial statements.
5
<PAGE> 7
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS--76.62%
Asset-Backed $ 53,053 Contimortgage Home Equity Loan
Securities--1.47% Trust 1994-4 A6, 8.27%,
12/15/24(2) $ 56,108
1,100,000 Contimortgage Home Equity Loan
Trust 1997-2 A5, 6.97%,
10/15/13(2) 1,135,530
214,701 First Alliance Mortgage Loan
Trust 1996-2 A1, 7.23%,
12/20/19(2) 215,775
199,126 Olympic Automobile Receivables
Trust 1994-B A2, 6.85%,
06/15/01(2) 199,970
169,079 UCFC Home Equity Loan 1994-B1
A4, 7.45%, 06/10/11(2) 173,715
903,589 UCFC Home Equity Loan 1995-D1
A2, 6.20%, 03/10/14(2) 908,477
------------
2,689,575
------------
CORPORATES--38.63%
Banks--17.18% 1,000,000 Bergen Bank ASA (FRN), 5.81%,
08/29/49(2) 746,650
500,000 Capital One Bank, 7.20%,
07/19/99 504,982
675,000 Capital One Bank, 8.13%,
03/01/00 695,514
820,000 Capital One Bank, 7.35%,
06/20/00 840,730
5,600,000 Den norske Bank ASA (FRN),
5.92%, 08/29/49(2) 4,315,640
3,500,000 Den norske Bank ASA (FRN),
6.06%, 11/29/49(2) 2,607,500
5,060,000 Fokus Bank ASA (FRN), 6.26%,
03/29/49(2) 4,787,266
2,965,000 Hong Kong & Shanghai Bank
(FRN), 6.06%, 08/29/49(2) 1,839,041
800,000 MBNA Corp., 6.50%, 09/15/00 814,313
1,175,000 MBNA Corp. (FRN), 5.88%,
09/13/01 1,175,306
2,000,000 MBNA Corp. (FRN), 5.85%,
06/17/02 1,967,400
1,500,000 MBNA Corp. (FRN), 6.06%,
09/09/02 1,478,588
5,100,000 Midland Bank PLC (FRN), 6.00%,
06/29/49(2) 3,644,205
5,000,000 Midland Bank PLC (FRN), 5.69%,
09/29/49(2) 3,569,000
1,300,000 Okobank (FRN), 6.09%,
09/29/49(2) 1,262,430
150,000 Okobank (FRN), 6.75%,
09/29/49(2) 151,350
1,100,000 Skandinavinska Enskilda (FRN),
6.44%, 06/29/49(2) 1,072,968
------------
31,472,883
------------
Brokerage 3,000,000 Lehman Brothers Holdings, Inc.
Services--5.83% (FRN), 6.29%, 01/30/02 2,914,800
4,000,000 Lehman Brothers Holdings, Inc.
(FRN), 6.10%, 03/17/07(2) 3,924,400
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 8
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATES (CONTINUED)
Brokerage $ 1,500,000 Merrill Lynch Co, Inc.
Services 6.75%, 06/01/28 $ 1,444,034
(continued) 100,000 Salomon Smith Barney Holdings,
Inc. (FRN), 5.97%, 12/01/98 100,168
1,000,000 Salomon Smith Barney Holdings,
Inc. (FRN) (MTN), 5.62%,
02/15/99 1,001,558
800,000 Salomon Smith Barney Holdings,
Inc. (FRN) (MTN), 5.62%,
02/15/99 801,609
500,000 Salomon Smith Barney Holdings,
Inc. (FRN) (MTN), 5.50%,
05/20/99 499,096
------------
10,685,665
------------
Electric Utilities 600,000 Arkansas Power & Light Co.,
- --3.18% 8.75%, 03/01/26(2) 675,020
1,400,000 Long Island Lighting Co.,
8.90%, 07/15/19(2) 1,485,347
1,700,000 New Orleans Public Service,
Inc. 8.00%, 03/01/06(2) 1,804,890
1,800,000 System Energy Resources 7.80%,
08/01/00 1,854,070
------------
5,819,327
------------
Finance--2.14% 100,000 American Bankers Insurance
Group, Inc. (FRN), 6.34%,
04/12/00 100,614
1,500,000 Associates Corp. NA 6.20%,
05/16/05 1,569,612
500,000 AT&T Capital Corp., 5.85%,
01/05/99 500,460
1,160,000 AT&T Capital Corp. (MTN),
6.23%, 09/24/99 1,166,537
500,000 AT&T Capital Corp. (FRN) (MTN),
5.48%, 12/05/00 490,550
100,000 Heller Financial, Inc. (FRN)
(MTN), 5.31%, 04/21/99 99,898
------------
3,927,671
------------
Industrial--6.91% 4,150,000 Cemex S.A., 10.75%, 07/15/00 4,092,315
3,300,000 La Quinta Inns (MTN), 7.11%,
10/17/01 3,456,450
3,000,000 Pennzoil Co., 10.63%,
06/01/01(2) 3,070,392
1,000,000 RJR Nabisco, Inc., 7.63%,
09/01/00 1,040,945
1,000,000 TCI Communications, Inc., (FRN)
(MTN), 5.17%, 09/11/00 998,386
------------
12,658,488
------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATES (CONTINUED)
Sovereign--3.39% $ 7,802,000 Republic of Argentina (FRN),
6.19%, 03/31/05(2) $ 6,212,342
------------
TOTAL CORPORATES 70,776,376
------------
MORTGAGE-BACKED--35.44%
Non-Agency 396,886 Blackrock Capital Finance L.P.
