<PAGE>
[ARTWORK]
FRANK RUSSELL INVESTMENT COMPANY
1997 ANNUAL REPORT
SPECIALTY FUNDS REAL ESTATE SECURITIES FUND
EMERGING MARKETS FUND
EQUITY FUND
LIMITED VOLATILITY TAX FREE FUND
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
TAX FREE MONEY MARKET FUND
December 31, 1997
[LOGO OF RUSSELL]
<PAGE>
Frank Russell Investment Company
Frank Russell Investment Company is a "series mutual fund" with 28 different
investment portfolios. These financial statements report on seven Funds, each of
which has distinct investment objectives and strategies.
Frank Russell Investment Management Company
Responsible for overall management and administration of the Funds.
Frank Russell Company
Consultant to Frank Russell Investment Management Company.
<PAGE>
Frank Russell Investment Company
Specialty Funds
Annual Report
December 31, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Our clients.................................................. 1
Real Estate Securities Fund............................................ 2
Emerging Markets Fund.................................................. 12
Equity T Fund.......................................................... 28
Limited Volatility Tax Free Fund....................................... 38
Money Market Fund...................................................... 52
U.S. Government Money Market Fund...................................... 60
Tax Free Money Market Fund............................................. 66
Notes to Financial Statements.......................................... 78
Report of Independent Accountants...................................... 86
Tax Information........................................................ 87
Manager, Money Managers and Service Providers.......................... 88
</TABLE>
Frank Russell Investment Company - Specialty Funds
Copyright (C) Frank Russell Company 1998. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. Frank Russell Company and Standard & Poor's
Corporation are the owners of the trademarks, service marks, and copyrights
related to their respective indexes. This material must be accompanied or
preceded by a current Frank Russell Investment Company Prospectus containing
complete information concerning the investment objectives and operations of the
Company, charges, and expenses. The Prospectus should be read carefully before
an investment is made. The performance quoted represents past performance and,
except for a money market fund, the investment return and principal value of an
investment will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. An investment in a money market fund is neither
insured nor guaranteed by the US government. There can be no assurance that a
money market fund will be able to maintain a stable net asset value of $1.00 per
share. Investments in securities of non-US issuers and foreign currencies
involve investment risks different than those of US issuers; the Prospectus
contains further information and details regarding these risks. Income from
tax-free funds may be subject to an alternative minimum tax, or state and local
taxes. Russell Fund Distributors, Inc., is the distributor of Frank Russell
Investment Company.
<PAGE>
To Our Clients
Frank Russell Investment Company is pleased to present its 1997 Annual Report.
This report covers information on seven of the Funds and represents the Funds'
sixteenth year of operation.
During the past year we have continued our focus on the benefits of
multi-manager, multi-style diversification in structuring the Funds. We remain
committed to providing our clients with superior investment solutions across
each of our multiple manager and style Funds. These efforts proved worthwhile in
1997 as our Funds, in general, provided solid returns as compared to their
respective benchmarks and attracted many new investors, both creating
significant growth in assets.
Frank Russell Investment Management Company continuously evaluates the Funds we
offer our clients. Each of these Funds is carefully monitored by Russell's
investment professionals to ensure that the most appropriate investment advisors
and strategies are utilized within each Fund. The Advisors are monitored by the
Frank Russell Investment Management Company, using the expertise and advice of
the consulting group of Frank Russell Company.
During the past year, the Frank Russell Investment Company opened five new
LifePoints Funds; Equity Balanced Strategy Fund, Aggressive Strategy Fund,
Balanced Strategy Fund, Moderate Strategy Fund and Conservative Strategy Fund.
The LifePoints Funds diversify their assets by investing in shares of six to
eight Funds of the Frank Russell Investment Company, referred to as the
Underlying Funds. Each LifePoints Fund has a different investment objective
which it seeks to achieve by investing in different combinations of the
Underlying Funds. We are excited to offer these new products which we believe
will provide additional diversification and convenience through a built-in asset
allocation strategy.
We look forward to having the opportunity to work with you over the upcoming
year and continuing to earn your support by exceeding your expectations. Thank
you for your continued confidence and investment with Frank Russell Investment
Company.
Sincerely,
/s/ George F. Russell, Jr. /s/ Lynn L. Anderson
George F. Russell, Jr. Lynn L. Anderson
Chairman President and Chief Executive Officer
Frank Russell Company Frank Russell Investment Company
<PAGE>
Real Estate Securities Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To achieve a high level of total return generated through
above-average current income, while maintaining the potential for capital
appreciation.
Invests in: Equity securities of companies in the real estate industry.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns with moderate risk. The Fund employed the investment management services
of two managers with distinct approaches to investing in real estate equity
securities.
PERFORMANCE CHART
<TABLE>
<CAPTION>
Real Estate
Securities - NAREIT Equity Lipper (C)
Dates Class S REIT ** Real Estate +
----------- ------------ ------------- -------------
<S> <C> <C> <C>
Inception * $10,000 $10,000 $10,000
1989 $ 9,843 $ 9,690 $ 9,692
1990 $ 8,276 $ 8,203 $ 8,093
1991 $11,345 $11,118 $10,712
1992 $13,306 $12,733 $12,093
1993 $15,624 $15,237 $14,911
1994 $16,754 $15,721 $14,614
1995 $18,576 $18,119 $16,528
1996 $25,414 $24,507 $21,656
1997 $30,240 $29,480 $26,490
</TABLE>
<TABLE>
<CAPTION>
Real Estate Securities Fund - Class S NAREIT Equity REIT Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
----------------- ------------ ------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 11,899 18.99% 1 Year $ 12,029 20.29%
5 Years $ 22,723 17.84%(S) 5 Years $ 23,153 18.28%(S)
Inception $ 30,240 14.03%(S) Inception $ 29,480 13.71%(S)
<CAPTION>
Real Estate Securities Fund - Class C *++ Lipper(C) Real Estate Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
----------------- ------------ ------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 11,820 18.20% 1 Year $ 12,232 22.32%
5 Years $ 22,543 17.65%(S) 5 Years $ 21,904 16.98%(S)
Inception $ 29,996 13.92%(S) Inception $ 26,490 12.53%(S)
</TABLE>
* Real Estate Securities Fund - Class S assumes initial investment on July 28,
1989. NAREIT Index comparison for the initial investment began August 1,
1989. Lipper index comparison for the initial investment began October 1,
1989.
** NAREIT Equity REIT Index is an index composed of all the data based on the
last closing price of the month for all tax-qualified REIT's listed on the
New York Stock Exchange, American Stock Exchange, and the NASDAQ National
Market System. The data is market value-weighted. The total-return
calculation is based upon whether it is 1-month, 3-months or 12-months. Only
those REITS listed for the entire period are used in the total return
calculation.
+ Lipper(C) Real Estate Benchmark is the average total return for the universe
of funds within the Real Estate Funds investment objective. The total return
for the funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates.
++ Real Estate Securities Fund - Class C - For the period, November 4, 1996
(commencement of sales) to December 31, 1997, shareholder service and Rule
12b-1 distribution fees were charged. Total return would have been lower had
these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
(S) Annualized.
2 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year end December 31, 1997, the Real Estate Securities Fund Class S and
Class C shares reflected total returns of 19.0% and 18.2%, respectively, as
compared to the NAREIT Equity REIT Index which gained 20.3%. The Fund lagged the
Index primarily due to an underweighting in higher valued REITs, which appeared
to be favored by momentum-oriented investors.
Portfolio Highlights
1997 was another very good year for equity REIT investments. Continuing good
fundamentals for real estate in general and a very active merger and acquisition
market boosted REIT prices. Three securities dominated the market during the
year; Crescent, Vornado, and Starwood Lodging accounted for three percentage
points of the market's 20% rise. It was also a market undergoing significant
change. At year end, 50 REITs had capitalizations in excess of $1 billion -- a
reflection of a strong consolidation trend and two consecutive years of strong
price appreciation. There were also more REITs at year end than at the
beginning, ending a trend of shrinkage in the number of issues due to
consolidation. Many of the new REITs were quite interesting, including a prison
REIT, a used car lot REIT, and a theater REIT.
The Real Estate Securities Fund was underweighted in the market's strongest
performers during the year. The value orientation of the Fund's new manager,
AEW, limited their willingness to pay up for some of these issues. Cohen &
Steers produced good results again in 1997, but faced the daunting task of
managing an increasingly large asset base. Both managers did, however, add value
elsewhere, particularly in the fourth quarter as the market was attracted to the
higher yields and lower valuations on many REITs, as well as the REIT market's
isolation from problems in Asia.
- --------------------------------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Vornado Realty Trust 4.2%
Rouse Co. (The) 3.5
Public Storage, Inc. 3.4
Mack-Cali Realty Corp. 3.0
Equity Office Properties Trust 2.9
Security Capital Industrial Trust 2.9
Highwoods Properties, Inc. 2.8
Starwood Lodging Trust 2.7
DeBartolo Realty Corp. 2.7
Spieker Properties, Inc. 2.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current PIE Ratio 29.8x
Portfolio Price/Book Ratio 2.47x
Market Capitalization - $-Weighted Average 1.64 Bil
Number of Holdings 82
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers
AEW Capital Management, L.P.
Cohen & Steers Capital Management
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Specialty Funds Real Estate Securities Fund 3
<PAGE>
Real Estate Securities Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Common Stocks (b) - 96.0%
Apartment - 16.2%
Ambassador Apartments, Inc. 63,400 $ 1,304
Apartment Investment & Management Co. 248,800 9,143
Avalon Properties, Inc. 342,500 10,596
Bay Apartment Communities, Inc. 104,300 4,068
Berkshire Realty Company, Inc. 115,000 1,380
BRE Properties, Inc. 86,700 2,438
Colonial Properties Trust 103,600 3,121
Equity Residential Properties Trust 104,500 5,284
Essex Property Trust Inc. 166,200 5,817
Irvine Apartment Communities, Inc. 175,500 5,583
Merry Land & Investment Company, Inc. 83,000 1,899
Mid-America Apartment Communities, Inc. 41,700 1,191
Oasis Residential, Inc. 255,500 5,701
Post Properties, Inc. 311,096 12,638
Security Capital Atlantic, Inc. 334,074 7,057
Security Capital Pacific Trust 189,700 4,600
Smith (Charles E.) Residential Realty, Inc. 279,300 9,915
Summit Properties, Inc. 251,800 5,319
United Dominion Realty Trust 214,638 2,992
---------
100,046
Health Care - 5.0%
Alternative Living Services, Inc. (a) 117,000 3,459
American Retirement Corp. (a) 152,700 3,054
Healthcare Realty Trust, Inc. 71,600 2,072
Meditrust Cos. 360,800 13,214
Sunrise Assisted Living, Inc. (a) 210,400 8,968
---------
30,767
---------
Hotels/Leisure - 5.3%
Boykin Lodging Company 78,600 2,078
Bristol Hotel Co. (a) 201,700 5,862
FelCor Suite Hotels, Inc. 115,700 4,107
Homestead Village Properties, Inc. (a) 14,499 218
RFS Hotel Investors, Inc. 177,400 3,537
Starwood Lodging Trust 288,700 16,709
---------
32,511
---------
Leasing - 0.7%
CCA Prison Realty Trust 37,000 1,651
Entertainment Properties Trust 78,000 1,511
Golf Trust of America, Inc. 32,600 946
---------
4,108
---------
Manufactured Homes - 0.9%
Sun Communities, Inc. 149,800 $ 5,383
---------
5,383
---------
Office/Industrial - 36.7%
AMB Property Corp. 146,500 3,681
Arden Realty Group, Inc. 359,200 11,045
Bedford Property Investors, Inc. 126,500 2,767
Brandywine Realty Trust 172,000 4,322
CarrAmerica Realty Corp. 278,650 8,830
Catellus Development Corp. (a) 541,200 10,824
CenterPoint Properties Corp. 171,800 6,034
Cousins Properties, Inc. 279,900 8,204
Crescent Operating, Inc. (a) 47,900 1,162
Crescent Real Estate Equities, Inc. 379,100 14,927
Duke Realty Investment, Inc. 4,000 97
Equity Office Properties Trust 555,949 17,547
First Industrial Realty Trust, Inc. 396,400 14,320
Highwoods Properties, Inc. 466,600 17,352
Kilroy Realty Corp. 247,700 7,121
Liberty Property Trust 186,400 5,324
Mack-Cali Realty Corp. 455,900 18,692
Meridian Industrial Trust, Inc. 213,900 5,454
Pacific Gulf Properties, Inc. 127,500 3,028
Prentiss Properties Trust 259,300 7,244
Reckson Associates Realty Corp. 440,200 11,170
Security Capital Group, Inc. (a) 146,600 4,765
Security Capital Group, Inc. 1998 Warrants (a) 66,050 347
Security Capital Industrial Trust 703,018 17,488
SL Green Realty Corp. 97,300 2,524
Spieker Properties, Inc. 380,800 16,327
Trizec Hahn Corp. 78,500 1,820
Weeks Corp. 120,900 3,869
--------
226,285
--------
Outlet Centers - 3.1%
Chelsea GCA Realty, Inc. 104,200 3,979
Prime Retail, Inc. 502,900 7,135
Tanger Factory Outlet Centers, Inc. 253,600 7,751
--------
18,865
--------
Regional Malls - 13.7%
CBL & Associates Properties, Inc. 200,000 4,938
General Growth Properties 408,100 14,743
</TABLE>
4 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
---------- ---------
<S> <C> <C>
J.P. Realty, Inc. 226,400 $ 5,872
Macerich Co. (The) 331,300 9,442
Mills Corp. 82,300 2,016
Rouse Co. (The) 662,900 21,710
Simon DeBartolo Realty Corp. 505,300 16,517
Taubman Centers, Inc. 414,800 5,392
Urban Shopping Centers, Inc. 113,700 3,965
-------
84,595
-------
Self Storage - 4.1%
Public Storage, Inc. 716,000 21,033
Shurgard Storage Centers, Inc. 147,600 4,280
-------
25,313
-------
Shopping Center - 10.3%
Bradley Real Estate, Inc. 218,000 4,578
Developers Diversified Realty Corp. 279,200 10,679
Glimcher Realty Trust 348,800 7,870
Kimco Realty Corp. 276,100 9,733
Kranzco Realty Trust 180,000 3,454
Malan Realty Investors, Inc. 74,100 1,343
Vornado Realty Trust 550,200 25,825
-------
63,482
-------
Total Common Stocks
(cost $465,221) 591,355
-------
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
Short-Term Investment - 3.5%
Frank Russell Investment Company
Money Market Fund,
due on demand (c) $ 21,550 $ 21,550
--------
Total Short-Term Investment
(cost $21,550) 21,550
--------
Total Investments
(identified cost $486,771)(d) - 99.5% 612,905
Other Assets And Liabilities,
Net-0.5% 2,966
--------
Net Assets-- 100.0% $615,871
========
</TABLE>
(a) Nonincome-producing security.
(b) All common stocks held are Real Estate Investment Trusts (REIT) with
the exception of the following:
Alternative Living Services, Inc.
American Retirement Corp.
Bristol Hotel Co.
Catellus Development Corp.
Crescent Operating, Inc.
Rouse Co. (The)
Sunrise Assisted Living, Inc.
Trizec Hahn Corp.
(c) At cost, which approximates market.
(d) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
Specialty Funds Real Estate Securities Fund 5
<PAGE>
Real Estate Securities Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $486,771)(Note 2)...................................................... $ 612,905
Cash.......................................................................................................... 196
Receivables:
Dividends................................................................................................. 2,936
Investments sold.......................................................................................... 4,625
Fund shares sold.......................................................................................... 3,487
--------------------
Total Assets........................................................................................... 624,149
Liabilities
Payables:
Investments purchased............................................................... $ 7,263
Fund shares redeemed................................................................ 397
Accrued fees to affiliates (Note 4)................................................. 521
Other accrued expenses.............................................................. 97
------------------
Total Liabilities...................................................................................... 8,278
--------------------
Net Assets.................................................................................................... $ 615,871
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income.................................................. $ (9)
Accumulated net realized gain (loss).......................................................................... 8,305
Unrealized appreciation (depreciation) on investments......................................................... 126,134
Shares of beneficial interest................................................................................. 200
Additional paid-in capital.................................................................................... 481,241
--------------------
Net Assets.................................................................................................... $ 615,871
====================
Net Asset Value, offering and redemption price per share:
Class S ($615,482,560 divided by 19,942,784 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 30.86
====================
Class C ($388,555 divided by 12,525 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 31.02
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends................................................................................................. $ 27,472
Dividends from Money Market Fund (Note 5)................................................................. 1,704
--------------------
Total Investment Income................................................................................ 29,176
Expenses (Notes 1, 2 and 4):
Management fees..................................................................... $ 4,428
Custodian fees...................................................................... 209
Transfer agent fees................................................................. 526
Bookkeeping service fees............................................................ 9
Professional fees................................................................... 17
Registration fees - Class S......................................................... 75
Distribution fees - Class C......................................................... 1
Shareholder servicing fees - Class C................................................ 1
Trustees' fees...................................................................... 5
Miscellaneous fees.................................................................. 52
------------------
Total Expenses......................................................................................... 5,323
--------------------
Net investment income......................................................................................... 23,853
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments..................................................................... 44,736
Net change in unrealized appreciation or depreciation of investments.......................................... 27,721
--------------------
Net gain (loss) on investments................................................................................ 72,457
--------------------
Net increase (decrease) in net assets resulting from operations............................................... $ 96,310
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Real Estate Securities Fund 7
<PAGE>
Real Estate Securities Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.................................................................... $ 23,853 $ 19,518
Net realized gain (loss)................................................................. 44,736 24,667
Net change in unrealized appreciation or depreciation.................................... 27,721 75,950
------------------ -----------------
Net increase (decrease) in net assets resulting from operations.................... 96,310 120,135
------------------ -----------------
From Distributions to Shareholders:
Net investment income
Class S................................................................................ (24,656) (18,705)
Class C................................................................................ (9) (1)
In excess of net investment income
Class S................................................................................ (9) --
Net realized gain on investments
Class S................................................................................ (40,156) (18,473)
Class C................................................................................ (25) (4)
------------------ -----------------
Total Distributions to Shareholders................................................ (64,855) (37,183)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)............... 138,695 71,779
------------------ -----------------
Total Net Increase (Decrease) in Net Assets.................................................. 170,150 154,731
Net Assets
Beginning of period...................................................................... 445,721 290,990
------------------ -----------------
End of period (including accumulated distributions in excess of
net investment income of $9 and undistributed net investment income
of $812, respectively)................................................................. $ 615,871 $ 445,721
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
8 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 29.19 $ 23.51 $ 22.53 $ 22.76 $ 21.50
----------- ----------- --------- --------- ---------
Income From Investment Operations:
Net investment income ................................ 1.36 1.39 1.32 1.25 1.05
Net realized and unrealized gain (loss) on investments 3.93 6.89 1.03 .40 2.68
----------- ----------- --------- --------- ---------
Total Income From Investment Operations ........... 5.29 8.28 2.35 1.65 3.73
----------- ----------- --------- --------- ---------
Less Distributions:
Net investment income ................................ (1.41) (1.34) (1.35) (1.23) (1.04)
Net realized gain on investments ..................... (2.21) (1.26) -- (.45) (1.43)
In excess of net realized gain on investments ........ -- -- -- (.20) --
Tax return of capital ................................ -- -- (.02) -- --
----------- ----------- --------- --------- ---------
Total Distributions ............................... (3.62) (2.60) (1.37) (1.88) (2.47)
----------- ----------- --------- --------- ---------
Net Asset Value, End of Period .......................... $ 30.86 $ 29.19 $ 23.51 $ 22.53 $ 22.76
=========== =========== ========= ========= =========
Total Return (%) ........................................ 18.99 36.81 10.87 7.24 17.42
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ............. 615,483 445,619 290,990 209,208 145,167
Ratios to average net assets (%):
Operating expenses ................................ 1.02 1.04 1.04 1.05 1.11
Net investment income ............................. 4.57 5.64 6.10 5.65 4.52
Portfolio turnover rate (%) .......................... 49.40 51.75 23.49 45.84 58.38
Average commission rate paid per share
of security ($ omitted) ............................ .0618 .0631 N/A N/A N/A
</TABLE>
Speciality Funds Real Estate Securities Fund 9
<PAGE>
Real Estate Securities Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996*
--------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................................................ $ 29.18 $ 26.67
--------------- -------------
Income From Investment Operations:
Net investment income ....................................................................... 1.14 .24
Net realized and unrealized gain (loss) on investments ...................................... 3.95 3.85
--------------- -------------
Total Income From Investment Operations ................................................... 5.09 4.09
--------------- -------------
Less Distributions:
Net investment income ....................................................................... (1.04) (.32)
Net realized gain on investments ............................................................ (2.21) (1.26)
--------------- -------------
Total Distributions ....................................................................... (3.25) (1.58)
--------------- -------------
Net Asset Value, End of Period .................................................................. $ 31.02 $ 29.18
=============== =============
Total Return (%) ................................................................................ 18.20 15.75(a)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) .................................................... 388 101
Ratios to average net assets (%)(b):
Operating expenses ........................................................................ 1.71 1.77
Net investment income ..................................................................... 3.94 5.31
Portfolio turnover rate (%)(b) .............................................................. 49.40 51.75
Average commission rate paid per share
of security ($ omitted) ................................................................... .0618 .0631
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
10 Real Estate Securities Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide high total return, primarily through capital appreciation,
by assuming the higher level of volatility typically expected from investment in
underdeveloped markets.
Invests in: Primarily emerging market equity securities.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns with moderate risk when compared to either single country or region
emerging markets investments. The Fund employed the investment management
services of three managers with three separate approaches to global emerging
markets investment.
PERFORMANCE CHART
<TABLE>
<CAPTION>
EMERGING EXTENDED IFC INVESTABLE
DATES MARKETS ++ BARINGS EM ++++ COMPOSITE **
----------- ---------- --------------- --------------
<S> <C> <C> <C>
Inception * $10,000 $10,000 $10,000
1993 $14,183 $17,628 $16,864
1994 $13,356 $16,793 $16,775
1995 $12,260 $15,956 $14,708
1996 $13,763 $17,288 $15,868
1997 $13,289 $15,672 $13,579
</TABLE>
Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Emerging Markets Fund IFC Investable Composite Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
--------------- --------- -------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1 Year $ 9,655 (3.45)% 1 Year $ 8,558 (14.42)%
Inception $ 13,289 5.95%(S) Inception $ 13,579 6.42%(S)
<CAPTION>
Extended Barings Emerging Markets Index
Periods Ended Growth of Total
12/31/97 $10,000 Return
---------------- -------------- -------------
1 Year $ 9,066 (9.34)%
Inception $ 15,672 9.57%(S)
</TABLE>
* Assumes initial investment on January 29, 1993. IFC Index and Barings Index
assumes initial investment on February 1, 1993.
** International Finance Corporation (IFC) Investable Composite Index is a
market capitalization-weighted index of the performance of securities
listed on the stock exchange(s) of the countries included in the index,
calculated on a total-return basis. The investable index reflects the
accessibility of markets and individual stocks to foreign investors.
++ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but
gross of any investment services fees. Information concerning these fees
can be obtained from the fund's managers upon request.
++++ Extended Barings Emerging Markets Index is a market capitalization-weighted
index of companies' performance within 20 countries in Africa, Asia, Europe
and Latin America.
(S) Annualized.
12 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Emerging Markets Fund reflected a loss
of 3.5%, as compared to the Barings Extended Emerging Markets Index (BEMI),
which fell 9.3%. The Fund outperformed the BEMI primarily due to favorable
country allocation decisions, particularly an underweighting in several of the
poorest performing markets.
Portfolio Highlights
The performance of the emerging markets changed dramatically toward year end.
After currency speculators exposed weaknesses in the currencies of several
southeast Asian economies, stocks of emerging markets plunged steeply. The focus
of the selloff was in Asia, however, countries in regions around the globe
experienced similarly dramatic short-term selloffs as investors adopted a "shoot
first, ask questions later" attitude. Much like 1996, the first half of 1997 was
quite favorable. The Barings Extended Emerging Markets Index was up more than
19% at mid year. The second half of the year was a virtual freefall as markets
in the index dropped nearly 25%. Latin American markets were not immune to the
market's year end weakness, but posted good gains for the year. Several Asian
markets suffered dramatic losses, particularly Malaysia, Korea, and Thailand,
all of which plummeted over 60%. The Europe, Middle East, and African region
produced a moderate gain, led by Russian and Turkey, which rose nearly 100% in
1997.
The Emerging Markets Fund experienced a relatively good year given the
precarious investment landscape. All three of the Fund's managers exceeded the
benchmark return for the year, and as a result, the Fund's 3.5% loss was nearly
600 basis points better than the index. Good country selection accounted for
much of the Fund's added value as the fund avoided much of the huge losses in
Asia by being underweighted and by focusing investments on stocks less impacted
by the drop in share prices. The fund also benefited from overweighted holdings
in Russia and several Latin American markets.
- --------------------------------------------------------------------------------
Top Ten Issues
(as a percent of Total Investments) December 31, 1997
Telefonos de Mexico SA Series L (Mexico) 3.0%
Telecomunicacoes Brasileiras NPV (Brazil) 2.2
CIA Anon Nacional Telefonos (Venezuela) 2.0
YPF Sociedad Anonima Class D (Argentina) 1.8
Petroleo Brasileiro SA NPV - ADR (Brazil) 1.7
Telecomunicacoes Brasileiras ADR (Brazil) 1.3
Cimpor Cimentos (Portugal) 1.2
Tatneft ADR (Russia) 1.2
Yapi Kredi Bankasi (Turkey) 1.1
Genesis India Investment (India) 1.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 16.7x
Portfolio Price/Book Ratio 1.68x
Market Capitalization - $ - Weighted Average 7.6 Bil
Number of Holdings 395
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers
Genesis Asset Managers, Ltd.
Montgomery Asset Management L.P.
J.P. Morgan Investment Management, Inc.
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
Specialty Funds Emerging Markets Fund 13
<PAGE>
Emerging Markets Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Common Stocks - 81.7%
Argentina - 4.9%
Banco de Galicia y Buenos Aires
Class B New - ADR 11,900 $ 306
Central Puerto SA Class B 120,000 336
Comercial de Plata 91,460 144
Corcemar SA Class B 99,462 481
Cresud SA (a) 281,400 563
Inversiones Y Representaciones 76,881 286
Inversiones Y Representaciones SA - GDR 10,372 390
Molinos Rio Plata 171,050 411
Naviera Perez Companc Class B 176,431 1,260
Perez Companc SA Class B - ADR 33,680 467
Siderar SA Series A 238,200 1,013
Telecom Argentina Class B 87,122 627
Telecom Argentina SA Class B - ADR 36,800 1,316
Telefonica de Argentina Class B 150,000 563
Telefonica de Argentina Class B - ADR 40,800 1,520
Transportadora de Gas del Sur SA Class B 280,000 636
YPF Sociedad Anonima Class D - ADR 176,600 6,038
--------
16,357
--------
Australia - 0.4%
Lihir Gold, Ltd. (a) 444,200 463
Orogen Minerals, Ltd. 480,000 939
---------
1,402
---------
Austria - 0.5%
Elektrim SA (a) 801 8
Tabak AS (a) 3,500 798
Zaklady Przemyslu Cukiemiczego
Jutrzenka SA (a) 25,900 474
Zywiec (a) 3,872 319
---------
1,599
---------
Bangladesh - 0.0%
Apex Tannery, Ltd. 4,600 41
Beximco Infusions 7,500 75
---------
116
---------
Bermuda - 0.4%
Central European Media Enterprises, Ltd.
Class A (a) 50,500 1,263
---------
1,263
---------
Brazil - 7.8%
Banco Bradesco SA NPV Rights (a) 15,332,293 55
Bompreco SA Supermercados do
Nordeste - GDR (Regd)(a) 28,500 526
Centrais Electricas de Santa 5,400 556
Centrais Electricas de Santa
Catarina SA - GDR (a) 700 74
Companhia Brasileira de Distribuicao
Grupo
Pao de Acucar (Regd) - GDR 2,500 49
Companhia Cervejaria Brahma - ADR 59,171 840
Companhia Energetica de Sao 16,300 660
Companhia Paranaense de
Energia-Copel - ADR 45,400 522
Copene Petroquirnica do Nordeste
SA - ADR 50,600 734
Eletrobras (centrais) NPV 28,310,000 1,408
Forca E Luz (Cia Paul) NPV 15,747,000 2,074
Light - Servicos de Eletricidade SA NPV 2,810,000 1,171
Makro Atacadista - GDS (a) 60,000 480
Makro Atacadista SA - GDR 60,800 486
Petroleo Brasileiro Petrobras SA - ADR 78,000 1,794
Rhodia Ster SA NPV (a) 129,820 14
Sabesp Cia Saneam 2,107,000 500
Souza Cruz NPV 48,620 392
Telecomunicacoes Brasileiras - ADR 36,708 4,274
Telecomunicacoes Brasileiras NPV 71,883,900 7,311
Telecomunicacoes Sao Paulo NPV (a) 19,113 4
Uniao de Bancos Brasileiros SA. -
GDR (a) 32,100 1,033
Votorantim Celulose e Papel SA - ADR 39,500 400
White Martins SA - NPV 374,738 547
---------
25,904
---------
Chile - 4.4%
Administradora de Fondos de Pensiones
Provida SA - ADR 27,870 476
Antofagasta Holdings PLC 283,636 1,514
Banco Santander Chile Series A - ADR 36,500 516
Banco Santiago - ADR (a) 20,000 445
Ohilgener SA - ADR 56,697 1,389
Compania de Telecomunicaciones de
Chile SA - ADR 54,893 1,640
Distribucion y Servicio D&S SA - ADR (a) 40,000 742
Embotelladora Andina SA - ADR Series A 53,300 1,109
Embotelladora Andina SA - ADR Series B 46,000 894
Enersis SA - ADR 70,755 2,052
Laboratorio Chile SA - ADR 30,000 668
Linea Aerea Nacional Chile SA - ADR (a) 51,400 700
</TABLE>
14 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- --------
<S> <C> <C>
Madeco SA-ADR 17,142 $ 261
Maderas Y Sinteticos Sociedad - ADR 25,400 241
Quinenco SA - ADR (a) 82,100 944
Sociedad Quimica Y Minera de
Chile SA - ADR 15,630 688
Supermercados Unimarc SA - ADR (a) 37,100 457
--------
14,736
--------
China - 0.7%
Anhui Conch Cement Co., Ltd. (a) 1,264,000 220
China Resources Beijing Land 41,000 20
China Telecom (Hong Kong), Ltd. - ADR (a) 30,000 1,007
Huaneng Power International, Inc.
Series N - ADR (a) 47,400 1,099
--------
2,346
--------
Colombia - 0.1%
Banco de Colombia New - GDR 17,300 99
Cementos Diamante SA Class B - ADR 31,200 359
--------
458
--------
Czech Republic - 1.3%
Ameriyah Cement Co. 46,100 1,077
Czechoslovakian Value Fund (Units)(a) 62,000 357
Elektramy Opatovice AS 2,200 255
Komercni Banka AS - GDR (a) 45,100 541
Komercni Banka AS - GDR (144A)(a) 17,000 204
Komercni Banka IF (a) 18,900 374
Privat Fonds (a) 53,400 645
Vseobecny Investment Fund (a) 119,775 295
Vynosovy Investment Fund (a) 55,500 300
Zivnostenska Banka 8,200 451
--------
4,499
--------
Ecuador - 0.3%
La Cement National - GDR (a) 3,700 751
La Cemento Nacional CA - GDR 700 142
--------
893
--------
Egypt - 0.8%
Al Ahram Beverage Co. S.A.E. (a) 8,700 496
Commercial International Bank (Regd) - GDR 43,250 895
Paints & Chemical Industry Co. - GDR (a) 57,600 601
Torah Portland Cement Co. 22,985 527
--------
2,519
--------
France - 0.0%
Elf Gabon 1,100 179
--------
179
--------
Germany - 0.4%
Al Ahram Beverage Co. - GDR 27,000 759
Al Ahram Beverage Co. - GDR (144A) 21,400 601
--------
1,360
--------
Greece - 1.1%
Athens Medical Center SA (Regd) 56,550 668
Ergo Bank (Regd) 18,400 951
Hellenic Bottling 22,000 510
Hellenic Telecommunication Organization SA 39,650 812
National Mortgage Bank 7,020 381
Silver & Baryte Ores Mining 23,360 424
--------
3,746
--------
Hong Kong - 2.6%
Chen Hsong Holding 1,900,000 576
China Everbright - IHD Pacific, Ltd. (a) 220,000 177
China Merchants Holdings
International Co. Ltd. 250,000 257
China National Aviation Co., Ltd. (a) 190,000 40
China Resources Enterprise, Ltd. 388,000 866
China Southern Airlines (a) 500,000 129
Citic Pacific, Ltd. 139,000 553
Goldlion Holdings, Ltd. 894,000 297
Guangdong Investment 1,138,000 756
Guangdong Kelon Electric Holdings 420,000 431
Jiangsu Expressway Co., Ltd. Class H (a) 4,590,000 948
New World Infrastructure, Ltd. (a) 498,300 1,122
Peregrine Investment Holdings, Ltd. -
Formosa Chemical (a) 12,950 15
Peregrine Investment Holdings, Ltd. -
Hung Sheng Construction (a) 28,600 46
Peregrine Investment Holdings, Ltd. -
Primax 2000 Warrants (a) 40,700 503
Shanghai Industrial Holdings, Ltd. 90,000 335
</TABLE>
Specialty Funds Emerging Markets Fund 15
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- --------
<S> <C> <C>
Tingyi (Cayman Island) Holding Co. 3,683,000 $ 480
Yue Yuen Industrial Holdings 312,800 662
Zhejiang Expressway Co., Ltd.
Series H (a) 1,624,000 329
--------
8,522
--------
Hungary - 2.4%
BorsodChem - GDR 42,000 1,495
BorsodChem Rt. 36,500 1,316
Egis Gyogyszergyar 200 12
Magyar Tavkozlesi Rt (Regd)(a) 158,076 839
Mol Magyar Olay-Es Gazipari - GDS (a) 80,000 1,928
Richter Gedeon, Ltd. - GDR 13,831 1,580
Zalakeramia Reszvenytarsasag - GDR (a) 45,400 411
Zalakeramia Rt. 5,800 269
--------
7,850
--------
India - 3.8%
Bajaj Auto Ltd. - GDR (a) 35,050 701
Bajaj Auto, Ltd. - GDR (144A)(a) 27,300 546
EIH, Ltd. - GDR (a) 34,150 448
Genesis India Investment Co. (a) 430,000 3,569
Global Tele-Systems Group, Inc. (a) 525 10
I.T.C., Ltd.- GDR (a) 116,800 2,307
India Cements, Ltd. - GDS (a) 114,200 108
Indian Hotels Co., Ltd. - GDR 65,100 1,211
Indian Hotels Co., Ltd. - GDR (144A) 7,000 130
Indian Petrochemicals Corp., Ltd. - GDR 38,000 195
Larsen & Toubro, Ltd. - GDR 42,400 456
Mahanagar Telephone Nigam
2000 Warrants (a) 120,000 790
Raymond Woolen Mills, Ltd. - GDR (a) 5,100 13
Reliance Industries Ltd. - GDS (a) 134,300 1,155
Tata Engineering & Locomotive Co., Ltd. (a) 27,800 231
Videsh Sanchar Nigam, Ltd. (a) 60,000 822
--------
12,692
--------
Indonesia - 0.9%
Gulf Indonesia Resources, Ltd. (a) 59,850 1,317
Perusahan Perkibu 192,000 109
PT Bank Niaga Thk (Alien Market)(a) 131,200 11
PT Matahari Putra Prima Thk (a) 1,958,000 160
PT Modem Photo Film Co. Thk (a) 70,000 20
PT Ometraco Corp. 700,000 248
PT Ometraco Corp. 2000 Warrants (a) 75,000 20
PT Pakuwon Jati 402,000 33
PT Ramayana Lestari Sentosa 500,000 $ 470
PT Semen Cibinong TBk (a) 538,788 25
PT Tempo Scan Pacific 268,500 21
PT Unilever Indonesia 19,000 105
Semen Gresik 698,000 409
--------
2,948
--------
Israel - 0.5%
Bank Leumi Le-Israel 292,000 490
Elbit Medical Imaging, Ltd. (a) 200 1
Elbit Systems, Ltd. 200 3
Elbit, Ltd. 200 1
Supersol, Ltd. 198,000 561
Teva Pharmaceutical Industries, Ltd. 7,220 342
Teva Pharmaceutical Industries, Ltd. - ADR 4,900 232
--------
1,630
--------
Lebanon - 0.2%
Lebareuze Lo for Dev & Recon SA 55,000 707
--------
707
--------
Luxembourg - 1.3%
Genesis Smaller Companies (a) 115,971 1,571
Millicom International Cellular SA (a) 43,000 1,597
Tata Engineering & Locomotive Co. -
GDR(a) 140,700 1,171
--------
4,339
--------
Malaysia - 1.3%
Genting International (CLOB Line)(a) 162,000 19
Golden Hope Plantation 463,000 536
Kuala Lumpur Kepong 314,000 674
Lion Corp. Berhad 38,400 11
London & Pacific Insurance Co. Berhad 1,600 2
Malaysia Mining Corp. 494,800 195
Malaysian Airline System 23,000 18
Malaysian Assurance Alliance Berhad 173,137 199
Malaysian Pacific 241,000 579
Malaysian Tobacco 243,000 125
Nestle Berhad 55,000 255
Nylex Berhad 378,500 145
O.Y.L. Industries Berhad 119,000 278
Oriental Holdings Berhad 192,000 235
Perlis Plantations 160,000 226
Phileo Allied Berhad 412,500 179
Public Finance Berhad (Alien Market) 495,000 136
</TABLE>
16 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Renong Berhad (a) 109,000 $ 50
Shell Refining (Malaysia) 147,000 231
Telekom Malaysia 130,000 384
--------
4,477
--------
Mexico - 12.1%
Accel SA de CV Series B NPV (a) 1,503,000 395
Acer Computec Latino
America SA de CV NPV (a) 131,000 389
Alfa SA de CV Class A NPV 427,971 2,900
Cemex SA de CV Class B NPV (a) 151,400 809
Cemex SA de CV NPV (a) 301,640 1,366
Cifra SA de CV - ADR 24,000 576
Cifra SA de CV Class C NPV 97,960 220
Cifra SA de CV Series V NPV (a) 40,151 99
Compania Cervecerias Unidas SA - ADR 22,700 667
Corporacion Industrial
Sanluis SA de CV (Units) 180,000 1,479
Corporacion Interamericana de
Entretenimiento SA Series B NPV (a) 65,000 504
Cydsa SA Series A NPV 114,300 319
Desc SA de CV NPV 80,714 760
Desc Sociedad de Fomento
Industrial SA de CV Series B NPV 65,200 623
Empresa Nacional de Electric - ADR 57,600 1,019
Empresas ICA Sociedad - ADR 125,628 2,065
Empresas La Modema SA de CV - ADR (a) 24,386 529
Empresas La Modema SA de CV
Class A NPV (a) 59,000 321
Fomento Economico Mexicano SA de CV
Series B NPV 343,000 2,741
Grupo Carso Series A NPV 64,500 431
Grupo Casa Autrey SA de CV - ADR 11,000 225
Grupo Financiero Banamex AC
Series B NPV (a) 211,000 631
Grupo Financiero Banorte SA de CV
Series B NPV (a) 1,090,000 1,899
Grupo Industrial Maseca Series B NPV 380,000 393
Grupo Industrial SA de CV New - ADR 40,000 620
Grupo lusacell SA de CV - ADR Series L (a) 5,600 121
Grupo Modelo SA Series C 46,700 392
Grupo Radio Centro SA de CV - ADR 40,700 580
Herdez Class B NPV 300,000 253
Industrias Penoles NPV 18,000 81
Kimberly-Clark, Mexico Class A NPV 345,000 1,689
Panamerican Beverages, Inc. Class A 58,000 1,892
Ponderosa Industrial SA de CV
Series B NPV (a) 460,000 397
Seguros Comercial America Series B NPV (a) 87,000 356
Sigma Alimentos, SA Series B 34,000 516
Telefonos de Mexico SA Series L - ADR 174,750 9,797
Transportacion Maritima
Mexicana SA de CV Series A - ADR (a) 80,000 490
TV Azteca SA de CV - ADR (a) 85,000 1,918
--------
40,462
--------
Morocco - 0.7%
Banque Marocaine Du Commerce
Exterieur - GDR (a) 69,835 1,405
ONA SA 4,700 407
Wafabank 4,600 428
--------
2,240
--------
Netherlands - 0.3%
Ceteco Holding NV 25,827 1,159
--------
1,159
--------
Pakistan - 1.1%
Adarujee Insurance 6,562 13
Dandot Cement Co. (a) 3,937 1
Fauji Fertilizer 330,800 633
Hub Power Co. (a) 44,200 1,370
Pakistan State Oil 168,877 1,437
Pakistan Telecommunications Corp. (a) 160,000 121
--------
3,575
--------
Panama - 0.2%
Banco Latinoamericano de
Exportaciones SA Class E 14,000 579
--------
579
--------
Papua New Guinea - 0.4%
Oil Search, Ltd. (Australia Regd) 700,000 1,266
--------
1,266
--------
Peru - 1.6%
Cementos Norte Pacasmayo SA Class T 275,394 389
Compania de Minas Buenaventura
Series B - ADR 29,400 470
CPT Telefonica del Peru Class B 289,098 646
Credicorp, Ltd. 21,165 381
</TABLE>
Specialty Funds Emerging Markets Fund 17
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Enrique Ferreyros 148,701 $ 157
Ferreyros SA - ADR (a) 10,875 225
Telefonica Del Peru SA Class B - ADR 132,200 3,082
--------
5,350
--------
Philippines - 1.2%
Ayala Land, Inc. (a) 821,772 325
Bacnotan Consolidated 185,354 59
Belle Corporation (a) 1,600,000 62
Far East Bank & Trust Co. 65,792 80
First Philippine Holdings Class B 404,967 315
International Container (a) 311,500 38
Ionics Circuit, Inc. NPV 230,000 94
Manila Electric Co. Class B 233,847 774
Music Semiconductors Corp. (a) 671,000 240
PCI Leasing & Finance, Inc. (a) 477,000 10
Philippine Long Distance
Telephone Co. - ADR 76,627 1,724
Philippine National Bank (a) 70,212 154
Uniwide Holdings, Inc. (a) 2,304,000 34
--------
3,909
--------
Poland - 0.6%
Bank Handlowy W. Warszawie SA - GDR (a) 41,284 547
Bank Slaski SA 3,400 188
KGHM Polska Miedz SA - GDR (a) 77,000 558
Polish National Investment Fund (a) 8,000 284
Prokom Software SA - GDR (a) 28,000 315
WBK 50,600 259
--------
2,151
--------
Portugal - 3.6%
Banco Espir Santo (Regd) 29,900 890
Brisa-Auto Estradas de
Portugal SA (Regd)(a) 31,000 1,111
Capital Portugal (a) 1,307 203
Cimpor Cimentos de Portugal 154,000 4,036
Companhia de Seguros Tranquilidade 28,500 684
Electricidade de Portugal SA (a) 47,100 892
Portugal Telecom SA - ADR 31,000 1,457
Sonae Investimentos SA 68,500 2,771
--------
12,044
--------
Russia - 4.4%
Irkutshkenegro - Russian Depositary
Trust (a) 23 874
Lukoil - Russian Depositary Trust (a) 5 575
Lukoil OilCo. - ADR 32,900 3,010
Mosenergo - ADR (a) 30,200 1,114
SFMT, Inc. (a) 2,000 40
Surgutneftegaz - ADR 201,100 2,011
Tatneft - ADR 8,700 1,218
Tatneft - ADR (144A) 28,400 3,976
Trade House GUM - ADR 62,000 380
Ukraine Enterprise Corp. (a) 31,000 43
Unified Energy Systems - GDR (a) 22,500 675
Vimpel-Communications - ADR (a) 20,200 720
--------
14,636
--------
Singapore - 0.1%
Star Cruises PLC (a) 162,000 335
--------
335
--------
Slovakia - 0.1%
Slovakofama AS 2,200 288
--------
288
--------
South Africa - 5.4%
Amalgamated Banks of South Africa 183,900 1,058
Anglo America Coal 2,260 105
Anglo America Corp. SA 13,500 545
Anglo American Industrial Corp. 2,130 52
Barlow, Ltd. 82,900 704
Billiton PLC (a) 355,760 914
Consolidated African Mines, Ltd. (a) 2,174,500 626
De Beers Centenary AG 60,000 1,221
Del Monte Royal Food, Ltd. 732,100 481
Ellerine Holdings, Ltd. 19,502 126
Engen, Ltd. 108,591 552
Gencor, Ltd. - ADR 10,935 15
Highstone Property 630,000 194
Highveld Steel & Vanadium Corp., Ltd. 202,134 444
Impala Platinum Holdings, Ltd. 33,300 318
Investec Group, Ltd. 13,200 508
Iscor 2,150,191 636
JCI, Ltd. 156,487 699
JD Group, Ltd. 64,121 392
Kersaf Investments, Ltd. 76,600 401
</TABLE>
18 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Lonrho PLC 293,757 $ 447
Murray & Roberts Holdings, Ltd. 226,600 342
New Clicks Holdings, Ltd. 53,722 66
PepsiCo International, Inc. (a) 2,000 174
Plate Glass and Shatterprufe Industries, Ltd. 22,166 424
Rembrandt Group, Ltd. 145,752 1,063
Safmarine & Rennie Holdings, Ltd. 168,700 309
Sappi, Ltd. 124,500 627
Sasol NPV 285,494 2,992
South African Breweries 42,400 1,046
Trans Natal Coal Corp., Ltd. 115,600 419
-------
17,900
-------
South Korea - 1.1%
Dong-Ah Construction - EDR (a) 2,154 2
Hana Bank - GDR (a) 46,385 262
Hanwha Chemical Corp. (a) 61,591 61
Housing & Commercial Bank
Korea - GDR (144A)(a) 62,700 329
Housing & Commercial Bank, Korea 33,240 224
Hyundai Motor Co. - GDR (a) 41,100 64
Korea Electric Power Corp. 32,700 303
Korea Long-Term Credit Bank 24,500 150
Korea Mobile Telecommunications Corp. 123 32
Pohang Iron & Steel 5,400 146
Pohang Iron & Steel - ADR 11,700 204
Samsung Electronics Co. - GDR (a) 24,981 394
Samsung Electronics, Ltd. (a) 7,059 160
Samsung Electronics, Ltd. - GDR (a) 87,102 457
Shin Han Bank (a) 45,000 201
Ssangyong Cement Co., Ltd. 43,400 92
Ssangyong Oil Refining Co., Ltd. 62,620 265
Tae Young Corp. 16,000 250
-------
3,596
-------
Spain - 0.2%
Quilmes Industrial (Regd)(a) 55,000 591
-------
591
-------
Sri Lanka - 0.2%
Aitken Spence & Co. 8,700 20
Ceylon Theatre 13,660 44
Development Finance Corp. 83,333 324
Hayleys 18,240 63
John Keells Holdings, Ltd. 34,828 190
National Development Bank 9,800 36
-------
677
-------
Switzerland - 0.3%
Holderbank Financiere Glarus AG (BR) 1,392 1,136
-------
1,136
-------
Taiwan - 3.1%
Advanced Semiconductor
Engineering - GDR (a) 19,000 372
Asia Cement Corp. - GDR 72,059 839
China Steel Corp. - GDS (a) 56,712 837
Delta Electronic Industrial (a) 66,000 263
Evergreen Marine Corp. - GDR 70,486 775
Hocheng Group Corp. - GDR 126,566 949
Peregrine SEC -
Bharat Petroleum (a) 10,700 114
Peregrine Investment Holdings, Ltd. -
China Development 2000 Warrants (a) 263,000 750
President Enterprises - GDS (a) 73,200 860
ROC Taiwan Fund 76,500 622
Siliconware Precision Industries Co. - GDR (a) 76,000 958
Taiwan Fund, Inc. 52,600 868
Yageo Corp. - GDR (a) 110,416 1,242
Yang Ming Marine Transport - GDR (a) 101,600 792
-------
10,241
-------
Thailand - 1.0%
Advanced Information Services
(Alien Market) 96,600 461
Ban Pu Coal (Alien Market) 41,100 165
Bangkok Bank (Alien Market) 184,300 459
Central Pattana Public Co., Ltd.
(Alien Market) 124,700 39
Grammy Entertainment PLC (Alien Market) 42,000 174
Hemaraj Land and Developement PLC
(Alien Market) 105,000 111
Krung Thai Bank PLC (Alien Market) 56,500 12
Land & House (Alien Market) 29,842 6
Phatra Thanakit Co. (Alien Market) 58,300 32
Pizza Public Co., Ltd. (Alien Market) 97,000 171
Precious Shipping (Alien Market) 137,000 88
</TABLE>
Specialty Funds Emerging Markets Fund 19
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
PTT Exploration & Production PLC
(Alien Market) 100,000 $ 1,151
Regional Container Line (Alien Market) 66,900 51
Siam Cement Co. (Alien Market) 25,800 204
Swedish Motor Public Co., Ltd.
(Alien Market) 164,900 41
TelecomAsia (Alien Market)(a) 461,400 88
Thai Farmers Bank (Alien Market) 84,400 153
Thai Farmers Bank PLC 2002 Warrants
(Alien Market)(a) 4,875 1
Tipco Asphalt Public Co., Ltd. 11,000 8
--------
3,415
--------
Turkey - 3.3%
Akansa Cimento AS 7,148,000 1,000
Aksigorta AS 9,426,000 603
EGE Biracilik Ve Malt Sanayii 5,899,000 534
Erciyas Biracilik Ve Malt Sanayii 2,165,374 303
Ford Otomatio San 618,000 514
Kazkommertsbank Co. - GDR (a) 4,800 96
Koc Holding 4,953,000 1,159
Migros 771,750 698
Sarkuysan Elektrolitik Bakir 4,245,000 379
T Garanti Bankasi 7,882,221 390
T Sise Cam (a) 20,042,024 1,475
Yapi Kredi Bankasi 96,831,316 3,691
--------
10,842
--------
United Kingdom - 0.6%
Ashanti Goldfields, Ltd. - ADR 107,200 804
Billiton PLC - ADR (a) 54,678 130
Lonrho PLC 465,816 719
Pliva d.d. - GDR (a) 23,200 404
--------
2,057
--------
United States - 0.4%
Enron Corp. 32,161 1,337
--------
1,337
--------
Venezuela - 3.2%
CIA Anon Nacional Telefonos de
Venezuela - ADR 157,546 6,558
Electricidad de Caracas (Regd) 1,001,013 1,201
Mavesa SA - ADR 151,875 968
Siderurgica Venezolana Sivensa - ADR 395,000 1,561
Siderurgica Venezolana
Sivensa - GDR (144A)(a) 35,909 216
--------
10,504
--------
Zimbabwe - 0.4%
Delta Corp. 1,328,757 880
Reunion Mining PLC (a) 250,000 341
--------
1,221
--------
Total Common Stocks
(cost $281,428) 272,053
--------
Preferred Stocks - 11.7%
Argentina - 0.4%
Quilmes Industrial Quinsa Societe - ADR 92,950 1,272
--------
1,272
--------
Brazil - 10.1%
Banco Bradesco SA NPV 358,606,720 3,535
Banco Itau SA (Regd) 5,934,031 3,190
Brahma (cia Cervej) NPV 1,093,000 735
Brasmotor SA NPV 4,575,000 451
Cia Riograndense Telecom NPV (a) 751,000 925
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar - NPV 9,500,000 174
Companhia Brasileira de Projetos e
Obras (Units)(a) 36,700,000 671
Companhia Energetica de Minas 50,879,399 3,247
Companhia Energetica de
Sao Paulo - ADR (Regd) 16,800 279
Companhia Energetica de Sao Paulo NPV 20,825,000 1,250
Companhia Paranaense de Energia - Copel 57,640,000 782
Companhia Paranaense de Energia
Copel Class B - ADR 15,800 216
Coteminas (Cia Tec) NPV 2,305,105 826
Duratex SA (BR) 3,364,000 133
Electrobras Series B NPV 6,210,000 317
Empresa Nacional de Comercio
Redito e Participacoes SA NPV (a) 2,305,105 2
Industrias Klabin de Papel e
Celulose SA NPV 1,214,928 555
Iochpe Maxion SA - ADR (a) 232,300 396
Itausa Investimentos Itau SA 1,100,000 857
Kepler Weber SA NPV (a) 3,200 13
</TABLE>
20 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- --------
<S> <C> <C>
Lojas Arapua SA NPV 54,300,000 $ 195
Lojas Renner SA NPV 6,000,000 188
Marcopolo SA - NPV 2,760,000 326
Odebrecht SA - NPV 11,793,000 79
Perdigao SA NPV 225,200,000 295
Petro Ipiranga (cia) NPV 79,100,000 1,205
Petrobras Distribuidora NPV 19,872,500 347
Petroleo Brasileiro SA NPV 23,698,866 5,542
Telecomunicacoes - NPV 5,230,047 1,392
Telecomunicacoes Brasileiras - NPV 23,035,542 2,628
Telecomunicacoes de Minas Gerais
Class B NPV 9,292,000 1,174
Telecomunicacoes de Minas Gerais
Series B NPV (a) 33,489 4
Telecomunicacoes de Sao Paulo SA -
TELESP (a) 175,358 47
Telecomunicacoes do Rio de
Janeiro SA - Telerj NPV (a) 250,123 26
Telecomunicacoes do Rio de
Janeiro SA NPV 8,650,817 899
Votorantim Papale 20,700,000 399
Weg SA 630,000 384
-------
33,684
-------
Colombia - 0.0%
Gran Cadena de Almacenes Class B - ADR 23,920 179
-------
179
179
-------
Greece - 0.1%
Delta Dairy 25,520 229
-------
229
-------
Portugal - 0.2%
Filmes Lusomundo-SGPS SA 61,000 558
-------
558
-------
Russia - 0.9%
Fleming Russia Securities Fund (a) 53,458 1,096
Lukoil Holding Oil Co. - ADR 62,300 1,884
-------
2,980
-------
Total Preferred Stocks
(cost $33,335) 38,902
-------
Long-Term Investments - 0.7%
Brazil - 0.1%
Casa Anglo Series 2
1.000% due 11/01/99 (conv.) 3 214
--------
214
--------
Indonesia - 0.0%
Modemland Realty
6.000% due 01/04/03 (conv.) IDR 30 8
--------
8
--------
Malaysia - 0.0%
Phileo Allied Berhad
4.000% due 09/12/01 (conv.) 275 23
--------
23
--------
Poland - 0.1%
Elektrim Spolka Akcyjna SA
2.000% due 05/30/04 (conv.) 596 315
--------
315
--------
South Korea - 0.1%
Shinwon Corp.
0.500% due 12/31/08 (conv.) 520 489
--------
489
--------
Taiwan - 0.4%
Far Eastern Dept. Stores
3.000% due 07/06/01 (conv.) 981 863
United Microelectronics Corp., Ltd.
1.250% due 06/08/04 (conv.)(a) 215 570
--------
1,433
--------
Total Long-Term Investments
(cost $2,568) 2,482
--------
Short-Term Investments - 4.0%
United States - 4.0%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 13,240 13,240
-------
Total Short-Term Investments
(cost $13,240) 13,240
-------
</TABLE>
Specialty Funds Emerging Markets Fund 21
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Market
Value
(000)
---------
<S> <C>
Total Investments
(identified cost $330,571)(c) - 98.1% $ 326,677
Other Assets and Liabilities,
Net-1.9% 6,375
---------
Net Assets - 100.0% $ 333,052
=========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
EDR - European Depositary Receipt
GDR - Global Depositary Receipt
GDS - Global Depositary Share
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
SEC - Shareholders Equity Certificates
144A - Represents private placement security for qualified buyers according to
rule 144A of the Securities Act of 1933.
Foreign Currency Abbreviations:
ARS - Argentina peso
GRD - Greek drachma
IDR - Indonesian rupiah
THB - Thailand baht
TRL - Turkish lira
The accompanying notes are an integral part of the financial statements.
22 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
% of Market
Net Value
Industry Diversification Assets (000)
- ------------------------------------ ---------- ---------
<S> <C> <C>
Auto & Transportation 3.1% $ 10,406
Consumer Discretionary 11.3 37,671
Consumer Staples 8.3 27,764
Financial Services 13.1 43,743
Health Care 0.6 1,895
Integrated Oils 8.4 27,857
Materials & Processing 14.3 47,554
Miscellaneous 6.7 22,322
Other Energy 3.4 11,366
Producer Durables 2.0 6,496
Technology 1.5 5,105
Utilities 20.7 68,776
Short-Term Investments 4.0 13,240
Long-Term Investments 0.7 2,482
---------- ---------
Total Investments 98.1 326,677
Other Assets and Liabilities, Net 1.9 6,375
---------- ---------
Net Assets 100.0% $ 333,052
========== =========
<CAPTION>
% of Market
Net Value
Geographic Diversification Assets (000)
- ------------------------------------ ---------- ---------
<S> <C> <C>
Latin America 45.2% $ 150,592
Europe 21.1 70,501
Pacific Basin 18.4 61,470
Africa 6.5 21,361
United Kingdom 0.6 2,057
United States 0.4 1,337
United States (Short-Term Investments) 4.0 13,240
Middle East 1.5 4,856
Bermuda 0.4 1,263
---------- ---------
Total Investments 98.1 326,677
Other Assets and Liabilities, Net 1.9 6,375
---------- ---------
Net Assets 100.0% $ 333,052
========== =========
</TABLE>
Foreign Currency Exchange Spot Contracts
(Note 2)
<TABLE>
<CAPTION>
Unrealized
Contracts to In Appreciation
Deliver Exchange For Settlement (Depreciation)
(000) (000) Date (000)
- ------------ ---------------- ---------- --------------
<S> <C> <C> <C>
USD 35 ARS 35 01/02/98 --
USD 9 GRD 2,375 01/05/98 --
USD 914 TRL 188,048,688 01/05/98 (7)
--------------
$ (7)
==============
</TABLE>
Forward Foreign Currency Exchange Contracts
(Note 2)
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
- ------------- ----------- ---------- --------------
<S> <C> <C> <C>
THB 71,145 USD 1,762 02/23/98 $ 258
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Emerging Markets Fund 23
<PAGE>
Emerging Markets Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $330,571)(Note 2).................................................... $ 326,677
Foreign currency holdings (identified cost $4,219).......................................................... 3,903
Forward foreign currency exchange contracts (cost $1,762)(Note 2)........................................... 1,762
Foreign currency exchange spot contracts (cost $958)(Note 2)................................................ 951
Receivables:
Dividends and interest.................................................................................... 1,155
Investments sold.......................................................................................... 3,259
Fund shares sold.......................................................................................... 3,974
Foreign taxes recoverable................................................................................. 13
Deferred organization expenses (Note 2)..................................................................... 1
--------------------
Total Assets......................................................................................... 341,695
Liabilities
Payables:
Bank overdraft...................................................................... $ 491
Investments purchased............................................................... 4,413
Fund shares redeemed................................................................ 714
Accrued fees to affiliates (Note 4)................................................. 392
Other accrued expenses and payables................................................. 171
Forward foreign currency exchange contracts (cost $1,762)(Note 2)..................... 1,504
Foreign currency exchange spot contracts (cost $958)(Note 2).......................... 958
------------------
Total Liabilities....................................................................................... 8,643
--------------------
Net Assets.................................................................................................. $ 333,052
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income................................................ $ (862)
Accumulated net realized gain (loss)........................................................................ (13,576)
Unrealized appreciation (depreciation) on:
Investments............................................................................................... (3,894)
Foreign currency-related transactions..................................................................... (46)
Shares of beneficial interest............................................................................... 283
Additional paid-in capital.................................................................................. 351,147
--------------------
Net Assets.................................................................................................. $ 333,052
====================
Net Asset Value, offering and redemption price per share:
($333,051,657 divided by 28,254,105 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 11.79
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
24 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends.......................................................................................... $ 7,455
Dividends from Money Market Fund (Note 5).......................................................... 1,657
Interest........................................................................................... 139
Less foreign taxes withheld........................................................................ (509)
--------------------
Total Investment Income....................................................................... 8,742
Expenses (Notes 2 and 4):
Management fees............................................................. $ 4,167
Custodian fees.............................................................. 894
Transfer agent fees......................................................... 447
Bookkeeping service fees.................................................... 36
Professional fees........................................................... 33
Registration fees........................................................... 77
Trustees' fees.............................................................. 4
Amortization of deferred organization expenses.............................. 7
Miscellaneous............................................................... 47
------------------
Total Expenses................................................................................ 5,712
--------------------
Net investment income................................................................................ 3,030
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments................................................................. (4,274)
Foreign currency-related transactions....................................... (564) (4,838)
------------------
Net change in unrealized appreciation or depreciation of:
Investments................................................................. (18,113)
Foreign currency-related transactions....................................... (9) (18,122)
------------------ --------------------
Net gain (loss) on investments....................................................................... (22,960)
--------------------
Net increase (decrease) in net assets resulting from operations...................................... $ (19,930)
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Emerging Markets Fund 25
<PAGE>
Emerging Markets Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.............................................................. $ 3,030 $ 1,770
Net realized gain (loss)........................................................... (4,838) 831
Net change in unrealized appreciation or depreciation.............................. (18,122) 20,295
------------------ -----------------
Net increase (decrease) in net assets resulting from operations................. (19,930) 22,896
------------------ -----------------
From Distributions to Shareholders:
Net investment income.............................................................. (1,176) (1,543)
In excess of net investment income................................................. (2,439) (1,918)
------------------ -----------------
Total Distributions to Shareholders............................................. (3,615) (3,461)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)........ 85,107 79,382
------------------ -----------------
Total Net Increase (Decrease) in Net Assets............................................ 61,562 98,817
Net Assets
Beginning of period................................................................ 271,490 172,673
------------------ -----------------
End of period (including accumulated distributions in excess of
net investment income of $862 and $1,854, respectively).......................... $ 333,052 $ 271,490
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
26 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993*
-------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................................... $ 12.35 $ 11.16 $ 12.25 $ 13.90 $ 10.00
-------- ------- ------- ------- --------
Income From Investment Operations:
Net investment income...................................................... .14 .10 .11 .15 .07
Net realized and unrealized gain (loss) on investments..................... (.56) 1.26 (1.12) (1.24) 4.09
-------- -------- ------- ------ --------
Total Income From Investment Operations................................. (.42) 1.36 (1.01) (1.09) 4.16
-------- -------- ------- ------ --------
Less Distributions:
Net investment income...................................................... (.05) (.08) (.03) (.10) (.07)
In excess of net investment income......................................... (.09) (.09) (.02) (.10) (.01)
Net realized gain on investments........................................... -- -- -- (.31) (.18)
In excess of net realized gain on investments.............................. -- -- (.03) (.05) --
-------- -------- ------- ------ --------
Total Distributions..................................................... (.14) (.17) (.08) (.56) (.26)
-------- -------- ------- ------ --------
Net Asset Value, End of Period................................................. $ 11.79 $ 12.35 $ 11.16 $ 12.25 $ 13.90
======== ======== ======== ======= =======
Total Return (%)(a)(c)......................................................... (3.45) 12.26 (8.21) (5.83) 41.83
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) 333,052 271,490 172,673 127,271 65,457
Ratios to average net assets (%)(b)(c):
Operating expenses, net................................................. 1.64 1.71 1.75 .80 .80
Operating expenses, gross............................................... 1.64 1.72 1.80 .83 1.60
Net investment income................................................... .87 .77 .88 1.10 1.33
Portfolio turnover rate (%)(b)............................................. 50.60 34.62 71.16 57.47 89.99
Average commission rate paid per share
of security ($ omitted)(d)............................................... .0012 .0007 N/A N/A N/A
</TABLE>
* For the period January 29, 1993 (commencement of operations) to
December 31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993, are annualized.
(c) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
(d) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.
Specialty Funds Emerging Markets Fund 27
<PAGE>
Equity T Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide capital growth while minimizing the impact of taxes on
investment returns.
Invests in: U.S. Equity Securities.
Strategy: The Fund focuses on superior stock selection in a risk-controlled
portfolio while minimizing the impact of taxes by explicitly integrating the tax
implications of portfolio activities on after-tax returns.
<TABLE>
<CAPTION>
PERFORMANCE CHART
Dates Equity T S&P 500(R) **
----------- -------- -------------
<S> <C> <C>
Inception * $10,000 $10,000
1996 $10,642 $10,551
1997 $14,019 $14,073
</TABLE>
<TABLE>
<CAPTION>
Equity T Fund Standard & Poor's(R)500 Composite Stock Price Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
------------- --------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 Year $ 13,173 31.73% 1 Year $ 13,338 33.38%
Inception $ 14,088 31.31%(S) Inception $ 14,240 32.41%(S)
</TABLE>
* The Fund commenced operations on October 7, 1996. Index comparison began
November 1, 1996.
** The Standard & Poor's(R) 500 Composite stock Index is composed of 500
common stocks which are chosen by standard and Poor's Corporation to best
capture the price performance of a large cross--section of the US publicly
traded stock market. The Index is structured to approximate the general
distribution of industries in the US economy.
(S) Annualized.
28 Equity T. Fund Specialty Funds
<PAGE>
Equity T Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ending December 31, 1997, the Equity T Fund reflected a total
return of 31.7% as compared to the S&P 500 Index gain of 33.4%. The Fund trailed
the Index primarily due to the impact of several underperforming securities, as
well as general weakness among stocks of companies with less predictable
earnings. Taxable capital gains were negligible for the year relative to other
mutual funds.
Portfolio Highlights
For the third consecutive year, the stock market favored the large
capitalization stocks over midcap and small cap alternatives. The market also
proved to be dominated by more defensive sectors, such as consistent
growth-oriented shares of health care and consumer staples companies, and
interest-rate sensitive financial services and utilities companies.
While many growth and income funds trailed the index due to the market's
rotation to defensive sectors, Equity T's limited economic sector deviations
from the index helped limit the effects of performance disparities versus the
benchmark. However, the Fund's midcap exposure did have a negative impact, as
performance was also impacted by its overweightings in several underperforming
technology companies late in the year. Positions in Oracle and Intel were two of
the Fund's larger underperforming technology holdings, both victims of negative
earnings news. With a strong dollar and weakening markets in Asia, it appeared
to be a good decision to avoid large US multinationals. However, with the
exception of third quarter, multinational consumer products companies such as
Coca Cola, Proctor & Gamble, and GE, outperformed. Unfortunately, the Fund was
persistently underweighted in the sector.
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Philip Morris Cos., Inc. 2.7%
Exxon Corp. 2.4
Proctor & Gamble Co. 1.8
Bristol-Myers Squibb Co. 1.6
Intel Corp. 1.5
Royal Dutch Petroleum Co. 1.4
GTE Corp. 1.4
First Union Corp. 1.4
International Business Machines Corp. 1.3
General Electric Corp. 1.3
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 21.9%
Portfolio Price/Book Ratio 3.88x
Market Capitalization - $-Weighted Average 47.88 Bil
Number of Holdings 239
Money Manager Style
J.P. Morgan Investment Management, Inc. Market-Oriented
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Specialty Funds Equity T. Fund 29
<PAGE>
Equity T Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
<S>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Common Stocks - 93.4%
Auto and Transportation - 3.3%
Burlington Northern, Inc. 1,900 $ 177
Chrysler Corp. 5,600 197
Consolidated Freightways Corp. (a) 250 3
CSX Corp. 5,500 297
Eaton Corp. 100 9
Ford Motor Co. 8,600 419
General Motors Corp. 800 49
Goodyear Tire & Rubber Co. 12,700 807
Norfolk Southern Corp. 21,600 666
Southwest Airlines Co. 8,850 218
Union Pacific Corp. 10,900 681
Wisconsin Central Transportation Corp. (a) 1,900 44
--------
3,567
--------
Consumer Discretionary - 7.8%
AutoZone Inc. (a) 4,200 122
Best Buy Co. (a) 4,100 151
Black & Decker Corp. 500 20
Choice Hotels International, Inc. (a) 300 5
Circuit City Stores, Inc. 10,600 377
Corporate Express, Inc. (a) 14,800 191
Dayton Hudson Corp. 6,900 466
Dillard's, Inc. Class A 9,700 342
Disney (Walt) Co. 900 89
Donnelley (R.R.) & Sons Co. 4,300 160
Extended Stay America, Inc. (a) 1,700 21
Federated Department Stores, Inc. (a) 9,700 418
Fruit of the Loom, Inc. Class A (a) 11,300 290
General Nutrition Companies, Inc. (a) 100 3
Harrah's Entertainment, Inc. (a) 13,900 262
Hasbro, Inc. 900 28
Hilton Hotels Corp. 1,100 33
Home Depot, Inc. (The) 500 29
International Game Technology 10,000 253
ITT Corp. (a) 800 66
JC Penney & Co., Inc. 800 48
Mattel, Inc. 7,700 287
McDonald's Corp. 500 24
Mirage Resorts, Inc. (a) 14,500 330
Nine West Group, Inc. (a) 5,400 140
Reebok International, Ltd. (a) 1,000 29
Sears Roebuck & Co. 16,100 729
Service Corp. International 12,800 473
Sunburst Hospitality Corp. (a) 100 1
Time Warner, Inc. 14,125 875
TJX Cos., Inc. 4,900 168
Toys "R" Us,Inc. (a) 11,700 368
Tricon Global Restaurants, Inc. (a) 2,140 62
Viacom, Inc. Class B (a) 3,800 157
Wal-Mart Stores, Inc. 22,100 871
Waste Management, Inc. 16,400 451
Whirlpool Corp. 4,300 237
--------
8,576
--------
Consumer Staples - 12.0%
Albertson's, Inc. 1,600 76
Anheuser-Busch Cos., Inc. 17,800 783
Campbell Soup Co. 300 17
Coca-Cola Co. (The) 21,700 1,446
Colgate-Palmolive Co. 400 29
CPC International, Inc. 1,000 108
General Mills, Inc. 4,600 329
Gillette Co. 11,300 1,135
Heinz (H.J.) Co. 1,400 72
Kellogg Co. 9,500 471
Kroger Co. (a) 13,000 480
PepsiCo. Inc. 31,800 1,159
Philip Morris Cos., Inc. 66,800 3,027
Procter & Gamble Co. 25,500 2,035
Ralston-Purina Group 5,600 520
Safeway, Inc. (a) 3,000 190
Sara Lee Corp. 1,800 102
Seagram Co., Ltd. 11,100 359
Unilever NV 13,600 849
--------
13,187
--------
Financial Services - 17.9%
AEGON NV 2,804 251
AMBAC, Inc. 2,600 120
American Express Co. 9,700 866
American General Corp. 200 11
American International Group, Inc. 10,800 1,175
Banc One Corp. 14,213 772
BankAmerica Corp. 2,500 183
Barnett Banks, Inc. 1,100 79
Bear Steams Cos., Inc. 1,770 84
Beneficial Corp. 5,100 424
Capital One Financial Corp. 300 16
Charter One Financial, Inc. 1,785 112
Chase Manhattan Corp. 13,300 1,456
Chubb Corp. (The) 200 15
CIGNA Corp. 5,800 1,004
Citicorp 3,200 405
ContiFinancial Corp. (a) 2,300 58
CoreStates Financial Corp. 900 72
</TABLE>
30 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Crestar Financial Corp. 668 $ 38
Dime Bancorp, Inc. 2,600 78
Edwards (A.G.), Inc. 5,700 227
Federal Home Loan Mortgage Corp. 5,600 235
Federal National Mortgage Association 22,500 1,284
Financial Security Assurance Holdings, Ltd. 1,700 82
First Chicago NBD Corp. 8,300 693
First Data Corp. 2,000 59
First Union Corp. 31,260 1,602
Firstar Corp. 1,500 64
Fleet Financial Group, Inc. 4,800 360
Fremont General Corp. 2,200 120
General Re Corp. 200 42
Green Tree Financial Corp. 3,900 102
Hartford Financial Services Group, Inc. (The) 6,200 580
Household International Corp. 3,200 408
Lincoln National Corp. 500 39
Marsh & McLennan Cos., Inc. 9,800 731
MBIA, Inc. 4,400 294
Morgan Stanley, Dean Witter, Discover and Co. 9,740 576
NationsBank Corp. 11,732 713
Ocwen Financial Corp. (a) 5,100 130
Pacific Century Financial Corp. 7,000 173
PMI Group, Inc. (The) 2,500 181
Providian Financial Corp. 6,400 289
Republic New York Corp. 1,000 114
SouthTrust Corp. 5,200 329
TCF Financial Corp. 4,600 156
Transamerica Financial Corp. 2,800 298
Travelers, Inc. 21,817 1,175
UNUM Corp. 4,100 223
Washington Federal, Inc. 13,850 435
Washington Mutual, Inc. 8,530 544
Wells Fargo & Co. 600 204
--------
19,681
--------
Health Care - 9.6%
ALZA Corp. (a) 17,400 554
American Home Products Corp. 8,600 658
Bausch & Lomb, Inc. 7,300 289
Bristol-Myers Squibb Co. 19,100 1,807
Columbia/HCA Healthcare Corp. 600 18
Crescenco Pharmaceuticals Corp. Class A (a) 870 10
Forest Labs, Inc. (a) 11,700 577
Health Care & Retirement Corp. (a) 3,400 137
Humana, Inc. (a) 28,000 581
Johnson & Johnson 9,700 639
Lilly (Eli) & Co. 1,800 125
Merck & Co., Inc. 13,800 1,466
Pfizer, Inc. 15,300 1,141
Schering-Plough Corp. 10,100 627
Tenet Healthcare Corp. (a) 5,900 195
United Healthcare Corp. 7,900 394
Warner-Lambert Co. 10,600 1,314
--------
10,532
--------
Integrated Oils - 7.0%
Amoco Corp. 100 9
Ashland, Inc. 100 5
Atlantic Richfield Co. 10,400 833
Enron Corp. 20,500 852
Exxon Corp. 44,800 2,741
Mobil Corp. 11,500 830
Royal Dutch Petroleum Co. 30,400 1,647
Tenneco, Inc. 15,500 612
Texaco, Inc. 3,500 190
--------
7,719
--------
Materials and Processing - 5.9%
Albemarle Corp. 7,300 174
Allegheny Teldyne, Inc. 3,900 101
Aluminum Co. of America 2,300 162
Boise Cascade Corp. 6,200 188
Crompton & Knowles Corp. 8,300 220
Cytec Industries, Inc. (a) 5,700 268
Dow Chemical Co. 14,500 1,472
du Pont (E.I.) de Nemours & Co. 16,300 979
Kimberly-Clark Corp. 8,700 429
Mead Corp. 5,000 140
Oregon Metallurgical Corp. (a) 8,400 280
Owens-Corning Fiberglas Corp. 7,500 256
Solutia, Inc. 2,700 71
Temple-Inland, Inc. 7,500 392
Tyco International, Ltd. 17,508 789
Union Carbide Corp. 12,800 550
--------
6,471
--------
Other Energy - 2.1%
Baker Hughes, Inc. 3,300 144
Cooper Cameron Corp. (a) 4,600 281
Diamond Offshore Drilling, Inc. 6,200 298
El Paso Natural Gas Co. 5,100 339
</TABLE>
Specialty Funds Equity T Fund 31
<PAGE>
Equity T Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Falcon Drilling Co., Inc. (a) 3,600 $ 126
Noble Drilling Corp. (a) 500 15
Schlumberger, Ltd. 7,000 564
Smith International, Inc. (a) 200 12
Tosco Corp. 9,600 363
Valero Energy Corp. 5,000 157
--------
2,299
--------
Producer Durables - 6.6%
AlliedSignal, Inc. 20,400 794
Applied Materials, Inc. (a) 4,800 144
Boeing Co. 18,860 923
Boston Scientific Corp. (a) 1,000 46
Caterpillar, Inc. 200 10
Coltec Industries, Inc. (a) 5,500 128
Emerson Electric Co. 10,300 581
General Electric Co. 20,100 1,475
Grainger (W.W.), Inc. 5,900 573
ITT Industries, Inc. 8,500 267
Johnson Controls, Inc. 10,900 520
Lockheed Martin Corp. 1,000 99
Northrop Grumman Corp. 300 35
Perkin-Elmer Corp. 11,200 796
Raychem Corp. 2,000 85
Raytheon Co. Class A 51 3
Rockwell International Corp. 1,000 52
Xerox Corp. 10,200 753
--------
7,284
--------
Technology - 10.9%
Bay Networks, Inc. (a) 3,800 97
Cisco Systems, Inc. (a) 14,350 800
COMPAQ Computer Corp. 9,550 539
Computer Associates International, Inc. 2,700 143
Cooper Industries, Inc. 7,200 353
Dell Computer Corp. (a) 2,900 244
Electronic Data Systems Corp. 700 30
EMC Corp. (a) 24,600 675
General Dynamics Corp. 400 35
Harris Corp. 10,600 486
Hewlett-Packard Co. 400 25
Intel Corp. 23,700 1,663
International Business Machines Corp. 14,500 1,516
Lucent Technologies, Inc. 2,900 232
Microsoft Corp. (a) 8,800 1,137
Motorola, Inc. 11,500 656
National Semiconductor Corp. (a) 8,300 215
NCR Corp. (a) 62 2
Newport News Shipbuilding, Inc. 60 2
Oracle Systems Corp. (a) 59,700 1,328
Quantum Corp. (a) 13,200 265
Sun Microsystems, Inc. (a) 20,500 817
Symbol Technologies, Inc. 2,300 87
Texas Instruments, Inc. 13,700 617
--------
11,964
--------
Utilities - 10.3%
Airtouch Communications, Inc. (a) 1,400 58
AT&T Corp. 5,900 361
Bell Atlantic Corp. 6,232 567
BellSouth Corp. 200 11
Dominion Resources, Inc. 4,000 170
DTE Energy Co. 400 14
Duke Power Co. 7,506 416
Entergy Corp. 11,900 356
GTE Corp. 30,700 1,604
Illinova Corp. 7,200 194
MCI Communications Corp. 18,000 771
New England Electric System 500 21
Northern States Power Co. 3,700 216
PG&E Corp. 1,717 52
SBC Communications, Inc. 16,100 1,179
Southern Co. 41,900 1,084
Sprint Corp. 23,200 1,360
Tele-Communications, Inc. Class A (a) 19,086 532
Tele-Communications TCI Ventures Group
Series A New (a) 10,914 309
Texas Utilities Co. 1,600 68
U.S. West Media Group (a) 16,500 476
Unicom Corp. 4,800 148
Western Resources, Inc. 200 9
Wisconsin Energy Corp. 1,000 29
WorldCom, Inc. (a) 40,710 1,231
--------
11,236
--------
Total Common Stocks
(cost $88,255) 102,516
--------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Short-Term Investments - 10.5%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $ 11,377 11,377
</TABLE>
32 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
United States Treasury Notes
5.125% due 04/30/98 (c) $ 150 $ 150
--------
Total Short-Term Investments
(cost $11,527) 11,527
--------
Total Investments
(identified cost $99,782)(d) - 103.9% 114,043
Other Assets and Liabilities,
Net - (3.9%) (4,308)
--------
Net Assets - 100.0% $109,735
========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S&P 500 Index Futures Contracts
expiration date 03/98 10 $ 31
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 31
==============
</TABLE>
((S)) At December 31, 1997, United States Treasury Notes valued at $150 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased.
(d) See Note 2 for federal income tax information.
Abbreviations:
NV - Nonvoting
The accompanying notes are an integral part of the financial statements.
Specialty Funds Equity T Fund 33
<PAGE>
Equity T Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $99,782)(Note 2)....................................................... $ 114,043
Receivables:
Dividends and interest...................................................................................... 160
Fund shares sold............................................................................................ 441
Prepaid expenses.............................................................................................. 3
Deferred organization expenses (Note 2)....................................................................... 18
--------------------
Total Assets........................................................................................... 114,665
Liabilities
Payables:
Investments purchased............................................................... $ 4,818
Accrued fees to affiliates (Note 4)................................................. 69
Other accrued expenses.............................................................. 43
------------------
Total Liabilities...................................................................................... 4,930
--------------------
Net Assets.................................................................................................... $ 109,735
====================
Net Assets consist of:
Undistributed net investment income........................................................................... $ 20
Accumulated net realized gain (loss).......................................................................... 39
Unrealized appreciation (depreciation) on:
Investments................................................................................................. 14,261
Futures contracts........................................................................................... 31
Shares of beneficial interest................................................................................. 79
Additional paid-in capital.................................................................................... 95,305
--------------------
Net Assets.................................................................................................... $ 109,735
====================
Net Asset Value, offering and redemption price per share:
($109,735,041 divided by 7,896,943 shares of $.01 par value
shares of beneficial interest outstanding)................................................................ $ 13.90
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
34 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends............................................................................................... $ 897
Dividends from Money Market Fund (Note 5)............................................................... 173
Interest................................................................................................ 7
--------------------
Total Investment Income.............................................................................. 1,077
Expenses (Notes 2 and 4):
Management fees.................................................................. $ 421
Custodian fees................................................................... 70
Transfer agent fees.............................................................. 26
Bookkeeping service fees......................................................... 3
Professional fees................................................................ 12
Registration fees................................................................ 63
Trustees' fees................................................................... 4
Amortization of deferred organization expenses................................... 5
Miscellaneous.................................................................... 3
------------------
Expenses before reductions....................................................... 607
Expense reductions (Note 4)...................................................... (46)
------------------
Total Expenses....................................................................................... 561
--------------------
Net investment income....................................................................................... 516
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments...................................................................... (287)
Futures contracts................................................................ 352 65
------------------
Net change in unrealized appreciation or depreciation of:
Investments...................................................................... 13,563
Futures contracts................................................................ 31 13,594
------------------ --------------------
Net gain (loss) on investments.............................................................................. 13,659
--------------------
Net increase (decrease) in net assets resulting from operations............................................. $ 14,175
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Equity T Fund 35
<PAGE>
Equity T Fund
Statements of Changes in Net Assets
For the Year or Period Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996*
------------- ------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ......................................................... $ 516 $ 46
Net realized gain (loss) ...................................................... 65 (26)
Net change in unrealized appreciation or depreciation ......................... 13,594 697
------------- ------------
Net increase (decrease) in net assets resulting from operations ............ 14,175 717
------------- ------------
From Distributions to Shareholders:
Net investment income ......................................................... (496) (46)
In excess of net investment income ............................................ -- (2)
------------- ------------
Total Distributions to Shareholders ........................................ (496) (48)
------------- ------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ... 76,125 19,262
------------- ------------
Total Net Increase (Decrease) in Net Assets ....................................... 89,804 19,931
------------- ------------
Net Assets
Beginning of period ........................................................... 19,931 --
------------- ------------
End of period (including undistributed net investment income of
$20 at December 31, 1997) .................................................. $ 109,735 $ 19,931
============= ============
</TABLE>
* For the period October 7, 1996 (commencement of operations) to December 31,
1996.
The accompanying notes are an integral part of the financial statements.
36 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996*
-------------- --------------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................................. $ 10.61 $ 10.00
-------------- --------------
Income From Investment Operations:
Net investment income .......................................................... .08 .03
Net realized and unrealized gain (loss) on investments.......................... 3.28 .61
-------------- --------------
Total Income From Investment Operations ...................................... 3.36 .64
-------------- --------------
Less Distributions:
Net investment income .......................................................... (.07) (.03)
-------------- --------------
Net Asset Value, End of Period ................................................... $ 13.90 $ 10.61
============== ==============
Total Return (%)(a)(c) ........................................................... 31.73 6.10
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ....................................... 109,735 19,931
Ratios to average net assets (%)(b)(c):
Operating expenses, net ...................................................... 1.00 1.00
Operating expenses, gross .................................................... 1.08 2.83
Net investment income ........................................................ .92 1.62
Portfolio turnover rate (%)(b) ................................................. 39.23 8.86
Average commission rate paid per share
of security ($ omitted) ...................................................... .0271 .0301
</TABLE>
* For the period October 7, 1996 (commencement of operations) to
December 31, 1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period October 7, 1996 (commencement of operations) to
December 31, 1996 are annualized.
(c) Fund performance, operating expenses, and net investment income are reported
net of investment management fees paid to the Manager or money managers, but
gross of any investment services fees. See Note 4.
Specialty Funds Equity T. Fund 37
<PAGE>
Limited Volatility Tax Free Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide a high level of federal tax-exempt income consistent with
the preservation of capital.
Invests in: Municipal obligations maturing in seven years or less from the date
of acquisition.
Strategy: The Fund concentrates on investment opportunities in the tax-free,
investment grade municipal debt securities market.
[LINE GRAPH APPEARS HERE]
Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Limited Volatility SB 3-Month T-Bill** Lipper(C) Short
Dates Tax Free Muni Debt++
- ----- ------------------ ------------------- ---------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1998 $10,523 $10,676 $10,599
1989 $11,254 $11,599 $11,349
1990 $11,943 $12,516 $12,074
1991 $12,856 $13,235 $13,050
1992 $13,608 $13,712 $13,886
1993 $14,502 $14,134 $14,746
1994 $14,425 $14,730 $14,716
1995 $15,552 $15,575 $15,798
1996 $16,029 $16,393 $16,387
1997 $16,818 $17,252 $17,145
</TABLE>
Limited Volatility Tax Free Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- --------------
<S> <C> <C>
1 Year $ 10,492 4.92%
5 Years $ 12,360 4.33%(S)
10 Years $ 16,818 5.34%(S)
</TABLE>
Salomon Brothers 3-Month Treasury Bill Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
---------------- --------------- --------------
<S> <C> <C>
1 Year $ 10,524 5.24%
5 Years $ 12,581 4.69%(S)
10 Years $ 17,252 5.92%(S)
</TABLE>
Lipper(C) Short Municipal Debt Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
---------------- --------------- --------------
<S> <C> <C>
1 Year $ 10,463 4.63%
5 Years $ 12,347 4.31%(S)
10 Years $ 17,145 5.54%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Salomon Brothers 3-Month Treasury Bill Index consists of equal dollar
amounts of three-month Treasury bills purchased at the beginning of each of
three consecutive months. As each bill matures, all proceeds are rolled over
or reinvested in a new three-month bill. The income used to calculate the
monthly return is derived by subtracting the original amount invested from
the maturity value.
