Dear Shareholder:
Included in this Annual Report is a look at the performance, holdings and
financial statements of the Star Select REIT-Plus Fund over the past year. As
investment adviser to the REIT-Plus Fund, Star Bank is able to bring over
10-years of Real Estate Investment Trust (REIT) experience to the management of
the REIT-Plus Fund. We continually strive to combine above-average income and
long-term growth of capital to shareholders of the Fund.
We believe that REITs are the best way for many investors to invest in
commercial real estate. As an investment vehicle, REITs combine the best
features of both real estate and the stock market. Investing in the REIT-Plus
Fund gives you the chance to invest in a professionally managed, diversified
real estate portfolio, with a degree of liquidity normally not associated with
real estate investing.
I would like to offer a glimpse of some recent changes to the Fund. REIT share
prices continued to suffer from the weak performance that began during the
fourth quarter of 1997. To a certain degree this type of consolidation was to be
expected following the powerful rally the group achieved from the fourth quarter
of 1995 through the second quarter of 1997. The heavy initial and secondary
offering calendar over that time period led to a saturation of the market. In
the first quarter, another major contributor of weakness has been the threat of
tax legislation targeting the hottest segment of the REIT market, those
structured as 'paired share' REIT's.
The principal cause of the Fund's underperformance vs. the Micropal REIT index
was the Fund's overweighted position in the lodging sector. The two largest
holdings in that group are Starwood Lodging and Patriot American Hospitality,
both of which are organized as paired share REIT's. The paired share REIT's had
been the market leaders over the last two years, but came under heavy selling
pressure when Congress declared its intention to legislate an end to the
advantage enjoyed by these organizations. Regardless of the outcome of the
paired share debate, we chose to focus on the underlying fundamentals of the
property types and the regional economic factors that will influence vacancy
rates and ultimately, rental income.
In a change from our year-end strategy we have reduced our emphasis on the hotel
sector. New supply is coming on stream at virtually every pricing level and
across all major markets. Our concern is that this capacity will lead to higher
vacancy rates and a reduction in income growth. We continue to favor the office
and industrial sector as rental rates per square foot have not yet reached a
level that would trigger the building of additional supply. We are also focusing
on the specialty property types such as cold storage, health care and self
storage. These smaller categories are often overlooked by larger institutional
investors. From a geographic perspective, our focus continues to shift from the
Southeast to the West Coast. Stronger relative economic activity and advancing
rental rates set the stage for enhanced returns versus the national average.
Thank you for investing in the REIT-Plus Fund and we look forward to rewarding
relationship.
Peter Sorrentino, CFA
Vice President, Fund Manager
<PAGE>
Star Select REIT-Plus Fund vs. Micropal U.S. Equity REIT Index
Graph comparing the growth of a $10,000 investment in the Star Select REIT-Plus
Fund with the growth of a hypothetical $10,000 investment in the Micropal U.S.
Equity REIT Index for the period from inception (6/24/97)to March 31, 1998.
Star - $11,129 Micropal - $11,321
Cumulative Total
Return for the Period Star Select
Ended March 31, 1998 REIT-Plus Fund
-------------------- --------------
Since Inception (6/24/97) 11.29%
* Not Annualized
* Past performance is not predictive of future performance.