Mortgage-Backed 1997-R2 AP144A (FRN), 7.22%,
- --11.95% 12/25/35 416,095
310,588 Capstead Securities Corp. IV
1992-11 IB, 7.88%, 08/25/22 312,408
115,842 Citicorp Mortgage Securities,
Inc. 1988-16 A1, 10.00%,
11/25/18 124,917
66,407 Citicorp Mortgage Securities,
Inc. 1990-D A1, 9.50%, 10/25/05 70,098
188,543 Citicorp Mortgage Securities,
Inc. 1991-5 A (FRN), 6.14%,
05/25/21 151,305
51,438 Citicorp Mortgage Securities,
Inc. 1992-20 A4, 7.50%,
01/25/07 51,304
253,150 Citicorp Mortgage Securities,
Inc. 1994-3 A12, 9.00%,
02/25/24 282,974
3,146,521 CMC Securities Corp. II 1993-2G
A2, 7.18%, 11/25/23 3,165,715
391,643 Countrywide Funding Corp.
1993-11 A12, 8.50%, 02/25/09 410,858
100,000 Countrywide Funding Corp.
1994-7 A7, 6.50%, 03/25/24 102,359
1,182,729 DLJ Mortgage Acceptance Corp.
1993-Q18 SC (FRN) (IO), 2.94%,
01/25/24 42,490
13,704,666 DLJ Mortgage Acceptance Corp.
1994-Q8 IIS (IO), 1.83%,
05/25/24 621,589
26,965 Drexel Burnham Lambert CMO
Trust H 3, 8.50%, 07/01/14 27,013
604,692 FDIC REMIC Trust 1994-C1 2A2,
7.85%, 09/25/25 612,904
4,045,742 GE Capital Mortgage Services,
Inc. 1992-12F F1, 7.00%,
10/25/07 4,116,259
974,707 GE Capital Mortgage Services,
Inc. 1996-4 A5, 7.00%, 03/25/26 1,006,414
1,425,858 GE Capital Mortgage Services,
Inc. 1998-10 1A6, 7.00%,
05/25/28 1,434,547
109,823 Guardian Savings & Loan
Association 1988-2 A, 6.92%,
09/25/18 110,410
79,031 Guardian Savings & Loan
Association 1988-5 A, 6.98%,
12/25/18 78,778
500,000 Independent National Mortgage
Corp. 1995-N A5, 7.50%,
10/25/25 514,280
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 10
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE-BACKED (CONTINUED)
Non-Agency $ 1,835,403 Norwest Asset Securities Corp.
Mortgage-Backed 1998-15 A15, 8.00%, 07/25/28 $ 1,895,476
(continued) 500,000 Residential Funding Mortgage
Securities I 1993-S26 A9,
7.50%, 07/25/23 517,930
17,290 Resolution Trust Corp. 1992-C6
B, 7.70%, 07/25/24 17,595
1,086,820 Resolution Trust Corp. 1994-C1
F, 8.00%, 06/25/26 1,130,632
789,317 Ryland Acceptance Corp. IV 28
1, 11.50%, 12/25/16 861,218
261,862 Ryland Mortgage Securities
Corp. 1993-3 2E, 6.71%,
08/25/08 265,190
1,210,052 Ryland Mortgage Securities
Corp. III 1992-D 1A, 8.00%,
09/25/22 1,266,207
2,080,100 Sears Mortgage Securities
1991-C A, 6.48%, 04/25/29 2,080,329
211,989 SLH Mortgage Trust 1990-1 G,
9.60%, 03/25/21 211,440
------------
21,898,734
------------
U.S. Agency 112,798 Fannie Mae 1990-14 H, 7.95%,
Mortgage-Backed 08/25/19 114,966
- --23.49% 238,175 Fannie Mae 1993-29 SP, 7.48%,
03/25/23 238,437
1,056,056 Fannie Mae 1993-33 ZA, 7.50%,
09/25/21 1,084,760
1,251,433 Fannie Mae 1993-121 SB, 9.54%,
02/25/23 1,345,682
4,210,695 Fannie Mae 1993-189 SB, 6.36%,
10/25/23 4,142,903
176,000 Fannie Mae 1993-202 SJ, 9.00%,
11/25/23 183,355
1,639,000 Fannie Mae 1993-206 SD, 10.00%,
11/25/23 1,736,160
935,488 Fannie Mae 1993-221 SD, 9.00%,
03/25/08 946,630
2,021,484 Fannie Mae 1993-224 SD, 9.40%,
11/25/23 2,107,397
295,866 Fannie Mae 1994-2 SB, 10.00%,
01/25/24 310,683
2,255,334 Fannie Mae 1996-71 S, 10.31%,
01/25/27 2,301,862
15,000,000 Fannie Mae 1997-44 SB (IO),
2.09%, 06/25/08 902,055
