<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
May 3, 1999
Fellow Partner:
Our Fund earned $0.96 per share of net investment income in the three
months ended March 31, 1999, as compared to $0.92 per share in the same period
of 1998.
After providing for the $0.85 per share distribution of ordinary income and
the $0.0546 distribution of 1998 capital gain to partners of record on March 30,
1999, the net asset value per partnership share at March 31, 1999 was $349.95,
again a record quarter-end high.
Securities purchased since our last report were: 17,100 shares of Lowe's
Companies, Inc., 12,500 shares of MCI WORLDCOM, INC., and 35,000 shares of
Staples, Inc. Shares received from stock splits were: 49,622 shares of IMS
Health, Inc., 101,234 shares of McDonald's Corporation, 203,995 shares of Merck
& Company, Inc. and 27,700 shares of Microsoft Corp.
The accompanying Investment Adviser's Report provides a comparison of our
Fund's recent performance to that of the Dow Jones Industrial Average and the
Standard & Poor's 500 Index.
Your comments or questions about Chestnut Street Exchange Fund are
welcomed.
Yours sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
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INVESTMENT ADVISER'S REPORT
US MARKET OVERVIEW
US equity performance was mixed during the first quarter of 1999. Large cap
stocks, as measured by the Russell 1000 Index, gained 4.12% while small cap
stocks, represented by the Russell 2000 Index, fell 5.42%. More notably, the Dow
Jones Industrial Average reached the 10,000 level for the first time, while the
S&P 500 Index gained 4.96%.
Once again, growth stocks significantly outperformed value stocks. The
Russell 1000 Growth Index gained 6.36% versus a 1.43% return for its value
counterpart. The style differential was even more pronounced at the smaller end
of the market, where growth stocks outperformed value stocks by just over 800
basis points. First quarter returns represent the second largest
underperformance by small stocks since the inception of the Russell 2000 Index
in 1979. The largest difference was in the third quarter of 1990 when the S&P
500 Index outperformed the Russell 2000 Index by 10.5%.
The Internet phenomenon continued unabated during the first quarter. Led by
America Online's return of almost 90%, Internet stocks significantly boosted the
returns of the large cap benchmarks. However, the overall impact of Internet
stocks has been strongest at the smaller end of the market, where they
contributed 315 basis points to the Russell 2000 Index return. Of the 25 best
performing companies within the index, 20 were Internet issues. Of these 20
companies, 13 gained over 100% during the first quarter alone.
The narrowness of the market's gains may concern investors, as a relatively
small group of large cap and Internet-related stocks accounted for much of the
market's strength over the past three months. However, the S&P 500 Index has had
annual returns over 10% on a price only basis 9 times since 1985. In each of
those years, the top 10 constituents (2% of the stocks) of the Index contributed
at least 20% of the return. In several years, they contributed nearly 40%. So
this recent "narrow breadth" is not unusual and does not necessarily signal the
end of a bull market. Over the last few years, the market has also been
characterized by dominant performance of growth stocks versus value stocks
across the capitalization range. This trend has continued although some value
groups, most notably energy and financials, have performed well.
The Fund's performance was helped by overweight in the strong performing
capital goods sector and underweights in the poorly performing utilities and
consumer staples sectors. Performance was hurt by overweight in the poorly
performing consumer cyclicals and healthcare sectors and underweights in the
strong technology sector.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
03/31/98 03/31/99
------------ ------------
<S> <C> <C>
Chestnut Street Exchange Fund.............................. 12.40% 0.95%
Dow Jones Industrial Average............................... 11.75% 7.02%
Standard & Poor's 500 Index................................ 13.96% 4.96%
</TABLE>
April 30, 1999 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
2
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CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
COMMON STOCKS--99.4%
AUTO & AUTO PARTS--0.4%
61,948 Genuine Parts Company...... $ 1,784,877
------------
BANKS--9.4%
49,826 BANC ONE CORPORATION ...... 2,743,544
208,286 BankAmerica Corp. ......... 14,710,199
97,200 First Union Corp. ......... 5,194,125
40,000 Morgan (J.P.) & Co., Inc. . 4,935,000
314,532 Wells Fargo & Co. ......... 11,028,278
------------
38,611,146
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BUILDING MATERIALS & FOREST
PRODUCTS--1.4%
45,130 Armstrong World Industries,
Inc. .................... 2,039,312
17,100 Lowe's Companies, Inc. .... 1,034,550
45,830 Weyerhaeuser Company....... 2,543,565
------------
5,617,427
------------
BUSINESS PRODUCTS &
SERVICES--1.7%
50,647 Dun & Bradstreet
Corporation.............. 1,804,299
68,416 Harland (John H.) Co. ..... 885,132
52,000 Minnesota Mining &
Manufacturing Company.... 3,679,000
16,882 Nielsen Media Research,
Inc. .................... 416,774
------------
6,785,205
------------
CHEMICALS--2.7%
193,400 Air Products & Chemicals,
Inc. .................... 6,623,950
208,000 Cabot Corporation.......... 4,420,000
------------
11,043,950
------------
CONSUMER NON-DURABLES &
SERVICES--4.7%
118,953* Cendant Corp. ............. 1,873,510
283,411 Coca-Cola (The) Company.... 17,394,350
------------
19,267,860
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CONTAINERS--0.5%
67,148 Crown Cork & Seal Company,
Inc. .................... 1,917,915
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
DRUGS & MEDICAL--23.6%
243,928 Abbott Laboratories,
Inc. .................... $ 11,418,879
39,177 Baxter International, Inc.. 2,585,682
96,599 IMS Health, Inc. .......... 3,199,842
403,668 Johnson & Johnson, Inc. ... 37,818,646
407,990 Merck & Company, Inc. ..... 32,715,698
124,000 SmithKline Beecham p.l.c.