<PAGE>
INVESTMENTS-STAR SELECT REIT-PLUS FUND
- --------------------------------------
Statement of Net Assets March 31, 1998
Number Market
of Shares Value
--------- --------
Real Estate Investment Trusts- 96.08%
- -------------------------------------
American General Hospitality
Corp. REIT 35,000 $ 969,080
Apartment Investment and
Management Co. REIT 15,000 577,500
Arden Realty Group, Inc. REIT 13,251 377,653
Avalon Properties, Inc. REIT 28,000 812,000
Bay Apartment Communities, Inc. REIT 25,000 928,125
Bedford Property Investors, Inc. REIT 15,000 289,695
Boston Properties, Inc. REIT 25,000 879,700
Brandywine Realty Trust REIT 25,000 595,325
BRE Properties, Inc. REIT 25,200 716,638
CarrAmerica Realty Corp. REIT 17,900 537,000
CenterPoint Properties Corp. REIT 22,975 796,957
Crescent Real Estate Equities Trust REI 20,000 720,000
Developers Diversified
Realty Corp. REIT 24,000 981,000
EastGroup Properties, Inc. REIT 23,000 474,375
Equity Office Properties Trust REIT 36,600 1,120,875
Equity Residential Properties Trust REIT 21,000 1,055,250
Federal Realty Investment Trust REIT 33,000 810,579
Felcor Suite Hotels, Inc. REIT 30,000 1,111,890
First Industrial Realty Trust, Inc. REIT 25,000 900,000
Glenborough Realty Trust, Inc. REIT 30,000 873,750
Healthcare Realty Trust REIT 19,510 551,157
Hospitality Properties Trust REIT 21,000 744,198
Irvine Apartment
Communities, Inc. REIT 26,700 841,050
JDN Realty Corp. REIT 22,579 771,931
Kilroy Realty Corp. REIT 23,000 656,949
Kimco Realty Corp. REIT 30,070 1,063,726
Lexington Corp. Properties, Inc. REIT 30,400 461,715
Liberty Property Trust REIT 24,450 657,094
LTC Properties, Inc. REIT 45,050 870,051
Mack-Cali Realty Corp. REIT 24,500 957,043
Manufactured Home
Communities, Inc. REIT 38,000 983,250
Meridian Industrial Trust, Inc. REIT 15,000 360,000
Merry Land & Investment Co., Inc. REIT 21,000 469,875
Mills Corp. REIT 15,000 392,820
Nationwide Health Properties, Inc. REIT 25,000 625,000
New Plan Realty Trust REIT 38,500 967,312
Omega Healthcare Investors, Inc. REIT 29,253 1,140,867
Pacific Gulf Properties, Inc. REIT 20,000 458,760
<PAGE>
Number Market
of Shares Value
--------- -----
Patriot American Hospitality, Inc. REIT 42,998 $ 1,160,946
Prentiss Properties Trust REIT 24,000 627,000
Public Storage, Inc. REIT 25,000 771,875
Realty Income Corp. REIT 23,000 625,324
Reckson Associates Realty Corp. REIT 35,000 923,125
RFS Hotel Investors, Inc. REIT 41,100 750,075
Security Capital Pacific, Inc. REIT 32,000 770,016
Security Capital Atlantic, Inc. REIT 25,000 525,000
Simon DeBartolo Group, Inc. REIT 34,040 1,165,870
Sizeler Property Investors, Inc. REIT 56,300 622,847
Smith Charles E Residential
Realty, Inc. REIT 25,000 831,250
Spieker Properties, Inc. REIT 22,000 907,500
Starwood Lodging Trust REIT 26,500 1,416,107
Storage Trust Realty REIT 31,000 765,328
Storage USA, Inc. REIT 15,240 584,835
Summit Properties, Inc. REIT 19,200 386,400
Weingarten Realty Investors REIT 20,550 919,613
Total Real Estate Investment Trusts
(Cost $36,336,821) 42,253,301
----------
Repurchase Agreements - 4.96%
- -----------------------------
Donaldson ($2,185,000, FNMA Med Term, 7.84%, 31364CHM3, 8/3/06) Purchase Date
3/31/98, Maturity Date 4/1/98 Amount Payable at Maturity $2,180,351
Total Repurchase Agreements
(Cost $2,180,000) 2,180,000
---------
Money Markets - 1.14%
- ---------------------
AIM Inst. Treasury 500,000 500,000
Total Money Markets
(Cost $500,000) 500,000
-------
Total Investments
(Cost $39,016,821) 44,933,301
Other Assets and Liabilities, Net - (2.18%) (952,778)
- ------------------------------------------- ---------
Net Assets - 100% $43,980,523
===========
<PAGE>
STAR SELECT REIT-PLUS FUND
- --------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- ------------------------------------
March 31, 1998
ASSETS
Investments, at value (cost $39,016,821) ................ $ 44,933,301
Cash ................................................... 14,764
Dividend receivable ..................................... 223,279
Interest receivable .................................. 11,663
Receivable for shares of beneficial interest sold ....... 14,170
Deferred organization costs (Note 2) ................ 29,662
Prepaid expenses......................................... 13,342
Total assets ............................................ 45,240,181
LIABILITIES
Payable for investments purchased ...................... 1,202,551
Payable for shares of beneficial interest redeemed...... 11,292
Accrued expenses ..................................... 45,815
Total liabilities ...................................... 1,259,658
NET ASSETS ................................................... $ 43,980,523
Net assets consist of:
Paid-in capital ......................................... 38,062,127
Overdistributed net investment income ................... (4,537)
Undistributed net realized gain on investments ..... 6,453
Net unrealized appreciation in
value of investments.............................. 5,916,480
Net assets ................................................... $ 43,980,523
Shares of capital stock
outstanding (no par value,
unlimited shares authorized)............................. 4,154,073
Net asset value per share, offering
and redemption price .................................... $ 10.59
The accompanying notes are an integral part of these financial statements.