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 11
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE-BACKED (CONTINUED)
U.S. Agency $ 3,569,942 Fannie Mae 1997-76 FS,
Mortgage-Backed 6.14%, 09/17/27 $ 3,505,647
(continued) 3,907,660 Fannie Mae 1998-34 AV, 6.50%,
06/18/28 3,951,035
2,281,906 Fannie Mae 1998-41 SA, 10.78%,
11/18/27 2,290,063
1,071,614 Freddie Mac 1164 O (IO), 6.36%,
11/15/06 97,154
642,256 Freddie Mac 1290 H, 7.50%,
06/15/21 663,880
1,396,712 Freddie Mac 1421 NB, 8.37%,
11/15/22 1,395,371
310,671 Freddie Mac 1482 MB, 7.59%,
03/15/23 311,448
200,000 Freddie Mac 1634 SE, 8.80%,
12/15/23 206,796
1,207,143 Freddie Mac 1643 SB, 8.80%,
12/15/23 1,244,190
3,785,769 Freddie Mac 1657 SB, 9.24%,
12/15/23 4,079,166
2,839,161 Freddie Mac 2030 ST (IO),
3.06%, 05/15/26 84,678
998,828 Freddie Mac 2056 ZA, 6.50%,
05/15/17 1,002,244
460,749 Freddie Mac Gold 21 SG, 9.39%,
10/25/23 480,179
42,023 Government National Mortgage
Association 1996-20 G, 7.50%,
08/20/19 42,563
335,362 Government National Mortgage
Association Pool 2020, 8.50%,
06/20/25 354,820
286,840 Government National Mortgage
Association Pool 2286, 8.50%,
09/20/26 301,451
1,416,336 Government National Mortgage
Association Pool 2487, 8.50%,
09/20/27 1,484,504
5,985,011 Government National Mortgage
Association Pool 2631, 7.00%,
08/20/28 6,140,250
------------
43,050,329
------------
TOTAL MORTGAGE-BACKED 64,949,063
------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 12
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENTS--1.08%
U.S. Treasury $ 871,000 U.S. Treasury Notes, 6.63%,
Notes--1.08% 05/15/07 $ 1,003,828
350,000 U.S. Treasury Notes, 8.13%,
08/15/19 480,485
410,000 U.S. Treasury Notes, 6.75%,
08/15/26 503,532
------------
1,987,845
------------
TOTAL BONDS
(Cost $141,458,417) 140,402,859
------------
SHORT TERM INVESTMENTS--22.51%
Commercial 3,250,000 Cox Communications, Inc.,
Paper--22.51% 5.68%, 10/16/98 3,242,308
8,030,000 Ford Motor Credit Co., 5.52%,
10/08/98 8,021,381
6,240,000 General Motor Acceptance Corp.
5.56%, 10/06/98 6,235,181
1,350,000 Lockheed Martin Corp., 5.63%,
10/21/98 1,345,778
150,000 Lockheed Martin Corp., 5.65%,
10/21/98 149,529
5,820,000 Lockheed Martin Corp., 5.67%,
10/21/98 5,801,667
3,540,000 Raytheon Co. 5.67%, 10/22/98 3,528,291
4,950,000 Raytheon Co. 5.69%, 10/22/98 4,933,571
8,000,000 Xerox Credit Corp. 5.52%,
10/09/98 7,990,187
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $41,247,893) 41,247,893
------------
TOTAL INVESTMENTS--99.13%
(Cost $182,706,310)(1) 181,650,752
CASH AND OTHER ASSETS,
LESS LIABILITIES--0.87% 1,597,338
------------
NET ASSETS--100.00% $183,248,090
============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 13
LOW DURATION BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
Notes:
(1) Cost for Federal income tax purposes is $182,706,310 and net unrealized
depreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 2,121,607
Gross unrealized depreciation (3,177,165)
-----------
Net unrealized depreciation $(1,055,558)
===========
</TABLE>
(2) Security has an effective maturity date less than the stated maturity date
due to a call feature.