++ Lipper(C) Short Municipal Debt Funds Average is the average total return for
the universe of funds within the Short Municipal Debt Funds investment
objective. The total return for the funds reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
(S) Annualized.
38 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997 the Limited Volatility Tax Free Fund
reflected a total return of 4.9%, as compared to the Lipper Short Municipal Debt
Funds Benchmark results of 4.6%. The Fund outperformed the benchmark primarily
due to duration-related factors. Its longer-than-index duration during the year
boosted returns as interest rates fell.
Portfolio Highlights
Fixed income markets were extremely volatile again in 1997. Fed policy,
uncertain economic prospects for the US, especially following the crises in
Asia, made it difficult to find clear opportunities in the market. Rates fell as
economic growth continued to be strong, but surprisingly non-inflationary. The
credit quality of municipal bonds continued to improve in step with local
economies. Although discussions of tax reform continued to test investors, yield
spreads on municipal credits helped continue the trend of narrowing credit yield
spreads. However, a general trend of rising spreads relative to treasuries
reflected the market's preoccupation with risk of any kind.
Top Ten Issuing States
(as a percent of Total Investments) December 31, 1997
New York 12.3%
Texas 9.7
Washington 9.2
Illinois 7.1
Utah 5.5
California 4.2
Alaska 4.1
Hawaii 4.1
New Jersey 3.8
Ohio 3.2
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AAA
Weighted Average Years-to-Maturity 3.6 Years
Weighted Average Duration 3.1 Years
Current Yield (SEC 30-day standardized) 3.5%
Number of Issues 123
Number of Issuers 96
Money Manager
MFS Asset Management, Inc.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Specialty Funds Limited Volatility Tax Free Fund 39
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ------ -------- --------
<S> <C> <C> <C> <C>
Municipal Bonds - 103.0%
Alabama - 1.0%
Huntsville, Alabama, Health Care Authority Revenue, Series A (a) $ 335 4.500% 06/01/01 $ 339
Jefferson County, Alabama Sewer Revenue, Series A (a) 500 5.000 02/01/05 521
--------
860
--------
Alaska - 4.2%
Alaska State Housing Finance Corp. Revenue, Series A-I (a) 650 4.550 12/01/02 655
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation (a) 500 0.000 06/30/99 470
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation (a) 1,385 0.000 06/30/00 1,246
North Slope Borough, Alaska, Zero Coupon, Series B, General Obligation (a) 375 0.000 06/30/99 352
North Slope Borough, Alaska, Zero Coupon, Series B, General Obligation (a) 900 0.000 01/01/01 791
--------
3,514
--------
Arizona - 1.9%
Arizona State Transportation Board, Series A, Special Obligations
Revenue (pre-refunded 07/01/01) 1,425 6.450 07/01/06 1,553
--------
1,553
--------
Arkansas - 0.3%
Arkansas State, Zero Coupon, Series B, General Obligation 300 0.000 06/01/03 236
--------
236
--------
California - 4.3%
California Pollution Control Financing Authority, Pollution Control Revenue,
Series A 100 4.900(b) 10/01/08 100
California State Public Works Board Lease Revenue, Series C 675 5.000 10/01/02 699
California, State of, General Obligation (a) 850 6.100 11/01/01 916
Los Angeles County, California, California Transportation
Participation Certificate, Series B, Tax Revenue 760 5.900 07/01/00 794
Sacramento, California, Municipal Utility District,
Series Z, Utility Revenue (a) 1,000 6.000 07/01/01 1,067
--------
3,576
--------
Connecticut - 2.8%
Bridgeport, Connecticut, Series A, General Obligation (a) 1,150 5.250 09/01/99 1,174
Connecticut State Unemployment, Series A, Compensation Revenue (a) 1,125 5.000 11/15/99 1,147
--------
2,321
--------
District of Columbia - 0.6%
District of Columbia, Series A, General Obligation (a)(d) 500 5.500 04/01/01 521
--------
521
--------
</TABLE>
40 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Florida - 1.8%
Hillsborough County, Florida, Zero Coupon, Series A,
Utility Refunding Revenue (a) $ 1,000 0.000% 8/1/99 $ 940
Orange County, Florida, Series A, School Board Participation Certificate (a) 575 4.700 8/1/01 588
---------
1,528
---------
Georgia - 2.4%
Atlanta, Georgia, Airport Facilities Revenue (a) 500 5.500 01/01/01 521
Burke County, Georgia, Development Authority, Pollution Control Revenue,
Series 4 100 5.000 09/01/25 100
Chatham County, Georgia, Series A, Hospital Authority Revenue (a) 500 5.000 01/01/00 510
Georgia Municipal Electric Authority, General Resolution Revenue, Series A (a) 850 5.000 01/01/02 876
---------
2,007
---------
Hawaii - 4.2%
Hawaii State General Obligation, Series CP (a) 600 5.000 10/01/02 621
Hawaii State Housing Financial & Development Corp.,
Single Family Management Purchasing Revenue 1,000 4.450 07/01/03 1,016
Honolulu, Hawaii, City & County, Series A, General Obligation 650 5.000 11/01/02 673
Honolulu, Hawaii, City & County, Series B, General Obligation 1,150 5.000 10/01/02 1,190
---------
3,500
---------
Illinois - 7.4%
Bolingbrook, Illinois, Parks District, Zero Coupon, General Obligation (a) 1,230 0.000 01/01/05 891
Chicago, Illinois, Series C, General Obligation (a) 1,500 6.250 10/31/01 1,612
Illinois Health Facilities Authority Revenue (a) 500 5.000 08/01/03 517
Illinois Health Facilities Authority Revenue (a) 270 5.250 08/15/03 282
Illinois Health Facilities Authority Revenue (a) 500 5.000 08/15/04 516
Illinois Health Facilities Authority Revenue, Series A (a) 250 4.800 10/01/99 253
Illinois Health Facilities Authority Revenue, Series A (a) 500 5.000 10/01/00 511
Illinois Health Facilities Authority Revenue, Series A (a) 1,000 4.550 07/01/01 1,013
Illinois State, General Obligation (a) 500 5.375 05/01/01 521
---------
6,116
---------
Indiana - 1.2%
Indiana Health Facilities Financing Authority, Hospital Revenue, Series A (a) 500 5.000 11/01/02 516
Monroe County, Industrial Hospital Authority Revenue (a) 500 4.500 05/01/03 504
---------
1,020
---------
Kentucky - 1.3%
McCracken County, Kentucky, Hospital Revenue, Series A,
Health Care Revenue (a) 1,000 5.700 11/01/00 1,043
---------
1,043
---------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 41
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Louisiana - 2.1%
De Soto Parish, Louisiana, Pollution Control Revenue, Series A $ 650 5.050% 12/01/02 $ 679
Louisiana Public Facilities Authority Revenue, Health Care Revenue 500 5.500 10/15/99 513
Louisiana, State of, Series A, General Obligation (a) 500 6.000 08/01/00 524
--------
1,716
--------
Maryland - 1.9%
Maryland State & Local Facilities Loan, Series 3, General Obligation 500 5.000 10/15/02 520
Maryland State, Stadium Authority Lease Revenue Convention
Center Expansion (a) 1,000 5.375 12/15/00 1,039
--------
1,559
--------
Massachusetts - 1.7%
Massachusetts State Health & Educational Facilities Authority Revenue,
Series B 500 4.550 01/01/21 505
Massachusetts State Health & Educational Facilities Authority Revenue,
Series D (a) 900 5.000(b) 01/01/35 900
--------
1,405
--------
Michigan - 2.8%
Jackson County, Michigan, Hospital Financial Authority Revenue (a) 300 4.375 06/01/02 302
Michigan Municipal Bond Authority Revenue, Series B,
State and Local Appropriations (a) 550 6.900 05/01/99 571
Michigan State Building Authority Revenue, Series I 375 5.400 10/01/03 396
Michigan State Hospital Finance Authority Revenue, Series A 500 5.000 07/01/02 515
Michigan State Hospital Finance Authority Revenue, Series S 500 5.500 08/15/00 518
--------
2,302
--------
Minnesota - 1.5%
Minnesota State Revenue, Series A (a) 500 5.000 06/30/99 508
Minnesota, State of, General Obligation 700 5.600 10/01/99 720
--------
1,228
--------
Mississippi - 1.7%
Jackson County, Mississippi, Pollution Control Revenue 900 5.000(b) 06/01/23 900
Perry County, Mississippi, Pollution Control Revenue 500 5.000(b) 03/01/02 500
--------
1,400
--------
Missouri - 0.1%
Kansas City, Missouri, Industrial Development Authority Hospital Revenue (a) 100 5.000(b) 10/15/14 100
--------
100
--------
</TABLE>
42 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Nebraska - 1.2%
Douglas County, Nebraska, Hospital Authority No. 001 Revenue (a) $ 1,000 4.350% 09/01/01 $ 1,009
--------
1,009
--------
New Jersey - 3.9%
New Jersey State, Series E, General Obligation 500 5.500 07/15/02 529
New Jersey State Transportation Corporation Capital Grant Anticipation Notes,
Series A 1,000 5.000 09/01/00 1,018
New Jersey State Transportation Corporation Capital Grant Anticipation Notes,
Series A 670 4.900 09/01/01 686
Ocean County, New Jersey, Utilities Authority Waste Water Revenue 1,000 5.000 01/01/01 1,028
--------
3,261
--------
New Mexico - 1.4%
New Mexico, Mortgage Finance Authority Revenue, Series Al 1,100 6.200 01/01/01 1,142
--------
1,142
--------
New York - 12.7%
Metropolitan Transportation Authority, New York, Transit Facilities Revenue,
Series R (d) 650 5.000 07/01/03 660
Municipal Assistance Corp. New York, New York Revenue, Series E 1,000 4.700 07/01/02 1,024
Municipal Assistance Corp. New York, New York Revenue, Series L 500 4.500 07/01/02 508
New York City, New York, Series H, General Obligation 750 5.250 08/01/03 776
New York State Dormitory Authority Revenue 500 4.900 05/15/00 509
New York State Dormitory Authority Revenue 500 5.000 07/01/00 510
New York State Dormitory Authority Revenue (d) 450 5.000 04/01/03 461
New York State Dormitory Authority Revenue, Series A 375 6.000 02/15/03 403
New York State Dormitory Authority Revenue, Series A 375 6.000 08/15/04 408
New York State Dormitory Authority Revenue, Series 1 500 5.000 07/01/03 513
New York State Urban Development Corp. Revenue, Series 7 125 5.500 01/01/01 129
New York State, General Obligation 765 4.500 10/15/01 777
New York, New York, Series A-1, General Obligation 550 5.500 08/01/01 571
New York, New York, Series A, General Obligation 500 5.700 08/01/02 526
New York, New York, Series C, General Obligation 500 6.125 08/01/01 529
New York, New York, Series D, General Obligation 250 6.000 02/01/99 255
New York, New York, Series E, General Obligation 500 5.300 08/01/03 519
New York, New York, Series F, General Obligation 500 5.300 08/01/03 519
New York, New York, Series L, General Obligation 150 5.000 08/01/01 153
United Nations Development Corp., New York Revenue, Series B 250 4.450 07/01/01 251
United Nations Development Corp., New York Revenue, Series B 250 4.600 07/01/02 251
Wallkill, New York, General Obligation (a) 300 4.500 03/01/01 303
--------
10,555
--------
North Carolina - 0.6%
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue, Series A (a) 500 5.000 01/01/01 513
--------
513
--------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 43
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ------ -------- --------
<S> <C> <C> <C> <C>
Ohio - 3.3%
Cleveland, Ohio, City School District Revenue Anticipation Notes (a) $ 555 5.000% 06/01/00 $ 568
Cuyahoga County, Ohio, Hospital Revenue (a) 1,000 5.000 02/15/00 1,020
Lorain County, Ohio, Hospital Revenue 500 4.750 09/01/00 509
Ohio State Building Authority Revenue, State Facilities,
Administration Building Fund, Series A 600 5.250 10/01/03 631
--------
2,728
--------
Oklahoma - 0.4%
Stiliwater, Oklahoma, Series A, Medical Center Authority Revenue 300 5.550 05/15/01 309
--------
309
--------
Pennsylvania - 2.5%
Harrisburg, Pennsylvania, Zero Coupon, Series D, General Obligation (a) 815 0.000 03/15/04 621
Pennsylvania, State of, General Obligation 500 5.300 07/01/99 510
Philadelphia, Pennsylvania, Hospitals & Higher Education Facilities
Authority Revenue, Series A 500 5.000 05/15/02 515
Philadelphia, Pennsylvania, Zero Coupon, Water & Sewer Revenue (a) 500 0.000 10/01/02 408
--------
2,054
--------
Puerto Rico - 0.6%
Commonwealth of Puerto Rico, General Obligation 500 5.500 07/01/01 522
--------
522
--------
Rhode Island - 1.3%
Rhode Island Housing & Mortgage Finance Authority,
Series A, Housing Revenue (a) 1,000 5.150 07/01/01 1,026
--------
1,026
--------
South Carolina - 0.6%
Spartanburg County, South Carolina, Social Health Services, Inc.
Hospital Revenue (a) 500 4.400 04/15/01 505
--------
505
--------
Tennessee - 1.3%
Metropolitan Government, Nashville & Davidson County, Tennessee,
Health & Education Revenue, Series A (d) 615 5.250 05/01/01 634
White House Utility District, Tennessee, Robertson & Sumner Countys,
Zero Coupon, Waterworks Revenue (a) 650 0.000 01/01/05 474
--------
1,108
--------
</TABLE>
44 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Texas - 10.0%
Abilene, Texas, Health Facilities Development Corp., Medical Center A,
Health Care Revenue (a) $ 500 5.100% 09/01/99 $ 509
Arlington, Texas, Independent School District, General Obligation 600 5.150 02/15/99 609
Denison, Texas, Hospital Authority Revenue 500 5.250 08/15/01 515
Houston, Texas, Series A, General Obligation 650 5.000 03/01/02 671
Houston, Texas, Series C, General Obligation 1,000 5.900 03/01/03 1,064
Irving, Texas, Independent School District, Zero Coupon, General Obligation 650 0.000 02/15/03 519
Lubbock, Texas, Health Facilities Development Corp. Revenue 100 5.000 07/01/13 100
San Antonio, Texas, General Obligation (d) 1,000 5.000 08/01/00 1,016
Stephenville, Texas, Independent School District, Zero Coupon,
General Obligation 830 0.000 02/15/04 633
Tarrant County, Texas, Health Facilities Development Corp. Systems Revenue,
Series A (a) 500 5.000 02/15/01 513
Texas, State of, Series C, General Obligation 1,500 5.000 04/01/99 1,522
University of Texas, University Revenues, Series A 605 5.000 08/15/03 628
---------
8,299
---------
Utah - 5.6%
Intermountain Power Agency, Series B, Utilities Revenue (a) 500 5.250 07/01/99 509
Intermountain Power Agency, Series B, Utilities Revenue (a) 500 7.200 07/01/99 518
Intermountain Power Agency, Series C, Power Supply Revenue 1,000 4.700 07/01/02 1,019
Intermountain Power Agency, Series C, Utilities Revenue (a) 1,250 5.500 07/01/99 1,278
Intermountain Power Agency, Series E, Utilities Revenue 500 5.250 07/01/01 519
Utah State Board of Regents Revenue 300 5.000 08/01/02 310
Utah State, Building Ownership Authority, Series A, Lease Revenue 500 5.500 05/15/00 517
---------
4,670
---------
Virginia - 1.5%
Virginia Public Building Authority Revenue, Staff and Local Appropriation 500 5.100 08/01/99 509
Virginia, State of, General Obligation 740 5.375 06/01/99 756
---------
1,265
---------
Washington - 9.5%
CDP King County III, Washington, Lease Revenue (a) 1,000 4.600 06/01/03 1,016
Washington State Health Care Facilities Authority Revenue, Series A 250 4.300 08/15/01 251
Washington State Public Power Supply System,
Nuclear Project No. 1 Revenue, Series B 500 5.000 07/01/00 510
Washington State Public Power Supply System,
Nuclear Project No. 2 Revenue, Series A 280 5.000 07/01/00 286
Washington State Public Power Supply System,
Nuclear Project No. 2 Revenue, Series A 1,500 5.450 07/01/00 1,545
Washington State Public Power Supply System,
Nuclear Project No. 2 Revenue, Series C 650 7.200 07/01/99 680
Washington State Public Power Supply System,
Nuclear Project No. 3 Revenue, Series A (d) 1,000 5.000 07/01/04 1,028
Washington, State of, Series C, General Obligation 2,000 5.500 07/01/99 2,047
Washington, State of, Series R, General Obligaion 500 5.000 07/01/99 508
---------
7,871
---------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 45
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Wyoming - 1.4%
Lincoln County, Wyoming, Pollution Control Revenue, Project C $ 300 5.100%(b) 11/01/14 $ 300
Uinta County, Wyoming, Pollution Control Revenue 700 5.000(b) 12/01/22 700
Uinta County, Wyoming, Pollution Control Revenue 200 5.000(b) 08/15/20 200
-------
1,200
-------
Total Investments
(identified cost $84,144)(c) - 103.0% 85,542
Other Assets and Liabilities, Net - (3.0%) (2,466)
-------
Net Assets - 100.0% $83,076
=======
</TABLE>
(a) Bond is insured by AMBAC, FGIC, or MBIA.
(b) Adjustable or floating rate security.
(c) See Note 2 for federal income tax information.
(d) Forward commitment. See Note 2.
Abbreviations:
AMBAC - AMBAC Indemnity Corporation
FGIC - Financial Guaranty Insurance Company
MBIA - Municipal Bond Investors Assurance
Quality Ratings as a % of Market Value
<TABLE>
<S> <C>
AAA 55%
AA 28
A 7
BBB 10
----
100%
====
</TABLE>
Economic Sector Emphasis as a % of Market Value
<TABLE>
<S> <C>
General Obligation 38%
Utility Revenue 16
State and Community Lease 12
Health Care Revenue 18
Refunded 2
Housing Revenue 5
University Revenue 2
Other 7
----
100%
====
</TABLE>
The accompanying notes are an integral part of the financial statements.
46 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $84,144)(Note 2)................................................ $ 85,542
Receivables:
Interest........................................................................................... 1,327
Fund shares sold................................................................................... 643
--------------------
Total Assets.................................................................................... 87,512
Liabilities
Payables:
Investments purchased (delayed settlement)(Note 2).......................... $ 4,342
Fund shares redeemed........................................................ 20
Accrued fees to affiliates (Note 4)......................................... 40
Other accrued expenses...................................................... 34
------------------
Total Liabilities............................................................................... 4,436
--------------------
Net Assets............................................................................................. $ 83,076
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income........................................... $ (24)
Accumulated net realized gain (loss)................................................................... (872)
Unrealized appreciation (depreciation) on investments.................................................. 1,398
Shares of beneficial interest.......................................................................... 39
Additional paid-in capital............................................................................. 82,535
--------------------
Net Assets............................................................................................. $ 83,076
====================
Net Asset Value, offering and redemption price per share:
($83,075,721 divided by 3,920,226 shares of $.01 par value
shares of beneficial interest outstanding)......................................................... $ 21.19
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Limited Volatility Tax Free Fund 47
<PAGE>
Limited Volatility Tax Free Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest .................................................................... $ 3,396
Expenses (Notes 2 and 4):
Management fees ........................................ $ 361
Custodian fees ......................................... 52
Transfer agent fees .................................... 45
Professional fees ...................................... 8
Registration fees ...................................... 22
Trustees' fees ......................................... 4
Miscellaneous .......................................... 19
--------
Total Expenses ........................................................... 511
---------
Net investment income ........................................................... 2,885
---------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments ....................................... 113
Net change in unrealized appreciation or depreciation of investments ............ 530
---------
Net gain (loss) on investments .................................................. 643
---------
Net increase (decrease) in net assets resulting from operations ................. $ 3,528
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
48 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
-------- --------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ......................................................... $ 2,885 $ 2,518
Net realized gain (loss) ...................................................... 113 (15)
Net change in unrealized appreciation or depreciation ......................... 530 (626)
-------- --------
Net increase (decrease) in net assets resulting from operations ............ 3,528 1,877
-------- --------
From Distributions to Shareholders:
Net investment income ......................................................... (2,885) (2,536)
In excess of net investment income ............................................ (24) (3)
-------- --------
Total Distributions to Shareholders ........................................ (2,909) (2,539)
-------- --------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ... 16,113 3,168
-------- --------
Total Net Increase (Decrease) in Net Assets ....................................... 16,732 2,506
Net Assets:
Beginning of period ........................................................... 66,344 63,838
-------- --------
End of period (including accumulated distributions in excess of
net investment income of $24 at December 31, 1997) .......................... $ 83,076 $ 66,344
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Limited Volatility Tax Free Fund 49
<PAGE>
Limited Volatility Tax Free Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........................ $ 21.02 $ 21.24 $ 20.48 $ 21.45 $ 21.03
-------- --------- --------- --------- ---------
Income From Investment Operations:
Net investment income .................................... .84 .85 .81 .86 .94
Net realized and unrealized gain (loss) on investments.... .18 (.21) .77 (.97) .42
-------- --------- --------- --------- ---------
Total Income From Investment Operations .............. 1.02 .64 1.58 (.11) 1.36
-------- --------- --------- --------- ---------
Less Distributions:
Net investment income .................................... (.84) (.86) (.82) (.86) (.94)
In excess of net investment income........................ (.01) -- -- -- --
-------- --------- --------- --------- ---------
Total Distributions .................................. (.85) (.86) (.82) (.86) (.94)
-------- --------- --------- --------- ---------
Net Asset Value, End of Period .............................. $ 21.19 $ 21.02 $ 21.24 $ 20.48 $ 21.45
======== ========= ========= ========= =========
Total Return (%) ............................................ 4.92 3.07 7.81 (0.54) 6.58
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................. 83,076 66,344 63,838 48,975 51,211
Ratios to average net assets (%):
Operating expenses ................................... .71 .75 .74 .72 .75
Net investment income................................. 3.99 4.02 3.91 4.14 4.40
Portfolio turnover rate (%) ............................. 40.79 74.34 73.91 71.71 24.05
</TABLE>
50 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Money Market Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------ --------- ----------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes - 20.9%
Alpha Finance Corp. (MTN) $ 10,000 5.850% 03/03/98 $ 10,000
BankAmerica Corp. (MTN)(a) 2,000 6.206 02/19/98 2,001
Beta Finance, Inc. (MTN) 5,000 5.930 03/16/98 5,000
Bravo Trust (a) 45,000 5.925 10/15/98 45,000
Carolina Medical Plan, Inc. (a) 20,000 5.710 06/01/22 20,000
Chrysler Financial Corp. (MTN) 10,000 7.480 03/09/98 10,025
First USA Bank (a) 5,000 5.902 04/29/98 5,002
Ford Motor Credit Co. 2,500 6.250 02/26/98 2,501
General Motors Acceptance Corp. (MTN)(a) 25,000 5.662 03/03/98 24,998
General Motors Acceptance Corp. (MTN)(a) 20,000 5.918 05/26/98 20,019
Merrill Lynch & Co., Inc. (a) 25,000 5.690 06/01/98 25,000
Merrill Lynch & Co., Inc. (MTN)(a) 14,000 5.874 10/14/98 13,999
Sigma Finance, Inc. (MTN) 10,000 5.870 01/20/98 9,999
----------
Total Corporate Bonds and Notes (cost $193,544) 193,544
----------
Domestic Certificates of Deposit - 8.0%
Corestates Bank NA (a) 20,000 5.670 08/27/98 20,000
First USA Bank (a) 17,400 5.950 01/13/98 17,401
First USA Bank (MTN)(a) 5,000 5.957 01/15/98 5,000
First USA Bank 2,000 6.298 10/01/98 2,004
Morgan Guaranty Trust Co. 5,000 5.600 01/29/98 4,999
PNC Bank NA 25,000 5.620 02/13/98 24,999
----------
Total Domestic Certificates of Deposit (cost $74,403) 74,403
----------
Eurodollar Certificates of Deposit - 1.1%
Commerzbank AG 10,000 5.890 03/06/98 9,999
----------
Total Eurodollar Certificates of Deposit (cost $9,999) 9,999
----------
Yankee Certificates of Deposit - 12.5%
Bank of Tokyo Mitsubishi, Ltd. 10,000 5.740 01/26/98 9,996
Bank of Tokyo Mitsubishi, Ltd. 5,000 6.000 03/04/98 5,000
Bank of Tokyo Mitsubishi, Ltd. 4,000 6.280 04/02/98 4,000
Barclays Bank PLC 15,000 5.805 02/09/98 15,000
Bayerische Landesbank 5,000 6.250 04/15/98 5,002
Canadian Imperial Bank 5,000 5.940 03/17/98 5,000
Fuji Bank, Ltd. (c) 20,000 6.190 02/17/98 20,004
Rabobank 10,000 6.200 04/09/98 9,997
Societe Generale (a) 25,000 6.160 07/01/98 24,991
Wells Fargo & Co. (a) 10,000 5.946 07/01/98 10,005
Westpac Banking Corp. 2,000 5.830 01/15/98 2,000
Westpac Banking Corp. 5,000 5.970 03/23/98 4,999
----------
Total Yankee Certificates of Deposit (cost $115,994) 115,994
----------
</TABLE>
52 Money Market Fund Specialty Funds
<PAGE>
Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------ --------- --------
<S> <C> <C> <C> <C>
Domestic Commercial Paper - 39.6%
Bavaria TRR Corp. $ 24,274 5.680% 01/30/98 $ 24,163
Bavaria TRR Corp. 25,000 5.750 02/27/98 24,772
Centric Capital Corp. 5,000 5.650 01/29/98 4,978
Centric Capital Corp. 7,500 5.730 02/13/98 7,449
Centric Capital Corp. 15,000 5.730 02/17/98 14,888
Centric Capital Corp. 10,000 5.750 02/23/98 9,915
Centric Capital Corp. 2,000 5.750 02/24/98 1,983
Centric Capital Corp. 10,000 5.760 03/02/98 9,904
Certain Funding Corp. 5,300 5.740 02/09/98 5,267
Certain Funding Corp. 8,950 5.750 02/10/98 8,893
Certain Funding Corp. 22,425 5.740 02/19/98 22,250
Cooper River Funding, Inc. 25,000 5.790 02/05/98 24,859
Dixie Overseas, Ltd. 25,000 5.760 05/04/98 24,508
General Electric Capital Corp. 21,000 5.620 02/12/98 20,862
General Electric Capital Corp. 10,000 5.700 02/26/98 9,911
General Electric Capital Services 3,700 5.730 01/21/98 3,688
General Electric Capital Services 5,000 5.650 01/23/98 5,000
ING America Insurance Holding 10,000 5.720 02/19/98 9,922
ING America Insurance Holding 19,600 5.720 02/20/98 19,444
KZH-Soleil Corp. 1,183 5.916 03/03/98 1,171
KZH-Soleil Corp. 4,630 5.830 04/17/98 4,551
KZH-Soleil Corp. 5,935 5.830 04/20/98 5,830
KZH-Soleil Corp. 1,443 5.830 04/23/98 1,417
KZH-Soleil Corp. 1,890 5.860 04/30/98 1,853
KZH-Soleil Corp. 2,835 5.835 06/10/98 2,762
Sigma Finance, Inc. 10,000 5.710 02/12/98 9,933
Special Purpose Accounts Receivable Co. 20,000 5.750 02/25/98 19,824
Special Purpose Accounts Receivable Co. 24,000 5.750 02/26/98 23,785
TEB Funding Corp. 12,250 5.760 05/01/98 12,015
Variable Funding Capital Corp. 31,026 5.750 02/06/98 30,848
--------
Total Domestic Commercial Paper (cost $366,645) 366,645
--------
Yankee Commercial Paper - 7.6%
Banco BCN Barclays, Ltd. 10,000 5.800 01/23/98 9,965
Banco Del Istmo SA 10,000 5.750 02/19/98 9,922
Salts III Cayman Island Corp. 30,000 6.100 06/12/98 30,000
Tasmanian Public Finance Corp. 20,000 5.650 01/12/98 19,965
--------
Total Yankee Commercial Paper (cost $69,852) 69,852
--------
Eurodollar Time Deposits - 6.9%
Bank of Montreal 23,041 6.250 01/02/98 23,041
Bank of Tokyo Mitsubishi, Ltd. 14,000 5.750 01/06/98 14,000
Bank of Tokyo Mitsubishi, Ltd. 10,000 5.750 01/20/98 10,000
Tokai Bank, Grand Cayman (c) 17,000 6.250 02/18/98 17,004
--------
Total Eurodollar Time Deposits (cost $64,045) 64,045
--------
</TABLE>
Specialty Funds Money Market Fund 53
<PAGE>
Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
United States Government Agencies - 3.2%
Aid to Chile Guaranteed Note (LIBOR Floater)(a) $ 12,348 6.187% 06/01/05 $ 12,359
Aid to INH Portugal Guaranteed Note (LIBOR Floater)(a) 12,500 6.254 12/01/17 12,713
Federal Home Loan Bank 5,000 5.875 02/26/98 5,000
----------
Total United States Government Agencies (cost $30,072) 30,072
----------
Total Investments (amortized cost $924,554)(b) - 99.8% 924,554
Other Assets and Liabilities, Net - 0.2% 1,729
----------
Net Assets - 100% $ 926,283
==========
</TABLE>
* The interest rate for all securities with a maturity greater than thirteen
months has an automatic reset feature resulting in an effective maturity of
thirteen months or less.
(a) Adjustable or floating rate security.
(b) The identified cost for federal income tax purposes is the same as shown
above.
(c) Insured by MBIA
Abbreviations:
LIBOR - London Interbank Offered Rate
MBIA - Municipal Bond Investors Assurance
MTN - Medium Term Note
The accompanying notes are an integral part of the financial statements.
54 Money Market Fund Specialty Funds
<PAGE>
Money Market Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at amortized cost which approximates market (Note 2) ... $ 924,554
Interest receivable ................................................ 6,663
---------------
Total Assets .................................................. 931,217
Liabilities
Payables:
Dividends ............................................ $ 4,706
Accrued fees to affiliates (Note 4) .................. 82
Other accrued expenses ............................... 146
---------
Total Liabilities ............................................. 4,934
---------------
Net Assets ......................................................... $ 926,283
===============
Net Assets consist of:
Shares of beneficial interest ...................................... $ 9,263
Additional paid-in capital ......................................... 917,020
---------------
Net Assets ......................................................... $ 926,283
===============
Net Asset Value, offering and redemption price per share:
($926,282,567 divided by 926,282,567 shares of $.0l par value
shares of beneficial interest outstanding) ......................... $ 1.00
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Money Market Fund 55
<PAGE>
Money Market Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest ......................................................... $ 41,325
Expenses (Notes 2 and 4):
Management fees .............................. $ 1,805
Custodian fees ............................... 172
Professional fees ............................ 25
Registration fees ............................ 147
Trustees' fees ............................... 4
Miscellaneous ................................ 15
---------------
Expenses before reductions ................... 2,168
Expense reductions (Note 4) .................. (1,611)
---------------
Total Expenses ................................................ 557
------------------
Net investment income .............................................. 40,768
------------------
Net increase in net assets resulting from operations................ $ 40,768
==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
56 Money Market Fund Specialty Funds
<PAGE>
Money Market Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ..................................................... $ 40,768 $ 31,584
From Distributions to Shareholders:
Net investment income ..................................................... (40,768) (31,584)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6). 429,351 (36,711)
------------ ------------
Total Net Increase (Decrease) in Net Assets ................................. 429,351 (36,711)
Net Assets
Beginning of period ....................................................... 496,932 533,643
------------ ------------
End of period ............................................................. $ 926,283 $ 496,932
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Money Market Fund 57
<PAGE>
Money Market Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income ......................... .0563 .0549 .0601 .0447 .0342
-------- -------- -------- -------- --------
Less Distributions:
Net investment income ......................... (.0563) (.0549) (.0601) (.0447) (.0342)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ========
Total Return (%)(a) ............................. 5.79 5.63 6.19 4.57 3.48
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)....... 926,283 496,932 533,643 502,302 415,998
Ratios to average net assets (%)(a):
Operating expenses, net (b) ................. .08 .05 .06 .05 .07
Operating expenses, gross (b) ............... .30 .30 .26 .05 .07
Net investment income ....................... 5.65 5.49 6.01 4.49 3.38
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment advisory fees. See Note 4.
(b) See Note 4 for current period amounts.
58 Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- -------- --------- --------
<S> <C> <C> <C> <C>
United States Government Agencies - 91.2%
Aid to Sri Lanka Guaranteed Note (LIBOR Floater)(a) $ 3,625 6.254% 06/15/12 $ 3,661
Aid to Chile Guaranteed Note (LIBOR Floater)(a) 5,802 6.187 06/01/05 5,807
Federal Farm Credit Bank Bonds 1,000 5.650 02/02/98 1,000
Federal Farm Credit Bank Bonds 2,500 5.540 03/02/98 2,499
Federal Farm Credit Bank (MTN)(a) 5,000 5.570 04/17/98 4,999
Federal Farm Credit Bank Discount Notes 3,385 5.420 01/12/98 3,379
Federal Home Loan Bank 1,050 5.135 01/12/98 1,050
Federal Home Loan Bank 1,000 5.610 01/26/98 1,000
Federal Home Loan Bank 5,000 5.420 02/06/98 4,997
Federal Home Loan Bank 10,000 4.500 02/25/98 9,980
Federal Home Loan Bank 1,000 4.980 02/26/98 999
Federal Home Loan Bank 4,000 5.135 03/04/98 3,995
Federal Home Loan Bank 4,000 5.670 03/05/98 3,998
Federal Home Loan Bank 6,241 5.122 04/13/98 6,227
Federal Home Loan Bank 1,000 5.260 04/27/98 997
Federal Home Loan Bank 1,000 6.200 05/06/98 1,000
Federal Home Loan Bank 2,000 6.010 07/29/98 2,000
Federal Home Loan Bank (MTN) 2,000 5.010 03/11/98 1,997
Federal Home Loan Mortgage Corp. 2,000 5.190 03/11/98 1,997
Federal Home Loan Mortgage Corp. 1,000 5.400 03/16/98 999
Federal Home Loan Mortgage Corp. 1,000 5.310 04/29/98 998
Federal Home Loan Mortgage Corp. Pool #M1-7487 1,321 6.000 03/01/98 1,320
Federal Home Loan Mortgage Discount Notes 2,000 5.950 01/07/98 1,998
Federal National Mortgage Association 2,500 6.050 01/12/98 2,500
Federal National Mortgage Association 2,000 5.375 01/13/98 2,000
Federal National Mortgage Association 5,000 8.650 02/10/98 5,015
Federal National Mortgage Association 2,100 8.200 03/10/98 2,109
Federal National Mortgage Association 2,000 5.350 03/10/98 1,998
Federal National Mortgage Association 2,840 5.250 03/25/98 2,835
Federal National Mortgage Association 3,000 5.730 04/13/98 2,997
Federal National Mortgage Association 1,000 6.000 04/17/98 1,000
Federal National Mortgage Association (MTN) 1,000 7.560 02/06/98 1,002
Federal National Mortgage Association (MTN) 1,000 4.600 02/25/98 998
Federal National Mortgage Association (MTN) 6,000 5.400 03/18/98 5,995
Federal National Mortgage Association (MTN) 2,150 5.710 03/18/98 2,150
Federal National Mortgage Association (MTN) 2,000 5.200 04/30/98 1,994
Federal National Mortgage Association (MTN)(a) 1,500 6.000 02/17/98 1,501
Federal National Mortgage Association (MTN)(a) 8,000 5.590 04/21/98 8,000
Federal National Mortgage Association (MTN)(a) 12,460 5.504 06/02/99 12,404
Federal National Mortgage Association Discount Notes 7,230 5.740 01/23/98 7,205
Nebraska Higher Education Loan (c) 1,007 5.850 01/26/98 1,003
New Hampshire Higher Education Loan Corp. (c) 5,000 5.720 02/17/98 4,963
Student Loan Marketing Association 3,000 7.000 03/03/98 3,006
Student Loan Marketing Association (a) 2,900 5.629 01/15/98 2,900
Student Loan Marketing Association (a) 2,600 5.619 08/20/98 2,597
Student Loan Marketing Association (a) 1,000 5.639 01/13/99 996
Student Loan Marketing Association (MTN) 5,000 5.700 03/17/98 4,998
</TABLE>
60 U.S. Government Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- ------ --------- ---------
<S> <C> <C> <C> <C>
Student Loan Marketing Association (MTN)(a) $ 10,000 5.877% 10/06/98 $ 9,995
Student Loan Marketing Association (MTN)(a) 2,000 5.504 07/12/99 1,997
USA Group Secondary Market Savings (c) 5,000 5.730 01/26/98 4,980
USA Group Secondary Market Savings (c) 5,000 5.700 02/12/98 4,967
---------
Total United States Government Agencies 171,002
---------
Total Investments (amortized cost $171,002) - 91.2% 171,002
---------
Repurchase Agreements - 8.0%
Agreement with BZW Securities and the Bank of New York (Tri-Party) of $14,925
acquired December 31, 1997 at 6.60% to be repurchased at $14,930 on January 2, 1998, collateralized by:
$14,929 Federal Home Loan Bank, due 06/02/98, valued at $15,228 14,925
---------
Total Repurchase Agreements (identified cost $14,925) 14,925
---------
Total Investments and Repurchase Agreements (cost $185,927)(b) - 99.2% 185,927
Other Assets and Liabilities, Net - 0.8% 1,485
---------
Net Asset - 100.0% $ 187,412
===== =========
</TABLE>
* The interest rate for all securities with a maturity greater than thirteen
months has an automatic reset feature resulting in an effective maturity of
thirteen months or less.
(a) Adjustable or floating rate security.
(b) The identified cost for federal income tax purposes is the same as shown
above.
(c) Guaranteed by Student Loan Marketing Association.
Abbreviations:
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
The accompanying notes are an integral part of the financial statements.
Specialty Funds U.S. Government Money Market Fund 61
<PAGE>
U.S. Government Money Market Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at amortized cost which approximates market (Note 2) ............................................... $ 171,002
Repurchase agreements (identified cost $14,925)(Note 2) ........................................................ 14,925
Interest receivable ............................................................................................ 2,340
----------------
Total Assets ............................................................................................ 188,267
Liabilities
Payables:
Dividends ........................................................................... $ 815
Accrued fees to affiliates (Note 4) ................................................. 29
Other accrued expenses .............................................................. 11
----------------
Total Liabilities ....................................................................................... 855
----------------
Net Assets ..................................................................................................... $ 187,412
================
Net Assets consist of:
Shares of beneficial interest .................................................................................. $ 1,874
Additional paid-in capital ..................................................................................... 185,538
----------------
Net Assets ..................................................................................................... $ 187,412
================
Net Asset Value, offering and redemption price per share:
($187,412,297 divided by 187,412,297 shares of $.01 par value
shares of beneficial interest outstanding) ................................................................. $ 1.00
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
62 U.S. Government Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest ................................................................................................ $ 12,212
Expenses (Notes 2 and 4):
Management fees ..................................................................... $ 542
Custodian fees ...................................................................... 67
Transfer agent fees ................................................................. 223
Professional fees ................................................................... 7
Registration fees ................................................................... 19
Trustees' fees ...................................................................... 4
Miscellaneous ....................................................................... 26
----------------
Expenses before reductions .......................................................... 888
Expense reductions (Note 4) ......................................................... (464)
----------------
Total Expenses .......................................................................................... 424
----------------
Net investment income .......................................................................................... 11,788
----------------
Net increase in net assets resulting from operations ........................................................... $ 11,788
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds U.S. Government Money Market Fund 63
<PAGE>
U.S. Government Money Market Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
----------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ................................................................ $ 11,788 $ 10,145
From Distributions to Shareholders:
Net investment income ................................................................ (11,788) (10,145)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) .......... (52,313) 89,784
----------------- -----------------
Total Net Increase (Decrease) in Net Assets .............................................. (52,313) 89,784
Net Assets
Beginning of period .................................................................. 239,725 149,941
----------------- -----------------
End of period ........................................................................ $ 187,412 $ 239,725
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
64 U.S. Government Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- ---------- ---------- ---------- ----------
Income From Investment Operations:
Net investment income .............................................. .0545 .0526 .0580 .0380 .0284
---------- ---------- ---------- ---------- ----------
Less Distributions:
Net investment income .............................................. (.0545) (.0526) (.0580) (.0380) (.0284)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ....................................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========== ========== ========== ========== ==========
Total Return (%) ..................................................... 5.59 5.40 5.98 3.87 2.88
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ........................... 187,412 239,725 149,941 112,077 95,410
Ratios to average net assets (%):
Operating expenses, net(a)........................................ .20 .25 .32 .57 .49
Operating expenses, gross(a)...................................... .41 .50 .51 .57 .49
Net investment income ............................................ 5.44 5.27 5.82 3.91 2.85
</TABLE>
(a) See Note 4 for current period amounts.
Specialty Funds U.S. Government Money Market Fund 65
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------ --------- ---------
<S> <C> <C> <C> <C>
Alabama - 0.8%
McIntosh, Alabama Industrial Development Board Pollution
Control Revenue, daily demand $ 1,100 5.100%(1) 07/01/04 $ 1,100
---------
1,100
---------
Alaska - 0.3%
City and Borough of Juneau, Alaska General Obligation Bonds (a) 410 6.000 01/01/98 410
---------
410
---------
Arizona - 3.8%
Maricopa County, Arizona Industrial Development Authority Revenue,
weekly demand 700 4.450(2) 10/01/04 700
Maricopa County, Arizona Pollution Control Revenue, weekly demand 4,000 3.700(2) 08/01/15 4,000
Pinal County, Arizona Industrial Development Authority Pollution
Control Revenue, daily demand 300 4.950(1) 12/01/09 300
---------
5,000
---------
Colorado - 5.4%
Colorado Housing Financial Authority, weekly demand 1,150 4.250(2) 06/01/05 1,150
Colorado Multi-family Housing Financing Authority, Series A, weekly demand 175 4.275(2) 11/01/09 175
Moffat County, Colorado Pollution Control Revenue, daily demand (a) 1,500 5.100(1) 05/01/13 1,500
Smith Creek Metropolitan District, Colorado Revenue, weekly demand 4,200 4.200(2) 10/01/35 4,200
---------
7,025
---------
Delaware - 0.5%
Delaware Economic Development Authority Multi-family Revenue, weekly demand 650 3.900(2) 12/01/15 650
---------
650
---------
District of Columbia - 0.9%
District of Columbia General Obligation, Series B-3, daily demand 1,200 5.000(1) 06/01/03 1,200
---------
1,200
---------
Florida - 1.9%
Boca Raton, Florida Industrial Development Authority Revenue, weekly demand 425 4.525(2) 12/01/14 425
Lee County, Florida Industrial Development Authority Revenue, weekly demand 625 4.075(2) 04/01/10 625
Orange County, Florida Industrial Development Authority Revenue,
weekly demand 950 4.000(2) 01/01/11 950
Palm Beach County, Florida Revenue, weekly demand (a) 500 3.750(2) 03/01/27 500
---------
2,500
---------
</TABLE>
66 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Georgia - 3.1%
DeKalb County, Georgia Housing Authority Multi-family Home Revenue,
weekly demand $ 700 3.800%(2) 06/01/25 $ 700
Georgia State Hospital Financing Authority Revenue, daily demand 100 4.950(1) 03/01/01 100
Gwinnett County, Georgia Development Authority Revenue, weekly demand 1,000 4.200(2) 03/01/17 1,000
Residential Apartments I Portfolio CERT Trust, 1996 Series A, weekly demand (d) 720 4.300(2) 12/01/02 720
Thomasville, Georgia Hospital Authority Revenue, weekly demand 1,500 4.200(2) 11/01/17 1,500
-------
4,020
-------
Illinois - 11.3%
DeKalb, Illinois Industrial Development Revenue, weekly demand 500 3.900(2) 02/01/01 500
East Peoria, Illinois Multi-family Housing Revenue, weekly demand 1,920 4.400(2) 06/01/08 1,920
Illinois Development Finance Authority Revenue, quarterly demand 700 3.900(4) 08/01/25 700
Illinois Development Finance Authority Revenue, weekly demand 1,250 4.100(2) 09/01/26 1,250
Illinois Health Facilities Authority Revenue, quarterly demand 450 10.375 01/01/98 450
Illinois Health Facilities Authority Revenue, Series B, weekly demand 555 4.000(2) 10/01/15 555
Illinois Health Facilities Authority Revenue, Series B, weekly demand 800 3.800(2) 08/15/22 800
Illinois Health Facilities Authority Revenue, Series C, weekly demand 2,100 4.000(2) 10/01/15 2,100
McCook, Illinois Revenue St. Andrew Society Project, Series 96-A, weekly demand 4,800 4.100(2) 12/01/21 4,800
St. Clair County, Illinois Industrial Development Board Revenue, weekly demand 1,000 4.550(2) 10/01/15 1,000
Troy Grove, Illinois Revenue, weekly demand 750 4.867(2) 05/01/10 750
-------
14,825
-------
Indiana - 12.9%
Benton, Indiana Community School Corporation Tax Anticipation Warrants 1,000 4.250 12/31/98 1,002
Calumet Township Lake County, Indiana Advancement Fund Notes,
Series 1996-A, weekly demand 1,525 4.150 01/15/98 1,525
Fort Wayne, Indiana Economic Development Revenue, weekly demand 1,000 4.275(2) 12/01/03 1,000
Indiana Bond Bank Advance Funding Notes, quarterly demand 1,000 4.000 01/21/98 1,000
Indiana Bond Bank Advance Funding Notes 1,500 3.900 02/02/98 1,500
Indiana Health Facility Financing Authority Revenue, weekly demand 3,000 4.000(2) 08/15/27 3,000
Jasper County, Indiana Pollution Control Revenue, daily demand 1,500 5.100(1) 08/01/10 1,500
New Albany Floyd County, Indiana School Building Corporate Bond
Anticipation Notes, semiannual demand 1,000 3.950 09/01/98 1,000
Perry Township, Indiana Multi-School Building Corporation Revenue,
semiannual demand 1,250 4.000 06/25/98 1,250
Princeton, Indiana Pollution Control Revenue, daily demand 1,900 5.100(1) 03/01/19 1,900
Residential Apartments I Portfolio CERT Trust, 1996 Series A, weekly demand (d) 740 4.300(2) 12/01/02 740
Westfield-Washington, Indiana Schools Temporary Loan Warrants 1,500 4.100 12/31/98 1,501
-------
16,918
-------
Iowa - 0.4%
Residential Apartments I Portfolio CERT Trust, 1996 Series A, weekly demand (d) 540 4.300(2) 12/01/02 540
-------
540
-------
</TABLE>
Specialty Funds Tax Free Money Market Fund 67
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Kansas - 0.7%
Shawnee County, Kansas General Obligation, Series 1 $ 965 4.250% 02/01/98 $ 965
-------
965
-------
Kentucky - 4.2%
Calloway County, Kentucky Fire Protection Area Development District 2,
weekly demand 1,210 4.220(2) 12/01/31 1,210
Elsmere, Kentucky Industrial Building Revenue, quarterly demand 535 3.900(4) 02/01/06 535
Elva-New Harmony-Oak Level, Kentucky Fire Protection District Area Development,
Series A-1, weekly demand 3,710 4.220(2) 12/01/31 3,710
-------
5,455
-------
Maine - 1.7%
Maine Health & Higher Educational Facilities Authority Revenue
Series D, weekly demand (a) 2,180 3.700(2) 12/01/25 2,180
-------
2,180
-------
Maryland - 4.4%
Anne Arundel County, Maryland Industrial Development, weekly demand 2,260 3.900(2) 02/01/01 2,260
Maryland State Health & Higher Education Facility Authority Revenue,
weekly demand 2,700 3.950(2) 07/01/27 2,700
Montgomery County, Maryland Industrial Development Revenue, monthly demand (a) 800 3.950(3) 04/01/14 800
-------
5,760
-------
Massachusetts - 2.3%
Brockton, Massachusetts Revenue Anticipation Notes 1,000 4.500 06/30/98 1,002
Falls River, Massachusetts Bond Anticipation Notes, semiannual demand 1,000 4.250 06/15/98 1,001
New England Education Loan Marketing Corp., Series C, semiannual demand 1,000 4.750 07/01/98 1,003
-------
3,006
-------
Michigan - 5.4%
Lansing, Michigan Economic Development Corp., semiannual demand 2,000 3.850(5) 05/01/15 2,000
Livonia, Michigan Economic Development Corp., semiannual demand 270 3.850(5) 11/15/04 270
McDonald Tax Exempt Mortgage Bond Trust, thirteen month demand (c) 152 4.250(6) 01/15/09 152
Michigan State Job Development Authority Revenue, monthly demand 1,100 3.800(3) 11/01/14 1,100
Northville, Michigan Economic Development Corporation, Ltd. Obligation
Revenue, weekly demand 500 4.275(2) 05/01/14 500
University of Michigan, University Revenue, Series A, daily demand 3,100 5.100(1) 12/01/27 3,100
-------
7,122
-------
</TABLE>
68 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Minnesota - 3.2%
Burnsville, Minnesota Industrial Development Revenue, Series C, weekly demand $ 350 3.900%(2) 02/01/01 $ 350
Mendota Heights, Minnesota Commercial Development, weekly demand 1,580 4.250(2) 12/01/15 1,580
Minneapolis, Minnesota General Obligation, Series A, weekly demand 800 4.140(2) 12/01/05 800
Moorehead, Minnesota Industrial Development Revenue, weekly demand 1,390 4.000(2) 11/01/09 1,390
--------
4,120
--------
Mississippi - 0.3%
DeSoto County, Mississippi Industrial Development Revenue, weekly demand 400 4.867(2) 12/01/08 400
--------
400
--------
Missouri - 0.9%
Jackson County, Missouri Industrial Development Authority Recreational
Facility Revenue, daily demand 200 5.400(1) 11/01/16 200
Kansas City, Missouri Industrial Development Authority Hospital Revenue,
weekly demand 260 4.000(2) 08/01/18 260
St. Louis, Missouri Industrial Development Authority Revenue, weekly demand 700 4.550(2) 08/30/99 700
--------
1,160
--------
Nevada - 0.1%
Henderson, Nevada Public Improvement Trust Housing Revenue, Series II-B,
weekly demand 125 4.350(2) 08/01/26 125
--------
125
--------
New York - 2.7%
Lindenhurst, New York University Free School District Tax Anticipation Notes 1,000 4.250 06/24/98 1,001
Nassau County, New York Revenue Anticipation Notes, Series A 1,000 4.250 03/10/98 1,001
North Hempstead, New York Bond Anticipation Notes, Series A 1,500 4.000 01/29/98 1,500
--------
3,502
--------
Ohio - 5.0%
Buckeye, Ohio Tax-Exempt Mortgage Bond Trust, quarterly demand 345 4.260(4) 02/01/05 345
Cincinnati & Hamilton County, Ohio Port Authority, quarterly demand 335 3.700(4) 09/01/99 335
Citizens Federal Tax-Exempt Mortgage Bond Trust, semiannual demand 55 3.600(5) 09/01/08 55
Clermont County, Ohio Economic Development Revenue, semiannual demand 405 3.800(5) 12/01/09 405
Clermont County, Ohio Economic Development Revenue, semiannual demand 210 3.800(5) 05/01/12 210
Cuyahoga County, Ohio Industrial Development Revenue, semiannual demand 160 3.850(5) 06/01/99 160
Franklin County, Ohio Industrial Development Revenue, semiannual demand 605 3.850(5) 04/01/15 605
Franklin County, Ohio Industrial Development Revenue, semiannual demand 150 3.880(5) 11/01/15 150
Mahoning County, Ohio Industrial Development Revenue, Series A, weekly demand 5 4.200(2) 10/01/00 5
Mahoning County, Ohio Industrial Development Revenue, Series B, weekly demand 45 4.200(2) 10/01/00 45
McDonald Tax Exempt Mortgage Bond Trust, thirteen month demand (c) 711 4.250(6) 01/15/09 711
</TABLE>
Specialty Funds Tax Free Money Market Fund 69
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Ohio State Higher Educational Facilities Community College Revenue,
weekly demand $ 665 4.150%(2) 09/01/20 $ 665
Scioto County, Ohio Health Care Facilities, semiannual demand 690 3.850(5) 12/01/15 690
Stark County, Ohio Health Care Facilities, quarterly demand 1,640 3.800(4) 09/15/16 1,640
Trumbull County, Ohio Industrial Development Revenue, weekly demand 495 4.200(2) 04/01/04 495
-------
6,516
-------
Oklahoma - 1.8%
Muskogee, Oklahoma Industrial Development Revenue, weekly demand 1,090 4.200(2) 12/01/15 1,090
Tulsa County, Oklahoma Industrial Development Authority Revenue,
semiannual demand 1,250 3.900(5) 12/15/08 1,250
-------
2,340
-------
Oregon - 0.6%
Hillsboro, Oregon Graduate Institute Revenue, weekly demand 750 4.250(2) 08/01/11 750
-------
750
-------
Pennsylvania - 12.3%
Berks County, Pennsylvania Industrial Development Authority, weekly demand 1,050 4.275(2) 12/01/04 1,050
Commonwealth Tax-Exempt Mortgage Bond Trust, semiannual demand 585 4.050(5) 11/01/05 585
Delaware County, Pennsylvania Industrial Development Authority Solid
Waste Revenue, Series A, weekly demand 100 3.650(2) 12/01/18 100
Emmaus, Pennsylvania General Authority Revenue, weekly demand 300 4.000(2) 12/01/28 300
McDonald Tax Exempt Mortgage Bond Trust, thirteen month demand (c) 152 4.250(6) 01/15/09 152
Montgomery County, Pennsylvania Education & Health Authority Revenue,
weekly demand 4,700 4.000(2) 08/01/21 4,700
Montgomery County, Pennsylvania Industrial Development Authority Revenue,
weekly demand 500 4.250(2) 04/01/04 500
Norristown, Pennsylvania Tax & Revenue Anticipation Notes 1,000 4.050 12/31/98 1,000
Pennsylvania State Higher Educational Revenue, quarterly demand 1,500 3.800(4) 06/01/07 1,500
Philadelphia, Pennsylvania School District Tax & Revenue Anticipation Notes,
annual demand 1,250 4.500 06/30/98 1,253
Sayre, Pennsylvania Health Care Facilities Authority Revenue, Series A,
weekly demand (a) 200 3.650(2) 12/01/20 200
Schuylkill County, Pennsylvania Industrial Development Authority
Residential Recovery Revenue, weekly demand 4,000 3.700(2) 12/01/02 4,000
Westmoreland County, Pennsylvania Industrial Development Authority Revenue,
Series D, weekly demand 755 3.900(2) 10/01/00 755
-------
16,095
-------
</TABLE>
70 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
South Carolina - 1.4%
Anderson County, South Carolina Industrial Revenue, weekly demand $ 830 4.250%(2) 07/01/04 $ 830
Richland County, South Carolina School District General Obligation,
quarterly demand 750 4.800 03/01/98 751
South Carolina State Public Service Authority Revenue, Series B, annual
demand (a) 205 5.000 01/01/99 207
--------
1,788
--------
South Dakota - 1.4%
Sioux Falls, South Dakota Industrial Development Revenue, weekly demand 1,775 4.250(2) 06/01/06 1,775
--------
1,775
--------
Tennessee - 1.8%
Franklin County, Tennessee Health & Educational Facilities Revenue,
monthly demand 1,300 3.800(3) 09/01/10 1,300
Tennessee State General Obligation, quarterly demand 300 5.000 03/01/98 301
Tennessee State General Obligation, quarterly demand 750 5.500 03/01/98 752
--------
2,353
--------
Virginia - 1.6%
Harrisonburg, Virginia Redevelopment & Housing Multi-family Housing
Revenue, quarterly demand 1,000 3.700(4) 02/01/26 1,000
Norfolk, Virginia Industrial Development Authority Revenue, weekly demand 1,075 4.275(2) 03/01/16 1,075
--------
2,075
--------
Washington - 8.0%
Washington State Housing Financial Community Nonprofit Housing
Revenue, daily demand 4,830 5.100(1) 07/01/11 4,830
Washington State Housing Financial Community Nonprofit Housing
Revenue, daily demand 1,300 5.100(1) 01/01/21 1,300
Washington State Housing Financial Community Nonprofit Housing
Revenue, daily demand 4,350 4.750(1) 01/01/27 4,350
--------
10,480
--------
West Virginia - 0.8%
Marshall County, West Virginia Pollution Control Revenue, weekly demand 1,000 3.950(2) 03/01/26 1,000
--------
1,000
--------
Wisconsin - 2.2%
Clinton, Wisconsin Community School District Tax & Revenue
Anticipation Notes, semiannual demand 775 4.240 08/31/98 775
Lodi, Wisconsin School District Tax & Revenue Anticipation Notes,
semiannual demand 1,000 3.990 10/15/98 1,000
Oregon, Wisconsin School District Tax & Revenue Anticipation Notes,
semiannual demand 1,100 4.220 09/16/98 1,101
--------
2,876
--------
</TABLE>
Specialty Funds Tax Free Money Market Fund 71
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Wyoming - 1.3%
Lincoln County, Wyoming Pollution Control Revenue, daily demand (a) $ 1,700 4.900%(1) 11/01/24 $ 1,700
--------
1,700
--------
Total Investments (amortized cost $137,731)(b) - 105.4% 137,731
Other Assets and Liabilities, Net - (5.4)% (7,006)
--------
Net Assets - 100.0% $130,725
========
</TABLE>
(a) Bond is insured by AMBAC, FGIC, or MBIA.
(b) The cost for federal income tax purposes is the same as shown above.
(c) Multi-State bond issue including Michigan, Ohio, and Pennsylvania.
(d) Multi-State bond issue including Georgia, Indiana, and Iowa.
* All securities with a maturity date greater than thirteen months have a
demand feature, or an optional or mandatory put, or are pre-refunded
resulting in an effective maturity of thirteen months or less.
Variable Rate:
(1) Daily
(2) Weekly
(3) Monthly
(4) Quarterly
(5) Semiannual
(6) Thirteen-month
The accompanying notes are an integral part of the financial statements.
72 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<S> <C>
Quality Ratings as a % of Market Value ++
VMIG1 or SP-1 91%
P1 8
VMIG2 1
-----
100%
=====
Economic Sector Emphasis as a % of Market Value
General Obligation 31%
Education Revenue 18
Industrial Revenue Bonds 18
Housing Revenue 15
Healthcare Revenue 9
Pollution Control Revenue 9
-----
100%
=====
</TABLE>
++ VMIG1: The highest short-term municipal note credit rating given by Moody's
Investors Services to notes with a demand feature which are of the
"best quality."
VMIG2: The highest short-term municipal note credit rating given by Moody's
Investors Services to notes with a demand feature which are of "high
quality."
SP-1: The highest short-term municipal note credit rating given by
Standard & Poor's Corporation to notes with a "very strong or strong
capacity to pay principal and interest."
P1: The highest tax-exempt commercial paper rating given by Moody's
Investors Services to commercial paper with a "superior capacity for
repayment."
The accompanying notes are an integral part of the financial statements.
Specialty Funds Tax Free Money Market Fund 73
<PAGE>
Tax Free Money Market Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at amortized cost which approximates market (Note 2) ............................................ $ 137,731
Receivables:
Interest ................................................................................................ 1,073
Investments sold ........................................................................................ 50
--------------------
Total Assets ......................................................................................... 138,854
Liabilities
Payables:
Dividends ......................................................................... $ 382
Investments purchased ............................................................. 7,703
Accrued fees to affiliates (Note 4) ............................................... 20
Other accrued expenses ............................................................ 24
------------------
Total Liabilities .................................................................................... 8,129
--------------------
Net Assets .................................................................................................. $ 130,725
====================
Net Assets consist of:
Shares of beneficial interest ............................................................................... $ 1,307
Additional paid-in capital .................................................................................. 129,418
--------------------
Net Assets .................................................................................................. $ 130,725
====================
Net Asset Value, offering and redemption price per share:
($130,724,586 divided by 130,724,586 shares of $.01 par value
shares of beneficial interest outstanding) .............................................................. $ 1.00
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
74 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest............................................................................................... $ 4,092
Expenses (Notes 2 and 4):
Management fees.................................................................. $ 267
Custodian fees................................................................... 37
Transfer agent fees.............................................................. 47
Professional fees................................................................ 8
Registration fees................................................................ 23
Trustees' fees................................................................... 4
Miscellaneous.................................................................... 20
------------------
Expenses before reductions....................................................... 406
Expense reductions (Note 4)...................................................... (107)
------------------
Total Expenses....................................................................................... 299
--------------------
Net investment income....................................................................................... 3,793
--------------------
Net increase in net assets resulting from operations........................................................ $ 3,793
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Tax Free Money Market Fund 75
<PAGE>
Tax Free Money Market Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
----------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income................................................................. $ 3,793 $ 3,086
From Distributions to Shareholders:
Net investment income................................................................. (3,793) (3,086)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)........... 28,518 24,207
----------------- -----------------
Total Net Increase (Decrease) in Net Assets............................................... 28,518 24,207
Net Assets
Beginning of period................................................................... 102,207 78,000
----------------- -----------------
End of period......................................................................... $ 130,725 $ 102,207
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
76 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- ---------
Income From Investment Operations:
Net investment income......................................... .0355 .0329 .0370 .0279 .0251
--------- --------- --------- --------- ---------
Less Distributions:
Net investment income......................................... (.0355) (.0329) (.0370) (.0279) (.0251)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period.................................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========= ========= ========= ========= =========
Total Return (%).................................................. 3.61 3.35 3.76 2.83 2.55
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)...................... 130,725 102,207 78,000 100,819 68,154
Ratios to average net assets (%):
Operating expenses, net(a)................................. .28 .42 .48 .40 .43
Operating expenses, gross(a)............................... .38 .42 .48 .40 .43
Net investment income...................................... 3.55 3.28 3.69 2.84 2.52
</TABLE>
(a) See Note 4 for current period amounts.
Specialty Funds Tax Free Money Market Fund 77
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements
December 31, 1997
1. Organization
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on seven Funds, each of which has distinct
investment objectives and strategies. The Investment Company is registered
under the Investment Company Act of 1940, as amended, as a diversified, open-
end management investment company. It is organized and operates as a
Massachusetts business trust under an amended master trust agreement dated
July 26, 1984. The Investment Company's master trust agreement permits the
Board of Trustees to issue an unlimited number of full and fractional shares
of beneficial interest at a $.01 par value. As of July 8, 1996, the Real
Estate Securities and Emerging Markets Funds have available Class S and Class
C shares. Each Class has equal rights as to assets and voting privileges.
Investment income, realized and unrealized gains and losses and fund level
expenses of a Fund are allocated on a pro rata basis to each Class, based on
relative net assets of each Class to the total net assets of a Fund. Certain
expenses may also be charged to an individual Class for services or fees that
relate specifically to that particular Class. Class C shares are charged a
12b-1 distribution fee and a shareholder servicing fee of 0.40% and 0.25% of
average daily net assets, respectively. Class S shares which are reported
herein are charged no such fees. Class C shares are not available for
purchase by new investors.
2. Significant Accounting Policies
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Funds in the preparation of these financial
statements.
Security valuation: United States equity and fixed-income securities listed
and traded principally on any national securities exchange are valued on the
basis of the last sale price or, lacking any sale, at the closing bid price,
on the primary exchange on which the security is traded. United States over-
the-counter equity and fixed-income securities and options are valued on the
basis of the closing bid price. Futures contracts are valued on the basis of
the last sale price. Many fixed-income securities do not trade each day and,
thus, last sale or bid prices are frequently not available. Fixed-income
securities, therefore, may be valued using prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair market
value of such securities.
The Money Market, U.S. Government Money Market and the Tax Free Money Market
Funds' portfolio investments are valued on the basis of "amortized cost," a
method by which each portfolio instrument is initially valued at cost, and
thereafter a constant accretion/amortization to maturity of any
discount/premium is assumed. All three Funds utilize the amortized cost
valuation method in accordance with Rule 2a-7 of the Investment Company Act
of 1940, as amended. Short-term investments maturing within 60 days of the
valuation date held by Funds other than the Money Market, U.S. Government
Money Market and Tax Free Money Market Funds are also valued at amortized
cost unless the Board of Trustees determines that amortized cost does not
represent fair value.
Municipal investments of the Limited Volatility Tax Free Fund are appraised
or priced by an independent pricing source, approved by the Board of
Trustees, which utilizes information with respect to bond transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
Investment transactions: Securities transactions are recorded on a trade date
basis. Realized gains and losses from securities transactions are recorded on
the basis of specific identified cost incurred by each money manager within a
particular fund. The Funds, except Limited Volatility Tax Free and Tax Free
Money Market Funds, may lend portfolio securities but have not done so during
the year ended December 31, 1997.
Investment income: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Distributions from Real
Estate Investment Trusts ("REITs") owned by the Real Estate Securities Fund
may have as their components dividend income, capital gains and/or returns of
capital. Distributions that are deemed to be capital gains or returns
78 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
of capital by the trusts are treated by the Fund, respectively, as an
adjustment to its realized capital gains or its cost of the investment. The
exact amount to be adjusted can be ascertained only at the end of each REIT's
fiscal year when finally determined and reported by the various trusts.
Amortization and accretion: Premiums and discounts for the Limited Volatility
Tax Free Fund, all zero-coupon bond discounts, and original issue discounts
are amortized/accreted for both tax and financial reporting purposes. All
short-term premiums/discounts are amortized/accreted for both tax and
financial reporting purposes.
Federal income taxes: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Funds. From November 1, 1997 to December 31,
1997, the Emerging Markets Fund, U.S. Government Money Market Fund and Tax
Free Money Market Fund incurred net realized capital losses of $8,399,434,
$1,427 and $200, respectively. As permitted by tax regulations, the Emerging
Markets Fund, U.S. Government Money Market Fund and Tax Free Money Market
Fund intend to elect to defer this loss and treat it as arising in the year
ending December 31, 1998.
At December 31, 1997, certain Funds had net tax basis capital loss
carryforwards which may be applied against any realized net taxable gains in
each succeeding year or until their respective expiration dates, whichever
occurs first. Available capital loss carryforwards and expiration dates are
as follows:
<TABLE>
<CAPTION>
12/31/98 12/31/99 12/31/02 12/31/03 12/31/04 12/31/05 Totals
------------ ------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets $ -- $ -- $ -- $3,235,981 $ -- $ -- $3,235,981
Limited Volatility Tax Free 17,292 383,404 345,504 110,634 15,075 -- 871,909
Money Market -- -- -- 42,906 814 -- 43,720
U.S. Government Money Market -- -- 1,309 4,913 3,331 1,570 11,123
Tax Free Money Market -- -- -- -- -- 1,583 1,583
</TABLE>
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income tax
purposes for certain Funds as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Federal Tax Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Real Estate Securities $ 486,894,747 $ 127,390,181 $ (1,379,746) $ 126,010,435
Emerging Markets 334,674,670 87,894,962 (95,982,863) (8,087,901)
Equity T 99,707,828 15,396,605 (1,061,219) 14,335,386
Limited Volatility Tax Free 84,143,698 1,398,324 (92) 1,398,232
</TABLE>
Redemption fees: In general, shares of the Equity T Fund may be redeemed at
net asset value. However, upon the redemption or exchange of shares held by
shareholders of the Fund, a redemption fee of 1% of the current net asset
value of the shares will be assessed and retained by the Fund for the benefit
of the remaining shareholders. The redemption fee is included in additional
paid-in capital in the accompanying Statement of Assets and Liabilities.
Dividends and distributions to shareholders: For all Funds, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend date.
Dividends are generally declared and paid monthly for the Limited Volatility
Tax Free Fund; quarterly for the Real Estate Securities Fund and annually for
the Equity T and Emerging Markets Funds. The Money Market, U.S. Government
Money Market and Tax Free Money Market Funds declare and record dividends
daily and pay them monthly. Capital gain distributions are generally declared
and paid annually. An additional distribution may be paid by the Funds to
avoid imposition of federal income tax on any remaining undistributed capital
gains and net investment income.
Specialty Funds Notes to Financial Statements 79
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations which
may differ from GAAP. As a result, net investment income and net realized
gain (or loss) on investment and foreign currency-related transactions for a
reporting period may differ significantly from distributions during such
period. The differences between tax regulations and GAAP primarily relate to
investments in options, futures, forward contracts, passive foreign
investment companies, foreign-denominated investments, mortgage-backed
securities, and certain securities sold at a loss. Accordingly, a Fund may
periodically make reclassifications among certain of its capital accounts
without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
Undistributed Accumulated
Net Investment Net Realized
Income Gain (Loss)
----------------- -----------------
<S> <C> <C>
Emerging Markets $ 1,576,364 $ (1,576,364)
Limited Volatility Tax Free 23,730 (23,730)
</TABLE>
Expenses: The Funds, and when appropriate each Class, will pay their own
expenses other than those expressly assumed by Frank Russell Investment
Management Company ("FRIMCo" or "Manager"). Most expenses can be directly
attributed to the individual Funds. Expenses which cannot be directly
attributed are allocated among all funds principally based on their relative
net assets. In addition, Class C shares will pay 12b-1 and shareholder
servicing fees along with other expenses that may be attributable to that
Class.
Deferred organization expenses: Organization and initial registration costs
of the Emerging Markets and Equity T Funds have been deferred and are being
amortized over 60 months on a straight-line basis.
Repurchase agreements: The Funds may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of underlying securities as collateral. Each Fund's Money
Manager will monitor repurchase agreements daily to determine that the market
value (including accrued interest) of the underlying securities at Fedwire
closing time remains at least equal to 102% of the repurchase price. The
Money Manager will notify the Seller to immediately increase the collateral
on the repurchase agreement to 102% of the repurchase price if collateral
value falls below 102%.
Foreign currency translations: The books and records of the Emerging Markets
Fund are maintained in U.S. dollars. Foreign currency amounts and
transactions of the Fund are translated into U.S. dollars on the following
basis:
(a) Market value of investment securities, other assets and liabilities
at the closing rate of exchange on the valuation date.
(b) Outstanding purchases and sales of investment securities and income
at the closing rate of exchange prevailing on the respective trade
dates of such transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from sales and maturities of short-term securities; sales
of foreign currencies; currency gains or losses realized between the trade
and settlement dates on securities transactions; the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized gains or losses from foreign currency-related
transactions arise from changes in the value of assets and liabilities, other
than investments in securities, at period-end, as a result of changes in the
exchange rates.
It is not practical to isolate that portion of the results of operations of
the Emerging Markets Fund that arises as a result of changes in exchange
rates from that portion that arises from changes in market prices of
investments during the year. Such fluctuations are included with the net
realized and unrealized gain or loss from investments. However, for federal
income tax purposes the Fund does isolate the effects of changes in foreign
exchange rates from the fluctuations arising from changes in market prices
for realized gain (or loss) on debt obligations.
Derivatives: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement of
Additional Information, certain Funds may participate in various derivative-
based transactions. Derivative securities are instruments or agreements whose
value is derived from an underlying security or index. They include options,
80 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
futures, swaps, forwards, structured notes and stripped securities. These
instruments offer unique characteristics and risks that assist the Funds in
meeting their investment strategies.
Funds typically use derivatives in three ways: cash equitization, hedging,
and return enhancement. Cash equitization is a technique that may be used by
certain Funds through the use of options and futures to earn "market-like"
returns with their excess and liquidity reserve cash balances. Hedging is
used by some Funds to limit or control risks, such as adverse movements in
exchange rates and interest rates. Return enhancement can be accomplished
through the use of derivatives in a Fund. By purchasing certain instruments,
Funds may more effectively achieve the desired portfolio characteristics that
assist them in meeting their investment objectives. Depending on how the
derivatives are structured and utilized, the risks associated with them may
vary widely. These risks are generally categorized as market risk, liquidity
risk and counterparty or credit risk.
Foreign currency exchange contracts: In connection with portfolio purchases
and sales of securities denominated in a foreign currency, the Emerging
Markets Fund may enter into foreign currency exchange spot contracts and
forward foreign currency exchange contracts ("contracts"). Additionally, from
time to time the Emerging Markets Fund may enter into contracts to hedge
certain foreign currency-denominated assets. Contracts are recorded at market
value. Certain risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of its contracts and
are generally limited to the amount of unrealized gain on the contracts, if
any, that are recognized in the Statement of Assets and Liabilities. Realized
gains or losses arising from such transactions are included in net realized
gain (or loss) from foreign currency-related transactions. Open contracts at
December 31, 1997, are presented on the Statement of Net Assets for the Fund.
Investment in emerging markets: Investing in emerging markets may involve
special risks and considerations not typically associated with investing in
the United States markets. These risks include revaluation of currencies,
high rates of inflation, repatriation, restrictions on income and capital,
and future adverse political and economic developments. Moreover, securities
issued in these markets may be less liquid, subject to government ownership
controls, delayed settlements, and their prices more volatile than those of
comparable securities in the United States.
Futures Contracts: The Equity T Fund utilizes futures to equitize liquidity
reserve balances. The face or contract amounts of these instruments reflect
the extent of the Fund's exposure to off balance sheet risk. The primary
risks associated with the use of futures contracts are an imperfect
correlation between the change in market value of the securities held by the
Fund and the prices of futures contracts and the possibility of an illiquid
market. Changes in the initial settlement values of futures contracts are
accounted for as unrealized appreciation (depreciation) until the contracts
are terminated, at which time realized gains and losses are recognized.
3. Investment Transactions
Securities: During the year ended December 31, 1997, purchases and sales of
investment securities (excluding U.S. Government and Agency obligations,
short-term investments, options, futures and repurchase agreements) were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
------------- -------------
<S> <C> <C>
Real Estate Securities $ 325,390,002 $ 243,461,211
Emerging Markets 240,855,988 156,399,882
<CAPTION>
Purchases Sales
------------- -------------
<S> <C> <C>
Equity T $ 92,490,574 $ 21,079,906
Limited Volatility 45,644,218 28,716,378
</TABLE>
Money Market purchases, sales and maturities of securities (excluding U.S.
Government and Agency obligations and repurchase agreements) were
$15,917,258,789, $127,997,923, and $15,309,791,630 respectively. Purchases,
sales and maturities of U.S. Government and Agency obligations (excluding
repurchase agreements) were $5,002,344, $11,123,599 and $53,900,000,
respectively.
U.S. Government Money Market purchases, sales and maturities of U.S.
Government and Agency obligations (excluding repurchase agreements) were
$955,120,727, $963,692 and $1,000,502,348, respectively.
Tax Free Money Market purchases, sales and maturities of short-term tax
exempt obligations were $424,913,501, $331,020,700 and $61,592,200,
respectively.
Specialty Funds Notes to Financial Statements 81
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Futures Contracts: Fund transactions in futures contract purchases for the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Equity T Futures Contracts
---------------------------------
Aggregate
Number of Face Value of
Contracts Contracts (1)
------------- -----------------
<S> <C> <C>
Outstanding December 31, 1996 -- $ --
Opened 32 11,902,673
Closed (22) (9,485,923)
------------- -----------------
Outstanding December 31, 1997 10 $ 2,416,750
============= =================
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
4. Related Parties
Manager: FRIMCo operates and administers all of the Funds which comprise the
Investment Company, and manages the Money Market and the U.S. Government
Money Market Funds. FRIMCo is a wholly owned subsidiary of Frank Russell
Company, which researches and recommends to FRIMCo, and to the Investment
Company, one or more investment management organizations to manage the
portfolio of each Fund.
For the year ended December 31, 1997, the management fee paid to the FRIMCo,
for the Funds listed below, in accordance with the Investment Company's
Management Agreement with that firm, amounted to $11,961,647 before waivers.
Such fee is payable monthly and is equal to the annual rate, by Fund, shown
in the table below, of the average daily net assets of the applicable Fund.
<TABLE>
<CAPTION>
Annual Rate
-------------
<S> <C>
Real Estate Securities 0.85%
Emerging Markets 1.20
Equity T 0.75
Limited Volatility Tax Free 0.50
<CAPTION>
Annual Rate
-------------
<S> <C>
Money Market 0.25%
Tax Free Money Market 0.25
U.S. Government Money Market 0.25
</TABLE>
The management contract also provides that if any Fund's expenses (exclusive
of interest and taxes) exceed specified limits imposed by the Manager on an
annual basis, such excess will be paid by FRIMCo. The Manager has voluntarily
agreed to waive a portion of its 1.20% management fee for the Emerging
Markets Fund, to the extent total fund level expenses for the Fund exceed
1.95% of its average daily net assets on an annual basis. There were no
waivers by the Manager for the year ended December 31, 1997.
The Manager has voluntarily agreed to waive a portion of its 0.75% management
fee for the Equity T Fund, up to the full amount of that fee, equal to the
amount by which the Fund's total operating expenses exceed 1.00% of the
Fund's average daily net assets on an annual basis. In addition, the Manager
has voluntarily agreed to reimburse the Fund for any remaining Fund operating
expenses after the Manager waivers which exceed 1.00% of the Fund's average
daily net assets on an annual basis. The amount of such waiver for the year
ended December 31, 1997 was $45,669.
Effective January 1, 1997, the Manager has voluntarily agreed to waive 0.10%
management fee for the Tax Free Money Market Fund. The amount of such waiver
for the year ended December 31, 1997 was $106,776.
Effective September 1, 1997, the Manager has voluntarily agreed to waive
0.13% of its management fee for the U.S. Government Money Market Fund. Prior
to September 1, 1997, the Manager voluntarily agreed to waive .25% of its
management fee. The amount of such waivers for the year ended December 31,
1997 was $463,787.
Effective October 15, 1997, the Manager has voluntarily agreed to waive 0.15%
of its 0.25% management fee for the Money Market Fund. Prior to October 15,
1997, the Manager voluntarily agreed to waive its 0.25% management fee. The
amount of such waivers for the year ended December 31, 1997 was $1,661,140.
82 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Effective October 15, 1997, FRIMCo began calculating its management fee based
on average daily net assets for each Fund less any management fee incurred on
assets invested in the Money Market Fund (see Note 5) thereby eliminating any
duplication at fees. Prior to October 15, 1997, FRIMCo calculated its
management fee based on average daily net assets for each Fund , which may
have included an investment in the Money Market Fund. Prior to October 15,
1997, the Money Market Fund waived all management fees.
Bookkeeping services: Fees for bookkeeping and analytics services provided to
the Funds are paid or accrued to Frank Russell Company, an affiliate of the
Investment Company. Frank Russell Company provides its Portfolio Verification
System ("PVS") and TruVP System to the Real Estate Securities, Emerging
Markets and Equity T Funds, pursuant to a written Service Agreement. The PVS
computerized database system records detailed transactions data for each of
the Funds necessary to prepare various financial and Internal Revenue Service
accounting reports, whereas the TruVP System provides analytics used by the
investment department. Total fees for the year ended December 31, 1997 for
the Real Estate Securities, Emerging Markets and Equity T Funds were $47,480.
The PVS system portion of the service agreement was terminated during 1997.
Transfer agent: The Funds have a contract with FRIMCo to provide transfer
agent services to the Investment Company. Total fees for the year ended
December 31, 1997 were $1,313,018.
Distributor and shareholder servicing: The Investment Company has adopted a
Distribution Plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act.
Under this Plan, the Investment Company is authorized to make payments to the
Distributor, or any Selling Agents, as defined in the Plan, an amount (the
"12b-1 Fee") for sales support services provided, and related expenses
incurred which are primarily intended to result in the sale of the Class C
Shares subject to the Distribution Plan.
The Investment Company has entered into a Distribution Agreement with Russell
Fund Distributors (the "Distributor") which is a wholly-owned subsidiary of
FRIMCo to promote and offer shares of Class S and Class C of the Investment
Company Funds. The Distributor may enter into sub-distribution agreements
with other non-affiliated parties (the "Selling/Servicing Agents"). The
amounts paid to the Distributor for distribution services relating to Class C
are included in the accompanying Statements of Operations. The Distributor
receives no compensation from the Investment Company for its services
relating to distributions of the Class S Shares.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments to the Distributor or
any Servicing Agent for any activities or expenses primarily intended to
assist, support or service the Servicing Agents' clients who beneficially own
Class C Shares of the Funds. The amounts paid to the Distributor for
shareholder services relating to Class C are included in the accompanying
Statements of Operations.
The 12b-1 Fee payments shall not exceed .75% of the average daily net assets
of a Fund's Class C Shares on an annual basis. Currently the Board of
Trustees has determined to assess a 12b-1 Fee equal to .40% of the average
daily net assets. The shareholder servicing payments shall not exceed .25% of
the average daily net assets of a Fund's Class C Shares on an annual basis.
The Investment Company does not pay for unreimbursed expenses of the
Distributor including amounts expended by the Distributor in excess of
amounts received by it from the Investment Company interest, carrying or
other financing charges in connection with excess amounts expended, or the
Distributor's overhead expenses. However, the Distributor may be able to
recover such amount or more from future payments made by the Investment
Company under the Distribution plan.
Accrued fees payable to affiliates as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Shareholder
Servicing &
Management Bookkeeping Transfer Distribution
Fees Service Fees Agent Fees Fees Totals
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Real Estate Securities $ 429,980 $ 6,645 $ 83,509 $ 577 $ 520,711
Emerging Markets 335,317 14,274 42,272 -- 391,863
Equity T 62,439 2,929 3,789 -- 69,157
Limited Volatility Tax Free 34,392 -- 5,889 -- 40,281
Money Market 81,926 -- -- -- 81,926
U.S. Government Money Market 19,732 -- 9,448 -- 29,180
Tax Free Money Market 15,903 -- 4,453 -- 20,356
-------------- -------------- -------------- ------------- --------------
$ 979,689 $ 23,848 $ 149,360 $ 577 $ 1,153,474
============== ============== ============== ============= ==============
</TABLE>
Specialty Funds Notes to Financial Statements 83
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Board of Trustees: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the year ended December
31, 1997, and were allocated to each Fund and Class, where appropriate, on a
pro rata basis, including 21 other affiliated funds not presented herein.
5. Money Market Fund
The Real Estate Securities, Emerging Markets and Equity T Funds are permitted
to invest their cash reserves (i.e., monies awaiting investment in portfolio
securities suitable for the Funds' objectives) in the Frank Russell
Investment Company Money Market Fund. As of December 31, 1997, $46,167,000 of
the Money Market Fund's net assets represents investments by these Funds and
$661,765,000 represents the investments of other affiliated Funds not
presented herein.
6. Fund Share Transactions
Share transactions for each Class of shares for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
Shares Dollars
-------------------------------------- ---------------------------------------
1997 1996 1997 1996
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Real Estate Securities
Class S
Proceeds from shares sold 7,684,555 5,017,237 $ 230,371,098 $ 125,244,724
Proceeds from reinvestment
of distributions 1,795,828 1,176,858 53,609,700 30,943,033
Payments for shares redeemed (4,804,495) (3,303,765) (145,560,311) (84,501,911)
------------------ ----------------- ------------------ -----------------
Net increase (decrease) 4,675,888 2,890,330 138,420,487 71,685,846
------------------ ----------------- ------------------ -----------------
Class C*
Proceeds form shares sold 10,282 3,474 312,091 92,731
Proceeds from reinvestment
of distributions 2 1 56 16
Payments for shares redeemed (1,234) -- (38,088) --
------------------ ----------------- ------------------ -----------------
Net increase (decrease) 9,050 3,475 274,059 92,747
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 4,684,938 2,893,805 $ 138,694,546 $ 71,778,593
================== ================= ================== =================
Emerging Markets
Class S
Proceeds from shares sold 14,335,518 10,179,422 $ 190,158,016 $ 124,450,513
Proceeds from reinvestment
of distributions 247,790 256,419 3,101,136 3,073,769
Payments for shares redeemed (8,321,103) (3,913,806) (108,152,054) (48,141,914)
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 6,262,205 6,522,035 $ 85,107,098 $ 79,382,368
================== ================= ================== =================
Equity T
Proceeds from shares sold 6,151,525 1,875,109 $ 77,850,485 $ 19,221,884
Proceeds from reinvestment
of distributions 32,047 4,338 433,594 44,985
Payments for shares redeemed (165,627) (450) (2,158,852) (4,671)
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 6,017,945 1,878,997 $ 76,125,227 $ 19,262,198
================== ================= ================== =================
</TABLE>
* Share transactions for Class C for the period November 4, 1996 (commencement
of sale of shares) to December 31, 1996.
