SCM FUNDS
Dear Fellow Shareholders:
We are pleased to provide you with this inaugural semi-annual report for the SCM
Strategic Growth Fund for the period ending November 30, 1998. Over this period,
your Fund produced a total return of negative thirteen percent. From its
inception date of June 26, 1998, the Fund traded for only 15 business days
before the broad market reached its summertime highs. From that point the "bear"
market of 1998 took over. By the end of August, the Fund had fallen to $7.77 per
share - a 22.3% drop in price. By November 30, the value of the Fund had risen
back to $8.70. And, as your enclosed statement will attest, the year-end share
price closed even higher at $9.43, but still $0.57 shy of the June 26th initial
offering.
We were certainly aware of the discouragement you felt throughout the few months
when stock prices seemed to be on a "freefall". Conversely, we sensed your
relief as equities managed to rally. For over 100 years the stock market has
provided investors the same experience. And without fail, those patient
investors who endured the "falls" have been rewarded, often handsomely, with the
"rallies". We, as investment managers, have grown professionally from the
experience of the last six-months and we know the next time (and yes, there will
be a next time) we will be better prepared. We hope you will be too.
Market Overview
Stocks of almost all size, shape and color got hammered during the 3rd quarter
and proved to be the worst quarter for stock funds since September of 1990.
Although there are lots of reasons to explain the poor performance, the most
critical event may have been the collapse of the financial system in Russia.
Investors had considered the U.S. banking system the healthiest in the world and
were shocked to hear of the exposure they had in Russia and still have in Latin
America. The exposure appears to be manageable but none the less was unexpected.
U.S stocks had been highly valued and vulnerable to this type of event for the
last three years. Although there have been many storm clouds come and go
throughout this period, most have never produced any rain. This storm however
was different, it emerged suddenly and brutally! However, a rainbow was seen on
the horizon.
The rebound which followed was equally as impressive and swift. After a slow
start in October, following gloomy economic comments from Alan Greenspan and a
stream of profit warnings, the market recovered quickly as earnings came in
higher than expected. The market surged again mid-month following Greenspan's
surprise interest rate cut, the first move outside of an official Federal Open
Market Committee meeting in over 4 years. A higher than expected GDP figure
released later sustained the market rally and bullish investors returned in
droves. By the end of November, broad-based indexes were reapproaching all-time
highs. Returns were broad-based, although large caps once again outperformed
small caps. U.S. fixed income markets, which had strongly rallied during the
"correction", failed to participate in the stock market's rebound as long-term
Treasury yields hovered at or below 5.25%.
We remain cautiously optimistic about equities for 1999. Our reasons for this
include; a sound U.S economy, low interest rates and also the expectation for an
improving situation around the world, which could point to a worldwide recovery
for the year 2000.
First, looking at the U.S. economy, not only are interest rates and inflation at
historically low levels, but employment is also at historically high levels. Low
unemployment means that consumption in the United States, which accounts for
about 80% of the U.S. GDP, will continue to be high - this in turn translates
into healthy profits for most U.S. companies.
Furthermore, the committee which publishes the report for the index of leading
economic indicators recently concluded that: "the leading indicator shows no
serious impediment to moderate, or even strong economic growth for 1999". This
index is a widely respected measure for future economic trends for the U.S.
economy and has been quite reliable in signaling turning points.
<PAGE>
According to IBES, a provider of consensus estimates for corporate earnings,
stocks are expected to see earnings per share (EPS) growth of about 17% next
year. This follows a flat performance during 1998, in which stocks did not post
any gains or perhaps even a modest decline. So, here again there is some room
for optimism.
Our optimism is tempered, however, due to many imaginable events which could
trigger a selloff. The Japanese banking reform and economic stimulus plans could
fail as many plans have before it. The Brazilians may not live up to the
requirements of their International Monetary Fund (IMF) bailout plan. There
could be violent social and political strife in Russia, Indonesia and Malaysia.
The Europeans may begin to bicker over the process of European monetary union.
Exceedingly low oil prices may soon undermine commodity-dependent economies that
range from Mexico to South Africa. There is also the potential of a long and
exhausting U.S. Senate trial of the President.