(3) Pass through securities backed by mortgage securities where payment is
periodically made will have an effective maturity date less than the stated
maturity date.
The following securities have been determined to be illiquid by the Fund's Board
of Trustees:
<TABLE>
<CAPTION>
SECURITY DATE OF PURCHASE COST % OF TNA
-------- ---------------- -------- --------
<S> <C> <C> <C>
DLJ Mortgage Acceptance Corp.
1993-Q18 SC (FRN) (IO), 2.94%,
01/25/24 09/30/97 $ 53,526 0.03%
DLJ Mortgage Acceptance Corp.
1994-Q8 IIS (IO), 1.83%,
05/25/24 06/19/97 734,907 0.40
-------- ----
$788,433 0.43%
======== ====
</TABLE>
(FRN): Floating rate note -- The rate disclosed is that in effect at September
30, 1998.
(IO): Interest only
(MTN): Medium term note
See accompanying notes to financial statements.
12
<PAGE> 14
ALPHATRAK 500 FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS--91.05%
Asset-Backed $ 20,882 Nationscredit Grantor Trust
Securities--5.83% 1997-1 A, 6.75%, 08/15/13 $ 21,296
18,436 Navistar Financial Corp. Owner
Trust 1996-B A3, 6.33%, 04/21/03 18,586
--------
39,882
--------
CORPORATES--57.16%
Banks--14.89% 30,000 Den norske Bank ASA (FRN), 5.92%,
08/29/49(2) 23,119
30,000 Fokus Bank (FRN), 6.40%, 03/29/49 28,383
15,000 Hong Kong & Shanghai Bank (FRN),
6.06%, 08/29/49(2) 9,304
20,000 MBNA Corp. (FRN), 6.04%, 06/17/02 19,674
30,000 Midland Bank PLC (FRN), 5.69%,
09/29/49(2) 21,414
--------
101,894
--------
Electric Utilities 25,000 Duquesne Light Co., 8.38%,
- --7.68% 05/15/24(2) 26,308
25,000 Philadelphia Electric Co., 7.75%,
03/01/23(2) 26,263
--------
52,571
--------
Finance--4.37% 30,000 Equity Residential Properties
(FRN), 6.02%, 11/24/99(2) 29,937
--------
Industrial--20.24% 10,000 Cemex S.A., 8.50%, 08/31/00 9,473
25,000 Dayton Hudson Corp., 9.88%,
06/01/17(2) 26,238
25,000 Pennzoil Co., 10.63%, 06/01/01(2) 25,587
30,000 PepsiCo., Inc., 7.63%, 12/18/98 30,139
25,000 RJR Nabisco, Inc., 8.00%, 07/15/01 25,310
20,000 Rohm & Haas Co., 9.38%, 11/15/19(2) 21,776
--------
138,523
--------
Sovereign--6.56% 56,400 Republic of Argentina (FRN), 6.19%,
03/31/05(3) 44,909
--------
Telephone--3.42% 20,000 MCI Worldcom, Inc., 9.38%,
01/15/04(2) 23,410
--------
TOTAL CORPORATES 391,244
--------
MORTGAGE-BACKED--28.06%
Non-Agency 29,000 Ryland Mortgage Securities Corp
Mortgage Backed Series III 1992-A 1C, 8.30%,
- --4.33% 03/29/30 29,621
--------
U.S. Agency 12,915 Fannie Mae G94-8 M, 8.00%, 05/17/24 12,927
Mortgage-Backed
- --23.73% 31,674 Fannie Mae 1994-75 S, 7.88%,
10/25/22 31,234
</TABLE>
See accompanying notes to financial statements.