ADR...................... 8,866,000
------------
96,604,747
------------
ELECTRICAL EQUIPMENT--6.1%
202,185 Emerson Electric Company... 10,703,168
128,000 General Electric Company... 14,160,000
------------
24,863,168
------------
ELECTRONICS--24.3%
92,056 AMP, Inc. ................. 4,942,256
44,596 Hewlett-Packard Company.... 3,024,166
535,566 Intel Corp. ............... 63,799,300
42,130 Lucent Technologies, Inc. . 4,539,508
55,400* Microsoft Corp. ........... 4,965,225
119,118 Motorola, Incorporated..... 8,725,394
159,207 Raytheon Company........... 9,333,510
------------
99,329,359
------------
ENTERTAINMENT--1.6%
204,000 Walt Disney Company........ 6,349,500
------------
FOOD PROCESSING &
DISTRIBUTION--2.8%
97,500 Hershey Foods Corp. ....... 5,460,000
174,000 Philip Morris Cos., Inc. .. 6,122,625
------------
11,582,625
------------
INSURANCE & FINANCIAL--5.1%
44,000 Aetna, Inc. ............... 3,652,000
43,930 American Express Company... 5,161,775
36,084 CIGNA Corp. ............... 3,024,290
70,000 Fannie Mae................. 4,847,500
58,176 Marsh & McLennan Companies,
Inc. .................... 4,315,932
------------
21,001,497
------------
LODGING & RESTAURANT--2.2%
202,468 McDonald's Corporation..... 9,174,331
------------
</TABLE>
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<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
NATURAL GAS
TRANSMISSION--0.2%
24,000 Tenneco, Inc. ............. $ 670,500
------------
OFFICE EQUIPMENT--0.9%
20,942 International Business
Machines Corporation..... 3,711,969
------------
PAPER--0.6%
49,638 Consolidated Papers, Inc. ... 1,166,493
55,432 Westvaco Corp. ............ 1,164,072
------------
2,330,565
------------
PETROLEUM--2.2%
27,000 Atlantic Richfield Co. .... 1,971,000
34,245 Burlington Resources, Inc. 1,367,660
77,648 Exxon Corp. ............... 5,479,037
------------
8,817,697
------------
PETROLEUM EQUIPMENT &
SERVICES--0.9%
60,432 Schlumberger, Ltd. ........ 3,637,251
------------
POLLUTION CONTROL--1.1%
114,556 Browning Ferris Industries,
Inc. .................... 4,417,566
------------
RETAIL--GENERAL &
SPECIALTY--3.4%
116,772 Albertson's, Inc. ......... 6,342,179
117,200 CVS Corp. ................. 5,567,000
27,567 Penney (J.C.) Company, Inc. 1,116,464
35,000 Staples, Inc. ............. 1,150,625
------------
14,176,268
------------
TELEPHONE UTILITIES--2.1%
124,355 GTE Corp. ................. 7,523,478
12,500 MCI WORLDCOM, INC. ........ 1,107,031
------------
8,630,509
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
TRANSPORTATION--1.5%
119,796 Burlington Northern, Inc. $ 3,938,294
40,000 Union Pacific Corp. ....... 2,137,500
------------
6,075,794
------------
Total Common Stocks
(Cost $54,262,902)....... 406,401,726
------------
PAR
- ----------
<C> <S> <C>
SHORT-TERM OBLIGATIONS--0.7%
$3,010,000 Federal Home Loan Mortgage
Corporation, Commercial
Paper, 4.70%, 04/01/99
(Cost $3,010,000)........ 3,010,000
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENT IN SECURITIES
(Cost $57,272,902)....... 100.1% 409,411,726
Distributions payable...... (0.2%) (1,056,918)
Other assets in excess of
other liabilities........ 0.1% 524,519
----- ------------
NET ASSETS (Applicable to
1,168,400 partnership
shares outstanding)...... 100.0% $408,879,327
===== ============
NET ASSET VALUE PER
SHARE.................... $ 349.95
============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,162,995 shares)....... $406,987,858
Managing general partners
(5,405 shares)........... 1,891,469
------------
Total net assets
(1,168,400 shares)....... $408,879,327
============
</TABLE>
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* Non-Income Producing
Values for securities listed on a securities exchange are based on the last
reported sale price on March 31, 1999. Securities not so listed or not traded on
that date are valued at the latest bid price.
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MANAGING GENERAL PARTNERS
Richard C. Caldwell
Robert R. Fortune
G. Willing Pepper
Langhorne B. Smith
David R. Wilmerding, Jr.
INVESTMENT ADVISERS
BlackRock Institutional
Management Corporation and
BlackRock Financial Management, Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
TRANSFER AGENT
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19899
(800) 852-4750
(302) 791-1043 (Delaware)
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[CHESTNUT STREET EXCHANGE FUND LOGO]
First Quarter Report
March 31, 1999
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
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