While the risk of another stock market correction is still present, the most
likely scenario remains that the stock market will simply trade sideways for
awhile. This will allow corporate earnings and the rest of the economy to "catch
up" to current market valuations. Under this assumption, we will continue to
seek out securities of companies we believe are reasonably priced growth
prospects. We will likely continue to allocate at least 15 to 25 percent of the
portfolio's assets into U.S. Treasury securities and money market instruments.
In addition to managing risk, these non-equity assets provide funds for new
stock purchases when prices become attractive.
Portfolio Focus
Equity investment results were most positively impacted by those companies which
were purchased during the period at historically low valuations. FDX Corp.,
Cisco Systems, MCI Worldcom, Home Depot, SCI Systems and Intel have all added
impressive gains since the market bottomed in early October. A special situation
stock, Net.B@nk Inc., has been the portfolio's stellar performer to date. The
Atlanta-based internet banking operation had appreciated by almost 120% on
November 30. Shortly after, we opted to book some of the profit by selling
nearly half of the initial position.
On the other side of the ledger, our exposure to some smaller companies and
health-care stocks hurt results. HEALTHSOUTH and Quorum Health Group, two large
health management companies headquartered in the Southeast, fell on extremely
hard times amid tighter regulatory issues and allegations of Medicare fraud.
Concerned by talk of global recessionary pressures, investors sold cyclicals,
including Birmingham Steel, and freight transporters, such as M S Carriers. All
four companies are no longer held by the Fund.
In the current equity environment issue selection should be the key factor
determining investment success. We will continue to find stocks we believe have
good long-term earnings growth potential that are attractively priced. Of
course, as with any investment, there are no guarantees and we will have to see
what develops.
We are grateful for the opportunity to invest your capital and will be working
diligently on your behalf to achieve satisfying long-term investment results.
Sincerely,
/S/ Dan Shanklin /s/ Tim Shanklin
Dan Shanklin Tim Shanklin
Chairman Portfolio Manager
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SCM STRATEGIC GROWTH FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 59.45%
Auto Parts - Original Equipment - 2.25%
Johnson Controls, Inc. ................................................. 1,700 $ 98,388
----------
Commercial Services - 4.48%
(a)Concord EFS, Inc. ...................................................... 3,030 96,392
Nichols Research Corporation ........................................... 4,680 100,035
----------
196,427
----------
Computer Software & Services - 6.76%
(a)Acxiom Corporation ..................................................... 4,000 94,500
(a)Cisco Systems, Inc. .................................................... 1,400 105,525
(a)RealNetworks, Inc. ..................................................... 2,500 96,250
----------
296,275
----------
Electronics - 5.96%
(a)SCI Systems, Inc. ...................................................... 3,500 170,188
Thomas & Betts Corporation ............................................. 2,100 90,956
----------
261,144
----------
Electronics - Semiconductor - 2.45%
Intel Corporation ...................................................... 1,000 107,625
----------
Financial - Banks, Commercial - 2.02%
First Tennessee National Corporation ................................... 2,640 88,440
----------
Financial - Savings/Loans/Thrifts - 3.79%
Net.B@nk, Inc. ......................................................... 5,300 166,288
----------
Financial - Securities Brokers - 2.19%
The Charles Schwab Corporation ......................................... 1,700 95,834
----------
Financial Services - 2.19%
Fannie Mae ............................................................. 1,320 96,030
----------
Insurance - Life & Health - 1.99%
Protective Life Corporation ............................................ 2,240 87,220
----------
Lodging - 2.21%
(a)Promus Hotel Corporation ............................................... 2,900 96,788
----------
Manufactured Housing - 2.00%
Clayton Homes, Inc. .................................................... 5,650 87,575
----------
(Continued)
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SCM STRATEGIC GROWTH FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Medical Supplies - 2.55%
(a)Sofamor Danek Group, Inc. .............................................. 1,000 $ 111,813
----------
Oil & Gas - Domestic - 1.60%
Energen Corporation .................................................... 3,900 70,200
----------
Real Estate Investment Trust - 2.05%
CCA Prison Realty ...................................................... 3,700 89,725
----------
Retail - Specialty Line - 2.55%
Home Depot, Inc. ....................................................... 2,250 111,938
----------
Shoes - Leather - 1.82%
Nike, Inc. ............................................................. 2,000 80,000
----------
Telecommunications - 2.17%
Century Telephone Enterprises, Inc. .................................... 1,670 95,190
----------
Transportation - Air - 4.28%
(a)FDX Corporation ........................................................ 1,600 103,800
Southwest Airlines Co. ................................................. 3,900 83,850
----------
187,650
----------
Utilities - Telecommunications - 4.14%
BellSouth Corporation .................................................. 1,000 87,250
MCI WorldCom, Inc. ..................................................... 1,600 94,400
----------
181,650
----------
Total Common Stocks (Cost $2,219,361) ......................................................... 2,606,200
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity
Principal Rate Date
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 15.56%
United States Treasury Note ..................... $120,000 5.13% 08/31/00 $ 121,022
United States Treasury Note ..................... 60,000 5.50% 02/29/00 60,600