13
<PAGE> 15
ALPHATRAK 500 FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) ISSUES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE-BACKED (CONTINUED)
$ 12,273 Fannie Mae 1997-90 SC, 7.96%,
04/18/26 $ 12,343
925,811 Freddie Mac 2030 SU (IO), 3.06%,
05/15/56 27,057
39,805 Freddie Mac-Government National
Mortgage Association 2 L, 8.00%,
11/25/22 45,563
32,314 Government National Mortgage
Association Pool 1554, 7.50%,
01/20/24 33,304
--------
162,428
--------
TOTAL MORTGAGE-BACKED 192,049
--------
TOTAL BONDS
(Cost $622,045) 623,175
--------
COMMON STOCK--2.33%
Common Stock --2.33% 157 S&P 500 Depositary Receipt 15,975
--------
TOTAL COMMON STOCK
(Cost $16,902) 15,975
--------
SHORT TERM INVESTMENTS--12.03%
Agency Discount 25,000 FMC Discount Note,
Note--3.65% 5.40%, 10/14/98 24,951
--------
Money Market RIC 16,000 J.P. Morgan Institutional Prime
- --2.34% Money Market 16,000
--------
U.S. Treasury Bills 42,000 U.S. Treasury Bill, 5.03%, 02/04/99 41,359
- --6.04%
--------
TOTAL SHORT TERM INVESTMENTS
(Cost $82,207) 82,310
--------
TOTAL INVESTMENTS--105.41%
(Cost $721,154)(1) 721,460
LIABILITIES, LESS CASH
AND OTHER ASSETS--(5.41%) (37,006)
--------
NET ASSETS--100.00% $684,454
========
</TABLE>
FUTURES CONTRACTS: LONG POSITIONS
<TABLE>
<CAPTION>
NUMBER OF UNREALIZED
CONTRACTS APPRECIATION/(DEPRECIATION)
- --------- ----------------------------
<C> <S> <C>
2 S&P 500 Index, December 1998 $(35,564)
3 S&P Mini, December 1998 1,688
--------
$(33,876)
========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 16
ALPHATRAK 500 FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
Notes:
(1) Cost for Federal income tax purposes is $721,154 and net unrealized
depreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 11,839
Gross unrealized depreciation (11,533)
---------
Net unrealized depreciation $ 306
=========
</TABLE>
(2) Security has an effective maturity date less than the stated maturity date
due to a call feature.
(3) Pass through securities backed by mortgage securities where payment is
periodically made will have an effective maturity date less than the stated
maturity date.
(FRN): Floating rate note -- The rate disclosed is that in effect at September
30, 1998.
(IO): Interest only
(MTN): Medium term note
See accompanying notes to financial statements.
15
<PAGE> 17
METROPOLITAN WEST FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN LOW DURATION ALPHATRAK 500
BOND FUND BOND FUND FUND
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost
$52,327,604, $182,706,310 and
$721,154, respectively) (Note 2) $52,925,817 $181,650,752 $721,460
Cash and cash equivalents (Note 2) 68,755 100,788 662
Dividends and interest receivable 728,794 1,481,373 10,338
Receivable for securities sold 2,935,172 4,277,316 1,600
Deferred unamortized organizational
costs (Note 2) 26,506 26,506 19,250
Other assets 9,240 9,240 0
----------- ------------ --------
Total assets 56,694,284 187,545,975 753,310
----------- ------------ --------
LIABILITIES:
Payable for securities purchased 3,548,734 2,220,977 30,110
Variation margin (Note 7) 0 0 24,242
Due to Adviser (Note 4) 9,520 55,656 3,015
Accrued expenses 12,846 29,959 11,489
Distributions payable 262,998 991,489 0
Other liabilities 0 999,804 0
----------- ------------ --------
Total liabilities 3,834,098 4,297,885 68,856
----------- ------------ --------
Net assets $52,860,186 $183,248,090 $684,454
=========== ============ ========
NET ASSETS CONSIST OF:
Common stock, unlimited shares
authorized, $0.01 par value,
4,959,132, 18,167,590 and 76,008
shares outstanding, respectively $51,885,674 $184,570,057 $751,478
Accumulated undistributed net
investment income 29,145 161,875 15,564
Accumulated undistributed net
realized gain (loss) on
investments 347,155 (428,284) (49,018)
Net unrealized appreciation
(depreciation) on investments 598,212 (1,055,558) (33,570)
----------- ------------ --------
$52,860,186 $183,248,090 $684,454
=========== ============ ========
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $10.66 $10.09 $9.01
====== ====== =====
</TABLE>
See accompanying notes to financial statements.
16
<PAGE> 18
METROPOLITAN WEST FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN LOW DURATION ALPHATRAK 500
BOND FUND BOND FUND FUND*
------------ ------------ -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 0 $ 0 $ 42
Interest 1,352,149 5,674,442 15,880
---------- ----------- --------
Total investment income 1,352,149 5,674,442 15,922
---------- ----------- --------
EXPENSES:
Investment advisory fees (Note
4) 105,653 393,903 591
Transfer agent fees 11,629 12,804 5,022
Administration fees 17,011 69,579 164
Registration and filing fees 13,150 14,992 496
Reports to shareholders 1,404 5,616 237
Custodian fees 7,477 19,774 2,435
Accounting services 14,833 25,253 6,341
Pricing fees 1,576 2,256 684
Legal fees 6,106 6,106 2,536
Insurance expenses 6,961 6,961 0
Trustees' fees and expenses 3,751 3,751 1,521
Auditing and tax consulting fees 6,590 6,590 4,796
Amortization of organizational
expenses (Note 2) 3,795 3,795 0
Miscellaneous expenses 1,504 1,504 761
---------- ----------- --------
Total operating expenses 201,440 572,884 25,584
Expenses waived and reimbursed
(Note 4) (76,577) (96,918) (24,664)
---------- ----------- --------
Net expenses 124,863 475,966 920
---------- ----------- --------
Net investment income 1,227,286 5,198,476 15,002
---------- ----------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) on
investments 150,234 (469,248) (48,456)
Net change in unrealized
appreciation (depreciation) on
investments 503,411 (1,373,752) 306
Net change in unrealized
depreciation on futures
contracts 0 0 (33,876)
---------- ----------- --------
Net realized and unrealized gain
(loss) on investments 653,645 (1,843,000) (82,026)
---------- ----------- --------
NET INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $1,880,931 $ 3,355,476 $(67,024)
========== =========== ========
</TABLE>
* The AlphaTrak 500 Fund commenced operations on June 29, 1998.