84 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Shares Dollars
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Limited Volatility Tax Free
Proceeds from shares sold 2,531,242 1,424,169 $ 53,259,367 $ 30,027,835
Proceeds from reinvestment
of distributions 103,927 84,366 2,187,639 1,775,094
Payments for shares redeemed (1,870,802) (1,357,561) (39,334,693) (28,634,470)
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 764,367 150,974 $ 16,112,313 $ 3,168,459
================== ================= ================== =================
</TABLE>
<TABLE>
<CAPTION>
On a Constant Dollar Basis
1997 1996
------------------ -----------------
<S> <C> <C>
Money Market
Proceeds from shares sold 8,643,687,722 5,832,269,612
Proceeds from reinvestment
of distributions 1,300,153 90,874
Payments for shares redeemed (8,215,637,307) (5,869,071,366)
------------------ -----------------
Total net increase (decrease) 429,350,568 (36,710,880)
================== =================
U.S. Government Money Market
Proceeds from shares sold 667,733,205 695,162,232
Proceeds from reinvestment
of distributions 9,531,602 7,499,618
Payments for shares redeemed (729,577,537) (612,878,224)
------------------ -----------------
Total net increase (decrease) (52,312,730) 89,783,626
================== =================
Tax Free Money Market
Proceeds from shares sold 267,746,557 214,968,815
Proceeds from reinvestment
of distributions 1,922,212 1,064,604
Payments for shares redeemed (241,151,219) (191,826,042)
------------------ -----------------
Total net increase (decrease) 28,517,550 24,207,377
================== =================
</TABLE>
There was no activity for Class C shares for the Emerging Markets Fund.
7. Dividends
On February 2, 1998, the Board of Trustees declared the following dividend
from net investment income payable on February 10, 1998, to shareholders of
record on February 3, 1998:
Limited Volatility Tax Free $ 0.067
8. Beneficial Interest
The following Funds or Class of shares have one or more shareholders with an
interest greater than 10% of the total outstanding shares as of December 31,
1997: Money Market 18.2% and 14.4%, Emerging Markets 13.7%, Equity T 15.4%
and 13.9%, Tax Free Money Market 48.3%, Real Estate Securities - Class 5
11.5%, and Real Estate Securities - Class C 99.8%.
9. Subsequent Event
On August 10, 1998, Frank Russell Company entered into an agreement with The
Northwestern Mutual Life Insurance Co., an insurance organization, pursuant
to which Northwestern Mutual Life will acquire all of the outstanding common
stock of Frank Russell Company.
Specialty Funds Notes to Financial Statements 85
<PAGE>
Report of Independent Accountants
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of assets and liabilities and
statements of net assets of each of the series of Frank Russell Investment
Company (in this report comprised of Real Estate Securities, Emerging Markets,
Equity T, Limited Volatility Tax Free, Money Market, U.S. Government Money
Market, and Tax Free Money Market (the "Funds")), as of December 31, 1997, and
the related statements of operations, the statements of changes in net assets
and the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' 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 securities owned as of
December 31, 1997, 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 the
Funds enumerated above as of December 31, 1997, the results of their operations,
the changes in their net assets and the financial highlights for each of the
periods indicated therein in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 17, 1998,
except for Note 9 as
to which the date is
August 10, 1998
/s/ PricewaterhouseCoopers LLP
86 Report of Independent Accountants Specialty Funds
<PAGE>
Frank Russell Investment Company
Tax Information
December 31, 1997 (Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates the
following amount as long-term capital gain dividends for its taxable year ended
December 31, 1997:
<TABLE>
<CAPTION>
Total Long-Term 20%
Capital Gains Capital Gains
------------------ -----------------
<S> <C> <C>
Real Estate Securities $ 28,736,083 $ 11,407,632
</TABLE>
Specialty Funds Tax Information 87
<PAGE>
Frank Russell Investment Company
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627--7001
Trustees
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
Officers
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
Manager and Transfer Agent
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Consultant
Frank Russell Company
909 A Street
Tacoma, WA 98402
Money Managers
Real Estate Securities
AEW Capital Management, L.P., Boston, MA
Cohen & Steers Capital Management, New York, NY
Emerging Markets
Genesis Asset Managers, Ltd., London, England
J.P. Morgan Investment Management, Inc., New York, NY
Montgomery Asset Management, L.P., San Francisco, CA
Equity T Fund
J.P. Morgan Investment Management, Inc., New York, NY
Limited Volatility Tax Free
MFS Institutional Advisors, Inc., Boston, MA
T. Rowe Price Associates, Inc., Baltimore, MD
Money Market
Frank Russell Investment Management Co., Tacoma, WA
U.S. Government Money Market
Frank Russell Investment Management Co., Tacoma, WA
Tax Free Money Market
Weiss, Peck & Greer, L.L.C., New York, NY
Custodian
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Office of Shareholder Inquiries
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103--7098
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
Distributor
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
88 Manager, Money Managers and Service Providers Specialty Funds
<PAGE>
[LOGO OF RUSSELL]
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, WA 98402
800-832-6688
IN13(198)SPEC
<PAGE>
[ARTWORK]
FRANK RUSSELL INVESTMENT COMPANY
1997 ANNUAL REPORT
DIVERSIFIED EQUITY FUND
SPECIAL GROWTH FUND
EQUITY INCOME FUND
QUANTITATIVE EQUITY FUND
INTERNATIONAL SECURITIES FUND
DIVERSIFIED BOND FUND
VOLATILITY CONSTRAINED BOND FUND
MULTISTRATEGY BOND FUND
December 31, 1997
[LOGO OF RUSSELL]
<PAGE>
Frank Russell Investment Company
Frank Russell Investment Company is a "series mutual fund" with 28 different
investment portfolios. These financial statements report on eight Funds, each of
which has distinct investment objectives and strategies.
Frank Russell Investment Management Company
Responsible for overall management and administration of the Funds.
Frank Russell Company
Consultant to Frank Russell Investment Management Company.
<PAGE>
Frank Russell Investment Company
Russell Funds
Annual Report
December 31, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Our clients ......................................... 1
Diversified Equity Fund ....................................... 2
Special Growth Fund ........................................... 18
Equity Income Fund ............................................ 36
Quantitative Equity Fund ...................................... 48
International Securities Fund ................................. 62
Diversified Bond Fund ......................................... 84
Volatility Constrained Bond Fund .............................. 102
Multistrategy Bond Fund ....................................... 114
Notes to Financial Statements ................................. 129
Report of Independent Accountants ............................. 140
Tax Information ............................................... 141
Manager, Money Managers and Service Providers ................. 142
</TABLE>
Frank Russell Investment Company - Russell Funds
Copyright (C) Frank Russell Company 1998. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. Frank Russell Company and Standard & Poor's
Corporation are the owners of the trademarks, service marks, and copyrights
related to their respective indexes. This material must be accompanied or
preceded by a current Frank Russell Investment Company Prospectus containing
complete information concerning the investment objectives and operations of the
Company, charges, and expenses. The Prospectus should be read carefully before
an investment is made. The performance quoted represents past performance and
the investment return and principal value of an investment will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different than those of US issuers; the Prospectus contains
further information and details regarding these risks. Russell Fund
Distributors, Inc., is the distributor of Frank Russell Investment Company.
<PAGE>
To Our Clients
Frank Russell Investment Company is pleased to present its 1997 Annual Report.
This report covers information on eight of the Funds and represents the Funds'
sixteenth year of operation.
During the past year we have continued our focus on the benefits of
multi-manager, multi-style diversification in structuring the Funds. We remain
committed to providing our clients with superior investment solutions across
each of our multiple manager and style Funds. These efforts proved worthwhile in
1997 as our Funds, in general, provided solid returns as compared to their
respective benchmarks and attracted many new investors, both creating
significant growth in assets.
Frank Russell Investment Management Company continuously evaluates the Funds we
offer our clients. Each of these Funds is carefully monitored by Russell's
investment professionals to ensure that the most appropriate investment advisors
and strategies are utilized within each Fund. The Advisors are monitored by the
Frank Russell Investment Management Company, using the expertise and advice of
the consulting group of Frank Russell Company.
During the past year, the Frank Russell Investment Company opened five new
LifePoints Funds; Equity Balanced Strategy Fund, Aggressive Strategy Fund,
Balanced Strategy Fund, Moderate Strategy Fund and Conservative Strategy Fund.
The LifePoints Funds diversify their assets by investing in shares of six to
eight Funds of the Frank Russell Investment Company, referred to as the
Underlying Funds. Each LifePoints Fund has a different investment objective
which it seeks to achieve by investing in different combinations of the
Underlying Funds. We are excited to offer these new products which we believe
will provide additional diversification and convenience through a built-in asset
allocation strategy.
We look forward to having the opportunity to work with you over the upcoming
year and continuing to earn your support by exceeding your expectations. Thank
you for your continued confidence and investment with Frank Russell Investment
Company.
Sincerely,
/s/ George F. Russell, Jr. /s/ Lynn L. Anderson
George F. Russell, Jr. Lynn L. Anderson
Chairman President and Chief Executive Officer
Frank Russell Company Frank Russell Investment Company
<PAGE>
Diversified Equity Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide capital growth and income.
Invests in: Primarily U.S. equity securities.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk. The Fund employed the investment
management services of nine managers with three separate and distinct investment
styles.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Performance Chart
Dates Diversified Equity - Class S Russell 1000(R) ** Lipper(C) Growth & Income ++
<S> <C> <C> <C>
$10,000 $10,000 $10,000
1988 $11,637 $11,723 $11,492
1989 $15,019 $15,289 $14,071
1990 $13,967 $14,653 $13,439
1991 $18,302 $19,493 $17,311
1992 $19,824 $21,254 $18,744
1993 $21,913 $23,412 $20,847
1994 $21,911 $23,500 $20,633
1995 $29,617 $32,376 $26,947
1996 $36,513 $39,644 $32,536
1997 $47,947 $52,668 $41,349
</TABLE>
<TABLE>
<CAPTION>
Diversified Equity Fund - Class S Russell 1000(R) Index
<S> <C> <C> <C> <C> <C>
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
--------------- ------------ ---------- ----------------- ----------- -----------
1 Year $ 13,132 31.32% 1 Year $ 13,285 32.85%
5 Years $ 24,186 19.32%(S) 5 Years $ 24,781 19.90%(S)
10 Years $ 47,947 16.97%(S) 10 Years $ 52,650 18.07%(S)
Diversified Equity Fund - Class C ++++ Lipper(C) Growth & Income Funds Average
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
---------------- ----------- --------- ----------------- ------------ ---------
1 Year $ 13,075 30.75% 1 Year $ 12,709 27.09%
5 Years $ 24,082 19.22%(S) 5 Years $ 22,059 17.14%(S)
10 Years $ 47,740 16.92%(S) 10 Years $ 41,349 15.25%(S)
</TABLE>
* Assumes initial investment on January 1, 1988
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $43 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select.
++ Lipper(C) Growth & Income Funds Average is the average total return for the
universe of funds within the Growth and Income Funds investment objective.
The total return for the funds reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
++++ The Diversified Equity Fund - Class C - For the period, November 4, 1996
(commencement of operations) to December 31, 1997, shareholder service and
Rule 12b-1 distribution fees were charged. Total return would have been
lower had these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
(S) Annualized.
2 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Diversified Equity Fund Class S and
Class C shares reflected total returns of 31.3% and 30.8%, respectively, as
compared to the Russell 1000(R) Index results of 32.9%. The Fund trailed the
Index primarily due to the strength of large cap stocks and the market's
defensiveness late in the year. However, performance compared favorably with the
average mutual fund tracked in the Lipper(C) Growth and Income Funds Universe.
Portfolio Highlights
The performance of stocks in 1997 once again defied expectations. Stocks
provided investors with returns in excess of 30%--the first time the market has
ever produced three consecutive years of gains in excess of 20% per annum.
Despite the market's strength, a year-end flight to defensive sectors made it a
difficult year for fund managers to keep9 pace with market indices. The market's
rotation away from segments emphasized by the "active" managers produced
particularly weak fourth quarter results. Technology stocks were hardest hit by
the market's changing sentiment, as tech shares were sold in favor of more
defensive alternatives, including utility stocks and fixed income instruments.
The dominance of large capitalization stocks appeared to be at an end by mid
year, but resumed again in the fourth quarter, resulting in the largest 50
stocks of the Russell 1000 Index outperforming small cap stocks in the Russell
2000(R) Index by nearly 14% for the year.
The Diversified Equity Fund's balance of investment styles helped lessen its
vulnerability to the market's rotation between sectors during the year. The
Fund's Value managers provided exposure to utility shares during the fourth
quarter, helping offset the underweightings of the Fund's other managers. An
overweighting in technology stocks reflected generally favorable opinions among
all of the Fund's managers, regardless of investment style, however, weakness in
the technology sector in the latter half of the year had a negative impact on
results. Waning confidence in the ability of US companies to increase profits,
coupled with the uncertain impact of economic crises in Asia, resulted in weak
returns from some of the market's leaders, including Intel, the Fund's largest
holding for most of the year. The Fund also failed to capture strong returns
from telephone utilities stocks during the fourth quarter, as merger activity
and defensive attributes combined to boost share prices in the sector.
Additionally, the Fund was underweighted in two of the market's best performers,
AT&T and MCI.
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Philip Morris Cos., Inc. 1.8%
Pfizer, Inc. 1.6
Cisco Systems, Inc. 1.4
Merck &Co., Inc. 1.3
General Electric Co. 1.3
Ford Motor Co. 1.3
PepsiCo, Inc. 1.3
COMPAQ Computer Corp. 1.2
Intel Corp. 1.2
American International Group, Inc. 1.2
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 22.3x
Portfolio Price/Book Ratio 3.54x
Market Capitalization - $-Weighted Average 38.56 Bil
Number of Holdings 549
Money Managers Styles
Alliance Capital Management L.P. Growth
Barclays Global Fund Advisors, N.A. Market-Oriented
Equinox Capital Management, Inc. Value
INVESCO Capital Management, Inc. Market-Oriented
Lincoln Capital Management Co. Growth
Peachtree Asset Management Market-Oriented
Schneider Capital Management Value
Suffolk Capital Management, Inc. Market-Oriented
Trinity Investment Management Corp. Value
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Diversified Equity Fund 3
<PAGE>
Diversified Equity Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Common Stocks - 92.1%
Auto and Transportation - 5.2%
Alexander & Baldwin, Inc. 2,400 $ 66
AMR Corp. (a) 20,700 2,660
Bandag, Inc. 4,700 251
BE Aerospace, Inc. (a) 28,000 749
Borg-Wamer Automotive, Inc. 8,200 426
Chrysler Corp. 68,800 2,421
CNF Transportation, Inc. 8,600 330
Comair Holdings, Inc. 20,700 499
Continental Airlines, Inc. Class B (a) 19,200 924
Cooper Tire & Rubber Co. 142,400 3,471
Dana Corp. 500 24
Delta Air Lines, Inc. 20,100 2,392
Dollar Thrifty Automotive Group, Inc. (a) 16,600 340
Eaton Corp. 11,700 1,044
Echlin, Inc. 24,000 868
Exide Corp. 65,000 1,682
Federal Express Corp. (a) 18,900 1,154
Ford Motor Co. 268,900 13,092
General Motors Corp. 5,300 321
Kirby Corp. (a) 50,000 966
KLM Royal Dutch Airlines 50,272 1,898
Lear Corp. (a) 10,600 503
Magna International, Inc. Class A 25,100 1,577
Meritor Automotive, Inc. 34,400 724
Navistar International Corp. (a) 25,300 628
Nordic American Tanker Shipping, Ltd. 108,400 1,789
Norfolk Southern Corp. 91,000 2,804
Northwest Airlines Corp. Class A (a) 68,300 3,270
PACCAR, Inc. 8,000 420
Southwest Airlines Co. 2,100 52
Trinity Industries, Inc. 9,500 424
UAL Corp. (a) 74,300 6,873
Walbro Corp. 30,500 404
--------
55,046
--------
Consumer Discretionary - 10.0%
AccuStaff, Inc. (a) 19,800 455
ACNielsen Corp. (a) 15,100 368
American Greetings Corp. Class A 9,500 372
Avon Products, Inc. 20,200 1,240
Barnes & Noble, Inc. (a) 2,100 70
Barry (R.G.) Corp. (a) 90,000 1,046
Bed Bath & Beyond, Inc. (a) 6,200 238
Belo (A.H.) Corp. Class A 7,500 421
Borders Group, Inc. (a) 8,400 263
Browning-Ferris Industries, Inc. 14,400 533
Carnival Corp. Class A 72,300 4,004
Central Newspapers, Inc. Class A 3,100 229
Chris Craft Industries, Inc. (a) 3,400 178
Clear Channel Communications, Inc. (a) 16,500 1,311
Cracker Barrel Old Country Store, Inc. 3,900 130
Darden Restaurants, Inc. 26,300 329
Dayton Hudson Corp. 82,300 5,555
Dillard's, Inc. Class A 44,000 1,551
Disney (Walt) Co. 100,100 9,916
Dollar Tree Stores, Inc. (a) 950 39
Eastman Kodak Co. 11,600 705
Estee Lauder Companies Class A 800 41
Federated Department Stores, Inc. (a) 26,500 1,141
General Nutrition Companies, Inc. (a) 7,000 237
Getty Realty Corp. 40,000 885
Grand Casinos, Inc. (a) 90,000 1,226
GTECH Holdings Corp. (a) 900 29
Harrah's Entertainment, Inc. (a) 26,400 498
Hasbro, Inc. 15,600 491
Hillenbrand Industries, Inc. 700 36
Hollinger International, Inc. Class A 11,600 162
Home Depot, Inc. (The) 122,850 7,233
Host Marriott Corp. (a) 47,700 936
Ikon Office Solutions, Inc. 38,300 1,077
International Game Technology 6,000 152
Interpublic Group Cos., Inc. 2,400 120
InterTAN, Inc. (a) 20,000 108
Intimate Brands, Inc. Class A 15,400 371
JC Penney & Co., Inc. 32,500 1,960
Jones Apparel Group, Inc. (a) 10,500 452
Kellwood Co. 50,000 1,500
King World Productions, Inc. (a) 3,000 173
Kmart Corp. (a) 83,900 970
Kohl's Corp. (a) 24,200 1,649
Leggett & Platt, Inc. 3,500 147
Limited, Inc. (The) 133,000 3,392
Liz Claiborne, Inc. 4,500 188
Lowe's Cos., Inc. 32,300 1,540
Mark Bros. Jewelers, Inc. (a) 70,000 1,094
Marriot International, Inc. 6,600 457
Mattel, Inc. 192,541 7,172
May Department Stores Co. 36,600 1,928
Maytag Corp. 17,800 664
Meredith Corp. 11,800 421
Metromedia International Group, Inc. (a) 127,200 1,208
Neiman-Marcus Group, Inc. (a) 7,900 239
New York Times Co. Class A 7,000 463
Nordstrom, Inc. 14,000 842
Office Depot, Inc. (a) 1,100 26
OfficeMax, Inc. (a) 37,300 532
Omnicom Group, Inc. 8,600 364
</TABLE>
4 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
PairGain Technologies, Inc. (a) 2,500 $ 48
Payless ShoeSource, Inc. (a) 7,200 483
Petroleum Heat & Power, Inc. Class A 267,230 601
Pittston Brink's Group 400 16
Pluma, Inc. (a) 9,400 80
Premark International, Inc. 22,800 661
Promus Hotel Corp. New (a) 9,495 399
QUALCOMM, Inc. (a) 400 20
Reebok International, Ltd. (a) 9,800 282
Salant Corp. (a) 115,200 202
Sears Roebuck & Co. 113,300 5,127
Service Corp. International 58,000 2,142
Servico, Inc. (a) 4,700 79
Stewart Enterprises, Inc. Class A 23,100 1,077
Sunbeam Corporation 25,000 1,053
Tele-Communications, Inc. Series A New (a) 87,600 3,176
Tiffany & Co. 2,100 76
Time Warner, Inc. 46,900 2,908
TJX Cos., Inc. 55,400 1,904
Toys "R" Us, Inc. (a) 88,000 2,767
Tribune Co. 44,500 2,770
Tricon Global Restaurants, Inc. (a) 21,460 624
Tupperware Corp. 11,400 318
Unisource Worldwide, Inc. 41,100 586
USA Waste Services, Inc. (a) 48,300 1,896
V.F. Corp. 2,800 129
Viad Corp. 2,200 42
Wal-Mart Stores, Inc. 46,400 1,830
Wallace Computer Services, Inc. 1,700 66
Whirlpool Corp. 42,000 2,310
---------
104,749
---------
Consumer Staples - 9.1%
American Stores Co. 35,200 724
Anheuser-Busch Cos., Inc. 53,700 2,363
Campbell Soup Co. 45,600 2,651
Canandaigua Wine International, Inc. Class A (a) 5,000 277
Chiquita Brands International, Inc. 43,600 711
Clorox Co. 13,600 1,075
Coca-Cola Co. (The) 146,400 9,754
Coca-Cola Enterprises, Inc. 58,600 2,084
Colgate-Palmolive Co. 69,700 5,123
CPC International, Inc. 22,200 2,392
CVS Corp. 6,200 397
Dean Foods Co. 2,900 173
Dial Corp. 5,200 108
Dole Food, Inc. 32,600 1,491
Fletcher's Fine Foods, Ltd. (a) 50,000 700
Gillette Co. 46,723 4,693
Heinz (H.J.) Co. 21,200 1,077
Hudson Foods, Inc. 30,000 617
IBP, Inc. 20,300 425
International Multifoods Corp. 53,500 1,515
McCormick & Co., Inc. 900 25
Nabisco Holdings Corp. Class A 20,900 1,012
PepsiCo, Inc. 353,500 12,881
Philip Morris Cos., Inc. 403,325 18,276
Procter & Gamble Co. 147,400 11,764
Quaker Oats Co. 32,400 1,709
RJR Nabisco Holdings Corp. 62,900 2,359
Sara Lee Corp. 36,850 2,075
SuperValu, Inc. 7,600 318
SYSCO Corp. 700 32
Tyson Foods, Inc. Class A 18,200 373
Unilever NV 66,700 4,165
Universal Corp. 32,600 1,341
Weis Markets, Inc. 800 28
Winn-Dixie Stores, Inc. 700 30
Wrigley (Win.), Jr. Co. 1,900 151
---------
94,889
---------
Financial Services - 17.1%
20th Century Industries 3,000 78
AFLAC, Inc. 63,000 3,221
Ahmanson (H.F.) & Co. 57,000 3,815
Allmerica Financial Corp. 6,100 305
Allstate Corp. 70,308 6,389
AMBAC Financial Group, Inc. 45,100 2,075
American Express Co. 39,200 3,499
American International Group, Inc. 109,893 11,951
AmSouth Bancorp 30,900 1,678
Automatic Data Processing, Inc. 130,750 8,025
Banc One Corp. 93,850 5,097
BankAmerica Corp. 44,300 3,234
Bankers Trust New York Corp. 10,400 1,169
Barnett Banks, Inc. 16,700 1,200
Bear Stearns Cos., Inc. 11,952 568
Canadian Hotel Income Properties 235,200 1,580
Charter One Financial, Inc. 1,400 88
Chase Manhattan Corp. 100,900 11,049
Chubb Corp. (The) 26,500 2,004
CIGNA Corp. 11,000 1,904
Cincinnati Financial Corp. 300 42
Citicorp 71,700 9,066
</TABLE>
Diversified Equity Fund 5
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Comdisco, Inc. 11,700 $ 391
Comerica, Inc. 19,000 1,715
Commerce Bancshares, Inc. 2,257 153
Conseco, Inc. 77,868 3,538
Danielson Holding Corp. (a) 100,000 725
Dime Bancorp, Inc. 17,200 520
Donaldson, Lufkin & Jenrette, Inc. 800 64
Dow Jones & Co., Inc. 10,600 569
DST Systems, Inc. (a) 2,300 98
Duke Realty Investments, Inc. 13,300 323
Edwards (A.G.), Inc. 26,700 1,061
Equitable Companies, Inc. 17,200 856
Equity Residential Properties Trust 27,000 1,365
Everest Reinsurance Holdings, Inc. 13,600 561
Federal Home Loan Mortgage Corp. 15,400 646
Federal National Mortgage Association 115,100 6,568
First America Bank Corp. 3,700 285
First American Corp. 29,300 1,458
First Chicago NBD Corp. 19,895 1,661
First Data Corp. 65,500 1,916
First Union Corp. 5,700 292
FIRSTPLUS Financial Group, Inc. (a) 8,800 336
Fleet Financial Group, Inc. 77,500 5,808
General Re Corp. 14,500 3,074
Golden State Bancorp, Inc. (a) 2,500 93
Golden West Financial Corp. 4,400 430
Green Tree Financial Corp. 48,300 1,265
Hartford Financial Services Group (The), Inc. 1,300 122
Horace Mann Educators Corp. 6,400 182
Household International Corp. 45,300 5,779
Jefferson-Pilot Corp. 3,200 249
Lehman Brothers Holdings, Inc. 15,500 790
Lincoln National Corp. 500 39
Local Financial Corp. 129,300 1,503
MBNA Corp. 371,812 10,155
Mellon Bank Corp. 13,300 806
Mercantile Bankshares Corp. 6,300 242
Mercury General Corp. 4,900 271
Merrill Lynch & Co., Inc. 69,900 5,098
MGIC Investment Corp. 11,400 758
Morgan Stanley, Dean Witter, Discover and Co. 138,015 8,160
National City Corp. 2,400 158
NationsBank Corp. 59,100 3,594
North Fork Bancorporation, Inc. 4,100 138
Northern Trust Corp. 16,900 1,179
Norwest Corp. 68,500 2,646
Old Republic International Corp. 11,600 431
Pacific Century Financial Corp. 43,400 1,074
PaineWebber Group, Inc. 34,650 1,197
Paychex, Inc. 23,000 1,164
PennCorp Financial Group, Inc. 40,000 1,427
Progressive Corp. 4,700 563
Reliance Group Holdings, Inc. 50,200 709
Republic New York Corp. 21,100 2,409
Ryder System, Inc. 95,200 3,118
SouthTrust Corp. 23,800 1,505
Spieker Properties, Inc. 7,200 309
Star Banc Corp. 1,900 109
State Street Corp. 7,200 419
Synovus Financial Corp. 7,500 246
Torchmark Corp. 22,800 959
Transamerica Financial Corp. 13,000 1,384
Transatlantic Holdings, Inc. 3,450 247
Travelers, Inc. 49,155 2,648
Washington Mutual, Inc. 45,440 2,897
---------
178,492
---------
Health Care - 11.1%
Abbott Laboratories 44,000 2,885
Aetna, Inc. 51,900 3,662
Alliance Pharmaceutical Corp. (a) 40,000 280
ALZA Corp. (a) 42,400 1,349
American Home Products Corp. 21,100 1,614
Amgen, Inc. 21,100 1,142
Apria Healthcare Group, Inc. (a) 57,000 766
Astra AB Class A - ADR 172,500 2,965
Baxter International, Inc. 71,400 3,601
Beckman Instruments, Inc. 400 16
Becton, Dickinson & Co. 5,800 290
Bergen Brunswig Corp. Class A 4,975 210
Biomet, Inc. 96,200 2,453
Bristol-Myers Squibb Co. 101,600 9,614
Cardinal Health, Inc. 22,600 1,698
ChromaVision Medical Systems, Inc. (a) 120 1
Columbia/HCA Healthcare Corp. 139,500 4,133
First Health Group Corp. (a) 17,100 874
Genzyme Corp. (a) 7,800 215
HBO & Co. 35,700 1,711
Health Management Associates Class A (a) 650 16
HEALTHSOUTH Corp. (a) 6,500 180
Humana, Inc. (a) 36,700 762
Integrated Health Services, Inc. 42,000 1,310
IVAX Corp. (a) 20,000 135
Johnson & Johnson 100,200 6,601
Lilly (Eli) & Co. 124,100 8,640
</TABLE>
6 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
McKesson Corp. 8,400 $ 909
Medtronic, Inc. 34,100 1,784
Merck & Co., Inc. 128,700 13,674
Mylan Laboratories, Inc. 152,600 3,195
Omnicare, Inc. 4,900 152
Oxford Health Plans, Inc. (a) 16,300 253
PacifiCare Health Systems, Inc. Class B (a) 16,000 838
Pfizer, Inc. 227,500 16,963
PhyCor, Inc. (a) 21,600 583
Quest Diagnostics, Inc. (a) 40,000 675
Quintiles Transnational Corp. (a) 33,600 1,294
Schering-Plough Corp. 140,500 8,729
Shared Medical Systems 1,900 125
Smithkline Beecham PLC - ADR 52,500 2,700
Tenet Healthcare Corp. (a) 17,075 566
Total Renal Care Holdings, Inc. (a) 5,000 138
U.S. Surgical Corp. 1,800 53
United Healthcare Corp. 100,800 5,008
US Bioscience, Inc. (a) 85,750 777
Watson Pharmaceuticals, Inc. (a) 6,200 201
Wellpoint Health Networks, Inc. Class A (a) 2,737 116
---------
115,856
---------
Integrated Oils - 4.1%
Amerada Hess Corp. NPV 55,600 3,051
Amoco Corp. 30,150 2,567
Ashland, Inc. 60,000 3,221
Atlantic Richfield Co. 30,200 2,420
British Petroleum Co. PLC - ADR 30,863 2,459
Coastal Corp. 36,100 2,236
Crown Central Petroleum Co. Class B (a) 62,000 1,259
Exxon Corp. 116,100 7,104
Kerr-McGee Corp. 17,900 1,133
Lyondell Petrochemical Co. 34,200 906
Mobil Corp. 22,200 1,602
Pennzoil Co. 4,800 321
Phillips Petroleum Co. 46,000 2,237
Royal Dutch Petroleum Co. 48,000 2,601
Seagull Energy Corp. (a) 5,100 105
Sun Co., Inc. 42,800 1,800
Tenneco, Inc. 12,400 490
Texaco, Inc. 38,400 2,088
Unocal Corp. 37,400 1,452
USX-Marathon Group 123,100 4,155
---------
43,207
---------
Materials and Processing - 8.5%
Air Products & Chemicals, Inc. 17,400 1,431
Albany International Corp. Class A 55,000 1,265
Albemarle Corp. 12,300 294
Aluminum Co. of America 30,700 2,161
American Real Estate Partners, L.P. (a) 196,462 1,928
American Standard Companies, Inc. (a) 10,000 383
Archer-Daniels-Midland Co. 21,000 455
Arco Chemical Co. 3,400 159
Asia Pulp & Paper Co, Ltd. - ADR 80,000 805
Ball Corp. 14,200 501
Bethlehem Steel Corp. (a) 10,200 88
Bowater, Inc. 1,800 80
Catellus Development Corp. (a) 80,000 1,600
Centex Corp. 17,300 1,089
Champion International Corp. 25,200 1,142
Commonwealth Industries, Inc. 85,000 1,243
Crown Cork & Seal Co., Inc. 39,000 1,955
du Pont (E.I.) de Nemours & Co. 15,700 943
Eastman Chemical Co. 26,200 1,561
FMC Corp. (a) 15,100 1,016
Fort James Corp. 61,800 2,364
Gaylord Container Corp. Class A (a) 469,200 2,698
Georgia Pacific Corp. 5,300 322
Goodrich (B.F.) Co. 4,300 178
Great Lakes Chemical Corp. 65,300 2,930
Hexcel Corp. (a) 85,000 2,120
Illinois Tool Works, Inc. 31,900 1,918
Inland Steel Industries, Inc. 21,200 363
International Paper Co. 36,900 1,591
International Specialty Products (a) 1,300 19
Kimberly-Clark Corp. 103,400 5,099
Lafarge Corp. 14,700 435
Lone Star Technologies, Inc. (a) 10,000 284
Longview Fibre Co. 10,000 152
Louisiana Pacific Corp. 45,000 855
LTV Corp. 12,100 118
Lubrizol Corp. 31,100 1,147
Mead Corp. 33,400 935
Mercer International, Inc. 131,100 1,147
Monsanto Co. 185,600 7,795
Nalco Chemical Co. 500 20
Newhall Land & Farming Co. 22,900 687
Olin Corp. 20,100 942
Oregon Steel Mills, Inc. 30,000 639
Owens-Illinois, Inc. (a) 300 11
Phelps Dodge Corp. 50,200 3,125
Pioneer Hi-Bred International, Inc. 1,600 172
</TABLE>
Diversified Equity Fund 7
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Potlatch Corp. 1,300 $ 56
Praxair, Inc. 43,400 1,953
Precision Castparts Corp. 700 42
Rayonier, Inc. 800 34
Reynolds Metals Co. 46,100 2,766
Rohm & Haas Co. 9,300 890
Sealed Air Corp. (a) 1,700 105
Security Capital Group, Inc. Class B (a) 3,900 127
Sherwin-Williams Co. 22,400 622
Solutia, Inc. 35,400 945
Sonoco Products Co. 1,500 52
Timken Co. 20,800 715
Tower Realty Trust, Inc. 6,100 150
Tyco International, Ltd. 249,600 11,248
Unifi, Inc. 13,600 553
Union Carbide Corp. 4,600 197
USG Corp. (a) 12,200 598
USX-U.S. Steel Group 53,300 1,666
Vulcan Materials Co. 900 92
W. R. Grace & Co. 75,100 6,041
Westvaco Corp. 21,600 679
Witco Corp. 10,000 408
Zeigler Coal Holding Co. 30,000 489
---------
88,593
---------
Miscellaneous - 0.3%
FBR Asset Investment Corp. 30,600 612
Legacy Hotels Real Estate Investment Trust 365,000 2,478
---------
3,090
---------
Other Energy - 2.0%
Apache Corp. 26,100 915
Baker Hughes, Inc. 69,900 3,049
BJ Services Co. (a) 3,300 237
Burlington Resources, Inc. 8,000 359
Dresser Industries, Inc. 14,700 617
EEX Corp. (a) 41,489 376
Enron Oil & Gas Co. 3,400 72
Halliburton Co. 45,000 2,337
Helmerich & Payne, Inc. 20,200 1,371
McDermott International, Inc. 40,000 1,465
Noble Affiliates, Inc. 20,600 726
Rowan Cos., Inc. (a) 5,000 153
Schlumberger, Ltd. 45,100 3,631
Smith International, Inc. (a) 5,200 319
Tidewater, Inc. 6,700 369
Transocean Offshore, Inc. 36,300 1,749
Triton Energy, Ltd. Class A (a) 45,000 1,314
Valero Energy Corp. 57,500 1,808
Vastar Resources, Inc. 1,800 64
Weatherford Enterra, Inc. (a) 5,600 245
---------
21,176
---------
Producer Durables - 6.0%
Aeroquip-Vickers, Inc. 6,600 324
AGCO Corp. 22,300 652
Alcatel Alsthom Compagnie
Generale d'Electricite - ADR 38,103 964
Applied Materials, Inc. (a) 28,200 848
Boeing Co. 33,900 1,659
Briggs & Stratton Corp. 7,700 374
Caterpillar, Inc. 27,000 1,311
Clayton Homes, Inc. 7,300 131
Coltec Industries, Inc. (a) 1,500 35
CommScope, Inc. (a) 39,100 525
Crane Co. 28,300 1,228
Dover Corp. 7,600 275
Elsag Bailey Process Automation NV (a) 50,000 825
Foster Wheeler Corp. 47,800 1,294
General Electric Co. 184,500 13,538
General Semiconductor, Inc. (a) 134,000 1,549
Harnischfeger Industries, Inc. 14,200 501
Honeywell, Inc. 35,000 2,398
Ingersoll-Rand Co. 67,150 2,720
Johnson Controls, Inc. 34,500 1,647
Kaiser Ventures, Inc. (a) 78,900 848
Lexmark International Group, Inc. Class A (a) 22,300 847
Litton Industries, Inc. (a) 6,000 345
Lockheed Martin Corp. 30,000 2,955
MagneTek, Inc. (a) 20,000 390
Mark IV Industries, Inc. 31,100 680
Molex, Inc. 4,075 130
Molex, Inc. Class A 31,500 906
National Service Industries, Inc. 3,700 183
Parker-Hannifin Corp. 44,100 2,023
Perkin-Elmer Corp. 3,300 235
Philips Electronics NV - ADR 11,000 666
Raychem Corp. 16,400 706
Raytheon Co. Class A 3,150 155
Sensormatic Electronics Corp. 85,000 1,397
Sundstrand Corp. 9,800 494
Tektronix, Inc. 750 30
Teradyne, Inc. (a) 14,400 461
</TABLE>
8 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Thiokol Corp. 9,600 $ 780
Thomas & Betts Corp. 15,800 747
U.S. Filter Corp. (a) 56,100 1,679
United Technologies Corp. 89,200 6,495
Whittaker Corp. (a) 152,200 1,674
Xerox Corp. 72,200 5,329
---------
62,953
---------
Technology - 10.4%
3Com Corp. (a) 26,300 917
Altera Corp. (a) 39,700 1,315
Apple Computer, Inc. (a) 30,000 392
AVX Corp. 1,900 35
Bay Networks, Inc. (a) 4,400 112
Cadence Design Systems, Inc. (a) 16,400 402
Cambridge Technology Partners, Inc. (a) 400 17
CDW Computer Centers, Inc. (a) 1,800 94
Cisco Systems, Inc. (a) 260,300 14,512
COMPAQ Computer Corp. 225,600 12,732
CompUSA, Inc. (a) 25,100 778
Cooper Industries, Inc. 19,900 975
Cypress Semiconductor Corp. (a) 35,000 298
Dell Computer Corp. (a) 124,600 10,466
DSC Communications Corp. (a) 31,400 750
Electronic Data Systems Corp. 130,838 5,749
Ericsson (LM) Telephone Co. Class B - ADR 122,270 4,562
FORE Systems (a) 21,900 334
General Dynamics Corp. 3,200 277
General Motors Corp. Class H (a) 6,100 225
Hewlett-Packard Co. 132,200 8,263
Imation Corp. (a) 38,200 611
Integrated Device Technology (a) 110,000 1,031
Intel Corp. 173,500 12,177
International Business Machines Corp. 75,050 7,847
Iomega Corp. (a) 23,900 297
Komag, Inc. (a) 3,100 46
Learning Co., Inc. (The) (a) 90,000 1,446
Lucent Technologies, Inc. 39,724 3,173
Micron Technology, Inc. (a) 6,100 159
Microsoft Corp. (a) 79,900 10,322
Motorola, Inc. 29,000 1,655
SCI Systems, Inc. (a) 13,600 592
Scientific-Atlanta, Inc. 8,000 134
Seagate Technology (a) 11,200 216
Storage Technology Corp. (a) 300 19
Symbol Technologies, Inc. 350 13
Synopsys, Inc. (a) 25,400 905
Tandy Corp. 12,600 486
Tech Data Corp. (a) 2,300 89
Tellabs, Inc. (a) 17,000 896
Texas Instruments, Inc. 36,100 1,624
Textron, Inc. 4,900 306
Transaction Systems Architects, Inc. Class A (a) 300 11
VLSI Technology, Inc. (a) 18,000 423
Xilinx, Inc. (a) 22,300 781
---------
108,464
---------
Utilities - 8.3%
360 Communications Co. (a) 600 12
Airtouch Communications, Inc. (a) 142,500 5,923
American Water Works, Inc. 12,000 328
Ameritech Corp. 9,300 749
AT&T Corp. 99,700 6,107
Baltimore Gas & Electric Co. 2,600 89
Bell Atlantic Corp. 92,835 8,448
Boston Edison Co. 3,800 144
Central Maine Power Co. 56,400 860
Century Telephone Enterprises, Inc. 34,000 1,694
Citizens Utilities Co. Class B (a) 135,704 1,306
Columbia Gas System, Inc. 300 23
Comsat Corp. Series 1 10,800 262
Consolidated Edison Co. 34,700 1,423
Delmarva Power & Light Co. 4,300 99
DTE Energy Co. 168,200 5,834
Duke Power Co. 64,000 3,544
Edison International 143,600 3,904
Entergy Corp. 226,800 6,790
EXCEL Communications, Inc. (a) 600 9
FirstEnergy Corp. (a) 525 15
GPU, Inc. 45,900 1,933
GTE Corp. 75,137 3,926
Illinova Corp. 1,400 38
IPALCO Enterprises, Inc. 8,100 340
KU Energy Corp. 2,800 110
Long Island Lighting Co. 26,600 801
MCI Communications Corp. 67,400 2,885
Montana Power Co. 23,200 738
National Fuel & Gas Co. 4,600 224
New Century Energies, Inc. 1,000 48
New England Electric System 5,000 214
New York State Electric & Gas Corp. 17,600 625
Niagara Mohawk Power Corp. (a) 154,400 1,621
NICOR, Inc. 16,300 688
NIPSCO Industries, Inc. 6,300 311
</TABLE>
Diversified Equity Fund 9
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Northeast Utilities 95,400 $ 1,127
PacifiCorp. 300 8
Paging Network, Inc. (a) 44,000 473
Peoples Energy Corp. 5,400 213
PG&E Corp. 88,500 2,694
Pinnacle West Capital Corp. 17,200 729
PP&L Resources, Inc. 1,800 43
Public Service Enterprise Group, Inc. 73,700 2,335
SBC Communications, Inc. 80,700 5,911
Southern Co. 26,500 686
Southern New England
Telecommunications Corp. 28,100 1,414
Unicorn Corp. 136,400 4,194
Union Electric Co. 8,000 346
United States Cellular Corp. (a) 2,500 77
UtiliCorp United, Inc. 800 31
Western Resources, Inc. 4,400 189
WorldCom, Inc. (a) 137,620 4,162
---------
86,697
---------
Total Common Stocks
(cost $790,288) 963,212
---------
Convertible Preferred Stocks - 0.1%
Elsag Bailey Financing Trust (a) 22,600 887
Metromedia International Group, Inc. 16,100 729
---------
Total Convertible Preferred Stocks
(cost $1,916) 1,616
---------
Preferred Stocks - 0.9%
Cooper Industries, Inc. 32,500 593
Nokia Corp. - ADR 121,200 8,484
---------
Total Preferred Stocks
(cost $9,735) 9,077
---------
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ----------
<S> <C> <C>
Short-Term Investments - 5.4%
Frank Russell Investment Company
Money Market Fund
due on demand(b) $ 52,137 $ 52,137
United States Treasury Notes (c)
5.125% due 04/30/98 4,097 4,095
----------
Total Short-Term Investments
(cost $56,234) 56,232
----------
Total Investments
(identified cost $858,173)(d) - 98.5% 1,030,137
Other Assets and Liabilities,
Net - 1.5% 15,322
----------
Net Assets - 100.0% $1,045,459
==========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
The accompanying notes are an integral part of the financial statements.
10 Diversified Equity Fund
<PAGE>
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/98 165 $ 20
S & P 400 Midcap Index Futures Contracts
expiration date 03/98 53 131
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 151
==============
</TABLE>
(S) At December 31, 1997, United States Treasury Notes valued at $4,095 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
Diversified Equity Fund 11
<PAGE>
Diversified Equity Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $858,173)(Note 2)........................................... $ 1,030,137
Cash............................................................................................... 286
Receivables:
Dividends and interest........................................................................... 1,822
Investments sold................................................................................. 7,634
Fund shares sold................................................................................. 11,495
Daily variation margin on futures contracts (Notes 2 and 3)...................................... 34
--------------
Total Assets................................................................................ 1,051,408
Liabilities
Payables:
Investments purchased......................................................... $ 2,942
Fund shares redeemed.......................................................... 2,074
Accrued fees to affiliates (Note 4)........................................... 774
Other accrued expenses........................................................ 159
--------------
Total Liabilities.............................................................................. 5,949
--------------
Net Assets......................................................................................... $ 1,045,459
==============
Net Assets consist of:
Accumulated distributions in excess of net realized gains.......................................... $ (777)
Unrealized appreciation (depreciation) on:
Investments...................................................................................... 171,964
Futures contracts................................................................................ 151
Shares of beneficial interest...................................................................... 240
Additional paid-in capital......................................................................... 873,881
--------------
Net Assets......................................................................................... $ 1,045,459
==============
Net Asset Value, offering and redemption price per share:
Class S ($1,042,619,846 divided by 23,890,058 shares of $.01 par value
shares of beneficial interest outstanding)................................................... $ 43.64
==============
Class C ($2,838,828 divided by 65,045 shares of $.01 par value
shares of beneficial interest outstanding)................................................... $ 43.64
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends........................................................................................... $ 12,629
Dividends from Money Market Fund (Note 5)........................................................... 2,403
Interest............................................................................................ 167
---------------
Total Investment Income........................................................................ 15,199
Expenses (Notes 1, 2 and 4):
Management fees..................................................................... $ 6,906
Custodian fees...................................................................... 501
Transfer agent fees................................................................. 481
Bookkeeping service fees............................................................ 35
Professional fees................................................................... 42
Trustees' fees...................................................................... 4
Miscellaneous....................................................................... 73
Registration fees
Class S........................................................................... 87
Class C........................................................................... 1
Distribution fees - Class C......................................................... 4
Shareholder servicing fees - Class C................................................ 3
-------------
Total Expenses................................................................................. 8,137
---------------
Net investment income................................................................................. 7,062
---------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments........................................................................... 168,718
Futures contracts..................................................................... 10,365 179,083
-------------
Net change in unrealized appreciation or depreciation of:
Investments........................................................................... 46,141
Futures contracts..................................................................... 489 46,630
------------- ---------------
Net gain (loss) on investments........................................................................ 225,713
---------------
Net increase (decrease) in net assets resulting from operations....................................... $ 232,775
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Equity Fund 13
<PAGE>
Diversified Equity Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income............................................................ $ 7,062 $ 7,130
Net realized gain (loss)......................................................... 179,083 81,288
Net change in unrealized appreciation or depreciation............................ 46,630 40,582
------------------ -----------------
Net increase (decrease) in net assets resulting from operations............. 232,775 129,000
------------------ -----------------
From Distributions to Shareholders:
Net investment income
Class S........................................................................ (7,061) (7,130)
Class C........................................................................ (1) --
In excess of net investment income
Class S........................................................................ (22) (54)
Class C........................................................................ (1) --
Net realized gain on investments
Class S........................................................................ (192,410) (80,193)
Class C........................................................................ (475) --
In excess of net realized gain on investments
Class S........................................................................ (752) --
Class C........................................................................ (2) --
------------------ -----------------
Total Distributions to Shareholders......................................... (200,724) (87,377)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)...... 313,717 127,423
------------------ -----------------
Total Net Increase (Decrease) in Net Assets.......................................... 345,768 169,046
Net Assets
Beginning of period.............................................................. 699,691 530,645
------------------ -----------------
End of period.................................................................... $ 1,045,459 $ 699,691
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......................................... $ 41.45 $ 38.62 $ 32.26 $ 34.88 $ 35.60
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income.................................................... .37 .48 .60 .58 .56
Net realized and unrealized gain (loss) on investments................... 12.06 8.15 10.63 (.49) 3.03
------- ------- ------- ------- -------
Total Income From Investment Operations................................ 12.43 8.63 11.23 .09 3.59
------- ------- ------- ------- -------
Less Distributions:
Net investment income.................................................... (.37) (.48) (.60) (.58) (.55)
Net realized gain on investments......................................... (9.83) (5.32) (4.27) (1.87) (3.76)
In excess of net realized gain on investments............................ (.04) -- -- (.26) --
------- ------- ------- ------- -------
Total Distributions................................................... (10.24) (5.80) (4.87) (2.71) (4.31)
------- ------- ------- ------- -------
Net Asset Value, End of Period............................................... $ 43.64 $ 41.45 $ 38.62 $ 32.26 $ 34.88
======= ======= ======= ======= =======
Total Return (%)............................................................. 31.32 23.29 35.17 (0.01) 10.53
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................................. 1,042,620 699,691 530,645 414,036 388,420
Ratios to average net assets (%):
Operating expenses..................................................... .92 .94 .95 .95 .96
Net investment income.................................................. .80 1.18 1.56 1.73 1.54
Portfolio turnover rate (%)............................................... 114.11 99.90 92.53 57.53 99.80
Average commission rate paid per share
of security ($ omitted)................................................. .0500 .0465 N/A N/A N/A
</TABLE>
Diversified Equity Fund 15
<PAGE>
Diversified Equity Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997*
-------
<S> <C>
Net Asset Value, Beginning of Period................................. $ 45.55
--------
Income From Investment Operations:
Net investment income............................................. .06
Net realized and unrealized gain (loss) on investments............ 7.97
--------
Total Income From Investment Operations....................... 8.03
--------
Less Distributions:
Net investment income............................................. (.06)
In excess of net investment income................................ (.01)
Net realized gain on investments.................................. (9.83)
In excess of net realized gain on investments..................... (.04)
--------
Total Distributions........................................... (9.94)
--------
Net Asset Value, End of Period....................................... $ 43.64
========
Total Return (%)(a).................................................. 15.99
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).......................... 2,839
Ratios to average net assets (%)(b):
Operating expenses............................................. 1.63
Net investment income.......................................... .10
Portfolio turnover rate (%)(b)................................... 114.11
Average commission rate paid per share of security ($ omitted)... .0500
</TABLE>
* For the period May 27, 1997 (commencement of sale) to December 31, 1997.
(a) Total return represents performance for the period May 27, 1997 to December
31, 1997.
(b) The ratios for the periods ended December 31, 1997 are annualized.
16 Diversified Equity Fund
<PAGE>
Special Growth Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To enhance total return, primarily through capital appreciation and
by assuming a higher level of volatility than is ordinarily expected from the
Diversified Equity Fund.
Invests in: Primarily small capitalization and "emerging growth-type" U.S.
equity securities.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk. The Fund employed the investment
management services of six small capitalization stock fund managers with three
separate and distinct investment styles.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Special Growth - Russel 2500(TM)** Lipper(C/)Small Co.
Dates Class S Growth ++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $11,382 $12,273 $11,903
1989 $14,105 $14,658 $14,564
1990 $12,091 $12,477 $13,082
1991 $17,303 $18,303 $19,761
1992 $19,469 $21,266 $22,193
1993 $22,483 $24,783 $25,890
1994 $21,648 $24,521 $25,624
1995 $27,821 $32,295 $33,525
1996 $33,011 $38,441 $40,152
1997 $42,509 $47,804 $48,478
</TABLE>
<TABLE>
<CAPTION>
Special Growth Fund - Class S Russell 2500(TM) Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- --------------- -------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 Year $ 12,877 28.77% 1 Year $ 12,436 24.36%
5 Years $ 21,834 16.90%(S) 5 Years $ 22,479 17.59%(S)
10 Years $ 42,509 15.57%(S) 10 Years $ 47,822 16.94%(S)
<CAPTION>
Special Growth Fund - Class C ++++ Lipper(C) Small Co. Growth Funds Average
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- --------------- -------- ----------- --------------- -------- -----------
<S> <C> <C> <C> <C> <C>
1 Year $ 12,790 27.90% 1 Year $ 12,074 20.74%
5 Years $ 21,667 16.72%(S) 5 Years $ 21,844 16.91%(S)
10 Years $ 42,182 15.48%(S) 10 Years $ 48,478 17.10%(S)
</TABLE>
* The Special Growth Fund - Class S assumes initial investment on January 1,
1988.
** Russell 2500(TM) Index is composed of the bottom 500 stocks in the Russell
1000(R) Index and all the stocks in the Russell 2000(R) Index. The largest
Security in this index has a market capitalization of about $5.7 billion.
++ Lipper(C) Small Co. Growth Funds Average is the average total return for
the universe of funds within the Small Company Growth Funds investment
objective. The total return for the funds reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
++++ The Special Growth Fund - Class C - For the period, November 4, 1996
(commencement of sales) to December 31, 1997, shareholder service and Rule
12b-1 distribution fees were charged. Total return would have been lower
had these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
(S) Annualized.
18 Special Growth Fund
18
<PAGE>
Special Growth Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Special Growth Fund Class S and Class
C shares reflected total returns of 28.8% and 27.9%, respectively, as compared
to the Russell 2500(TM) Index, which gained only 24.4%. The Fund's performance
was even better relative to other small cap funds tracked by Lipper Analytical
Services. Although good security selection was the primary factor in achieving
positive returns, sector exposures also contributed to the Fund's favorable
results.
Portfolio Highlights
After outperforming large caps in the second and third quarters, the small
capitalization market appeared to be gaining momentum. However, the market's
flight to defensive stocks in the fourth quarter proved a decisive setback, with
the Russell 2000(R) Index gaining only 22.4% for the year versus the 32.9% gain
of the large and medium cap Russell 1000(R) Index. Despite fourth quarter
weakness, the Fund produced strong results for the year, with managers' security
selection accounting for the majority of the superior performance. Sector
allocations also contributed to favorable returns, mainly due to the Fund's
overweightings in financial services and energy stocks during the year.
Investment style also had a strong influence on performance in the small cap
market. While the returns of small Value stocks rivaled large caps, small Growth
stocks trailed by a sizable margin. The Russell 2000(R) Value Index gained 31.8%
during the year, while its counterpart, the Russell 2000(R) Growth Index rose
only 12.9%. The Special Growth Fund's Value managers contributed even better
gains than their benchmark, both up more than 40% for the year. The Growth
managers struggled through a difficult environment, although Fiduciary
International managed to produce returns exceeding their small cap growth
benchmark. Despite the dominance of larger cap stocks, the Fund's micro-cap
oriented manager, Wellington, also produced strong performance for the year.
- --------------------------------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Fremont General Corp. 0.8%
Donaldson Lufkin & Jenrette 0.6
Ciber 0.6
City National Corp. 0.6
CBT Group 0.5
Best Buy 0.5
Compuware Corp. 0.5
Earthgrains 0.5
American Bankers Insurance Group, Inc. 0.5
AAR Corp. 0.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 21.8x
Portfolio Price/Book Ratio 3.07x
Market Capitalization - $-Weighted Average 1.49 Bil
Number of Holdings 868
- --------------------------------------------------------------------------------
Money Managers Styles
Delphi Management, Inc. Small Cap-Value
Fiduciary International, Inc. Small Cap-Growth
GlobeFlex Capital, L.P. Small Cap-Market-
Oriented
Jacobs Levy Equity Management, Inc. Small Cap-Value
Sirach Capital Management, Inc. Small Cap-Growth
Wellington Management Company LLP Small Cap-Market-
Oriented
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Special Growth Fund 19
<PAGE>
Special Growth Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- ---------
<S> <C> <C>
Common Stocks - 93.1%
Auto and Transportation - 4.4%
AAR Corp. 74,500 $ 2,887
ABC Rail Products Corp. (a) 6,000 120
Aftermarket Technology Corp. (a) 25,500 462
Airborne Freight Corp. 40,200 2,497
AirNet Systems, Inc. (a) 6,700 144
Alaska Air Group, Inc. (a) 24,700 957
Alexander & Baldwin, Inc. 3,500 96
Arctic Cat, Inc. 4,100 40
Arvin Industries, Inc. 11,500 383
Avondale Industries, Inc. (a) 5,300 157
Barnes Group, Inc. 6,800 155
Borg-Warner Automotive, Inc. 18,000 936
Carey International, Inc. New (a) 10,000 151
Circle International Group, Inc. 2,200 50
Coachmen Industries, Inc. 59,000 1,272
Consolidated Freightways Corp. (a) 27,500 375
Control Devices, Inc. (a) 10,666 171
Excel Industries, Inc. 8,000 144
Fleetwood Enterprises, Inc. 18,700 794
FRP Properties, Inc. (a) 5,000 157
Hvide Marine, Inc. Class A (a) 18,300 462
Keystone Automotive Industries, Inc. (a) 6,000 142
Knight Transportation, Inc. (a) 6,000 156
Landair Services, Inc. (a) 7,000 161
M.S. Carriers, Inc. (a) 5,400 132
Mark VII, Inc. (a) 8,000 130
Midwest Express Holdings, Inc. (a) 4,600 179
MTL, Inc. (a) 47,000 1,187
Navistar International Corp. (a) 58,300 1,447
Offshore Logistics, Inc. (a) 70,200 1,500
Overseas Shipholding Group, Inc. 6,500 142
Pittston Burlington Group 3,700 97
Roadway Express, Inc. 11,600 257
Standard Motor Products, Inc. Class A 3,400 77
Trans World Airlines, Inc. New (a) 39,100 396
Transport Corp. of America (a) 12,000 189
Trinity Industries, Inc. 49,800 2,222
U.S. Xpress Enterprises, Inc. Class A (a) 25,500 555
US Airways Group, Inc. (a) 32,600 2,037
USFreightways Corp. 15,900 517
Wynn's International, Inc. 5,350 170
Yellow Corp. (a) 53,900 1,351
--------
25,454
--------
Consumer Discretionary - 16.2%
Abacus Direct Corp. (a) 11,300 463
Abercrombie & Fitch Co. Class A (a) 61,000 1,906
ABM Industries, Inc. 1,100 34
AccuStaff, Inc. (a) 88,800 2,042
Advo Systems, Inc. (a) 3,000 58
American Eagle Outfitters, Inc. (a) 14,900 511
American Greetings Corp. Class A 54,400 2,128
Ames Department Stores, Inc. New (a) 15,800 271
Anchor Gaming (a) 16,200 899
Apple South 88,900 1,167
ARC International Corp. (a) 25,000 156
Ascent Entertainment Group, Inc. (a) 20,900 212
Aviation Sales Co. (a) 2,400 90
Belo (A.H.) Corp. Class A 3,800 213
Best Buy Co. (a) 82,900 3,057
BJ's Wholesale Club, Inc. (a) 39,000 1,224
Bob Evans Farms, Inc. 8,300 184
Bowne & Co., Inc. 10,400 415
Brylane, Inc. (a) 25,000 1,231
Buckle, Inc. (The) (a) 7,200 247
Burlington Coat Factory
Warehouse Corp. 71,640 1,178
Cameron Ashley Building Products, Inc. (a) 10,000 167
Caribiner International, Inc. (a) 21,000 934
Cash America International, Inc. 6,698 87
Catalytica, Inc. (a) 13,000 154
CellStar Corp. (a) 26,700 531
Central Newspapers, Inc. Class A 25,000 1,848
CIDCO, Inc. (a) 7,700 143
CKE Restaurants, Inc. 37,900 1,597
CMP Media, Inc. Class A (a) 48,000 822
Coinmach Laundry Corp. (a) 6,000 147
Cole National Corp. Class A (a) 5,000 150
Computer Horizons Corp. (a) 22,500 1,024
Consolidated Graphics, Inc. (a) 20,000 932
Cornell Corrections, Inc. (a) 7,000 145
CorporateFamily Solutions, Inc. (a) 2,700 57
Cox Radio, Inc. Class A (a) 3,200 129
Cross (A.T.) Co. Class A 4,700 48
Daisytek International Corp. (a) 4,000 139
Dan River, Inc. Class A (a) 11,000 181
Data Processing Corp. (a) 5,700 145
Department 56, Inc. (a) 9,100 262
DeVRY, Inc. (a) 42,000 1,339
Dollar Tree Stores, Inc. (a) 12,500 517
Dress Barn, Inc. (a) 17,000 476
Equity Corp. International (a) 32,000 740
Ethan Allen Interiors, Inc. 11,500 443
Extended Stay America, Inc. (a) 5,500 68
Fingerhut Cos., Inc. 31,200 667
First Brands Corp. 32,100 865
Footstar, Inc. (a) 13,100 352
</TABLE>
20 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Fossil, Inc. (a) 2,300 $ 57
General Nutrition Companies, Inc. (a) 32,130 1,088
Genesco, Inc. (a) 33,500 427
Gibson Greetings, Inc. (a) 3,700 81
Goody's Family Clothing, Inc. (a) 36,200 984
Grand Casinos, Inc. (a) 37,100 505
Grey Advertising 4,400 1,443
Ha-Lo Industries, Inc. (a) 6,000 156
Handleman Co. (a) 12,000 83
Helen of Troy, Ltd. (a) 10,000 160
Homebase, Inc. (a) 29,600 233
Houghton Mifflin Co. 32,000 1,228
Huffy Corp. 2,100 28
InaCom Corp. (a) 24,600 690
Interim Services, Inc. (a) 13,100 339
Iron Mountain, Inc. (a) 3,000 108
Jostens, Inc. 3,000 69
Keliwood Co. 45,700 1,371
Kelly Services, Inc. Class A 3,200 96
Knight-Ridder, Inc. 27,500 1,430
Land's End, Inc. (a) 4,300 151
Landry's Seafood Restaurants, Inc. (a) 8,500 204
Leather Factory, Inc. (a) 60,000 30
Lee Enterprises, Inc. 44,500 1,316
Lithia Motors, Inc., Class A (a) 10,000 139
Lo-Jack Corp. (a) 6,000 88
Lodgenet Entertainment Corp. (a) 8,000 86
Lone Star Steakhouse & Saloon (a) 53,800 941
Marcus Corp. 1,050 19
Maxim Group, Inc. (a) 11,000 171
Mazel Stores, Inc. (a) 12,000 175
McClatchy Newspapers, Inc. Class A 48,675 1,323
McGraw-Hill Companies, Inc. 19,700 1,458
Media General, Inc. Class A 5,100 213
Men's Wearhouse, Inc. (The)(a) 43,000 1,494
Metzler Group, Inc. (a) 31,500 1,244
Movado Group, Inc. 82,875 1,896
Nautica Enterprises, Inc. (a) 54,200 1,260
North Face, Inc. (The) (a) 3,500 77
Nutramax Products, Inc. New (a) 10,000 130
O'Charleys, Inc. (a) 10,000 175
Ogden Corp. 18,600 524
On Assignment, Inc. (a) 50,000 1,288
Outdoor Systems, Inc. (a) 27,900 1,071
Oxford Industries, Inc. 2,100 68
Pacific Sunwear of California (a) 40,700 1,201
Paragon Trade Brands, Inc. (a) 2,600 33
Payless ShoeSource, Inc. (a) 9,900 665
Pegasus Communications Corp. Class A (a) 7,600 155
Pier 1 Imports, Inc. 2,000 45
Polo Ralph Lauren Corp.
Class A New (a) 31,300 761
Premark International, Inc. 28,500 827
Prime Hospitality Corp. (a) 67,800 1,381
Protection One, Inc. 12,000 134
Pulitzer Publishing Co. 19,500 1,225
RCM Technologies, Inc. (a) 8,000 134
RDO Equipment Co. Class A (a) 9,000 165
Recoton Corp. (a) 11,000 149
Red Roof Inns, Inc. (a) 11,600 178
Regis Corp. 6,000 151
Rent-Way, Inc. (a) 32,500 601
Richey Electronics, Inc. (a) 12,000 120
Rio Hotel & Casino, Inc. (a) 10,200 214
Robert Half International, Inc. (a) 38,100 1,524
RockShox, Inc. (a) 12,000 104
Rocky Shoes & Boots, Inc. (a) 12,000 179
Romac International, Inc. (a) 32,200 785
Ross Stores, Inc. 74,050 2,694
Ruby Tuesday, Inc. (a) 5,200 134
Rural/Metro Corp. (a) 4,000 134
Russ Berrie & Co., Inc. 6,100 160
Ryan's Family Steak Houses, Inc. (a) 157,200 1,346
Saga Communications Class A (a) 6,640 141
Schultz Sav-O Stores, Inc. 76,500 1,186
SCP Pool Corp. (a) 8,500 159
Select Appointments Holdings PLC - ADR 60,000 1,095
SFX Broadcasting, Inc. Class A (a) 1,500 120
ShoLodge, Inc. (a) 8,133 126
Shopko Stores, Inc. (a) 61,100 1,329
Showbiz Pizza Time, Inc. (a) 51,500 1,185
Snyder Communications, Inc. New (a) 16,900 617
Spectrian Corp. (a) 8,000 154
Sport Supply Group, Inc. (a) 20,000 153
Sports Authority, Inc. (a) 7,500 111
Strategic Distribution, Inc. (a) 30,600 138
Superior Services, Inc. (a) 36,400 1,051
Thomas Nelson, Inc. 4,300 50
Tiffany & Co. 23,000 829
TJX Cos., Inc. 55,000 1,891
TRM Copy Centers Corp. (a) 15,000 133
Trnmp Hotels & Casino Resorts, Inc. (a) 49,200 329
Unisource Worldwide, Inc. 32,000 456
United Natural Foods, Inc. (a) 7,000 180
United Television, Inc. 6,700 690
Urban Outfitters, Inc. (a) 10,000 183
</TABLE>
Special Growth Fund 21
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Valassis Communications, Inc. (a) 67,000 $ 2,479
Video Update, Inc. Class A (a) 50,000 100
Wackenhut Corp. Class A 6,000 139
Wackenhut Corrections Corp. (a) 45,000 1,209
Washington Post Co. Class B 4,500 2,189
Waste Industries, Inc. (a) 16,270 293
Windmere Durable Holdings, Inc. 10,200 230
Youth Services International, Inc. (a) 7,000 105
-------
93,161
-------
Consumer Staples - 3.9%
800 - JR CIGAR, Inc. (a) 27,900 697
American Italian Pasta Co. Class A (a) 14,200 355
Arbor Drugs, Inc. 52,500 971
Beringer Wine Estates
Holdings, Inc. Class B (a) 12,500 473
Block Drug Co., Inc. Class A 22,331 949
Bush Boake Allen, Inc. (a) 2,000 52
Canandaigua Wine, Inc. Class A (a) 10,900 604
Church and Dwight Co., Inc. 4,600 129
Coca-Cola Bottling Co. Consolidated 18,500 1,253
Coors (Adolph) Co. Class B 40,900 1,355
Dean Foods Co. 20,500 1,220
Earthgrains Co. 62,700 2,947
Fleming Cos., Inc. 24,600 331
General Cigar Holdings, Inc. Class A (a) 22,500 480
IBP. Inc. 35,300 739
Ingles Markets, Inc. 4,200 60
International Multifoods Corp. 8,300 235
Michael Foods, Inc. 71,700 1,748
Nature's Sunshine Products, Inc. 5,000 130
Pilgrim's Pride Corp. 10,600 165
Schweitzer-Mauduit International, Inc. 6,000 223
Smucker (J.M.) Co. 3,900 92
Standard Commercial Corp. (a) 10,000 166
Suiza Foods Corp. (a) 27,000 1,608
SuperValu, Inc. 22,200 930
Tootsie Roll Industries, Inc. 25,600 1,600
Universal Corp. 15,400 633
Universal Foods Corp. 10,300 435
Weider Nutrition International,
Inc. Class A 10,700 133
Whole Foods Market, Inc. (a) 31,600 1,616
-------
22,329
-------
Financial Services - 23.2%
Advanta Corp. Class A 16,700 436
AlBank Financial Corp. 5,100 260
Allied Capital Corp. (a) 4,160 92
Allied Group, Inc. 5,850 167
Allmerica Financial Corp. 10,600 529
American Bankers Insurance
Group, Inc. 63,900 2,935
American Heritage Life
Investment Corp. 1,400 50
AmerUs Life Holdings, Inc. 2,500 92
Amplicon, Inc. 7,000 115
AMRESCO, Inc. (a) 47,100 1,395
Amwest Insurance Group, Inc. 10,000 145
Arcadia Financial, Ltd. (a) 13,600 101
Arden Realty Group, Inc. 30,000 922
ARM Financial Group, Inc. Class A 6,300 166
Associated Banc-Corp. 2,400 132
Astoria Financial Corp. 24,000 1,338
Bank United Corp. Class A 7,000 341
Bankatlantic Bancorp, Inc. Class A 99,116 1,617
Banknorth Group, Inc. 1,100 71
Bear Steams Cos., Inc. 56,598 2,688
Berkley (W.R.) Corp. 31,700 1,391
BISYS Group, Inc. New (a) 23,000 765
Capital RE Corp. 2,500 155
Capstead Mortgage Corp. 24,500 488
Centris Group, Inc. 67,900 1,515
Centura Banks, Inc. 800 55
Charter One Financial, Inc. 26,612 1,670
Chartwell Re Corp. 2,900 98
Chittenden Corp. 2,125 72
CitiFed Bancorp, Inc. 2,250 88
City National Corp. 94,000 3,472
CNA Surety Corp. (a) 6,500 100
CNB Bancshares, Inc. 1,191 57
Colonial BancGroup, Inc. 50,600 1,743
Commerce Bancshares, Inc. 5,145 349
Commerce Group, Inc. 3,000 98
Community First Bankshares, Inc. 1,800 96
Compass Bancshares, Inc. 10,350 453
Conning Corp. New (a) 3,600 59
CORT Business Services Corp. (a) 34,400 1,370
Cullen Frost Bankers, Inc. 5,500 334
Dain Rauscher Corp. 9,400 649
Data Transmission Network Corp. (a) 5,000 138
Delphi Financial Group, Inc. (a) 5,038 227
Delta Financial Corp. (a) 10,100 135
Dime Bancorp, Inc. 4,700 142
Dime Community Bancorp, Inc. 2,200 52
</TABLE>
22 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Donaldson, Lufkin & Jenrette, Inc. 45,200 $ 3,593
Doral Financial Corp. 6,000 147
Downey Financial Corp. 4,600 131
DST Systems, Inc. (a) 30,000 1,281
Duke Realty Investments, Inc. 39,500 958
Edwards (A.G.), Inc. 48,950 1,946
Enhance Financial Services Group, Inc. 2,500 149
EVEREN Capital Corp. 2,200 104
Everest Reinsurance Holdings, Inc. 22,500 928
Executive Risk, Inc. 24,000 1,676
EXEL, Ltd. 21,000 1,331
FBL Financial Group, Inc. Class A 2,400 96
Fidelity National Financial 82,753 2,576
Financial Fed Corp. (a) 8,500 201
Financial Security Assurance
Holdings, Ltd. 5,300 256
First American Corp. 25,500 1,269
First American Financial Corp. 3,800 281
First Colorado Bancorp, Inc. 4,300 102
First Commonwealth Financial Corp. 2,300 81
First Empire State Corp. 500 233
First Hawaiian, Inc. 3,900 155
First Midwest Bancorp, Inc. 1,400 61
First Mortgage Corp. (a) 22,700 81
First Republic Bank (a) 1,000 32
First Savings Bank of
Washington Bancorp, Inc. 2,100 57
First Virginia Banks, Inc. 7,050 364
FirstFed Financial Corp. (a) 3,400 132
FIRSTPLUS Financial Group, Inc. (a) 63,800 2,432
Hushing Financial Corp. 6,300 148
Fremont General Corp. 78,775 4,313
Gables Residential Trust 40,000 1,105
Guarantee Life Companies, Inc. 1,600 44
Hambrecht & Quist Group (a) 9,600 350
Hibemia Corp. 26,900 506
Highlands Insurance Group, Inc. (a) 4,500 128
Horace Mann Educators Corp. 18,600 529
HUBCO, Inc. 5,500 215
Imperial Bancorp (a) 38,832 1,915
Imperial Credit Industries, Inc. (a) 78,002 1,599
Intercargo Corp. 10,000 129
Jack Henry & Assocociates, Inc. 49,300 1,343
Jefferies Group, Inc. 44,000 1,801
John Alden Financial Corp. 21,700 521
JSB Financial, Inc. 1,300 65
Klamath First Bancorp, Inc. 3,100 66
Lawyers Title Corp. 42,000 1,320
Legg Mason, Inc. 26,000 1,454
Lehman Brothers Holdings, Inc. 24,300 1,239
Leucadia National Corp. 41,900 1,446
Liberty Corp. 1,100 51
Liberty Financial Cos., Inc. 1,500 57
Life USA Holdings, Inc. New (a) 7,000 118
Litchfield Financial Corp. 7,350 134
Long Beach Financial Corp. (a) 37,900 441
Long Island Bancorp, Inc. 6,900 342
MAF Bancorp, Inc. 71,400 2,526
Magna Group, Inc. 5,600 256
Markel Corp. (a) 13,000 2,030
McDonald & Co. Investments 5,800 165
Medical Assurance, Inc. (a) 600 17
Mid Ocean, Ltd. 23,500 1,275
MMI Companies, Inc. 3,800 95
Morgan Keegan, Inc. 57,700 1,461
NAC Reinsurance Corp. 9,400 459
National Data Corp. 25,000 903
Nationwide Financial
Services, Inc. Class A 24,200 874
North Fork Bancorporation, Inc. 23,500 789
Ocean Financial Corp. 1,400 52
Ocwen Financial Corp. (a) 43,000 1,094
Ohio Casualty Corp. 6,200 277
Old Republic International Corp. 23,300 866
Orion Capital Corp. 8,400 390
Pacific Century Financial Corp. 21,600 535
Pacific Gulf Properties, Inc. 7,000 166
Patriot American Hospitality, Inc. 47,500 1,369
Paychex, Inc. 27,000 1,367
Penn Treaty American Corp. (a) 5,000 159
Pennsylvania Real Estate
Investment Trust 7,000 172
Peoples Heritage Financial Group 38,340 1,764
Pioneer Group, Inc. 4,400 122
Policy Management Systems Corp. (a) 4,400 306
Popular, Inc. 38,600 1,901
Presidential Life Corp. 7,000 142
Price (T. Rowe) & Associates, Inc. 20,900 1,314
Provident Bankshares Corp. 2,205 141
Provident Companies, Inc. 6,300 243
Provident Financial Group, Inc. 18,520 898
PXRE Corp. 43,559 1,446
Queens County Bancorp 5,998 237
Raymond James Financial, Inc. 39,900 1,584
Reliance Bancorp, Inc. 2,500 91
Renaissance Holdings, Ltd. 34,500 1,522
</TABLE>
Special Growth Fund 23
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Republic Bancorp, Inc. 3,267 $ 70
Riggs National Corp. 7,300 196
RLI Corp. 3,400 169
Rollins Truck Leasing Corp. 8,900 159
Roslyn Bancorp, Inc. 15,000 349
Saville Systems Ireland PLC - ADR (a) 42,200 1,749
Selective Insurance Group, Inc. 51,800 1,399
Silicon Valley Bancshares (a) 26,600 1,483
SL Green Realty Corp. REIT 13,000 337
Smith (Charles E.) Residential
Realty, Inc. 34,500 1,225
Sotheby's Holdings Co., Inc. Class A 50,000 925
Southern Pacific Funding Corp. (a) 14,000 184
SouthTrust Corp. 20,000 1,265
Sovereign Bancorp, Inc. 79,472 1,649
Sovran Self Storage, Inc. 36,000 1,168
St. Francis Capital Corp. 3,000 152
St. Paul Bancorp, Inc. 8,587 224
Sterling Bancshares, Inc. 30,000 600
SunAmerica, Inc. 39,000 1,667
Sunstone Hotel Investors, Inc. 22,400 386
Susquehanna Bancshares, Inc. 1,950 74
T R Financial Corp. 11,200 372
TCF Financial Corp. 48,000 1,629
TIG Holdings, Inc. 12,600 418
Trans Financial, Inc. 3,400 130
Transatlantic Holdings, Inc. 38,550 2,756
Trenwick Group, Inc. 36,750 1,328
UICI (a) 5,600 195
Union Planters Corp. 25,575 1,738
United Bankshares, Inc. 900 43
United Companies Financial Corp. 27,400 425
United Fire & Casualty Co. 24,450 1,082
Unitrin, Inc. 5,000 321
USF&G Corp. 33,100 730
Valley National Bancorp 2,415 95
Vesta Insurance Group, Inc. 28,000 1,663
Washington Federal, Inc. 9,290 292
Webster Financial Corp. 27,300 1,812
Westamerica Bancorporation 20,000 2,045
WFS Financial, Inc. (a) 16,000 180
Whitney Holding Corp. 1,000 57
XTRA Corp. 2,700 158
--------
133,302
--------
Health Care - 7.7%
Access Health, Inc. (a) 25,900 751
Alpharma, Inc. Class A 6,900 150
American HomePatient, Inc. (a) 6,300 145
ARV Assisted Living, Inc. (a) 12,000 192
Assisted Living Concepts, Inc. (a) 8,000 158
ATL Ultrasound, Inc. (a) 29,800 1,371
Beckman Instruments, Inc. 11,400 456
Beveriy Enterprises, Inc. New (a) 14,100 183
Bindley Western Industries, Inc. 16,000 494
Biogen, Inc. (a) 29,000 1,055
Centocor, Inc. (a) 31,500 1,047
Concentra Managed Care, Inc. (a) 26,000 874
CorVel Corp. (a) 4,000 151
Coventry Corp. (a) 59,900 913
Curative Health Services, Inc. (a) 49,000 1,488
Datascope Corp. (a) 6,600 171
DENTSPLY International, Inc. 51,000 1,555
Diagnostic Products Corp. 2,600 72
Dura Pharmaceuticals, Inc. (a) 44,000 2,018
Genset - ADR (a) 30,000 585
Health Care & Retirement Corp. (a) 27,500 1,107
Health Management
Associates Class A (a) 54,000 1,363
Healthcare Services Group, Inc. (a) 10,000 126
Home Health Corp. of America, Inc. (a) 14,000 143
Hooper Holmes, Inc. 12,000 175
Human Genome Sciences, Inc. (a) 27,000 1,073
ICN Pharmaceuticals, Inc. 47,900 2,338
IDEXX Laboratories, Inc. (a) 13,500 215
Immucor Corp. (a) 16,000 137
Incyte Pharmaceuticals, Inc. (a) 22,000 963
Integrated Health Services, Inc. 31,800 992
Jones Medical Industries, Inc. 7,100 272
Landauer, Inc. 3,700 104
Lincare Holdings, Inc. (a) 48,700 2,776
Mallinckrodt, Inc. 18,900 718
Mariner Health Group, Inc. (a) 15,200 247
Maxxim Medical, Inc. (a) 6,000 131
Medicis Pharmaceutical
Corp. Class A. (a) 31,350 1,607
Monarch Dental Corp. New (a) 11,000 146
NBTY, Inc. (a) 42,500 1,418
NCS HealthCare, Inc. Class A (a) 22,000 578
Neurogen Corp. (a) 3,700 50
NovaCare, Inc. (a) 126,400 1,651
Paragon Health Network, Inc. (a) 1,686 33
Pediatric Services of America, Inc. (a) 7,000 128
Pediatrix Medical Group (a) 14,300 611
Perrigo Co. (a) 37,400 500
PharMerica, Inc. (a) 6,417 67
Physio-Control International Corp. (a) 9,000 142
</TABLE>
24 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Physiometrix, Inc. (a) 30,000 $ 60
PMR Corp. (a) 3,400 68
Protocol Systems, Inc. (a) 9,000 91
Quest Diagnostics, Inc. (a) 12,500 211
Quintiles Transnational Corp. (a) 40,000 1,540
Renal Treatment Centers, Inc. (a) 33,360 1,205
Res-Care, Inc. (a) 6,000 171
Respironics, Inc. (a) 6,000 134
Scios, Inc. (a) 8,900 89
Sola International, Inc. (a) 39,600 1,287
STAAR Surgical Co. New (a) 9,000 155
Steris Corp. (a) 20,000 965
Sun Healthcare Group, Inc. (a) 17,700 343
Sunrise Assisted Living, Inc. (a) 39,100 1,667
Theragenics Corp. (a) 10,400 374
Total Renal Care Holdings, Inc. (a) 32,300 888
Trigon Healthcare, Inc. (a) 30,600 799
U.S. Vision, Inc. New (a) 16,000 142
Universal Health
Services, Inc. Class B (a) 5,800 292
UroCor, Inc. (a) 20,000 124
Urologix, Inc. (a) 8,000 145
Wesley Jessen VisionCare, Inc. New (a) 5,800 226
-------
44,616
-------
Integrated Oils - 1.0%
Cabot Oil & Gas Corp. 11,500 223
Cross Timbers Oil Co. 55,000 1,372
Giant Industries, Inc. 59,700 1,134
Houston Exploration Co. (The) (a) 14,300 263
Lyondell Petrochemical Co. 18,000 477
Murphy Oil Corp. 12,400 672
Sun Co., Inc. 30,600 1,287
Tesoro Petroleum Corp. (a) 12,500 194
-------
5,622
-------
Materials and Processing - 7.6%
ACX Technologies, Inc. (a) 10,500 257
Agrium, Inc. 99,700 1,215
AK Steel Holding Corp. 26,300 465
Albemarle Corp. 12,400 296
Alumax, Inc. (a) 6,100 207
American Buildings Co. New (a) 7,000 176
American Residential Services, Inc. (a) 10,000 156
Applied Extrusion
Technologies, Inc. (a) 22,000 143
AptarGroup, Inc. 29,600 1,643
ARMCO, Inc. (a) 49,600 245
Atchenson Casting Corp. (a) 9,000 146
Ball Corp. 15,500 547
Banta Corp. 30,800 832
Bowater, Inc. 17,900 795
Brush Wellman, Inc. 2,200 54
Building Materials Holding Corp. (a) 12,000 126
BWay Corp. (a) 7,500 172
Calgon Carbon Corp. 7,000 75
CalMat Co. 9,400 262
Cambrex Corp. 3,750 172
Carbide/Graphite
Group, Inc. (The) (a) 4,000 135
Castle & Cook, Inc. New (a) 6,000 101
CB Commercial Real Estate
Services Group, Inc. (a) 1,200 39
Centex Construction Products, Inc. 52,600 1,585
Centex Corp. 25,300 1,592
Channell Commercial Corp. (a) 12,000 144
Chemed Corp. 4,000 166
Citation Corp. (a) 12,100 197
Cleveland-Cliffs, Inc. 9,200 421
Comfort Systems USA, Inc. (a) 40,900 808
Commonwealth Industries, Inc. 2,300 34
Consolidated Papers, Inc. 7,950 424
Crompton & Knowles Corp. 29,800 790
Cyprus Amax Minerals Co. 56,000 861
Dayton Superior Corp. Class A (a) 6,000 99
Deltic Timber Corp. 3,000 82
Dexter Corp. 12,400 536
Easco, Inc. 12,000 156
Ennis Business Forms, Inc. 55,375 512
Ethyl Corp. 10,000 77
Finish Line (The), Inc. Class A (a) 10,000 131
Florida Rock Industries, Inc. 4,800 109
Fort James Corp. 20,625 789
Giant Cement Holding, Inc. (a) 6,600 152
Goodrich (B.F.) Co. 5,200 215
Guilford Mills, Inc. 8,600 235
Halter Marine Group, Inc. (a) 26,550 767
Hanna (M.A.) Co. 11,000 278
Hecla Mining Co. (a) 17,200 85
Home Properties of
New York, Inc. REIT 4,800 130
Hughes Supply, Inc. 8,650 302
IMCO Recycling, Inc. 9,000 145
Inland Steel Industries, Inc. 4,200 72
International Specialty Products (a) 9,700 145
Kaiser Aluminum Corp. (a) 13,400 118
</TABLE>
Special Growth Fund 25
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Kaydon Corp. 27,500 $ 896
Lesco, Inc. 6,000 122
Lone Star Industries, Inc. 23,500 1,248
LTV Corp. 33,000 322
Lubrizol Corp. 15,100 557
Martin Marietta Materials, Inc. 10,900 399
Maverick Tube Corp. (a) 44,100 1,097
McWhorter Technologies, Inc. (a) 1,800 46
Millennium Chemicals, Inc. 30,000 707
Minerals Technologies, Inc. 32,100 1,459
National Steel Corp. Class B (a) 24,400 282
NCI Building Systems, Inc. (a) 30,400 1,056
NL Industries, Inc. (a) 3,700 50
NN Ball & Roller, Inc. 20,000 177
Northland Cranberries, Inc. Class A 12,000 186
Olin Corp. 16,600 778
Oneida, Ltd. 4,500 120
Pan Pacific Retail Properties, Inc. 8,000 171
Penford Corp. 4,000 137
Plum Creek Timber Co. L.P. 35,300 1,066
Pope & Talbot, Inc. 8,400 127
Potlatch Corp. 8,900 383
Quaker Fabric Corp. New (a) 8,000 154
Rayonier, Inc. 9,000 383
Reliance Steel & Aluminum Co. 1,800 54
RMI Titanium Co. (a) 2,300 46
Rock of Ages Corp. Class A (a) 2,700 41
Rock-Tenn Co. Class A 3,200 66
Schulman (A.), Inc. 12,600 317
Shaw Group, Inc. (The) (a) 6,100 140
SIFCO Industries 61,000 1,167
Southdown, Inc. 29,100 1,717
Southern Peru Copper Corp. 6,800 91
SPS Technologies, Inc. (a) 1,600 70
St. Joe Corp. 12,000 1,086
Synalloy Corp. 10,000 147
Texas Industries, Inc. 48,200 2,169
Thomas Industries, Inc. 3,600 71
Timken Co. 19,900 684
TJ International, Inc. 27,200 663
Tractor Supply Co. (a) 10,000 139
Triangle Pacific Corp. (a) 1,700 58
Universal Stainless & Alloy
Products, Inc. (a) 10,000 144
USG Corp. (a) 28,100 1,377
Valley National Gases, Inc. (a) 12,000 128
Webb (Del E.) Corp. 8,900 231
Wellman, Inc. 20,100 392
Wellsford Real Properties, Inc. 5,600 88
Wolverine Tube, Inc. (a) 5,000 155
Zero Corp. 4,000 118
-------
43,698
-------
Miscellaneous - 0.8%
Alexandria Real Estate Equities, Inc. 5,900 186
Griffon Corp. (a) 97,000 1,419
Imperial Credit Commercial
Mortgage Investment Corp. 47,800 699
Imperial Credit Mortgage Holdings 13,200 236
LNR Property Corp. 41,000 969
MAXIMUS, Inc. (a) 37,000 895
Pameco Corp. (a) 8,000 152
Rental Service Corp. (a) 4,400 108
U.S. Rentals, Inc. (a) 5,000 117
-------
4,781
-------
Other Energy - 5.6%
Atwood Oceanics, Inc. (a) 14,000 663
Basin Exploration, Inc. (a) 78,800 1,389
BJ Services Co. (a) 17,500 1,259
Cliffs Drilling Co. (a) 19,700 983
Coho Energy, Inc. (a) 107,980 965
Comstock Resources, Inc. New (a) 35,800 427
Core Laboratories N.Y. (a) 34,600 623
Costilla Energy, Inc. (a) 12,000 130
Dailey Petroleum Services Corp. (a) 2,000 21
Eastern Enterprises, Inc. 9,200 414
ENSCO International, Inc. 36,900 1,236
Evergreen Resources, Inc. (a) 15,000 232
EVI, Inc. (a) 24,200 1,252
Helmerich & Payne, Inc. 14,600 991
HS Resources, Inc. (a) 7,900 109
Hugoton Energy Corp. (a) 16,000 147
Input/Output, Inc. (a) 54,200 1,609
KeySpan Energy Corp. 8,300 306
Louis Dreyfus Natural Gas Corp. (a) 7,100 133
Mallon Resources Corp. New (a) 16,000 130
Marine Drilling Co, Inc. (a) 134,300 2,787
Mitcham Industries, Inc. (a) 8,000 145
Newpark Resources, Inc. (a) 46,800 819
OMNI Energy Services Corp. New (a) 15,100 174
ONEOK, Inc. New (a) 7,100 287
Parallel Petroleum Corp. (a) 8,900 59
Patterson Energy, Inc. (a) 23,000 890
</TABLE>
26 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Pool Energy Services Co. (a) 74,300 $ 1,653
Reading & Bates Corp. (a) 17,500 733
Rowan Cos., Inc. (a) 33,600 1,025
Santa Fe Energy Resources, Inc. (a) 24,900 280
Seacor Smit, Inc. (a) 32,800 1,976
Stolt Comex Seaway SA (a) 29,000 1,406
Supreme Industries, Inc. Class A (a) 11,940 107
Titan Exploration, Inc. New (a) 8,950 85
Transocean Offshore, Inc. 24,000 1,156
Trico Marine Services, Inc. (a) 91,200 2,679
Tuboscope Corp. (a) 18,400 443
Unit Corp. (a) 10,000 96
Vintage Petroleum, Inc. 80,900 1,537
Weatherford Enterra, Inc. (a) 1,200 53
Willbros Group, Inc. (a) 7,000 105
Wiser Oil Co. 68,600 969
-------
32,483
-------
Producer Durables - 6.6%
AFC Cable Systems, Inc. (a) 9,625 279
Allied Waste Industries, Inc. (a) 48,100 1,121
ANTEC Corp. (a) 11,000 172
Bell Industries (a) 57,109 785
C&D Technologies, Inc. 4,000 193
CFM Technologies, Inc. (a) 10,000 152
Cognex Corp. (a) 35,500 967
Cohu, Inc. 61,000 1,868
Columbus McKinnon Corp. 50,000 1,212
Commercial Intertech Corp. 3,200 66
Computer Products, Inc. (a) 36,500 826
Cuno, Inc. (a) 6,000 92
Daniel Industries, Inc. 6,800 131
DeCrane Aircraft Holdings, Inc. (a) 5,700 90
Detroit Diesel Corp. (a) 3,000 71
EG&G, Inc. 7,000 146
FARO Technologies, Inc. (a) 12,000 139
Farr Co. (a) 10,500 157
FLIR Systems, Inc. (a) 10,000 203
Flow International Corp. (a) 15,000 141
Franklin Electric Co., Inc. 2,500 153
Gardner Denver Machinery, Inc. (a) 49,800 1,261
Gemstar International Group, Ltd. (a) 54,500 1,294
GenCorp, Inc. 12,900 323
General Cable Corp. New 17,300 626
Graco, Inc. 2,600 97
Holophane Corp. (a) 7,000 173
JLK Direct
Distribution, Inc. Class A (a) 38,900 1,089
Kaman Corp. Class A 9,000 $ 147
Kellstrom Industries, Inc. (a) 14,100 349
Kennametal, Inc. 3,600 187
KLA Tencor Corporation (a) 22,600 872
Knoll, Inc. (a) 9,300 299
Lennar Corp. 107,600 2,320
Litton Industries, Inc. (a) 23,800 1,369
Mettler-Toledo International, Inc. New (a) 5,600 97
Middleby Corp. (The) (a) 6,300 49
Molex, Inc. Class A 42,187 1,213
NACCO Industries, Inc. Class A 12,900 1,383
National Service Industries, Inc. 9,800 486
Novellus Systems, Inc. (a) 25,000 808
OYO Geospace Corp. (a) 8,000 149
Pittway Corp. Class A 22,467 1,564
Powell Industries, Inc. (a) 10,000 144
Pulte Corp. 7,800 326
Regal-Beloit Corp. 36,300 1,073
Ryland Group, Inc. 4,200 99
Schult Homes Corp. 4,200 87
Standard Pacific Corp. 85,800 1,351
Starrett (L.S.) Co. Class A 28,500 1,042
STM Wireless, Inc. Class A (a) 20,000 168
Superior TeleCom, Inc. (a) 7,000 242
TB Wood's Corporation 6,000 128
Tecumseh Products Co. Class A 4,600 224
Teradyne, Inc. (a) 62,682 2,006
Terex Corp. New (a) 60,600 1,424
Thiokol Corp. 14,400 1,170
Toll Brothers, Inc. (a) 48,000 1,284
TransTechnology Corp. 5,600 159
Triumph Group, Inc. New (a) 4,000 133
Uniphase Corp. (a) 41,900 1,718
Worldtex, Inc. (a) 15,000 119
Zurn Industries, Inc. 5,600 176
-------
38,192
-------
Technology - 12.1%
ADC Telecommunications, Inc. (a) 14,600 610
Anixter International, Inc. (a) 17,000 280
Aspen Technology, Inc. (a) 30,000 1,016
Avant ! Corp. (a) 44,000 737
Avid Technology, Inc. (a) 41,700 1,115
BEA Systems, Inc. (a) 6,700 116
Bel Fuse, Inc. (a) 10,000 191
Benchmark Electronics, Inc. (a) 3,100 69
Berg Electronics Corp. (a) 60,000 1,365
BGS Systems, Inc. 4,000 136
</TABLE>
Special Growth Fund 27
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ------
<S> <C> <C>
Boole & Babbage, Inc. (a) 6,000 $ 179
BTG, Inc. (a) 14,000 137
Cable Design Technologies Corp. (a) 49,900 1,940
CACI International, Inc. Class A (a) 6,000 118
Cambridge Technology
Partners, Inc. (a) 45,000 1,873
CBT Group PLC - ADR (a) 38,400 3,144
Celeritek, Inc. (a) 10,000 138
CFI ProServices, Inc. (a) 12,000 144
CHS Electronics, Inc. (a) 49,400 827
Ciber, Inc. (a) 60,400 3,503
Cirrus Logic, Inc. (a) 17,700 188
Citrix Systems, Inc. (a) 16,100 1,224
Comarco, Inc. (a) 6,000 130
Complete Business Solutions, Inc. (a) 2,400 103
Compuware Corp. (a) 92,400 2,957
Cotelligent Group, Inc. (a) 9,000 171
Creative Technology, Ltd. (a) 35,100 768
CSG Systems International, Inc. (a) 5,300 212
Dallas Semiconductor Corp. 25,500 1,039
Datum, Inc. (a) 3,300 47
Davox Corp. (a) 30,300 977
Digital Lightwave, Inc. (a) 7,700 101
Discreet Logic, Inc. (a) 21,400 455
Dr. Solomon's Group PLC - ADR (a) 47,500 1,508
Electro Scientific Industries, Inc. (a) 26,000 988
Electronics For Imaging, Inc. (a) 18,000 298
Esterline Technologies Corp. (a) 5,900 212
Evans & Sutherland Computer Corp. (a) 2,400 70
Exar Corp. (a) 8,000 131
Excel Switching Corp. New (a) 9,000 161
GeoTel Communications Corp. (a) 4,900 77
Globecomm Systems, Inc. (a) 15,000 169
Harmon Industries, Inc. 7,000 189
Harmonic Lightwaves, Inc. (a) 12,000 130
HNC Software, Inc. (a) 63,200 2,710
Hyperion Software Corp. (a) 64,100 2,292
IDX Systems Corp. (a) 25,500 944
Information Management Resources, Inc. (a) 39,600 1,485
Integrated Device Technology (a) 47,800 448
Integrated Silicon Solution, Inc. (a) 109,000 831
Inter-Tel, Inc. 3,200 62
Intersolv, Inc. (a) 75,800 1,535
Keane, Inc. (a) 17,600 715
Kronos, Inc. (a) 3,900 119
LSI Logic Corp. (a) 60,100 1,187
Mercury Interactive Corp. (a) 31,900 845
MicroAge, Inc. (a) 19,700 297
Midway Games, Inc. (a) 4,400 $ 80
Network Associates, Inc. (a) 30,700 1,618
Newport News Shipbuilding, Inc. 12,500 318
ORBIT/FR, Inc. (a) 9,000 145
OSI Systems, Inc. New (a) 13,000 158
Par Technology Corp. (a) 11,000 100
Park Electrochemical Corp. 4,600 131
PeopleSoft, Inc. (a) 41,000 1,589
Pericom Semiconductor Corp. New (a) 16,000 112
Photronics, Inc. (a) 4,000 97
Platinum Technology, Inc. (a) 47,000 1,328
PMC - Sierra, Inc. (a) 14,600 453
Progress Software Corp. (a) 4,200 90
Sandisk Corp. (a) 4,000 80
ScanSource, Inc. (a) 8,000 159
SCI Systems, Inc. (a) 27,400 1,194
SeaChange International, Inc. (a) 14,000 98
Security Dynamics
Technologies, Inc. (a) 33,000 1,180
Sequent Computer Systems, Inc. (a) 34,000 680
SMART Modular Technologies, Inc. (a) 44,800 1,019
SmarTalk Teleservices, Inc. (a) 52,800 1,201
SpecTran Corp. (a) 15,000 144
Splash Technology Holdings, Inc. (a) 32,400 729
STAR Telecommunications, Inc. (a) 19,700 633
Storage Technology Corp. (a) 26,700 1,654
Structural Dynamics Research Corp. (a) 30,200 680
Symantec Corp. (a) 49,200 1,079
Tech-Sym Corp. (a) 34,600 880
Tellabs, Inc. (a) 28,000 1,475
Tracor, Inc. New (a) 6,700 204
Transaction Systems
Architects, Inc. Class A (a) 20,000 755
USCS International, Inc. (a) 30,000 510
Verilink Corp. (a) 29,000 174
Veritas Software Corp. (a) 56,841 2,878
Viasoft, Inc. (a) 38,600 1,631
Vitesse Semiconductor Corp. (a) 22,800 861
Wonderware Corp. (a) 11,400 161
-------
69,691
-------
Utilities - 4.0%
Aliant Communications, Inc. 5,100 160
American Water Works, Inc. 12,600 344
Aquarion Co. 1,000 35
Black Hills Corp. 1,600 56
Boston Edison Co. 16,200 614
</TABLE>
28 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Cablevision Systems Corp. Class A (a) 7,300 $ 699
Calpine Corp. (a) 9,000 134
Centennial Cellular Corp. Class A (a) 71,500 1,439
Central Hudson Gas & Electric Corp. 4,600 202
Central Louisiana Electric Co., Inc. 2,000 65
Central Maine Power Co. 10,000 153
Century Telephone Enterprises, Inc. 10,700 533
Colonial Gas Co. 2,700 78
Commonwealth Energy System 2,700 90
Commonwealth Telephone
Enterprises, Inc. (a) 5,700 148
Corecomm, Inc. (a) 71,066 728
CTG Resources, Inc. 4,100 107
Delmarva Power & Light Co. 14,400 332
DPL, Inc. 23,800 684
E'town Corp. 1,000 40
Empire District Electric Co. 2,500 49
Energen Corp. 1,900 76
Enova Corp. 24,100 652
Florida Progress Corp. 27,700 1,087
General Communication, Inc. Class A (a) 22,000 146
Hawaiian Electric Industries, Inc. 5,000 204
Idaho Power Co. 7,200 271
Illinova Corp. 33,600 905
Indiana Energy, Inc. 3,200 105
IXC Communications, Inc. (a) 28,300 888
Jones Intercable, Inc. Class A (a) 87,100 1,530
Laclede Gas Co. 1,200 34
MCN Corp. 1,000 40
MDU Resources Group, Inc. 5,100 161
Metrocall, Inc. (a) 36,000 178
MidAmerican Energy Holdings Co. 15,700 345
Minnesota Power & Light Co. 9,800 427
Montana Power Co. 23,400 745
National Fuel & Gas Co. 9,900 482
New England Electric System 17,800 761
New Jersey Resources Corp. 2,300 92
New York State Electric & Gas Corp. 18,600 660
Niagara Mohawk Power Corp. (a) 45,800 481
NICOR, Inc. 8,900 376
Northwest Natural Gas Co. 1,400 43
Northwestern Public Service Co. 2,800 64
NUI Corp. 1,300 37
Orange & Rockland Utilities, Inc. 4,300 200
Pacific Gateway Exchange, Inc. (a) 5,600 301
Pennsylvania Enterprises, Inc. 1,700 43
Peoples Energy Corp. 6,700 264
Piedmont Natural Gas Co., Inc. 4,100 147
Primus Telecommunications
Group, Inc. (a) 9,000 146
Public Service Co. of New Mexico 17,300 410
Public Service Co. of North Carolina, Inc. 1,700 39
Questar Corp. 4,400 196
Rochester Gas & Electric Corp. 17,900 609
SCANA Corp. 3,800 114
Sierra Pacific Resources 9,300 349
SIG Corp., Inc. 2,800 82
Southwestern Energy Co. 6,900 89
TNP Enterprises, Inc. 8,300 276
UGI Corp. 9,600 281
United Illuminating Co. 6,500 299
UtiliCorp United, Inc. 21,500 834
Washington Gas & Light Co. 8,900 275
Western Resources, Inc. 8,100 348
WPS Resources Corp. 5,600 189
--------
22,971
--------
Total Common Stocks
(cost $424,071) 536,300
--------
Convertible Preferred Stocks - 0.1%
Callon Petroleum Co. Series A 4,000 154
Golden Books Financial Trust (conv.) 3,000 157
--------
Total Convertible Preferred Stocks
(cost $299) 311
--------
Preferred Stock - 0.2%
Finova Finance Trust 13,000 910
--------
Total Preferred Stock
(cost $654) 910
--------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C>
Long-Term Investments - 0.0%
Central Garden & Pet Co. (conv.)