<PAGE>
STAR SELECT REIT-PLUS FUND
- --------------------------
STATEMENTS OF OPERATIONS
- ------------------------
For the Period June 24, 1997(commencement of operations) through March 31, 1998
INVESTMENT INCOME
Income:
Interest ................................................ $ 135,219
Dividends ............................................... 1,450,878
Total net income ................................... 1,586,097
EXPENSES:
Administrative service fees (Note 3) .................... 29,253
Auditing fees ........................................... 11,934
Custodian fees (Note 3) ................................. 8,593
Fund accounting fees .................................... 22,836
Insurance ............................................... 2,898
Servicing fees .......................................... 14,273
Legal fees .............................................. 15,123
Investment adviser fees (Note 3) ........................ 214,090
Trustee's fees .......................................... 14,000
24f-2 fees expense ..................................... 4,973
Amortization of organization expenses ................. 7,365
Postage ................................................. 1,313
Registration and filing fees ............................ 27,897
Printing ................................................ 18,853
Transfer agent fees (Note 3) ............................ 19,269
Other expenses .......................................... 3,468
-----
Total net expenses ................................ 416,138
-------
NET INVESTMENT INCOME ....................................... 1,169,959
---------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on investments ........................ 903,721
Change in net unrealized
appreciation of investments ........................ 5,916,480
---------
Net gain on investments ................................. 6,820,201
---------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............................... $ 7,990,160
=============
The accompaying notes are an integral part of these financial statements.
<PAGE>
STAR SELECT REIT-PLUS FUND
- --------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------
For the Period June 24, 1997(commencement of operations) through March 31, 1998
INCREASE IN NET ASSETS
Operations:
Net investment income ................................... $ 1,169,959
Net realized gain on investments ........................ 903,721
Change in net unrealized appreciation of investments..... 5,916,480
---------
Increase in net assets resulting from operations ........ 7,990,160
---------
Dividends and distributions to shareholders from:
Net investment Income ........................ (1,174,496)
Realized Capital Gains ............................... (897,268)
--------
Total Distributions ........................... (2,071,764)
----------
TOTAL INCREASE ............................................... 5,918,396
Capital share transactions:
Proceeds from shares sold ............................... 40,066,968
Value of shares issued to shareholders in
reinvestment of dividends and distributions ........ 206,179
Cost of shares redeemed ................................. (2,211,020)
----------
Net increase in net assets resulting from
capital share transactions ......................... 38,062,127
----------
TOTAL INCREASE IN NET ASSETS ............................ 43,980,523
----------
NET ASSETS:
Beginning of period ..................................... ---
End of period (including undistributed net
realized gains on investments) ..................... $ 43,980,523
============
Shares of capital stock of the Fund sold and redeemed:
Shares sold ............................................. 4,340,838
Shares issued to shareholders in reinvestment
dividends and distributions....................... 19,649
Shares redeemed ......................................... (206,414)
NET INCREASE IN NUMBER
OF SHARES OUTSTANDING ................................... 4,154,073
=========
The accompanying notes are an integral part of these financial statements.
<PAGE>
STAR SELECT REIT-PLUS FUND
- --------------------------
FINANCIAL HIGHLIGHTS
- --------------------
1998(a)
-------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning ................................... $ 10.00
Income from investment
Operations:
Net investment income ................................... 0.35
Net realized and unrealized
gain (loss) on investments.......................... 0.86
----
Total from investment income ................................. 1.21
Less distributions:
Dividends from net
investment income .................................. (0.35)
Distributions from net realized
Gains on investments ........................... (0.27)
-----
Total from distributions ..................................... (0.62)
-----
Net asset value at end of period ............................. $ 10.59
=======
TOTAL RETURN (b).............................................. 14.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)..................... 43.9
Ratio of total expenses to
average net assets (b).............................. 1.52%
Ratio of net investment
income to average net assets (b).................... 4.29%
Portfolio turnover ...................................... 29.50%
Average commission rate paid ............................ $ 0.0764
(a) For the period June 24, 1997 (commencement of operations) to
March 31,1998.
(b) Annualized.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 1 - General
Star Select REIT-Plus Fund (the "Fund") was organized as a series of Star Select
Funds, an Ohio business trust (the "Trust") on February 28, 1997. The investment
objective of the Fund is to provide shareholders with above average income and
long term growth of capital.
Note 2 - Significant Accounting Policies
The following is a summary of the significant accounting policies followed by
the Fund in the preparation of its financial statements.