See accompanying notes to financial statements.
17
<PAGE> 19
METROPOLITAN WEST FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL RETURN
BOND FUND
----------------------------
SIX MONTHS
ENDED YEAR
SEPTEMBER 30, ENDED
1998 MARCH 31,
(UNAUDITED) 1998
------------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,227,286 $ 998,506
Net realized gain on investments 150,234 398,295
Net change in unrealized appreciation on
investments 503,411 94,801
Net change in unrealized depreciation on
futures contracts 0 0
----------- -----------
Net increase in net assets resulting from
operations 1,880,931 1,491,602
----------- -----------
DISTRIBUTIONS:
Dividends to shareholders from net investment
income (1,227,286) (998,506)
Distributions to shareholders from net
realized gains on investments 0 (172,229)
----------- -----------
Net decrease in net assets resulting from
distributions (1,227,286) (1,170,735)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 29,271,758 26,106,354
Shares issued in reinvestment of dividends
and distributions 720,792 947,050
Cost of shares redeemed (2,769,026) (2,441,254)
----------- -----------
Net increase in net assets resulting from
capital share transactions 27,223,524 24,612,150
----------- -----------
Net increase in net assets 27,877,169 24,933,017
Net assets at beginning of period 24,983,017 50,000
----------- -----------
Net assets at end of period (including
undistributed net investment income of
$29,145 and $0, respectively) $52,860,186 $24,983,017
=========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE> 20
METROPOLITAN WEST FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
LOW DURATION ALPHATRAK 500
BOND FUND FUND*
---------------------------- -------------
SIX MONTHS PERIOD
ENDED YEAR ENDED
SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 MARCH 31, 1998
(UNAUDITED) 1998 (UNAUDITED)
------------- ------------ -------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 5,198,476 $ 4,002,660 $ 15,002
Net realized gain (loss) on
investments (469,248) 306,941 (48,456)
Net change in unrealized
appreciation (depreciation) on
investments (1,373,752) 318,194 306
Net change in unrealized
depreciation on futures contracts 0 0 (33,876)
------------ ------------ --------
Net increase (decrease) in net
assets resulting from operations 3,355,476 4,627,795 (67,024)
------------ ------------ --------
DISTRIBUTIONS:
Dividends to shareholders from net
investment income (5,198,476) (4,002,660) 0
Distributions to shareholders from
net realized gains on investments 0 (104,102) 0
------------ ------------ --------
Net decrease in net assets resulting
from distributions (5,198,476) (4,106,762) 0
------------ ------------ --------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 79,893,330 163,923,693 751,599
Shares issued in reinvestment of
dividends and distributions 4,050,090 4,018,103 0
Cost of shares redeemed (34,165,325) (33,199,834) (120)
------------ ------------ --------
Net increase in net assets resulting
from capital share transactions 49,778,095 134,741,962 751,478
------------ ------------ --------
Net increase in net assets 47,935,095 135,262,995 684,454
Net assets at beginning of period 135,312,995 50,000 0
------------ ------------ --------
Net assets at end of period
(including undistributed net
investment income of $161,875, $0,
and $15,564, respectively) $183,248,090 $135,312,995 $684,454
============ ============ ========
</TABLE>
* The AlphaTrak 500 Fund commenced operations on June 29, 1998.
See accompanying notes to financial statements.
19
<PAGE> 21
METROPOLITAN WEST FUNDS
FINANCIAL HIGHLIGHTS
THE TABLE BELOW SETS FORTH FINANCIAL DATA FOR ONE SHARE OF
CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD PRESENTED.