6.000% due 11/15/03 $ 108 113
Titan Corp. (conv.)
8.250% due 11/01/03 52 84
-------
Total Long-Term Investments
(cost $160) 197
-------
</TABLE>
Special Growth Fund 29
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
-------- --------
<S> <C> <C>
Short-Term Investments - 6.2%
Frank Russell Investment Company
Money Market Fund
due on demand (b) $ 33,485 $ 33,485
United States Treasury Notes (c)
5.125% due 04/30/98 2,098 2,097
--------
Total Short-Term Investments
(cost $35,583) 35,582
--------
Total Investments
(identified cost $460,767)(d) - 99.6% 573,300
Other Assets and Liabilities,
Net 0.4% 2,488
--------
Net Assets - 100.0% $ 575,788
=========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
NV - Nonvoting
PLC - Public Limited Company
REIT - Real Estate Investment Trust
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciated)
Contracts (000)
--------- ------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S&P 500 Index Futures Contracts
expiration date 03/98 32 $ 3
S&P 400 Midcap Index Futures
Contracts expiration date 03/98 177 540
------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased((S)) $ 543
============
</TABLE>
(S) At December 31, 1997, United States Treasury Notes
valued at $2,097 were held as collateral by the
custodian in connection with futures contracts
purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
30 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $460,767)(Note 2)................................................... $ 573,300
Receivables:
Dividends and interest................................................................................. 625
Investments sold....................................................................................... 970
Fund shares sold....................................................................................... 6,670
Daily variation margin on futures contracts (Notes 2 and 3)............................................ 122
--------------
Total Assets........................................................................................ 581,687
Liabilities
Payables:
Investments purchased.............................................................. $ 3,745
Fund shares redeemed............................................................... 1,497
Accrued fees to affiliates (Note 4)................................................ 535
Other accrued expenses............................................................. 122
-----------------
Total Liabilities................................................................................... 5,899
-------------
Net Assets................................................................................................. $ 575,788
=============
Net Assets consist of:
Undistributed net investment income........................................................................ $ 258
Accumulated net realized gain (loss)....................................................................... 4,018
Unrealized appreciation (depreciation) on:
Investments............................................................................................. 112,533
Futures contracts....................................................................................... 543
Shares of beneficial interest.............................................................................. 126
Additional paid-in capital................................................................................. 458,310
-------------
Net Assets................................................................................................. $ 575,788
=============
Net Asset Value, offering and redemption price per share:
Class S ($572,635,141 divided by 12,523,861 shares of $.01 par value
shares of beneficial interest outstanding).......................................................... $ 45.72
=============
Class C ($3,152,591 divided by 69,408 shares of $.01 par value
shares of beneficial interest outstanding)........................................................... $ 45.42
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 31
<PAGE>
Special Growth Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends................................................................................... $ 4,402
Dividends from Money Market Fund (Note 5)................................................... 1,889
Interest.................................................................................... 120
----------------
Total Investment Income.................................................................. 6,411
Expenses (Notes 1, 2 and 4):
Management fees....................................................... $ 4,557
Custodian fees........................................................ 371
Transfer agent fees................................................... 433
Bookkeeping service fees.............................................. 24
Professional fees..................................................... 20
Trustees' fees........................................................ 4
Miscellaneous......................................................... 51
Registration fees
Class S............................................................ 68
Class C............................................................ 1
Distribution fees - Class C........................................... 8
Shareholder servicing fees - Class C.................................. 5
------------------
Total Expenses........................................................................... 5,542
-----------------
Net investment income........................................................................... 869
-----------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments........................................................... 60,452
Futures contracts..................................................... 5,882
Options written....................................................... 13 66,347
------------------
Net change in unrealized appreciation or depreciation of:
Investments........................................................... 53,348
Futures contracts..................................................... 564
Options written....................................................... (5) 53,907
------------------ -----------------
Net gain (loss) on investments.................................................................. 120,254
-----------------
Net increase (decrease) in net assets resulting from operations................................. $ 121,123
=================
</TABLE>
The accompanying notes are an integral part of the financial statements.
32 Special Growth Fund
<PAGE>
Special Growth Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income..................................................................... $ 869 $ 988
Net realized gain (loss).................................................................. 66,347 44,803
Net change in unrealized appreciation or depreciation..................................... 53,907 14,118
-------------- --------------
Net increase (decrease) in net assets resulting from operations...................... 121,123 59,909
-------------- --------------
From Distributions to Shareholders:
Net investment income - Class S........................................................... (842) (1,043)
Net realized gain on investments
Class S................................................................................. (68,942) (45,015)
Class C................................................................................. (356) (87)
-------------- --------------
Total Distributions to Shareholders.................................................. (70,140) (46,145)
-------------- --------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)............... 130,847 66,516
-------------- --------------
Total Net Increase (Decrease) in Net Assets................................................... 181,830 80,280
Net Assets
Beginning of period....................................................................... 393,958 313,678
-------------- --------------
End of period (including undistributed net investment income of
$258 and $231, respectively)............................................................ $ 575,788 $ 393,958
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 33
<PAGE>
Special Growth Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................................... $ 40.79 $ 39.17 $ 33.47 $ 35.82 $ 36.63
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income...................................................... .08 .12 .18 .16 .07
Net realized and unrealized gain (loss) on investments..................... 11.18 6.87 9.25 (.71) 5.22
------- ------- ------- ------- -------
Total Income From Investment Operations.................................. 11.26 6.99 9.43 (.55) 5.29
------- ------- ------- ------- -------
Less Distributions:
Net investment income...................................................... (.08) (.12) (.21) (.10) (.07)
Net realized gain on investments........................................... (6.25) (5.25) (3.52) (.85) (6.03)
In excess of net realized gain on investments.............................. -- -- -- (.85) --
------- ------- ------- ------- -------
Total Distributions...................................................... (6.33) (5.37) (3.73) (1.80) (6.10)
------- ------- ------- ------- -------
Net Asset Value, End of Period................................................. $ 45.72 $ 40.79 $ 39.17 $ 33.47 $ 35.82
======= ======= ======= ======= =======
Total Return (%)............................................................... 28.77 18.65 28.52 (3.71) 15.48
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................................... 572,635 393,048 313,678 229,077 188,891
Ratios to average net assets (%):
Operating expenses....................................................... 1.15 1.19 1.22 1.20 1.31
Net investment income.................................................... .18 .28 .49 .50 .19
Portfolio turnover rate (%)................................................ 97.19 118.13 87.56 55.40 91.97
Average commission rate paid per share
of security ($ omitted).................................................. .0402 .0384 N/A N/A N/A
</TABLE>
34 Special Growth Fund
<PAGE>
Special Growth Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996*
--------- ----------
<S> <C> <C>
Net Asset Value, Beginning of Period................................................................ $ 40.75 $ 43.48
--------- ----------
Income From Investment Operations:
Net investment income (loss).................................................................... (.13) (.02)
Net realized and unrealized gain (loss) on investments.......................................... 11.05 1.63
--------- ----------
Total Income From Investment Operations....................................................... 10.92 1.61
--------- ----------
Less Distributions:
Net realized gain on investments................................................................ (6.25) (4.34)
--------- ----------
Net Asset Value, End of Period...................................................................... $ 45.42 $ 40.75
========= ==========
Total Return (%).................................................................................... 27.90 4.04(a)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)........................................................ 3,153 910
Ratios to average net assets (%)(b):
Operating expenses............................................................................ 1.83 1.89
Net investment income (loss).................................................................. (.51) (.38)
Portfolio turnover rate (%)(b).................................................................. 97.19 118.13
Average commission rate paid per share
of security ($ omitted)....................................................................... .0402 .0384
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
Special Growth Fund 35
<PAGE>
Equity Income Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To achieve a high level of current income, while maintaining the
potential for capital appreciation.
Invests in: Primarily income-producing U.S. equity securities.
Strategy: The Fund uses a multi-manager strategy intended to achieve a high
level of current income and the potential for capital appreciation with moderate
risk. The Fund employed the investment management services of three managers
with three separate approaches to Value-oriented investment.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Equity Income - Class S Russell 1000(R) Value ** Lipper(C) Equity Income++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $11,942 $12,316 $11,367
1989 $15,001 $15,418 $13,698
1990 $13,965 $14,172 $12,839
1991 $17,809 $17,659 $16,220
1992 $19,859 $20,097 $17,742
1993 $22,484 $23,740 $20,185
1994 $22,637 $23,268 $19,674
1995 $30,506 $32,191 $25,530
1996 $37,050 $39,157 $30,271
1997 $49,496 $52,933 $38,606
</TABLE>
<TABLE>
<CAPTION>
Equity Income Fund - Class S Russell 1000(R)Value Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- ---------------- ------------- ----------- ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 Year $ 13,359 33.59% 1 Year $ 13,518 35.18%
5 Years $ 24,924 20.04%(S) 5 Years $ 26,338 21.37%(S)
10 Years $ 49,484 17.34%(S) 10 Years $ 52,918 18.13%(S)
<CAPTION>
Equity Income Fund - Class C +++ Lipper(C) Equity Income Funds Average
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- ---------------- ------------- ----------- ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 Year $ 13,268 32.68% 1 Year $ 12,754 27.54%
5 Years $ 24,722 19.85%(S) 5 Years $ 21,760 16.82%(S)
10 Years $ 49,105 17.25%(S) 10 Years $ 38,606 14.46%(S)
</TABLE>
* The Equity Income Fund - Class S assumes initial investment on January 1,
1988.
** Russell 1000(R) Value Index includes stocks from the Russell 1000(R) Index
with a less than average growth orientation. The Index represents the
universe of stocks from which most price-driven managers typically select.
++ Lipper(C) Equity Income Funds Average is the average total return for the
universe of funds within the Equity Income Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
+++ The Equity Income Fund - Class C - For the period, November 4, 1996
(commencement of sales) to December 31, 1997, shareholder service and Rule
12b-1 distribution fees were charged. Total return would have been lower had
these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
(S) Annualized.
36 Equity Income Fund
<PAGE>
Equity Income Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Equity Income Fund Class S and Class C
shares reflected total returns of 33.6% and 32.7%, respectively, as compared to
the Russell 1000(R) Value Index, which rose 35.2%. The Fund's slight
underperformance relative to the Russell 1000 Value Index was due primarily to
poor results from holdings in the capital goods and consumer non-durable
sectors. The Fund managed to outperform the average return of funds in the
Lipper(C) Equity Income Funds Universe.
Portfolio Highlights
Despite the strong performance of Growth stocks through the first half of 1997,
value-oriented stocks finished the year ahead with the Russell 1000 Value Index
up 35.2% versus the 30.5% return of the Russell l000(R) Growth Index. The
differentiating factor proved to be the strong performance of financial services
stocks throughout the year and the strong year end performance of the utilities
sector, both predominantly value sectors. However, the managers in the Fund
underweighted utilities in favor of capital expenditure sensitive sectors, such
as capital goods and technology, both of which were hurt by the market's concern
over prospects for economic recessions in Asia during the last four months of
the year.
These factors posed challenges to managers in the Fund, particularly given their
emphasis on midcap shares, which appeared to offer both better growth prospects
and more attractive valuations. The strong gains of telephone utilities proved
somewhat unexpected, as a large buyout produced some unusually large gains for
the acquisition target, MCI, but also added to the enthusiasm towards AT&T.
Unfortunately, the fund had its largest telephone utilities position in
Worldcom, an underperformer, and the eventual acquirer of MCI. Earnings
disappointments and weakened prospects tied to Asia's problems also resulted in
losses for several other holdings, including disk drive-maker Seagate
Technologies, and Foster and Wheeler, a global construction company.
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Bell Atlantic Corp. 2.9%
Fleet Financial Group, Inc. 2.5
SBC Communications, Inc. 2.3
GTE Corp. 2.1
Chase Manhattan Corp. 2.1
Allstate Corp. 2.0
International Business Machines Corp. 2.0
Ford Motor Co. 1.7
Citicorp 1.6
Banc One Corp. 1.5
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 17.8x
Portfolio Price/Book Ratio 2.54x
Market Capitalization - $ - Weighted Average 27.71 Bil
Number of Holdings 190
Money Managers Styles
Brandywine Asset Management, Inc. Value
Equinox Capital Management, Inc. Value
Trinity Investment Management Corp. Value
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Equity Income Fund 37
<PAGE>
Equity Income Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- ----------
<S> <C> <C>
Common Stocks - 93.4%
Auto and Transportation - 6.4%
AMR Corp. (a) 19,200 $ 2,467
Borg-Warner Automotive, Inc. 7,900 411
Chrysler Corp. 80,100 2,818
CSX Corp. 11,400 616
Delta Air Lines, Inc. 10,900 1,297
Federal Express Corp. (a) 11,000 672
Ford Motor Co. 79,700 3,880
General Motors Corp. 7,400 449
Trinity Industries, Inc. 6,600 294
UAL Corp. (a) 18,000 1,665
----------
14,569
----------
Consumer Discretionary - 6.7%
Black & Decker Corp. 14,900 582
Carnival Corp. Class A 22,700 1,257
Dayton Hudson Corp. 16,500 1,114
Donnelley (R.R.) & Sons Co. 5,600 209
Eastman Kodak Co. 7,800 474
Harrah's Entertainment, Inc. (a) 24,200 457
JC Penney & Co., Inc. 31,400 1,894
Kmart Corp. (a) 42,100 487
Maytag Corp. 21,400 798
Reader's Digest Association, Inc. Class A 9,500 224
Reebok International, Ltd. (a) 10,400 300
Sears Roebuck & Co. 28,800 1,303
Time Warner, Inc. 13,600 843
Toys "R" Us, Inc. (a) 19,100 600
Tribune Co. 24,800 1,544
Viacom, Inc. Class B (a) 16,700 692
Wal-Mart Stores, Inc. 27,100 1,069
Whirlpool Corp. 24,500 1,348
----------
15,195
----------
Consumer Staples - 3.9%
American Stores Co. 24,400 502
Anheuser-Busch Cos., Inc. 27,800 1,223
IBP, Inc. 49,700 1,040
PepsiCo, Inc. 33,800 1,232
Philip Morris Cos., Inc. 12,800 580
RJR Nabisco Holdings Corp. 57,940 2,173
Sara Lee Corp. 21,500 1,211
Universal Corp. 6,700 275
UST Corp. 18,200 672
----------
8,908
----------
Financial Services - 26.0%
Ahmanson (H.E) & Co. 25,400 1,700
Allstate Corp. 50,020 4,546
AMBAC, Inc. 47,100 2,167
American General Corp. 9,500 514
Banc One Corp. 63,210 3,433
BankAmerica Corp. 25,900 1,891
Bankers Trust New York Corp. 6,100 686
Barnett Banks, Inc. 9,500 683
Beneficial Corp. 7,200 599
Chase Manhattan Corp. 43,568 4,771
Chelsea GCA Realty, Inc. 5,800 221
Chubb Corp. (The) 15,500 1,172
CIT Group, Inc. (The) Class A (a) 7,900 255
Citicorp 27,500 3,477
Colonial Properties Trust 14,000 422
Duke Realty Investments, Inc. 17,800 432
Equity Residential Properties Trust 25,200 1,274
Everest Reinsurance Holdings, Inc. 10,900 450
Federal National Mortgage Association 37,200 2,123
First Chicago NBD Corp. 19,842 1,657
First Union Corp. 18,000 922
Fleet Financial Group, Inc. 73,400 5,500
Foundation Health Systems, Inc. (a) 16,790 376
Hartford Financial Services Group (The). Inc. 6,500 608
Horace Mann Educators Corp. 12,000 341
Kilroy Realty Corp. 11,100 319
Mid Ocean, Ltd. 7,100 385
Morgan (J.P.) & Co., Inc. 3,900 440
Morgan Stanley, Dean Witter, Discover and Co. 37,300 2,205
National City Corp. 15,900 1,045
NationsBank Corp. 17,000 1,034
Oasis Residential, Inc. 12,300 274
Old Republic International Corp. 17,600 654
Pacific Century Financial Corp. 30,200 747
PMI Group, Inc. (The) 13,800 998
Prentiss Properties Trust 9,400 263
Provident Companies, Inc. 28,600 1,105
Reliance Group Holdings, Inc. 75,500 1,066
Republic New York Corp. 17,300 1,975
Ryder System, Inc. 41,800 1,369
Spieker Properties, Inc. 11,000 472
TIG Holdings, Inc. 7,600 252
Transamerica Financial Corp. 7,600 809
Travelers, Inc. 28,718 1,547
Washington Mutual, Inc. 30,000 1,913
----------
59,092
----------
</TABLE>
38 Equity Income Fund
<PAGE>
Equity Income Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Health Care - 4.0%
Aetna, Inc. 26,600 $ 1,877
Baxter International, Inc. 21,200 1,069
Bergen Brunswig Corp. Class A 10,200 430
Bristol-Myers Squibb Co. 16,650 1,576
Columbia/HCA Healthcare Corp. 25,400 753
Genzyme Corp. (a.) 15,000 414
Humana, Inc. (a.) 20,000 415
McKesson Corp. 5,000 541
Schering-Plough Corp. 19,400 1,205
U.S. Surgical Corp. 22,900 671
--------
8,951
--------
Integrated Oils - 9.3%
Amerada Hess Corp. NPV 29,700 1,630
Ashland, Inc. 43,800 2,351
Atlantic Richfield Co. 27,600 2,211
British Petroleum Co. PLC - ADR 10,988 876
Coastal Corp. 22,700 1,406
Equitable Resources, Inc. 25,300 895
Exxon Corp. 35,800 2,191
Kerr-McGee Corp. 19,800 1,254
Lyondell Petrochemical Co. 16,332 433
Mobil Corp. 13,000 938
Murphy Oil Corp. 9,600 520
Phillips Petroleum Co. 30,300 1,473
Tenneco, Inc. 13,200 521
Texaco, Inc. 33,600 1,827
USX-Marathon Group 78,000 2,633
--------
21,159
--------
Materials and Processing - 8.5%
Alumax, Inc. (a.) 29,000 986
Archer-Daniels-Midland Co. 25,521 553
Armstrong World Industries, Inc. 12,400 927
Bowater, Inc. 13,900 618
Burlington Industries, Inc. (a.) 15,100 209
Crown Vantage, Inc. (a.) 8,340 58
Cyprus Amax Minerals Co. 19,300 297
Eastman Chemical Co. 23,200 1,382
FMC Corp. (a) 20,100 1,353
Fort James Corp. 40,100 1,534
Geon Co. 11,400 266
Georgia Pacific Corp. 4,400 267
Great Lakes Chemical Corp. 13,700 615
IMC Global, Inc. 8,800 288
Inco, Ltd. 18,600 316
International Paper Co. 21,600 932
Lafarge Corp. 16,200 479
LTV Corp. 29,900 291
Lubrizol Corp. 12,200 450
Mead Corp. 41,200 1,154
Phelps Dodge Corp. 9,600 598
Reynolds Metals Co. 15,000 900
Rohm & Haas Co. 4,500 431
Solutia, Inc. 14,300 382
Temple-Inland, Inc. 11,100 581
Timken Co. 19,000 653
UCAR International, Inc. (a.) 15,300 611
Union Carbide Corp. 15,800 678
USX-U.S. Steel Group 30,800 962
Westvaco Corp. 20,400 641
--------
19,412
--------
Other Energy - 1.6%
Apache Corp. 13,700 481
Elf Aquitaine - ADR 11,600 680
Helmerich & Payne, Inc. 11,600 787
Occidental Petroleum Corp. 18,800 551
Santa Fe Energy Resources, Inc. (a.) 46,500 523
Valero Energy Corp. 21,500 676
--------
3,698
--------
Producer Durables - 5.3%
AGCO Corp. 36,500 1,068
Caterpillar, Inc. 25,600 1,243
Foster Wheeler Corp. 27,900 755
General Electric Co. 23,900 1,754
Harnischfeger Industries, Inc. 27,200 960
Hitachi, Ltd. - ADR 6,300 436
Honeywell, Inc. 6,800 466
Johnson Controls, Inc. 31,000 1,480
Lexmark International Group, Inc.
Class A (a.) 13,100 498
Mark IV Industries, Inc. 29,400 643
Matsushita Electric Industrial Co.,
Ltd. - ADR 3,000 456
Parker-Hannifin Corp. 11,100 509
Raytheon Co. Class A 497 25
Sundstrand Corp. 9,400 473
Thiokol Corp. 7,400 601
Thomas & Betts Corp. 12,800 605
--------
11,972
--------
</TABLE>
Equity Income Fund 39
<PAGE>
Equity Income Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Technology - 4.3%
Data General Corp. (a) 25,400 $ 443
Electronic Data Systems Corp. 29,062 1,277
Hewlitt-Packard Co. 12,600 788
International Business Machines Corp. 42,300 4,423
MEMC Electronic Materials, Inc. (a) 25,700 392
Motorola, Inc. 16,900 964
Seagate Technology (a) 29,000 558
Textron, Inc. 3,800 238
VLSI Technology, Inc. (a) 24,700 580
---------
9,663
---------
Utilities - 17.4%
AT&T Corp. 30,100 1,844
BCE, Inc. 30,000 1,000
Bell Atlantic Corp. 70,865 6,449
Columbia Gas System, Inc. 7,800 613
Consolidated Edison Co. 20,300 832
DTE Energy Co. 43,400 1,506
Edison International 60,700 1,650
Entergy Corp. 76,500 2,290
GPU, Inc. 22,300 939
GTE Corp. 91,372 4,774
New York State Electric & Gas Corp. 25,300 898
Niagara Mohawk Power Corp. (a) 41,200 433
PacifiCorp. 38,400 1,049
Peco Energy Co. 24,700 599
PG&E Corp. 87,865 2,674
Public Service Enterprise Group, Inc. 32,200 1,020
SBC Communications, Inc. 70,279 5,148
Southern Co. 18,400 476
Southern New England
Telecommunications Corp. 23,100 1,162
Texas Utilities Co. 24,100 1,002
U.S. West Communications Group 46,300 2,089
WorldCom, Inc. (a) 39,600 1,198
---------
39,645
---------
Total Common Stocks
(cost $176,183) 212,264
---------
Short-Term Investments - 4.9%
Frank Russell Investment Company
Money Market Fund,
due on demand (b) $ 10,235 $ 10,235
United States Treasury Notes
5.125% due 04/30/98 (c) 1,000 999
---------
Total Short-Term Investments
(cost $11,234) 11,234
---------
Total Investments
(identified cost $187,417)(d) - 98.3% 223,498
Other Assets and Liabilities,
Net - 1.7% 3,792
---------
Net Assets - 100.0% $ 227,290
=========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depository Receipt
NPV - No Par Value
PLC - Public Limited Company
The accompanying notes are an integral part of the financial statements
40 Equity Income Fund
<PAGE>
Equity Income Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/98 28 $ 73
S & P Barra Value Futures Contracts
expiration date 03/98 28 (1)
---------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 72
=========
</TABLE>
((S)) At December 31, 1997, United States Treasury Notes valued at $999 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
Equity Income Fund 41
<PAGE>
Equity Income Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $187,417)(Note 2)............................................. $ 223,498
Receivables:
Dividends and interest........................................................................... 527
Investments sold................................................................................. 780
Fund shares sold................................................................................. 4,641
Daily variation margin on futures contracts (Notes 2 and 3)...................................... 14
-------------
Total Assets.................................................................................. 229,460
Liabilities
Payables:
Investments purchased............................................................... $ 1,433
Fund shares redeemed................................................................ 475
Accrued fees to affiliates (Note 4)................................................. 197
Other accrued expenses.............................................................. 65
------------
Total Liabilities............................................................................. 2,170
--------------
Net Assets........................................................................................... $ 227,290
==============
Net Assets consist of:
Accumulated net realized gain (loss)................................................................. $ 4,772
Unrealized appreciation (depreciation) on:
Investments...................................................................................... 36,081
Futures contracts................................................................................ 72
Shares of beneficial interest........................................................................ 55
Additional paid-in capital........................................................................... 186,310
--------------
Net Assets........................................................................................... $ 227,290
==============
Net Asset Value, offering and redemption price per share:
Class S ($226,952,198 divided by 5,524,671 shares of $.01 par value
shares of beneficial interest outstanding).................................................... $ 41.08
==============
Class C ($337,608 divided by 8,149 shares of $.01 par value
shares of beneficial interest outstanding).................................................... $ 41.43
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
42 Equity Income Fund
<PAGE>
Equity Income Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends............................................................................................. $ 5,018
Dividends from Money Market Fund (Note 5)............................................................. 421
Interest.............................................................................................. 54
----------------
Total Investment Income............................................................................ 5,493
Expenses (Notes 1, 2 and 4):
Management fees..................................................................... $ 1,722
Custodian fees...................................................................... 184
Transfer agent fees................................................................. 229
Bookkeeping service fees............................................................ 13
Professional fees................................................................... 16
Trustees' fees...................................................................... 4
Miscellaneous....................................................................... 36
Registration fees - Class S......................................................... 46
Distribution fees - Class C......................................................... 1
Shareholder servicing fees - Class C................................................ 1
-----------------
Total Expenses...................................................................................... 2,252
----------------
Net investment income..................................................................................... 3,241
----------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments........................................................................... 48,207
Futures contracts..................................................................... 2,013 50,220
-----------------
Net change in unrealized appreciation or depreciation of:
Investments........................................................................... 8,263
Futures contracts..................................................................... 90 8,353
----------------- -----------------
Net gain (loss) on investments............................................................................ 58,573
----------------
Net increase (decrease) in net assets resulting from operations........................................... $ 61,814
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Income Fund 43
<PAGE>
Equity Income Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income................................................................... $ 3,241 $ 3,812
Net realized gain (loss)................................................................ 50,220 25,079
Net change in unrealized appreciation or depreciation................................... 8,353 8,001
------------------ -----------------
Net increase (decrease) in net assets resulting from operations................... 61,814 36,892
------------------ -----------------
From Distributions to Shareholders:
Net investment income
Class S............................................................................... (3,241) (3,811)
Class C............................................................................... -- (1)
In excess of net investment income
Class S............................................................................... (46) (48)
Net realized gain on investments
Class S............................................................................... (52,197) (23,810)
Class C............................................................................... (78) (12)
------------------ -----------------
Total Distributions to Shareholders............................................... (55,562) (27,682)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)............... 25,784 5,928
------------------ -----------------
Total Net Increase (Decrease) in Net Assets................................................. 32,036 15,138
Net Assets
Beginning of period..................................................................... 195,254 180,116
------------------ -----------------
End of period........................................................................... $ 227,290 $ 195,254
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
44 Equity Income Fund
<PAGE>
Equity Income Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding
throughout each year or period and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...................................... $ 40.22 $ 38.43 $ 32.21 $ 35.90 $ 35.32
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income................................................. .69 .82 .94 .90 .83
Net realized and unrealized gain (loss) on investments................ 12.11 7.03 10.08 (.70) 3.69
-------- -------- -------- -------- --------
Total Income From Investment Operations............................. 12.80 7.85 11.02 .20 4.52
-------- -------- -------- -------- --------
Less Distributions:
Net investment income................................................. (.69) (.82) (.97) (.89) (.83)
In excess of net investment income.................................... (.01) (.01) -- -- --
Net realized gain on investments...................................... (11.24) (5.23) (3.83) (3.00) (3.11)
-------- -------- -------- -------- --------
Total Distributions................................................. (11.94) (6.06) (4.80) (3.89) (3.94)
-------- -------- -------- -------- --------
Net Asset Value, End of Period............................................ $ 41.08 $ 40.22 $ 38.43 $ 32.21 $ 35.90
======== ======== ======== ======== ========
Total Return (%).......................................................... 33.59 21.45 34.76 .69 13.23
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).............................. 226,952 195,132 180,116 144,285 149,532
Ratios to average net assets (%):
Operating expenses.................................................. 1.04 1.07 1.06 1.04 1.05
Net investment income............................................... 1.51 2.03 2.51 2.56 2.23
Portfolio turnover rate (%)........................................... 139.33 106.40 92.40 89.91 78.72
Average commission rate paid per share
of security ($ omitted)............................................. .0410 .0441 N/A N/A N/A
</TABLE>
Equity Income Fund 45
<PAGE>
Equity Income Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding
throughout each year or period and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
1997 1996*
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................................... $ 40.22 $ 41.86
------------ ------------
Income From Investment Operations:
Net investment income.............................................. .32 .10
Net realized and unrealized gain (loss) on investments............. 12.20 2.39
------------ ------------
Total Income From Investment Operations.......................... 12.52 2.49
------------ ------------
Less Distributions:
Net investment income.............................................. (.07) (.18)
Net realized gain on investments................................... (11.24) (3.95)
------------ ------------
Total Distributions............................................. (11.31) (4.13)
------------ ------------
Net Asset Value, End of Period......................................... $ 41.43 $ 40.22
============ ============
Total Return (%)....................................................... 32.68 6.23(a)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)........................... 338 122
Ratios to average net assets (%)(b):
Operating expenses.............................................. 1.74 1.77
Net investment income........................................... .77 1.50
Portfolio turnover rate (%)(b)...................................... 139.33 106.40
Average commission rate paid per share
of security ($ omitted)........................................... .0410 .0441
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
46 Equity Income Fund
<PAGE>
Quantitative Equity Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide total return greater than the total return of the U.S.
Stock Market as measured by the Russell 1000(R) Index over a market cycle of
four to six years, while maintaining volatility and diversification similar to
the Russell 1000 Index.
Invests in: Primarily U.S. equity securities.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns through security selection with sector diversification similar to its
benchmark index. The Fund employed the investment management services of three
managers using three distinctive quantitative approaches to investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Years Quantitative Equity Lipper(C) Growth & Income++ Russell 1000(R)**
- ----- ------------------- --------------------------- -----------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $11,505 $11,723 $11,492
1989 $14,505 $15,289 $14,071
1990 $13,692 $14,653 $13,439
1991 $18,032 $19,493 $17,311
1992 $19,595 $21,254 $18,744
1993 $22,057 $23,412 $20,847
1994 $22,098 $23,500 $20,633
1995 $30,427 $32,376 $26,947
1996 $37,449 $39,644 $32,536
1997 $49,694 $52,668 $41,349
</TABLE>
Quantitative Equity Fund - Class S
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ----------- -----------
<S> <C> <C>
1 Year $ 13,270 32.70%
5 Years $ 25,361 20.46%(S)
10 Years $ 49,694 17.39%(S)
</TABLE>
Russell 1000(R) Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ----------- -----------
<S> <C> <C>
1 Year $ 13,285 32.85%
5 Years $ 24,781 19.90%(S)
10 Years $ 52,650 18.07%(S)
</TABLE>
Quantitative Equity Fund - Class C++
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ---------- -----------
<S> <C> <C>
1 Year $ 13,170 31.70%
5 Years $ 25,141 20.25%(S)
10 Years $ 49,267 17.29%(S)
</TABLE>
Lipper(C) Growth & Income Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ----------- -----------
<S> <C> <C>
1 Year $ 12,709 27.09%
5 Years $ 22,059 17.14%(S)
10 Years $ 41,349 15.25%(S)
</TABLE>
* Quantitative Equity Fund - Class S assumes initial investment on
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $43 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select.
+ Lipper(C) Growth & Income Funds Average is the average total return for the
universe of funds within the Growth & Income Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
++ Quantitative Equity Fund - Class C - For the period, November 4, 1996
(commencement of sales) to December 31, 1997, shareholder service and Rule
12b-1 distribution fees were charged. Total return would have been lower had
these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
(S) Annualized.
48 Quantitative Equity Fund
<PAGE>
Quantitative Equity Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Quantitative Fund Class S and Class C
shares reflected total returns of 32.7% and 31.7%, respectively, as compared to
the Russell 1000(R) Index, which rose 32.9%. The Fund kept pace with the index
on the strength of security selection, particularly in the financial services
and health care sectors. It finished the year well ahead of the average of funds
in the Lipper(C) Growth and Income Funds Universe.
Portfolio Highlights
For the third consecutive year the stock market favored large capitalization
stocks over midcap and small cap alternatives. The market also proved to be
dominated by more defensive sectors, such as consistent growth-oriented shares
of health care and consumer staples companies, and interest-rate sensitive
financial services and utilities companies. While many growth and income funds
trailed the index due to the market's focus on the sectors, Quantitative
Equity's economic sector and cap size-neutral strategy produced strong results
due to its exposure to these sectors in the market's fourth quarter rotation
from some of the market's earlier leaders, such as Intel.
The Fund's concentration on stock selection was well suited to the rapidly
changing market environment toward year end. Although the Fund's utilities
holdings lagged some of the strongest performers in the sector, the Fund's index
weighting captured much of the upside. Elsewhere, security selection proved very
effective. Large positions in pharmaceutical companies such as Schering Plough
and Bristol-Myers Squibb, as well as financial services companies like Travelers
Group Insurance and Lehman Brothers added substantial value over the index. They
also compensated for holdings in other sectors, particularly technology, where
several negative earnings announcements fueled concerns.
- ---------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Merck & Co., Inc. 2.7%
Exxon Corp. 2.2
American International Group, Inc. 2.1
General Electric Corp. 1.6
Travelers, Inc. 1.6
Bristol-Myers Squibb Co. 1.5
Dow Chemical Co. 1.4
BankAmerica Corp. 1.4
Dayton Hudson Corp. 1.3
Ford Motor Co. 1.2
- ---------------------------------------------------------
- ---------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 20.9x
Portfolio Price/Book Ratio 3.56x
Market Capitalization - S-Weighted Average 41.8 Bil
Number of Holdings 513
- ---------------------------------------------------------
- ---------------------------------------------------------
Money Managers Styles
Barclays Global Fund Advisors, N.A. Market-Oriented
Franklin Portfolio Associates, LLC Market-Oriented
J.P. Morgan Investment Management, Inc. Market-Oriented
- ---------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Quantitative Equity Fund 49
<PAGE>
Quantitative Equity Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Common Stocks - 95.9%
Auto and Transportation - 4.5%
Alaska Air Group, Inc. (a) 4,100 $ 159
Alexander & Baldwin, Inc. 7,300 199
AMR Corp. (a) 38,200 4,909
Bandag, Inc. 8,000 428
Burlington Northern, Inc. 10,800 1,004
Chrysler Corp. 101,300 3,564
Consolidated Freightways Corp. (a) 1,400 19
Cooper Tire & Rubber Co. 12,500 305
CSX Corp. 15,100 815
Dana Corp. 24,500 1,164
Eaton Corp. 34,800 3,106
Echlin, Inc. 10,500 380
Exide Corp. 2,700 70
Federal Express Corp. (a) 3,900 238
Fleetwood Enterprises, Inc. 6,400 272
Ford Motor Co. 234,800 11,432
Fritz Companies, Inc. (a) 1,000 14
General Motors Corp. 96,100 5,826
Genuine Parts Co. 22,300 757
Goodyear Tire & Rubber Co. 29,500 1,877
Illinois Central Corp. 4,300 146
Kansas City Southern Industries, Inc. 21,400 679
Modine Manufacturing Co. 11,500 392
Navistar International Corp. (a) 7,200 179
Norfolk Southern Corp. 25,000 770
PACCAR, Inc. 7,500 394
Southwest Airlines Co. 6,400 158
Trinity Industries, Inc. 26,600 1,187
UAL Corp. (a) 21,700 2,007
Union Pacific Corp. 40,400 2,522
Wisconsin Central Transportation Corp. (a) 3,100 72
Yellow Corp. (a) 7,100 178
--------
45,222
--------
Consumer Discretionary - 10.6%
ACNielsen Corp. (a) 41,100 1,002
Alberto Culver Co. Class B 9,200 295
AutoZone Inc. (a) 13,800 400
Belo (A.H.) Corp. Class A 16,100 904
Best Buy Co. (a) 12,900 476
BHC Communications, Inc. Class A 2,300 300
Borders Group, Inc. (a) 35,000 1,096
Browning-Ferris Industries, Inc. 34,700 1,284
Brunswick Corp. 28,300 858
Cendant Corp. (a) 15,620 537
Cintas Corp. 8,600 335
Circuit City Stores, Inc. 9,800 349
Circus Circus Enterprises, Inc. (a) 11,600 238
Corporate Express, Inc. (a) 16,600 214
Darden Restaurants, Inc. 9,500 119
Dayton Hudson Corp. 196,000 13,230
Deluxe Corp. 15,700 542
Department 56, Inc. (a) 10,900 313
Dillard's, Inc. Class A 19,400 684
Disney (Walt) Co. 70,100 6,944
Donnelley (R.R.) & Sons Co. 18,500 689
Eastman Kodak Co. 5,200 316
EKCO Group, Inc. (a) 400 3
Estee Lauder Companies Class A 2,300 118
Extended Stay America, Inc. (a) 11,700 146
Federated Department Stores, Inc. (a) 21,500 926
Fingerhut Cos., Inc. 14,900 318
First Brands Corp. 25,700 692
Food Lion, Inc. Class A 8,200 69
Fruit of the Loom, Inc. Class A (a) 12,900 331
Gannett Co., Inc. 132,300 8,178
General Nutrition Companies, Inc. (a) 7,600 257
Harrah's Entertainment, Inc. (a) 13,300 251
Hasbro, Inc. 6,600 208
Hilton Hotels Corp. 54,400 1,618
Hollinger International, Inc. Class A 15,300 214
Home Depot, Inc. (The) 95,650 5,631
Host Marriott Corp. (a) 86,900 1,705
Huffy Corp. 1,700 23
Ikon Office Solutions, Inc. 6,200 174
International Game Technology 16,700 422
ITT Corp. (a) 7,400 613
JC Penney & Co., Inc. 16,700 1,007
Knight-Ridder, Inc. 34,700 1,804
Land's End, Inc. (a) 800 28
Leggett & Platt, Inc. 4,100 172
MacFrugals Bargains Close Outs, Inc. (a) 2,700 111
Mattel, Inc. 44,900 1,673
May Department Stores Co. 3,000 158
McDonald's Corp. 20,400 974
Media General, Inc. Class A 3,100 130
Meredith Corp. 2,300 82
MGM Grand, Inc. (a) 7,400 267
Mine Safety Appliances Co. 600 39
Mirage Resorts, Inc. (a) 18,800 428
Neiman-Marcus Group, Inc. (a) 16,100 487
New York Times Co. Class A 16,500 1,091
Newell Co. 6,200 264
NIKE, Inc. Class B 3,700 145
Nine West Group, Inc. (a) 3,100 80
Nordstrom, Inc. 26,400 1,587
OHM Corp. (a) 700 5
</TABLE>
50 Quantitative Equity Fund
50
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Premark International, Inc. 3,100 $ 90
Promus Hotel Corp. New (a) 31,728 1,333
QUALCOMM, Inc. (a) 13,500 682
Reebok International, Ltd. (a) 9,300 268
Robert Half International, Inc. (a) 23,400 936
Rubbermaid, Inc. 30,600 765
Ruby Tuesday, Inc. (a) 12,300 317
Sears Roebuck & Co. 48,800 2,208
Service Corp. International 32,000 1,182
Spelling Entertainment Group, Inc. (a) 800 6
Stewart Enterprises, Inc. Class A 55,100 2,569
Tele-Communications, Inc. Series A New (a) 72,400 2,625
Time Warner, Inc. 70,800 4,390
TJX Cos., Inc. 29,100 1,000
Toys "R" Us, Inc. (a) 35,600 1,119
Tribune Co. 31,500 1,961
Tupperware Corp. 28,600 797
ME Corp. 6,200 285
Viacom, Inc. Class B (a) 110,100 4,562
Wal-Mart Stores, Inc. 222,100 8,759
Washington Post Co. Class B 3,700 1,800
Waste Management, Inc. 79,200 2,178
Whirlpool Corp. 53,000 2,914
--------
106,300
--------
Consumer Staples - 8.2%
Albertson's, Inc. 55,000 2,606
American Stores Co. 7,600 156
Anheuser-Busch Cos., Inc. 48,300 2,125
Block Drug Co., Inc. Class A 7,224 307
Clorox Co. 1,200 95
Coca-Cola Co. (The) 49,800 3,318
ConAgra, Inc. 90,500 2,970
Dean Foods Co. 14,000 833
Dial Corp. 24,400 508
Fleming Cos., Inc. 7,400 99
General Mills, Inc. 4,900 351
Gillette Co. 49,400 4,962
Heinz (H.J.) Co. 4,600 234
Interstate Bakeries Corp. 22,000 822
Kellogg Co. 92,600 4,595
Kroger Co. (a) 29,300 1,082
PepsiCo, Inc. 134,000 4,883
Philip Morris Cos., Inc. 241,800 10,957
Procter & Gamble Co. 134,200 10,711
Quaker Oats Co. 126,500 6,673
Ralston-Purina Group 10,200 948
Richfood Holdings, Inc. Class A 6,300 178
RJR Nabisco Holdings Corp. 173,600 6,510
Safeway, Inc. (a) 121,985 7,716
Seagram Co., Ltd. 38,800 1,254
SuperValu, Inc. 6,900 289
SYSCO Corp. 1,300 59
Unilever NV 83,600 5,220
Universal Corp. 27,100 1,113
Winn-Dixie Stores, Inc. 3,200 140
Wrigley (Win.), Jr. Co. 5,700 453
-------
82,167
-------
Financial Services - 18.8%
20th Century Industries 11,200 291
Ahmanson (H.F.) & Co. 60,700 4,063
Allmerica Financial Corp. 12,400 619
Allstate Corp. 39,179 3,560
AMBAC, Inc. 19,100 879
American Express Co. 25,500 2,276
American General Corp. 4,300 232
American International Group, Inc. 194,600 21,163
American National Insurance Co. 800 74
AmSouth Bancorp 29,500 1,602
Automatic Data Processing, Inc. 48,900 3,001
Banc One Corp. 33,900 1,841
BankAmerica Corp. 187,100 13,658
BankBoston Corp. 4,300 404
Bankers Trust New York Corp. 55,200 6,207
Bamett Banks, Inc. 27,300 1,962
Bear Stearns Cos., Inc. 105,026 4,989
Beneficial Corp. 4,600 382
Capital One Financial Corp. 3,000 163
Charter One Financial, Inc. 4,200 264
Chase Manhattan Corp. 30,000 3,285
CIGNA Corp. 24,200 4,188
Citicorp 16,400 2,074
Comerica, Inc. 48,300 4,359
Conseco, Inc. 23,300 1,059
ContiFinancial Corp. (a) 3,800 96
Countrywide Credit Industries, Inc. 3,000 129
Crestar Financial Corp. 7,400 422
Dime Bancorp, Inc. 9,200 278
Donaldson, Lufkin & Jenrette, Inc. 4,700 374
Dow Jones & Co., Inc. 22,800 1,224
Dun & Bradstreet Corp. 79,500 2,460
Edwards (A.G.), Inc. 11,600 461
Equitable Companies, Inc. 64,200 3,194
Everest Reinsurance Holdings, Inc. 5,100 210
Federal Home Loan Mortgage Corp. 52,600 2,206
</TABLE>
Quantitative Equity Fund 51
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- --------
<S> <C> <C>
Federal National Mortgage Association 125,100 $ 7,139
FINOVA Group, Inc. 4,400 219
First America Bank Corp. 14,900 1,149
First Chicago NBD Corp. 39,752 3,319
First Data Corp. 53,400 1,562
First Empire State Corp. 200 93
First Union Corp. 57,870 2,966
Fiserv, Inc. (a) 19,400 953
Fleet Financial Group, Inc. 18,340 1,374
Fremont General Corp. 2,700 148
Golden West Financial Corp. 18,100 1,770
Green Tree Financial Corp. 6,200 162
Greenpoint Financial Corp. 1,300 94
Hartford Financial Services Group
(The), Inc. 10,800 1,010
Household International Corp. 5,400 689
Kansas City Life Insurance Co. 1,300 124
Lehman Brothers Holdings, Inc. 134,500 6,860
Lincoln National Corp. 36,700 2,867
Marsh & McLennan Cos., Inc. 62,100 4,630
MBIA, Inc. 11,600 775
Mercantile Bankshares Corp. 5,500 211
Mercury General Corp. 2,100 116
Merrill Lynch & Co., Inc. 23,400 1,707
Money Store, Inc. 3,800 80
Morgan (J.P.) & Co., Inc. 21,200 2,393
Morgan Stanley, Dean Witter,
Discover and Co. 100,050 5,915
National City Corp. 17,300 1,137
National Commerce Bancorp 3,500 122
NationsBank Corp. 109,374 6,651
North Fork Bancorporation, Inc. 5,600 188
Ocwen Financial Corp. (a) 4,200 107
Ohio Casualty Corp. 3,100 138
Old Republic International Corp. 29,150 1,084
Pacific Century Financial Corp. 12,200 302
PaineWebber Group, Inc. 11,500 397
Paychex, Inc. 22,400 1,134
PMI Group, Inc. (The) 4,700 340
PNC Bank Corp. 4,905 280
Provident Financial Group, Inc. 2,900 141
Providian Financial Corp. 12,700 574
Republic New York Corp. 1,900 217
Ryder System, Inc. 5,400 177
Security Capital Pacific Trust 40,500 982
SouthTrust Corp. 42,900 2,713
Sovereign Bancorp, Inc. 2,600 54
St. Paul Cos., Inc. 3,700 304
Star Banc Corp. 38,300 2,197
SunTrust Banks, Inc. 26,900 1,920
Synovus Financial Corp. 23,200 760
TCF Financial Corp. 6,600 224
Tele-Communications TCI Ventures Group
Series A New (a) 30,300 858
Transamerica Financial Corp. 6,300 671
Travelers Property Casualty Corp. Class A 80,100 3,524
Travelers, Inc. 289,756 15,611
UNUM Corp. 12,600 685
Washington Federal, Inc. 4,100 129
Washington Mutual, Inc. 21,900 1,396
Wells Fargo & Co. 1,300 441
XTRA Corp. 1,500 89
--------
187,521
--------
Health Care - 9.9%
Aetna, Inc. 9,500 670
ALZA Corp. (a) 47,500 1,511
American Home Products Corp. 7,000 536
Bausch & Lomb, Inc. 9,000 357
Beckman Instruments, Inc. 700 28
Bergen Brunswig Corp. Class A 14,900 628
Beverly Enterprises, Inc. New (a) 66,600 866
Boston Scientific Corp. (a) 31,800 1,459
Bristol-Myers Squibb Co. 157,200 14,875
Cardinal Health, Inc. 47,950 3,602
Columbia/HCA Healthcare Corp. 58,700 1,739
Crescenco Pharmaceuticals Corp. Class A (a) 600 7
Forest Labs, Inc. (a) 6,800 335
HBO & Co. 55,200 2,646
Health Care & Retirement Corp. (a) 20,800 837
HEALTHSOUTH Corp. (a) 87,000 2,414
Humana, Inc. (a) 64,700 1,343
Immune Response Corp. (a) 2,900 32
Johnson & Johnson 121,100 7,977
McKesson Corp. 15,300 1,655
Merck & Co., Inc. 251,270 26,697
Mylan Laboratories, Inc. 67,100 1,405
NovaCare, Inc. (a) 8,300 108
Olsten Corp. 4,100 62
Omnicare, Inc. 15,800 490
Pfizer, Inc. 5,700 425
PharMerica, Inc. (a) 30,310 314
PhyCor, Inc. (a) 133,200 3,596
Schering-Plough Corp. 145,600 9,045
Tenet Healthcare Corp. (a) 139,300 4,614
United Healthcare Corp. 32,100 1,595
Warner-Lambert Co. 51,200 6,349
Watson Pharmaceuticals, Inc. (a) 6,000 196
Wellpoint Health Networks, Inc. Class 18,700 791
--------
99,204
--------
</TABLE>
52 Quantitative Equity Fund
<PAGE>
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- --------
<S> <C> <C>
Integrated Oils - 6.8%
Amoco Corp. 8,900 $ 758
Ashland, Inc. 75,200 4,037
Atlantic Richfield Co. 25,500 2,043
Chevron Corp. 17,900 1,378
Coastal Corp. 21,200 1,313
Enron Corp. 134,500 5,590
Exxon Corp. 359,444 21,993
Lyondell Petrochemical Co. 40,300 1,068
Mobil Corp. 144,800 10,453
Pennzoil Co. 22,300 1,490
Phillips Petroleum Co. 146,500 7,124
Royal Dutch Petroleum Co. 80,200 4,346
Tenneco, Inc. 26,100 1,031
Tesoro Petroleum Corp. (a) 7,900 122
Texaco, Inc. 83,700 4,552
--------
67,298
--------
Materials and Processing - 6.0%
Albemarle Corp. 10,900 260
Alcan Aluminum, Ltd. 25,000 691
Allegheny Teldyne, Inc. 21,300 551
Aluminum Co. of America 9,600 676
Barrick Gold Corp. 116,500 2,170
Betz Laboratories, Inc. 9,400 574
Boise Cascade Corp. 8,300 251
Bowater, Inc. 6,500 289
Centex Corp. 16,600 1,045
Champion International Corp. 37,200 1,686
Consolidated Papers, Inc. 5,000 267
Corning, Inc. 48,400 1,797
Crompton & Knowles Corp. 29,200 744
Cytec Industries, Inc. (a) 4,400 207
Dow Chemical Co. 136,100 13,814
du Pont (E.I.) de Nemours & Co. 71,600 4,300
Fluor Corp. 10,700 400
Fort James Corp. 33,812 1,293
Freeport-McMoRan Copper & Gold, Inc.
Class A 23,500 360
Georgia Gulf Corp. 3,900 119
Georgia Pacific Corp. 6,100 371
Goodrich (B.F.) Co. 1,510 63
Great Lakes Chemical Co. 6,800 305
Halter Marine Group, Inc. (a) 4,540 131
Illinois Tool Works, Inc. 10,400 625
Inco, Ltd. 9,400 160
Inland Steel Industries, Inc. 31,100 533
International Paper Co. 7,300 315
Kimberly-Clark Corp. 43,500 2,145
LTV Corp. 81,600 796
Martin Marietta Materials, Inc. 6,997 256
Masco Corp. 36,700 1,867
Mead Corp. 16,600 465
Millennium Chemicals, Inc. 46,900 1,105
Monsanto Co. 20,800 874
Nucor Corp. 22,600 1,092
Olin Corp. 17,500 820
Oregon Metallurgical Corp. (a) 1,000 33
Owens-Corning Fiberglas Corp. 9,200 314
Owens-Illinois, Inc. (a) 25,500 967
Phelps Dodge Corp. 900 56
Praxair, Inc. 2,200 99
Reynolds Metals Co. 8,300 498
Rohm & Haas Co. 6,000 575
Security Capital Group, Inc. 1998
Warrant (a) 2,132 11
Sigma Aldrich Corp. 25,200 995
Solutia, Inc. 67,700 1,807
Stone Container Corp. (a) 13,000 136
Temple-Inland, Inc. 9,000 471
Texas Industries, Inc. 5,100 230
Tyco International, Ltd. 107,100 4,826
Unifi, Inc. 37,000 1,505
Union Camp Corp. 21,900 1,176
Union Carbide Corp. 12,100 520
USG Corp. (a) 14,700 720
USX-U.S. Steel Group 22,800 713
Vulcan Materials Co. 5,700 581
Webb (Del E.) Corp. 10,900 282
Weyerhaeuser Co. 2,200 107
--------
60,069
--------
Other Energy - 2.6%
AES Corp. (a) 35,000 1,632
Anadarko Petroleum Corp. 3,400 206
Baker Hughes, Inc. 63,830 2,785
BJ Services Co. (a) 1,000 72
Burlington Resources, Inc. 27,400 1,228
Calenergy, Inc. (a) 23,200 667
Cooper Cameron Corp. (a) 8,100 494
Diamond Offshore Drilling, Inc. 10,400 501
Dresser Industries, Inc. 56,100 2,353
El Paso Natural Gas Co. 4,900 326
ENSCO International, Inc. 25,200 844
Falcon Drilling Co., Inc. (a) 9,900 347
Halliburton Co. 34,700 1,802
Helmerich & Payne, Inc. 41,400 2,810
Input/Output, Inc. (a) 9,700 288
</TABLE>
Quantitative Equity Fund 53
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- --------
<S> <C> <C>
Parker Drilling Co. (a) 600 $ 7
Schlumberger, Ltd. 45,300 3,647
Tidewater, Inc. 67,400 3,715
Tosco Corp. 26,700 1,010
Union Pacific Resources Group, Inc. 37,300 904
Valero Energy Corp. 7,400 232
--------
25,870
--------
Producer Durables - 8.5%
Aeroquip-Vickers, Inc. 2,900 142
AlliedSignal, Inc. 108,300 4,217
AMP, Inc. 900 38
Boeing Co. 107,500 5,261
Caterpillar, Inc. 189,900 9,222
Cincinnati Milacron, Inc. 3,600 93
Clayton Homes, Inc. 14,600 263
Coltec Industries, Inc. (a) 25,500 591
Cummins Engine Co., Inc. 2,200 130
Deere & Co. 94,800 5,528
Dover Corp. 71,400 2,579
Emerson Electric Co. 45,900 2,590
Foster Wheeler Corp. 5,200 141
General Electric Co. 218,900 16,062
General Signal Corp. 5,500 232
Grainger (W.W.), Inc. 12,400 1,205
Harnischfeger Industries, Inc. 6,300 222
Ingersoll-Rand Co. 65,850 2,667
ITT Industries, Inc. 40,600 1,274
Johnson Controls, Inc. 14,100 673
Kennametal, Inc. 4,200 218
Lexmark International Group, Inc.
Class A (a) 33,800 1,284
Litton Industries, Inc. (a) 36,400 2,093
Molex, Inc. 14,100 451
National Service Industries, Inc. 14,800 734
Northern Telecom, Ltd. 11,700 1,041
Parker-Hannifin Corp. 45,950 2,108
Perkin-Elmer Corp. 10,100 718
Pitney Bowes, Inc. 54,900 4,938
Pulte Corp. 12,200 510
Raychem Corp. 85,200 3,669
Raytheon Co. Class A 8,322 410
Republic Industries, Inc. (a) 202,600 4,723
Rockwell International Corp. 13,700 716
Ryland Group, Inc. 9,300 219
Sensormatic Electronics Corp. 9,500 156
Solectron Corp. (a) 8,800 366
Thermo Instrument Systems, Inc. (a) 9,375 323
Thomas & Betts Corp. 18,100 855
United Technologies Corp. 27,000 1,966
Xerox Corp. 54,300 4,008
--------
84,636
--------
Technology - 9.5%
ADC Telecommunications, Inc. (a) 15,400 643
Anixter International, Inc. (a) 10,700 177
Autodesk, Inc. 4,700 173
AVX Corp. 23,400 431
Bay Networks, Inc. (a) 42,000 1,074
BMC Software, Inc. (a) 20,000 1,310
Borland International, Inc. (a) 15,400 112
Cabletron Systems, Inc. (a) 18,700 281
Cisco Systems, Inc. (a) 110,100 6,138
COMPAQ Computer Corp. 80,950 4,569
Computer Associates International, Inc. 3,600 190
Cooper Industries, Inc. 63,700 3,121
Dell Computer Corp. (a) 9,400 790
Digital Equipment Corp. (a) 69,400 2,568
EMC Corp. (a) 95,400 2,618
FORE Systems (a) 89,800 1,369
General Dynamics Corp. 57,100 4,936
General Motors Corp. Class H 6,700 247
Harris Corp. 28,300 1,298
Intel Corp. 128,500 9,019
International Business Machines Corp. 81,100 8,480
Iomega Corp. (a) 144,100 1,792
Komag, Inc. (a) 14,000 207
Lucent Technologies, Inc. 89,700 7,165
Microsoft Corp. (a) 87,500 11,304
Motorola, Inc. 103,800 5,923
National Semiconductor Corp. (a) 59,700 1,548
Oracle Systems Corp. (a) 114,000 2,537
Premisys Communications, Inc. (a) 7,700 199
Quantum Corp. (a) 42,200 847
SCI Systems, Inc. (a) 12,700 553
Silicon Graphics, Inc. (a) 16,500 205
Storage Technology Corp. (a) 40,300 2,496
Sun Microsystems, Inc. (a) 103,400 4,123
Symantec Corp. (a) 5,800 127
Symbol Technologies, Inc. 7,000 264
Synopsys, Inc. (a) 31,500 1,122
Tech Data Corp. (a) 7,800 303
Tellabs, Inc. (a) 2,400 126
Texas Instruments, Inc. 88,200 3,969
--------
94,354
--------
</TABLE>
54 Quantitative Equity Fund
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- ---------
<S> <C> <C>
Utilities - 10.5%
360 Communications Co. (a) 5,200 $ 105
Airtouch Communications, Inc. (a) 54,200 2,253
American Electric Power Co., Inc. 8,800 454
American Water Works, Inc. 37,200 1,016
Ameritech Corp. 74,700 6,013
AT&T Corp. 115,600 7,081
Atlantic Energy, Inc. 11,200 237
Baltimore Gas & Electric Co. 6,000 204
Bell Atlantic Corp. 125,307 11,403
BellSouth Corp. 126,800 7,140
Carolina Power & Light Co. 38,900 1,651
Central & Southwest Corp. 7,300 198
ClNergy Corp. 5,200 199
CMS Energy Corp. 7,800 344
Columbia Gas System, Inc. 15,700 1,233
Commonwealth Energy System 1,100 37
Consolidated Natural Gas Co. 2,100 127
Dominion Resources, Inc. 21,600 919
Duke Power Co. 30,200 1,672
Enova Corp. 19,700 533
Entergy Corp. 94,700 2,835
Florida Progress Corp. 2,600 102
FPL Group, Inc. 5,900 349
GPU, Inc. 42,100 1,773
GTE Corp. 98,900 5,168
Houston Industries, Inc. 94,100 2,511
Illinova Corp. 6,200 167
IPALCO Enterprises, Inc. 1,400 59
Long Island Lighting Co. 97,400 2,934
MCI Communications Corp. 76,400 3,271
Minnesota Power & Light Co. 3,000 131
New Century Energies, Inc. 11,800 566
New England Electric System 5,500 235
New York State Electric & Gas Corp. 72,000 2,556
Niagara Mohawk Power Corp. (a) 6,900 72
NICOR, Inc. 5,600 236
Northern States Power Co. 17,200 1,002
PacifiCorp. 12,300 336
Peco Energy Co. 27,600 669
Peoples Energy Corp. 8,500 335
Pinnacle West Capital Corp. 12,700 538
Potomac Electric Power Co. 10,000 258
PP&L Resources, Inc. 26,900 644
Public Service Enterprise Group, Inc. 87,500 2,773
SBC Communications, Inc. 119,145 8,727
SIG Corp., Inc. 400 12
Southern Co. 57,800 1,496
Sprint Corp. 44,500 2,609
TECO Energy, Inc. 10,700 301
Tele-Communications, Inc. Class A (a) 59,600 1,661
Texas Utilities Co. 55,300 2,298
U.S. West Communications Group 21,500 970
U.S. West Media Group (a) 79,900 2,307
Unicom Corp. 17,300 532
Union Electric Co. 8,200 355
UtiliCorp United, Inc. 37,900 1,471
Washington Gas & Light Co. 1,800 56
Western Resources, Inc. 28,900 1,243
Wisconsin Energy Corp. 9,000 259
WorldCom, Inc. (a) 284,200 8,598
---------
105,234
---------
Total Common Stocks
(cost $733,407) 957,875
---------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Short-Term Investments - 2.9%
Frank Russell Investment Company
Money Market Fund,
due on demand (b) $ 27,070 27,070
United States Treasury Notes
5.125% due 04/30/98 (c) 2,098 2,098
---------
Total Short-Term Investments
(cost $29,168) 29,168
---------
Total Investments
(identified cost $762,575)(d) - 98.8% 987,043
Other Assets and Liabilities,
Net - 1.2% 12,181
---------
Net Assets - 100.0% $ 999,224
=========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures
contracts purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
NV - Nonvoting
The accompanying notes are an integral part of the financial statements.
Quantitative Equity Fund 55
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/98 76 $ 10
S & P 400 Midcap Index Futures Contracts
expiration date 03/98 32 108
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 118
==============
</TABLE>
((S)) At December 31, 1997, United States Treasury Notes valued at $2,098 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
56 Quantitative Equity Fund
<PAGE>
Quantitative Equity Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPITON>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $762,575)
(Note 2)................................................... $ 987,043
Cash........................................................ 445
Receivables:
Dividends and interest.................................. 1,773
Investments sold........................................ 3,235
Fund shares sold........................................ 12,839
Daily variation margin on futures contracts
(Notes 2 and 3)........................................ 22
-----------------
Total Assets......................................... 1,005,357
Liabilities
Payables:
Investments purchased................... $ 3,104
Fund shares redeemed.................... 2,144
Accrued fees to affiliates (Note 4)..... 734
Other accrued expenses.................. 151
--------------
Total Liabilities.................................... 6,133
-----------------
Net Assets.................................................. $ 999,224
=================
Net Assets consist of:
Accumulated distributions in excess of net
investment income.......................................... $ (23)
Accumulated net realized gain (loss)........................ 5,940
Unrealized appreciation (depreciation) on:
Investments.............................................. 224,468
Futures contracts........................................ 118
Shares of beneficial interest............................... 272
Additional paid-in capital.................................. 768,449
-----------------
Net Assets.................................................. $ 999,224
=================
Net Asset Value, offering and redemption price per share:
Class S ($996,879,538 divided by 27,105,522
shares of $.01 par value shares of beneficial
interest outstanding)................................. $ 36.78
=================
Class C ($2,344,080 divided by 63,702 shares of
$.01 par value shares of beneficial
interest outstanding)................................. $ 36.80
=================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Quantitative Equity Fund 57
<PAGE>
Quantitative Equity Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands
<S> <C> <C>
Investment Income:
Dividends............................................. $ 14,617
Dividends from Money Market Fund (Note 5)............. 1,775
Interest.............................................. 113
------------
Total Investment Income............................ 16,505
Expenses (Notes 1, 2 and 4):
Management fees....................... $ 6,616
Custodian fees........................ 417
Transfer agent fees................... 458
Bookkeeping service fees.............. 17
Professional fees..................... 29
Trustees' fees........................ 4
Miscellaneous......................... 71
Registration fees
Class S............................. 87
Class C............................. 1
Distribution fees - Class C........... 6
Shareholder servicing fees - Class C.. 3
--------------
Total Expenses..................................... 7,709
------------
Net investment income..................................... 8,796
------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and.3)
Net realized gain (loss) from:
Investments............................. 123,836
Futures contracts....................... 7,474 131,310
--------------
Net change in unrealized appreciation
or depreciation of:
Investments............................. 93,158
Futures contracts....................... 433 93,591
-------------- ------------
Net gain (loss) on investments............................ 224,901
------------
Net increase (decrease) in net assets
resulting from operations............................... $ 233,697
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
58 Quantitative Equity Fund
<PAGE>
Quantitative Equity Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income........................ $ 8,796 $ 9,109
Net realized gain (loss)..................... 131,310 70,157
Net change in unrealized appreciation
or depreciation............................ 93,591 41,332
------------- -------------
Net increase (decrease) in net assets
resulting from operations.............. 233,697 120,598
------------- -------------
From Distributions to Shareholders:
Net investment income
Class S.................................... (8,794) (9,111)
Class C.................................... (2) (1)
In excess of net investment income
Class S.................................... (23) (80)
Net realized gain on investments
Class S.................................... (145,647) (70,285)
Class C.................................... (311) (25)
------------- -------------
Total Distributions to Shareholders..... (154,777) (79,502)
------------- -------------
From Fund Share Transactions:
Net increase (decrease) in net assets from
Fund share transactions (Note 6)........... 256,057 134,203
------------- -------------
Total Net Increase (Decrease) in Net Assets...... 334,977 175,299
Net Assets
Beginning of period.......................... 664,247 488,948
------------- -------------
End of period (including accumulated
distributions in excess of net investment
income of $23 at December 31, 1997)........ $ 999,224 $ 664,247
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Quantitative Equity Fund 59
<PAGE>
Quantitative Equity Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................................... $ 33.05 $ 30.76 $ 24.84 $ 26.44 $ 25.82
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income.................................................. .38 .51 .50 .49 .45
Net realized and unrealized gain (loss) on investments................. 10.00 6.24 8.72 (.19) 2.69
------- ------- ------- ------- -------
Total Income From Investment Operations............................. 10.38 6.75 9.22 .30 3.14
------- ------- ------- ------- -------
Less Distributions:
Net investment income.................................................. (.38) (.51) (.51) (.49) (.45)
Net realized gain on investments....................................... (6.27) (3.95) (2.79) (1.41) (2.07)
------- ------- ------- ------- -------
Total Distributions................................................. (6.65) (4.46) (3.30) (1.90) (2.52)
------- ------- ------- ------- -------
Net Asset Value, End of Period............................................. $ 36.78 $ 33.05 $ 30.76 $ 24.84 $ 26.44
======= ======= ======= ======= =======
Total Return (%)........................................................... 32.70 23.08 37.69 .19 12.56
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)............................... 996,880 663,925 488,948 380,592 314,647
Ratios to average net assets (%):
Operating expenses................................................... .91 .93 .93 .94 .98
Net investment income................................................ 1.04 1.59 1.71 1.95 1.68
Portfolio turnover rate (%)............................................ 87.67 74.33 78.83 45.97 62.48
Average commission rate paid per share
of security ($ omitted).............................................. .0349 .0331 N/A N/A N/A
</TABLE>
60 Quantitative Equity Fund
<PAGE>
Quantitative Equity Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996*
---------- ----------
<S> <C> <C>
Net Asset Value, Beginning of Period............................................. $ 33.05 $ 33.81
---------- ----------
Income From Investment Operations:
Net investment income......................................................... .14 .05
Net realized and unrealized gain (loss) on investments........................ 9.95 1.87
---------- ----------
Total Income From Investment Operations................................... 10.09 1.92
---------- ----------
Less Distributions:
Net investment income........................................................ (.07) (.08)
Net realized gain on investments............................................. (6.27) (2.60)
---------- ----------
Total Distributions....................................................... (6.34) (2.68)
---------- ----------
Net Asset Value, End of Period................................................... $ 36.80 $ 33.05
========== ==========
TotalReturn(%)................................................................... 31.70 5.91(a)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)..................................... 2,344 322
Ratios to average net assets (%)(b):
Operating expenses......................................................... 1.59 1.65
Net investment income...................................................... .33 .81
Portfolio turnover rate (%)(b)............................................... 87.67 74.33
Average commission rate paid per share
of security ($ omitted).................................................... .0349 .0331
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
Quantitative Equity Fund 61
<PAGE>
International Securities Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide favorable total return and diversification for US
investors.
Invests in: Primarily the equity securities of non-US companies in developed
foreign markets.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns than its benchmark index with moderate risk by employing the investment
management services of seven managers with separate and distinct investment
approaches. The Fund's primary source of added value is intended to be stock
selection with only moderate country allocations relative to the index to
capture the diversification benefits of international investment in an asset
allocation context.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates International Securities - Class S MSCI EAFE** Lipper(C) International+
- ----- ---------------------------------- ----------- ------------------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $12,205 $12,859 $11,658
1989 $14,919 $14,247 $14,281
1990 $12,631 $10,943 $12,575
1991 $14,146 $12,310 $14,138
1992 $13,163 $10,851 $13,553
1993 $17,571 $14,426 $18,918
1994 $18,425 $15,589 $18,727
1995 $20,305 $17,390 $20,455
1996 $21,853 $18,497 $22,818
1997 $21,910 $18,877 $23,989
</TABLE>
International Securities Fund - Class S
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- -------------
<S> <C> <C>
1 Year $ 10,026 0.26%
5 Years $ 16,645 10.73%(S)
l0 Years $ 21,910 8.16%(S)
</TABLE>
International Securities - Class C ++
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- -------------
<S> <C> <C>
1 Year $ 9,959 (0.41)%
5 Years $ 16,514 l0.55%(S)
10 Years $ 21,738 8.07%(S)
</TABLE>
MSCI EAFE Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- -------------
<S> <C> <C>
1 Year $ 10,206 2.06%
5 Years $ 17,396 11.71%(S)
l0 Years $ 18,877 6.56%(S)
</TABLE>
Lipper(C) International Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- -------------
<S> <C> <C>
1 Year $ 10,513 5.13%
5 Years $ 17,700 12.l0%(S)
10 Years $ 23,989 9.14%(S)
</TABLE>
Salomon Brothers Broad Market Index (BMI) ex-US +++
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- -------------
<S> <C> <C>
1 Year $ 10,261 2.61%
5 Years $ 17,584 ll.95%(S)
</TABLE>
62 International Securities Fund
See related Notes on page 63.
<PAGE>
International Securities Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the International Securities Fund Class S
and Class C shares reflected total returns of 0.3% and (0.4)%, respectively, as
compared to the Salomon Brothers Broad Market Index ex-US, which gained 2.6% for
the year. The Fund's shortfall to the benchmark was primarily due to its
overweighting in midcap stocks during a year in which large caps dominated
globally.
Portfolio Highlights
The consequences of the economic crises sweeping Asia during the last four
months of the year were felt in virtually all developed markets as well. Already
in a recession attributed to a poorly timed increase in consumption taxes,
prospects for Japan's economy worsened when the weakening economies of its Asian
trading partners diminished prospects for Japan's export business. Several major
corporate failures in Japan provided some indications of the severity of the
situation. Japanese stocks dropped 28% during the year. Although European
economies seemed much healthier, the uncertain exposure of European companies to
these markets dampened enthusiasm during the fourth quarter. However, European
stocks still gained 24% for the year.
While security selection helped offset some of the impact, the overweighting to
midcap stocks had a significant negative impact on the Fund's performance during
the year. While a modest overweighting in Japan also detracted from performance,
the Fund's underweighting in the UK had a bigger impact over the course of the
year.
- --------------------------------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Telecom Italia SPA (Italy) 1.5%
Sony Corp. (Japan) 1.4
Royal Dutch Petroleum Co. (Netherlands) 1.3
Roche Holdings
Genusscheine AG NPV (Switzerland) 1.2
Nestle SA (Switzerland) 1.2
Veba AG (Germany) 0.9
Novartis AG (Switzerland) 0.9
Glaxo Wellcome PLC (UK) 0.8
British Petroleum Co. PLC (UK) 0.8
Canon, Inc. (Japan) 0.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 21.9x
Portfolio Price/Book Ratio 2.19x
Market Capitalization - $-Weighted Average 20.9 Bil
Number of Holdings 820
- --------------------------------------------------------------------------------
Money Managers Styles
J.P. Morgan Investment Management, Inc. Market-Oriented
Marathon Asset Management, Ltd. Value
Mastholm Asset Management, L.L.C. Growth
Oechsle International Advisors Growth
Rowe Price-Fleming International, Inc. Market-Oriented
Sanford C. Bernstein & Co., Inc. Value
The Boston Company Asset Management, Inc. Value
- --------------------------------------------------------------------------------
Notes: The following notes relate to the Growth of $10,000 graph and table on
the preceding page.
* International Securities Fund - Class S assumes initial investment on
January 1, 1988.
** Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE)
Index is an index composed of an arithmetic, market value-weighted average
of the performance of over approximately 1,600 securities listed on the
stock exchanges of the countries of Europe, Australia, and the Far East. The
index is calculated on a total-return basis, which includes reinvestment of
gross dividends before deduction of withholding taxes.
+ Lipper(C) International Funds Average is the average total return for the
universe of funds within the International Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
++ International Securities Fund - Class C - For the period, November 4, 1996
(commencement of sales) to December 31, 1997, shareholder service and Rule
12b-1 distribution fees were charged. Total return would have been lower had
these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
+++ Salomon Brothers BMI Index ex-US is a comprehensive float-weighted equity
index consisting of every company with an investable market capitalization
of over $100 million in 22 countries. This Index has broader representation
than the MSCI EAFE benchmark. However, 10 years of historical performance
information is not available because the BMI Index was constructed on June
30, 1989.