United States Treasury Note ..................... 90,000 5.88% 08/31/99 90,759
(Continued)
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SCM STRATEGIC GROWTH FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity Value
Principal Rate Date (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
United States Treasury Strip .................... $126,000 0.00% 11/15/99 $ 120,635
United States Treasury Strip .................... 185,000 0.00% 11/15/00 169,385
United States Treasury Strip .................... 128,000 0.00% 05/15/00 119,817
----------
Total U.S. Government Obligations (Cost $682,347) ................................................ 682,218
----------
---------
Shares
---------
INVESTMENT COMPANIES - 8.49%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares ............................... 186,156 186,156
Evergreen Money Market Treasury Institutional Treasury Money
Market Fund Institutional Service Shares ............................... 186,155 186,155
----------
Total Investment Companies (Cost $372,311) ....................................................... 372,311
----------
Total Value of Investments (Cost $3,274,019 (b)) ........................................................ 83.50 % $3,660,729
Other Assets Less Liabilities ........................................................................... 16.50 % 723,548
------ ----------
Net Assets ....................................................................................... 100.00 % $4,384,277
====== ==========
(a) Non-income producing investment.
(b) Aggregate cost for financial reporting and federal income tax purposes is the same. Unrealized appreciation
(depreciation) of investments for financial reporting and federal income tax purposes is as follows:
Unrealized appreciation $ 419,357
Unrealized depreciation (32,647)
----------
Net unrealized appreciation $ 386,710
==========
See accompanying notes to financial statements
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SCM STRATEGIC GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1998
(Unaudited)
ASSETS
Investments, at value (cost $3,274,019) ......................................................... $ 3,660,729
Cash ............................................................................................ 894,001
Income receivable ............................................................................... 5,472
Prepaid expenses ................................................................................ 1,133
Deferred organization expenses, net (note 3) .................................................... 24,707
Due from advisor (note 2) ....................................................................... 2,830
-----------
Total assets ............................................................................... 4,588,872
-----------
LIABILITIES
Accrued expenses ................................................................................ 4,944
Payable for investment purchases ................................................................ 199,651
-----------
Total liabilities .......................................................................... 204,595
-----------
NET ASSETS
(applicable to 503,888 shares outstanding; unlimited
shares of no par value beneficial interest authorized) ......................................... $ 4,384,277
===========
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE
($4,384,277 / 503,888 shares) ................................................................... $ 8.70
======
NET ASSETS CONSIST OF
Paid-in capital ................................................................................. $ 4,483,147
Undistributed net investment income ............................................................. 4,990
Accumulated net realized loss on investments .................................................... (490,570)
Net unrealized appreciation on investments ...................................................... 386,710
-----------
$ 4,384,277
===========
See accompanying notes to financial statements
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SCM STRATEGIC GROWTH FUND
STATEMENT OF OPERATIONS
Period from June 1, 1998
to November 30, 1998
(Unaudited)
INVESTMENT INCOME
Income
Interest ...................................................................................... $ 7,471
Dividends ..................................................................................... 8,217
---------
Total income ............................................................................ 15,688
---------
Expenses
Investment advisory fees (note 2) ............................................................. 7,500
Fund administration fees (note 2) ............................................................. 1,324
Custody fees .................................................................................. 1,456
Registration and filing administration fees (note 2) .......................................... 67
Fund accounting fees (note 2) ................................................................. 10,000
Legal fees .................................................................................... 6,019
Securities pricing fees ....................................................................... 682
Shareholder recordkeeping fees ................................................................ 3,493
Other fees .................................................................................... 1,395
Shareholder servicing expenses ................................................................ 2,480
Registration and filing expenses .............................................................. 1,340
Printing expenses ............................................................................. 2,204
Amortization of deferred organization expenses (note 3) ....................................... 2,293
Other operating expenses ...................................................................... 861
---------
Total expenses .......................................................................... 41,114
---------
Less:
Expense reimbursements (note 2) .................................................... (22,830)
Investment advisory fees waived (note 2) ........................................... (7,500)