<TABLE>
<CAPTION>
TOTAL RETURN
BOND FUND
--------------------------
SIX MONTHS
ENDED YEAR
SEPTEMBER 30, ENDED
1998 MARCH 31,
(UNAUDITED) 1998
------------- ---------
<S> <C> <C>
Net Asset Value, Beginning of Period $10.49 $10.00
-------- ------
Income from Investment Operations:
Net investment income 0.34 0.73
Net realized and unrealized gain on investments 0.17 0.60
-------- ------
Total from Investment Operations 0.51 1.33
-------- ------
Less Distributions:
Dividends from net investment income (0.34) (0.73)
Distributions from net capital gains on
investments 0.00 (0.11)
-------- ------
Total Distributions (0.34) (0.84)
-------- ------
Net Asset Value, End of Period $10.66 $10.49
======== =======
Total Return (not annualized) 4.91% 13.71%
Ratios/Supplemental Data:
Net Assets, end of period (in thousands) $52,860 $24,983
Ratio of Expenses to Average Net Assets
Before expense reimbursement 1.05%# 1.99%
After expense reimbursement 0.65%# 0.65%
Ratio of Net Income to Average Net Assets
Before expense reimbursement 5.99%# 6.05%
After expense reimbursement 6.39%# 7.39%
Portfolio Turnover Rate 70% 235%
</TABLE>
# Annualized
See accompanying notes to financial statements.
20
<PAGE> 22
METROPOLITAN WEST FUNDS
FINANCIAL HIGHLIGHTS
THE TABLE BELOW SETS FORTH FINANCIAL DATA FOR ONE SHARE OF
CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD PRESENTED.
<TABLE>
<CAPTION>
LOW DURATION ALPHATRAK 500
BOND FUND FUND*
------------------------- -------------
SIX MONTHS PERIOD
ENDED YEAR ENDED
SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 MARCH 31, 1998
(UNAUDITED) 1998 (UNAUDITED)
------------- --------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.18 $10.00 $10.00
-------- ------ ---------
Income from Investment Operations:
Net investment income 0.33 0.65 0.20
Net realized and unrealized gain
(loss) on investments (0.10) 0.19 (1.19)
-------- ----- ---------
Total from Investment Operations 0.23 0.84 (0.99)
-------- ------ ---------
Less Distributions:
Dividends from net investment income (0.32) (0.65) 0.00
Distributions from net capital gains
on investments 0.00 (0.01) 0.00
-------- ------ ---------
Total Distributions (0.32) (0.66) 0.00
-------- ------ ---------
Net Asset Value, End of Period $10.09 $10.18 $9.01
======== ====== =========
Total Return (not annualized) 2.30% 8.71% (9.90%)
Ratios/Supplemental Data:
Net Assets, end of period (in
thousands) $183,248 $135,313 $684
Ratio of Expenses to Average Net
Assets
Before expense reimbursement 0.70%# 0.93% 15.51%#
After expense reimbursement 0.58%# 0.58% 0.56%#
Ratio of Net Income to Average Net
Assets
Before expense reimbursement 6.22%# 6.37% (5.86%)#
After expense reimbursement 6.34%# 6.72% 9.09%#
Portfolio Turnover Rate 41% 102% 25%
</TABLE>
* The AlphaTrak 500 Fund commenced operations on June 29, 1998.
# Annualized
See accompanying notes to financial statements.
21
<PAGE> 23
METROPOLITAN WEST FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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
four 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"), Metropolitan West AlphaTrak 500 Fund (the "AlphaTrak 500 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
investments operations on March 31, 1997. The AlphaTrak 500 Fund commenced
investment operations on June 29, 1998. The Short-Term Investment Fund was not
operational at September 30, 1998.
The Total Return Bond Fund seeks to maximize long-term total return. This 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 seeks to maximize current income, consistent with
preservation of capital. Capital appreciation is a secondary consideration of
the Fund. This Fund invests in a diversified portfolio of fixed-income
securities of varying maturities with a portfolio duration of one to three
years. The dollar-weighted average maturity for this Fund will exceed its
portfolio duration.
The AlphaTrak 500 Fund seeks to achieve a total return that exceeds the total
return of the Standard & Poor's 500 Index ("S&P 500 Index"). The Fund invests
in S&P 500 Index futures contracts backed by a diversified portfolio of fixed
income securities of varying maturities with a portfolio duration of up to
three years. The Fund's dollar-weighted average maturity will exceed its
portfolio duration.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds.
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, 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
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Cost is determined and gains and losses are
based on the first-in-first-out method for both financial statement and
Federal income tax purposes. Dividend income is recorded on the ex-dividend
date. Interest income is accrued daily.
ORGANIZATION COSTS:
Organization costs are being amortized on a straight-line basis over five
years from each Fund's respective commencement of operations.
DISTRIBUTIONS TO SHAREHOLDERS:
The Funds (except the AlphaTrak 500 Fund) expect to declare dividends daily
and pay them monthly to shareholders. The AlphaTrak 500 Fund expects to
declare and pay dividends to shareholders quarterly. 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 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.
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS:
The Funds have defined cash and cash equivalents as cash in interest bearing
and non-interest bearing accounts.
USE OF ESTIMATES:
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. PORTFOLIO INVESTMENTS
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 principal are generally paid monthly. CMOs may be collateralized by whole
mortgage loans or private mortgage pass-through securities but are more
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
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 period ended
September 30, 1998, certain interest only securities were held 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.