(S) Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
International Securities Fund 63
<PAGE>
International Securities Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
---------- -----------
<S> <C> <C>
Common Stocks - 90.0%
Argentina - 0.3%
Banco de Galicia y Buenos Aires
Class B - ADR 3,410 $ 88
Banco Frances del Rio la Plata - ADR 5,554 152
Naviera Perez Companc Class B 40,162 287
Sociedad Comercial del Plata - ADR 1,296 20
Telecom Argentina SA Class B - ADR 13,700 490
Telefonica de Argentina Class B - ADR 9,510 354
YPF Sociedad Anonima Class D - ADR 33,082 1,131
-----------
2,522
-----------
Australia- 2.7%
Amcor, Ltd. 192,700 848
Australia & New Zealand Bank Group, Ltd. 630,252 4,165
Australian Gas & Light Co. 40,079 279
Australian National Industries, Ltd. 96,270 89
Australian Provincial Newspapers Holdings, Ltd. 116,600 174
Boral, Ltd. 635,662 1,608
Brambles Industries, Ltd. 4,000 79
Broken Hill Proprietary Co. 124,892 1,160
Caltex Australia 100,000 311
Commonwealth Bank of Australia 29,096 334
CSR, Ltd. 154,000 522
Eastern Aluminum 272,000 231
Eltin, Ltd. 204,565 155
Fairfax (John) 64,000 134
Foster's Brewing Group, Ltd. 232,400 442
FXF Trust (Units)(a) 36,360 6
GIO Australia Holdings 244,650 626
ICI Australia, Ltd. 60,000 420
Lend Lease Corp. 10,302 201
Mayne Nickless, Ltd. 63,836 337
Morgan & Banks, Ltd. 28,500 187
National Australia Bank, Ltd. 33,535 468
News Corp. 310,310 1,713
Pasminco, Ltd. 140,000 161
PMP Communications Ltd. 165,000 366
Publishing Broadcasting, Ltd. 36,360 164
QBE Insurance Group 98,350 443
RGC, Ltd. 138,905 212
Santos, Ltd. 250,000 1,030
Southcorp Holdings, Ltd. 268,900 890
Tabcorp. Holdings, Ltd. 36,000 169
Telstra Corp., Ltd. (a) 134,000 283
Wesfarmers 26,672 223
Western Mining Corp., Ltd. 408,760 1,425
Westfield Trust 494,000 943
Westpac Banking Corp. 174,751 1,118
Woodside Petroleum, Ltd. 28,000 197
Woolworth's Ltd. 233,662 781
-----------
22,894
-----------
Austria - 0.1%
Bank Austria AG 4,000 203
Brau-Union Goess-Reininghaus-
Osterreichische Brau 1,346 68
Oester Brau Beteil 1,200 60
Voest-Alpine Stahl AG 11,000 424
Wienerberger Baustoff 1,300 249
-----------
1,004
-----------
Belgium - 0.5%
Algem Maatsch Voor Nijverheidskredit
Almanij NPV 17,000 858
Credit Communal Holding/Dexia NPV 4,687 629
Generale de Banque NPV 968 421
Kredietbank NPV 2,550 1,070
PetroFina SA NPV 970 358
UCB Capital NV 79 261
Virgin Express Holdings PLC - ADR (a) 16,900 351
-----------
3,948
-----------
Brazil - 0.4%
Banco Bradesco SA NPV Rights (a) 1,029,859 4
CEMIG SA - ADR 6,892 279
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar (Regd) - GDR 4,750 92
Eletrobras (centrais) NPV 6,556,180 326
Telecomunicacoes Brasileiras - ADR 17,624 2,052
Telecomunicacoes de Sao Paulo - NPV (a) 37,771 9
Uniao de Bancos Brasileiros S.A. - GDR (a) 6,974 224
Usinas Siderurgicas de Minas - ADR 19,363 115
White Martins SA - NPV 24,695 36
-----------
3,137
-----------
Canada - 3.3%
Air Canada, Inc. (a) 197,300 2,036
Alcan Aluminum, Ltd. 39,640 1,093
Algoma Steel, Inc. (a) 30,000 104
ATI Technologies, Inc. (a) 8,600 199
Avenor, Inc. 35,000 500
Barrick Gold Corp. 26,000 485
</TABLE>
64 International Securities Fund
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
Barrick Gold Corp. (US Regd) 27,100 $ 505
BCE, Inc. 38,900 1,296
BCE, Inc. NPV 26,300 877
Canadian Airlines Corp. (a) 45,000 106
Canadian Imperial Bank of Commerce 39,499 1,233
Canadian National Railway Co. 8,100 383
Canadian Pacific, Ltd. 46,900 1,263
Dofasco, Inc. NPV 27,601 444
Donohue, Inc. Class A 23,700 430
Edperbrascan Corp. Class A 26,500 479
Geac Computer Corp., Ltd. (a) 12,100 398
Hudson's Bay Co. 50,000 1,114
Imasco, Ltd. IF 46,484 1,643
Imperial Oil, Ltd. New 19,715 1,269
Inco, Ltd. 66,087 1,123
Laidlaw, Inc. 47,000 641
Leitch Technology Corp. (a) 7,100 212
Magna International, Inc. Class A 12,900 809
Moore Corp., Ltd. 106,500 1,611
National Bank of Canada 122,400 2,021
Noranda, Inc. 34,400 592
Nova Scotia Power, Inc. 44,500 542
Philip Services Corp. (a) 16,300 234
Potash Corp. of Saskatchewan, Inc. 3,600 299
Renaissance Energy, Ltd. (a) 15,000 310
Rogers Communications, Inc. Class B (a) 70,000 338
Royal Bank of Canada 25,570 1,353
Stelco, Inc. Series A 56,800 376
Suncor, Inc. NPV 15,700 538
Torstar Corp. Class B 15,600 546
Westcoast Energy, Inc. 20,500 473
-----------
27,875
-----------
Chile - 0.1%
Chilectra SA - ADR 4,271 109
Chilgener SA - ADR 3,458 85
Enersis SA - ADR 4,419 128
Santa Isabel SA - ADR 14,662 257
-----------
579
-----------
China - 0.1%
Huaneng Power International, Inc. - ADR
Series N (a) 19,000 441
-----------
441
-----------
Czech Republic - 0.0%
SPT Telecom AS (a) 580 61
-----------
61
-----------
Denmark - 0.4%
Bang & Olufsen Holding Series B 10,000 595
Coloplast AS Class B (Regd) 5,250 406
Den Danske Bank 2,225 297
Tele Danmark AS Series B 840 52
Tele Danmark Class B - ADR 50,100 1,544
Unidanmark Class A (Regd) 2,040 150
-----------
3,044
-----------
Finland - 0.8%
Aamulehti Group 5,500 183
Enso OY Series A 62,500 484
Finnair Oyj 63,800 515
Kesko 8,600 136
Kymmene GY 52,000 1,040
Metsa-Serla Oyj Series B 70,000 546
Nokia AB Series A 11,244 798
Outokumpu OY Class A 37,200 454
OY Tamro AB 34,700 190
Pohjola Series B 9,600 356
Rauma Group (The) 9,300 145
Rautaruukki OY 102,200 825
Valmet Corp. Series A 52,600 726
-----------
6,398
-----------
France - 9.4%
Accor SA 21,421 3,983
Alcatel Alsthom 8,555 1,087
Alcatel Alsthom Compagnie Generale
d'Electricite - ADR 61,900 1,567
Assurances Generales de France 3,346 177
AXA - UAP 36,896 2,855
Banque Nationale Paris 17,069 907
Boiron 3,400 185
Bongrain SA 600 253
Canal Plus 1,100 205
Carrefour SA 1,502 784
Chargeurs International SA 3,500 209
Cie de St. Gobain 10,844 1,541
Cie Finance Paribas Class A (BR) 28,960 2,517
Clarins 3,284 252
Credit Commercial de France 3,274 224
Credit Local de France (Regd.) 1,347 156
</TABLE>
International Securities Fund 65
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- ---------
<S> <C> <C>
Credit National 4,122 $ 240
D.M.C. Dollfuss-Mieg (a) 2,900 52
Dexia France 10,962 1,270
Dexia France (Regd) 900 104
Eaux (cic Generale) 34,707 4,844
Elf Aquitaine - ADR 33,600 1,970
Elf Aquitaine SA 13,440 1,563
Eridania Beghin-Say 8,995 1,406
France Telecom SA (a) 22,687 823
Galeries Lafayette 500 276
Groupe Andre SA (a) 2,500 251
Groupe Danone 25,636 4,579
GTM - Entrepose 1,900 128
Guilbert SA 1,535 219
Havas 1,450 104
L'Air Liquide 4,499 704
L'Oreal (Societe) 491 192
Lafarge Corp. SA (BR) 5,511 362
Lagardere Groupe (Regd) 51,200 1,693
Lapeyre (BR) 2,950 163
Legrand 1,209 241
Legris Industries SA 3,900 135
LVMH Moet-Hennessy 617 102
Lyonnais Eaux Dumez 31,841 3,524
M6 Metropole Television 4,500 493
Michelin (Cie Gen) Class B (Regd) 32,237 1,623
Nord-Est 11,000 219
Pathe SA 1,039 202
Pechiney International Class A 44,282 1,748
Peugeot SA 8,690 1,096
Pinault-Printemps Redoute SA 2,244 1,197
Primagaz CIE 1,761 147
Renault (a) 121,983 3,431
Rhone Poulene SA - ADR 23,139 1,027
Rhone-Poulene SA Class A - ADR 50,110 2,245
Sanofi SA 28,062 3,124
Schneider SA 65,013 3,530
Scor SA 12,000 574
Selimeg (Regd) 2,000 100
SEITA 10,950 393
SGS Thomson Microelectronics (a) 8,360 517
Simco (Regd) 3,300 222
Societe Generale 13,689 1,865
Sodexho 815 437
Sodexho Alliance SA (a) 90 47
Sylea 2,400 229
Thomson-CSF 71,976 3,269
Total Co. SA Class B 38,307 4,169
TV Francaise (TFI) 15,877 1,622
Union des Assurances Federales 4,538 596
Usinor Sacilor 143,768 2,076
Valeo 27,149 1,841
Vallourec (Usin) 360 21
---------
78,907
---------
Germany - 6.5%
Adidas AG 8,900 1,171
Allianz AG (Regd) 2,990 775
BASF AG 15,450 547
Bayer AG 64,679 2,416
Bayer Motoren Werk 381 285
Bayerische Hypotheken-und Wechsel Bank AG 9,901 483
Bayerische Vereinsbank AG 8,146 533
Berliner Kraft-und Licht (Bewag) -
Aktiengesellschaft Class A 32,400 980
Billinger & Berger BAU AG 13,610 422
Buderus AG 1,093 490
Commerzbank AG 25,130 989
Continental AG 23,630 521
Daimler-Benz AG 63,300 4,441
Deutsche Bank AG 46,167 3,259
Deutsche Lufthansa AG (a) 96,550 1,852
Deutsche Telekom AG 14,759 278
Douglas Holding AG 17,400 525
Dresdner Bank AG 14,450 667
Fresenius Medical Care AG - ADR (a) 27,240 592
GEA AG 3,532 1,335
Gehe AG 13,045 653
Gerresheimer Glas AG 3,500 49
Hanover Rueckversicherungs AG 8,457 790
Henkel KGaA 14,600 820
Hoechst AG 99,379 3,480
Hornback Baumarkt AG 1,135 32
IKB Deutshe Industriebank AG 1,750 34
Karstadt AG 1,075 367
M.A.N. AG 650 188
Mannesmann AG 9,242 4,670
Merck KGAA 12,100 393
Metro AG 9,240 331
MobilCom AG (a) 2,856 432
Muenchener Rueckversicherungs - Gesellschaft AG 2,690 1,014
ProSieben Media AG - ADR (a) 1,154 27
Rhoen - Klinikum AG 2,764 270
SAP AG 2,770 841
</TABLE>
66 International Securities Fund
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
Schering AG 5,600 $ 540
Sero Entsorgung AG 4,300 90
SGL Carbon AG 1,279 165
Siemens AG 77,967 4,616
Tarkett AG 30,823 711
Veba AG 103,450 7,044
Viag AG 3,050 1,643
Volkswagen International AG 4,588 2,581
Wella Aktiengesellschaft 250 179
-----------
54,521
-----------
Hong Kong - 1.9%
Cathay Pacific Airways 128,000 104
Cheung Kong Holdings, Ltd. 21,000 138
China Light & Power 32,000 178
Dao Heng Bank Group, Ltd. 80,000 200
Dickson Concepts International, Ltd. 123,000 179
First Pacific Co. 138,615 67
Great Eagle Holdings 60,470 85
Great Eagle Holdings 1998 Warrants (a) 12,094 2
Guangshen Railway Co., Ltd. 2,772,500 733
Guoco Group, Ltd. 162,000 396
Hang Lung Development Co. 192,000 270
Hong Kong & China Gas Co., Ltd. 324,720 629
Hong Kong Electric Holding, Ltd. 691,000 2,626
HSBC Holdings (UK Regd) PLC 85,385 2,105
Hutchison Whampoa, Ltd. 483,000 3,029
National Mutual Asia 492,000 489
New World Development Co., Ltd. 632,421 2,187
Orient Overseas International Ltd. 121,000 65
Sun Hung Kai Properties, Ltd. 177,000 1,233
Swire Pacific, Ltd. Class A 74,000 406
Swire Pacific, Ltd. Class B 404,000 409
Tai Cheung Holdings 56,000 22
Television Broadcast 167,000 476
Wharf Holdings 166,000 364
-----------
16,392
-----------
Ireland - 0.2%
Allied Irish Banks 112,000 1,068
Independent Newspapers PLC 90,000 493
Waterford Wedgwood (Units) 275,000 372
-----------
1,933
Italy - 4.8%
Assicurazioni Generali SPA 19,000 467
Banca Commerciale Italiana 448,700 1,560
Banca Pop di Bergamo CV 3,000 52
Banca Pop di Milano 170,000 1,067
Banco di Roma (a) 352,000 355
Credito Italiano 1,608,874 4,961
Edison 49,000 296
ENI SPA - ADR 21,300 1,215
Ente Nazionale Idrocarburi SPA (Regd) 383,940 2,177
Fiat SPA 173,800 505
Fiat SPA di Risp 278,065 460
Fila Holdings SPA - ADR 8,000 161
Finmeccanica SPA (a) 233,545 116
First Banco S. Paolo 97,000 927
Gewiss SPA 10,000 189
Gucci Group NV 4,946 207
Industrie Natuzzi SPA - ADR 27,412 565
Istituto Mobiliare Italiano SPA 106,530 1,265
Istituto Mobiliare Italiano SPA - ADR 20,800 744
Istituto Nazionale Delle Assicurazioni 304,000 616
Italgas (Soc. Ital.) 41,000 169
Luxottica Group SPA - ADR 7,900 494
Magneti Marelli SPA 40,000 68
Mediaset SPA 358,985 1,763
Mediolanum SPA 26,576 500
Mondadori (Arnoldo) Editore SPA 93,500 735
Montedison SPA New 830,000 746
Montefibre di Risp 67,000 41
Montefibre SPA 240,000 170
Parmalat Finanziaria SPA 315,100 451
Pirelli SPA 1,010,000 2,701
Rinascente (LA) 13,100 98
Simint S.p.A. (a) 100,000 726
Telecom Italia Mobile SPA 241,534 1,115
Telecom Italia Mobile SPA - di Risp 41,973 119
Telecom Italia SPA (a) 2,220,019 12,199
-----------
40,000
-----------
Japan - 18.6%
Acom Co., Ltd. 8,000 441
Advantest 2,420 137
Alps Electric Co. 21,000 198
Amada Co., Ltd. 42,000 156
Aoki International 32,000 159
</TABLE>
International Securities Fund 67
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
Aoyama Trading Co. 57,600 $ 1,028
Apic Yamada Corp. 19,300 167
Ashikaga Bank 137,000 220
Bank Of Tokyo - Mitsubishi, Ltd. 127,000 1,751
Bank of Yokohama 80,000 211
Bridgestone Tire Corp. 73,000 1,582
Brother Industries 134,000 306
Canon Sales Co., Inc. 11,000 126
Canon, Inc. 262,000 6,100
Chugai Pharmaceutical Co. 89,000 457
Citizen Watch Co., Ltd. 23,000 154
Credit Saison Co. 74,750 1,843
CSK Corp., Ltd. 14,000 358
Dai Ichi Kangyo Bank 98,000 578
Dai Ichi Pharmaceutical Co. 90,000 1,013
Dai Nippon Screen Manufacturing Co. 36,000 165
Dai-Tokyo Fire & Marine 323,000 1,108
Daifuku Machinery Co. 9,000 44
Daito Trust Construction 51,350 313
Daiwa Bank 112,000 239
Daiwa Danchi Co., Ltd. (a) 65,000 96
Daiwa House Industries Co. 109,000 576
Daiwa Kosho Lease Co., Ltd. 122,000 495
DDI Corp. 268 708
East Japan Railway 511 2,305
Ebara Corp. 38,000 402
Eisai Co. 900 14
Ezaki Glico Co. 69,000 446
Fanuc Co. 10,000 378
Fuji Machine Manufacturing Co. 25,000 603
Fuji Oil Co. 60,000 197
Fuji Photo Film Co. 21,000 804
Fujitsu, Ltd. 50,000 536
Fujitsu, Ltd. 1999 Warrants Series 2 (a) 23 46
Fukui Bank 110,000 206
Furukawa Electric Co. 130,000 557
Gakken Co. 72,000 101
General Sekiyu KK 26,000 110
Heiwa Corp. 29,000 251
Hitachi Credit Co., Ltd. 36,000 593
Hitachi Zosen Corp. 62,000 99
Hitachi, Ltd. 562,000 4,003
Hokkaido Electric 20,700 292
Honda Motor Co., Ltd. 40,000 1,467
Hyakugo Bank 35,000 150
Inax Corp. 21,000 61
Intec, Inc. 40,000 225
Ishihara Sangyo (a) 134,000 149
Ishikawajima-Harima Heavy Industries 220,000 329
Ito-Yokado Co., Ltd. 90,000 4,584
Japan Tobacco, Inc. 137 972
Jeol 50,000 159
Kamei Corp. 46,000 317
Kao Corp. 255,000 3,672
Kawasho Corp. 92,000 120
Keiyo Bank, Ltd. 30,000 62
Kinki Coca-Cola Bottling 27,000 287
Kirin Beverage Corp. 24,000 397
Kissei Pharmaceutical Co. 34,000 490
Koa Fire & Marine 67,000 251
Kokuyo Co., Ltd. 17,000 293
Komatsu Forklift Co., Ltd. 52,000 261
Komori Corp. 15,000 223
Kumagai Gumi Co. 41,000 22
Kuraray Co., Ltd. 40,000 331
Kurimoto Iron Works 90,000 255
Kyocera Corp. 20,000 907
KyokutoBoeki 35,000 73
Kyushu Electric Power 13,900 200
Mabuchi Motor Co. 29,600 1,503
Makita Corp. 119,000 1,139
Marui Co., Ltd. 40,000 622
Maruichi Steel Tube 38,000 463
Matsumotokiyoshi 20,900 800
Matsushita Electric Industrial Co., Ltd. 222,000 3,247
Mazda Motor Corp. (a) 363,000 862
Mikuni Coca-Cola Bottling 37,000 462
Minebea Co., Ltd. 168,000 1,801
Ministop Co., Ltd. 7,000 181
Mitsubishi Corp. 151,000 1,191
Mitsubishi Estate Co., Ltd. 61,000 663
Mitsubishi Heavy Industries 594,000 2,475
Mitsubishi Paper Mills 30,000 42
Mitsubishi Rayon 75,000 184
Mitsubishi Trust & Banking 133,000 1,334
Mitsui & Co. 84,000 497
Mitsui Fudosan Co., Ltd. 211,000 2,036
Mitsui Marine & Fire Insurance Co., Ltd. 30,000 153
Mitsui Mining & Smelting 110,000 441
Mitsui Petrochemical Industry 20,000 37
Mitsui Trust & Banking 374,000 725
Murata Manufacturing Co., Ltd. 107,000 2,688
Nagase & Co. 25,000 73
Namco 48,700 1,414
Nanto Bank 57,000 292
National House Industrial 11,000 75
</TABLE>
68 International Securities Fund
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
NEC Corp. 112,000 $ 1,192
Nichido Fire & Marine 450 2
Nichiei Co., Ltd. 16,000 1,703
Nichimo Co. 65,000 61
Nippon Denso Co. 179,000 3,222
Nippon Express Co. 134,000 667
Nippon Fire & Marine 80,000 300
Nippon Hodo Co. 11,000 35
Nippon Oil Co. 156,000 403
Nippon Steel Corp. 595,000 879
Nippon Telegraph & Telephone Corp. 661 5,670
Nishimatsu Construction 195,000 612
Nissan Motor Co., Ltd. 137,000 567
Nissho Iwai Corp. 83,400 146
Nomura Securities 266,000 3,545
Noritake Co. 14,000 67
North Pacific Bank 20,000 68
NIT Data Communications Systems Corp. 58 3,123
Okarnura Corp. 60,000 148
Pioneer Electronics Corp. 190,000 2,925
Promise Co., Ltd. 7,980 442
Ricoh Co., Ltd. 68,000 844
Rinnai Corp. 46,000 694
Rohm Co. 27,000 2,750
Roland Corp. 9,000 165
Sakura Bank, Ltd. 114,000 326
Sangetsu Co. 6,000 62
Sankyo Co. 41,000 926
Sankyo Co., Ltd. 45,000 658
Sankyo Seiko Co. 96,000 173
Santen Pharmaceutical Co., Ltd. 22,000 253
Sanwa Bank 99,000 1,001
Secom Co. 16,000 1,022
Sega Enterprises 6,800 123
Sekisui Chemical Co., Ltd. 195,000 990
Sekisui House, Ltd. 126,000 810
Seven-Eleven Japan NPV 8,200 580
Sharp Corp. 75,000 516
Shiga Bank, Ltd. 37,000 159
Shikoku Electric Power 7,700 110
Shimachu Co., Ltd. 12,000 188
Shin Etsu Chemical 2000 Warrants (a) 110 151
Shin-Etsu Chemical Co. 62,050 1,183
Shiseido Co., Ltd. 88,000 1,200
Shohkoh Fund & Co., Ltd. 700 213
Showa Aircraft Industry 21,000 66
Showa Shell Sekiyu 50,300 252
Sintokogio 15,000 45
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
Sony Corp. 129,400 $ 11,496
Stanley Electric 76,000 210
Sumitomo Bank 135,000 1,541
Sumitomo Corp. 69,000 386
Sumitomo Electric Industries 87,000 1,186
Sumitomo Forestry 101,000 494
Sumitomo Marine & Fire 26,000 137
Sumitomo Metal Industries, Ltd. 352,000 450
Sumitomo Realty & Development 413,000 2,372
Sumitomo Rubber Industries 58,000 245
Sumitomo Trust & Banking 435,000 2,259
Tadano 60,000 163
Takeda Chemical Industries 29,000 826
TDK Corp. 23,000 1,733
Teijin, Ltd. 92,000 192
Toc Co. 41,000 311
Toda Corp. 50,000 136
Toho Bank 83,000 331
Tohoku Electric Power 16,500 250
Tokio Marine & Fire Insurance Co. 17,000 193
Tokyo Broadcasting 62,000 783
Tokyo Electric Power 118,000 2,151
Tokyo Electronics 8,800 282
Tokyo Gas Co. 441,000 1,000
Tokyo Steel Manufacturing 67,400 228
Toppan Printing 48,000 625
Tori Pharmaceutical Co., Ltd. 12,200 206
Toshiba Corp. 513,000 2,133
Tostem Corp. 16,000 172
Toyo Trust & Banking 130,000 767
Toyota Motor Corp. 127,000 3,638
Tsubakimoto Chain 60,000 216
UNY Co., Ltd. 19,000 260
West Japan Railway Co. 110 350
Yamaha Motor Co. 34,000 228
Yamanouchi Pharmaceutical 57,000 1,222
Yamato Kogyo Co. 34,000 204
Yamato Transport 87,000 1,166
Yasuda Fire & Marine Insurance Co., Ltd. (The) 33,000 141
Yodogawa Steel Works, Ltd. 61,000 248
Yoshitomi Pharmaceutical 44,000 154
Yurtec Corp. 11,550 71
-----------
156,722
-----------
Malaysia - 0.5%
Berjaya Sports 76,000 195
Carlsberg Brewery Malaysia Berhad 260,000 802
</TABLE>
International Securities Fund 69
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
Commerce Asset Holdings 52,631 $ 25
Gamuda Berhad 344,300 191
IND Oxygen, Inc. 260,000 84
Kumpulan Guthrie 654,000 420
Malakoff Bhd 167,000 348
Petronas Dagangan 1999 Warrants (a) 92,000 13
Renong Berhad (a) 596,000 276
Resorts World Berhad 633,000 1,066
Tanjong PLC 236,000 391
-----------
3,811
-----------
Mexico - 0.5%
Cemex SA de CV Class B NPV (a) 21,360 114
Cifra SA de CV - ADR 2,046 50
Compania Cervecerias Unidas SA - ADR 2,702 79
Empresa Nacional de Electric - ADR 7,939 140
Fomento Economico Mexicano SA de CV
Series B NPV 31,157 249
Gruma SA - ADR (a) 8,127 129
Gruma SA Series B NPV (a) 27,670 110
Grupo Financiero Banamex AC
Series B NPV (a) 49,168 147
Grupo Financiero Banamex AC
Series L NPV (a) 3,238 8
Grupo Industrial Durango SA
de CV - ADR (a) 24,500 349
Grupo Industrial Maseca Series B NPV 88,656 92
Grupo Modelo SA Series C 22,110 186
Grupo Television SA de CV - GDR (a) 23,056 892
Kimberly-Clark, Mexico Class A NPV 50,601 248
Panamerican Beverages, Inc. Class A 9,508 310
Telefonos de Mexico SA Series L - ADR 12,675 711
TV Azteca SA de CV - ADR (a) 9,700 219
Vitro Sociedad Anonima - ADR 12,700 166
-----------
4,199
-----------
Netherlands - 6.3%
ABN Amro Holdings NV 97,541 1,900
Aegon 13,020 1,159
AKZO Nobel NV 23,185 2,796
Apothekers Cooperatie OPG 6,700 200
Baan Co. NV (a) 11,198 367
Benckiser NV Class B (a) 30,600 1,266
Boskalis Westminster CVA 14,559 259
CSM NV CVA 11,452 $ 508
DOCdata NV (a) 18,200 314
Elsevier NV 100,234 1,621
European Vinyls Corp. International NV 6,100 135
Fortis Amev NV 13,847 604
Heineken Holding NV Class A 2,100 323
Hollandsche Beton Groep NV (a) 41,630 774
Hunter Douglas NV (a) 24,290 851
ING Groep NV 107,726 4,537
KNP BT (Kon) NV 53,302 1,228
Koninklijke Ahold NV 35,174 918
Koninklijke Emballage Industrie Van Leer 9,500 195
Koninklijke Nutricia Verenigde Bedrijven NV (a) 9,280 281
Nedlloyd Groep NV 28,000 635
Nutreco Holding NV (a) 12,700 289
Otra NV 2,860 41
Pakhoed Kon NV CVA 2,000 58
Philips Electronics 61,755 3,704
Philips Electronics - ADR 18,800 1,137
Polygram 29,793 1,425
Royal Dutch Petroleum Co. 201,168 11,042
Royal PTT Nederland NV 65,836 2,747
Royal PTT Nederland NV - ADR 29,019 1,204
Stork NV 11,100 383
Unilever NV 34,950 2,155
Verenigde Nederlandse Uitgeversbedrijven
Verenigd Bezit 175,053 4,938
Wereldhave NV 6,600 415
Wolters Kluwer CVA 21,272 2,748
-----------
53,157
-----------
New Zealand - 0.2%
Air New Zealand Class B 199,434 400
fletcher Challenge Building 46,122 94
fletcher Challenge Energy 144,968 508
Lion Nathan, Ltd. 96,300 216
Telecom Corp. of New Zealand, Ltd. 86,700 420
Wrightson, Ltd. 250,000 116
-----------
1,754
-----------
Norway - 0.7%
Bergesen DY AS Series A 3,510 83
Kvaerner Industries AS Series B 7,200 334
Norsk Hydro AS 39,714 1,933
Olav Thon Eiendomsselskap AS 13,700 441
Orkla AS New 15,051 1,294
</TABLE>
70 International Securities Fund
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
Orkla AS Series B Free 6,657 $ 517
Rieber & Son ASA Series B 20,000 542
Saga Petroleum AS Series B 6,610 100
Schibsted AS 31,100 533
Storebrand ASA Series A (a) 50,000 352
-----------
6,129
-----------
Panama - 0.0%
Banco Latinoamericano
de Exportaciones SA Class E 1,435 59
-----------
59
-----------
Peru - 0.0%
Credicorp, Ltd. 3,000 54
Telefonica Del Peru SA Class B - ADR 4,441 104
-----------
158
-----------
Portugal - 0.3%
Banco Totta e Acores (Regd) 70,800 1,391
Estabelecimentos Jeronimo Martins & Filho (a) 16,741 531
Jeronimo Martins SGPS 11,161 354
Telecel-Comunicacaoes Pessoaissa (a) 4,000 426
-----------
2,702
-----------
Russia - 0.0%
Gazprom - ADR 1,140 27
Lukoil Oil Co. - ADR 1,140 105
-----------
132
-----------
Singapore - 0.7%
City Developments 18,000 83
Creative Technology, Ltd. (a) 5,000 109
Development Bank of Singapore, Ltd.
(Alien Market) 112,000 957
Hong Kong Land Holdings, Ltd. (a) 198,093 380
Jardine Strategic Holdings, Ltd. (a) 436,375 1,152
Jardine Strategic Holdings, Ltd.
1998 Warrants (a) 13,375 1
Jurong Shipyard 133,000 631
Mandarin Oriental International, Ltd. (a) 557,318 373
Overseas Chinese Banking (Alien Market) 13,200 77
Overseas Union Bank (Alien Market) 35,800 137
Singapore Airlines, Ltd. (Alien Market) 133,500 871
Singapore Land 68,000 149
Singapore Press Holdings (Alien Market) 23,760 298
United Overseas Bank, Ltd. (Alien Market) 129,866 721
-----------
5,939
-----------
South Korea - 0.0%
Samsung Electronics, Ltd. 3,256 74
-----------
74
-----------
Spain - 2.8%
Acerinox SA 3,500 518
Argentaria 13,209 804
Banco Bilbao Vizcaya SA 49,560 1,604
Banco Popular Espanol SA 16,448 1,150
Banco Santander SA (Regd) 18,304 611
Centros Commerciales Pryca 23,116 344
Corp. Fin. Reunida (a) 150,000 802
Corporacion Bancaria de Espana SA 57,200 1,748
Cubiertas Y Mzov 5,000 816
Dragados y Construcciones SA 5,300 113
Empresa Nacional de Electricidad SA (a) 61,856 1,098
Fomento de Construcciones y Contratas SA (a) 8,900 339
Fuerzas Electricat Series A 58,800 490
Gas Natural SDG SA (a) 4,357 226
Gas Y Electricidad SA Series 2 17,424 1,258
Hidroelectrica del Cantabrico SA 12,330 541
Iberdrola SA 117,853 1,551
Prosegur CIA de Seguridad SA (Regd) 40,000 402
Repsol - ADR 41,200 1,754
Repsol SA 31,450 1,342
Tabacalera SA Series A (Regd) 27,143 2,200
Telefonica de Espana 118,307 3,378
Union Electrica Fenosa 17,000 163
Viscofan Envoltura 20,000 502
-----------
23,754
-----------
Sweden - 2.7%
ABB AB Series A (a) 25,600 303
ABB AB Series B (a) 80,600 949
Astra AB Series A (a) 52,700 913
Astra AB Series B (a) 70,910 1,192
Atlas Copco AB Series B 14,740 439
Autoliv, Inc. 39,270 1,279
Avesta-Sheffield 52,500 347
BT Industries AB 42,000 841
</TABLE>
International Securities Fund 71
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
----------- -----------
<S> <C> <C>
Diligentia AB (a) 18,370 $ 245
Electrolux AB Series B 31,940 2,217
Esselte AB Series B 3,090 63
Granges AB (a) 4,420 69
Hennes and Mauritz AB Series B (a) 29,320 1,293
Hoganas AB B Shares 14,000 429
Incentive AB Series A 6,800 612
Incentive AB Series B 14,200 1,282
Kalmar Industries 35,000 564
Marieberg Tidnings Series A 37,000 867
Munksjo AB 40,900 389
Nordbanken Holding AB (a) 119,072 673
OM Gruppen AB 21,000 764
Pharmacia & Upjohn, Inc. 39,600 1,450
Sandvik AB Series A 3,420 97
Sandvik AB Series B 13,170 377
Scandic Hotels AB (a) 16,600 406
Scania AB Series B 7,000 156
Scania Aktiebolag - ADR Series A 11,100 244
Scania Aktiebolag - ADR Series B 4,800 106
Scribona AB Series B Free 3,060 34
SKF AB Series A 20,380 408
Stora Kopparbergs Bergslags Aktiebolag
Series A 78,000 982
Svenska Celluosa Series B Free 13,700 308
Svenska Handelsbank Series A 31,000 1,072
Telefonaktiebolaget Ericsson (LM) Series B 17,260 649
Tornet Fastighets AB 52,500 747
-----------
22,766
-----------
Switzerland - 6.0%
ABB AG (a) 959 1,204
Adecco SA 2,052 595
Baloise Holding, Ltd. (a) 600 1,110
Bobst AG (BR) 450 662
Bobst SA - AG 450 325
Ciba Specialty Chemicals AG (a) 9,300 1,108
Credit Suisse Group (Regd) 8,565 1,325
Danzas Holding AG 1,900 373
Fischer (Georg) AG (BR) 220 301
Fischer (Georg) AG (Regd) 300 80
Forbo Holding AG (Regd) 1,540 629
Generali (Schweiz) Holding (a) 4,400 911
Liechtenstein Global Trust AG 1,200 743
Lindt & Spruengli AG 230 577
Nestle SA (Regd) 6,627 9,928
Novartis AG (Regd) 4,306 6,984
Phoenix Mecano (BR) 500 255
Publicitas Holdings SA - (Regd) 1,000 218
Roche Holdings Genusscheine AG NPV 1,008 10,006
Sarna Kunststoff Holdings AG (Regd) 200 260
Schweiz Bankgesellsch (BR) 3,819 5,520
Schweiz Ruckversicher (Regd) 983 1,838
Schweizerischer Bankverein (Regd) 8,600 2,672
SGS Holding (BR) 450 862
SMH AG Neuenburg (Regd) 7,700 1,038
Sulzer AG (Regd) 1,300 824
-----------
50,348
-----------
United Kingdom - 19.2%
Abbey National PLC 52,000 936
Airtours PLC 60,000 1,222
Allied Colloids PLC 187,600 511
Amersham International PLC 9,100 338
Anglian Water PLC 75,300 1,027
Argos PLC 54,133 489
ASDA-MPI Group PLC 929,708 2,735
Associated British Ports PLC 170,000 840
B.A.T. Industries PLC 108,600 990
Barclays Bank PLC 83,000 2,210
BASS PLC 46,000 716
Berisford PLC 400,000 1,229
BG PLC 51,176 230
Billiton PLC (a) 171,000 438
BOC Group PLC 178,100 2,928
BPB Industries PLC 38,900 217
British Aerospace PLC 122,185 3,482
British Airways PLC 89,000 819
British Petroleum Co. PLC 486,468 6,435
British Steel PLC 297,600 640
British Telecom PLC 182,160 1,435
British-Borneo Petroleum Syndicate PLC 26,800 188
BTR PLC 704,900 2,130
Bunzl PLC 333,000 1,294
Burmah Castrol PLC 33,000 576
Cable & Wireless Communications PLC (a) 89,000 386
Cable & Wireless PLC 496,252 4,361
Cable & Wireless PLC - ADR 31,509 857
Cadbury Schweppes PLC 132,918 1,342
Caradon PLC 110,624 322
Centrica PLC (a) 58,000 85
Clark (Matthew) & Sons 45,000 118
Coats Viyella PLC 268,000 401
</TABLE>
72 International Securities Fund
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- ---------
<S> <C> <C>
Commercial Union Assurance Co. PLC 122,000 $ 1,701
Compass Group PLC 117,000 1,439
Costain Group PLC (a) 6,800 2
Courtaulds Textile Co. PLC 111,200 652
Cowie Group PLC 130,416 737
Dalgety PLC 235,000 1,065
Devro International PLC 85,000 526
ED&F Man Group PLC 110,000 450
Electrocomponents PLC 40,000 298
EMI Group PLC (a) 54,000 451
Enterprise Oil PLC 35,000 333
First Leisure Corp. PLC 85,000 418
Flextech PLC (a) 70,000 600
General Accident PLC 66,900 1,203
General Electric Co. PLC 63,000 408
GKN PLC 7,000 143
Glaxo Wellcome PLC 288,315 6,874
Glynwed International PLC 63,200 269
Granada Group PLC 122,200 1,867
Great University Stores PLC 88,000 1,109
Guardian Royal Exchange PLC 297,000 1,613
Guinness PLC 505,900 4,628
Hanson PLC 165,750 739
Heywood Williams Group PLC 21,041 72
Hillsdown Holdings PLC 303,051 737
HSBC Holdings PLC 69,000 1,791
Hyder PLC 49,250 783
Imperial Chemical Industries PLC 118,300 1,848
Imperial Tobacco Group PLC 101,000 635
Kingfisher PLC 159,542 2,227
Ladbroke Group, Ltd. PLC 742,669 3,220
Laing (John) PLC Class A NV 31,000 163
Laird Group PLC 163,868 1,198
Lloyds TSB Group PLC 241,620 3,143
London Clubs International 110,000 587
LucasVarity PLC 1,275,070 4,503
Manchester United PLC 240,000 631
Medeva PLC 248,000 660
MEPC PLC 46,800 390
MFI Fumiture Group PLC 305,076 604
Mirror Group News PLC 579,000 1,854
National Power PLC 16,000 158
National Westminster Bank PLC 298,071 4,955
Next PLC 48,600 555
Northem Rock PLC (a) 64,000 628
Pace Micro Technology PLC 160,000 124
Pearson PLC 78,800 1,024
Pilkington Brothers PLC 176,000 369
Powell Duffryn PLC 55,000 465
Powergen PLC 160,848 2,092
Premier Consolidated Oil PLC 836,000 728
Premier Famell PLC 61,000 439
Provident Financial PLC 72,000 946
Prudential Corp. PLC 108,000 1,315
Racal Electronics PLC 273,400 1,199
Railtrack Group PLC 80,000 1,271
Rank Group PLC 147,500 821
Redland PLC 17,927 101
Reed International 244,880 2,333
Rio Tinto Corp. PLC (Regd) 212,724 2,622
Rolls-Royce PLC 141,937 548
Royal & Sun Alliance Insurance Group PLC 335,399 3,377
Royal Bank of Scotland Group PLC 155,200 1,979
Safeway PLC 370,177 2,085
Sainsbury (J.) PLC 184,595 1,555
Scottish Media Group PLC 17,900 196
Scottish Power PLC 166,000 1,467
Shell Transportation & Trading PLC (Regd) 822,100 5,766
Smith & Nephew PLC 599,000 1,771
Smith (David S.) Holdings PLC 65,500 214
SmithKline Beecham PLC 250,000 2,577
Somerfield PLC 347,000 1,197
South West Water PLC 72,200 1,097
Stagecoach Holdings PLC 89,166 1,223
Stakis PLC 510,302 796
Tarmac, Ltd. PLC 471,290 882
Taylor Woodrow PLC 212,000 620
Tesco Store Holdings PLC 81,181 669
Thames Water PLC 27,000 402
Thom PLC 214,285 556
Tomkins PLC 821,070 3,884
Trinity Holdings PLC 80,000 407
Unilever PLC 188,760 1,624
United Newspaper, Ltd. PLC 122,200 1,391
Vendome PLC 53,000 418
Vickers, Ltd. PLC 95,700 371
Vodafone Group PLC 603,150 4,359
Wessex Water PLC 96,400 812
Williams Holdings PLC 128,333 712
WPP Group PLC 170,000 757
Zeneca Group PLC 36,000 1,275
--------
161,630
--------
Venezuela - 0.0%
CIA Anon Nacional Telefonos de
Venezuela - ADR 4,397 183
--------
183
--------
</TABLE>
International Securities Fund 73
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
---------- ---------
<S> <C> <C>
Total Common Stocks
(cost $713,662) $ 757,173
---------
Preferred Stocks - 1.4%
Australia - 0.2%
News Corp., Ltd. 174,237 862
Sydney Harbour Casino Holdings, Ltd. (a) 832,053 789
---------
1,651
---------
Austria - 0.2%
Bank Austria (a) 20,064 893
Bank Austria AG (a) 18,628 841
Z Landerbank Bank Austria AG 3,800 180
---------
1,914
---------
Brazil - 0.2%
Banco Bradesco SA NPV 24,087,361 237
Banco Itau SA (Regd) 253,000 136
Brahma (cia Cervej) NPV 264,711 178
Brasmotor SA NPV 445,000 44
CEMIG SA 4,668,942 203
Cim Port Itau (Cia) 313,600 60
Coteminas (Cia Tec) NPV 312,000 112
Lojas Americanas NPV (a) 4,389,000 21
Petroleo Brasileiro SA NPV 1,592,669 373
Telecomunicacoes - NPV 1,505,538 401
Telecomunicacoes de Minas Gerais
Class B NPV 660,000 83
Telecomunicacoes de Minas Gerais
Series B NPV (a) 8,186 1
Telecomunicacoes do Rio de Janeiro SA NPV 694,625 72
Usiminas Uni Sd Mg NPV 14,962 88
-------
2,009
-------
Germany - 0.7%
Bayer Motoren Werk 600 307
Draegerwerk AG 950 17
Dyckerhoff AG 200 53
Fielmann AG 2,271 51
Fresenius AG 820 151
Henkel KGAA 3,000 189
Hombach Holding AG 2,150 149
Hugo Boss 550 703
Jungheinrich 900 135
Krones AG NV 800 249
M.A.N. AG 200 45
Porsche AG 700 1,167
ProSieben Media AG NV (a) 9,543 446
RWEAG 10,000 422
SAP AG 3,965 1,297
Wella AG 100 76
---------
5,457
---------
Italy-0.0%
Fiat SpA 135,300 207
---------
207
---------
Netherlands - 0.0%
International Nederlanden CVA 2,274 11
---------
11
---------
United States - 0.1%
WBK STRYPES Trust (conv.) 15,700 526
---------
526
---------
Total Preferred Stocks
(cost $9,658) 11,775
---------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Long-Term Investments - 0.2%
Belgium - 0.0%
Kredietbank
5.750% due 12/03/03 (conv.) BEF 15,000 63
---------
63
---------
Japan - 0.2%
Bank of Tokyo - Cayman
Finance, Ltd. (Perpetual Maturity)
4.250% due 03/31/49 JPY 90,000 755
Sumitomo Wiring Systems
0.900% due 09/30/08 40,000 245
Yamanouchi Pharmaceutical (conv.)
1.250% due 03/31/14 60,000 651
---------
1,651
---------
Total Long-Term Investments
(cost $2,080) 1,714
---------
</TABLE>
74 International Securities Fund
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- -------
<S> <C> <C>
Short-Term Investments - 5.8%
United States - 5.8%
Frank Russell Investment Company
Money Market Fund, due on demand(b) $ 39,019 $ 39,019
United States Treasury Notes
5.125% due 04/30/98 (c) 9,400 9,388
---------
Total Short-Term Investments
(cost $48,409) 48,407
---------
Total Investments
(identified cost $773,809)(d) - 97.4% 819,069
Other Assets and Liabilities,
Net - 2.6% 21,968
---------
Net Assets - 100.0% $ 841,037
=========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures purchased by
the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
GDS - Global Depositary Share
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
Foreign Currency Abbreviations:
AUD - Australian dollar IEP - Irish punt
BEF - Belgian franc ITL - Italian lira
CAD - Canadian dollar JPY - Japanese yen
DEM - German mark NLG - Dutch guilder
ESP - Spanish peseta NOK - Norwegian krone
FRF - French franc NZD - New Zealand dollar
GBP - British pound USD - U.S. dollar
The accompanying notes are an integral part of the financial statements.
International Securities Fund 75
<PAGE>
International Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- -------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
FTSE - 100 Index
Futures Contracts (UK)
expiration date 03/98 110 $ (159)
TOPIX Index
Futures Contracts (Japan)
expiration date 03/98 299 (1,116)
--------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ (1,275)
========
</TABLE>
(S) At December 31, 1997, United States Treasury Notes valued at
$9,388 were held as collateral by the custodian in connection
with futures contracts purchased by the Fund.
<TABLE>
<CAPTION>
% of Market
Net Value
Industry Diversification Assets (000)
- ------------------------ -------- -----------
<S> <C> <C>
Auto & Transportation 5.4% $ 45,533
Consumer Discretionary 16.3 136,640
Consumer Staples 6.9 58,007
Financial Services 17.0 143,515
Health Care 5.8 48,526
Integrated Oils 3.6 30,487
Materials & Processing 10.9 91,887
Miscellaneous 5.0 41,805
Other Energy 2.4 19,861
Producer Durables 6.8 57,248
Technology 2.8 23,816
Utilities 8.5 71,623
Long-Term Investments 0.2 1,714
Short-Term Investments 5.8 48,407
--------- ----------
Total Investments 97.4 819,069
Other Assets and Liabilities, Net 2.6 21,968
--------- ----------
Net Assets 100.0% $ 841,037
========= ==========
</TABLE>
<TABLE>
<CAPTION>
% of Market
Net Value
Geographic Diversification Assets (000)
-------------------------- -------- ----------
<S> <C> <C>
Europe 42.4% $ 356,262
Japan 18.8 158,373
United Kingdom 19.2 161,630
Pacific Basin 6.3 52,957
Latin America 1.5 12,846
United States (Short-Term Investments) 5.8 48,407
Other 3.4 28,594
-------- ----------
Total Investments 97.4 819,069
Other Assets and Liabilities, Net 2.6 21,968
-------- ----------
Net Assets 100.0% $ 841,037
======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
76 International Securities Fund
<PAGE>
International Securities Fund
Foreign Currency Exchange Contracts (Note 2)
December 31, 1997
Foreign Currency Exchange Spot Contracts
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
------------- ------------- ---------- -------------
<S> <C> <C> <C>
USD 160 AUD 244 01/02/98 $ (1)
USD 45 AUD 68 01/05/98 --
USD 188 AUD 288 01/07/98 --
USD 14 AUD 21 01/08/98 --
USD 71 FRF 424 01/30/98 --
USD 140 GBP 85 01/06/98 (1)
USD 118 JPY 15,375 01/05/98 (1)
USD 139 JPY 18,110 01/07/98 (1)
AUD 46 DEM 53 01/02/98 (1)
CAD 59 DEM 74 01/02/98 (1)
ESP 7,974 DEM 94 01/02/98 --
GBP 126 DEM 374 01/02/98 2
IEP 10 DEM 26 01/05/98 --
JPY 14,528 DEM 200 01/06/98 --
NOK 186 DEM 45 01/05/98 --
JPY 10,760 GBP 50 01/06/98 --
DEM 575 USD 321 01/05/98 2
ESP 150,508 USD 1,002 01/02/98 14
ESP 24,452 USD 161 01/05/98 1
FRF 1,486 USD 249 01/30/98 1
GBP 66 USD 109 01/07/98 1
ITL 379,612 USD 218 01/05/98 3
NLG 338 USD 168 01/05/98 1
NLG 350 USD 174 01/06/98 --
NZD 70 USD 41 01/05/98 --
-------------
$ 19
=============
</TABLE>
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
------------- ------------- ---------- -------------
<S> <C> <C> <C>
USD 34,501 GBP 21,000 03/20/98 $ (143)
USD 37,341 JPY 4,700,000 03/20/98 (921)
DEM 14,170 USD 8,042 03/18/98 129
GBP 4,750 USD 7,877 03/20/98 106
JPY 2,049,000 USD 16,298 02/25/98 476
JPY 1,175,000 USD 9,197 03/20/98 91
------------
$ (262)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Securities Fund 77
<PAGE>
International Securities Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
-------------------
<S> <C> <C>
Assets
Investments at market (identified cost $773,809)(Note 2) .................................................. $ 819,069
Foreign currency holdings (identified cost $12,315) ....................................................... 12,079
Forward foreign currency exchange contracts (cost $113,255)(Note 2) ...................................... 112,191
Foreign currency exchange spot contracts (cost $4,459)(Note 2) ............................................ 4,447
Receivables:
Dividends and interest .................................................................................. 1,601
Investments sold ........................................................................................ 10,142
Fund shares sold ........................................................................................ 5,675
Foreign taxes recoverable ............................................................................... 608
-------------------
Total Assets ....................................................................................... 965,812
Liabilities
Payables:
Investments purchased ............................................................. $ 4,659
Fund shares redeemed .............................................................. 1,970
Accrued fees to affiliates (Note 4) ............................................... 786
Other accrued expenses ............................................................ 437
Daily variation margin on futures contracts (Notes 2 and 3) ....................... 42
Forward foreign currency exchange contracts (cost $113,255)(Note 2) ................. 112,453
Foreign currency exchange spot contracts (cost $4,459)(Note 2) ...................... 4,428
------------------
Total Liabilities ..................................................................................... 124,775
--------------------
Net Assets ................................................................................................ $ 841,037
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income .............................................. $ (5,606)
Accumulated distributions in excess of net realized gains ................................................. (13,313)
Unrealized appreciation (depreciation) on:
Investments ............................................................................................. 45,260
Futures contracts ....................................................................................... (1,275)
Foreign currency-related transactions ................................................................... (570)
Shares of beneficial interest ............................................................................. 154
Additional paid-in capital ................................................................................ 816,387
--------------------
Net Assets ................................................................................................ $ 841,037
====================
Net Asset Value, offering and redemption price per share:
Class S ($839,766,613 divided by 15,353,898 shares of $.01 par value
shares of beneficial interest outstanding) .......................................................... $ 54.69
=====================
Class C ($1,270,665 divided by 23,255 shares of $.01 par value
shares of beneficial interest outstanding) .......................................................... $ 54.64
=====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
78 International Securities Fund
<PAGE>
International Securities Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Dividends .............................................................................................. $ 16,009
Dividends from Money Market Fund (Note 5) .............................................................. 3,012
Interest ............................................................................................... 647
Less foreign taxes withheld ............................................................................ (1,881)
--------------------
Total Investment Income ............................................................................. 17,787
Expenses (Notes 1, 2 and 4):
Management fees ................................................................ $ 7,751
Custodian fees ................................................................. 1,751
Transfer agent fees ............................................................ 504
Bookkeeping service fees ....................................................... 100
Professional fees .............................................................. 46
Trustees' fees ................................................................. 4
Miscellaneous .................................................................. 76
Registration fees
Class S ...................................................................... 79
Class C ...................................................................... 1
Distribution fees - Class C .................................................... 4
Shareholder servicing fees - Class C ........................................... 3
------------------
Total Expenses ..................................................................................... 10,319
--------------------
Net investment income ..................................................................................... 7,468
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ...................................................................... 28,910
Futures contracts ................................................................ 1,727
Foreign currency-related transactions ............................................ (5,117) 25,520
------------------
Net change in unrealized appreciation or depreciation of:
Investments ...................................................................... (32,916)
Futures contracts ................................................................ (742)
Foreign currency-related transactions ............................................ (208) (33,866)
------------------ --------------------
Net gain (loss) on investments ............................................................................ (8,346)
--------------------
Net increase (decrease) in net assets resulting from operations ........................................... $ (878)
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Securities Fund 79
<PAGE>
International Securities Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
----------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income................................................................. $ 7,468 $ 6,195
Net realized gain (loss).............................................................. 25,520 23,177
Net change in unrealized appreciation or depreciation................................. (33,866) 20,308
----------------- -----------------
Net increase (decrease) in net assets resulting from operations................. (878) 49,680
----------------- -----------------
From Distributions to Shareholders:
Net investment income
Class S............................................................................ (5,261) (3,797)
Class C............................................................................ (3) (3)
In excess of net investment income
Class S............................................................................ (3,871) (2,153)
Class C............................................................................ (3) (2)
Net realized gain on investments
Class S............................................................................ (31,097) (22,766)
Class C............................................................................ (45) (13)
In excess of net realized gain on investments
Class S............................................................................ (15,023) --
Class C............................................................................ (22) --
----------------- ----------------
Total Distributions to Shareholders............................................. (55,325) (28,734)
----------------- ----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ......... 153,002 99,903
----------------- -----------------
Total Net Increase (Decrease) in Net Assets.............................................. 96,799 120,849
Net Assets
Beginning of period................................................................... 744,238 623,389
----------------- -----------------
End of period (including accumulated distributions in excess of
net investment income of $5,606 and $2,204, respectively)............................ $ 841,037 $ 744,238
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
80 International Securities Fund
<PAGE>
International Securities Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........................... $ 58.48 $ 56.61 $ 53.96 $ 57.95 $ 44.75
Income From Investment Operations:
Net investment income ....................................... .56 .53 .56 .44 .40
Net realized and unrealized gain (loss) on investments ...... (.46) 3.72 4.89 1.23 14.53
-------- -------- -------- -------- --------
Total Income From Investment Operations ................ .10 4.25 5.45 1.67 14.93
-------- -------- -------- -------- --------
Less Distributions:
Net investment income ....................................... (.37) (.31) (.88) (.04) (.38)
In excess of net investment income .......................... (.27) (.17) (.23) (.02) (.23)
Net realized gain on investments ............................ (2.19) (1.90) (1.69) (5.60) (1.12)
In excess of net realized gain on investments ............... (1.06) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ............................................ (3.89) (2.38) (2.80) (5.66) (1.73)
Net Asset Value, End of Period ................................. $ 54.69 $ 58.48 $ 56.61 $ 53.96 $ 57.95
======== ======== ======== ======== ========
Total Return (%)(a) ............................................ .26 7.63 10.20 4.86 33.48
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)..................... 839,767 743,615 623,389 563,333 454,482
Ratios to average net assets (%)(a):
Operating expenses, net ..................................... 1.26 1.30 1.30 1.30 1.38
Operating expenses, gross ................................... 1.26 1.31 1.31 1.33 1.42
Net investment income ....................................... .91 .91 .97 .70 .82
Portfolio turnover rate (%) .................................... 73.54 42.43 42.96 72.23 60.22
Average commission rate paid per share
of security ($ omitted)(b) ................................... .0055 .0039 N/A N/A N/A
</TABLE>
(a) Periods less than one year are not annualized.
(b) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.
International Securities Fund 81
<PAGE>
International Securities Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996*
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period ..................... $ 58.47 $ 58.56
------------ ------------
Income From Investment Operations:
Net investment income (loss) ......................... .35 (.03)
Net realized and unrealized gain (loss) on investments (.64) 1.68
------------ ------------
Total Income From Investment Operations ........... (.29) 1.65
------------ ------------
Less Distributions:
Net investment income ................................ (.14) (.27)
In excess of net investment income ................... (.15) (.16)
Net realized gain on investments ..................... (2.19) (1.31)
In excess of net realized gain on investments ........ (1.06) --
------------ ------------
Total Distributions ............................... (3.54) (1.74)
------------ ------------
Net Asset Value, End of Period ........................... $ 54.64 $ 58.47
============ ============
Total Return (%) ......................................... (.41) 2.86(a)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ............. 1,271 623
Ratios to average net assets (%)(b):
Operating expenses ................................. 1.96 2.00
Net investment income (loss) ....................... .19 (.61)
Portfolio turnover rate (%)(b) ....................... 73.54 42.43
Average commission rate paid per share
of security ($ omitted)(c) ......................... .0055 .0039
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.
82 International Securities Fund
<PAGE>
Diversified Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide effective diversification against equities and a stable
level of cash flow.
Invests in: Fixed-income securities.
Strategy: The Fund uses a multi-style, multi-manager strategy and employed
three managers with distinct approaches to managing portfolios of intermediate-
maturity, investment-grade fixed income securities.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Diversified Bond-Class S LB Aggregate ** Lipper(c) Intermediate +
- ----- ------------------------ --------------- ------------------------
<S> <C> <C> <C>
$10,000 $10,000 $10,000
1988 $10,766 $10,789 $10,696
1989 $12,115 $12,357 $11,910
1990 $13,034 $13,464 $12,752
1991 $15,028 $15,619 $14,689
1992 $16,014 $16,775 $15,679
1993 $17,618 $18,410 $17,169
1994 $17,046 $17,873 $16,596
1995 $20,073 $21,175 $19,348
1996 $20,761 $21,944 $19,963
1997 $22,648 $24,062 $21,648
</TABLE>
<TABLE>
<CAPTION>
Diversified Bond Fund - Class S Lehman Brothers Aggregate Bond Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- ----------------- ----------- ----------- -------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,909 9.09% 1 Year $ 10,966 9.66%
5 Years 14,143 7.18%(S) 5 Years $ 14,345 7.48%(S)
10 Years 22,648 8.52%(S) 10 Years $ 24,062 9.18%(S)
<CAPTION>
Diversified Bond Fund - Class C ++ Lipper(C)Intermediate Investment Grade Debt Funds Average
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- ----------------- ----------- ----------- -------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,835 8.35% 1 Year $ 10,844 8.44%
5 Years $ 14,033 7.01%(S) 5 Years $ 13,807 6.66%(S)
10 Years $ 22,473 8.43%(S) 10 Years $ 21,648 8.03%(S)
</TABLE>
* The Diversified Bond Fund - Class S assumes initial investment on
January 1, 1988.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
+ Lipper(C) Intermediate (5-10 Yr.) Investment Grade Debt Funds Average is
the average total return for the universe of funds within the Intermediate
Investment Grade Debt Funds investment objective. The total return for the
funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates.
++ The Diversified Bond Fund - Class C - For the period, November 4, 1996
(commencement of sales) to December 31, 1997, shareholder service and Rule
12b-1 distribution fees were charged. Total return would have been lower
had these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
(S) Annualized.
84 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Diversified Bond Fund Class S and
Class C shares reflected total returns of 9.1% and 8.4%, respectively, as
compared to the Lehman Brothers Aggregate Bond Index, which gained 9.7%. The
index outperformed the Fund primarily due to the Fund's shorter duration through
part of the year, which reflected some of the uncertainty in the market, with
Fed intervention an almost constant concern. With yields falling on
intermediate- and longer-maturity bonds, the best returns were produced by
longer duration strategies. The bellwether 30-year treasury bond returns
exceeded 15% for the year.
Portfolio Highlights
Interest rates declined throughout the year as signs of disinflation, or even
deflation, helped ease yields. Although quite volatile again in 1997, the trend
in falling yields was strong, with the yield on the long bond reaching its
lowest point since its introduction in 1977. The Federal Reserve Board added
uncertainty to the market, but made only one interest rate move during the year,
a 1/4% increase in the first quarter. With trends in the economy suggesting
stable growth and no inflation, investors found appealing opportunities in
several segments of the bond markets, including lower quality corporate issues.
Uncertainties in the marketplace for bonds created some challenging
opportunities to add value. The Fund generated positive returns through security
selection, with a focus on exploiting favorable yield spreads, particularly in
mortgage-backed securities. However, mortgage-backed securities appeared to be
exposed to prepayments late in the year, as rates on mortgages reached very
attractive levels. Contrary to these expectations, the sector proved to be the
best performer versus duration-equivalent alternatives. Reflecting the benefit
of multiple manager perspectives, PIMCO was able to maintain an overweighting in
the sector by focusing on securities less vulnerable to prepayment concerns,
helping offset the reduction in mortgage-backed positions by Standish, Ayer &
Wood. While the strong performance of corporate issues throughout the first
three quarters also contributed positively to the Fund's performance, the
market's flight to quality in the fourth quarter produced weak returns from
lower quality issues in the sector.
- -------------------------------------------------------------------------------
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
United States Treasury 25.4%
Federal Home Loan Mortgage Corp. 11.1
Federal National Mortgage Association 11.1
Government National Mortgage Association 7.7
CIT Group Holdings, Inc. 0.7
Green Tree Financial Corp. 0.7
Fingerhut Master Trust 0.7
Resolution Funding Corp. 0.6
Premier Auto Trust 0.6
Fleetwood Credit Corp. 0.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AAA
Weighted Average Years-to-Maturity 8.8 Years
Weighted Average Duration 4.6 Years
Current Yield (SEC 30-day standardized)
Class S 5.88%
Class C 5.17%
Number of Issues 775
Number of Issuers 520
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers Styles
Lincoln Capital Management Co. Enhanced Core
Pacific Investment Management Co. Broad Market-Sector
Rotation
Standish, Ayer & Wood, Inc. Broad Market-Sector
Rotation
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Diversified Bond Fund 85
<PAGE>
Diversified Bond Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Amount Market Value
(000) (000)
-------------- -------------
<S> <C> <C>
Long-Term Investments - 94.4%
Asset-Backed Securities - 9.9%
Advanta Home Equity Loan Trust
Series 1991-1 Class A
9.000% due 02/25/06 $ 54 $ 56
Advanta Mortgage Loan Trust
Series 1997-3 Class A7
6.920% due 10/25/28 1,000 1,015
AFC Home Equity Loan Trust
Series 1996-2 Class 1 A3
7.590% due 09/25/27 1,315 1,330
American Express Credit Account
Master Trust
Series 1997-1 Class A
6.400% due 04/15/05 2,000 2,021
Arcadia Automobile Receivables Trust
Series 1997-C Class A3
6.250% due 11/15/01 1,600 1,605
BankAmerica Manufactured Housing Contract
Series 1997-1 Class A4
6.200% due 06/10/10(c) 1,000 1,003
California Infrastructure PG&E-1
Series 1997-1 Class A4
6.160% due 06/25/03 1,285 1,285
Capita Equipment Receivables Trust
Series 1996 - 1 Class A4
6.280% due 06/15/00 860 862
Case Equipment Loan Trust
Series 1996 - B Class A3
6.650% due 09/15/03 3,460 3,486
Chevy Chase Auto Receivables Trust
Series 1997-1 Class A
6.500% due 10/15/03 1,709 1,719
Circuit City Credit Card Master Trust
8.000% due 11/15/03 2,030 2,098
Citibank Credit Card Master Trust I
Series 1997-3 Class A
6.839% due 02/10/04 (c) 980 995
Contimortgage Home Equity Loan Trust
Mortgage Pass-thru Certificate
Series 1994-3 Class A-4
7.850% due 06/01/24 374 389
Series 1994-4 Class A-6
8.270% due 12/15/24 269 277
Series 1995-1 Class A2-A
8.600% due 06/15/25 1 1
Series 1996-4 Class A-9
6.880% due 01/15/28 825 833
Series 1997-2 Class A6
7.120% due 03/15/16 825 846
Discover Card Trust
Series 1992-B Class A
6.800% due 06/16/00 73 72
EQCC Home Equity Loan Trust
Series 1997-1 Class A4
7.160% due 03/15/13 900 927
Fleetwood Credit Corporation Grantor Trust
Series 1997-B Class A
6.400% due 05/15/13 (c) 4,014 4,044
Green Tree Financial Corp.
Series 1997-1 Class Ml
7.220% due 03/15/28 (c) 1,200 1,211
Series 1997-4 Class Ml
7.220% due 02/15/29 925 942
Series 1997-7 Class A5
6.540% due 07/15/19 3,000 3,017
Green Tree Recreational Equipment
Series 1997-3 Class Al
6.550% due 07/15/28 3,266 3,278
Key Auto Finance Trust
Series 1997-1 Class A3
6.150% due 03/15/04 1,455 1,460
Metris Master Trust
Series 1996-1 Class A
6.450% due 02/20/02 4,900 4,926
Series 1997 - 1 Class A
6.870% due 10/20/05 745 766
Navistar Financial Owner Trust
Series 1997-A Class A3
6.750% due 03/15/02 1,475 1,494
Series 1997-B Class A3
6.200% due 03/15/01 2,500 2,503
Norwest Financial, Inc.
6.375% due 11/15/03 575 577
Oakwood Mortgage Investors, Inc.
Series 1996-B Class A2
6.800% due 10/15/26 (c) 1,000 1,014
Series 1997-D Class A3
6.500% due 02/15/28 605 604
Onyx Acceptance Grantor Trust
Series 1997-1 Class A
6.550% due 09/15/03 (c) 122 122
Series 1997-4 Class A
6.300% due 05/l5/04 2,580 2,584
Preferred Credit Corp.
Series 1997-1 Class A6
7.590% due 07/25/26 850 891
</TABLE>
86 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
-------------- -------------
<S> <C> <C>
Premier Auto Trust
Series 1996-4 Class A4
6.400% due 10/06/01 $ 935 $ 940
Series 1997-2 Class AS
6.320% due 03/06/02 3,770 3,792
Providian Master Trust
6.250% due 06/15/07 1,565 1,575
Sears Credit Account Master Trust
Series 1997-1 Class A
6.200% due 07/16/07 3,105 3,103
Sears Credit Account Master Trust II
Series 1996-2 Class A
6.500% due 10/15/03 740 745
Team Fleet Financing Corp.
Series 1997-1 Class A
7.350% due 05/15/03 1,800 1,866
The Money Store Home Equity Loan Trust
Series 1994-D Class A4
8.750% due 09/15/20 700 727
Wal-Mart Stores, Inc.
Series 1994-B3
8.800% due 12/30/14 315 377
WFS Financial Owner Trust
Series 1997-B Class A3
6.300% due 06/20/99 1,580 1,590
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A2
6.200% due 11/15/02 774 775
Series 1997-A Class B
7.300% due 06/25/03 (144A)(c) 750 762
Series 1997-B Class A3
6.180% due 11/25/03 1,565 1,566
------------
68,071
------------
Bankers Acceptance Notes - 0.2%
Mellon Bank, NA
7.625% due 09/15/07 355 383
Signet Bank
7.800% due 09/15/06 750 813
-------------
1,196
-------------
Corporate Bonds and Notes - 15.7%
Ahmanson Capital Trust I, Series A
8.360% due 12/01/26 400 430
Air Products & Chemicals, Inc.
8.750% due 04/15/21 250 308
Allegiance Corp.
7.300% due 10/15/06 875 913
7.000% due 10/15/26 130 134
America West Airlines Series A
6.850% due 07/02/09 480 488
American Express Co.
8.500% due 08/15/01 255 273
American General Finance Corp.
8.500% due 06/15/99 570 588
American Health Properties
7.050% due 01/15/02 550 560
American Stores Co.
8.000% due 06/01/26 690 772
Analog Devices, Inc.
6.625% due 03/01/00 125 126
Aristar, Inc.
6.300% due 07/15/00 1,270 1,272
Associates Corp. of North America
Series H (MTN)
6.250% due 03/15/99 1,010 1,012
6.500% due 07/15/02 450 454
7.090% due 04/11/03 400 416
AT&T Corp.
8.625% due 12/01/31 220 242
Atlantic Richfield Co.
9.125% due 08/01/31 550 723
AVCO Financial Services, Inc.
7.250% due 07/15/99 275 280
8.500% due 10/15/99 405 421
6.000% due 08/15/02 800 789
Baltimore Gas & Electric Co.
6.500% due 02/15/03 840 852
Banc One, Columbus, Ohio
7.375% due 12/01/02 120 125
Bank of New York, Inc.
7.875% due 11/15/02 350 374
BankAmerica Corp.
6.850% due 03/01/03 425 433
6.875% due 06/01/03 260 266
Barnett Bank, Inc.
6.900% due 09/01/05 405 415
Baxter International, Inc.
7.650% due 02/01/27 100 110
Bell Telephone Co. of Pennsylvania
8.350% due 12/15/30 355 442
</TABLE>
Diversified Bond Fund 87
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
BellSouth Telecommunications
7.000% due 12/01/95 $ 385 $ 401
Beneficial Corp.
8.400% due 05/15/08 1,235 1,431
Boeing Co.
8.750% due 08/15/21 550 689
Carolina Power & Light Co.
6.875% due 08/15/23 410 398
Case Corp.
7.250% due 08/01/05 330 344
7.250% due 01/15/16 295 308
Caterpillar Financial Services (MTN)
9.500% due 02/06/07 420 510
Caterpillar, Inc.
8.000% due 02/15/23 200 229
Central Fidelity Banks, Inc.
8.150% due 11/15/02 170 183
Central Power & Light Co.
Series FF
6.875% due 02/01/03 600 618
Champion International Corp.
6.400% due 02/15/26 460 457
Chase Manhattan Corp.
6.500% due 08/01/05 300 300
Chesapeake & Potomac Telephone Co.
8.375% due 10/01/29 230 285
Chrysler Corp.
7.450% due 03/01/27 450 481
Chrysler Financial Corp.
9.500% due 12/15/99 275 292
Cincinnati Gas & Electric Co.
7.200% due 10/01/23 410 411
CIT Group Holdings, Inc.
6.350% due 07/31/98 3,000 3,007
CIT Group Holdings, Inc. (MTN)
6.625% due 06/28/99 1,200 1,211
6.700% due 05/02/00 500 506
6.375% due 10/01/02 800 800
Citicorp
6.000% due 05/24/01 (MTN)(c) 2,000 2,000
9.500% due 02/01/02 120 134
7.125% due 06/01/03 390 405
Coca Cola Enterprises, Inc.
7.000% due 10/01/26 675 711
Colonial Realty LP (MTN)
6.980% due 09/26/05 450 461
Commercial Credit Group, Inc.
5.750% due 07/15/00 295 292
7.875% due 07/15/04 805 868
8.700% due 06/15/10 380 451
Commonwealth Edison Co. Series 85
7.375% due 09/15/02 945 982
Conagra, Inc. (MTN)
8.100% due 05/20/02 300 321
Consolidated Natural Gas Co.
8.625% due 12/01/11 31 32
Consolidated Rail Corp.
Pass-thru Certificate Structured Note
Series 1995 Class A
6.760% due 05/25/15 469 474
Constitution Capital Trust I
9.150% due 04/15/27 400 450
CoreStates Capital Corp.
5.875% due 10/15/03 400 390
Crown Cork & Seal Finance PLC
7.000% due 12/15/06 750 770
Dayton Hudson Corp.
6.400% due 02/15/03 295 295
7.500% due 07/15/06 100 106
Discover Credit Corp. (MTN)
8.350% due 04/27/99 360 370
Dole Food Co., Inc.
6.750% due 07/15/00 170 171
Duke Power Co.
7.000% due 07/01/33 695 684
Eastman Chemical Co.
7.250% due 01/15/24 300 310
Equitable Life Assurance Society
7.700% due 12/01/15 1,575 1,694
Excel Realty Trust, Inc.
6.875% due 10/15/04 775 778
Federal Express Corp.
7.600% due 07/01/97 300 316
Federal Realty Investment Trust
7.480% due 08/15/26 325 342
Finova Capital Corp.
7.125% due 05/01/02 925 951
First Chicago Corp.
8.875% due 03/15/02 505 553
First Interstate Bancorp (MTN)
9.375% due 0l/23/02 135 148
First Union Institutional Capital Trust I
8.040% due 12/01/26 225 237
</TABLE>
88 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
First Union National Bank, Newark (MTN)
7.125% due 10/15/06 $ 500 $ 521
Fleet Financial Group, Inc.
8.125% due 07/01/04 595 647
Florida Residential Property & Casualty
Insurance Co., Series A
7.375% due 07/01/03 1,700 1,759
Ford Motor Credit Co.
7.500% due 06/15/04 300 318
Ford Motor Credit Co. (MTN)
6.000% due 02/27/01 1,170 1,163
6.290% due 03/05/0l 580 581
Fort James Corporation
6.625% due 09/15/04 745 747
Fortune Brands, Inc.
8.625% due 11/15/21 420 504
7.875% due 01/15/23 80 89
General Electric Capital Corp.
8.300% due 09/20/09 235 272
6.660% due 05/01/18 (c) 775 785
General Motors Acceptance Corp.
6.625% due 10/01/02 1,975 2,002
Grand Metropolitan Investment Corp.
7.450% due 04/15/35 300 335
Great Atlantic & Pacific Tea, Inc.
7.750% due 04/15/07 1,600 1,687
Hertz Corp.
7.625% due 08/01/02 550 574
9.000% due 11/01/09 230 272
Household Finance Corp.
6.375% due 06/30/00 1,200 1,204
Hutchison Whampoa Finance, Ltd.
7.450% due 08/01/17 1,475 1,427
ICI Wilmington, Inc.
6.950% due 09/15/04 380 391
International Lease Finance Corp.
5.750% due 01/15/99 455 453
6.375% due 08/01/01 400 401
6.375% due 02/15/02 400 401
IRT Property Co.
7.250% due 08/15/07 450 466
ITT Financial Corp.
7.400% due 11/15/25 715 750
Jackson National Life Insurance Co.
8.150% due 03/15/27 950 1,044
JC Penney & Co., Inc.
7.250% due 04/01/02 850 880
7.600% due 04/01/07 550 592
JPM Capital Trust I
7.540% due 01/15/27 225 229
Kansas Gas & Electric, Co.
7.600% due 12/15/03 200 211
6.500% due 08/01/05 450 452
Key Corporation
7.500% due 06/15/06 750 798
Lasmo USA, Inc.
7.500% due 06/30/06 380 402
6.750% due 12/15/07 400 403
Liberty Mutual Insurance Co.
8.500% due 05/15/25 500 579
7.875% due 10/15/26 500 537
7.697% due 10/15/97 650 685
Lockheed Martin Corp.
7.750% due 05/01/26 600 665
Mashantucket Western Pequot
6.910% due 09/01/12 475 498
May Department Stores Co.
6.875% due 11/01/05 480 493
Mellon Capital II Series B
7.995% due 01/15/27 320 344
Merrill Lynch & Co., Inc.
6.550% due 08/0l/04 725 731
Morgan Stanley Group, Inc.
8.100% due 06/24/02 125 134
Motorola, Inc.
7.500% due 05/15/25 100 111
Nabisco, Inc.
6.700% due 06/15/02 260 263
Nationsbank Corp.
7.750% due 08/15/04 450 482
New England Telephone &
Telegraph Co.
7.875% due 11/15/29 235 274
News America Holdings, Inc.
7.750% due 0l/20/24 300 315
Northwestern Bell Telephone Co.
7.750% due 05/01/30 630 701
Norwest Corp. Series H (MTN)
6.750% due 06/15/07 300 307
Norwest Financial, Inc.
6.250% due 11/01/02 525 524
6.000% due 02/01/04 600 591
NYNEX Corp.
9.550% due 05/01/10 375 436
Occidental Petroleum Corp.
10.125% due 11/15/01 210 237
</TABLE>
Diversified Bond Fund 89
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
Occidental Petroleum Corp. (MTN)
8.500% due 11/09/01 $ 245 $ 264
Pacific Bell
7.500% due 02/01/33 785 807
Pennsylvania Power & Light Co.
6.875% due 03/01/04 1,000 1,028
Pennzoil Co.
10.125% due 11/15/09 85 106
PepsiCo, Inc.
7.625% due 12/18/98 285 289
Philadelphia Electric Company
7.125% due 09/01/02 550 567
Philip Morris Cos., Inc.
6.950% due 06/01/06 295 306
7.650% due 07/01/08 310 329
Pitney Bowes Credit Corp.
8.550% due 09/15/09 460 542
Praxair, Inc.
6.850% due 06/15/05 700 721
Procter & Gamble Co. Sharing ESOP
Series A
9.360% due 01/01/21 90 116
Ralston Purina Co.
7.875% due 06/15/25 615 680
Raytheon Co.
6.450% due 08/15/02 780 784
Realty Income Corp.
7.750% due 05/06/07 1,175 1,223
Republic New York Corp.
9.750% due 12/01/00 190 207
8.250% due 11/01/01 150 160
RJR Nabisco, Inc.
8.625% due 12/01/02 325 346
Rockwell International Corp.
8.875% due 09/15/99 255 266
Salomon Smith Barney Holdings
6.625% due 07/01/02 400 404
7.000% due 03/15/04 950 980
Seagram Co., Ltd.
8.350% due 0l/15/22 320 372
Sears Roebuck Acceptance Corp.
Series II (MTN)
6.690% due 04/30/01 375 381
Service Corp. International
6.750% due 06/01/01 250 253
7.375% due 04/15/04 560 585
Shopping Center Associates
6.750% due 0l/15/04 750 757
Simon Debartolo Group LP
6.875% due 10/27/05 750 758
6.875% due 11/15/06 800 816
Socgen Real Estate Co. LLC
7.640% due 12/29/49 430 449
Southern California Edison Co.
Series 1993 - E
5.450% due 06/15/98 600 599
Spieker Properties (MTN)
8.000% due 07/19/05 700 754
Summit Properties Inc.
7.200% due 08/15/07 475 489
Suntrust Banks, Inc.
7.375% due 07/01/02 700 729
Tenneco Corp.
10.200% due 03/15/08 590 741
Texaco Capital, Inc.
9.750% due 03/15/20 440 599
8.875% due 09/01/21 220 279
Texas Utilities Electric Co.
9.500% due 08/01/99 805 844
TIG Capital Trust I
8.597% due 0l/15/27 1,050 1,164
Time Warner, Inc.
7.975% due 08/15/04 300 320
8.110% due 08/15/06 600 650
8.180% due 08/15/07 600 653
Union Carbide Chemicals & Plastics
7.875% due 04/01/23 590 620
Union Oil Co. (MTN)
9.400% due 02/15/11 470 582
Union Pacific Corp.
7.600% due 05/0l/05 120 126
Union Pacific Railroad Trust
Pass-thru Certificate
Series 1996-A2
7.060% due 05/15/03 500 518
United Technologies Corp.
8.750% due 03/01/21 380 472
US Bank National - Minnesota
6.079% due 12/19/01 (c) 2,000 1,998
US West Capital Funding, Inc.
7.900% due 02/01/27 760 832
USA Waste Services, Inc.
6.500% due 12/15/02 825 824
Virginia Electric & Power Co.
8.750% due 04/01/21 200 215
Wachovia Corp.
6.800% due 06/0l/05 305 312
</TABLE>
90 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
Wal-Mart Stores, Inc.
7.500% due 05/15/04 $ 300 $ 320
Wells Fargo & Co.
6.875% due 04/0l/06 500 511
Wellsford Residential Property Trust
9.375% due 02/01/02 750 825
Westvaco Corp.
9.750% due 06/15/20 115 154
Whirlpool Corp.
9.500% due 06/15/00 250 269
Willamette Industries, Inc.
7.850% due 07/01/26 520 584
Wilmington Trust
10.370% due 01/02/07 1,711 2,001
World Financial Properties Tower
Series 1996 WBF-B
6.910% due 09/01/13 1,188 1,234
--------
108,156
--------
Eurodollar Bonds - 0.4%
Finland, Republic of
5.875% due 02/27/06 475 470
Italy, Republic of
6.875% due 09/27/23 150 157
Ontario, Province of
7.375% due 01/27/03 525 553
Skandinaviska Enskilda Banken
8.125% due 09/06/49 (g) 800 863
Videotron Holdings PLC Step Up Bond
11.125% due 07/01/04 925 881
--------
2,924
--------
Mortgage-Backed Securities - 33.5%
ACLC Franchise Loan Receivables
1997 Pass Thru Class Al
7.120% due 03/15/12 882 908
American Southwest Financial Corp.
Series G Class G-4 CMO
12.250% due 11/01/14 238 271
BKD Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00(c) 1,125 1,127
Chase Commercial Mortgage Securities Corp.
Series 1997-1 Class E
7.370% due 12/19/07 (c) 800 804
Citicorp Mortgage Securities, Inc.
Series 1992-1 Class A5
8.000% due 04/25/21 720 739
Series 1997-5 Class Al
6.500% due 11/25/27 1,000 1,003
Collateralized Mortgage Obligation Trust
56 Class B CMO
9.985% due 12/01/18 240 266
Commercial Mortgage Acceptance Corp.
Series 1997-ML1 Class Al
6.500% due 11/15/04 (c) 1,225 1,234
CSFB Finance Co., Ltd.
Series 1995-A Class A
7.542% due 11/15/05 (c) 450 460
Delta Funding Home Equity Loan Trust
Series 1997-3 Class MIF
7.080% due 10/25/28 500 504
DLJ Mortgage Acceptance Corp.
Series 1993 Class A-2 CMO
7.650% due 09/18/03 2,500 2,550
Federal Home Loan Mortgage Corp. (b)
6.000% 15 Year TBA Gold 3,385 3,330
6.500% 15 Year TBA 1,905 1,908
6.500% 30 Year TBA 23,500 23,228
7.000% 30 Year TBA 4,110 4,146
7.500% 30 Year TBA 4,775 4,890
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.000% due 1998 19 19
7.500% due 2001 201 204
7.000% due 2002 81 83
7.000% due 2003 335 339
6.750% due 2007 382 386
7.000% due 2008 82 83
8.000% due 2008 146 151
8.500% due 2008 167 174
6.500% due 2009 1,720 1,729
7.500% due 2009 1,493 1,536
8.000% due 2009 282 292
7.500% due 2010 57 59
8.000% due 2010 53 54
6.000% due 2011 3,271 3,233
6.500% due 2011 640 644
7.500% due 2011 523 538
8.000% due 2011 519 536
6.000% due 2012 1,050 1,035
6.500% due 20l2 715 717
</TABLE>
Diversified Bond Fund 91
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- --------
<S> <C> <C>
7.500% due 2012 $ 829 $ 851
8.000% due 2012 341 352
12.000% due 2014 98 112
12.000% due 2015 64 74
9.000% due 2016 752 805
12.500% due 2016 106 123
8.000% due 2017 808 836
9.000% due 2017 7 7
9.000% due 2018 1,503 1,622
9.000% due 2020 732 786
8.500% due 2022 179 188
9.000% due 2022 251 270
6.500% due 2024 3,439 3,414
7.500% due 2024 1,868 1,918
9.000% due 2024 172 183
9.000% due 2025 795 848
6.000% due 2026 971 936
9.000% due 2026 30 32
6.500% due 2027 8,017 7,924
7.500% due 2027 508 521
8.000% due 2027 4,003 4,143
Federal Home Loan Mortgage Corp.
Series 1053 Class G
7.000% due 03/15/21 1,893 1,908
Federal National Mortgage
Association Pools
7.000% due 1999 303 305
7.000% due 2000 717 723
9.500% due 2001 39 40
8.000% due 2002 417 423
9.500% due 2002 95 99
6.000% due 2003 529 524
7.000% due 2003 782 793
7.500% due 2003 1,012 1,032
8.000% due 2003 159 162
9.500% due 2003 109 114
6.500% due 2004 30 30
8.000% due 2004 233 237
9.500% due 2005 131 138
9.500% due 2006 129 136
7.000% due 2007 161 164
6.500% due 2008 748 752
7.000% due 2008 384 391
6.500% due 2009 5,286 5,314
7.000% due 2009 681 694
8.000% due 2010 28 29
10.500% due 2010 29 32
6.000% due 2011 1,743 1,719
7.500% due 2011 311 319
8.000% due 2011 111 115
6.500% due 2012 543 543
7.000% due 2012 936 950
7.500% due 2012 129 132
8.000% due 2017 756 792
8.000% due 2020 35 37
8.000% due 2022 795 832
7.000% due 2023 879 890
8.000% due 2023 131 137
6.500% due 2024 5,579 5,535
7.000% due 2024 4,152 4,200
7.500% due 2024 809 830
7.000% due 2025 4,905 4,959
8.500% due 2025 1,521 1,590
8.500% due 2026 3,431 3,584
6.500% due 2026 322 319
9.000% due 2026 721 768
6.500% due 2027 1,446 1,429
7.000% due 2027 7,970 8,027
8.000% due 2027 440 455
Federal National Mortgage Association (b)
6.500% 30 Year TBA 4,165 4,113
7.500% 30 Year TBA 4,675 4,785
8.000% 3O Year TBA 5,505 5,699
9.000% 30 year TBA 855 909
Federal National Mortgage Association
(REMIC)
Series 1992-10 Class ZD
8.000% due 11/25/21 1,598 1,754
Series 1994-81 Class PJ
8.000% due 07/25/23 1,550 1,685
Series G92-36 Class A
7.000% due 04/25/15 227 228
Federal National Mortgage Association
Principal Only Strip
Zero Coupon due 03/01/20 143 116
Federal National Mortgage Association
Interest Only Inverse Floater
Series 1993-208 Class SA
0.450% due 02/25/23 (c) 36,406 420
First Union Lehman Brothers Commercial
Trust
Series 1997-C1 Class C
7.440% due 04/18/07 750 780
Government National Mortgage
Association Pools
6.500% due 2008 195 197
6.500% due 2009 1,714 1,731
</TABLE>
92 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- --------
<S> <C> <C>
7.000% due 2011 $ 22 $ 23
9.000% due 2016 1,894 2,062
9.500% due 2016 92 100
8.000% due 2Ol7 162 171
9.000% due 2017 184 200
9.000% due 2020 59 64
10.500% due 2020 361 406
10.500% due 2021 56 63
7.000% due 2022 675 683
6.875% due 2023 (c) 7,157 7,359
7.000% due 2023 (c) 3,489 3,592
7.000% due 2023 2,469 2,498
7.500% due 2023 2,337 2,400
7.000% due 2024 (c) 2,129 2,155
7.000% due 2024 7,751 7,836
7.500% due 2024 508 521
8.000% due 2025 2,224 2,306
9.000% due 2025 978 1,047
7.500% due 2026 1,602 1,641
8.000% due 2026 4,118 4,269
8.500% due 2026 452 475
5.500% due 2027 4,925 4,955
7.500% due 2027 5,599 5,735
8.000% due 2027 996 1,032
Government National Mortgage
Association (b)
6.500% 30 Year TBA 2,910 2,880
8.000% 30 Year TBA 1,000 1,037
GS Mortgage Securities Corp. II
Series 1997-GL Class A2A
6.940% due 07/13/30 1,468 1,468
Housing Securities, Inc.