A) Security Valuations
Portfolio securities are valued using the current market valuations: either the
last reported sales price, or in the case of securities for which there is no
reported last sale, the mean of the closing bid and asked prices. Bid price is
used when no ask price is available.
B) Securities Transactions
Securities transactions are recorded on a trade date. Realized gains and losses
from securities transactions are recorded on the identified cost basis.
C) Dividends and Distributions to Shareholders
The Fund intends to distribute substantially all of its net investment income as
dividends to its shareholders on a quarterly basis, and intends to distribute
its net capital gains at least once a year. However, to the extent that net
realized gains of the Fund can be reduced by any capital loss carry-overs, such
gains will not be distributed.
D) Federal Income Taxes
It is the policy of the Fund to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders.
E) Expenses
Organizational costs represent costs incurred in connection with the
organization and the initial public offering of the shares of the Fund.
Organizational costs are deferred and will be amortized on a straight-line basis
over five years. In the event that the original shareholders (or any subsequent
transferee) redeems any of its original capital (seed capital) prior to these
organizational costs being fully amortized, the redemption proceeds will be
reduced by a pro-rata portion of any then unamortized organizational costs. At
March 31,1998, the unamortized balance was $29,662.
F) Estimates
Preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
<PAGE>
G) Repurchase Agreement
Under the terms of a typical repurchase agreement, a Fund writes a financial
contract with a counterparty and takes possession of a government debt
obligation as collateral. The Fund also agrees with the counterparty to allow
the counterparty to repurchase the financial contract at a specific date and
price, thereby determining the yield during the Fund's holding period. This
arrangement will result in a fixed-rate of return not subject to the market's
fluctuation during the holding period indicated in the contract. The value of
the collateral is at least equal to the total amount of the repurchase
obligation, including interest. In the event of a default by the counterparty, a
Fund has the right to use the collateral to offset any losses incurred.
H) Investments
Interest income is recorded on the accrual basis and dividend income is recorded
on the ex-dividend date.
Note 3 - Agreements and Other Transactions with Affiliates
The Fund retains Star Bank, N.A. (the "Adviser" or "Star Bank") to manage the
Fund's investments. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund. The
Fund is authorized to pay the Adviser a monthly fee equal to an annual average
rate of 0.75% of its average daily net assets.
The Fund also retains Star Bank to act as shareholder servicing agent on its
behalf. The Fund is authorized to pay Star Bank up to 0.25% of its average daily
net assets to provide shareholder support services and to maintain shareholder
accounts. Star Bank currently receives 0.05% of the Fund's average daily net
assets for shareholder services and it is anticipated that the fee will remain
at 0.05% for the foreseeable future. Star Bank also acts as the Fund's
custodian, for which it receives a monthly fee equal to an annual average rate
of 0.025% of its average daily net assets.
The Fund retains Unified Fund Services, Inc. ("Unified") to act as the Fun's
administrator and transfer agent. As administrator, Unified manages the Fund's
business affairs and provides the Fund with administrative services, including
compliance and accounting services and all regulatory reporting, and necessary
office equipment, personnel and facilities to operate the Fund. For these
administrative and transfer agency services, Unified receives a monthly fee from
the Fund equal to an annual average rate of 0.25% of the Fund's average daily
net assets. The Fund retains Unified Management Corporation to act as the
principal distributor of the Fund's shares.
Note 4- Securities Transactions
For the period ending March 31,1998, purchases and sales of investment
securities, excluding short-term investments were as follows:
Purchases Sales
--------- -----
The Star Select REIT-Plus Fund $ 29,620,601 $ 8,870,663
Note 5- Unrealized Appreciation(Depreciation)
At March 31,1998, the composition of unrealized appreciation(depreciation) of
investment securities were as follows:
Appreciation Depreciation Net
------------ ------------ ---
The Star Select REIT-Plus Fund $ 6,200,720 ($ 284,240) $ 5,916,480
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Shareholders and
Board of Trustees
Star Select REIT-Plus Fund
We have audited the accompanying statement of assets and liabilities of Star
Select REIT-Plus Fund, including the schedule of portfolio investments, as of
March 31, 1998, and the related statement of operations, the statement of
changes in net assets, and financial highlights for the period from June 24,
1997 (commencement of operations) to March 31, 1998 in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments and cash held by
the custodian as of March 31, 1998, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Star
Select REIT-Plus Fund as of March 31, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for the period from June
24, 1997 (commencement of operations) to March 31, 1998 in the period then
ended, in conformity with generally accepted accounting principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
May 11, 1998