Fund administration fees waived (note 2) ........................................... (86)
---------
Net expenses ............................................................................ 10,698
---------
Net investment income .............................................................. 4,990
---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss from investment transactions ..................................................... (490,570)
Increase in unrealized appreciation on investments ................................................. 386,710
---------
Net realized and unrealized loss on investments ............................................... (103,860)
---------
Net decrease in net assets resulting from operations .................................... $ (98,870)
=========
See accompanying notes to financial statements
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SCM STRATEGIC GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the period from June 1, 1998
to November 30, 1998
(Unaudited)
INCREASE IN NET ASSETS
Operations
Net investment income ................................................................................. $ 4,990
Net realized loss from investment transactions ........................................................ (490,570)
Increase in unrealized appreciation on investments .................................................... 386,710
-----------
Net decrease in net assets resulting from operations .............................................. (98,870)
-----------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) .................................. 4,483,147
-----------
Total increase in net assets ................................................................. 4,384,277
NET ASSETS
Beginning of period ........................................................................................ 0
-----------
End of period (including net investment income of $4,990 at November 30, 1998) ............................. $ 4,384,277
===========
(a) A summary of capital share activity follows:
----------------------------------
Shares Value
----------------------------------
Shares sold ...................................................................................... 510,775 $ 4,541,847
Shares issued for reinvestment
of distributions ............................................................................ 0 0
----------- -----------
510,775 4,541,847
Shares redeemed .................................................................................. (6,887) (58,700)
----------- -----------
Net increase ................................................................................ 503,888 $ 4,483,147
=========== ===========
See accompanying notes to financial statements
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SCM STRATEGIC GROWTH FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
For the period from June 29, 1998
(commencement of operations)
to November 30, 1998
(Unaudited)
Net asset value, beginning of period ....................................................................... $ 10.00
Loss from investment operations (a)
Net investment income ........................................................................... 0.01
Net realized and unrealized loss on investments ................................................. (1.31)
-----------
Total from investment operations ........................................................... (1.30)
-----------
Net asset value, end of period ............................................................................. $ 8.70
===========
Total return ............................................................................................... (13.00)%
===========
Ratios/supplemental data
Net assets, end of period ............................................................................ $ 4,384,277
===========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees ................................................... 4.67 % (b)
After expense reimbursements and waived fees .................................................... 1.22 % (b)
Ratio of net investment (loss) income to average net assets
Before expense reimbursements and waived fees ................................................... (2.87)% (b)
After expense reimbursements and waived fees .................................................... 0.56 % (b)
Portfolio turnover rate .............................................................................. 42.60 %
Average brokerage commission per share (c) ........................................................... $ 0.0384
(a) Includes undistributed net investment income of $0.00 per share and undistributed net realized gains and unrealized gains of
$0.00 per share, from June 1, 1998 (seed date) through June 29, 1998 (commencement of operations).
(b) Annualized.
(c) Represents total commissions paid on portfolio securities divided by total portfolio shares purchased or sold on which
commissions were charged.
See accompanying notes to financial statements
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SCM STRATEGIC GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
November 30, 1998
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The SCM Strategic Growth Fund (the "Fund") is a diversified series of
shares of beneficial interest of The SCM Investment Trust (the
"Trust"). The Trust, an open-ended investment company, was organized on
April 18, 1998 as a Massachusetts Business Trust and is registered
under the Investment Company Act of 1940, as amended. The investment
objective of the Fund is to provide its shareholders with a maximum
total return consisting of any combination of realized and unrealized
capital appreciation. Current income is of secondary importance. The
Fund will seek to achieve this objective by investing primarily in a
flexible portfolio of equity securities, fixed income securities, and
money market instruments. The Fund was initially seeded on June 1,
1998. The Fund had no net investment income, or net realized and
unrealized gains from the seed date through the commencement of
operations, or June 29, 1998. The following is a summary of significant
accounting policies followed by the Fund.