Series 1994-2 Class Al
6.500% due 07/25/09 949 944
Lehman Pass-thru Securities, Inc.
Series 1991-2 Class A-1
8.000% due 03/20/99 39 40
Merrill Lynch Mortgage
Investors, Inc.
Series 1996 - C2 Class Al
6.690% due 11/21/28 464 466
Series 1997-C1 Class Al
6.950% due 06/18/29 (c) 1,711 1,751
Mid-St Trust II Class A-3 CMO
9.350% due 04/0l/98 115 115
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class A2B
7.900% due 02/15/06 775 823
Norwest Asset Securities Corp.
Series 1997-9 Class A5
7.000% due 06/25/12 981 993
PNC Mortgage Securities Corp.
Series 1994-3 Class A-1
7.500% due 06/18/10 99 99
Residential Funding Mortgage
Securities
Series 1997-S4 Class A5
7.000% due 03/25/12 971 983
Series 1997-S10 Class A-5
7.000% due 07/25/12 985 1,003
Series 1997-S18 Class A-7
6.750% due 11/25/12 748 753
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1992 Class A-3
10.600% due 05/25/24 (c) 328 330
Series 1994-C1 Class C
8.000% due 06/25/26 975 1,005
Series 1994-C2 Class D
8.000% due 04/25/25 371 379
Series 1995-C1 Class C
6.900% due 02/25/27 (c) 350 349
Series 1995-C1 Class D
6.900% due 02/25/27 775 770
Ryland Acceptance Corp. Four
Series 88 Class E CMO
7.950% due 0l/01/19 2,161 2,218
Sears Savings Bank
Mortgage Pass-thru Certificate
Series 1992-A Class A
8.670% due 05/25/32 (c) 763 760
Structured Asset Securities Corp.
Mortgage Pass-thru Certificate
Series 1996-CFL Class C
6.525% due 02/25/28 300 300
United States Department of Veteran Affairs
REMIC
Series 1992-1 Class 2-E
7.750% due 03/15/16 550 569
--------
231,372
========
Non-US Bonds - 0.5%
Great Britain Treasury
7.250% due 12/07/07 GBP 1,800 3,166
--------
3,166
--------
</TABLE>
Diversified Bond Fund 93
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- --------
<S> <C> <C>
United States Government
Agencies - 4.6%
Federal Home Loan Bank
6.450% due 03/13/02 $ 4,250 $ 4,288
Federal National Mortgage
Association (MTN)
5.790% due 10/12/99 4,000 4,000
6.100% due 10/06/00 1,305 1,306
6.250% due 11/20/02 1,335 1,337
7.790% due 09/27/06 775 795
7.780% due 09/29/06 665 682
6.940% due 03/19/07 1,065 1,088
7.280% due 05/23/07 655 682
6.900% due 08/21/07 2,155 2,201
Government Backed Trust Certificates
Series 2E
9.400% due 05/15/02 925 982
Series T-3
9.625% due 05/15/02 (c) 3,632 3,856
Government Backed Trust Certificates
Class 1-C
9.250% due 11/15/01 3,109 3,308
Resolution Funding Corp.
8.875% due 07/15/20 1,855 2,451
8.625% due 01/15/21 1,380 1,786
8.625% due 01/15/30 390 524
Tennessee Valley Authority
Series E
6.250% due 12/15/17 610 611
6.750% due 11/01/25 1,825 1,930
--------
31,827
--------
United States Government
Treasuries - 27.3%
United States Treasury Bonds
10.750% due 05/15/03 9,710 11,917
10.750% due 08/15/05 13,865 18,038
11.750% due 02/15/10 3,025 4,046
12.750% due 11/15/10 7,720 11,019
13.875% due 05/15/1l 2,120 3,226
12.000% due 08/15/13 1,860 2,741
13.250% due 05/15/14 725 1,160
9.875% due 11/15/15 1,670 2,377
7.250% due 05/15/16 1,075 1,224
7.500% due 11/15/16 7,195 8,398
8.750% due 05/15/17 230 302
8.875% due 08/15/17 7,145 9,484
8.125% due 08/15/19 (h) 6,910 8,646
8.125% due 08/15/21 5,650 7,127
8.000% due 11/15/21 3,320 4,139
7.250% due 08/15/22 4,100 4,736
7.125% due 02/15/23 5,305 6,056
6.250% due 08/15/23 2,260 2,328
7.500% due 11/15/24 2,455 2,937
6.000% due 02/15/26 3,500 3,496
6.750% due 08/15/26 8,800 9,688
6.500% due 11/15/26 2,000 2,135
United States Treasury Notes
5.375% due 05/31/98 525 525
5.625% due 11/30/98 (h) 3,975 3,975
5.875% due 03/31/99 550 551
6.375% due 04/30/99 2,145 2,164
6.750% due 05/31/99 200 203
6.750% due 06/30/99 100 102
5.875% due 08/31/99 4,365 4,379
6.875% due 08/31/99 2,990 3,046
5.875% due 11/15/99 3,625 3,638
7.750% due 11/30/99 265 275
7.750% due 0l/31/00 8,970 9,329
5.875% due 02/15/00 1,690 1,697
7.125% due 02/29/00 500 514
8.750% due 08/15/00 795 853
6.250% due 08/31/00 565 573
5.750% due 10/31/00 565 566
6.375% due 03/31/0l 90 92
6.500% due 05/31/01 2,200 2,252
6.250% due 10/31/01 9,090 9,245
6.250% due 02/28/02 2,475 2,520
6.625% due 04/30/02 705 728
6.500% due 05/31/02 330 340
3.625% due 07/15/02 4,000 3,980
5.750% due 12/31/02 5,000 4,981
5.750% due 08/15/03 575 575
5.875% due 11/15/05 795 799
5.625% due 02/15/06 55 54
6.500% due 10/15/06 5,000 5,235
--------
188,411
--------
Yankee Bonds - 2.3%
African Development Bank
9.750% due 12/15/03 325 382
6.875% due 10/15/15 1,245 1,289
8.800% due 09/01/19 295 373
Alberta, Province of
9.250% due 04/01/00 160 170
Asian Development Bank
8.000% due 04/30/01 175 184
8.500% due 05/02/01 180 192
6.250% due 10/24/05 315 318
</TABLE>
94 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
CE Electric UK Funding Co.
6.853% due 12/30/04 $ 1,050 $ 1,061
Hydro Quebec
Series GH
8.250% due 04/15/26 505 589
International American Development Bank
6.375% due 10/22/07 300 305
7.000% due 06/15/25 1,400 1,507
6.950% due 08/01/26 155 166
International Bank for Reconstruction &
Development
8.625% due 10/15/16 270 339
Manitoba, Province of
Series CB
8.800% due 01/15/20 200 254
Series CD
9.250% due 04/01/20 200 264
Metropolitano de Lisboa
7.420% due 10/15/16 750 803
National Westminster Bank PLC
7.750% due 04/29/49 (g) 875 942
New Brunswick, Province of
7.125% due 10/01/02 400 417
9.750% due 05/15/20 190 262
Newfoundland, Province of
10.000% due 12/01/20 90 123
Noranda Forest, Inc.
6.875% due 11/15/05 250 253
Nova Scotia, Province of
9.125% due 05/01/21 690 883
Quebec, Province of
7.125% due 02/09/24 635 654
Saskatchewan, Province of
8.000% due 07/15/04 1,045 1,141
Societe Generale
7.850% due 04/29/49 (g) 1,500 1,625
Svenska Handeisbanken
7.125% due 03/29/49 (g) 875 903
Wharf International Finance, Ltd.
7.625% due 03/13/07 850 794
---------
16,193
---------
Total Long-Term Investments
(cost $633,733) 651,316
---------
<CAPTION>
Number Market
of Value
Contracts* (000)
---------- ----------
<S> <C> <C>
Options Purchased - 0.0%
United States Treasury Bonds (e)
Feb 100.72 Put 21 $ 17
Mar 100.16 Call 26 18
United States Treasury Note (e)
Mar 104.22 Call 30 18
---------
Total Options Purchased
(cost $97) 53
---------
<CAPTION>
Number
of
Shares
------
<S> <C> <C>
Preferred Stocks - 0.2%
Credit Lyonnais Capital S.C.A. - ADR 15,700 414
TIG Holdings, Inc. 7,200 767
---------
Total Preferred Stocks
(cost $1,117) 1,181
---------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Short-Term Investments - 13.0%
Campbell Soup Company
5.500% due 01/09/98 (a) $ 1,500 1,498
Federal Home Loan Bank
Discount Notes
5.430% due 01/15/98 (a)(f) 2,000 1,996
Federal Home Loan Mortgage Corp.
5.950% due 06/19/98 3,000 3,006
Federal Home Loan Mortgage Corp.
Discount Notes
5.710% due 01/23/98 (a)(f) 2,000 1,993
Frank Russell Investment Company
Money Market Fund, due on demand (a) 74,124 74,124
International Bank for
Reconstruction & Development
5.500% due 01/21/98 (a) 1,000 997
Merrill Lynch & Co., Inc.
5.550% due 01/12/98 (a) 2,000 1,997
Salomon, Inc. Series D (MTN)
6.080% due 03/10/98 2,000 2,000
Sigma Finance Corp.
5.550% due 01/26/98 (a) 1,000 996
</TABLE>
Diversified Bond Fund 95
<PAGE>
Diversified Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Union Pacific Corp.
5.780% due 02/02/98 (a) $ 1,000 $ 984
---------
Total Short-Term Investments
(cost $89,584) 89,591
---------
Total Investments
(identified cost $724,531)(d) - 107.6% 742,141
Other Assets and Liabilities,
Net, Including Options Written - (7.6%) (52,341)
---------
Net Assets - 100.0% $ 689,800
=========
</TABLE>
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2.
(c) Adjustable or floating rate securities.
(d) See Note 2 for federal income tax information.
(e) Nonincome-producing security.
(f) Rate noted is yield-to-maturity.
(g) Perpetual floating rate note.
(h) Held as collateral by the custodian in connection with options written by
the Fund.
* Each contract represents $100,000 notional value.
Abbreviations:
ADR - American Depositary Receipt
CMO - Collateralized Mortgage Obligation
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
Foreign Currency Abbreviations:
GBP - British pound
CAD - Canadian dollar
NZD - New Zealand dollar
<TABLE>
<CAPTION>
Number Market
of Value
Contracts* (000)
---------- --------
<S> <C> <C>
Options Written
(Notes 2 and 3)
United States Treasury Bonds
Jul 112.19 Call 20 $ 5
Nov 109.00 Call 21 9
Feb 101.95 Put 39 23
Mar 98.68 Put 26 6
Jul 97.22 Put 20 2
Nov 95.27 Put 21 6
United States Treasury Notes
Mar 106.22 Call 30 5
--------
Total Liability for Options Written
(premiums received $114)((S)) $ 56
========
</TABLE>
((S)) At December 31, 1997, United States Government Securities valued at $8,480
were held as collateral by the custodian in connection with futures
contracts purchased and options written by the Fund.
The accompanying notes are an integral part of the financial statements.
96 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $724,531)(Note 2).................................................. $ 742,141
Cash...................................................................................................... 398
Receivables:
Dividends and interest................................................................................ 8,315
Investments sold (regular settlement)................................................................. 3,116
Investments sold (delayed settlement)(Note 2)......................................................... 24,187
Fund shares sold...................................................................................... 3,657
--------------------
Total Assets....................................................................................... 781,814
Liabilities
Payables:
Investments purchased (regular settlement).......................................... $ 9,549
Investments purchased (delayed settlement)(Note 2).................................. 80,806
Fund shares redeemed................................................................ 1,138
Accrued fees to affiliates (Note 4)................................................. 325
Other accrued expenses.............................................................. 140
Options written, at market value (premiums received $114)(Note 2 and 3)................ 56
------------------
Total Liabilities.................................................................................. 92,014
--------------------
Net Assets................................................................................................ $ 689,800
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income.............................................. $ (100)
Accumulated net realized gain (loss)...................................................................... (8,311)
Unrealized appreciation (depreciation) on:
Investments............................................................................................. 17,610
Options written......................................................................................... 58
Foreign currency-related transactions................................................................... 10
Shares of beneficial interest............................................................................. 294
Additional paid-in capital................................................................................ 680,239
--------------------
Net Assets................................................................................................ $ 689,800
====================
Net Asset Value, offering and redemption price per share:
Class S ($687,330,897 divided by 29,329,418 shares of $.01 par value
shares of beneficial interest outstanding)........................................................... $ 23.43
====================
Class C ($2,469,362 divided by 102,628 shares of $.01 par value
shares of beneficial interest outstanding)........................................................... $ 24.06
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Bond Fund 97
<PAGE>
Diversified Bond Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Interest............................................................................................... $ 39,015
Dividends from Money Market Fund (Note 5).............................................................. 3,459
Dividends.............................................................................................. 361
--------------------
Total Investment Income.............................................................................. 42,835
Expenses (Notes 1, 2 and 4):
Management fees..................................................................... $ 2,755
Custodian fees...................................................................... 399
Transfer agent fees................................................................. 360
Bookkeeping service fees............................................................ 30
Professional fees................................................................... 28
Trustees' fees...................................................................... 4
Miscellaneous....................................................................... 62
Registration fees
Class S........................................................................... 77
Class C........................................................................... 1
Distribution fees - Class C......................................................... 7
Shareholder servicing fees - Class C................................................ 4
------------------
Total Expenses....................................................................................... 3,727
--------------------
Net investment income...................................................................................... 39,108
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments......................................................................... 4,307
Options written..................................................................... 16
Foreign currency-related transactions............................................... 84 4,407
------------------
Net change in unrealized appreciation or depreciation of:
Investments......................................................................... 11,265
Options written..................................................................... 58
Foreign currency-related transactions............................................... (38) 11,285
-------------------- ---------------------
Net gain (loss) on investments............................................................................. 15,692
--------------------
Net increase (decrease) in net assets resulting from operations............................................ $ 54,800
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
98 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
--------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income................................................................ $ 39,108 $ 33,861
Net realized gain (loss)............................................................. 4,407 445
Net change in unrealized appreciation or depreciation................................ 11,285 (15,913)
------------------ -----------------
Net increase (decrease) in net assets resulting from operations................ 54,800 18,393
------------------ -----------------
From Distributions to Shareholders:
Net investment income
Class S............................................................................ (39,001) (33,898)
Class C............................................................................ (45) (11)
In excess of net investment income
Class S............................................................................ (514) (87)
In excess of net realized gain on investments
Class S............................................................................ (2,393) --
Class C............................................................................ (8) --
------------------ -----------------
Total Distributions to Shareholders............................................ (41,961) (33,996)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)........... 121,196 57,560
------------------ -----------------
Total Net Increase (Decrease) in Net Assets............................................. 134,035 41,957
Net Assets
Beginning of period.................................................................. 555,765 513,808
------------------ -----------------
End of period (including accumulated distributions in excess of
net investment income of $100 and $62, respectively)................................ $ 689,800 $ 555,765
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Bond Fund 99
<PAGE>
Diversified Bond Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..................... $ 22.97 $ 23.69 $ 21.53 $ 23.73 $ 23.49
----------- --------- --------- --------- ---------
Income From Investment Operations:
Net investment income ................................ 1.45 1.47 1.54 1.46 1.48
Net realized and unrealized gain (loss) on investments .56 (.71) 2.18 (2.22) .83
----------- --------- --------- --------- ---------
Total Income From Investment Operations ........... 2.01 .76 3.72 (.76) 2.31
----------- --------- --------- --------- ---------
Less Distributions:
Net investment income ................................ (1.45) (1.48) (1.56) (1.42) (1.48)
In excess of net investment income ................... (.02) -- -- -- (.01)
Net realized gain on investments ..................... -- -- -- -- (.58)
In excess of net realized gain on investments ........ (.08) -- -- (.02) --
----------- --------- --------- --------- ---------
Total Distributions ................................ (1.55) (1.48) (1.56) (1.44) (2.07)
----------- --------- --------- --------- ---------
Net Asset Value, End of Period ........................... $ 23.43 $ 22.97 $ 23.69 $ 21.53 $ 23.73
=========== ========= ========= ========= =========
Total Return (%) ......................................... 9.09 3.43 17.76 (3.25) 10.02
Ratios/Supplemental Data:
Net Assets, end of period ($omitted) .................. 687,331 554,804 513,808 525,315 477,341
Ratios to average net assets (%):
Operating expenses ................................. .60 .61 .59 .56 .58
Net investment income .............................. 6.35 6.46 6.69 6.57 6.13
Portfolio turnover rate (%) ............................ 172.43 138.98 135.85 153.21 177.74
</TABLE>
100 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1997 1996*
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period................................................................ $ 22.98 $ 23.16
----------- -----------
Income From Investment Operations:
Net investment income............................................................................ 1.22 .25
Net realized and unrealized gain (loss) on investments........................................... .66 (.09)
----------- -----------
Total Income From Investment Operations....................................................... 1.88 .16
----------- -----------
Less Distributions:
Net investment income........................................................................... (.72) (.34)
In excess of net realized gain on investments................................................... (.08) --
----------- -----------
Total Distributions........................................................................... (.80) (.34)
----------- -----------
Net Asset Value, End of Period...................................................................... $ 24.06 $ 22.98
=========== ===========
Total Return (%).................................................................................... 8.35 .67(a)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)......................................................... 2,469 962
Ratios to average net assets (%)(b):
Operating expenses............................................................................ 1.29 1.31
Net investment income......................................................................... 5.64 5.75
Portfolio turnover rate (%)(b)................................................................... 172.43 138.98
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
Diversified Bond Fund 101
<PAGE>
Volatility Constrained Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To preserve capital and generate current income consistent with the
preservation of capital.
Invests in: Fixed-income securities with low-volatility characteristics.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns with moderate risk relative to other short-term bond investments. The
Fund employed the investment management services of three managers using three
approaches to investment in short-term fixed income securities.
Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Yearly
Periods Volatility
Ended Constrained Merrill Lynch Lipper (C) Short
December 31, Bond Fund 1-2.99 ** 1-5 Yr +
- ------------ ------------ --------------- ----------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $10,777 $10,622 $10,687
1989 $11,923 $11,777 $11,768
1990 $12,986 $12,922 $12,719
1991 $14,544 $14,431 $14,231
1992 $14,877 $15,341 $15,042
1993 $15,869 $16,171 $15,968
1994 $15,867 $16,263 $15,910
1995 $17,435 $18,052 $17,620
1996 $18,248 $18,950 $18,405
1997 $19,325 $20,212 $19,529
</TABLE>
Volatility Constrained Bond Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
-------- ------- ------
<S> <C> <C>
1 Year $ 10,590 5.90%
5 Years $ 12,990 5.37%(S)
10 Years $ 19,325 6.81%(S)
</TABLE>
Merrill Lynch 1-2.99 Years Treasury Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
-------- -------- ------
<S> <C> <C>
1 Year $ 10,666 6.66%
5 Years $ 13,175 5.67%(S)
10 Years $ 20,212 7.29%(S)
</TABLE>
Lipper(C) Short Investment Grade Debt Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
-------- -------- ------
<S> <C> <C>
1 Year $ 10,611 6.11%
5 Years $ 12,983 5.36%(S)
10 Years $ 19,529 6.92%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Merrill Lynch 1--2.99 Years Treasury Index is an index composed of
approximately 160 issues in the form of publicly placed, coupon-bearing US
Treasury debt. Issues must carry a term to maturity of at least one year,
and par amounts outstanding must be no less than $10 million at the start
and at the close of the performance measurement periods.
+ Lipper(C) Short (1-5 Yr.) Investment Grade Debt Funds Average is the average
total return for the universe of funds within the Short Investment Grade
Debt Funds investment objective. The total return for the funds reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates. This type of fund which invests at least 65% of
assets in investment grade debt issues (rated in top four grades) with
average maturities of five years or less.
(S) Annualized.
102 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Volatility Constrained Bond Fund
reflected a total return of 5.9%, as compared to the Merrill Lynch 1-2.99 Years
Treasury Index which rose 6.7%. The Fund modestly underperformed the Index as
the managers in the Fund maintained conservative duration positions throughout
most of the year due to concerns over Fed intervention. Weak returns from
corporate bonds late in the year, as the market's flight to defensive sectors
favored treasuries, also contributed to the Fund's modest underperformance.
Portfolio Highlights
Indications of the US economy's ability to sustain strong growth without
inflation benefited bonds increasingly throughout 1997. However, two factors
diminished the attractiveness of short-term bonds for much of the year. The
first proved to be the Federal Reserve Board which threatened to increase rates
during much of the year, but acted only once, late in the first quarter, when it
increased the Fed Funds rate 1/4%. The second threat was directly attributable
to the problems facing Asian economies during the last four months of the year.
As major holders of short-term US treasuries, it was feared that Korean and
Japanese investors would be forced to redeem their investments to support
weakened businesses in their own countries. Although some withdrawals appeared
to occur late in the year, fears of massive selling of T-bills were not
realized.
The Fund was impacted by these factors in several ways. The Fed's inflammatory
comments about the economy's strength and inflation risk kept the Fund's
investment managers conservatively positioned in terms of portfolio duration
during the first half of the year. The market's flight to quality sectors of the
market in reaction to Asia's problems later in the year favored US treasuries.
Other sectors were negatively impacted, particularly where credit weakness was
perceived. Lower quality corporate issues lagged as yield spreads widened.
Credit-sensitive asset- and mortgage-backed securities holdings were also
underperformers in the fourth quarter. The Fund was able to offset some of these
influences. The bond managers captured some value by extending portfolio
duration in the third quarter as economic fundamentals stabilized and the Fed
became less of a factor.
- --------------------------------------------------------------------------------
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
United States Treasury 17.6
Barnett Auto Trust 3.3
World Omni Automobile Lease 3.3
Olympic Automobile Receivables Trust 2.5
Proctor & Gamble 2.5
General Electric Capital Corporation 2.4
Associates Corp. North America 2.4
Sears Roebuck Acceptance 2.3
First Chicago Master Trust 2.2
Toyota Auto Lease Trust 2.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 2.6 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day standardized) 5.4%
Number of Issues 152
Number of Issuers 120
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers Styles
BlackRock Financial Management Mortgage/Asset-Backed
Specialist
STW Fixed Income Management, Sector Rotation Core
Inc.
Standish, Ayer & Wood, Inc. Corporate Specialist
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Volatility Constrained Bond Fund 103
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Long-Term Investments - 90.7%
Asset-Backed Securities - 34.6%
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 $ 189 $ 186
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 0l/20/13 157 154
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 12/25/27 125 125
Associates Manufactured Housing
Pass-thru Certificates
Series 1996-1 Class A3
7.000% due 03/15/27 700 710
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03 2,798 2,804
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 5,700 5,696
California Infrastructure PG&E
Series 1997-1 Class A3
6.150% due 06/25/02 1,600 1,604
Case Equipment Loan Trust
Series 1997-B Class C
6.410% due 09/15/04 284 286
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 2,900 2,922
Chase Manhattan Grantor Trust
Series 1996-B Class A
6.610% due 09/15/02 783 787
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 803 800
Series 1997-3 Class A
6.200% due 03/20/04 (c) 868 869
Contimortgage Home Equity Loan Trust
Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 500 499
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 51 51
Series 1994-1 Class A
5.800% due 03/15/09 260 258
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25 486 488
Fifth Third Bank Auto Grantor Trust
Series 1996-B Class A
6.450% due 03/15/02 1,000 1,003
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/01 3,200 3,257
First Omni Credit Card Master Trust
Series 1996-A Class A
6.650% due 09/15/03 610 620
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 697 698
Fleetwood Credit Corporation Grantor Trust
Series 1997-B Class A
6.400% due 05/15/13 378 381
Ford Credit Auto Lease Trust
Series 1996-1 Class A2
5.800% due 05/15/99 809 808
Green Tree Financial Corp.
Series 1996-6 Class A4
7.050% due 09/15/27 500 507
Green Tree Securitized Net Interest
Margin Trust
Series 1994-A Class A
6.900% due 02/15/04 440 444
Series 1995-A Class A
7.250% due 07/15/05 354 355
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00 346 346
Series 1997-B Class A
5.950% due 05/15/03 923 922
IMC Home Equity Loan Trust
Series 1997-5 Class Al
6.510% due 02/20/06 (c) 584 584
Nationsbank Auto Owner Trust
Series 1996-A Class A3
6.375% due 07/15/00 2,500 2,505
Newcourt Receivables Asset Trust
Series 1996-2 Class A
6.870% due 06/20/04 156 159
Nissan Auto Recievables Grantor Trust
Series 1997-1 Class A
6.150% due 02/17/03 837 839
Olympic Automobile Receivables
Series 1996-B Class A4
6.700% due 03/15/02 1,000 1,009
Series 1996-D Class CTFS
6.125% due 11/15/04 2,860 2,852
Series 1997-A Class A2
6.125% due 01/01/99 451 451
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 0l/25/01 3,500 3,529
</TABLE>
104 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01 $ 3,500 $ 3,508
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 269 269
Sears Credit Account Master Trust II
Series 1995-3 Class A
7.000% due 10/15/04 500 511
Series 1997-1 Class A
6.200% due 07/16/07 500 500
SMS Student Loan Trust
Series 1997-A Class A
6.030% due 10/27/25 (c) 500 505
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 151 153
Student Loan Marketing Association
Series 1997-3 Class CTFS
6.259% due 08/25/12 (c) 400 395
The Money Store Home Equity Loan Trust
Series 1996-B Class A3
6.820% due 03/15/10 130 131
TLFC IV Equipment Lease Trust
Series 1996-1 Class A
5.980% due 11/20/02 305 305
TMS Small Business Administration Loan Trust
Series 1997-1 Class A
6.240% due 01/15/25 (c) 497 497
Series 1997-1 Class B
6.719% due 01/15/25 (c) 497 495
Toyota Auto Lease Trust
Series 1997-A Class Al
6.200% due 04/26/04 3,600 3,603
UCFC Home Equity Loan Trust
Series 1993-B1 Class Al
6.075% due 07/25/14 95 94
Series 1996-D1 Class A3
6.541% due 11/15/13 275 276
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 3,500 3,506
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 699 699
Series 1996-B Class B
6.850% due 11/15/02 (c) 400 402
World Omni Automobile Lease
Securitization Trust
Series 1997-A Class A2
6.750% due 06/25/03 (c) 3,500 3,531
Series 1997-A Class A4
6.900% due 06/25/03 400 406
Series 1997-B Class Al
6.070% due 11/25/03 600 601
-------
59,895
=======
Corporate Bonds and Notes -- 21.2%
Advanta National Bank
6.450% due 10/30/00 250 244
Ahmanson (H.F.)
9.875% due 11/15/99 400 425
Aristar Inc.
6.125% due 12/01/00 500 498
Associates Corp North America
6.375% due 08/15/00 4,000 4,023
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99 1,100 1,094
Bear Stearns Co., Inc.
7.625% due 09/15/99 725 742
Caterpillar Financial Services (MTN)
6.100% due 07/15/99 500 500
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 3,100 3,092
Cox Enterprises, Inc.
6.250% due 08/26/99 1,000 1,000
Crescent Real Estate Equities
6.625% due 09/15/02 750 749
ERP Operating, L.P.
8.500% due 05/15/99 225 231
Finova Capital Corp.
6.450% due 06/01/00 625 627
First Chicago Corp.
9.000% due 06/15/99 500 519
First Union Corp.
6.750% due 0l/15/98 410 410
Franchise Finance Corp.
7.000% due 11/30/00 575 581
General Electric Capital Corporation (MTN)
6.120% due 08/15/00 4,000 4,032
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 984 994
General Motors Acceptance Corp. (MTN)
7.500% due 07/22/99 850 868
7.465% due 07/25/19 974 981
</TABLE>
Volatility Constrained Bond Fund 105
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Greyhound Financial Corp.
8.500% due 02/15/99 $ 775 $ 793
Heller Financial, Inc. (MTN)
5.928% due 03/01/99 (c) 600 602
Hertz Corp.
6.625% due 07/15/00 650 654
Homeside Lending, Inc. (MTN)
6.875% due 06/30/02 600 611
ITT Corp.
6.250% due 11/15/00 450 442
JC Penney & Co., Inc. (MTN)
6.375% due 09/15/00 675 680
Lehman Brothers Holdings, Inc. (MTN)
Series E
7.110% due 09/27/99 1,075 1,092
Series IBC
7.000% due 05/13/99 700 709
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 375 379
Merrill Lynch & Co., Inc. (MTN)
7.260% due 03/25/02 (c) 925 946
Midlantic Corp.
9.250% due 09/01/99 450 471
Salomon Smith Barney Holdings
6.625% due 07/01/02 375 379
Salomon, Inc. (MTN)
5.718% due 04/05/99 (c) 1,000 1,000
Sears Roebuck Acceptance (MTN)
6.160% due 09/20/00 4,000 4,001
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 475 478
USF&G Corp.
7.000% due 05/15/98 1,000 1,003
Wellsford Residential Property Trust (MTN)
6.195% due 11/24/99 (c) 850 851
---------
36,701
---------
Eurodollar Bonds - 3.8%
ALPS Pass-thru Trust
Series 1994-1 Class A-2
7.150% due 09/15/04 (c) 351 353
Chase Manhattan Corp.
6.062% due 12/05/09 (c) 800 782
Export-Import Bank of Korea
7.125% due 09/20/0l 200 166
Procter & Gamble
9.625% due 01/14/01 3,900 4,224
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/0l/04 1,175 1,119
---------
6,644
=========
Mortgage-Backed Securities -11.0%
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 750 748
BKD Commercial Mortgage Trust
Series 1997-CI Class B
7.218% due 04/25/00(c) 550 551
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class Al
6.500% due 11/25/27 400 401
CMC Securities Corp. II
Series 1993-2G Class Al
7.194% due 11/25/23 (c) 664 674
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.500% due 2000 221 223
7.500% due 2002 201 202
9.000% due 2005 256 267
7.375% due 2006 (c) 261 268
7.500% due 2007 369 374
8.500% due 2011 156 162
8.000% due 2018 758 788
Federal Home Loan Mortgage Corp.
Series 1714 Class E
6.250% due 09/l5/18 525 526
Federal National Mortgage
Association Pools
8.500% due 2001 144 148
7.000% due 2004 757 767
8.750% due 2004 44 46
7.000% due 2008 325 331
7.500% due 2009 475 486
8.500% due 2010 711 741
Federal National Mortgage Association
Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 1,066 1,059
GE Capital Mortgage Services, Inc.
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 1,000 1,005
Government National Mortgage
Association Pools
9.500% due 2025 693 752
7.250% due 2026 1,040 1,065
</TABLE>
106 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 $ 462 $ 465
Residential Accredited Loans, Inc.
Series 1997-Q57 Class Al
7.500% due 07/25/27 367 371
Residential Asset Securitization Trust
Mortgage Pass-thru Certificates
Series 1996-A8 Class Al
8.000% due 12/25/26 396 401
Series 1997-Al Class A
7.000% due 03/25/27 415 417
Series 1997-A5 Class A3
7.125% due 07/25/27 851 856
Series 1997-A9 Class Al
7.250% due 11/25/27 740 745
Residential Funding Mortgage Securities I
Series 1997-S12 Class Al0
6.700% due 08/25/27 850 855
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-M3 Class Al
7.750% due 07/25/30 111 111
Series 1994-Cl Class D
8.000% due 06/25/26 (c) 657 669
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 289 292
SASCO LLC
Series 1997-N1 Class D
6.217% due 09/25/28 (c) 600 600
Sequoia Mortgage Trust
Series 1 Class Al
6.028% due 07/04/27 (c) 820 821
Wilshire Funding Corporation
Series 1997-WFC1 Class Al
7.250% due 08/25/27 745 753
---------
18,940
---------
Municipal Bonds - 0.4%
Philadelphia, Pennsylvania, Authority for
Industrial Development Class A
6.480% due 06/15/04 621 638
---------
638
---------
United States Government
Treasuries - 17.4%
United States Treasury Notes
5.625% due 11/30/98 1,250 1,250
6.000% due 06/30/99 1,500 1,508
5.750% due 09/30/99 1,775 1,778
5.875% due 02/l5/00 12,500 12,549
6.875% due 03/31/00 1,075 1,102
5.625% due 11/30/00 500 499
6.375% due 05/15/00 600 609
6.375% due 03/31/0l 280 285
6.250% due 06/30/02 2,325 2,371
3.625% due 07/15/02 7,027 6,992
5.750% due 11/30/02 170 170
5.750% due 08/l5/03 1,000 1,000
---------
30,113
---------
Yankee Bonds - 2.3%
Household International
5.250% due 10/15/98 850 845
Noranda Forest, Inc.
8.875% due 10/15/99 450 470
Ontario, Province of
ll.500% due 03/l0/13 1,240 1,305
Quebec, Province of
13.250% due 09/l5/14 450 520
Westpac Banking, Ltd.
7.875% due 10/15/02 750 796
---------
3,936
---------
Total Long-Term Investments
(cost $156,911) 156,867
---------
Short-Term Investments - 8.2%
Chrysler Financial Corp. (MTN)
Series P
6.250% due 06/29/98 850 851
Frank Russell Investment Company
Money Market Fund, due on demand (a) 12,456 12,456
Goldman Sachs Group
6.300% due 01/05/98 (a) 900 900
---------
Total Short-Term Investments
(cost $14,207) 14,207
</TABLE>
Volatility Constrained Bond Fund 107
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Market
Value
(000)
---------
<S> <C>
Total Investments
(identified cost $171,118)(b) - 98.9% $ 171,074
Other Assets and Liabilities,
Net - 1.1% 1,902
---------
Net Assets - 100.0% $ 172,976
=========
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate securities.
Abbreviations:
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
108 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $171,118)(Note 2).................................................... $ 171,074
Receivables:
Dividends and interest.................................................................................. 1,986
Investments sold........................................................................................ 176
Fund shares sold........................................................................................ 513
--------------------
Total Assets.......................................................................................... 173,749
Liabilities
Payables:
Investments purchased............................................................. $ 598
Accrued fees to affiliates (Note 4)............................................... 111
Other accrued expenses............................................................ 64
------------------
Total Liabilities.................................................................................... 773
--------------------
Net Assets.................................................................................................. $ 172,976
====================
Net Assets consist of:
Undistributed net investment income......................................................................... $ 708
Accumulated net realized gain (loss)........................................................................ (10,088)
Unrealized appreciation (depreciation) on investments....................................................... (44)
Shares of beneficial interest............................................................................... 91
Additional paid-in capital.................................................................................. 182,309
--------------------
Net Assets.................................................................................................. $ 172,976
====================
Net Asset Value, offering and redemption price per share:
($172,976,445 divided by 9,074,415 shares of $.01 par value
shares of beneficial interest outstanding)............................................................... $ 19.06
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 109
<PAGE>
Volatility Constrained Bond Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
Investment Income:
<S> <C> <C>
Interest............................................................................................... $ 9,879
Dividends from Money Market Fund (Note 5).............................................................. 529
Dividends.............................................................................................. 39
--------------------
Total Investment Income............................................................................. 10,447
Expenses (Notes 2 and 4):
Management fees................................................................... $ 812
Custodian fees.................................................................... 136
Transfer agent fees............................................................... 193
Bookkeeping service fees.......................................................... 15
Professional fees................................................................. 23
Registration fees................................................................. 48
Trustees' fees.................................................................... 4
Miscellaneous..................................................................... 34
------------------
Total Expenses....................................................................................... 1,265
--------------------
Net investment income...................................................................................... 9,182
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments.................................................................. (141)
Net change in unrealized appreciation or depreciation of investments....................................... 325
--------------------
Net gain (loss) on investments............................................................................. 184
--------------------
Net increase (decrease) in net assets resulting from operations............................................ $ 9,366
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
110 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
---------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income................................................................. $ 9,182 $ 9,516
Net realized gain (loss).............................................................. (141) (2,355)
Net change in unrealized appreciation or depreciation................................. 325 275
---------------- -----------------
Net increase (decrease) in net assets resulting from operations..................... 9,366 7,436
---------------- -----------------
From Distributions to Shareholders:
Net investment income................................................................. (9,388) (8,805)
---------------- -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ........... 9,801 (17,315)
---------------- -----------------
Total Net Increase (Decrease) in Net Assets............................................... 9,779 (18,684)
Net Assets
Beginning of period.................................................................... 163,197 181,881
---------------- -----------------
End of period (including undistributed net investment income of
$708 and $763, respectively)......................................................... $ 172,976 $ 163,197
================ =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 111
<PAGE>
Volatility Constrained Bond Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......................................... $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income..................................................... 1.07 1.09 1.21 1.15 .82
Net realized and unrealized gain (loss) on investments.................... .02 (.22) .58 (1.16) .45
------- ------- ------- ------- -------
Total Income From Investment Operations............................... 1.09 .87 1.79 (.01) 1.27
------- ------- ------- ------- -------
Less Distributions:
Net investment income..................................................... (1.10) (1.01) (1.22) (1.13) (.71)
Tax return of capital..................................................... -- -- -- -- (29)
------- ------- ------- ------- -------
Total Distributions................................................... (1.10) (1.01) (1.22) (1.13) (1.00)
------- ------- ------- ------- -------
Net Asset Value, End of Period............................................... $ 19.06 $ 19.07 $ 19.21 $ 18.64 $ 19.78
======= ======= ======= ======= =======
Total Return (%)............................................................. 5.90 4.66 9.89 (.02) 6.67
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).................................. 172,976 163,197 181,881 195,007 225,672
Ratios to average net assets (%):
Operating expenses..................................................... .78 .76 .71 .67 .66
Net investment income.................................................. 5.63 5.69 6.33 5.97 5.79
Portfolio turnover rate (%)................................................ 197.45 311.51 256.72 182.65 220.77
</TABLE>
112 Volatility Constrained Bond Fund
<PAGE>
Multistrategy Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide maximum total return through capital appreciation and by
assuming a higher level of volatility than is ordinarily expected from broad
fixed-income market portfolios.
Invests in: Fixed-income securities.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns by assuming the additional risk of investment in
non-investment grade US fixed income securities, and foreign bonds including
emerging markets debt in addition to US investment grade fixed income
instruments. The Fund employed the investment management services of three
managers with three separate approaches to bond market investment.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lipper(C)
Dates Multistrategy Bond LB Aggregate** Intermediate++
- ----- ------------------ -------------- --------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1993 $10,874 $10,768 $10,950
1994 $10,401 $10,454 $10,585
1995 $12,265 $12,386 $12,340
1996 $12,875 $12,835 $12,732
1997 $14,098 $14,075 $13,807
</TABLE>
<TABLE>
<CAPTION>
Multistrategy Bond Fund Lehman Brothers Aggregate Bond Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- ------------------- --------------- --------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,950 9.50% 1 Year $ 10,966 9.66%
Inception $ 14,098 7.23%(S) Inception $ 14,075 7.20%(S)
<CAPTION>
Lipper(C) Intermediate Investment Grade Debt Funds Average
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ---------------- --------------
<S> <C> <C>
1 Year $ 10,844 8.44%
Inception $ 13,807 6.66%(S)
</TABLE>
* Assumes initial investment on January 29, 1993. Lehman Brothers Index
comparison for the initial investment began February 1, 1993.
Lipper index comparison for the initial investment began January 1, 1993.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
++ Lipper(C) Intermediate (5-10 Yr.) Investment Grade Debt Funds Average is
the average total return for the universe of funds within the Intermediate
Investment Grade Debt Funds investment objective. The total return for the
funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates. This type of funds
invests at least 65% of assets in U.S. Treasury Bills, Notes and Bonds with
average maturities of five to ten years.
(S) Annualized.
114 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Multistrategy Bond Fund reflected a
total return of 9.5%, as compared to the Lehman Brothers Aggregate Bond Index
results of 9.7%. The Fund's performance was aided by its longer duration
relative to the benchmark and the strong performance of non-investment grade and
emerging markets debt holdings during the first three quarters of the year.
Portfolio Highlights
Although 1997 produced reasonably strong returns from fixed income investments,
it was once again a difficult year for fixed income investors. Continuing the
trend from the previous year, high yield US corporate bonds and emerging markets
debt securities produced the strongest returns. However, the trend ended just
prior to the start of the fourth quarter, as economic crises in Asia created
concerns around the globe. The resulting flight to safer investments had two
divergent effects on bonds. The first was a shift of stock market assets into
bonds, particularly among mutual funds. The second was a preference for "safe"
bonds that resulted in a widening of yield spreads by quality. This had the
consequence of weakening the demand for high yield US bonds. It also caused a
selloff of emerging markets debt. High yield bonds still fared relatively well
due to the continued creditworthiness of US corporations and a sound domestic
economy, and as a result, ended the year as the best performing US bond sector.
Although emerging markets debt securities produced losses for the quarter, their
gains earlier in the year were sufficient to maintain their status as the year's
best performers.
Despite the erosion of opportunities in the fourth quarter, the Multistrategy
Bond Fund performed well in 1997. The market for fixed income securities was
again marked by limited opportunities to generate significant returns from
investment grade bonds. Alternatives in other segments of the market offered
better returns. Although they were the source of the Fund's weakness in the
fourth quarter, the Fund benefited from its emerging markets and high yield
holdings for the year. In addition to generating healthy returns from both high
yield and emerging markets securities, the Fund managers ` mortgage--backed
securities holdings also produced above average returns. Duration strategies
were conservative for most of the year due to the Fed's comments and the lack of
clear economic signals. This resulted in some opportunity cost as yields fell
during the year, particularly in the fourth quarter.
<TABLE>
<CAPTION>
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
<S> <C>
United States Treasury 13.5%
Federal Home Loan Mortgage Corp. 10.2
Government National Mortgage Association 6.6
Federal National Mortgage Association 6.2
Great Britain Treasury 1.6
Kellogg Co. 1.2
Time Warner, Inc. 1.1
Salomon, Inc. 1.1
World Bank 1.0
Bankers Trust Company 0.6
</TABLE>
<TABLE>
<CAPTION>
Portfolio Characteristics December 31, 1997
<S> <C>
Weighted Average Quality Diversification AA2
Weighted Average Years-to-Maturity 8.0 Years
Weighted Average Duration 4.7 Years
Current Yield (SEC 30-day standardized) 5.6%
Number of Issues 335
Number of Issuers 264
Money Managers Styles
BEA Associates Broad Market-Sector
Rotation
Pacific Investment Management Co. Broad Market-Sector
Rotation
Standish Ayer & Wood, Inc. Broad Market-Sector
Rotation
</TABLE>
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Multistrategy Bond Fund 115
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Long-Term Investments - 77.8%
Asset-Backed Securities - 6.5%
Advanta Credit Card Master Trust
Series 1995-F Class A2
6.170% due 08/01/03 (b) $ 2,200 $ 2,199
Advanta Mortgage Loan Trust
7.040% due 01/25/29 1,600 1,606
Aesop Funding II
Series 1997-1 Class A-2
6.400% due 10/20/03 2,550 2,554
American Airlines, Inc.
Class A-l
9.710% due 01/02/07 333 370
Series 1990-H
9.800% due 0l/02/08 1,190 1,442
American Express Credit Account Master Trust
Series 1997-1 Class A
6.400% due 04/15/05 500 507
Asset Securitization Corp.
Series 1996-MD6 Class A1C
7.040% due 11/13/26 975 1,007
California Infrastructure SDG&E
Series 1997-1 Class A6
6.310% due 09/25/08 300 300
Series 1997-1 Class A7
6.370% due 12/26/09 310 310
Cityscape Home Equity Loan Trust
Pass-thru Certificate
Series 1996-2 Class A2
7.200% due 04/25/11 900 909
First USA Credit Card Master Trust
Series 1997-6 Class A
6.420% due 03/17/05 1,060 1,075
Fleetwood Credit Corp. Grantor Trust
Series 1994-B Class A
6.750% due 03/15/10 354 356
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A-1
5.400% due 09/25/09 100 94
GMAC Commercial Mortgage Securities, Inc.
Series 1996-Cl Class F
7.860% due 11/15/06 500 480
Green Tree Financial Corp.
Series 1995-5 Class A3
6.250% due 10/15/25 600 600
Series 1995-6 Class A3
6.650% due 11/15/25 900 903
Series 1995-8 Class A2
6.150% due 12/15/26 (b) 537 538
Greenwich Capital Acceptance, Inc.
Series 1994 Class A-1
8.890% due 11/25/24 (b) 157 160
Mellon Bank Credit Card Master Trust
Series 1995-A Class A
6.170% due 04/15/03 (b) 1,750 1,752
Metris Master Trust
Series 1997 - 1 Class A
6.870% due 10/20/05 1,065 1,096
Morgan Stanley Capital I, Inc.
Mortgage Pass-thru Certificate
Series 1996 - WFl Class X
1.420% due 11/15/28 (b) 3,450 252
Residential Funding Mortgage Securities II
Series 1997-HS5 Class Ml
7.010% due 05/25/27 1,400 1,423
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1994-1 Class M-2
7.750% due 09/25/29 407 418
Series 1994-C2 Class G
8.000% due 04/25/25 263 264
Series 1995-1 Class 2-C
7.500% due 10/25/28 (b) 325 330
Series 1995-Cl Class C
6.900% due 02/25/27 (b) 300 299
Salomon Brothers Mortgage Securities VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16 Class A
8.440% due 11/25/24 (b) 849 880
Series 1997 Class A2
7.174% due 03/25/25 855 885
Sears Credit Account Master Trust
Series 1997-1 Class A
6.200% due 07/16/07 1,050 1,049
Standard Credit Card Master Trust
Series 1994-2 Class A
7.250% due 04/07/06 700 740
Series 1994-4 Class A
8.250% due 11/07/03 800 857
Structured Asset Securities Corp.
Mortgage Pass-thru Certificate
Series 1996-CFL Class A1C
5.944% due 02/25/28 301 299
Series 1996-CFL Class C
6.525% due 02/25/28 250 249
The Money Store Home Equity Loan Trust
Series 1992-B Class A
6.900% due 07/15/07 207 208
</TABLE>
116 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
The Money Store Home Equity Loan Trust
Series 1996-A Class AS
6.850% due 06/15/19 $ 700 $ 709
Series 1996-B Class AS
7.180% due 02/15/15 750 765
Toyota Auto Lease Trust
Series 1997-A Class A2
6.350% due 04/26/04 580 581
UCFC Home Equity Loan Trust
Series 1994-B Class A-6
7.100% due 06/l0/23 217 221
---------
28,687
---------
Corporate Bonds and Notes - 20.0%
AT&T Capital Corp. (MTN)
6.470% due 12/03/99 480 481
A.H. Belo Corp.
6.875% due 06/01/02 900 917
Aames Financial Corp.
9.125% due 11/01/03 475 467
ACLC Franchise Loan Receivables
6.728% due 04/15/14 1,000 1,007
Advanta National Bank
6.450% due 10/30/00 700 698
Albank Capital Trust
9.270% due 06/06/27 625 682
American General Institutional
Capital Series B
8.125% due 03/15/46 1,200 1,323
Ameins Capital I Series A
8.850% due 02/01/27 500 551
AMR Corp. (MTN)
9.950% due 03/07/01 1,000 1,105
Azteca Holdings SA
11.000% due 06/15/02 1,050 1,083
Banesto Delaware, Inc.
8.250% due 07/28/02 500 534
Banponce Trust I Series A
8.327% due 02/01/27 475 508
Bear Steams Capital Trust I
7.000% due 01/15/27 (b) 500 506
Beaver Valley Funding Corp.
9.000% due 06/01/17 1,570 1,759
BellSouth Capital Funding Corp.
6.040% due 11/15/26 1,400 1,413
BellSouth Telecommunications, Inc.
5.850% due 11/15/45 640 644
BNP US Funding LLC
7.738% due 12/31/49 (b) 630 639
Building Materials Corp.
8.000% due 10/15/07 1,400 1,404
Cablevision Systems Corp.
7.875% due 12/15/07 510 521
CBS Inc.
7.125% due 11/01/23 725 658
Citicorp (MTN)
5.956% due 06/27/02 (b) 3,000 2,987
Cliffs Drilling Co. Series B
10.250% due 05/15/03 215 232
Coast Federal Bank
13.000% due 12/31/02 375 396
Coast Savings Financial, Inc.
10.000% due 03/01/00 175 186
Colonial Realty LP
7.500% due 07/15/01 775 799
Commercial Federal Corp.
7.950% due 12/01/06 100 100
Compass Trust I Series A
8.230% due 01/15/27 350 373
Conseco Finance Trust III
8.796% due 04/01/27 700 791
Contifinancial Corp.
8.375%due08/15/03 900 932
Continental Airlines, Inc.
9.500% due 12/15/01 795 835
CP Limited Partnership
8.750% due 03/02/00 500 511
Crescent Real Estate Equities
6.625% due 09/15/02 900 902
7.125% due 09/15/07 1,000 1,014
CS Wireless System, Inc. Step Up Bond
Zero Coupon due 03/01/06 (b) 360 97
Dime Capital Trust I Series A
9.330% due 05/06/27 325 368
Equitable Life Assurance Society
7.700% due 12/01/15 500 538
Equity Residential Properties
7.125% due 10/15/17 475 475
ERAC USA Finance Co. (MTN)
6.350% due 0l/15/01 725 726
ERP Operating, LP
8.500% due 05/15/99 350 360
Federal Realty Investment Trust
8.875% due 01/15/00 650 682
</TABLE>
Multistrategy Bond Fund 117
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Felcor Suites, Ltd.
7.625% due 10/01/07 $ 800 $ 809
First Nationwide Holdings, Inc.
12.500% due 04/15/03 1,475 1,674
10.625% due 10/01/03 500 559
First Republic Bancorp
7.750% due 09/15/12 750 766
First Tennessee Capital I Series A
8.070% due 01/06/27 575 605
First USA Bank
5.850% due 02/22/01 500 495
Fox/Liberty Networks LLC
Zero Coupon due 08/15/07 (b) 920 918
Fox/Liberty Networks LLC Step Up Bond
9.750% due 08/15/07 295 189
Gaylord Container Corp. Step Up Bond
12.750% due 05/15/05 (b) 325 348
GMAC (MTN)
7.375% due 04/15/99 940 956
8.500% due 0l/31/00 600 627
6.625% due 04/24/00 550 555
6.900% due 07/05/00 180 183
Goldman Sachs Group, LP
6.375% due 06/15/00 400 403
6.200% due 01/15/01 300 298
Great Atlantic & Pacific Tea, Inc.
7.750% due 04/15/07 1,225 1,292
Haven Capital Trust I
10.460% due 02/01/27 350 371
Homeside, Inc.
11.250% due 05/15/03 226 269
Imperial Capital Trust I Series B
9.980% due 12/31/26 250 284
Imperial Credit Industries, Inc., Series B
9.875% due 0l/l5/07 675 662
Interpool Capital Trust Series B
9.875% due 02/15/27 500 584
ISP Holdings, Inc. Series B
9.000% due 10/15/03 225 233
Kaufman and Broad Home Corp.
7.750% due 10/15/04 800 792
Loewen Group International, Inc. Series 4
8.250% due 10/15/03 700 742
Long Island Lighting Co.
9.000% due 11/01/22 770 860
Markel Capital Trust I Series B
8.710% due 0l/01/46 325 354
Mashantucket Western Pequot
6.910% due 09/01/12 1,275 1,338
Merck and Co., Series B (MTN)
5.760% due 05/03/37 1,780 1,824
Merita Bank, Ltd.
7.150% due 12/29/49 (b) 1,200 1,215
MMI Trups
7.625% due 12/15/27 1,425 1,419
National Westminster
6.062% due 12/31/99 (b) 20 18
Nextel Communications, Inc. Step Up Bond (b)
Zero Coupon due 10/31/07 285 175
Zero Coupon due 09/15/07 635 400
Niagara Mohawk Power Corporation
8.750% due 04/01/22 365 392
Noranda, Inc.
8.625% due 07/15/02 400 433
Norfolk Southern Corp.
7.050% due 05/01/37 800 846
North Atlantic Energy Corp. Series A
9.050% due 06/01/02 720 740
NWA Trust
13.875% due 06/21/08 90 109
Ocwen Federal Bank
11.875% due 10/01/03 725 816
12.000% due 06/l5/05 300 330
Onbank Capital Trust I
9.250% due 02/01/27 450 529
Orion Capital Trust I
8.730% due 01/01/37 225 245
Paxson Communications Corp.
11.625% due 10/01/02 550 594
Prime Succession Acquisition Co.
l0.750% due 08/15/04 400 439
Providian Capital I Series A
9.525% due 02/01/27 500 545
Prudential Insurance Co. of America
6.875% due 04/l5/03 700 712
Public Service Co., New Hampshire Series B
9.170% due 05/l5/98 1,500 1,509
Revlon Worldwide
Zero Coupon due 03/15/01 1,900 1,325
Rose Hills Corp.
9.500% due 11/15/04 500 520
Salomon Smith Barney Holdings
7.980% due 03/0l/00 400 415
</TABLE>
118 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Salomon, Inc.
7.000% due 05/15/99 $ 275 $ 278
7.125% due 08/0l/99 275 279
7.750% due 05/15/00 550 567
Salomon, Inc. (MTN)
6.625% due 11/30/00 750 757
Seagate Technology, Inc.
7.450% due 03/01/37 1,100 1,130
Simon Debartolo Group, LP
6.750% due 07/15/04 850 856
Sinclair Broadcast Group, Inc.
8.750% due 12/15/07 975 982
Sovereign Capital Trust I
9.000% due 04/01/27 975 1,057
Spieker Properties, LP
6.950% due 12/15/02 500 505
Summit Properties Inc.
7.200% due 08/15/07 625 643
Sun Healthcare Group, Inc.
9.500% due 07/01/07 625 644
Tanger Properties LP
8.750% due 03/11/01 350 360
Taubman Realty Group, LP
8.000% due 06/15/99 450 460
TCI Communications, Inc. (MTN)
6.355% due 09/l1/00(b) 2,000 1,985
Tenet Healthcare Corp.
9.625% due 09/01/02 285 309
7.875% due 0l/l5/03 150 154
8.625% due 12/01/03 340 354
8.000% due 01/15/05 500 508
Time Warner Inc.
7.975% due 08/15/04 225 240
8.ll0% due 08/l5/06 450 487
8.180% due 08/15/07 450 490
7.570% due 02/01/24 625 654
6.850% due 0l/l5/26 2,455 2,512
Toledo Edison Co.
8.700% due 09/01/02 500 526
Toledo Edison Co. (MTN)
8.000% due 12/31/98 500 505
Toll Brothers Corp.
7.750% due 09/15/07 1,175 1,157
Trenwick Capital Trust I
8.820% due 02/01/37 625 698
TU Electrical Capital V
8.175% due 0l/30/37 600 643
UCC Investors Holding, Inc. Step Up Bond
Zero Coupon due 05/01/05 (b) 220 214
Union Planters Trust Capital
8.200% due 12/15/26 675 716
United Companies Financial Corp.
9.350% due 11/01/99 375 391
8.375% due 07/01/05 625 648
USAir, Inc.
10.000% due 07/01/03 805 829
Valero Energy
6.750% due 12/15/02 570 573
Viacom, Inc.
7.750% due 06/01/05 525 534
Webster Capital Trust I
9.360% due 01/29/27 250 279
Wellsford Residential Property Trust
9.375% due 02/01/02 475 522
Wireless One, Inc. Step Up Bond
Zero Coupon due 08/01/06 (b) 220 46
---------
87,412
---------
Eurodollar Bonds -- 4.2%
Aiberton Oil Company
9.875% due 08/15/00(b) 250 238
Argentina, Republic of, Series 10
5.718% due 04/0l/00(b) 366 345
Argentina, Republic of, Series L
6.687% due 03/31/05 (b) 1,920 1,716
Arisco Productos Alimenticios
10.750% due 05/22/05 110 107
Auxiliaire Credit Foncier
5.687% due 09/25/02 (b) 600 578
Brazil, Federal Republic of
6.812% due 01/01/01 (b) 1,652 1,570
Brazil, Republic of
1.000% due 04/15/14 1,241 974
Credit Fonc France
8.000% due 01/14/02 600 629
Credit Lyonnais
7.125% due 09/19/49 (e) 360 355
Fifth Mexican Acceptance Corp. Class A
8.000% due 12/15/98 1,050 294
Hutchison Whampoa Finance, Ltd.
7.450% due 08/0l/17 1,375 1,330
Hutchison Whampoa Finance, Ltd. Series C
7.500% due 08/01/27 625 598
</TABLE>
Multistrategy Bond Fund 119
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Mexico (United Mexican States)
6.250% due 12/31/19 $ 2,000 $ 1,664
6.692% due 12/31/19 (b) 250 231
Midland Bank
6.062% due 12/31/49 (e) 130 111
Okobank Series E (MTN)
6.406% due 09/29/49 750 743
Poland, Republic of, Step Up Bond
4.000% due 10/27/14 (b) 2,275 1,965
Skandinaviska Enskilda Banken (e)
7.500% due 03/29/49 700 700
8.125% due 09/06/49 475 513
Skandinaviska Enskilda Banken Series 1(MTN)
6.625% due 03/29/49 (e) 510 507
Tata Electric Co.
8.500% due 08/19/17 625 557
TFM SA de CV Step Up Bond (b)
Zero Coupon due 06/15/09 475 299
Zero Coupon due 06/15/09 (144A) 1,160 719
Venezuela, Republic of, Series A
6.750% due 03/31/07 (b) 1,131 1,015
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/01/04 (b) 650 619
-------
18,377
-------
Mortgage-Backed Securities - 27.1%
Asset Securitization Corporation
Series 1997-D5 Class AID
6.850% due 02/14/41 900 913
Chase Commercial Mortgage Securities Corp.
6.600% due 12/19/07 1,500 1,453
Collateralized Mortgage Securities Corp.
Series J Class J-5 CMO
7.985% due 05/01/17 2,099 2,131
Delta Funding Home Equity Loan Trust
Series 1997-3 Class MIF
7.080% due 10/25/28 1,250 1,259
Federal Home Loan Mortgage Corp. (d)
6.500% 15 Year TBA 5,930 5,939
7.000% 15 Year TBA 270 274
Federal Home Loan Mortgage Corp. (d)
7.000% 30 Year TBA 8,500 8,574
6.500%30 Year TBA 15,300 15,123
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.000% due 1999 684 696
7.000% due 2009 521 532
6.000% due 2011 2,763 2,730
7.000% due 2011 877 893
7.000% due 2012 1,657 1,686
8.500% due 2020 351 371
8.500% due 2021 981 1,036
8.500% due 2027 1,462 1,544
Federal Home Loan Mortgage Corp.
Participation Certificate
Series 1014 Class E
7.950% due 02/15/20 569 583
Federal Home Loan Mortgage Corp.
Series 1037 Class Z
9.000% due 02/15/21 1,562 1,669
Series 1708 Class D
6.000% due 07/15/08 2,300 2,271
Series 1934 Class AB
6.000% due 08/15/07 1,415 1,406
Federal National Mortgage
Association Pools
8.500% due 1999 402 428
6.000% due 2003 296 293
10.000% due 2005 268 282
6.000% due 2009 1,419 1,404
7.000% due 2009 505 514
6.000% due 2011 1,859 1,832
7.000% due 2011 2,203 2,241
7.835% due 2023 (b) 1,055 1,098
7.000% due 2024 1,155 1,168
7.000% due 2025 7,619 7,702
7.000% due 2026 920 929
7.000% due 2027 460 463
Federal National Mortgage Association
(REMIC)
Series 1992-10 Class ZD
8.000% due 11/25/21 1,603 1,759
Federal National Mortgage Association (d)
6.000% 7 Year TBA 2,550 2,521
6.500% 30 Year TBA 8,480 8,374
Government National Mortgage
Association Pools
6.875% due 2023 (b) 921 946
7.000% due 2023 (b) 2,356 2,426
Government National Mortgage
Association Pools
7.000% due 2023 2,206 2,231
6.875% due 2024 (b) 4,101 4,219
7.000% due 2024 (b) 4,539 4,643
8.500% due 2025 1,721 1,809
6.500% due 2026 (b) 4,516 4,635
</TABLE>
120 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
----------- ---------
<S> <C> <C>
Government National Mortgage Association
6.500% 30 Year TBA (d) $ 11,820 $ 11,698
Kidder Peabody Acceptance Corp.
Series 1994-Cl Class B
6.850% due 02/01/06 1,065 1,077
Morgan Stanley Capital I, Inc.
Series HH Class A2
7.270% due 05/15/07 400 416
Series WFI Class A2
7.220% due 05/15/07 500 519
Paine Webber Mortgage Acceptance Corp. IV
Mortgage Pass-thru Certificate
Series 1995-MI Class A
6.700% due 01/15/07 720 730
Ryland Mortgage Securities Corp. CMO
Series 1993-8 Class A
8.060% due 09/25/23 (b) 1,036 1,050
---------
118,490
---------
Municipal Bonds - 0.6%
Municipal Electric Authority of Georgia
5.000% due 01/01/26 1,300 1,270
New Jersey Economic Development Authority
Series A
7.425% due 02/15/29 950 1,041
Series B
Zero Coupon due 02/15/08 520 275
---------
2,586
---------
Non-US Bonds - 2.2%
Australian Government
10.000% due 10/15/07 AUD 2,000 1,689
Great Britain Treasury
7.250% due 12/07/07 GBP 4,500 7,916
---------
9,605
---------
United States Government
Agencies - 0.3%
Tennessee Valley Authority
5.880% due 04/01/36 $ 1,190 1,232
---------
1,232
---------
United States Government
Treasuries - 15.0%
United States Treasury Bonds
8.125% due 08/15/19 6,090 7,620
7.625% due 02/15/25 9,475 11,499
United States Treasury Notes
5.625% due 0l/31/98 525 525
5.125% due 11/30/98 2,150 2,140
5.625% due 11/30/98 (f) 8,010 8,010
5.750% due 12/31/98 925 926
6.000% due 06/30/99 1,800 1,809
6.875% due 07/31/99 325 331
5.875% due 10/31/99 1,250 1,249
7.750% due 11/30/99 9,310 9,655
7.125% due 02/29/00 150 154
6.625% due 06/30/01 (f) 4,125 4,239
6.250% due 10/31/01 (f) 12,200 12,408
6.625% due 04/30/02 500 516
6.250% due 06/30/02 190 194
5.750% due 08/15/03 2,775 2,777
7.875% due 11/15/04 410 458
United States Treasury
Principal Only Strip
Zero Coupon due 11/15/99 465 419
Interest Only Strips
Zero Coupon due 02/15/19 1,775 498
---------
65,427
---------
Yankee Bonds - 1.9%
Argentina, Republic of
9.500% due 11/30/02 (b) 1,300 1,291
Bell Cablemedia PLC Step Up Bond
Zero Coupon due 09/15/05 (b) 965 855
Brazil Media Trust
6.688% due 09/15/07 (b) 226 192
Brazil, Republic of, Series EI-L
6.688% due 04/l5/06 (b) 59 51
Crown Packaging Enterprise, Ltd. Step Up Bond
14.000% due 08/01/06 (b) 300 15
Diamond Cable Communication PLC
Step Up Bond
Zero Coupon due 02/15/07 (b) 145 100
Indah Kiat International Finance Co.
11.875% due 06/15/02 360 343
Industrial Credit & Investment Corporation
7.550% due 08/15/07 170 152
</TABLE>
Multistrategy Bond Fund 121
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Korea Development Bank
7.900%due02/01/02 $ 180 $ 152
Midland Bank
6.187% due 12/31/99 (b) 410 350
National Australia Bank
6.400% due 12/10/07 (b) 440 442
Repap New Brunswick
10.625% due 04/15/05 725 689
Rogers Cantel, Inc.
9.375% due 06/01/08 490 517
Royal Caribbean Cruises
7.500% due 10/15/27 1,400 1,425
Santander Finnish Issuances
6.962% due 09/30/49 (b) 250 245
St. George Bank, Ltd.
7.150% due 10/01/05 700 721
Tata Engineering & Locomotive, Ltd.
7.875% due 07/15/07 625 616
Videotron Holdings PLC Step Up Bond
Zero Coupon due 08/15/05 (b) 390 345
---------
8,501
---------
Total Long-Term Investments
(cost $334,607) 340,317
---------
<CAPTION>
Number
of
Contracts*
----------
<S> <C> <C>
Options Purchased - 0.0%
United States Treasury Bonds (h)
Mar 100.l6 Call 37 26
Feb 100.72 Put 29 23
United States Treasury Note (h)
Mar 104.22 Call 41 25
---------
Total Options Purchased
(cost $135) 74
---------
<CAPTION>
Number
of
Shares
---------
<S> <C> <C>
Preferred Stocks - 1.8%
American RE Capital 18,100 469
Australia & New Zealand Banking Group, Ltd. 5,300 146
California Federal Preferred Capital Corp.
Series A 66,050 1,734
Chancellor Media Corporation 10,031 1,156
Credit Lyonnais Capital S.C.A. - ADR 6,400 169
El Paso Electric Co. Series A
Payment in Kind Preferred Stock 4,351 481
Long Island Lighting Co. Series QQ 16,850 423
Pinto Totta International Finance, Ltd. 1,250 1,307
Primedia, Inc. 5,000 501
Time Warner, Inc. 1,147 1,284
---------
Total Preferred Stocks
(cost $6,907) 7,670
---------
Warrants - 0.0%
Capital Pacific Holdings, Inc.
2002 Warrants (h) 1,817 1
---------
Total Warrants
(cost $0) 1
---------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Short-Term Investments - 33.3%
AT&T Capital Corp. Series 4 (MTN)
6.275% due 06/09/98 $ 1,100 1,101
Bankers Trust Company
5.900% due 07/07/98 3,000 2,999
Canada Treasury Bill
3.513% due 01/29/98 (a)(g) CAD 2,000 1,396
Federal Home Loan Mortgage Corp.
5.950% due 06/19/98 5,000 5,009
Frank Russell Investment Company
Money Market Fund,
due on demand (a) 117,892 117,892
Hertz Corp.
9.500% due 05/15/98 1,300 1,316
Imperial Chemical Industrial PLC
6.000% due 09/05/98 (b) 2,000 1,999
Kellogg Co.
5.600% due 01/13/98 (a) 3,600 3,593
5.620% due 01/28/98 2,400 2,390
Salomon, Inc.
5.813% due 10/20/98 2,000 1,997
United States Treasury Bills (f)(g)
5.190% due 01/12/98 (a) 160 159
5.020% due 02/05/98 (a) 80 79
5.090% due 02/05/98 (a) 75 74
5.160% due 02/05/98 (a) 55 55
5.100% due 03/12/98 65 64
5.185% due 03/12/98 100 99
5.175% due 04/16/98 390 384
</TABLE>
122 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
World Bank Discount Notes
5.800% due 01/16/98 (a)(g) $ 5,000 $ 4,988
---------
Total Short-Term Investments
(cost $145,624) 145,594
---------
Total Investments
(identified cost $487,273)(c) - 112.9% 493,656
Other Assets and Liabilities,
Net, Including Options Written - (12.9%) (56,344)
---------
Net Assets - 100.0% $ 437,312
=========
</TABLE>
(a) At cost, which approximates market.
(b) Adjustable or floating rate security.
(c) See Note 2 for federal income tax information.
(d) Forward commitment. See Note 2.
(e) Perpetual floating rate note.
(f) Held as collateral by the custodian in connection with futures contracts
and options written by the Fund.
(g) Rate noted is yield-to-maturity.
(h) Nonincome-producing security.
* Each contract represents $100,000 notional value.
Abbreviations:
ADR - American Depositary Receipt
CMO - Collateralized Mortgage Obligation
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
Foreign Currency Abbreviations:
AUD - Australian dollar
CAD - Canadian dollar
GBP - British pound
The accompanying notes are an integral part of the financial statements.
Multistrategy Bond Fund 123
<PAGE>
Multistrategy Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
----------- ---------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
Eurodollar Financial
Futures Contracts
expiration date 03/98 10 $ 8
United States Treasury 5 Year Note
Futures Contracts
expiration date 03/98 36 10
United States Treasury 10 Year Note
Futures Contracts
expiration date 03/98 254 16
United States Treasury 30 Year Bond
Futures Contracts
expiration date 03/98 257 125
------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 159
============
</TABLE>
(S) At December 31, 1997, United States Government Securities valued at
$21,332 were held as collateral by the custodian in connection with futures
contracts purchased and options written by the Fund.
* Each contract represents $100,000 notional value.
<TABLE>
<CAPTION>
Number Market
of Value
Contracts* (000)
----------- -----------
<S> <C> <C>
Options Written
(Notes 2 and 3)
United States Treasury 5 Year Notes
Mar98.68 Put 37 $ 8
United States Treasury 10 Year Notes
Mar 106.22 Call 41 8
Jul 112.19 Call 25 6
Nov 109.00 Call 29 13
Feb 101.95 Put 55 32
Jul 97.22 Put 25 2
Nov 95.27 Put 29 8
-----------
Total Liability for Options Written
(premiums received $156)(S) $ 77
===========
</TABLE>
Foreign Currency Exchange Spot Contracts
(Note 2)
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
- ---------------- ----------- ---------- --------------
<S> <C> <C> <C>
GBP 112 USD 186 01/02/98 $ 2
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
124 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
-------------------
<S> <C> <C>
Assets
Investments at market (identified cost $487,273)(Note 2)................................................. $ 493,656
Foreign currency holdings (identified cost $256)......................................................... 254
Foreign currency exchange spot contracts (cost $1 86)(Note 2)............................................ 186
Receivables:
Dividends and interest................................................................................. 4,477
Investments sold (regular settlement).................................................................. 648
Investments sold (delayed settlement)(Note 2).......................................................... 7,470
Fund shares sold....................................................................................... 1,775
Daily variation margin on futures contracts (Notes 2 and 3)............................................ 241
------------------
Total Assets...................................................................................... 508,707
Liabilities
Payables:
Investments purchased (regular settlement)....................................... $ 6,834
Investments purchased (delayed settlement)(Note 2)............................... 63,147
Fund shares redeemed............................................................. 758
Accrued fees to affiliates (Note 4).............................................. 298
Other accrued expenses........................................................... 97
Foreign currency exchange spot contracts (cost $186)(Note 2)....................... 184
Options written, at market value (premiums received $156)(Notes 2 and 3)........... 77
------------------
Total Liabilities.................................................................................... 71,395
------------------
Net Assets............................................................................................... $ 437,312
==================
Net Assets consist of:
Accumulated distributions in excess of net investment income............................................. $ (9)
Accumulated net realized gain (loss)..................................................................... 658
Unrealized appreciation (depreciation) on:
Investments............................................................................................ 6,383
Futures contracts...................................................................................... 159
Options written........................................................................................ 79
Foreign currency-related transactions.................................................................. 117
Shares of beneficial interest............................................................................ 426
Additional paid-in capital............................................................................... 429,499
------------------
Net Assets............................................................................................... $ 437,312
==================
Net Asset Value, offering and redemption price per share:
($437,311,610 divided by 42,609,254 shares of $.01 par value
shares of beneficial interest outstanding)............................................................. $ 10.26
==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Multistrategy Bond Fund 125
<PAGE>
Multistrategy Bond Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Interest............................................................................................. $ 19,762
Dividends from Money Market Fund (Note 5)............................................................ 4,131
Dividends............................................................................................ 701
--------------------
Total Investment Income........................................................................... 24,594
Expenses (Notes 2 and 4):
Management fees................................................................ $ 2,351
Custodian fees................................................................. 221
Transfer agent fees............................................................ 306
Bookkeeping service fees....................................................... 20
Professional fees.............................................................. 20
Registration fees.............................................................. 79
Trustees' fees................................................................. 4
Amortization of deferred organization expenses................................. 7
Miscellaneous.................................................................. 43
----------------
Expenses before reductions..................................................... 3,051
Expense reductions (Note 4).................................................... (126)
----------------
Total Expenses..................................................................................... 2,925
--------------------
Net investment income.................................................................................... 21,669
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments.................................................................... 4,844
Futures contracts.............................................................. 3,037
Options written................................................................ 45
Foreign currency-related transactions.......................................... 256 8,182
----------------
Net change in unrealized appreciation or depreciation of:
Investments.................................................................... 3,659
Futures contracts.............................................................. 482
Options written................................................................ 72
Foreign currency-related transactions.......................................... (132) 4,081
---------------- -------------------
Net gain (loss) on investments........................................................................... 12,263
-------------------
Net increase (decrease) in net assets resulting from operations.......................................... $ 33,932
===================
</TABLE>
The accompanying notes are an integral part of the financial statements.
126 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income..................................................................... $ 21,669 $ 15,928
Net realized gain (loss).................................................................. 8,182 534
Net change in unrealized appreciation or depreciation..................................... 4,081 (2,357)
------------ ------------
Net increase (decrease) in net assets resulting from operations....................... 33,932 14,105
------------ ------------
From Distributions to Shareholders:
Net investment income..................................................................... (21,584) (15,942)
In excess of net investment income........................................................ (670) (283)
Net realized gain on investments.......................................................... (6,734) (87)
------------ ------------
Total Distributions to Shareholders................................................... (28,988) (16,312)
------------ ------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)............... 126,940 88,869
------------ ------------
Total Net Increase (Decrease) in Net Assets................................................. 131,884 86,662
Net Assets
Beginning of period....................................................................... 305,428 218,766
------------ ------------
End of period (including accumulated distributions in excess of net
investment income of $9 and $85, respectively).......................................... $ 437,312 $ 305,428
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Multistrategy Bond Fund 127
<PAGE>
Multistrategy Bond Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993*
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................................... $ 10.11 $ 10.25 $ 9.29 $ 10.31 $ 10.00
------- -------- ------- ------- -------
Income From Investment Operations:
Net investment income................................................... .60 .61 .65 .58 .46
Net realized and unrealized gain (loss) on investments.................. .33 (.12) .97 (1.03) .40
------- -------- ------- ------- -------
Total Income From Investment Operations.............................. .93 .49 1.62 (.45) .86
------- -------- ------- ------- -------
Less Distributions:
Net investment income................................................... (.60) (.61) (.66) (.57) (.46)
In excess of net investment income...................................... (.01) (.01) -- -- --
Net realized gain on investments........................................ (.17) (.01) -- -- (.08)
In excess of net realized gain on investments........................... -- -- -- -- (.0 1)
------- -------- ------- ------- -------
Total Distributions.................................................. (.78) (.63) (.66) (.57) (.55)
------- -------- ------- ------- -------
Net Asset Value, End of Period............................................. $ 10.26 $ 10.11 $ 10.25 $ 9.29 $ 10.31
======= ======== ======= ======= =======
Total Return (%)(a)........................................................ 9.50 4.97 17.92 (4.35) 8.74
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................................ 437,312 305,428 218,765 173,035 98,374
Ratios to average net assets (%)(b):
Operating expenses, net.............................................. .80 .81 .85 .85 .85
Operating expenses, gross............................................ .83 .88 .89 .90 1.20
Net investment income................................................ 5.93 6.19 6.61 6.26 5.60
Portfolio turnover rate(%)(b)........................................... 263.75 145.38 142.26 136.39 188.95
</TABLE>
* For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
128 Multistrategy Bond Fund
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements
December 31, 1997
1. Organization
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on eight Funds, each of which has distinct
investment objectives and strategies. The Investment Company is registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. It is organized and operates as a
Massachusetts business trust under an amended master trust agreement dated
July 26, 1984. The Investment Company's master trust agreement permits the
Board of Trustees to issue an unlimited number of full and fractional shares
of beneficial interest at a $.0l par value. As of July 8, 1996, the eight
Funds that are reported in these financial statements have available Class S
and Class C shares. Each Class has equal rights as to assets and voting
privileges. Investment income, realized and unrealized gains and losses and
fund level expenses of a Fund are allocated on a pro rata basis to each
Class, based on relative net assets of each Class to the total net assets of
a Fund. Certain expenses may also be charged to an individual Class for
services or fees that relate specifically to that particular Class. Class C
shares are charged a 12b-l distribution fee and a shareholder servicing fee
of 0.40% and 0.25% of average net assets, respectively. Class S shares which
are reported herein are charged no such fees. Class C shares of Frank
Russell Investment Company Funds are not currently offered for investment
except to existing Class C shareholders.
2. Significant Accounting Policies
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Funds in the preparation of these financial
statements.
Security valuation: United States equity and fixed-income securities listed
and traded principally on any national securities exchange are valued on the
basis of the last sale price or, lacking any sale, at the closing bid price,
on the primary exchange on which the security is traded. United States
over-the-counter equity and fixed-income securities and options are valued
on the basis of the closing bid price. Futures contracts are valued on the
basis of the last sale price. Many fixed-income securities do not trade each
day and, thus, last sale or bid prices are frequently not available.
Fixed-income securities, therefore, may be valued using prices provided by a
pricing service when such prices are believed to reflect the fair market
value of such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair market
value of such securities.
Short-term investments held by the Funds maturing within 60 days of the
valuation date are valued at "amortized cost" unless the Board of Trustees
determines that amortized cost does not represent fair value.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
Investment transactions: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of specific identified cost incurred by each money
manager within a particular fund. The Funds may lend portfolio securities
but have not done so during the year ended December 31, 1997.
Investment income: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
Amortization and accretion: All zero-coupon bond discounts and original
issue discounts are accreted for both tax and financial reporting purposes.
All short-term premiums/discounts are amortized/accreted for both tax and
financial reporting purposes.
Notes to Financial Statements 129
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Federal income taxes: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Funds.
At December 31, 1997, the following Fund had net tax basis capital loss
carryforwards which may be applied against any net realized taxable gains in
each succeeding year or until their respective expiration dates, whichever
occurs first. Available capital loss carryforwards and expiration dates are
as follows:
<TABLE>
<CAPTION>
12/31/02 12/31/03 12/31/04 12/31/05 Totals
----------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Volatility Constrained Bond $ 5,583,410 $ 1,871,605 $ 2,135,100 $ 201,012 $ 9,791,127
</TABLE>
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income
tax purposes as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Federal Tax Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
---------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Diversified Equity $ 861,245,411 $ 198,901,676 $ (30,010,052) $ 168,891,624
Special Growth 461,500,686 129,056,949 (17,258,000) 111,798,949
Equity Income 187,584,686 42,716,116 (6,803,054) 35,913,062
Quantitative Equity 763,265,290 243,083,614 (19,305,904) 253,777,710
International Securities 783,951,641 124,074,226 (88,956,569) 35,117,657
Diversified Bond 724,753,132 18,854,130 (1,466,363) 17,387,767
Volatility Constrained Bond 171,175,204 998,958 (1,100,384) (101,426)
Multistrategy Bond 487,553,517 7,298,443 (1,196,248) 6,102,195
</TABLE>
Dividends and distributions to shareholders: For all Funds, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend
date. Dividends are generally declared and paid quarterly for the equity
Funds, annually for the International Securities Fund and monthly for the
fixed income Funds. Capital gain distributions are generally declared and
paid annually. An additional distribution may be paid by the Funds to avoid
imposition of federal income tax on any remaining undistributed capital
gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from GAAP. As a result, net investment income and net
realized gain (or loss) on investment and foreign currency-related
transactions for a reporting period may differ significantly from
distributions during such period. The differences between tax regulations
and GAAP primarily relate to investments in options, futures, forward
contracts, passive foreign investment companies, foreign-denominated
investments, mortgage-backed securities, and certain securities sold at a
loss. Accordingly, a Fund may periodically make reclassifications among
certain of its capital accounts without impacting its net asset value.
130 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
Undistributed Accumulated
Net Investment Net Realized Additional
Income Gain (Loss) Paid-in Capital
------------------- --------------------- ---------------------
<S> <C> <C> <C>
Diversified Equity $ 22,634 $ (22,634) $ --
Equity Income 45,969 (45,969) --
International Securities (1,732,403) 1,732,403 --
Diversified Bond 414,286 (374,285) (40,001)
Volatility Constrained Bond 151,289 (151,289) --
Multistrategy Bond 661,387 (661,387) --
</TABLE>
Expenses: The Funds, and when appropriate each Class, will pay their own
expenses other than those expressly assumed by Frank Russell Investment
Management Company ("FRIMCo" or "Manager"). Most expenses can be directly
attributed to the individual Funds. Expenses which cannot be directly
attributed are allocated among all Funds principally based on their relative
net assets. In addition, Class C shares will pay 12b-l and shareholder
servicing fees along with other expenses that may be attributable to that
Class.
Deferred organization expenses: Organization costs of the Multistrategy Bond
Fund were deferred and amortized over 60 months on a straight-line basis.
Repurchase agreements: The Funds may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of underlying securities as collateral. Each Fund's Money
Manager will monitor repurchase agreements daily to determine that the
market value (including accrued interest) of the underlying securities at
Fedwire closing time remains at least equal to 102% of the repurchase price.
The Money Manager will notify the Seller to immediately increase the
collateral on the repurchase agreement to 102% of the repurchase price if
collateral value falls below 102%.
Foreign currency translations: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts and transactions of the
Funds are translated into U.S. dollars on the following basis:
(a) Market value of investment securities, other assets and liabilities at
the closing rate of exchange on the valuation date.
(b) Outstanding purchases and sales of investment securities and income at
the closing rate of exchange prevailing on the respective trade dates
of such transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from: sales and maturities of short-term securities;
sales of foreign currencies; currency gains or losses realized between the
trade and settlement dates on securities transactions; the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Funds' books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized gains or losses from foreign
currency-related transactions arise from changes in the value of assets and
liabilities, other than investments in securities, at period-end, as a
result of changes in the exchange rates.
It is not practical to isolate that portion of the results of operations of
the Funds that arises as a result of changes in exchange rates from that
portion that arises from changes in market prices of investments during the
year. Such fluctuations are included with the net realized and unrealized
gain or loss from investments. However, for federal income tax purposes the
Funds do isolate the effects of changes in foreign exchange rates from the
fluctuations arising from changes in market prices for realized gain (or
loss) on debt obligations.
Derivatives: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement
of Additional Information, the Funds may participate in various derivative-
based transactions. Derivative securities are instruments or agreements
whose value is derived from an underlying security or index. They include
options,
Notes to Financial Statements 131
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
futures, swaps, forwards, structured notes and stripped securities. These
instruments offer unique characteristics and risks that assist the Funds in
meeting their investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
"market-like" returns with their excess and liquidity reserve cash balances.
Hedging is used by some Funds to limit or control risks, such as adverse
movements in exchange rates and interest rates. Return enhancement can be
accomplished through the use of derivatives in a Fund. By purchasing certain
instruments, Funds may more effectively achieve the desired portfolio
characteristics that assist them in meeting their investment objectives.
Depending on how the derivatives are structured and utilized, the risks
associated with them may vary widely. These risks are generally categorized
as market risk, liquidity risk and counterparty or credit risk.
Foreign currency exchange contracts: In connection with portfolio purchases
and sales of securities denominated in a foreign currency, certain Funds may
enter into foreign currency exchange spot contracts and forward foreign
currency exchange contracts ("contracts"). The International Securities Fund
may enter into foreign currency forward overlays on liquidity reserve
balances. Additionally, from time to time the International Securities,
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
may enter into contracts to hedge certain foreign currency-denominated
assets. Contracts are recorded at market value. Certain risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and are generally limited to the amount
of unrealized gain on the contracts, if any, that are recognized in the
Statement of Assets and Liabilities. Realized gains or losses arising from
such transactions are included in net realized gain (or loss) from foreign
currency-related transactions. Open contracts at December 31, 1997, are
presented on the Statement of Net Assets for the applicable Funds.
Forward commitments: The Funds may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (i.e., a
"forward commitment", "delayed settlement" or "when issued" transaction,
e.g., to be announced ("TBA")) consistent with a Fund's ability to manage
its investment portfolio and meet redemption requests. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. The Funds may
dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short--term gains (or losses) upon such
sale. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund in a dollar amount sufficient to make payment for
the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled. A
forward commitment transaction involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date or the other
party to the transaction fails to complete the transaction.
Options: The Funds may purchase and sell (write) call and put options on
securities and securities indices, provided such options are traded on a
national securities exchange or in an over-the-counter market. These Funds
may also purchase and sell call and put options on foreign currencies. The
domestic equity Funds may utilize options to equitize liquidity reserve
balances.
When a Fund writes a covered call or a put option, an amount equal to the
premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. The Fund receives a premium on the sale of a
call option but gives up the opportunity to profit from any increase in
stock value above the exercise price of the option, and when the Fund writes
a put option it is exposed to a decline in the price of the underlying
security. If an option which the Fund has written either expires on its
stipulated expiration date or the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss, if the cost of a closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is extinguished. If a call option
which the Fund has written is exercised, the Fund realizes a capital gain or
loss from the sale of the underlying security, and the proceeds from such
sale are increased by the premium originally received. When a put option
which a Fund has written is exercised, the amount of the premium originally
received will reduce the cost of the security which a Fund purchases upon
exercise of the option. Realized gains (losses) on purchased options are
included in net realized gain (loss) from investments.