In addition to the securities listed above, the AlphaTrak 500 Fund may invest
all of its assets in the following equity derivative instruments: S&P 500
Index futures contracts, Mini S&P 500 Index futures contracts, options on the
S&P 500 Index and S&P futures, and swap agreements involving the S&P 500
Index. When the above listed S&P Index derivatives appear to be overvalued
relative to the S&P 500 Index, the Fund may invest up to 100% in the common
stocks that comprise the S&P 500 Index. The Fund may also invest up to 25% of
its total assets in these stocks indirectly by purchasing interests in one or
more mutual funds, asset pools or trusts that invest in such stocks.
4. SECURITIES TRANSACTIONS
PURCHASES AND SALES:
Investment transactions for the period ended September 30, 1998, excluding
temporary short-term investments, were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
PURCHASES SALES
------------ -------------
<S> <C> <C>
Total Return Bond Fund $ 53,451,934 $25,072,831
Low Duration Bond Fund 134,818,625 52,467,519
AlphaTrak 500 Fund 1,154,914 116,799
</TABLE>
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. 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. The Adviser charges the AlphaTrak 500 Fund a basic fee of 0.35% of the
Fund's average daily net assets. The basic fee may be adjusted upward or
downward (by up to 0.35% of the Fund's average daily net assets), depending on
whether, and to what extent, the investment performance of the AlphaTrak 500
Fund, for the relevant performance period, exceeds or is exceeded by, the
performance of the S&P 500 Index over the same period. 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 period ended September
30, 1998, were as follows:
<TABLE>
<CAPTION>
EXPENSES
INVESTMENT VOLUNTARY WAIVED AND
ADVISORY EXPENSE ADVISORY REIMBURSED DUE FROM
FEE RATE LIMITATION FEES BY ADVISER ADVISER
----------- ----------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
Total Return Bond
Fund 0.55% 0.65% $105,653 $76,577 $0
Low Duration Bond
Fund 0.48 0.58 393,903 96,918 0
AlphaTrak 500 Fund 0.00 - 0.70 0.20 - 0.90 591 24,664 0
</TABLE>
26
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 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 ALPHATRAK 500 FUND
------------------------- -------------------------- ------------------
PERIOD PERIOD PERIOD
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 MARCH 31, 1998 MARCH 31, 1998
(UNAUDITED) 1998 (UNAUDITED) 1998 (UNAUDITED)
------------- --------- ------------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Increase in Fund
shares:
Shares outstanding at
beginning of period 2,381,576 5,000 13,289,111 5,000 0
Shares sold 2,771,560 2,520,599 7,842,659 16,152,929 76,021
Shares issued through
reinvestment of
dividends 68,334 90,346 397,609 395,250 0
Shares redeemed (262,338) (234,369) (3,361,789) (3,264,068) (13)
--------- --------- ---------- ---------- ------
Net increase in Fund
shares 2,577,556 2,376,576 4,878,479 13,284,111 76,008
--------- --------- ---------- ---------- ------
Shares outstanding at
end of period 4,959,132 2,381,576 18,167,590 13,289,111 76,008
========= ========= ========== ========== ======
</TABLE>
7. FUTURES CONTRACTS
The Funds may purchase or sell exchange-traded futures contracts. Futures
contracts obligate a Fund to make or take delivery of a financial instrument
or the cash value of a security index at a specified future date at a
specified price. The Funds may use futures contracts to manage exposure to the
stock and bond markets or changes in interest rates and currency values, or
for gaining exposure to markets. Risks of entering into futures contracts
include the possibility that there may be an illiquid market at the time the
advisor to the Fund may be attempting to sell some or all the Fund holdings or
that a change in the value of the contract may not correlate with changes in
the value of the underlying securities. S&P 500 futures contracts are valued
at the first sale price after 4 p.m. EST on the Chicago Mercantile Exchange.
All other futures contracts are valued at the official settlement price of the
exchange on which it is traded. Upon entering into a futures contract, the
Fund is required to deposit either cash or securities (initial margin).
Subsequent payments (variation margin) are made or received by the Fund,
generally on a daily basis. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains or
losses. The Funds recognize a realized gain or loss when the contract is
closed or expires. The statement of operations reflects net realized and net
unrealized gains and losses on these contracts.
27
<PAGE> 29
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<PAGE> 30
BOARD OF TRUSTEES
Scott B. Dubchansky
Keith T. Holmes
Martin Luther King III
Laird Landmann
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
Lara Mulpagano
Secretary and Assistant Treasurer
<TABLE>
<S> <C>
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:
First Data Investor Services Group, 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
</TABLE>
[MetWstLg Logo]
[MetWstLg Logo]
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.