A. Security Valuation - The Fund's investments in securities are
carried at value. Securities listed on an exchange or quoted on a
national market system are valued at the last sales price as of
4:00 p.m. New York time on the day of valuation. Other securities
traded in the over-the-counter market and listed securities for
which no sale was reported on that date are valued at the most
recent bid price. Securities for which market quotations are not
readily available, if any, are valued by using an independent
pricing service or by following procedures approved by the Board
of Trustees. Short-term investments are valued at cost which
approximates value.
B. Federal Income Taxes - No provision has been made for federal
income taxes since substantially all taxable income has been
distributed to shareholders. It is the policy of the Fund to
comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies and to make
sufficient distributions of taxable income to relieve it from all
federal income taxes.
C. Investment Transactions - Investment transactions are recorded on
the trade date. Realized gains and losses are determined using
the specific identification cost method. Interest income is
recorded daily on an accrual basis. Dividend income is recorded
on the ex-dividend date.
D. Distributions to Shareholders - The Fund may declare dividends
quarterly, payable in March, June, September and December, on a
date selected by the Trust's Trustees. In addition, distributions
may be made annually in December out of net realized gains
through October 31 of that year. Distributions to shareholders
are recorded on the ex-dividend date. The Fund may make a
supplemental distribution subsequent to the end of its fiscal
year ending May 31.
E. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets, liabilities, expenses and revenues reported in
the financial statements. Actual results could differ from those
estimates.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, Shanklin Capital
Management, Inc. (the "Advisor") provides the Fund with a continuous
program of supervision of the Fund's assets, including the composition
of its portfolio, and furnishes advice and recommendations with respect
to investments, investment policies and the purchase and sale of
securities. As compensation for its services, the Advisor receives a
fee at the annual rate of 0.85% of the Fund's average daily net assets.
(Continued)
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SCM STRATEGIC GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
November 30, 1998
(Unaudited)
The Advisor intends to voluntarily waive all or a portion of its fee
and reimburse expenses of the Fund to limit total Fund operating
expenses to 1.25% of the average daily net assets of the Fund. There
can be no assurance that the foregoing voluntary fee waivers or
reimbursements will continue. The Advisor has voluntarily waived a
portion of its fee amounting to $7,500 ($0.04 per share) and has agreed
to reimburse $22,830 to the Fund's operating expenses for the period
ended November 30, 1998.
The Fund's administrator, The Nottingham Company (the "Administrator"),
provides administrative services to and is generally responsible for
the overall management and day-to-day operations of the Fund pursuant
to an accounting and administrative agreement with the Trust. As
compensation for its services, the Administrator receives a fee at the
annual rate of 0.150% of the Fund's first $100 million of average daily
net assets, and 0.125% of average daily net assets over $100 million.
The Administrator also receives a monthly fee of $2,000 for accounting
and recordkeeping services. The contract with the Administrator
provides that the aggregate fees for the aforementioned administration,
accounting and recordkeeping services shall not be less than $3,000 per
month. The Administrator also charges the Fund for certain expenses
involved with the daily valuation of portfolio securities.
North Carolina Shareholder Services, LLC (the "Transfer Agent") serves
as the Fund's transfer, dividend paying, and shareholder servicing
agent. The Transfer Agent maintains the records of each shareholder's
account, answers shareholder inquiries concerning accounts, processes
purchases and redemptions of the Fund shares, acts as dividend and
distribution disbursing agent, and performs other shareholder servicing
functions.
Certain Trustees and officers of the Trust are also officers of the
Advisor, the distributor or the Administrator.
NOTE 3 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund incurred in connection with its organization
and the registration of its shares have been assumed by the Fund. The
organization expenses are being amortized over a period of sixty
months. Investors purchasing shares of the Fund bear such expenses only
as they are amortized against the Fund's investment income.
NOTE 4 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $4,360,884 and $971,595, respectively, for the period ended
November 30, 1998.