132 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
The Funds' use of written options involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statement of Assets
and Liabilities. The face or contract amounts of these instruments reflect
the extent of the Funds' exposure to off balance sheet risk. The risks may
be caused by an imperfect correlation between movements in the price of the
instrument and the price of the underlying securities and interest rates.
The Funds' activities in written options are conducted through regulated
exchanges, which do not result in counterparty credit risks.
Futures Contracts: The domestic and international equity Funds utilize
futures to equitize liquidity reserve balances. Multistrategy Bond Fund may
utilize futures contracts (i.e., interest rate, foreign currency and index
futures contracts) to a limited extent. The face or contract amounts of
these instruments reflect the extent of the Funds' exposure to off balance
sheet risk. The primary risks associated with the use of futures contracts
are an imperfect correlation between the change in market value of the
securities held by the Fund and the prices of futures contracts and the
possibility of an illiquid market. Changes in the initial settlement values
of futures contracts are accounted for as unrealized appreciation
(depreciation) until the contracts are terminated, at which time realized
gains and losses are recognized.
3. Investment Transactions
Securities: During the year ended December 31, 1997, purchases and sales of
investment securities (excluding U.S. Government and Agency obligations,
short-term investments, options, futures and repurchase agreements) were as
follows:
<TABLE>
<CAPTION>
Purchases Sales Purchases Sales
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Diversified Equity $1,045,930,073 $ 947,511,960 International Securities $ 640,428,512 $ 546,059,656
Special Growth 489,270,179 431,240,120 Diversified Bond 188,273,625 113,896,204
Equity Income 284,386,921 311,750,337 Volatility Constrained Bond 122,596,258 84,854,304
Quantitative Equity 818,416,332 707,524,869 Multistrategy Bond 203,365,969 143,707,462
</TABLE>
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------- ---------------
<S> <C> <C>
Diversified Bond $ 912,906,651 $ 881,736,294
Volatility Constrained Bond 183,206,901 215,956,623
Multistrategy Bond 672,131,660 661,181,843
</TABLE>
Options Written and Futures Contracts: Fund transactions in written options
and futures contracts for the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Diversified Equity Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
--------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 129 $ 35,917,221
Opened 1,115 333,950,160
Closed (1,026) (320,749,349)
--------------- ---------------
Outstanding December 31, 1997 218 $ 49,118,032
=============== ===============
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
Notes to Financial Statements 133
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Special Growth Written Options Futures Contracts
Aggregate
Number of Premiums Number of Face Value of
Contracts Received Contracts Contracts (1)
----------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1996 20 $ 12,440 167 $ 29,276,827
Opened -- -- 1,063 211,119,652
Closed -- -- (1,021) (203,445,662)
Expired (20) (12,440) -- --
----------------- --------------- -------------- ---------------
Outstanding December 31, 1997 -- $ -- 209 $ 36,950,817
================= =============== ============== ===============
<CAPTION>
Equity Income Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
----------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 27 $ 8,642,750
Opened 253 73,137,005
Closed (224) (71,532,735)
----------------- ---------------
Outstanding December 31, 1997 56 $ 10,247,020
================= ===============
<CAPTION>
Quantitative Equity Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
----------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 92 $ 26,023,400
Opened 792 225,385,169
Closed (776) (227,561,260)
----------------- ---------------
Outstanding December 31, 1997 108 $ 23,847,309
================= ===============
<CAPTION>
International Securities Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
----------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 283 $ 41,086,759
Opened 2,997 403,117,161
Closed (2,871) (392,088,537)
----------------- ---------------
Outstanding December 31, 1997 409 $ 52,115,383
================= ===============
<CAPTION>
Diversified Bond Written Options
Number of Premiums
Contracts Received
----------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 -- $ --
Opened 223 148,600
Closed (20) (11,094)
Expired (26) (23,430)
---------------- ---------------
Outstanding December 31, 1997 177 $ 114,076
================ ===============
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
134 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Multistrategy Bond Written Options Futures Contracts
Aggregate
Number of Premiums Number of Face Value of
Contracts Received Contracts Contracts (1)
----------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1996 19 $ 7,498 339 $ 37,553,938
Opened 348 216,627 2,175 242,887,035
Closed (25) (13,867) (1,957) (214,886,057)
Expired (101) (53,175) -- --
----------------- -------------- --------------- ---------------
Outstanding December 31, 1997 241 $ 157,083 557 $ 65,554,916
================= ============== =============== ===============
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
4. Related Parties
Manager: FRIMCo operates and administers all of the Funds which comprise the
Investment Company, and manages the Money Market and U.S. Government Money
Market Funds (two series of the Investment Company not presented in this
report). FRIMCo is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to FRIMCo, and to the Investment Company, one or
more investment management organizations to manage the portfolio of each
Fund.
For the year ended December 31, 1997, the management fee paid to FRIMCo, for
the Funds listed below, in accordance with the Investment Company's
Management Agreement with that firm, amounted to $33,472,172 before waivers.
Such fee is payable monthly and is equal to the annual rate, by Fund, shown
in the table below, of the average daily net assets of the applicable Fund.
<TABLE>
<CAPTION>
Annual Rate Annual Rate
----------- -----------
<S> <C> <C> <C>
Diversified Equity 0.78% International Securities 0.95%
Special Growth 0.95 Diversified Bond 0.45
Equity Income 0.80 Volatility Constrained Bond 0.50
Quantitative Equity 0.78 Multistrategy Bond 0.65
</TABLE>
The management contract also provides that if any Fund's expenses (exclusive
of interest and taxes) exceed specified limits imposed by the Manager on an
annual basis, such excess will be paid by FRIMCo. The Manager has
voluntarily agreed to waive a portion of its 0.65% management fee for the
Multistrategy Bond Fund, to the extent that total fund level expenses for
this Fund exceed 0.80% of its average daily net assets on an annual basis.
The total amount of such waivers for the year ended December 31, 1997 was
$126,393.
Effective October 15, 1997, FRIMCo began calculating its management fee
based on average daily net assets for each Fund, less any management fee
incurred on assets invested in the Money Market Fund (see Note 5) thereby
eliminating any duplication of fees. Prior to October 15, 1997, FRIMCo
calculated its management fee based on average daily net assets for each
Fund, which may have included an investment in the Money Market Fund. Prior
to October 15, 1997, the Money Market Fund waived all management fees.
Bookkeeping services: Fees for bookkeeping and analytic services provided to
the Funds are paid or accrued to Frank Russell Company, an affiliate of the
Investment Company. Frank Russell Company provides its Portfolio
Verification System ("PVS") and TruVP System to the Funds, pursuant to a
written Service Agreement. The PVS computerized database system records
detailed transactions data for each of the Funds necessary to prepare
various financial and Internal Revenue Service accounting reports, whereas
the TruVP System provides analytics used by the investment department. The
Funds' total fees for the year ended December 31, 1997 were $254,152. The
PVS system portion of the service agreement was terminated during 1997.
Transfer agent: The Funds have a contract with FRIMCo to provide transfer
agent services to the Investment Company. Total fees for the year ended
December 31, 1997 were $2,963,398.
Distributor and Shareholder Servicing: The Investment Company has adopted a
Distribution Plan pursuant to Rule 12b-l (the "Plan") under the 1940 Act.
Under this Plan, the Investment Company is authorized to make payments to
the Distributor, or any Selling Agents, as defined in the Plan, an amount
(the "12b-l Fee") for sales support services provided, and related expenses
incurred which are primarily intended to result in the sale of the Class C
Shares subject to the Distribution Plan.
Notes to Financial Statements 135
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
The Investment Company has entered into a Distribution Agreement with
Russell Fund Distributors (the "Distributor") which is a wholly-owned
subsidiary of FRIMCo to promote and offer shares of Class S and Class C of
the Investment Company Fund. The Distributor may enter into sub-distribution
agreements with other non-affiliated parties (the "Selling/Servicing
Agents"). The amounts paid to the Distributor for distribution services
relating to Class C are included in the accompanying Statements of
Operations. The Distributor receives no compensation from the Investment
Company for its services relating to distributing the Class S Shares.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments to the Distributor or
any Servicing Agent for any activities or expenses primarily intended to
assist, support or service the Servicing Agents' clients who beneficially
own Class C Shares of the Funds. The amounts paid to the Distributor for
shareholder services relating to Class C are included in the accompanying
Statements of Operations.
The 12b-1 Fee payments shall not exceed .75% of the average daily net assets
of a Fund's Class C Shares on an annual basis. Currently the Board of
Trustees has determined to assess a 12b-1 Fee equal to .40% of the average
daily net assets. The shareholder servicing payments shall not exceed .25%
of the average daily net assets of a Fund's Class C Shares on an annual
basis. The Investment Company does not pay for unreimbursed expenses of the
Distributor including amounts expended by the Distributor in excess of
amounts received by it from the Investment Company, interest, carrying or
other financial charges in connection with excess amounts expended, or the
Distributor's overhead expenses. However, the Distributor may be able to
recover such amount or more from future payments made by the Investment
Company under the Distribution plan.
Accrued fees payable to affiliates as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Shareholder
Servicing &
Management Bookkeeping Transfer Distribution Distribution
Fees Service Fees Agent Fees Fees Fees Totals
------------- ------------- ------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Diversified Equity $ 674,779 $ 28,161 $ 67,619 $ 952 $ 2,587 $ 774,098
Special Growth 448,689 19,384 62,399 (61) 5,063 535,474
Equity Income 155,136 9,758 31,923 (112) 735 197,440
Quantitative Equity 649,944 10,964 69,595 127 3,622 734,252
International Securities 674,393 34,935 75,211 (661) 2,843 786,721
Diversified Bond 255,225 14,108 51,470 (470) 4,425 324,758
Volatility Constrained Bond 72,119 10,797 27,585 -- -- 110,501
Multistrategy Bond 240,128 11,949 45,588 -- -- 297,665
------------- ------------- ------------- -------------- ------------ -----------
$ 3,170,413 $ 140,056 $ 431,390 $ (225) $ 19,275 $ 3,760,909
============= ============= ============= ============== ============ ===========
</TABLE>
Brokerage commissions: The Funds may effect portfolio transactions through
Frank Russell Securities, Inc., an affiliate of the Manager, when a money
manager determines that the Fund will receive competitive execution, price,
and commissions. Upon completion of such transactions, Frank Russell
Securities, Inc. will refund up to 70% of the commissions paid by that Fund
after reimbursement for research services provided to FRIMCo. Amounts
retained by Frank Russell Securities, Inc. for the year ended December 31,
1997 were as follows:
<TABLE>
<S> <C> <C> <C>
Diversified Equity $ 111,929 Equity Income $ 42,638
Special Growth 8,633 International Securities 134,955
</TABLE>
Additionally, the Funds paid brokerage commissions to non-affiliated
brokers who provided brokerage and research services to the Manager.
Board of Trustees: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the year ended December
31, 1997, and were allocated to each Fund and Class, where appropriate, on a
pro rata basis, including 20 other affiliated funds not presented herein.
136 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
5. Money Market Fund
The Funds are permitted to invest their cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Funds' objectives) in
the Frank Russell Investment Company Money Market Fund (a series of Frank
Russell Investment Company not presented herein). As of December 31, 1997,
$366,418,000 of the Money Market Fund's net assets represents investments by
these Funds and $341,514,000 represents the investments of other affiliated
Funds not presented herein.
6. Fund Share Transactions
Share transactions for each Class of shares for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
Shares Dollars
--------------------------------- --------------------------------
1997 1996 1997 1996
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Diversified Equity
Class S
Proceeds from shares sold 8,086,088 5,614,599 $ 375,766,850 $ 230,097,300
Proceeds from reinvestment
of distributions 3,725,974 1,642,850 158,438,737 66,106,841
Payments for shares redeemed (4,802,360) (4,119,044) (223,615,053) (168,781,509)
------------- --------------- --------------- --------------
Net increase (decrease) 7,009,702 3,138,405 310,590,534 127,422,632
------------- --------------- --------------- --------------
Class C*
Proceeds from shares sold 66,243 -- 3,187,196 --
Proceeds from reinvestment
of distributions 2 -- 89 --
Payments for shares redeemed (1,200) -- (62,020) --
------------- --------------- --------------- --------------
Net increase (decrease) 65,045 -- 3,125,265 --
------------- --------------- --------------- --------------
Total net increase (decrease) 7,074,747 3,138,405 $ 313,715,799 $ 127,422,632
============= =============== =============== ==============
</TABLE>
* Share transactions for Class C are for the period May 27, 1997
(commencement of sale of shares) to December 31, 1997.
<TABLE>
<CAPTION>
Special Growth
Class S
<S> <C> <C> <C> <C>
Proceeds from shares sold 4,899,155 3,804,912 $ 218,414,199 $ 156,927,623
Proceeds from reinvestment
of distributions 1,184,723 820,671 51,369,028 32,324,567
Payments for shares redeemed (3,197,051) (2,997,309) (141,074,274) (123,713,625)
------------- --------------- --------------- --------------
Net increase (decrease) 2,886,827 1,628,274 128,708,953 65,538,565
------------- --------------- --------------- --------------
Class C**
Proceeds from shares sold 52,918 22,414 2,414,652 980,934
Proceeds from reinvestment
of distributions 2 1 99 43
Payments for shares redeemed (5,846) (82) (276,164) (3,301)
------------- --------------- --------------- --------------
Net increase (decrease) 47,074 22,333 2,138,587 977,676
------------- --------------- --------------- --------------
Total net increase (decrease) 2,933,901 1,650,607 $ 130,847,540 $ 66,516,241
============= =============== =============== ==============
</TABLE>
** Share transactions for Class C are for the period November 4, 1996
(commencement of sale of shares) to December 31, 1997.
Notes to Financial Statements 137
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Shares Dollars
--------------------------------- ------------------------------------
1997 1996 1997 1996
------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Equity Income
Class S
Proceeds from shares sold 1,660,711 1,393,790 $ 73,122,240 $ 55,293,883
Proceeds from reinvestment
of distributions 911,813 446,910 36,860,520 17,486,574
Payments for shares redeemed (1,899,151) (1,675,865) (84,411,404) (66,979,445)
------------- --------------- ----------------- ----------------
Net increase (decrease) 673,373 164,835 25,571,356 5,801,012
------------- --------------- ----------------- ----------------
Class C**
Proceeds from shares sold 11,673 3,036 500,212 127,066
Proceeds from reinvestment
of distributions 4 1 177 41
Payments for shares redeemed (6,565) -- (288,276) --
------------- --------------- ----------------- ----------------
Net increase (decrease) 5,112 3,037 212,113 127,107
------------- --------------- ----------------- ----------------
Total net increase (decrease) 678,485 167,872 $ 25,783,469 $ 5,928,119
============= =============== ================= ================
Quantitative Equity
Class S
Proceeds from shares sold 9,083,437 6,980,352 $ 338,711,998 $ 225,170,427
Proceeds from reinvestment
of distributions 3,377,853 1,823,635 119,025,818 58,110,154
Payments for shares redeemed (5,466,417) (4,608,884) (203,662,362) (149,407,184)
------------- --------------- ----------------- ----------------
Net increase (decrease) 6,994,873 4,195,103 254,075,454 133,873,397
------------- --------------- ----------------- ----------------
Class C**
Proceeds form shares sold 57,845 9,741 2,137,628 329,240
Proceeds from reinvestment
of distributions 3 1 102 27
Payments for shares redeemed (3,888) -- (155,726) --
------------- --------------- ----------------- ----------------
Net increase (decrease) 53,960 9,742 1,982,004 329,267
------------- --------------- ----------------- ----------------
Total net increase (decrease) 7,048,883 4,204,845 $ 256,057,458 $ 134,202,664
============= =============== ================= ================
International Securities
Class S
Proceeds from shares sold 5,602,508 4,161,163 $ 329,786,927 $ 242,904,319
Proceeds from reinvestment
of distributions 778,773 365,866 42,316,642 21,034,288
Payments for shares redeemed (3,744,190) (2,822,528) (219,850,134) (164,668,819)
------------- --------------- ----------------- ----------------
Net increase (decrease) 2,637,091 1,704,501 152,253,435 99,269,788
------------- --------------- ----------------- ----------------
Class C**
Proceeds from shares sold 15,385 10,652 911,652 633,353
Proceeds from reinvestment
of distributions 1 1 48 17
Payments for shares redeemed (2,782) (2) (161,903) (62)
------------- --------------- ----------------- ----------------
Net increase (decrease) 12,604 10,651 749,797 633,308
------------- --------------- ----------------- ----------------
Total net increase (decrease) 2,649,695 1,715,152 $ 153,003,232 $ 99,903,096
============= =============== ================= ================
</TABLE>
** Share transactions for Class C are for the period November 4, 1996
(commencement of sale of shares) to December 31, 1997.
138 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Shares Dollars
--------------------------------- ------------------------------------
1997 1996 1997 1996
------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Diversified Bond
Class S
Proceeds from shares sold 12,348,179 9,067,853 $ 285,135,050 $ 208,139,587
Proceeds from reinvestment
of distributions 1,005,608 790,678 23,212,199 18,102,789
Payments for shares redeemed (8,175,529) (7,398,945) (188,567,724) (169,652,552)
------------- --------------- ----------------- ----------------
Net increase (decrease) 5,178,258 2,459,586 119,779,525 56,589,824
------------- --------------- ----------------- ----------------
Class C**
Proceeds from shares sold 71,904 42,495 1,676,993 984,717
Proceeds from reinvestment
of distributions 1 1 14 2
Payments for shares redeemed (11,128) (645) (260,392) (15,022)
------------- --------------- ----------------- ----------------
Net increase (decrease) 60,777 41,851 1,416,615 969,697
------------- --------------- ----------------- ----------------
Total net increase (decrease) 5,239,035 2,501,437 $ 121,196,140 $ 57,559,521
============= =============== ================= ================
Volatility Constrained Bond
Class S
Proceeds from shares sold 4,531,595 3,498,329 $ 86,343,467 $ 66,587,891
Proceeds from reinvestment
of distributions 318,828 296,985 6,058,603 5,642,187
Payments for shares redeemed (4,334,448) (4,705,618) (82,601,508) (89,544,794)
------------- --------------- ----------------- ----------------
Total net increase (decrease) 515,975 (910,304) $ 9,800,562 $ (17,314,716)
============= =============== ================= ================
Multistrategy Bond
Class S
Proceeds from shares sold 19,095,215 14,210,027 $ 195,040,097 $ 142,635,388
Proceeds from reinvestment
of distributions 2,374,546 1,325,784 24,254,657 13,293,418
Payments for shares redeemed (9,058,823) (6,685,533) (92,355,378) (67,059,749)
------------- --------------- ----------------- ----------------
Total net increase (decrease) 12,410,938 8,850,278 $ 126,939,376 $ 88,869,057
============= =============== ================= ================
</TABLE>
There was no activity in Class C shares for Volatility Constrained Bond
and Multistrategy Bond Funds.
** Share transactions for Class C are for the period November 4, 1996
(commencement of sale of shares) to December 31, 1997.
7. Dividends
On February 2, 1998, the Board of Trustees declared the following dividends
from net investment income payable on February 10, 1998, to shareholders of
record on February 3, 1998:
Diversified Bond - Class S $ 0.1176 Volatility Constrained Bond $ 0.0854
Diversified Bond - Class C 0.1044 Multistrategy Bond 0.0491
8. Beneficial Interest
The following Funds or Class of shares have a shareholder with an interest
greater than 10% of the total outstanding shares as of December 31, 1997:
Diversified Bond - Class 5 15.6%, Diversified Bond - Class C 99.9%,
Diversified Equity - Class C 99.9%, Special Growth Fund - Class C 99.9%,
Equity Income - Class C 99.8%, International Securities - Class C 99.9%,
and Quantitative Equity - Class C 99.9%.
9. Subsequent Events
On August 10, 1998, Frank Russell Company entered into an agreement with
The Northwestern Mutual Life Insurance Co., an insurance organization,
pursuant to which Northwestern Mutual Life will acquire all of the
outstanding common stock of Frank Russell Company.
At its meeting on April 27, 1998, the Investment Company's Board of
Trustees, in an effort to meet the best interests of shareholders of the
Volatility Constrained Bond Fund and the Fixed Income II Fund (a series of
the Investment Company not presented herein) approved a plan of
reorganization for the merger of the two Funds. The merger is subject to
shareholder approval at a meeting scheduled for November 19, 1998.
Notes to Financial Statements 139
<PAGE>
Report of Independent Accountants
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of assets and liabilities and
statements of net assets of each of the series of Frank Russell Investment
Company (in this report comprised of Diversified Equity, Special Growth, Equity
Income, Quantitative Equity, International Securities, Diversified Bond,
Volatility Constrained Bond, and Multistrategy Bond (the "Funds")), as of
December 31, 1997, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Funds' 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 securities owned as of
December 31, 1997, 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 the
Funds enumerated above as of December 31, 1997, the results of their operations,
the changes in their net assets and the financial highlights for each of the
periods indicated therein in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 17, 1998, /s/ PricewaterhouseCoopers LLP
except for Note 9 as
to which the date is
August 10, 1998
140 Report of Independent Accountants
<PAGE>
Frank Russell Investment Company
Tax Information
December 31, 1997 (Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following amounts as long-term capital gain dividends for their taxable year
ended December 31, 1997:
<TABLE>
<CAPTION>
Total Long-Term 20%
Capital Gains Capital Gains
----------------- -----------------
<S> <C> <C>
Diversified Equity $ 109,703,117 $ 51,126,534
Special Growth 43,986,236 18,075,734
Equity Income 26,510,344 10,143,341
Quantitative Equity 104,834,661 41,367,069
International Securities 40,151,287 19,300,365
Multistrategy Bond 2,796,526 2,395,249
Diversified Bond 3,520,752 2,401,708
</TABLE>
Tax Information 141
<PAGE>
Frank Russell Investment Company
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
Trustees
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
Officers
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
Manager and Transfer Agent
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Consultant
Frank Russell Company
909 A Street
Tacoma, WA 98402
Custodian
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Office of Shareholder Inquiries
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103-7098
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
Distributor
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Money Managers
Diversified Equity
Alliance Capital Management L.P., Minneapolis, MN
Barclays Global Fund Advisors, San Francisco, CA
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc. Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Peachtree Asset Management, Atlanta, GA
Schneider Capital Management, Wayne, PA
Suffolk Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Special Growth
Delphi Management, Inc., Boston, MA
Fiduciary International, Inc., New York, NY
GlobeFlex Capital, L.P., San Diego, CA
Jacobs Levy Equity Management, Inc., Roseland, NJ
Sirach Capital Management, Inc., Seattle, WA
Wellington Management Company LLP, Boston, MA
Equity Income
Brandywine Asset Management, Inc., Wilmington, DE
Equinox Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Quantitative Equity
Barclays Global Fund Advisors, San Francisco, CA
Franklin Portfolio Associates, LLC, Boston, MA
J.P. Morgan Investment Management, Inc., New York, NY
International Securities
J.P. Morgan Investment Management, Inc., New York, NY
Marathon Asset Management Limited, London, England
Mastholm Asset Management, L.L.C., Bellevue, WA
Oechsle International Advisors, Boston, MA
Rowe Price-Fleming International, Inc., Baltimore, MD
Sanford C. Bernstein & Co., Inc., New York, NY
The Boston Company Asset Management, Inc., Boston, MA
Diversified Bond
Lincoln Capital Management Company, Chicago, IL
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
Volatility Constrained Bond
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Ltd., Hamilton, Bermuda
Multistrategy Bond
BEA Associates, New York, NY
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
142 Manager, Money Managers and Service Providers
<PAGE>
[LOGO OF RUSSELL]
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, WA 98402
800-832-6688
IN13(198)RUSS
<PAGE>
[ARTWORK]
FRANK RUSSELL INVESTMENT COMPANY
1997 ANNUAL REPORT
INSTITUTIONAL FUNDS EQUITY I FUND
EQUITY II FUND
EQUITY III FUND
EQUITY Q FUND
INTERNATIONAL FUND
FIXED INCOME I FUND
FIXED INCOME II FUND
FIXED INCOME III FUND
December 31, 1997
[LOGO OF RUSSELL]
<PAGE>
Frank Russell Investment Company
Frank Russell Investment Company is a "series mutual fund" with 28 different
investment portfolios. These financial statements report on eight Funds, each of
which has distinct investment objectives and strategies.
Frank Russell Investment Management Company
Responsible for overall management and administration of the Funds.
Frank Russell Company
Consultant to Frank Russell Investment Management Company.
<PAGE>
Frank Russell Investment Company
Institutional Funds
Annual Report
December 31, 1997
Table of Contents
Page
Letter to Our Clients................................... 1
Equity I Fund........................................... 2
Equity II Fund.......................................... 16
Equity III Fund......................................... 34
Equity Q Fund........................................... 44
International Fund...................................... 58
Fixed Income I Fund..................................... 78
Fixed Income II Fund.................................... 96
Fixed Income III Fund................................... 108
Notes to Financial Statements........................... 122
Report of Independent Accountants....................... 131
Tax Information......................................... 132
Manager, Money Managers and Service Providers........... 133
Frank Russell Investment Company - Institutional Funds
Copyright (C) Frank Russell Company 1998. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. Frank Russell Company and Standard & Poor's
Corporation are the owners of the trademarks, service marks, and copyrights
related to their respective indexes. This material must be accompanied or
preceded by a current Frank Russell Investment Company Prospectus containing
complete information concerning the investment objectives and operations of the
Company, charges, and expenses. The Prospectus should be read carefully before
an investment is made. The performance as of April 1, 1995 is reported gross of
investment advisory fees. For periods thereafter, performance and yields are
reported net of investment advisory fees but gross of investment services fees,
descriptions of which can be obtained from the investment advisor. Investment
services fees and other account expenses will reduce performance (e.g., an
investment services fee of 0.2% of average managed assets will reduce a 10.0%
annual return to 9.8%). The performance quoted represents past performance and
the investment return and principal value of an investment will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different than those of US issuers; the Prospectus contains
further information and details regarding these risks. Russell Fund
Distributors, Inc., is the distributor of Frank Russell Investment Company.
<PAGE>
To Our Clients
Frank Russell Investment Company is pleased to present its 1997 Annual Report.
This report covers information on eight of the Funds and represents the Funds'
sixteenth year of operation.
During the past year we have continued our focus on the benefits of
multi-manager, multi-style diversification in structuring the Funds. We remain
committed to providing our clients with superior investment solutions across
each of our multiple manager and style Funds. These efforts proved worthwhile in
1997 as our Funds, in general, provided solid returns as compared to their
respective benchmarks and attracted many new investors, both creating
significant growth in assets.
Frank Russell Investment Management Company continuously evaluates the Funds we
offer our clients. Each of these Funds is carefully monitored by Russell's
investment professionals to ensure that the most appropriate investment advisors
and strategies are utilized within each Fund. The Advisors are monitored by the
Frank Russell Investment Management Company, using the expertise and advice of
the consulting group of Frank Russell Company.
During the past year, the Frank Russell Investment Company opened five new
LifePoints Funds; Equity Balanced Strategy Fund, Aggressive Strategy Fund,
Balanced Strategy Fund, Moderate Strategy Fund and Conservative Strategy Fund.
The LifePoints Funds diversify their assets by investing in shares of six to
eight Funds of the Frank Russell Investment Company, referred to as the
Underlying Funds. Each LifePoints Fund has a different investment objective
which it seeks to achieve by investing in different combinations of the
Underlying Funds. We are excited to offer these new products which we believe
will provide additional diversification and convenience through a built-in asset
allocation strategy.
We look forward to having the opportunity to work with you over the upcoming
year and continuing to earn your support by exceeding your expectations. Thank
you for your continued confidence and investment with Frank Russell Investment
Company
Sincerely,
/s/ George F. Russell, Jr. /s/ Lynn L. Anderson
George F. Russell, Jr. Lynn L. Anderson
Chairman President and Chief Executive Officer
Frank Russell Company Frank Russell Investment Company
<PAGE>
Equity I Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide capital growth and income.
Invests in: Primarily U.S. equity securities.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk. The Fund employed the investment
management services of nine managers with three separate and distinct investment
styles.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lipper(C) Growth &
Years Equity I Fund+ Russell 1000(R) Index** Income Funds Average++
- ------ ------------- --------------------- --------------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $11,642 $11,723 $11,492
1989 $15,227 $15,289 $14,071
1990 $14,369 $14,653 $13,439
1991 $18,855 $19,493 $17,311
1992 $20,557 $21,254 $18,744
1993 $22,944 $23,412 $20,847
1994 $23,123 $23,500 $20,633
1995 $31,434 $32,376 $26,947
1996 $38,846 $39,644 $32,536
1997 $51,285 $52,668 $41,349
</TABLE>
Equity I Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ------------- --------------
<S> <C> <C>
1 Year $ 13,202 32.02%
5 Years $ 24,948 20.06%(S)
10 Years $ 51,285 17.76%(S)
</TABLE>
Russell 1000(R) Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ------------- --------------
<S> <C> <C>
1 Year $ 13,285 32.85%
5 Years $ 24,781 19.90%(S)
10 Years $ 52,668 18.07%(S)
</TABLE>
Lipper(C) Growth & Income Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
--------------- ------------- --------------
<S> <C> <C>
1 Year $ 12,709 27.09%
5 Years $ 22,059 17.14%(S)
10 Years $ 41,349 15.25%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Russell 1000(R) Index includes the 1,000 largest companies in the
Russell 3000(R) Index, the smallest of which is valued at about $43
million. The Russell 1000 Index represents the universe of stocks from
which most active money managers typically select.
+ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995,
fund performance results are reported net of investment management
fees but gross of any investment services fees. Information concerning
these fees can be obtained from the fund's managers upon request.
++ Lipper(C) Growth & Income Funds Average is the average total return
for the universe of funds within the Growth and Income Funds
investment objective. The total return for the funds reflects
adjustments for income dividends and capital gains distributions
reinvested as of the ex-dividend dates.
(S) Annualized.
2 Equity I Fund
<PAGE>
Equity I Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Equity I Fund reflected a total return
of 32.0% as compared to the Russell 1000(R) Index gain of 32.9%. The Fund
trailed the Index primarily due to the strength of large cap stocks and the
market's defensiveness late in the year. However, performance compared favorably
with the average mutual fund tracked in the Lipper(C) Growth and Income Funds
Universe.
Portfolio Highlights
The performance of stocks in 1997 once again defied expectations. Stocks
provided investors with returns in excess of 30%--the first time the market has
ever produced three consecutive years of gains in excess of 20% per annum.
Despite the market's strength, a year end flight to defensive sectors made it a
difficult year for fund managers to keep pace with market indices. The market's
rotation away from segments emphasized by the "active" managers produced
particularly weak fourth quarter results. Technology stocks were hardest hit by
the market's changing sentiment, as tech shares were sold in favor of more
defensive alternatives, including utility stocks and fixed income instruments.
The dominance of large capitalization stocks appeared to be at an end by mid
year, but resumed again in the fourth quarter, resulting in the largest 50
stocks of the Russell 1000 Index outperforming small cap stocks in the Russell
2000(R) Index by nearly 14% for the year.
The Equity I Fund's balance of investment styles helped lessen its vulnerability
to the market's rotation between sectors during the year. The Fund's Value
managers provided exposure to utility shares, helping offset the underweightings
of the Fund's other managers. An overweighting in technology stocks reflected
generally favorable opinions among all of the Fund's managers, regardless of
investment style, however, weakness in the technology sector in the latter half
of the year had a negative impact on results. Waning confidence in the ability
of US companies to increase profits, coupled with the uncertain impact of
economic crises in Asia, resulted in weak returns from some of the market's
leaders, including Intel, the Fund's largest holding for most of the year. The
Fund also failed to capture some strong returns from telephone utilities stocks
during the fourth quarter, as merger activity and defensive attributes combined
to boost share prices in the sector. Additionally, the Fund was underweighted in
two of the market's best performers, AT&T and MCI.
- --------------------------------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Philip Morris Cos., Inc. 1.7%
Pfizer, Inc. 1.6
Cisco Systems, Inc. 1.4
Merck & Co., Inc. 1.3
Ford Motor Co. 1.3
General Electric Co. 1.3
COMPAQ Computer Corp. 1.3
PepsiCo, Inc. 1.2
American International Group, Inc. 1.2
MBNA Corp. 1.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 22.3x
Portfolio Price/Book Ratio 3.48x
Market Capitalization - S-Weighted Average 37.49 Bil
Number of Holdings 539
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers Styles
Alliance Capital Management L.P. Growth
Barclays Global Fund Advisors, N.A. Market-Oriented
Equinox Capital Management, Inc. Value
INVESCO Capital Management, Inc. Market-Oriented
Lincoln Capital Management Co. Growth
Peachtree Asset Management Market-Oriented
Schneider Capital Management Value
Suffolk Capital Management, Inc. Market-Oriented
Trinity Investment Management Corp. Value
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Equity I Fund 3
<PAGE>
Equity I Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Common Stocks - 95.2%
Auto and Transportation - 5.7%
Aftermarket Technology Corp. (a) 46,800 $ 848
Alexander & Baldwin, Inc. 2,900 79
AMR Corp. (a) 22,400 2,878
Bandag, Inc. 5,000 267
BE Aerospace, Inc. (a) 47,300 1,265
Borg-Warner Automotive, Inc. 9,100 473
Chrysler Corp. 71,800 2,526
CNF Transportation, Inc. 9,150 351
Comair Holdings, Inc. 27,300 659
Continental Airlines, Inc. Class B (a) 18,400 886
Cooper Tire & Rubber Co. 165,800 4,041
Delta Air Lines, Inc. 20,200 2,404
Dollar Thrifty Automotive Group, Inc. (a) 19,100 392
Eaton Corp. 11,700 1,044
Echlin, Inc. 49,000 1,773
Exide Corp. 70,400 1,822
Federal Express Corp. (a) 24,000 1,466
Ford Motor Co. 303,500 14,777
General Motors Corp. 4,400 267
KLM Royal Dutch Airlines 58,091 2,193
Magna International, Inc. Class A 34,500 2,167
Meritor Automotive, Inc. 41,700 878
Navistar International Corp. (a) 21,300 529
Nordic American Tanker Shipping, Ltd. 215,200 3,551
Norfolk Southern Corp. 120,000 3,698
Northwest Airlines Corp. Class A (a) 81,800 3,916
PACCAR, Inc. 13,200 693
Southwest Airlines Co. 900 22
Trinity Industries, Inc. 21,100 942
UAL Corp. (a) 81,000 7,493
US Airways Group, Inc. (a) 2,000 124
-------
64,424
-------
Consumer Discretionary - 10.7%
AccuStaff, Inc. (a) 4,300 99
ACNielsen Corp. (a) 9,100 222
Avon Products, Inc. 19,900 1,221
Barnes & Noble, Inc. (a) 2,300 77
Barry (R.G.) Corp. (a) 126,100 1,466
Bed Bath & Beyond, Inc. (a) 3,900 150
Belo (A.H.) Corp. Class A 8,800 494
Borders Group, Inc. (a) 5,800 182
Browning-Ferris Industries, Inc. 19,500 722
Carnival Corp. Class A 73,600 4,076
Central Newspapers, Inc. Class A 4,400 325
Chris Craft Industries, Inc. (a) 3,200 167
Clear Channel Communications, Inc. (a) 23,600 1,875
Cracker Barrel Old Country Store, Inc. 2,400 80
Darden Restaurants, Inc. 39,500 494
Dayton Hudson Corp. 89,200 6,021
Dillard's, Inc. Class A 46,300 1,632
Disney (Walt) Co. 102,800 10,184
Dollar Tree Stores, Inc. (a) 3,550 147
Eastman Kodak Co. 17,100 1,040
Estee Lauder Companies Class A 1,100 57
Federated Department Stores, Inc. (a) 20,600 887
General Nutrition Companies, Inc. (a) 9,100 308
Getty Realty Corp. 40,000 885
Grand Casinos, Inc. (a) 59,600 812
GTECH Holdings Corp. (a) 2,500 80
Harland (John H.) Co. 20,000 420
Hasbro, Inc. 16,000 504
Hillenbrand Industries, Inc. 900 46
Hilton Hotels Corp. 9,300 277
Hollinger International, Inc. Class A 11,200 157
Home Depot, Inc. (The) 137,000 8,066
Host Marriott Corp. (a) 61,300 1,203
Ikon Office Solutions, Inc. 49,500 1,392
International Game Technology 12,300 311
Intimate Brands, Inc. Class A 23,900 575
JC Penney & Co., Inc. 35,200 2,123
Jones Apparel Group, Inc. (a) 27,500 1,183
Kellwood Co. 50,300 1,509
King World Productions, Inc. (a) 5,900 341
Kmart Corp. (a) 132,600 1,533
Knight-Ridder, Inc. 1,200 62
Kohl's Corp. (a) 29,800 2,030
Leggett & Platt, Inc. 4,200 176
Limited, Inc. (The) 150,000 3,825
Liz Claiborne, Inc. 18,400 769
Lowe's Cos., Inc. 31,400 1,497
Mark Bros. Jewelers, Inc. (a) 30,000 469
Marriot International, Inc. 7,700 533
Mattel, Inc. 223,143 8,312
May Department Stores Co. 37,200 1,960
Maytag Corp. 22,400 836
Meredith Corp. 18,100 646
Metromedia International Group, Inc. (a) 161,100 1,530
MGM Grand, Inc. (a) 14,700 530
Neiman-Marcus Group, Inc. (a) 8,800 266
New York Times Co. Class A 62,700 4,146
Newell Co. 1,600 68
Nordstrom, Inc. 15,900 956
Office Depot, Inc. (a) 2,700 65
OfficeMax, Inc. (a) 35,300 503
</TABLE>
4 Equity I Fund
<PAGE>
Equity I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- -------
<S> <C> <C>
Omnicom Group, Inc. 19,200 $ 814
PairGain Technologies, Inc. (a) 2,200 42
Payless ShoeSource, Inc. (a) 8,400 564
Petroleum Heat & Power, Inc. Class A 378,808 852
Premark International, Inc. 26,700 774
Promus Hotel Corp. New (a) 9,725 408
Sears Roebuck & Co. 122,800 5,557
Service Corp. International 70,900 2,619
Stewart Enterprises, Inc. Class A 24,100 1,124
Sunbeam Corporation 39,000 1,643
Tele-Communications, Inc. Series A New (a) 104,200 3,777
Tiffany & Co. 3,600 130
Time Warner, Inc. 53,900 3,342
TJX Cos., Inc. 50,400 1,732
Toys "R" Us, Inc. (a) 105,000 3,301
Tribune Co. 47,800 2,975
Tricon Global Restaurants, Inc. (a) 22,790 662
Tupperware Corp. 17,100 476
Unisource Worldwide, Inc. 68,400 975
USA Waste Services, Inc. (a) 59,400 2,331
V.F. Corp. 1,000 46
Viad Corp. 2,600 50
Wal-Mart Stores, Inc. 51,500 2,031
Wallace Computer Services, Inc. 1,100 43
Whirlpool Corp. 45,400 2,497
-------
121,287
-------
Consumer Staples - 8.9%
American Stores Co. 10,000 206
Anheuser-Busch Cos., Inc. 51,600 2,270
Campbell Soup Co. 49,400 2,871
Canandaigua Wine International, Inc.
Class A (a) 1,200 66
Chiquita Brands International, Inc. 53,700 876
Clorox Co. 16,000 1,265
Coca-Cola Co. (The) 142,700 9,507
Coca-Cola Enterprises, Inc. 60,300 2,144
Colgate-Palmolive Co. 72,400 5,321
CPC International, Inc. 21,000 2,263
CVS Corp. 5,400 346
Dean Foods Co. 1,500 89
Dial Corp. 1,700 35
Dole Food, Inc. 28,300 1,295
Fletcher's Fine Foods, Ltd. (a) 40,000 560
Gillette Co. 46,500 4,670
Heinz (H.J.) Co. 21,100 1,072
Hormel Foods Corp. 26,800 878
Hudson Foods, Inc. 53,500 1,100
International Multifoods Corp. 68,400 1,937
Interstate Bakeries Corp. 2,600 97
JP Foodservice, Inc. (a) 42,003 1,552
McCormick & Co., Inc. 1,100 31
Nabisco Holdings Corp. Class A 19,500 945
PepsiCo, Inc. 387,900 14,134
Philip Morris Cos., Inc. 439,250 19,904
Procter & Gamble Co. 154,600 12,339
Quaker Oats Co. 49,900 2,632
RJR Nabisco Holdings Corp. 82,520 3,095
Sara Lee Corp. 39,900 2,247
SuperValu, Inc. 19,700 825
SYSCO Corp. 600 27
Tyson Foods, Inc. Class A 8,200 168
Unilever NV 62,700 3,915
Universal Corp. 12,500 514
Weis Markets, Inc. 2,200 77
Winn-Dixie Stores, Inc. 1,200 53
Wrigley (Win.), Jr. Co. 2,100 167
-------
101,493
-------
Financial Services - 17.9%
20th Century Industries 2,800 73
Advanta Corp. Class A 17,500 457
AFLAC, Inc. 74,000 3,783
Ahmanson (H.F.) & Co. 59,600 3,989
Allmerica Financial Corp. 8,100 404
Allstate Corp. 82,366 7,485
AMBAC Financial Group, Inc. 47,800 2,199
American Express Co. 45,000 4,016
American International Group, Inc. 127,500 13,866
AmSouth Bancorp 37,100 2,015
Automatic Data Processing, Inc. 140,800 8,642
Banc One Corp. 64,230 3,488
BankAmerica Corp. 65,900 4,811
Bankers Trust New York Corp. 11,300 1,271
BarnettBanks, Inc. 19,100 1,373
Bear Stearns Cos., Inc. 14,068 668
Canadian Hotel Income Properties 226,100 1,519
Charter One Financial, Inc. 1,575 99
Chase Manhattan Corp. 106,592 11,672
Chubb Corp. (The) 29,450 2,227
CIGNA Corp. 12,300 2,129
Citicorp 81,600 10,317
Comdisco, Inc. 5,100 171
Comerica, Inc. 27,000 2,437
Commerce Bancshares, Inc. 2,257 153
</TABLE>
Equity I Fund 5
<PAGE>
Equity I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Conseco, Inc. 85,544 $ 3,887
Danielson Holding Corp. (a) 128,300 930
Dime Bancorp, Inc. 29,200 883
Donaldson, Lufkin & Jenrette, Inc. 500 40
Dow Jones & Co., Inc. 14,500 778
DST Systems, Inc. (a) 1,900 81
Duke Realty Investments, Inc. 24,100 584
Edwards (A.G.), Inc. 30,100 1,196
Equitable Companies, Inc. 18,100 900
Equity Residential Properties Trust 34,400 1,739
Everest Reinsurance Holdings, Inc. 14,700 606
Federal Home Loan Mortgage Corp. 14,400 604
Federal National Mortgage Association 132,700 7,572
First America Bank Corp. 4,450 343
First American Corp. 26,600 1,323
First Chicago NBD Corp. 21,501 1,795
First Data Corp. 65,500 1,916
First Empire State Corp. 500 233
Fleet Financial Group, Inc. 81,600 6,115
General Re Corp. 18,000 3,816
Golden State Bancorp, Inc. (a) 5,700 213
Golden West Financial Corp. 6,800 665
Green Tree Financial Corp. 67,900 1,778
Hartford Financial Services Group
(The), Inc. 500 47
Household International Corp. 47,200 6,021
Jefferson-Pilot Corp. 2,700 210
Lehman Brothers Holdings, Inc. 18,100 923
Lincoln National Corp. 1,300 102
Local Financial Corp. (144A) 157,900 1,836
MBNA Corp. 455,012 12,428
Mellon Bank Corp. 16,800 1,019
Mercantile Bankshares Corp. 8,400 322
Mercury General Corp. 4,600 254
Merrill Lynch & Co., Inc. 79,600 5,806
MGIC Investment Corp. 16,800 1,117
Morgan Stanley, Dean Witter,
Discover and Co. 149,550 8,842
National City Corp. 53,300 3,504
NationsBank Corp. 87,500 5,321
North Fork Bancorporation, Inc. 3,700 124
Northern Trust Corp. 21,100 1,472
Norwest Corp. 66,500 2,569
Old Republic International Corp. 15,050 560
Pacific Century Financial Corp. 31,700 785
PaineWebber Group, Inc. 44,850 1,550
Paychex, Inc. 16,800 851
PennCorp Financial Group, Inc. 34,000 1,213
Progressive Corp. 6,600 791
Reliance Group Holdings, Inc. 58,200 822
Republic New York Corp. 21,400 2,444
Ryder System, Inc. 102,900 3,370
SouthTrust Corp. 34,000 2,151
Spieker Properties, Inc. 15,800 677
StarBanc Corp. 5,500 316
State Street Corp. 12,100 704
Synovus Financial Corp. 7,100 233
Torchmark Corp. 20,400 858
Transamerica Financial Corp. 14,100 1,502
Transatlantic Holdings, Inc. 3,350 239
Travelers, Inc. 52,375 2,822
Unitrin, Inc. 600 38
Washington Mutual, Inc. 33,660 2,146
--------
203,250
--------
Health Care - 11.1%
Abbott Laboratories 52,700 3,455
Aetna, Inc. 57,800 4,079
ALZA Corp. (a) 40,400 1,285
American Home Products Corp. 19,800 1,515
Amgen, Inc. 20,500 1,110
Apria Healthcare Group, Inc. (a) 71,000 954
Astra AB Class A - ADR 202,033 3,472
Baxter International, Inc. 87,100 4,393
Beckman Instruments, Inc. 2,500 100
Becton, Dickinson & Co. 3,000 150
Bergen Brunswig Corp. Class A 7,800 329
Biomet, Inc. 67,300 1,716
Bristol-Myers Squibb Co. 101,560 9,610
Cardinal Health, Inc. 21,700 1,630
ChromaVision Medical Systems, Inc. (a) 140 1
Columbia/HCA Healthcare Corp. 145,000 4,296
First Health Group Corp. (a) 13,100 670
Genzyme Corp. (a) 17,200 475
HBO & Co. 35,100 1,683
Health Management Associates Class A (a) 3,950 100
HEALTHSOUTH Corp. (a) 4,000 111
Humana, Inc. (a) 43,500 903
Integrated Health Services, Inc. 50,000 1,559
IVAX Corp. (a) 70,200 474
Johnson & Johnson 115,300 7,595
Lilly (Eli) & Co. 132,000 9,191
Matrix Pharmaceutical, Inc. (a) 87,700 301
McKesson Corp. 7,300 790
Medtronic, Inc. 39,400 2,061
Merck & Co., Inc. 140,750 14,955
</TABLE>
6 Equity I Fund
<PAGE>
Equity I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- ---------
<S> <C> <C>
Mylan Laboratories, Inc. 188,700 $ 3,951
Omnicare, Inc. 6,300 195
PacifiCare Health Systems, Inc. Class B (a) 24,000 1,257
Pfizer, Inc. 245,100 18,275
PharMerica, Inc. (a) 5,584 58
PhyCor, Inc. (a) 25,900 699
Quest Diagnostics, Inc. (a) 119,300 2,013
Quintiles Transnational Corp. (a) 34,600 1,332
Schering-Plough Corp. 154,100 9,573
Smithkline Beecham PLC - ADR 49,500 2,546
Tenet Healthcare Corp. (a) 11,650 386
Total Renal Care Holdings, Inc. (a) 7,700 212
United Healthcare Corp. 109,900 5,461
US Bioscience, Inc. (a) 94,563 857
Watson Pharmaceuticals, Inc. (a) 9,200 298
Wellpoint Health Networks, Inc.-Class A (a) 6,406 271
---------
126,347
---------
Integrated Oils - 4.4%
Amerada Hess Corp. NPV 63,300 3,473
Amoco Corp. 37,000 3,150
Ashland, Inc. 73,900 3,967
Atlantic Richfield Co. 33,000 2,644
British Petroleum Co. PLC - ADR 33,968 2,707
Coastal Corp. 44,000 2,725
Crown Central Petroleum Co. Class B (a) 98,000 1,991
Exxon Corp. 132,820 8,127
Lyondell Petrochemical Co. 47,900 1,269
Mobil Corp. 24,100 1,740
Murphy Oil Corp. 5,200 282
Pennzoil Co. 10,700 715
Phillips Petroleum Co. 41,100 1,998
Royal Dutch Petroleum Co. 63,200 3,425
Seagull Energy Corp. (a) 6,300 130
Sun Co., Inc. 35,400 1,489
Tenneco, Inc. 38,200 1,509
Texaco, Inc. 41,600 2,262
Unocal Corp. 44,200 1,715
USX-Marathon Group 140,200 4,732
---------
50,050
---------
Materials and Processing.. 8.7%
Air Products & Chemicals, Inc. 21,900 1,801
Albany International Corp. Class A 51,100 1,175
Albemarle Corp. 32,300 771
Alumax, Inc. (a) 3,400 116
Aluminum Co. of America 49,300 3,469
American Real Estate Partners, L.P. (a) 318,062 3,121
American Standard Companies, Inc. (a) 15,000 575
Archer-Daniels-Midland Co. 52,500 1,139
Arco Chemical Co. 6,100 285
Asia Pulp & Paper Co, Ltd. - ADR 100,000 1,006
Ball Corp. 12,700 448
Bethlehem Steel Corp. (a) 18,700 161
Bowater, Inc. 1,300 58
Catellus Development Corp. (a) 100,700 2,014
Centex Corp. 21,400 1,347
Champion International Corp. 31,000 1,405
Commonwealth Industries, Inc. 30,000 439
Crown Cork & Seal Co., Inc. 47,300 2,371
Cyprus Amax Minerals Co. 20,200 311
Cytec Industries, Inc. (a) 2,500 117
du Pont (E.I..) de Nemours & Co. 15,000 901
Eastman Chemical Co. 31,600 1,882
FMC Corp. (a) 19,600 1,319
Fort James Corp. 67,300 2,574
Gaylord Container Corp. Class A (a) 483,800 2,782
Georgia Pacific Corp. 3,500 213
Georgia Pacific Corp. (a) 600 14
Goodrich (B.F.) Co. 5,600 232
Great Lakes Chemical Corp. 78,500 3,523
Harsco Corp. 8,200 354
Hexcel Corp. (a) 98,700 2,461
Illinois Tool Works, Inc. 29,300 1,762
Inland Steel Industries, Inc. 22,500 385
International Paper Co. 39,200 1,691
Kimberly-Clark Corp. 117,700 5,804
Lafarge Corp. 16,600 491
Longview Fibre Co. 8,000 122
Louisiana Pacific Corp. 31,600 600
LTV Corp. 23,200 226
Lubrizol Corp. 20,400 752
Mead Corp. 58,900 1,649
Mercer International, Inc. 130,300 1,140
Monsanto Co. 179,100 7,522
Newhall Land & Farming Co. 58,800 1,764
Olin Corp. 20,600 966
Oregon Steel Mills, Inc. 20,000 426
Phelps Dodge Corp. 58,400 3,635
Pioneer Hi-Bred International, Inc. 1,900 204
Potlatch Corp. 8,500 366
Praxair, Inc. 55,900 2,516
Precision Castparts Corp. 1,400 84
Rayonier, Inc. 1,800 77
</TABLE>
Equity I Fund 7
<PAGE>
Equity I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ---------
<S> <C> <C>
Reynolds Metals Co. 52,500 $ 3,150
Rohm & Haas Co. 10,400 996
Sealed Air Corp. (a) 2,300 142
Security Capital Group, Inc. Class B (a) 4,700 153
Sherwin-Williams Co. 23,400 649
Sigma Aldrich Corp. 1,600 63
Solutia, Inc. 29,700 793
Sonoco Products Co. 2,900 101
Timken Co. 23,300 801
Tower Realty Trust, Inc. 8,000 197
Tyco International, Ltd. 274,200 12,356
Unifi, Inc. 12,900 525
Union Carbide Corp. 9,200 395
USG Corp. (a) 9,800 480
USX-U.S. Steel Group 38,800 1,212
Vulcan Materials Co. 1,200 122
W. R. Grace & Co. 71,400 5,743
Witco Corp. 17,900 730
---------
99,174
---------
Miscellaneous - 0.3%
FBR Asset Investment Corp. 32,600 652
Legacy Hotels Real Estate Investment Trust 328,500 2,230
---------
2,882
---------
Other Energy -2.2%
Apache Corp. 38,200 1,339
Baker Hughes, Inc. 80,200 3,499
BJ Services Co. (a) 6,800 489
Burlington Resources, Inc. 11,600 520
Dresser Industries, Inc. 19,400 814
EEX Corp. (a) 40,186 364
Enron Oil & Gas Co. 4,000 85
Halliburton Co. 42,200 2,192
Helmerich & Payne, Inc. 23,200 1,575
McDermott International, Inc. 50,300 1,842
Noble Affiliates, Inc. 28,700 1,012
Rowan Cos., Inc. (a) 15,000 458
Schlumberger, Ltd. 46,700 3,759
Smith International, Inc. (a) 5,700 350
Tidewater, Inc. 7,800 430
Transocean Offshore, Inc. 45,100 2,173
Triton Energy, Ltd. Class A (a) 44,900 1,310
Ultramar Diamond Shamrock Corp. 9,300 296
Union Pacific Resources Group, Inc. 2,100 51
Valero Energy Corp. 53,900 1,694
Vastar Resources, Inc. 2,300 82
Weatherford Enterra, Inc. (a) 10,900 477
---------
24,811
---------
Producer Durables - 6.1%
Aeroquip-Vickers, Inc. 9,600 471
AGCO Corp. 31,400 918
Alcatel Alsthom Compagnie Generale
d'Electricite - ADR 52,036 1,317
Applied Materials, Inc. (a) 33,200 998
Boeing Co. 32,700 1,600
Briggs & Stratton Corp. 8,800 427
Caterpillar, Inc. 27,800 1,350
Clayton Homes, Inc. 6,300 113
Crane Co. 39,600 1,718
Curtiss-Wright Corp. 30,800 1,118
Danaher Corp. 500 32
Dover Corp. 4,400 159
Elsag Bailey Process Automation NV (a) 72,500 1,196
Foster Wheeler Corp. 49,100 1,329
General Electric Co. 194,900 14,301
General Semiconductor, Inc. (a) 131,600 1,522
Harnischfeger Industries, Inc. 10,200 360
Honeywell, Inc. 25,100 1,719
Ingersoll-Rand Co. 71,200 2,884
Johnson Controls, Inc. 35,700 1,705
Kaiser Ventures, Inc. (a) 60,000 645
Lexmark International Group,
Inc. Class A (a) 31,500 1,197
Litton Industries, Inc. (a) 7,800 449
Lockheed Martin Corp. 36,200 3,566
Mark IV Industries, Inc. 32,200 704
Miller (Herman), Inc. 2,400 130
Molex, Inc. 5,125 164
Molex, Inc. Class A 29,500 848
National Service Industries, Inc. 800 40
Parker-Hannifin Corp. 36,150 1,658
Perkin-Elmer Corp. 4,200 298
Philips Electronics NV - ADR 14,000 847
Raychem Corp. 16,800 724
Raytheon Co. Class A 1,518 75
Sensormatic Electronics Corp. 108,000 1,775
Sundstrand Corp. 8,300 418
Tecumseh Products Co. Class A 6,700 327
Teradyne, Inc. (a) 17,900 573
Thiokol Corp. 700 57
Thomas & Betts Corp. 18,900 893
U.S. Filter Corp. (a) 69,100 2,069
</TABLE>
8 Equity I Fund
<PAGE>
Equity I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- ---------
<S> <C> <C>
United Technologies Corp. 119,800 $ 8,723
Whittaker Corp. (a) 177,300 1,950
Xerox Corp. 82,600 6,097
---------
69,464
---------
Technology - 10.6%
3Com Corp. (a) 26,300 917
Altera Corp. (a) 40,800 1,352
Apple Computer, Inc. (a) 35,000 457
AVX Corp. 900 17
Bay Networks, Inc. (a) 1,600 41
Cadence Design Systems, Inc. (a) 23,300 571
Cambridge Technology Partners, Inc. (a) 4,600 191
CDW Computer Centers, Inc. (a) 2,100 109
Cisco Systems, Inc. (a) 279,400 15,577
COMPAQ Computer Corp. 252,250 14,236
CompUSA, Inc. (a) 28,800 893
Cooper Industries, Inc. 25,900 1,269
Cypress Semiconductor Corp. (a) 35,000 298
Dallas Semiconductor Corp. 1,700 69
Dell Computer Corp. (a) 138,000 11,592
DSC Communications Corp. (a) 29,800 711
Electronic Data Systems Corp. 143,126 6,289
Ericsson (LM) Telephone Co. Class B - ADR 139,983 5,223
ESS Technology, Inc. (a) 10,000 76
FORE Systems (a) 35,600 543
General Dynamics Corp. 3,900 337
General Motors Corp. Class H (a) 3,300 122
Hewlett-Packard Co. 145,200 9,075
Imation Corp. (a) 50,100 802
Integrated Device Technology (a) 138,600 1,299
Intel Corp. 172,400 12,100
International Business Machines Corp. 85,300 8,919
Iomega Corp. (a) 27,400 341
Komag, Inc. (a) 5,100 75
Learning Co., Inc. (The) (a) 116,900 1,878
Lucent Technologies, Inc. 45,859 3,663
Micron Technology, Inc. (a) 30,000 780
Microsoft Corp. (a) 88,300 11,407
Motorola, Inc. 31,300 1,786
PeopleSoft, Inc. (a) 5,500 213
SCI Systems, Inc. (a) 13,500 588
Scientific-Atlanta, Inc. 10,500 176
Seagate Technology (a) 25,900 498
Sterling Software, Inc. (a) 800 33
Symbol Technologies, Inc. 1,500 57
Synopsys, Inc. (a) 29,900 1,065
Tandy Corp. 20,700 798
Tellabs, Inc. (a) 26,000 1,370
Texas Instruments, Inc. 39,200 1,764
VLSI Technology, Inc. (a) 22,000 517
Xilinx, Inc. (a) 21,200 742
---------
120,836
---------
Utilities - 8.6%
360 Communications Co. (a) 3,100 63
Airtouch Communications, Inc. (a) 157,500 6,546
Alltel Corp. 2,700 111
American Water Works, Inc. 13,700 374
AT&T Corp. 117,913 7,222
Bell Atlantic Corp. 104,802 9,537
BellSouth Corp. 62,200 3,503
Boston Edison Co. 900 34
Calpine Corp. (a) 26,500 394
Central Maine Power Co. 37,000 564
Century Telephone Enterprises, Inc. 30,700 1,529
Citizens Utilities Co. Class B (a) 164,921 1,587
Columbia Gas System, Inc. 1,400 110
Comsat Corp. Series 1 10,800 262
Consolidated Edison Co. 37,600 1,542
Delmarva Power & Light Co. 1,900 44
DTE Energy Co. 141,700 4,915
Duke Power Co. 72,000 3,987
Edison International 177,400 4,823
Entergy Corp. 203,600 6,095
EXCEL Communications, Inc. (a) 2,300 33
FirstEnergy Corp. (a) 4,935 143
GPU, Inc. 58,600 2,469
GTE Corp. 85,989 4,493
IPALCO Enterprises, Inc. 8,400 352
Long Island Lighting Co. 44,100 1,329
MCI Communications Corp. 82,000 3,511
Montana Power Co. 21,200 674
National Fuel & Gas Co. 7,800 380
New England Electric System 2,400 103
New York State Electric & Gas Corp. 50,400 1,789
Niagara Mohawk Power Corp. (a) 223,700 2,349
NICOR, Inc. 17,800 751
NIPSCO Industries, Inc. 9,900 489
Northeast Utilities 114,400 1,351
OGE Energy Corp. 600 33
Paging Network, Inc. (a) 84,000 903
Peoples Energy Corp. 5,000 197
PG&E Corp. 95,000 2,892
</TABLE>
Equity I Fund 9
<PAGE>
Equity I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ ----------
<S> <C> <C>
Pinnacle West Capital Corp. 25,400 $ 1,076
PP&L Resources, Inc. 3,400 81
Public Service Enterprise Group, Inc. 84,300 2,671
SBC Communications, Inc. 53,700 3,934
Southern Co. 33,500 867
Southern New England
Telecommunications Corp. 28,900 1,454
Unicom Corp. 165,800 5,098
Union Electric Co. 2,300 100
United States Cellular Corp. (a) 6,300 195
UtiliCorp United, Inc. 700 27
Western Resources, Inc. 400 17
WorldCom, Inc. (a) 150,610 4,556
----------
97,559
----------
Total Common Stocks
(cost $869,545) 1,081,577
----------
Convertible Preferred Stocks - 0.1%
Elsag Bailey Financing Trust (a) 18,200 714
Elsag Bailey Process Automation (144A) 9,300 365
----------
Total Convertible Preferred Stocks
(cost $1,278) 1,079
----------
Preferred Stocks - 0.9%
Cooper Industries, Inc. 40,400 737
Nokia Corp. - ADR 139,600 9,772
----------
Total Preferred Stocks
(cost $11,297) 10,509
----------
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ----------
<S> <C> <C>
Short-Term Investments - 4.0%
Frank Russell Investment Company
Money Market Fund
due on demand (b) $ 39,943 $ 39,943
United States Treasury Notes (c)
5.125% due 04/30/98 5,700 5,693
----------
Total Short-Term Investments
(cost $45,639) 45,636
----------
Total Investments
(identified cost $927,759)(d) - 100.2% 1,138,801
Other Assets and Liabilities,
Net - (0.2%) (2,428)
-----------
Net Assets - 100.0% $ 1,136,373
===========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
144A - Represents private placement security for qualified buyers
according to rule 144A of the Security Act of 1933.
The accompanying notes are an integral part of the financial statements.
10 Equity I Fund
<PAGE>
Equity I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S & P 500 Index Futures Contracts
expiration date 03/98 129 $ 319
S & P 400 Midcap Index Futures Contracts
expiration date 03/98 47 110
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 429
==============
</TABLE>
((S)) At December 31, 1997, United States Treasury Notes valued at
$5,693 were held as collateral by the custodian in
connection with futures contracts purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
Equity I Fund 11
<PAGE>
Equity I Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $927,759)(Note 2)..................................................... $ 1,138,801
Cash......................................................................................................... 842
Receivables:
Dividends and interest................................................................................... 2,005
Investments sold......................................................................................... 5,584
Fund shares sold......................................................................................... 5,346
Daily variation margin on futures contracts (Notes 2 and 3).............................................. 33
--------------------
Total Assets........................................................................................... 1,152,611
Liabilities
Payables:
Investments purchased.............................................................. $ 2,766
Fund shares redeemed............................................................... 12,702
Accrued fees to affiliates (Note 4)................................................ 648
Other accrued expenses............................................................. 122
-----------------
Total Liabilities..................................................................................... 16,238
--------------------
Net Assets................................................................................................... $ 1,136,373
====================
Net Assets consist of:
Accumulated net realized gain (loss)......................................................................... 7,329
Unrealized appreciation (depreciation) on:
Investments................................................................................................ 211,037
Futures contracts.......................................................................................... 429
Shares of beneficial interest................................................................................ 372
Additional paid-in capital................................................................................... 917,206
--------------------
Net Assets................................................................................................... $ 1,136,373
====================
Net Asset Value, offering and redemption price per share:
($1,136,372,648 divided by 37,244,829 shares of $.01 par value
shares of beneficial interest outstanding)............................................................... $ 30.51
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 Equity I Fund
<PAGE>
Equity I Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
---------------------
<S> <C> <C>
Investment Income:
Dividends................................................................................................ $ 15,638
Dividends from Money Market Fund (Note 5)................................................................ 2,042
Interest................................................................................................. 230
---------------------
Total Investment Income............................................................................... 17,910
Expenses (Notes 2 and 4):
Management fees.................................................................... $ 6,457
Custodian fees..................................................................... 545
Transfer agent fees................................................................ 335
Bookkeeping service fees........................................................... 35
Professional fees.................................................................. 40
Registration fees.................................................................. 35
Trustees' fees..................................................................... 4
Miscellaneous...................................................................... 80
-----------------
Total Expenses................................................................... 7,531
---------------------
Net investment income.................................................................. 10,379
=====================
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments........................................................................ 239,276
Futures contracts.................................................................. 10,990 250,266
-----------------
Net change in unrealized appreciation or depreciation of:
Investments........................................................................ 30,599
Futures contracts.................................................................. 575 31,174
----------------- ---------------------
Net gain (loss) on investments............................................................................... 281,440
---------------------
Net increase (decrease) in net assets resulting from operations.............................................. $ 291,819
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity I Fund 13
<PAGE>
Equity I Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
-------------------------
1997 1996
---------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income .............................................................. $ 10,379 $ 12,119
Net realized gain (loss) ........................................................... 250,266 110,958
Net change in unrealized appreciation or depreciation .............................. 31,174 65,403
---------- ---------
Net increase (decrease) in net assets resulting from operations .................. 291,819 188,480
---------- ---------
From Distributions to Shareholders:
Net investment income .............................................................. (10,379) (12,119)
In excess of net investment income ................................................. (26) (104)
Net realized gain on investments ................................................... (260,727) (104,791)
---------- ---------
Total Distributions to Shareholders .............................................. (271,132) (117,014)
---------- ---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ........ 153,733 138,990
---------- ---------
Total Net Increase (Decrease) in Net Assets ............................................ 174,420 210,456
Net Assets
Beginning of period ................................................................ 961,953 751,497
---------- ---------
End of period ...................................................................... $1,136,373 $ 961,953
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 Equity I Fund
<PAGE>
Equity I Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................................... $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00
--------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income................................................... .34 .42 .52 .62 .60
Net realized and unrealized gain (loss) on investments.................. 8.89 5.96 7.71 (.41) 2.18
--------- ------- ------- ------- -------
Total Income From Investment Operations.............................. 9.23 6.38 8.23 .21 2.78
--------- ------- ------- ------- -------
Less Distributions:
Net investment income................................................... (.34) (.42) (.52) (.62) (.60)
Net realized gain on investments........................................ (8.72) (3.62) (3.03) (.94) (2.11)
In excess of net realized gain on investments........................... -- -- -- (.24) (.16)
--------- ------- ------- ------- -------
Total Distributions.................................................. (9.06) (4.04) (3.55) (1.80) (2.87)
--------- ------- ------- ------- -------
Net Asset Value, End of Period............................................. $ 30.51 $ 30.34 $ 28.00 $ 23.32 $ 24.91
--------- ------- ------- ------- -------
Total Return (%)(a)........................................................ 32.02 23.58 35.94 0.79 11.61
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................................ 1,136,373 961,953 751,497 547,242 514,356
Ratios to average net assets (%)(a):
Operating expenses................................................... .70 .71 .59 .12 .14
Net investment income................................................ .96 1.38 1.91 2.52 2.36
Portfolio turnover rate (%)............................................. 110.75 99.51 92.04 75.02 91.87
Average commission rate paid per share
of security ($ omitted)................................................ .0511 .0464 N/A N/A N/A
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
Equity I Fund 15
<PAGE>
Equity II Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To enhance total return, primarily through capital appreciation and
by assuming a higher level of volatility than is ordinarily expected from the
Equity I Fund.
Invests in: Primarily small capitalization and "emerging growth-type" U.S.
equity securities.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk. The Fund employed the investment
management services of six small capitalization stock fund managers with three
separate and distinct investment styles.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lipper(C)
Dates Equity II+ Russell 2500(TM)** Small Co. Growth ++
----- ---------- ------------------ ------------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $11,522 $12,273 $11,903
1989 $14,360 $14,658 $14,564
1990 $12,240 $12,477 $13,082
1991 $17,430 $18,303 $19,761
1992 $19,750 $21,266 $22,193
1993 $23,049 $24,783 $25,890
1994 $22,449 $24,521 $25,624
1995 $28,885 $32,295 $33,525
1996 $34,230 $38,441 $40,152
1997 $44,038 $47,804 $48,478
</TABLE>
Equity II Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
------------- ---------- ------------
<S> <C> <C>
1 Year $ 12,866 28.66%
5 Years $ 22,298 17.40%(S)
1O Years $ 44,038 15.98%(S)
</TABLE>
Russell 2500(TM) Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ---------- ------------
<S> <C> <C>
1 Year $ 12,436 24.36%
5 Years $ 22,479 17.59%(S)
l0 Years $ 47,804 16.94%(S)
</TABLE>
Lipper(C) Small Co. Growth Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ---------- ------------
<S> <C> <C>
1 Year $ 12,074 20.74%
5 Years $ 21,844 16.91%(S)
10 Years $ 48,478 17.10%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Russell 2500(TM) Index is composed of the bottom 500 stocks in the Russell
1000(R) Index and all the stocks in the Russell 2000(R) Index. The largest
security in this index has a market capitalization of about $5.7 billion.
+ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but gross
of any investment services fees. Information concerning these fees can be
obtained from the fund's managers upon request.
++ Lipper(C) Small Co. Growth Funds Average is the average total return for the
universe of funds within the Small Company Growth Funds investment
objective. The total return for the funds reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
(S) Annualized.
16 Equity II Fund
<PAGE>
Equity II Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Equity II Fund reflected a total
return of 28.7% as compared to the Russell 2500TM Index, which gained only
24.4%. The Fund's performance was even better relative to other small cap funds
tracked by Lipper Analytical Services. Although good security selection was the
primary factor in achieving positive returns, sector exposures also contributed
to the Fund's favorable results.
Portfolio Highlights
After outperforming large caps in the second and third quarters, the small
capitalization market appeared to be gaining momentum. However, the market's
flight to defensive stocks in the fourth quarter proved a decisive setback, with
the Russell 2000(R) Index gaining only 22.4% for the year versus the 32.9% gain
of the large and medium cap Russell 1000(R) Index. Despite fourth quarter
weakness, the Fund produced strong results for the year, with managers' security
selection accounting for the majority of the superior performance. Sector
allocations also contributed to positive returns, mainly due to the Fund's
overweightings in financial services and energy stocks during the year.
Investment style also had a strong influence on performance in the small cap
market. While the returns of small Value stocks rivaled large cap issues, small
Growth stocks trailed by a sizable margin. The Russell 2000(R) Value Index
gained 31.8% during the year, while its counterpart, the Russell 2000(R) Growth
Index rose only 12.9%. The Equity II Fund's Value managers contributed even
better gains than their benchmark, both up more than 40% for the year. The
Growth managers struggled through a difficult environment, although Fiduciary
International managed to produce returns exceeding their small cap growth
benchmark. Despite the dominance of larger cap stocks, the Fund's micro-cap
oriented manager, Wellington, also produced strong performance for the year.
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Fremont General Corp. 0.8%
City National Corp. 0.7
Ciber 0.6
Donaldson, Lufkin & Jenrette 0.6
Best Buy 0.6
American Bankers Insurance Group, Inc. 0.6
Earthgrains 0.6
Compuware Corp. 0.5
CBT Group PLC - ADR 0.5
AAR Corp. 0.5
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 21.8x
Portfolio Price/Book Ratio 3.09x
Market Capitalization - $-Weighted Average 1.47 Bil
Number of Holdings 838
Money Managers Styles
Delphi Management, Inc. Small Cap-Value
Fiduciary International, Inc. Small Cap-Growth
GlobeFlex Capital, L.P. Small Cap-Market-
Oriented
Jacobs Levy Equity Management, Inc. Small Cap-Value
Sirach Capital Management, Inc. Small Cap-Growth
Wellington Management Company LLP Small Cap-Market-
Oriented
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Equity II Fund 17
<PAGE>
Equity II Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Common Stocks - 93.8%
Auto and Transportation - 4.5%
AAR Corp. 64,800 $ 2,511
ABC Rail Products Corp. (a) 7,000 140
Aftermarket Technology Corp. (a) 25,000 453
Airborne Freight Corp. 34,500 2,143
AirNet Systems, Inc. (a) 7,800 168
Alaska Air Group, Inc. (a) 21,400 829
Alexander & Baldwin, Inc. 2,700 74
Arctic Cat, Inc. 4,300 42
Arvin Industries, Inc. 11,000 366
Avondale Industries, Inc. (a) 5,300 157
Barnes Group, Inc. 7,000 159
Borg-Warner Automotive, Inc. 9,100 473
Carey International, Inc. New (a) 8,000 121
Circle International Group, Inc. 3,300 76
Coachmen Industries, Inc. 47,000 1,013
Consolidated Freightways Corp. (a) 27,700 377
Control Devices, Inc. (a) 9,333 149
Excel Industries, Inc. 7,000 126
Fleetwood Enterprises, Inc. 16,200 687
FRP Properties, Inc. (a) 4,000 126
Hvide Marine, Inc. Class A (a) 16,900 427
Keystone Automotive Industries, Inc. (a) 6,000 143
Knight Transportation, Inc. (a) 4,000 104
Landair Services, Inc. (a) 6,000 138
M.S. Carriers, Inc. (a) 4,700 115
Mark VII, Inc. (a) 8,000 130
Midwest Express Holdings, Inc. (a) 2,900 113
MTL, Inc. (a) 37,500 947
Navistar International Corp. (a) 51,400 1,275
Offshore Logistics, Inc. (a) 64,200 1,372
Overseas Shipholding Group, Inc. 5,700 124
Pittston Burlington Group 5,100 134
Roadway Express, Inc. 8,700 193
Standard Motor Products, Inc. Class A 2,800 63
Trans World Airlines, Inc. New (a) 37,100 376
Transport Corp. of America (a) 10,000 158
Trinity Industries, Inc. 35,700 1,593
U.S. Xpress Enterprises, Inc. Class A (a) 23,000 500
US Airways Group, Inc. (a) 29,700 1,856
USFreightways Corp. 15,500 504
Wynn's International, Inc. 2,500 80
Yellow Corp. (a) 48,900 1,226
--------
21,761
--------
Consumer Discretionary - 16.3%
Abacus Direct Corp. (a) 9,800 402
Abercrombie & Fitch Co. Class A (a) 52,600 1,644
ABM Industries, Inc. 1,400 43
AccuStaff, Inc. (a) 77,200 1,776
American Eagle Outfitters, Inc. (a) 13,300 456
American Greetings Corp. Class A 51,100 1,999
Ames Department Stores, Inc. New (a) 13,400 229
Anchor Gaming (a) 14,100 783
Apple South 76,300 1,001
ARC International Corp. (a) 20,000 125
Ascent Entertainment Group, Inc. (a) 15,900 161
Authentic Fitness Corp. 9,300 171
Aviation Sales Co. (a) 2,600 98
Belo (A.H.) Corp. Class A 1,000 56
Best Buy Co. (a) 74,000 2,729
BJ's Wholesale Club, Inc. (a) 30,500 957
Bob Evans Farms, Inc. 9,405 208
Bowne & Co., Inc. 8,500 339
Buckle, Inc. (The)(a) 6,700 229
Burlington Coat Factory
Warehouse Corp. 61,200 1,006
Cameron Ashley Building Products, Inc. (a) 10,000 167
Caribiner International, Inc. (a) 18,500 823
Cash America International, Inc. 9,838 127
Catalytica, Inc. (a) 11,800 139
CellStar Corp. (a) 23,600 469
Central Newspapers, Inc. Class A 22,200 1,641
CIDCO, Inc. (a) 8,700 162
CKE Restaurants, Inc. 32,660 1,376
Claire's Stores, Inc. 42,400 824
Coinmach Laundry Corp. (a) 7,000 172
Cole National Corp. Class A (a) 4,000 120
Computer Horizons Corp. (a) 19,300 878
Consolidated Graphics, Inc. (a) 15,500 723
Cornell Corrections, Inc. (a) 8,000 166
CorporateFamily Solutions, Inc. (a) 2,300 48
Cox Radio, Inc. Class A (a) 2,200 89
Cross (A.T.) Co. Class A 4,900 50
Daisytek International Corp. (a) 4,000 139
Dan River, Inc. Class A (a) 9,000 148
Data Processing Corp. (a) 4,700 120
Department 56, Inc. (a) 8,100 233
DeVRY, Inc. (a) 36,000 1,148
Dollar Tree Stores, Inc. (a) 11,000 455
Dress Barn, Inc. (a) 14,700 412
Equity Corp. International (a) 35,000 809
Ethan Allen Interiors, Inc. 2,300 89
Extended Stay America, Inc. (a) 17,800 221
Fingerhut Cos., Inc. 27,400 586
First Brands Corp. 17,000 458
Footstar, Inc. (a) 12,600 339
Fossil, Inc. (a) 1,900 48
</TABLE>
18 Equity II Fund
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
General Nutrition Companies, Inc. (a) 28,100 $ 952
Genesco, Inc. (a) 29,200 372
Gibson Greetings, Inc. (a) 3,600 79
Goody's Family Clothing, Inc. (a) 31,700 862
Grand Casinos, Inc. (a) 33,100 451
Grey Advertising 4,000 1,312
Ha-Lo Industries, Inc. (a) 5,000 130
Handleman Co. (a) 3,300 23
Hearst-Argyle Television, Inc. (a) 8,000 235
Helen of Troy, Ltd. (a) 7,000 112
Homebase, Inc. (a) 26,400 208
Houghton Mifflin Co. 29,000 1,113
Huffy Corp. 3,000 41
InaCom Corp. (a) 21,900 615
Interim Services, Inc. (a) 9,500 246
Iron Mountain, Inc. (a) 4,000 144
Kellwood Co. 42,100 1,263
Kelly Services, Inc. Class A 3,100 93
Knight-Ridder, Inc. 21,000 1,092
Landry's Seafood Restaurants, Inc. (a) 7,500 180
Leather Factory, Inc. (a) 60,000 30
Lee Enterprises, Inc. 37,000 1,094
Linens `N Things, Inc. (a) 4,800 209
Lithia Motors, Inc., Class A (a) 9,100 126
Lo-Jack Corp. (a) 6,000 88
Lodgenet Entertainment Corp. (a) 7,000 76
Lone Star Steakhouse & Saloon (a) 43,600 763
Luby's Cafeterias, Inc. 3,700 65
Marcus Corp. 1,350 25
Maxim Group, Inc. (a) 10,000 156
Mazel Stores, Inc. (a) 10,000 146
McClatchy Newspapers, Inc. Class A 39,300 1,068
McGraw-Hill Companies, Inc. 12,700 940
Media General, Inc. Class A 5,900 247
Metzler Group, Inc. (a) 31,000 1,224
Movado Group, Inc. 73,312 1,677
Nautica Enterprises, Inc. (a) 46,700 1,086
North Face, Inc. (The) (a) 900 20
Nutramax Products, Inc. New (a) 8,000 104
O'Charleys, Inc. (a) 8,000 140
Ogden Corp. 20,700 583
On Assignment, Inc. (a) 43,000 1,107
Outdoor Systems, Inc. (a) 24,500 940
Oxford Industries, Inc. 2,400 78
Pacific Sunwear of California (a) 35,200 1,038
Paragon Trade Brands, Inc. (a) 2,400 31
Pegasus Communications Corp.
Class A (a) 7,600 155
Polo Ralph Lauren Corp.
Class A New (a) 27,000 656
Premark International, Inc. 26,200 760
Prime Hospitality Corp. (a) 57,800 1,178
Protection One, Inc. 9,000 100
Pulitzer Publishing Co. 16,000 1,005
RCM Technologies, Inc. (a) 8,000 134
RDO Equipment Co. Class A (a) 6,000 110
Recoton Corp. (a) 10,000 135
Red Roof Inns, Inc. (a) 11,400 175
Regis Corp. 5,000 126
Rent-Way, Inc. (a) 28,760 532
Richey Electronics, Inc. (a) 12,000 120
Rio Hotel & Casino, Inc. (a) 9,900 208
Robert Half International, Inc. (a) 32,800 1,312
RockShox, Inc. (a) 11,000 95
Rocky Shoes & Boots, Inc. (a) 2,700 40
Romac International, Inc. (a) 28,200 687
Ross Stores, Inc. 64,700 2,353
Ruby Tuesday, Inc. (a) 3,900 100
Rural/Metro Corp. (a) 3,500 117
Russ Berrie & Co., Inc. 5,200 136
Ryan's Family Steak Houses, Inc. (a) 124,100 1,063
Saga Communications Class A (a) 6,250 133
Schultz Sav-O Stores, Inc. 60,750 942
SCP Pool Corp. (a) 8,000 150
Select Appointments
Holdings PLC - ADR 50,000 912
SFX Broadcasting, Inc. Class A (a) 1,500 120
ShoLodge, Inc. (a) 8,000 124
Shopko Stores, Inc. (a) 54,100 1,177
Showbiz Pizza Time, Inc. (a) 44,500 1,023
Snyder Communications, Inc. New (a) 14,400 526
Spectrian Corp. (a) 7,000 135
Sport Supply Group, Inc. (a) 16,000 122
Strategic Distribution, Inc. (a) 35,410 159
Superior Services, Inc. (a) 31,500 910
The Men's Wearhouse, Inc. (a) 37,450 1,301
Tiffany & Co. 20,500 739
TJX Cos., Inc. 48,500 1,667
TRM Copy Centers Corp. (a) 10,000 89
Trump Hotels & Casino Resorts, Inc. (a) 25,000 167
Unisource Worldwide, Inc. 31,300 446
United Natural Foods, Inc. (a) 6,000 154
United Television, Inc. 7,400 762
Urban Outfitters, Inc. (a) 7,000 128
Valassis Communications, Inc. (a) 58,800 2,176
Video Update, Inc. Class A (a) 28,500 57
</TABLE>
Equity II Fund 19
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Wackenhut Corp. Class A 5,000 $ 116
Wackenhut Corrections Corp. (a) 37,000 994
Washington Post Co. Class B 3,600 1,751
Waste Industries, Inc. (a) 13,100 236
Windmere Durable Holdings, Inc. 2,200 50
Youth Services International, Inc. (a) 6,000 90
--------
78,828
--------
Consumer Staples - 3.8%
800 - JR CIGAR, Inc. (a) 24,000 600
American Italian Pasta Co. Class A (a) 12,300 307
Arbor Drugs, Inc. 45,000 832
Block Drug Co., Inc. Class A 18,419 783
Bush Boake Allen, Inc. (a) 600 16
Canandaigua Wine, Inc. Class A (a) 11,500 637
Church and Dwight Co., Inc. 4,600 129
Coca-Cola Bottling Co. Consolidated 16,000 1,084
Coors (Adolph) Co. Class B 36,000 1,193
Dean Foods Co. 19,700 1,172
Earthgrains Co. 57,400 2,698
Fleming Cos., Inc. 23,700 318
General Cigar Holdings, Inc. Class A (a) 18,900 403
IBP, Inc. 27,100 567
Ingles Markets, Inc. 3,700 53
International Multifoods Corp. 7,300 207
Michael Foods, Inc. 62,500 1,523
Nature's Sunshine Products, Inc. 5,000 130
Pilgrim's Pride Corp. 11,500 179
Smucker (J.M.) Co. 3,100 73
Standard Commercial Corp. (a) 8,000 133
Suiza Foods Corp. (a) 21,500 1,281
SuperValu, Inc. 19,900 833
Tootsie Roll Industries, Inc. 18,128 1,133
Universal Corp. 9,200 378
Universal Foods Corp. 9,300 393
Weider Nutrition International, Inc.
Class A 9,500 118
Whole Foods Market, Inc. (a) 27,600 1,411
--------
18,584
--------
Financial Services - 23.7%
Advanta Corp. Class A 15,300 400
ALBANK Financial Corp. 5,000 255
Allied Capital Corp. (a) 7,200 159
Allied Group, Inc. 3,375 97
Allmerica Financial Corp. 10,100 504
American Bankers Insurance Group, Inc. 58,800 2,701
American Heritage Life Investment Corp. 600 22
AmerUs Life Holdings, Inc. 2,200 81
Amplicon, Inc. 10,000 165
AMRESCO, Inc. (a) 41,000 1,215
Arcadia Financial, Ltd. (a) 9,300 69
Arden Realty Group, Inc. 30,000 922
ARM Financial Group, Inc. Class A 5,200 137
Associated Banc-Corp. 1,500 83
Astoria Financial Corp. 18,300 1,020
Bank United Corp. Class A 7,000 341
BankAtlantic Bancorp, Inc. 48,000 792
Bankatlantic Bancorp, Inc. Class A 28,112 459
Banknorth Group, Inc. 300 19
Bear Stearns Cos., Inc. 50,740 2,410
Berkley (W.R.) Corp. 9,450 415
BISYS Group, Inc. New (a) 16,000 532
Capital RE Corp. 2,500 155
Capstead Mortgage Corp. 17,100 341
Centris Group, Inc. 53,500 1,194
Centura Banks, Inc. 4,300 297
Charter One Financial, Inc. 22,081 1,386
Chartwell Re Corp. 2,700 91
Chittenden Corp. 2,125 72
CitiFed Bancorp, Inc. 2,250 88
City National Corp. 88,300 3,262
CNB Bancshares, Inc. 1,102 53
Colonial BancGroup, Inc. 47,500 1,636
Commerce Bancshares, Inc. 1,790 121
Commerce Group, Inc. 2,600 85
Community First Bankshares, Inc. 1,500 80
Compass Bancshares, Inc. 9,900 433
Conning Corp. New (a) 3,000 49
CORT Business Services Corp. (a) 28,800 1,147
Cullen Frost Bankers, Inc. 4,000 243
Dain Rauscher Corp. 8,400 580
Data Transmission Network Corp. (a) 6,000 166
Delphi Financial Group, Inc. (a) 5,304 239
Delta Financial Corp. (a) 8,700 116
Dime Community Bancorp, Inc. 2,700 64
Donaldson, Lufkin & Jenrette, Inc. 37,900 3,013
Donegal Group, Inc. 53,466 1,183
Doral Financial Corp. 6,000 147
Downey Financial Corp. 3,900 111
DST Systems, Inc. (a) 28,500 1,217
Duke Realty Investments, Inc. 36,000 873
Edwards (A.G.), Inc. 29,400 1,169
Enhance Financial Services Group, Inc. 4,600 274
EVEREN Capital Corp. 1,400 66
Everest Reinsurance Holdings, Inc. 11,600 478
Executive Risk, Inc. 23,000 1,606
</TABLE>
20 Equity II Fund
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
EXEL, Ltd. 17,000 $ 1,077
FBL Financial Group, Inc. Class A 2,200 88
Fidelity National Financial 72,953 2,271
Financial Fed Corp. (a) 6,500 154
Financial Security Assurance
Holdings, Ltd. 4,000 193
First American Corp. 23,700 1,179
First American Financial Corp. 2,900 214
First Commonwealth Financial Corp. 1,900 67
First Colorado Bankcorp, Inc. 4,300 102
First Hawaiian, Inc. 2,500 99
First Midwest Bancorp, Inc. 1,300 57
First Mortgage Corp. (a) 15,200 54
First Republic Bank (a) 6,000 192
First Savings Bank of
Washington Bancorp, Inc. 2,300 62
First Virginia Banks, Inc. 6,900 357
FirstFed Financial Corp. (a) 3,100 120
FIRSTPLUS Financial Group, Inc. (a) 55,300 2,108
Flushing Financial Corp. 6,200 146
Fremont General Corp. 72,550 3,972
Guarantee Life Companies, Inc. 1,800 50
Hambrecht & Quist Group (a) 2,000 73
Hibernia Corp. 23,600 444
Highlands Insurance Group, Inc. (a) 3,900 111
Horace Mann Educators Corp. 14,600 415
HUBCO, Inc. 1,500 59
Imperial Bancorp (a) 34,770 1,715
Imperial Credit Industries, Inc. (a) 68,016 1,394
Intercargo Corp. 10,000 129
Jack Henry & Associates, Inc. 45,000 1,226
Jefferies Group, Inc. 40,000 1,637
John Alden Financial Corp. 21,300 511
JSB Financial, Inc. 1,100 55
Klamath First Bancorp, Inc. 500 11
Lawyers Title Corp. 37,400 1,176
Legg Mason, Inc. 24,000 1,342
Lehman Brothers Holdings, Inc. 22,100 1,127
Leucadia National Corp. 30,000 1,035
Liberty Corp. 1,100 51
Liberty Financial Cos., Inc. 1,500 57
Life USA Holdings, Inc. New (a) 9,000 152
Litchfield Financial Corp. 7,350 134
Long Beach Financial Corp. (a) 33,500 389
Long Island Bancorp, Inc. 6,900 342
MAF Bancorp, Inc. 41,700 1,475
Magna Group, Inc. 7,000 320
Markel Corp. (a) 12,500 1,952
McDonald & Co. Investments 4,900 139
Medical Assurance, Inc. (a) 800 22
Mercantile Bankshares Corp. 4,850 186
Mid Ocean, Ltd. 19,500 1,058
MMI Companies, Inc. 3,700 93
Morgan Keegan, Inc. 51,400 1,301
NAC Reinsurance Corp. 9,900 483
National Data Corp. 28,000 1,011
Nationwide Financial
Services, Inc. Class A 21,300 769
North Fork Bancorporation, Inc. 23,100 775
Ocean Financial Corp. 2,300 85
Ocwen Financial Corp. (a) 37,400 951
Ohio Casualty Corp. 6,100 272
Old Republic International Corp. 16,900 628
One Valley Bancorp of West Virginia, Inc. 462 18
Orion Capital Corp. 6,600 306
Pacific Century Financial Corp. 25,300 626
Pacific Gulf Properties, Inc. 5,000 119
Patriot American Hospitality, Inc. 39,000 1,124
Paychex, Inc. 26,250 1,329
Penn Treaty American Corp. (a) 4,000 127
Pennsylvania Real Estate
Investment Trust 5,000 123
Peoples Heritage Financial Group 33,812 1,555
Pioneer Group, Inc. 2,500 69
Popular, Inc. 34,000 1,674
Presidential Life Corp. 6,900 140
Price (T. Rowe) & Associates, Inc. 20,000 1,258
Provident Bankshares Corp. 2,523 161
Provident Financial Group, Inc. 16,150 783
PXRE Corp. 38,486 1,277
Queens County Bancorp 5,998 237
Raymond James Financial, Inc. 35,500 1,409
Reliance Bancorp, Inc. 2,000 73
RenaissanceRe Holdings, Ltd. 30,500 1,346
Republic Bancorp, Inc. 4,290 92
Riggs National Corp. 6,400 172
RLI Corp. 3,800 189
Rollins Truck Leasing Corp. 8,800 157
Roslyn Bancorp, Inc. 15,100 351
Saville Systems Ireland PLC - ADR (a) 37,000 1,533
Selective Insurance Group, Inc. 49,200 1,328
Silicon Valley Bancshares (a) 23,500 1,310
SL Green Realty Corp. REIT 12,000 311
Smith (Charles E.) Residential
Realty, Inc. 29,000 1,030
Sotheby's Holdings Co., Inc. Class A 45,000 833
</TABLE>
Equity II Fund 21
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ --------
<S> <C> <C>
Southern Pacific Funding Corp. (a) 12,000 $ 158
SouthTrust Corp. 17,500 1,107
Sovereign Bancorp, Inc. 67,106 1,392
Sovran Self Storage, Inc. 27,500 892
St. Francis Capital Corp. 3,000 152
St. Paul Bancorp, Inc. 11,550 302
SunAmerica, Inc. 32,000 1,368
Sunstone Hotel Investors, Inc. 21,500 371
Susquehanna Bancshares, Inc. 1,500 57
T R Financial Corp. 11,200 372
TCF Financial Corp. 48,000 1,629
TIG Holdings, Inc. 5,600 186
Trans Financial, Inc. 1,900 73
Transatlantic Holdings, Inc. 29,550 2,113
Trenwick Group, Inc. 36,000 1,301
UICI (a) 5,400 188
Union Planters Corp. 20,002 1,359
United Bankshares, Inc. 1,200 57
United Companies Financial Corp. 24,200 375
United Fire & Casualty Co. 25,575 1,132
Unitrin, Inc. 4,900 315
USF&G Corp. 27,100 598
Valley National Bancorp 2,310 91
Vesta Insurance Group, Inc. 23,500 1,395
Washington Federal, Inc. 9,120 287
Webster Financial Corp. 22,200 1,474
Westamerica Bancorporation 15,200 1,554
WFS Financial, Inc. (a) 7,800 88
Whitney Holding Corp. 1,000 57
XTRA Corp. 2,400 141
--------
114,144
--------
Health Care - 7.7%
Access Health, Inc. (a) 20,000 580
Alpharma, Inc. Class A 5,800 126
American HomePatient, Inc. (a) 5,600 129
ARV Assisted Living, Inc. (a) 10,000 160
Assisted Living Concepts, Inc. (a) 8,000 158
ATL Ultrasound, Inc. (a) 26,000 1,196
Beckman Instruments, Inc. 8,500 340
Beverly Enterprises, Inc. New (a) 14,400 187
Bindley Western Industries, Inc. 12,600 389
Biogen, Inc. (a) 21,000 764
Centocor, Inc. (a) 27,500 914
Concentra Managed Care, Inc. (a) 22,400 753
CorVel Corp. (a) 4,000 151
Coventry Corp. (a) 51,900 791
Curative Health Services, Inc. (a) 39,000 1,185
Datascope Corp. (a) 6,100 158
DENTSPLY International, Inc. 40,000 1,220
Diagnostic Products Corp. 2,200 61
Dura Pharmaceuticals, Inc. (a) 38,900 1,785
Genset - ADR (a) 22,000 429
Health Care & Retirement Corp.(a) 26,500 1,067
Health Management Associates Class A (a) 52,500 1,326
Healthcare Services Group, Inc. (a) 10,000 126
Home Health Corp. of America, Inc. (a) 14,000 143
Hooper Holmes, Inc. 8,000 116
Human Genome Sciences, Inc. (a) 15,500 616
ICN Pharmaceuticals, Inc. 41,700 2,035
IDEXX Laboratories, Inc. (a) 15,600 249
Immucor Corp. (a) 15,000 128
Incyte Pharmaceuticals, Inc. (a) 20,000 875
Integrated Health Services, Inc. 25,200 786
Jones Medical Industries, Inc. 5,700 218
Landauer, Inc. 5,300 148
Lincare Holdings, Inc. (a) 41,500 2,365
Mallinckrodt, Inc. 10,500 399
Mariner Health Group, Inc. (a) 12,300 200
Maxxim Medical, Inc. (a) 5,000 109
Medicis Pharmaceutical Corp. Class A (a) 27,500 1,409
Monarch Dental Corp. New (a) 9,000 119
NCS HealthCare, Inc. Class A (a) 20,500 538
Neurogen Corp. (a) 1,700 23
NovaCare, Inc. (a) 105,600 1,379
Paragon Health Network, Inc. (a) 8,796 172
Pediatric Services of America, Inc. (a) 6,500 119
Pediatrix Medical Group (a) 12,500 534
Perrigo Co. (a) 33,200 444
PharMerica, Inc. (a) 6,553 68
Physio-Control International Corp. (a) 9,000 142
Physiometrix, Inc. (a) 25,000 50
PMR Corp. (a) 2,900 58
Protocol Systems, Inc. (a) 9,000 91
Quest Diagnostics, Inc. (a) 12,300 208
Quintiles Transnational Corp. (a) 35,000 1,347
Renal Treatment Centers, Inc. (a) 29,600 1,069
Res-Care, Inc. (a) 6,000 171
Respironics, Inc.(a) 6,000 134
Scios, Inc. (a) 5,400 54
Sola International, Inc. (a) 37,000 1,203
STAAR Surgical Co. New (a) 8,000 138
Steris Corp. (a) 16,000 772
Sun Healthcare Group, Inc. (a) 19,100 370
Sunrise Assisted Living, Inc. (a) 36,800 1,569
Theragenics Corp. (a) 9,100 328
Total Renal Care Holdings, Inc. (a) 28,500 784
</TABLE>
22 Equity II Fund
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ --------
<S> <C> <C>
Trigon Healthcare, Inc. (a) 24,700 $ 645
U.S. Vision, Inc. New (a) 12,000 107
Universal Health Services, Inc. Class B (a) 5,800 292
UroCor, Inc. (a) 18,000 111
Urologix, Inc. (a) 6,000 109
Wesley Jessen VisionCare, Inc. New (a) 5,000 195
--------
37,134
--------
Integrated Oils - 0.9%
Cabot Oil & Gas Corp. 10,900 212
Cross Timbers Oil Co. 48,750 1,216
Giant Industries, Inc. 46,700 887
Houston Exploration Co. (The) (a) 13,000 239
Lyondell Petrochemical Co. 10,800 286
Sun Co., Inc. 26,800 1,127
Tesoro Petroleum Corp. (a) 12,300 191
--------
4,158
--------
Materials and Processing - 7.7%
ACX Technologies, Inc. (a) 7,600 186
Agrium, Inc. 76,500 932
AK Steel Holding Corp. 23,100 409
Albemarle Corp. 12,300 294
Alumax, Inc. (a) 8,200 279
American Buildings Co. New (a) 5,000 126
American Residential Services, Inc. (a) 7,800 122
Applied Extrusion Technologies, Inc. (a) 12,000 78
AptarGroup, Inc. 26,700 1,482
ARMCO, Inc. (a) 43,200 213
Atchenson Casting Corp. (a) 6,000 98
Ball Corp. 10,300 364
Banta Corp. 26,400 713
Bowater, Inc. 15,900 707
Building Materials Holding Corp. (a) 8,000 84
BWay Corp. (a) 7,000 160
CalMat Co. 8,000 223
Cambrex Corp. 2,750 126
Carbide/Graphite Group, Inc. (The) (a) 4,000 135
Castle & Cook, Inc. New (a) 6,000 101
Centex Construction Products, Inc. 46,200 1,392
Centex Corp. 22,400 1,410
Channell Commercial Corp. (a) 8,000 96
Chemed Corp. 3,500 145
Citation Corp. (a) 12,200 198
Cleveland-Cliffs, Inc. 6,800 312
Comfort Systems USA, Inc. (a) 35,300 697
Consolidated Papers, Inc. 7,900 422
Crompton & Knowles Corp. 26,100 692
Cyprus Amax Minerals Co. 50,300 773
Dayton Superior Corp. Class A (a) 4,400 73
Deltic Timber Corp. 2,900 79
Dexter Corp. 10,900 471
Easco, Inc. 11,000 143
Ennis Business Forms, Inc. 47,450 439
Finish Line (The), Inc. Class A (a) 10,000 131
Florida Rock Industries, Inc. 4,000 91
Fort James Corp. 13,750 526
Giant Cement Holding, Inc. (a) 5,700 131
Guilford Mills, Inc. 7,400 203
Halter Marine Group, Inc. (a) 23,550 680
Hanna (M.A.) Co. 100 3
Hecla Mining Co. (a) 23,400 116
Home Properties of New York, Inc. REIT 4,000 109
Hughes Supply, Inc. 7,500 262
IMCO Recycling, Inc. 6,000 96
Inland Steel Industries, Inc. 4,200 72
International Specialty Products (a) 7,000 105
Kaiser Aluminum Corp. (a) 10,000 88
Kaydon Corp. 16,800 548
Lesco, Inc. 6,000 121
Lone Star Industries, Inc. 20,800 1,105
LTV Corp. 36,600 357
Lubrizol Corp. 13,300 490
Martin Marietta Materials, Inc. 10,600 387
Maverick Tube Corp. (a) 39,300 977
McWhorter Technologies, Inc. (a) 1,800 46
Millennium Chemicals, Inc. 30,900 728
Minerals Technologies, Inc. 27,200 1,236
Mueller Industries, Inc. (a) 1,700 100
National Steel Corp. Class B (a) 17,500 202
NCI Building Systems, Inc. (a) 26,800 931
NL Industries, Inc. (a) 4,200 57
NN Ball & Roller, Inc. 8,000 71
Northland Cranberries, Inc. Class A 7,000 108
Olin Corp. 21,700 1,017
Oneida, Ltd. 3,750 100
Pan Pacific Retail Properties, Inc. 7,000 150
Penford Corp. 4,000 137
Plum Creek Timber Co. L.P. 26,800 809
Pope & Talbot, Inc. 5,900 89
Potlatch Corp. 8,600 370
Quaker Fabric Corp. New (a) 7,000 135
Rayonier, Inc. 9,000 383
Reliance Steel & Aluminum Co. 1,800 54
RMI Titanium Co. (a) 1,800 36
Rock of Ages Corp. Class A (a) 2,000 30
</TABLE>
Equity II Fund 23
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ --------
<S> <C> <C>
Rock-Tenn Co. Class A 1,500 $ 31
Schulman (A.), Inc. 12,500 314
Shaw Group, Inc. (The) (a) 3,300 76
SIFCO Industries 55,000 1,052
Southdown, Inc. 20,000 1,180
Southern Peru Copper Corp. 6,700 90
SPS Technologies, Inc. (a) 1,800 78
St. Joe Corp. 9,400 851
Synalloy Corp. 7,000 103
Texas Industries, Inc. 41,400 1,863
Thomas Industries, Inc. 2,700 53
Timken Co. 16,000 550
TJ International, Inc. 24,200 590
Tractor Supply Co. (a) 6,000 83
Triangle Pacific Corp. (a) 1,700 58
Universal Stainless & Alloy
Products, Inc. (a) 9,000 129
USG Corp. (a) 24,900 1,220
Valley National Gases, Inc. (a) 12,000 128
Webb (Del E.) Corp. 7,700 200
Weilman, Inc. 18,200 355
Wellsford Real Properties, Inc. (a) 4,600 72
Wolverine Tube, Inc. (a) 5,000 155
Zero Corp. 5,000 148
--------
36,940
--------
Miscellaneous - 0.8%
Griffon Corp. (a) 77,600 1,135
Imperial Credit Commercial
Mortgage Investment Corp. 40,900 598
Imperial Credit Mortgage Holdings 11,850 212
LNR Property Corp. 33,000 779
MAXIMUS, Inc. (a) 31,000 750
Pameco Corp. (a) 7,000 133
Rental Service Corp. (a) 4,000 98
U.S. Rentals, Inc. (a) 5,400 127
--------
3,832
--------
Other Energy - 5.5%
Atwood Oceanics, Inc. (a) 14,200 673
Basin Exploration, Inc. (a) 63,000 1,110
BJ Services Co. (a) 17,500 1,259
Cliffs Drilling Co. (a) 17,400 868
Coho Energy, Inc. (a) 13,181 118
Comstock Resources, Inc. New (a) 31,000 370
Costilla Energy, Inc. (a) 10,000 109
Eastern Enterprises, Inc. 8,100 365
ENSCO International, Inc. 32,624 1,093
Evergreen Resources, Inc. (a) 8,000 124
EVI, Inc. (a) 21,400 1,107
Helmerich & Payne, Inc. 12,900 876
HS Resources, Inc. (a) 4,800 66
Hugoton Energy Corp. (a) 10,000 92
Input/Output, Inc. (a) 47,800 1,419
KeySpan Energy Corp. 8,500 313
Louis Dreyfus Natural Gas Corp. (a) 6,200 116
Mallon Resources Corp. New (a) 12,000 98
Marine Drilling Co, Inc. (a) 113,600 2,357
Mitcham Industries, Inc. (a) 6,000 109
Newpark Resources, Inc. (a) 40,800 714
OMNI Energy Services Corp. New (a) 6,000 69
Parallel Petroleum Corp. (a) 7,300 48
Patterson Energy, Inc. (a) 20,500 793
Pool Energy Services Co. (a) 64,800 1,442
Reading & Bates Corp. (a) 17,500 733
Rowan Cos., Inc. (a) 28,400 866
Santa Fe Energy Resources, Inc. (a) 21,800 245
Seacor Smit, Inc. (a) 28,200 1,699
Stolt Comex Seaway SA (a) 23,700 1,149
Supreme Industries, Inc. Class A (a) 16,537 149
Titan Exploration, Inc. New (a) 14,900 142
Transocean Offshore, Inc. 24,000 1,156
Trico Marine Services, Inc. (a) 73,100 2,147
Tuboscope Corp. (a) 17,000 409
Vintage Petroleum, Inc. 69,100 1,313
Willbros Group, Inc. (a) 6,000 90
Wiser Oil Co. 51,500 727
--------
26,533
--------
Producer Durables - 6.8%
AFC Cable Systems, Inc. (a) 8,100 235
Allied Waste Industries, Inc. (a) 41,700 972
ANTEC Corp. (a) 10,000 156
Bell Industries (a) 48,129 662
C&D Technologies, Inc. 3,000 145
CFM Technologies, Inc. (a) 8,000 122
Cognex Corp. (a) 31,300 853
Cohu, Inc. 50,700 1,553
Columbus McKinnon Corp. 39,000 946
Commercial Intertech Corp. 1,000 21
Computer Products, Inc. (a) 31,000 701
Cuno, Inc. (a) 6,000 91
DeCrane Aircraft Holdings, Inc. (a) 5,700 91
FARO Technologies, Inc. (a) 10,000 116
Farr Co. (a) 9,000 135
FLIR Systems, Inc. (a) 3,200 65
</TABLE>
24 Equity II Fund
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ --------
<S> <C> <C>
Flow International Corp. (a) 10,000 $ 94
Franklin Electric Co., Inc. 2,500 153
Gardner Denver Machinery, Inc. (a) 44,700 1,131
Gemstar International Group, Ltd. (a) 47,000 1,116
GenCorp, Inc. 13,800 345
General Cable Corp. New 15,100 546
Graco, Inc. 2,300 86
Holophane Corp. (a) 6,000 149
JLG Industries, Inc. 10,400 147
JLK Direct Distribution, Inc. Class A (a) 35,200 986
Kaman Corp. Class A 8,000 131
Kellstrom Industries, Inc. (a) 12,300 304
Kennametal, Inc. 3,200 166
KLA Tencor Corporation (a) 20,400 787
Knoll, Inc. (a) 8,300 267
Lennar Corp. 91,900 1,982
Litton Industries, Inc. (a) 17,900 1,029
Mettler-Toledo International, Inc. New (a) 4,900 85
Middleby Corp. (The) (a) 5,100 40
Molex, Inc. Class A 37,500 1,078
NACCO Industries, Inc. Class A 11,400 1,222
National Service Industries, Inc. 10,300 510
Novellus Systems, Inc. (a) 16,500 533
OmniQuip International, Inc. 1,000 20
OYO Geospace Corp. (a) 7,000 130
Pittway Corp. Class A 19,561 1,362
Powell Industries, Inc. (a) 8,000 115
Pulte Corp. 8,200 343
Regal-Beloit Corp. 33,000 976
Ryland Group, Inc. 3,300 78
Schult Homes Corp. 4,200 87
Standard Pacific Corp. 76,400 1,203
Starrett (L.S.) Co. Class A 23,000 841
STM Wireless, Inc. Class A (a) 12,000 101
Superior TeleCom, Inc. (a) 6,000 207
TB Wood's Corporation 8,000 170
Tecumseh Products Co. Class A 3,700 180
Teradyne, Inc. (a) 53,700 1,718
Terex Corp. New (a) 53,500 1,257
Thiokol Corp. 12,700 1,032
Toll Brothers, Inc. (a) 40,000 1,070
TransTechnology Corp. 4,300 122
Triumph Group, Inc. New (a) 5,000 166
Uniphase Corp. (a) 38,000 1,558
Worldtex, Inc. (a) 15,000 119
Zurn Industries, Inc. 5,500 173
--------
32,779
--------
Technology - 12.5%
ADC Telecommunications, Inc. (a) 12,000 $ 501
Anixter International, Inc. (a) 14,700 243
Apex PC Solutions, Inc. (a) 4,100 88
Aspen Technology, Inc. (a) 27,500 932
Avant ! Corp. (a) 39,100 655
Avid Technology, Inc. (a) 36,800 984
BEA Systems, Inc. (a) 5,200 90
Bel Fuse, Inc. (a) 8,000 153
Benchmark Electronics, Inc. (a) 2,700 60
Berg Electronics Corp. (a) 52,000 1,183
BGS Systems, Inc. 3,000 102
Boole & Babbage, Inc. (a) 4,500 134
BTG, Inc. (a) 10,000 99
Cable Design Technologies Corp. (a) 42,200 1,641
CACI. International, Inc. Class A (a) 9,000 177
Cambridge Technology Partners, Inc. (a) 40,000 1,665
CBT Group PLC - ADR (a) 31,100 2,546
Celeritek, Inc. (a) 10,000 137
CFI ProServices, Inc. (a) 10,000 120
CHS Electronics, Inc. (a) 44,000 737
Ciber, Inc. (a) 52,700 3,057
Cirrus Logic, Inc. (a) 9,700 103
Citrix Systems, Inc. (a) 14,300 1,087
Comarco, Inc. (a) 5,000 108
Complete Business Solutions, Inc. (a) 2,000 86
Compuware Corp. (a) 80,500 2,576
Cotelligent Group, Inc. (a) 5,000 95
Creative Technology, Ltd. (a) 31,100 680
CSG Systems International, Inc. (a) 5,000 200
Dallas Semiconductor Corp. 22,500 917
Datum, Inc. (a) 2,600 37
Davox Corp. (a) 27,500 887
Digital Lightwave, Inc. (a) 7,400 97
Discreet Logic, Inc. (a) 19,000 404
Dr. Solomon's Group PLC - ADR (a) 40,000 1,270
Electro Scientific Industries, Inc. (a) 23,000 874
Electronics For Imaging, Inc. (a) 18,000 298
Esterline Technologies Corp. (a) 5,800 209
Evans & Sutherland Computer Corp. (a) 1,500 43
Exar Corp. (a) 6,000 98
GeoTel Communications Corp. (a) 4,200 66
Globecomm Systems, Inc. (a) 11,400 128
Harmon Industries, Inc. 5,000 135
Harmonic Lightwaves, Inc. (a) 10,000 109
HNC Software, Inc. (a) 57,600 2,470
Hyperion Software Corp. (a) 56,300 2,013
IDX Systems Corp. (a) 22,400 829
</TABLE>
Equity II Fund 25
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------ -------
<S> <C> <C>
Information Management
Resources, Inc. (a) 35,200 $ 1,320
Integrated Device Technology (a) 41,100 385
Integrated Silicon Solution, Inc. (a) 85,300 650
Inter-Tel, Inc. 3,800 74
Intersolv, Inc. (a) 66,900 1,355
Keane, Inc. (a) 15,300 622
Kronos, Inc. (a) 5,300 162
LSI Logic Corp. (a) 46,200 912
Mercury Interactive Corp. (a) 27,500 729
MicroAge, Inc. (a) 21,900 330
Midway Games, Inc. (a) 4,100 75
National Computer Systems, Inc. 600 21
Network Associates, Inc. (a) 26,950 1,420
Newport News Shipbuilding, Inc. 15,800 402
ORBIT/FR, Inc. (a) 9,000 145
OSI Systems, Inc. New (a) 10,000 121
Par Technology Corp. (a) 15,000 136
Park Electrochemical Corp. 4,000 114
PeopleSoft, Inc. (a) 40,000 1,550
Pericom Semiconductor Corp. New (a) 14,000 98
Photronics, Inc. (a) 4,000 97
Platinum Technology, Inc. (a) 41,500 1,172
PMC - Sierra, Inc. (a) 12,500 388
Progress Software Corp. (a) 2,000 43
Sandisk Corp. (a) 3,000 60
ScanSource, Inc. (a) 6,000 119
SCI Systems, Inc. (a) 24,200 1,054
SeaChange International, Inc. (a) 12,000 84
Security Dynamics Technologies, Inc. (a) 29,000 1,037
Sequent Computer Systems, Inc. (a) 28,500 570
SMART Modular Technologies, Inc. (a) 39,800 905
SmarTalk Teleservices, Inc. (a) 47,000 1,069
SpecTran Corp. (a) 12,000 116
Splash Technology Holdings, Inc. (a) 28,000 630
STAR Telecommunications, Inc. (a) 17,100 549
Storage Technology Corp. (a) 23,600 1,462
Structural Dynamics Research Corp. (a) 26,200 590
Symantec Corp. (a) 47,500 1,042
Tech-Sym Corp. (a) 26,700 679
Tellabs, Inc. (a) 18,000 948
Tracor, Inc. New (a) 6,600 200
Transaction Systems
Architects, Inc. Class A (a) 18,500 698
USCS International, Inc. (a) 30,000 510
Verilink Corp. (a) 22,000 132
Veritas Software Corp. (a) 46,343 2,346
Viasoft, Inc. (a) 33,100 1,398
Vitesse Semiconductor Corp. (a) 19,700 744
Wonderware Corp. (a) 9,500 134
-------
60,520
-------
Utilities - 3.6%
Aliant Communications, Inc. 5,000 157
American Water Works, Inc. 100 3
Aquarion Co. 1,000 35
Black Hills Corp. 1,000 35
Boston Edison Co. 15,600 591
Cablevision Systems Corp. Class A (a) 6,200 594
Centennial Cellular Corp. Class A (a) 59,000 1,187
Central Hudson Gas & Electric Corp. 4,400 193
Central Louisiana Electric Co., Inc. 4,600 149
Central Maine Power Co. 7,200 110
Citizens Utilities Co. Class B (a) 19,834 191
Colonial Gas Co. 800 23
Commonwealth Energy System 2,000 66
Commonwealth Telephone
Enterprises, Inc. (a) 5,000 129
Connecticut Energy Corp. 1,700 51
Corecomm, Inc. (a) 56,000 574
CTG Resources, Inc. 3,700 96
Delmarva Power & Light Co. 12,200 281
DPL, Inc. 3,000 86
E'town Corp. 300 12
Empire District Electric Co. 2,100 41
Energen Corp. 1,700 68
Enova Corp. 21,400 579
General Communication, Inc. Class A (a) 16,000 106
Idaho Power Co. 7,000 263
Illinova Corp. 7,400 199
Indiana Energy, Inc. 3,100 102
IXC Communications, Inc. (a) 23,300 731
Jones Intercable, Inc. Class A (a) 67,700 1,189
Laclede Gas Co. 1,100 31
MDU Resources Group, Inc. 3,700 117
Metrocall, Inc. (a) 31,500 156
MidAmerican Energy Holdings Co. 15,300 337
Minnesota Power & Light Co. 7,800 340
Montana Power Co. 23,500 748
National Fuel & Gas Co. 9,500 463
Nevada Power Co. 1,300 35
New England Electric System 17,600 752
</TABLE>
26 Equity II Fund
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
New Jersey Resources Corp. 2,600 $ 104
New York State Electric & Gas Corp. 20,000 710
Niagara Mohawk Power Corp. (a) 45,900 482
NICOR, Inc. 3,700 156
Northwestern Public Service Co. 2,000 46
NUI Corp. 1,200 34
Pacific Gateway Exchange, Inc. (a) 4,800 258
Pennsylvania Enterprises, Inc. 1,700 43
Peoples Energy Corp. 8,400 331
Piedmont Natural Gas Co., Inc. 4,005 144
Primus Telecommunications Group, Inc. (a) 7,600 123
Public Service Co. of New Mexico 18,100 429
Public Service Co. of North Carolina, Inc. 1,700 39
Rochester Gas & Electric Corp. 17,400 592
SIG Corp., Inc. 2,500 73
Southwestern Energy Co. 6,000 77
TNP Enterprises, Inc. 7,900 263
UGI Corp. 9,500 278
United Illuminating Co. 5,800 266
UtiliCorp United, Inc. 20,600 800
Washington Gas & Light Co. 7,700 238
Western Resources, Inc. 15,600 671
WPS Resources Corp. 5,400 183
--------
17,160
--------
Total Common Stocks
(cost $352,200) 452,373
--------
Convertible Preferred Stocks - 0.1%
Callon Petroleum Co. Series A 2,000 77
Golden Books Financial Trust (conv.) 2,500 131
--------
Total Convertible Preferred Stocks
(cost $195) 208
--------
Preferred Stock - 0.2%
Finova Finance Trust 13,000 910
--------
Total Preferred Stock
(cost $654) 910
--------
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- --------
<S> <C> <C>
Long-Term Investments - 0.0%
Central Garden & Pet Co. (conv.)
6.000% due 11/15/03 $ 108 $ 113
Titan Corp. (conv.)
8.250% due 11/01/03 52 84
--------
Total Long-Term Investments
(cost $160) 197
--------
Short-Term Investments - 6.2%
Frank Russell Investment Company
Money Market Fund,
due on demand (b) 28,319 28,319
United States Treasury Notes (c)
5.125% due 04/30/98 1,550 1,548
--------
Total Short-Term Investments
(cost $29,868) 29,867
--------
Total Investments
(identified cost $383,077)(d) - 100.3% 483,555
Other Assets and Liabilities,
Net - (0.3%) (1,396)
--------
Net Assets - 100.0% $482,159
========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
L.P. - Limited Partnership
PLC - Public Limited Company
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
Equity II Fund 27
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S&P 400 Midcap Index Futures Contracts
expiration date 03/98 122 $ 189
S&P 500 Index Futures Contracts
expiration date 03/98 24 15
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 204
==============
</TABLE>
((S))At December 31, 1997, United States Treasury Notes valued at $1,548 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
28 Equity II Fund
<PAGE>
Equity II Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $383,077)(Note 2).................................................... $ 483,555
Cash........................................................................................................ 127
Receivables:
Dividends and interest.................................................................................. 434
Investments sold........................................................................................ 1,567
Fund shares sold........................................................................................ 1,333
Daily variation margin on futures contracts (Notes 2 and 3)............................................. 84
--------------------
Total Assets......................................................................................... 487,100
Liabilities
Payables:
Investments purchased............................................................. $ 2,331
Fund shares redeemed.............................................................. 2,185
Accrued fees to affiliates (Note 4)............................................... 344
Other accrued expenses............................................................ 81
------------------
Total Liabilities.................................................................................... 4,941
--------------------
Net Assets.................................................................................................. $ 482,159
====================
Net Assets consist of:
Undistributed net investment income......................................................................... $ 230
Accumulated net realized gain (loss)........................................................................ 2,274
Unrealized appreciation (depreciation) on:
Investments.............................................................................................. 100,478
Futures contracts........................................................................................ 204
Shares of beneficial interest............................................................................... 146
Additional paid-in capital.................................................................................. 378,827
--------------------
Net Assets.................................................................................................. $ 482,159
====================
Net Asset Value, offering and redemption price per share:
($482,158,859 divided by 14,626,941 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 32.96
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity II Fund 29
<PAGE>
Equity II Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Dividends............................................................................................... $ 3,907
Dividends from Money Market Fund (Note 5)............................................................... 1,468
Interest................................................................................................ 107
--------------------
Total Investment Income.............................................................................. 5,482
Expenses (Notes 2 and 4):
Management fees................................................................... $ 3,227
Custodian fees.................................................................... 355
Transfer agent fees............................................................... 259
Bookkeeping service fees.......................................................... 25
Professional fees................................................................. 18
Registration fees................................................................. 37
Trustees' fees.................................................................... 4
Miscellaneous..................................................................... 37
------------------
Total Expenses....................................................................................... 3,962
--------------------
Net investment income....................................................................................... 1,520
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments....................................................................... 56,547
Futures contracts................................................................. 5,190
Options written................................................................... 19 61,756
------------------
Net change in unrealized appreciation or depreciation of:
Investments....................................................................... 48,451
Futures contracts................................................................. 70
Options written................................................................... (8) 48,513
------------------ --------------------
Net gain (loss) on investments.............................................................................. 110,269
--------------------
Net increase (decrease) in net assets resulting from operations............................................. $ 111,789
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
30 Equity II Fund
<PAGE>
Equity II Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
--------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.......................................................... $ 1,520 $ 1,711
Net realized gain (loss)....................................................... 61,756 40,938
Net change in unrealized appreciation or depreciation.......................... 48,513 13,891
--------------- --------------
Net increase (decrease) in net assets resulting from operations.............. 111,789 56,540
--------------- --------------
From Distributions to Shareholders:
Net investment income.......................................................... (1,485) (1,695)
Net realized gain on investments............................................... (65,718) (40,870)
--------------- --------------
Total Distribution to Shareholders........................................... (67,203) (42,565)
--------------- --------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6).... 71,618 72,414
--------------- --------------
Total Net Increase (Decrease) in Net Assets...................................... 116,204 86,389
Net Assets
Beginning of period............................................................ 365,955 279,566
--------------- --------------
End of period (including undistributed net investment income of $230 and $195,
respectively)................................................................ $ 482,159 $ 365,955
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity II Fund 31
<PAGE>
Equity II Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................................... $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income...................................................... .11 .16 .27 .36 .32
Net realized and unrealized gain (loss) on investments..................... 8.11 4.96 6.80 (.86) 3.97
------- ------- ------- ------- -------
Total Income From Investment Operations.................................. 8.22 5.12 7.07 (.50) 4.29
------- ------- ------- ------- -------
Less Distributions:
Net investment income...................................................... (.11) (.16) (.29) (.31) (.31)
Net realized gain on investments........................................... (5.20) (3.79) (2.90) (.21) (4.72)
In excess of net realized gain on investments.............................. -- -- -- (.56) (.39)
------- ------- ------- ------- -------
Total Distributions..................................................... (5.31) (3.95) (3.19) (1.08) (5.42)
------- ------- ------- ------- -------
Net Asset Value, End of Period................................................. $ 32.96 $ 30.05 $ 28.88 $ 25.00 $ 26.58
======= ======= ======= ======= =======
Total Return (%)(a)............................................................ 28.66 18.51 28.67 (2.60) 16.70
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................................... 482,159 365,955 279,566 202,977 171,421
Ratios to average net assets (%)(a):
Operating expenses...................................................... .92 .95 .83 .23 .34
Net investment income................................................... .35 .52 .97 1.46 1.14
Portfolio turnover rate (%)................................................ 103.00 120.78 89.31 58.04 87.25
Average commission rate paid per share
of security ($ omitted)................................................. .0390 .0381 N/A N/A N/A
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
32 Equity II Fund
<PAGE>
Equity III Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To achieve a high level of current income, while maintaining the
potential for capital appreciation.
Invests in: Primarily income-producing U.S. equity securities.
Strategy: The Fund uses a multi-manager strategy intended to achieve a high
level of current income and the potential for capital appreciation with moderate
risk. The Fund employed the investment management services of three managers
with three separate approaches to Value-oriented investment.
Growth of a 10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION> Russell 1000(R)
Dates Equity III+ Value** Lipper(C) Equity Income++
----- ---------- --------------- -------------------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $12,220 $12,316 $11,367
1989 $15,649 $15,418 $13,698
1990 $14,753 $14,172 $12,839
1991 $18,864 $17,659 $16,220
1992 $21,864 $20,097 $17,742
1993 $24,350 $23,740 $20,185
1994 $24,632 $23,268 $19,674
1995 $33,491 $32,191 $25,530
1996 $40,491 $39,157 $30,271
1997 $53,903 $52,933 $38,606
</TABLE>
Equity III Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ------------- ----------
<S> <C> <C>
1 Year $ 13,313 33.13%
5 Years $ 25,445 20.54%(S)
10 Years $ 53,903 18.35%(S)
</TABLE>
Russell 1000(R) Value Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ------------- ----------
<S> <C> <C>
1 Year $ 13,518 35.18%
5 Years $ 26,338 21.37%(S)
10 Years $ 52,933 18.13%(S)
</TABLE>
Lipper(C) Growth & Income Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ------------- ----------
<S> <C> <C>
1 Year $ 12,754 27.54%
5 Years $ 21,760 16.82%(S)
10 Years $ 38,606 14.46%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Russell 1000(R) Value Index includes stocks from the Russell 1000(R) Index
with a less than average growth orientation. The Index represents the
universe of stocks from which most value money managers typically select.
+ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but
gross of any investment services fees. Information concerning these fees
can be obtained from the fund's managers upon request.
++ Lipper(C) Equity Income Funds Average is the average total return for the
universe of funds within the Equity Income Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
(S) Annualized.
34 Equity III Fund
<PAGE>
Equity III Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Equity III Fund reflected a total
return of 33.1% as compared to the Russell 1000(R) Value Index, which rose
35.2%. The Fund's slight underperformance relative to the Russell 1000 Value
Index was due primarily to poor results from holdings in the capital goods and
consumer non-durable sectors. The Fund managed to outperform the average return
of funds in the Lipper(C) Equity Income Funds Universe.
Portfolio Highlights
Despite the strong performance of Growth stocks through the first half of 1997,
Value-oriented stocks finished the year ahead with the Russell 1000 Value Index
up 35.2% versus the 30.5% return of the Russell 1000(R) Growth Index. The
differentiating factor proved to be the strong performance of financial services
stocks throughout the year, as well as the strong year end performance of the
utilities sector, both predominantly Value sectors. However, the managers in the
Fund underweighted utilities in favor of capital expenditure sensitive sectors,
such as capital goods and technology, both of which were hurt by the market's
concern over prospects for economic recessions in Asia during the last four
months of the year.
These factors posed challenges to managers in the Fund, particularly given their
emphasis on midcap shares, which appeared to offer both better growth prospects
and more attractive valuations. The strong gains of telephone utilities proved
somewhat unexpected, as a large buyout produced some unusually large gains for
the acquisition target, MCI, but also added to the enthusiasm towards AT&T.
Unfortunately, the fund had its largest telephone utilities position in
Worldcom, an underperformer, and the eventual acquirer of MCI. Earnings
disappointments and weakened prospects tied to Asia's problems also resulted in
losses for several other holdings, including disk drive-maker Seagate
Technologies, and Foster and Wheeler, a global construction company.
- --------------------------------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Bell Atlantic Corp. 2.9%
Fleet Financial Group, Inc. 2.4
SBC Communications, Inc. 2.4
Allstate Corp. 2.3
International Business Machines Corp. 2.0
Chase Manhattan Corp. 2.0
Ford Motor Co. 1.6
Citicorp 1.5
Banc One Corp. 1.5
Chrysler Corp. 1.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 17.8x
Portfolio Price/Book Ratio 2.5x
Market Capitalization - $-Weighted Average 27.23 Bil
Number of Holdings 196
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers Styles
Brandywine Asset Management, Inc. Value
Equinox Capital Management, Inc. Value
Trinity Investment Management Corp. Value
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Equity III Fund 35
<PAGE>
Equity III Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Common Stocks - 97.3%
Auto and Transportation - 6.7%
AMR Corp. (a) 21,000 $ 2,699
Borg-Warner Automotive, Inc. 8,200 426
Chrysler Corp. 101,000 3,554
CSX Corp. 11,700 632
Delta Air Lines, Inc. 12,000 1,428
Federal Express Corp. (a) 12,100 739
Ford Motor Co. 79,800 3,885
General Motors Corp. 7,600 461
Trinity Industries, Inc. 7,200 321
UAL Corp. (a) 23,600 2,183
--------
16,328
--------
Consumer Discretionary - 7.0%
American Greetings Corp. Class A 2,000 78
Black & Decker Corp. 16,000 625
Carnival Corp. Class A 25,100 1,390
Dayton Hudson Corp. 8,900 601
Dillard's, Inc. Class A 17,100 603
Eastman Kodak Co. 11,700 712
Harrah's Entertainment, Inc. (a) 26,700 504
JC Penney & Co., Inc. 34,000 2,051
Kmart Corp. (a) 46,400 537
Reader's Digest Association, Inc. Class A 10,300 243
Reebok International, Ltd. (a) 11,400 328
Sears Roebuck & Co. 53,900 2,439
Shaw Industries, Inc. 13,600 158
Time Warner, Inc. 14,500 899
Tribune Co. 27,200 1,693
Viacom, Inc. Class B (a) 21,800 903
Wal-Mart Stores, Inc. 29,700 1,171
Whirlpool Corp. 37,300 2,051
--------
16,986
--------
Consumer Staples - 4.2%
American Stores Co. 8,700 179
Anheuser-Busch Cos., Inc. 30,500 1,342
IBP, Inc. 45,100 944
PepsiCo, Inc. 37,000 1,348
Philip Morris Cos., Inc. 14,000 635
RJR Nabisco Holdings Corp. 75,600 2,835
Sara Lee Corp. 23,600 1,329
SuperValu, Inc. 10,200 427
Universal Corp. 6,900 284
UST Corp. 19,800 731
--------
10,054
--------
Financial Services - 26.6%
Ahmanson (H.F) & Co. 27,900 $ 1,868
Allstate Corp. 61,431 5,583
AMBAC Financial Group, Inc. 40,600 1,868
American General Corp. 10,400 562
Banc One Corp. 65,730 3,570
BankAmerica Corp. 28,300 2,066
Bankers Trust New York Corp. 6,700 753
Barnett Banks, Inc. 10,400 748
Beneficial Corp. 7,900 657
Chase Manhattan Corp. 44,188 4,839
Chelsea GCA Realty, Inc. 6,600 252
Chubb Corp. (The) 17,000 1,286
CIGNA Corp. 8,100 1,402
CIT Group, Inc. (The) Class A (a) 8,600 277
Citicorp 29,000 3,667
Colonial Properties Trust 15,900 479
Comdisco, Inc. 400 13
Equity Residential Properties Trust 29,800 1,507
Everest Reinsurance Holdings, Inc. 11,900 491
Federal National Mortgage Association 40,700 2,322
First Chicago NBD Corp. 21,891 1,828
First Union Corp. 39,400 2,019
Fleet Financial Group, Inc. 77,900 5,838
Foundation Health Systems, Inc. (a) 18,510 414
Hartford Financial Services Group (The), Inc. 7,000 655
Kilroy Realty Corp. 12,100 348
Mid Ocean, Ltd. 7,800 423
Morgan (J.P.) & Co., Inc. 4,300 485
Morgan Stanley, Dean Witter, Discover and Co. 40,900 2,418
National City Corp. 4,900 322
NationsBank Corp. 18,600 1,131
Oasis Residential, Inc. 12,000 268
Pacific Century Financial Corp. 35,600 881
PMI Group, Inc. (The) 15,100 1,092
Prentiss Properties Trust 14,300 400
Provident Companies, Inc. 31,200 1,205
Public Storage, Inc. 28,000 822
Reliance Group Holdings, Inc. 82,300 1,162
Republic New York Corp. 18,000 2,055
Ryder System, Inc. 39,800 1,303
Spieker Properties, Inc. 15,900 682
TIG Holdings, Inc. 8,600 285
Transamerica Corp. 8,300 884
Travelers, Inc. 31,696 1,708
United Dominion Realty Trust, Inc. 40,700 567
Washington Mutual, Inc. 11,900 759
Weingarten Realty Investors, Inc. 6,700 300
--------
64,464
--------
</TABLE>
36 Equity III Fund
<PAGE>
Equity III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Health Care - 4.3%
Aetna, Inc. 28,800 $ 2,032
Baxter International, Inc. 23,200 1,170
Bristol-Myers Squibb Co. 18,200 1,722
Columbia/HCA Healthcare Corp. 27,700 821
Genzyme Corp. (a) 15,700 434
Humana, Inc. (a) 21,000 436
McKesson Corp. 11,600 1,255
Schering-Plough Corp. 21,300 1,323
U.S. Surgical Corp. 30,300 888
United Healthcare Corp. 6,200 308
--------
10,389
--------
Integrated Oils - 10.1%
Amerada Hess Corp. NPV 32,000 1,756
Ashland, Inc. 46,400 2,491
Atlantic Richfield Co. 30,300 2,428
British Petroleum Co. PLC - ADR 12,124 966
Coastal Corp. 21,100 1,307
Equitable Resources, Inc. 27,400 969
Exxon Corp. 43,700 2,674
Kerr-McGee Corp. 8,100 513
Lyondell Petrochemical Co. 18,322 486
Mobil Corp. 14,200 1,025
Murphy Oil Corp. 10,400 564
Phillips Petroleum Co. 48,400 2,353
Sun Co., Inc. 14,000 589
Tenneco, Inc. 37,300 1,473
Texaco, Inc. 36,200 1,968
USX-Marathon Group 86,200 2,909
--------
24,471
--------
Materials and Processing - 9.0%
Alumax, Inc. (a) 33,800 1,149
Archer-Daniels-Midland Co. 27,679 600
Armstrong World Industries, Inc. 13,700 1,024
Bowater, Inc. 15,500 689
Burlington Industries, Inc. (a) 15,300 211
Crown Vantage, Inc. (a) 10,440 73
Cyprus Amax Minerals Co. 40,500 623
Eastman Chemical Co. 21,700 1,293
FMC Corp. (a) 20,500 1,380
Fort James Corp. 37,200 1,423
Geon Co. 11,500 269
Georgia Pacific Corp. 5,200 316
Great Lakes Chemical Corp. 15,100 678
IMC Global, Inc. 17,900 586
Inco, Ltd. 20,400 347
International Paper Co. 23,200 1,001
Lafarge Corp. 16,800 497
LTV Corp. 33,100 323
Lubrizol Corp. 20,100 741
Mead Corp. 44,800 1,254
Potlatch Corp. 11,800 507
Reynolds Metals Co. 16,400 984
Rohm & Haas Co. 15,700 1,503
Solutia, Inc. 15,600 416
Temple-Inland, Inc. 11,800 617
Timken Co. 21,000 722
UCAR International, Inc. (a) 15,800 631
USX-U.S. Steel Group 42,200 1,319
Westvaco Corp. 18,400 578
--------
21,754
--------
Other Energy - 1.7%
Apache Corp. 14,000 491
Elf Aquitaine - ADR 12,700 744
Helmerich & Payne, Inc. 13,300 903
Occidental Petroleum Corp. 20,803 610
Santa Fe Energy Resources, Inc. (a) 50,900 573
Valero Energy Corp. 22,300 701
--------
4,022
--------
Producer Durables - 5.4%
AGCO Corp. 41,300 1,208
Briggs & Stratton Corp. 8,200 398
Caterpillar, Inc. 28,300 1,374
Foster Wheeler Corp. 30,600 828
General Electric Co. 26,200 1,922
Harnischfeger Industries, Inc. 29,800 1,052
Hitachi, Ltd. - ADR 6,800 471
Honeywell, Inc. 1,800 123
Johnson Controls, Inc. 33,200 1,585
Lexmark International Group, Inc.
Class A (a) 14,400 547
Mark IV Industries, Inc. 30,900 676
Matsushita Electric Industrial Co.,
Ltd. - ADR 3,200 487
Raytheon Co. Class A 484 24
Sundstrand Corp. 9,000 453
Tecumseh Products Co. Class A 9,800 478
Thiokol Corp. 7,800 634
Thomas & Betts Corp. 12,700 600
United Technologies Corp. 3,700 270
--------
13,130
--------
</TABLE>
Equity III Fund 37
<PAGE>
Equity III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Technology - 4.4%
Data General Corp. (a) 27,800 $ 485
Electronic Data Systems Corp. 31,967 1,404
Hewlett-Packard Co. 13,600 850
International Business Machines Corp. 47,200 4,935
MEMC Electronic Materials, Inc. (a) 28,300 432
Motorola, Inc. 18,500 1,056
Seagate Technology (a) 29,900 576
Vishay Intertechnology, Inc. (a) 15,800 373
VLSI Technology, Inc. (a) 26,400 620
--------
10,731
--------
Utilities - 17.9%
AT&T Corp. 33,000 2,021
BCE, Inc. 33,206 1,106
Bell Atlantic Corp. 75,811 6,899
Century Telephone Enterprises, Inc. 24,100 1,200
Columbia Gas System, Inc. 8,000 629
Consolidated Edison Co. 22,200 910
DTE Energy Co. 29,700 1,030
Edison International 64,500 1,754
Entergy Corp. 97,100 2,907
GPU, Inc. 39,600 1,668
GTE Corp. 57,373 2,998
New York State Electric & Gas Corp. 39,100 1,388
Niagara Mohawk Power Corp. (a) 46,400 487
PacifiCorp. 41,500 1,133
Peco Energy Co. 26,700 648
PG&E Corp. 96,859 2,948
Public Service Enterprise Group, Inc. 13,500 428
SBC Communications, Inc. 77,681 5,690
Southern Co. 18,300 474
Southern New England
Telecommunications Corp. 29,100 1,464
Texas Utilities Co. 26,300 1,093
U.S. West Communications Group 68,100 3,073
WorldCom, Inc. (a) 43,400 1,313
--------
43,261
--------
Total Common Stocks
(cost $194,898) 235,590
--------
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
Short-Term Investments - 2.2%
Frank Russell Investment Company
Money Market Fund,
due on demand (b) $ 4,429 $ 4,429
United States Treasury Notes
5.125% due 04/30/98 (c) 1,000 999
--------
Total Short-Term Investments
(cost $5,428) 5,428
--------
Total Investments
(identified cost $200,326)(d) - 99.5% 241,018
Other Assets and Liabilities,
Net - 0.5% 1,094
--------
Net Assets - 100.0% $242,112
========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
NPV - No Par Value
PLC - Public Limited Company
The accompanying notes are an integral part of the financial statements.
38 Equity III Fund
<PAGE>
Equity III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S&P 500 Index Futures Contracts
expiration date 03/98 20 $ 58
S&P Barra Value Futures Contracts
expiration date 03/98 19 (2)
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 56
==============
</TABLE>
(S) At December 31, 1997, United States Treasury Notes valued at $999 were held
as collateral by the custodian in connection with futures contracts
purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
Equity III Fund 39
<PAGE>
Equity III Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $200,326)(Note 2)....................................... $ 241,018
Receivables:
Dividends and interest..................................................................... 548
Investments sold........................................................................... 1,067
Fund shares sold........................................................................... 954
Daily variation margin on futures contracts (Notes 2 and 3)................................ 9
--------------------
Total Assets............................................................................ 243,596
Liabilities
Payables:
Investments purchased.............................................. $ 812
Fund shares redeemed............................................... 459
Accrued fees to affiliates (Note 4)................................ 153
Other accrued expenses............................................. 60
-------------------
Total Liabilities....................................................................... 1,484
--------------------
Net Assets..................................................................................... $ 242,112
====================
Net Assets consist of:
Accumulated net realized gain (loss)........................................................... $ 1,408
Unrealized appreciation (depreciation) on:
Investments................................................................................ 40,692
Futures contracts.......................................................................... 56
Shares of beneficial interest.................................................................. 81
Additional paid-in capital..................................................................... 199,875
--------------------
Net Assets..................................................................................... $ 242,112
====================
Net Asset Value, offering and redemption price per share:
($242,111,519 divided by 8,124,454 shares of $.01 par value
shares of beneficial interest outstanding)................................................. $ 29.80
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
40 Equity III Fund
<PAGE>
Equity III Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
-------------------
<S> <C> <C>
Investment Income:
Dividends.......................................................................... $ 5,490
Dividends from Money Market Fund (Note 5).......................................... 334
Interest........................................................................... 54
-------------------
Total Investment Income......................................................... 5,878
Expenses (Notes 2 and 4):
Management fees............................................. $ 1,381
Custodian fees.............................................. 172
Transfer agent fees......................................... 149
Bookkeeping service fees.................................... 12
Professional fees........................................... 15
Registration fees........................................... 27
Trustees' fees.............................................. 5
Miscellaneous............................................... 28
------------------
Total Expenses.................................................................. 1,789
-------------------
Net investment income.................................................................. 4,089
-------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments................................................. 51,058
Futures contracts........................................... 1,241 52,299
------------------
Net change in unrealized appreciation or depreciation of:
Investments................................................. 8,793
Futures contracts........................................... 33 8,826
------------------ -------------------
Net gain (loss) on investments......................................................... 61,125
-------------------
Net increase (decrease) in net assets resulting from operations........................ $ 65,214
===================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity III Fund 41
<PAGE>
Equity III Fund
Statements of changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
--------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.......................................................... $ 4,089 $ 4,993
Net realized gain (loss)....................................................... 52,299 33,675
Net change in unrealized appreciation or depreciation.......................... 8,826 4,076
--------------- --------------
Net increase (decrease) in net assets resulting from operations.............. 65,214 42,744
--------------- --------------
From Distributions to Shareholders:
Net investment income.......................................................... (4,089) (5,022)
In excess of net investment income............................................. (43) (14)
Net realized gain on investment................................................ (58,222) (30,909)
--------------- --------------
Total Distribution to Shareholders........................................... (62,354) (35,945)
--------------- --------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6).... 17,474 (7,562)
--------------- --------------
Total Net Increase (Decrease) in Net Assets...................................... 20,334 (763)
Net Assets
Beginning of period............................................................ 221,778 222,541
--------------- --------------
End of period.................................................................. $ 242,112 $ 221,778
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
42 Equity III Fund
<PAGE>
Equity III Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................................... $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income................................................. .60 .70 .82 .93 .89
Net realized and unrealized gain (loss) on investments................ 8.69 5.10 7.73 (.85) 2.99
-------- -------- -------- -------- --------
Total Income From Investment Operations............................. 9.29 5.80 8.55 .08 3.88
-------- -------- -------- -------- --------
Less Distributions:
Net investment income................................................. (.60) (.71) (.83) (.91) (.90)
In excess of net investment income.................................... (.01) -- -- -- --
Net realized gain on investments...................................... (8.56) (4.52) (2.79) (1.94) (2.68)
In excess of net realized gain on investments......................... -- -- -- (.10) --
-------- -------- -------- -------- --------
Total Distributions................................................. (9.17) (5.23) (3.62) (2.95) (3.58)
-------- -------- -------- -------- --------
Net Asset Value, End of Period........................................... $ 29.80 $ 29.68 $ 29.11 $ 24.18 $ 27.05
======== ======== ======== ======== ========
Total Return (%)(a)...................................................... 33.13 20.90 35.96 1.16 14.95
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).............................. 242,112 221,778 222,541 177,807 181,630
Ratios to average net assets (%)(a):
Operating expenses................................................. .78 .79 .65 .17 .16
Net investment income.............................................. 1.77 2.23 2.90 3.39 3.09
Portfolio turnover rate (%)........................................... 128.86 100.78 103.40 85.92 76.77
Average commission rate paid per share
of security ($ omitted)............................................ .0415 .0447 N/A N/A N/A
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
Equity III Fund 43
<PAGE>
Equity Q Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide total return greater than the total return of the U.S.
stock market as measured by the Russell 1000(R) Index over a market cycle of
four to six years, while maintaining volatility and diversification similar to
the Russell 1000(R) Index.
Invests in: Primarily U.S. equity securities.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns through security selection with sector diversification generally similar
to its benchmark index. The Fund employed the investment management services of
three managers using three distinctive quantitative approaches to investment.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Years Equity Q+ Russell 1000(R)** Lipper(C) Growth & Income++
----- -------- ---------------- ---------------------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $11,716 $11,723 $11,492
1989 $14,891 $15,289 $14,071
1990 $14,175 $14,653 $13,439
1991 $18,731 $19,493 $17,311
1992 $20,597 $21,254 $18,744
1993 $23,439 $23,412 $20,847
1994 $23,671 $23,500 $20,633
1995 $32,645 $32,376 $26,947
1996 $40,371 $39,644 $32,536
1997 $53,723 $52,668 $41,349
</TABLE>
Equity Q Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ------------- ----------
<S> <C> <C>
1 Year $ 13,307 33.07%
5 Years $ 26,083 21.14%(S)
10 Years $ 53,723 18.31%(S)
</TABLE>
Russell 1000(R) Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ------------- ----------
<S> <C> <C>
1 Year $ 13,285 32.85%
5 Years $ 24,781 19.90%(S)
10 Years $ 52,668 18.07%(S)
</TABLE>
Lipper(C) Growth & Income Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ------------- ----------
<S> <C> <C>
1 Year $ 12,709 27.09%
5 Years $ 22,059 17.14%(S)
10 Years $ 41,349 15.25%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $43 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select.
+ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but gross
of any investment services fees. Information concerning these fees can be
obtained from the fund's managers upon request.
++ Lipper(C) Growth & Income Funds Average is the average total return for the
universe of funds within the Growth & Income Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
(S) Annualized.
44 Equity Q Fund
<PAGE>
Equity Q Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Equity Q Fund reflected a total return
of 33.1% as compared to the Russell 1000(R) Index, which rose 32.9%. The Fund
outperformed the index on the strength of security selection, particularly in
the financial services and health care sectors. It finished the year well ahead
of the average of funds in the Lipper(C) Growth and Income Funds Universe.
Portfolio Highlights
For the third consecutive year the stock market favored large capitalization
stocks over midcap and small cap
alternatives. The market also proved to be dominated by more defensive sectors,
such as consistent growth-oriented shares of health care and consumer staples
companies, and interest-rate sensitive financial services and utilities
companies. While many growth and income funds trailed the index due to the
market's focus on the sectors, Equity Q's economic sector and cap size-neutral
strategy produced strong results due to its exposure to these sectors in the
market's fourth quarter rotation from some of the market's earlier leaders, such
as Intel.
The Fund's concentration on stock selection was well suited to the rapidly
changing market environment toward year end. Although the Fund's utilities
holdings lagged some of the strongest performers in the sector, the Fund's index
weighting captured much of the upside. Elsewhere, security selection proved very
effective. Large positions in pharmaceutical companies such as Schering Plough
and Bristol-Myers Squibb, and financial services companies like Travelers Group
Insurance and Lehman Brothers added substantial value over the index. They also
compensated for holdings in other sectors, particularly technology, where
several negative earnings announcements fueled concerns.
- --------------------------------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Merck & Co., Inc. 2.6%
Exxon Corp. 2.3
American International Group, Inc. 2.3
General Electric Co. 1.7
Bristol-Myers Squibb Co. 1.7
Travelers, Inc. 1.7
Dow Chemical Co. 1.5
BankAmerica Corp. 1.4
Dayton Hudson Corp. 1.3
Ford Motor Co. 1.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 20.9x
Portfolio Price/Book Ratio 3.53x
Market Capitalization - $-Weighted Average 41.93 Bil
Number of Holdings 504
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers Styles
Barclays Global Fund Advisors, N.A. Market-Oriented
Franklin Portfolio Associates, LLC Market-Oriented
J.P. Morgan Investment Management, Inc. Market-Oriented
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Equity Q Fund 45
<PAGE>
Equity Q Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Common Stocks - 109.5%
Auto and Transportation - 5.2%
Alaska Air Group, Inc. (a) $ 5,200 $ 202
Alexander & Baldwin, Inc. 8,100 221
AMR Corp. (a) 42,500 5,461
Bandag, Inc. 16,100 860
Burlington Northern, Inc. 12,400 1,152
Chrysler Corp. 136,100 4,789
Consolidated Freightways Corp. (a) 1,500 20
Cooper Tire & Rubber Co. 17,800 434
CSX Corp. 18,700 1,010
Dana Corp. 32,900 1,563
Eaton Corp. 39,300 3,508
Echlin, Inc. 13,000 470
Exide Corp. 3,900 101
Federal Express Corp. (a) 4,500 275
Fleetwood Enterprises, Inc. 5,900 250
Ford Motor Co. 283,800 13,818
Fritz Companies, Inc. (a) 1,200 17
General Motors Corp. 98,100 5,947
Genuine Parts Co. 21,500 730
Goodyear Tire & Rubber Co. 36,000 2,291
Illinois Central Corp. 4,900 167
Kansas City Southern Industries, Inc. 24,400 775
Modine Manufacturing Co. 3,600 123
Navistar International Corp. (a) 11,200 278
Norfolk Southern Corp. 30,000 924
PACCAR, Inc. 7,800 410
Southwest Airlines Co. 800 20
Trinity Industries, Inc. 1,400 62
UAL Corp. (a) 25,400 2,350
Union Pacific Corp. 50,700 3,165
Wisconsin Central Transportation Corp. (a) 4,000 93
Yellow Corp. (a) 6,700 167
---------
51,653
---------
Consumer Discretionary - 11.8%
ACNielsen Corp. (a) 39,700 968
Alberto Culver Co. Class B 17,500 561
AutoZone Inc. (a) 18,400 534
Bassett Furniture Industries, Inc. 2,500 75
Belo (A.H.) Corp. Class A 25,900 1,454
Best Buy Co. (a) 27,700 1,021
BHC Communications, Inc. Class A 2,700 352
Bob Evans Farms, Inc. 1,800 40
Borders Group, Inc. (a) 40,900 1,281
Browning-Ferris Industries, Inc. 20,600 762
Brunswick Corp. 35,600 1,079
Carter-Wallace, Inc. 1,500 25
Cendant Corp. (a) 9,612 330
Chris Craft Industries, Inc. (a) 1,700 89
Cintas Corp. 9,000 351
Circuit City Stores, Inc. 12,000 427
Circus Circus Enterprises, Inc. (a) 14,400 295
Corporate Express, Inc. (a) 20,600 265
Darden Restaurants, Inc. 9,800 123
Dayton Hudson Corp. 211,500 14,276
Deluxe Corp. 19,400 669
Department 56, Inc. (a) 16,700 480
Dillard's, Inc. Class A 15,700 553
Disney (Walt) Co. 60,000 5,944
Donnelley (R.R.) & Sons Co. 20,600 767
Estee Lauder Companies Class A 4,600 237
Extended Stay America, Inc. (a) 15,000 187
Federated Department Stores, Inc. (a) 30,800 1,326
Fingerhut Cos., Inc. 13,500 289
First Brands Corp. 28,700 773
Food Lion, Inc. Class A 1,200 10
Fruit of the Loom, Inc. Class A (a) 14,500 372
Gannett Co., Inc. 147,200 9,099
General Nutrition Companies, Inc. (a) 6,000 203
Genesco, Inc. (a) 3,100 40
Handleman Co. (a) 2,400 17
Harrah's Entertainment, Inc. (a) 16,700 315
Hasbro, Inc. 6,700 211
Hilton Hotels Corp. 55,900 1,663
Hollinger International, Inc. Class A 24,000 336
Home Depot, Inc. (The) 141,850 8,351
Host Marriott Corp. (a) 103,900 2,039
Huffy Corp. 1,700 23
Ikon Office Solutions, Inc. 12,200 343
International Game Technology 21,500 543
ITT Corp. (a) 7,200 597
JCPenney & Co., Inc. 29,100 1,755
Knight-Ridder, Inc. 41,800 2,174
Land's End, Inc. (a) 2,400 84
Leggett & Platt, Inc. 4,700 197
MacFrugals Bargains Close Outs, Inc. (a) 6,000 247
Mattel, Inc. 20,200 752
May Department Stores Co. 2,500 130
Media General, Inc. Class A 1,500 63
Meredith Corp. 1,100 39
MGM Grand, Inc. (a) 8,200 296
Mirage Resorts, Inc. (a) 25,300 576
Neiman-Marcus Group, Inc. (a) 28,100 850
New York Times Co. Class A 4,400 291
Nine West Group, Inc. (a) 3,600 93
</TABLE>
46 Equity Q Fund
<PAGE>
Equity Q Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Nordstrom, Inc. 22,000 $ 1,323
Omnicom Group, Inc. 800 34
Premark International, Inc. 11,000 319
Promus Hotel Corp. New (a) 45,325 1,904
QUALCOMM, Inc. (a) 12,600 636
Reebok International, Ltd. (a) 11,600 334
Robert Half International, Inc. (a) 23,100 924
Rubbermaid, Inc. 43,200 1,080
Ruby Tuesday, Inc. (a) 10,400 268
Sears Roebuck & Co. 48,400 2,190
Service Corp. International 18,000 665
Spelling Entertainment Group, Inc. (a) 4,000 28
Stewart Enterprises, Inc. Class A 49,100 2,289
Tele-Communications, Inc.
Series A New (a) 82,300 2,983
Time Warner, Inc. 91,100 5,648
TJX Cos., Inc. 27,200 935
Toys "R" Us, Inc. (a) 42,200 1,327
Tribune Co. 39,100 2,434
Tupperware Corp. 34,900 973
V.F. Corp. 7,400 340
Viacom, Inc. Class B (a) 148,600 6,158
Wal-Mart Stores, Inc. 239,300 9,437
Washington Post Co. Class B 2,900 1,410
Waste Management, Inc. 96,000 2,640
Whirlpool Corp. 62,200 3,420
--------
116,941
--------
Consumer Staples - 9.3%
Albertson's, Inc. 70,500 3,340
American Stores Co. 3,300 68
Anheuser-Busch Cos., Inc. 62,000 2,728
Block Drug Co., Inc. Class A 9,872 420
Clorox Co. 4,000 316
Coca-Cola Co. (The) 52,100 3,471
ConAgra, Inc. 83,216 2,731
Dean Foods Co. 16,800 1,000
Dial Corp. 7,200 150
Fleming Cos., Inc. 23,800 320
General Mills, Inc. 3,800 272
Gillette Co. 61,200 6,147
Heinz (H.J.) Co. 2,600 132
Interstate Bakeries Corp. 22,600 845
Kellogg Co. 107,400 5,330
Kroger Co. (a) 31,500 1,164
PepsiCo, Inc. 137,600 5,014
Philip Morris Cos., Inc. 241,100 10,925
Procter & Gamble Co. 141,400 11,285
Quaker Oats Co. 155,600 8,208
Ralston-Purina Group 13,100 1,217
Richfood Holdings, Inc. Class A 7,000 198
RJR Nabisco Holdings Corp. 191,400 7,178
Safeway, Inc. (a) 142,075 8,986
Sara Lee Corp. 11,900 670
Seagram Co., Ltd. 50,000 1,616
SuperValu, Inc. 7,500 314
SYSCO Corp. 1,700 77
Unilever NV 101,500 6,336
Universal Corp. 28,400 1,167
--------
91,625
--------
Financial Services - 21.6%
Ahmanson (H.F.) & Co. 66,000 4,418
Allmerica Financial Corp. 13,200 659
Allstate Corp. 48,314 4,391
AMBAC Financial Group, Inc. 36,500 1,679
American Express Co. 29,700 2,651
American International Group, Inc. 237,450 25,823
American National Insurance Co. 5,900 549
AmSouth Bancorp 36,100 1,961
Automatic Data Processing, Inc. 61,500 3,775
Banc One Corp. 28,100 1,526
BankAmerica Corp. 210,500 15,367
BankBoston Corp. 4,800 451
Bankers Trust New York Corp. 43,600 4,902
Barnett Banks, Inc. 14,200 1,021
Bear Stearns Cos., Inc. 108,868 5,171
Beneficial Corp. 5,700 474
Capital One Financial Corp. 5,100 276
Charter One Financial, Inc. 5,200 326
Chase Manhattan Corp. 36,600 4,008
CIGNA Corp. 23,200 4,015
Citicorp 15,900 2,010
Comerica, Inc. 38,200 3,448
Compass Bancshares, Inc. 1,300 57
Conseco, Inc. 28,600 1,300
ContiFinancial Corp. (a) 4,800 121
Countrywide Credit Industries, Inc. 7,200 309
Crestar Financial Corp. 3,700 211
Dime Bancorp, Inc. 7,900 239
Donaldson, Lufkin & Jenrette, Inc. 3,900 310
Dow Jones & Co., Inc. 21,300 1,144
DST Systems, Inc. (a) 6,300 269
Dun & Bradstreet Corp. 71,800 2,221
</TABLE>
Equity Q Fund 47
<PAGE>
Equity Q Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Edwards (A.G.), Inc. 11,850 $ 471
Equitable Companies, Inc. 60,100 2,990
Everest Reinsurance Holdings, Inc. 1,200 50
Federal Home Loan Mortgage Corp. 66,200 2,776
Federal National Mortgage Association 164,200 9,370
FINOVA Group, Inc. 5,600 278
First America Bank Corp. 18,750 1,446
First Chicago NBD Corp. 63,181 5,276
First Data Corp. 69,700 2,039
First Union Corp. 69,600 3,567
Fiserv, Inc. (a) 19,900 978
Fleet Financial Group, Inc. 17,419 1,305
Fremont General Corp. 1,600 88
Golden West Financial Corp. 24,600 2,406
Greenpoint Financial Corp. 1,400 102
Hartford Financial Services
Group (The), Inc. 12,500 1,170
Household International Corp. 5,700 727
KeyCorp 15,400 1,091
Lehman Brothers Holdings, Inc. 144,700 7,380
Lincoln National Corp. 46,700 3,648
Marsh & McLennan Cos., Inc. 78,700 5,868
MBIA, Inc. 22,600 1,510
Mercury General Corp. 4,200 232
Merrill Lynch & Co., Inc. 26,900 1,962
Money Store, Inc. 4,500 95
Morgan (J.P.) & Co., Inc. 24,900 2,811
Morgan Stanley, Dean Witter,
Discover and Co. 115,040 6,802
National City Corp. 21,500 1,414
National Commerce Bancorp 3,200 111
NationsBank Corp. 149,280 9,078
North Fork Bancorporation, Inc. 4,500 151
Ocwen Financial Corp. (a) 5,200 132
Ohio Casualty Corp. 800 36
Old Republic International Corp. 35,100 1,305
Pacific Century Financial Corp. 25,200 624
PaineWebber Group, Inc. 3,850 133
Paychex, Inc. 12,100 613
PMI Group, Inc. (The) 5,900 427
PNC Bank Corp. 4,850 277
Provident Financial Group, Inc. 3,600 175
Providian Financial Corp. 15,700 709
Republic New York Corp. 2,200 251
Ryder System, Inc. 3,800 124
Security Capital Pacific Trust 51,700 1,254
SouthTrust Corp. 46,000 2,910
Sovereign Bancorp, Inc. 3,000 62
St. Paul Cos., Inc. 4,000 328
Star Banc Corp. 13,100 752
SunTrust Banks, Inc. 42,000 2,998
Synovus Financial Corp. 25,600 837
TCF Financial Corp. 6,200 210
Tele-Communications TCI
Ventures Group Series A (a) 39,201 1,110
Travelers Property Casualty Corp. Class A 83,100 3,655
Travelers, Inc. 359,650 19,375
UNUM Corp. 13,100 711
Washington Federal, Inc. 5,100 160
Washington Mutual, Inc. 28,300 1,803
XTRA Corp. 1,900 110
--------
213,355
--------
Health Care - 11.4%
Abbott Laboratories 7,900 518
Aetna, Inc. 3,500 247
ALZA Corp. (a) 52,300 1,664
American Home Products Corp. 7,900 604
Bausch & Lomb, Inc. 10,000 396
Beckman Instruments, Inc. 7,300 292
Bergen Brunswig Corp. Class A 15,300 645
Beverly Enterprises, Inc. New (a) 64,900 844
Boston Scientific Corp. (a) 35,400 1,624
Bristol-Myers Squibb Co. 205,080 19,406
Cardinal Health, Inc. 55,800 4,192
Chiron Corp. (a) 9,200 156
Columbia/HCA Healthcare Corp. 65,100 1,929
Crescenco Pharmaceuticals Corp.
Class A (a) 800 9
Forest Labs, Inc. (a) 9,400 464
HBO & Co. 66,200 3,173
Health Care & Retirement Corp. (a) 27,200 1,095
HEALTHSOUTH Corp. (a) 90,700 2,517
Humana, Inc. (a) 74,900 1,554
Immune Response Corp. (a) 6,000 67
Johnson & Johnson 119,900 7,898
McKesson Corp. 18,100 1,958
Merck & Co., Inc. 271,207 28,816
Mylan Laboratories, Inc. 76,200 1,595
NovaCare, Inc. (a) 13,300 174
Olsten Corp. 4,800 72
Omnicare, Inc. 27,900 865
Pfizer, Inc. 9,500 708
PharMerica, Inc. (a) 29,537 306
PhyCor, Inc. (a) 143,000 3,861
</TABLE>
48 Equity Q Fund
<PAGE>
Equity Q Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Schering-Plough Corp. 137,600 $ 8,548
Tenet Healthcare Corp. (a) 137,700 4,561
United Healthcare Corp. 42,300 2,102
Warner-Lambert Co. 62,100 7,700
Watson Pharmaceuticals, Inc. (a) 20,900 678
Wellpoint Health Networks, Inc.
Class A (a) 24,903 1,053
--------
112,291
--------
Integrated Oils - 7.4%
Amoco Corp. 7,500 638
Ashland, Inc. 86,000 4,617
Atlantic Richfield Co. 28,800 2,308
Chevron Corp. 16,100 1,240
Coastal Corp. 21,500 1,332
Enron Corp. 151,200 6,284
Exxon Corp. 422,600 25,858
Lyondell Petrochemical Co. 22,200 588
Mobil Corp. 187,500 13,535
Pennzoil Co. 31,700 2,118
Phillips Petroleum Co. 113,500 5,519
Royal Dutch Petroleum Co. 51,700 2,801
Tenneco, Inc. 37,100 1,465
Tesoro Petroleum Corp. (a) 12,100 188
Texaco, Inc. 92,100 5,008
--------
73,499
--------
Materials and Processing - 7.0%
Albemarle Corp. 5,300 127
Alcan Aluminum, Ltd. 20,600 569
Allegheny Teldyne, Inc. 25,000 647
Aluminum Co. of America 11,700 823
Barrick Gold Corp. 131,100 2,442
Betz Betzdearborn, Inc. 11,300 690
Boise Cascade Corp. 10,100 306
Bowater, Inc. 8,300 369
Centex Corp. 20,600 1,297
Champion International Corp. 39,900 1,808
Consolidated Papers, Inc. 6,000 320
Corning, Inc. 49,700 1,845
Crompton & Knowles Corp. 34,200 906
Cytec Industries, Inc. (a) 5,300 249
Dow Chemical Co. 163,300 16,575
du Pont (E.I.) de Nemours & Co. 82,700 4,967
Fluor Corp. 13,900 520
Fort James Corp. 15,400 589
Freeport-McMoRan Copper &
Gold, Inc. Class A 28,600 438
Georgia Gulf Corp. 4,900 150
Georgia Pacific Corp. 3,100 188
Goodrich (B.F.) Co. 1,880 78
Great Lakes Chemical Corp. 7,900 355
Halter Marine Group, Inc. (a) 5,845 169
Illinois Tool Works, Inc. 17,000 1,022
Inco, Ltd. 22,000 374
Inland Steel Industries, Inc. 27,100 464
International Paper Co. 13,600 587
Kimberly-Clark Corp. 59,300 2,924
LTV Corp. 109,300 1,066
Martin Marietta Materials, Inc. 7,802 285
Masco Corp. 45,500 2,315
Mead Corp. 21,400 599
Millennium Chemicals, Inc. 43,900 1,034
Monsanto Co. 9,700 407
Nucor Corp. 21,000 1,015
Olin Corp. 41,500 1,945
Oregon Metallurgical Corp. (a) 1,400 47
Owens-Corning Fiberglas Corp. 11,600 396
Owens-Illinois, Inc. (a) 29,700 1,127
Phelps Dodge Corp. 200 12
Reynolds Metals Co. 7,000 420
Rohm & Haas Co. 4,100 393
Schulman (A.), Inc. 2,200 55
Security Capital Group, Inc. 1998
Warrant (a) 2,721 14
Sigma Aldrich Corp. 17,100 675
Solutia, Inc. 108,300 2,890
Stone Container Corp. (a) 15,700 164
Temple-Inland, Inc. 11,500 602
Texas Industries, Inc. 4,000 180
Tyco International, Ltd. 123,700 5,574
Unifi, Inc. 47,600 1,937
Union Camp Corp. 25,000 1,342
Union Carbide Corp. 10,200 438
USG Corp. (a) 5,800 284
USX-U.S. Steel Group 25,900 809
Vulcan Materials Co. 7,500 766
Webb (Del E.) Corp. 13,000 338
Weyerhaeuser Co. 2,900 142
--------
69,069
--------
</TABLE>
Equity Q Fund 49
<PAGE>
Equity Q Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Miscellaneous - 0.0%
LNR Property Corp. 1,000 $ 24
--------
24
--------
Other Energy - 3.0%
AES Corp. (a) 41,800 1,949
Anadarko Petroleum Corp. 1,800 109
Baker Hughes, Inc. 76,400 3,333
BJ Services Co. (a) 900 65
Burlington Resources, Inc. 34,400 1,542
Calenergy, Inc. (a) 27,200 782
Cooper Cameron Corp. (a) 7,100 433
Diamond Offshore Drilling, Inc. 9,000 433
Dresser Industries, Inc. 93,900 3,938
El Paso Natural Gas Co. 5,900 392
ENSCO International, Inc. 30,600 1,025
Falcon Drilling Co., Inc. (a) 6,800 238
Halliburton Co. 41,200 2,140
Helmerich & Payne, Inc. 48,900 3,319
Input/Output, Inc. (a) 26,900 799
Parker Drilling Co. (a) 20,000 244
Schlumberger, Ltd. 39,900 3,212
Tidewater, Inc. 54,200 2,988
Tosco Corp. 43,300 1,637
Union Pacific Resources Group, Inc. 41,800 1,014
Valero Energy Corp. 9,500 298
--------
29,890
--------
Producer Durables - 10.0%
Aeroquip-Vickers, Inc. 1,500 74
AlliedSignal, Inc. 119,500 4,653
AMP, Inc. 7,300 307
Applied Materials, Inc. (a) 9,000 271
Boeing Co. 81,700 3,998
Caterpillar, Inc. 216,300 10,504
Cincinnati Milacron, Inc. 4,700 122
Clayton Homes, Inc. 57,400 1,033
Coltec Industries, Inc. (a) 35,800 830
Cummins Engine Co., Inc. 4,400 260
Deere & Co. 112,700 6,572
Dover Corp. 86,200 3,114
Emerson Electric Co. 51,400 2,901
Foster Wheeler Corp. 6,700 181
General Electric Co. 264,600 19,415
General Signal Corp. 6,600 278
Grainger (W.W.), Inc. 15,300 1,487
Hamischfeger Industries, Inc. 8,100 286
Honeywell, Inc. 11,100 760
Ingersoll-Rand Co. 60,600 2,454
ITT Industries, Inc. 53,000 1,663
Johnson Controls, Inc. 29,200 1,394
Kennametal, Inc. 3,200 166
Lexmark International Group, Inc.
Class A (a) 83,800 3,184
Litton Industries, Inc. (a) 43,300 2,490
Molex, Inc. 7,275 233
National Service Industries, Inc. 15,100 748
Northern Telecom, Ltd. 8,500 757
Parker-Hannifin Corp. 45,550 2,090
Perkin-Elmer Corp. 12,500 888
Pitney Bowes, Inc. 61,600 5,540
Pulte Corp. 15,500 648
Raychem Corp. 105,400 4,539
Raytheon Co. Class A 17,130 845
Republic Industries, Inc. (a) 220,100 5,131
Rockwell International Corp. 10,000 523
Ryland Group, Inc. 6,800 160
Sensormatic Electronics Corp. 12,500 205
Solectron Corp. (a) 10,200 424
Thermo Instrument Systems, Inc. (a) 3,500 121
Thomas & Betts Corp. 19,900 940
United Technologies Corp. 23,800 1,733
Vicor Corp. (a) 2,500 68
Xerox Corp. 62,800 4,635
--------
98,625
--------
Technology - 10.7%
ADC Telecommunications, Inc. (a) 23,400 977
Anixter International, Inc. (a) 12,900 213
Autodesk, Inc. 5,800 213
AVX Corp. 22,300 411
Bay Networks, Inc. (a) 44,600 1,140
BMC Software, Inc. (a) 23,600 1,546
Cabletron Systems, Inc. (a) 1,300 20
Cisco Systems, Inc. (a) 139,000 7,749
COMPAQ Computer Corp. 76,500 4,317
Cooper Industries, Inc. 64,400 3,156
Dell Computer Corp. (a) 11,000 924
Digital Equipment Corp. (a) 72,100 2,668
EMC Corp. (a) 119,600 3,282
FORE Systems (a) 104,500 1,594
General Dynamics Corp. 64,000 5,532
General Motors Corp. Class H 22,400 827
</TABLE>
50 Equity Q Fund
<PAGE>
Equity Q Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- ---------
<S> <C> <C>
Harris Corp. 34,200 $ 1,569
Intel Corp. 129,300 9,075
International Business Machines Corp. 99,600 10,414
Iomega Corp. (a) 67,300 837
Komag, Inc. (a) 17,000 251
Lucent Technologies, Inc. 85,600 6,837
Microsoft Corp. (a) 106,500 13,758
Motorola, Inc. 105,200 6,003
National Semiconductor Corp. (a) 71,900 1,865
Oracle Systems Corp. (a) 146,700 3,264
Premisys Communications, Inc. (a) 4,300 111
Quantum Corp. (a) 51,800 1,039
SCI Systems, Inc. (a) 12,000 523
Silicon Graphics, Inc. (a) 10,300 128
Storage Technology Corp. (a) 48,600 3,010
Sun Microsystems, Inc. (a) 128,700 5,132
Symantec Corp. (a) 9,400 206
Symbol Technologies, Inc. 6,100 230
Synopsys, Inc. (a) 54,400 1,938
Tech Data Corp. (a) 17,300 673
Texas Instruments, Inc. 84,100 3,785
---------
105,217
---------
Utilities - 12.1%
360 Communications Co. (a) 7,100 143
Airtouch Communications, Inc. (a) 68,700 2,855
American Electric Power Co., Inc. 10,100 521
American Water Works, Inc. 40,900 1,117
Ameritech Corp. 87,400 7,036
AT&T Corp. 112,900 6,915
Atlantic Energy, Inc. 12,300 261
Baltimore Gas & Electric Co. 7,700 262
Bell Atlantic Corp. 111,403 10,138
BellSouth Corp. 150,550 8,478
Carolina Power & Light Co. 38,300 1,625
CINergy Corp. 4,200 161
CMS Energy Corp. 10,100 445
Columbia Gas System, Inc. 18,300 1,438
Commonwealth Energy System 700 23
Dominion Resources, Inc. 19,500 830
Duke Power Co. 37,600 2,082
Enova Corp. 26,600 720
Entergy Corp. 177,700 5,320
Florida Progress Corp. 2,900 114
GPU, Inc. 19,200 809
GTE Corp. 123,000 6,427
Houston Industries, Inc. 100,700 2,687
Illinova Corp. 7,100 191
IPALCO Enterprises, Inc. 1,800 75
Long Island Lighting Co. 143,000 4,308
MCI Communications Corp. 95,900 4,106
Minnesota Power & Light Co. 4,600 200
New Century Energies, Inc. 13,700 657
New England Electric System 6,400 274
New York State Electric & Gas Corp. 72,700 2,581
NICOR, Inc. 6,000 253
Northern States Power Co. 20,200 1,177
Peco Energy Co. 32,500 788
Peoples Energy Corp. 11,000 433
Pinnacle West Capital Corp. 19,300 818
Potomac Electric Power Co. 12,200 315
PP&L Resources, Inc. 32,200 771
Public Service Enterprise Group, Inc. 80,900 2,564
SBC Communications, Inc. 155,614 11,399
Southern Co. 72,100 1,866
Sprint Corp. 55,300 3,242
TECO Energy, Inc. 7,300 205
Tele-Communications, Inc. Class A (a) 56,200 1,567
Texas Utilities Co. 59,500 2,473
U.S. West Communications Group 12,400 560
U.S. West Media Group (a) 132,500 3,826
Unicom Corp. 22,300 686
Union Electric Co. 10,500 454
UtiliCorp United, Inc. 26,500 1,029
Washington Gas & Light Co. 2,000 62
Washington Water Power Co. 2,200 52
Western Resources, Inc. 38,200 1,642
Wisconsin Energy Corp. 11,600 333
WorldCom, Inc. (a) 326,700 9,883
---------
119,197
---------
Total Common Stocks
(cost $824,304) 1,081,386
---------
</TABLE>
Equity Q Fund 51
<PAGE>
Equity Q Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ----------
<S> <C> <C>
Short-Term Investments - 2.9%
Frank Russell Investment Company
Money Market Fund,
due on demand (b) $ 27,045 $ 27,045
United States Treasury Notes (c)
5.125% due 04/30/98 1,800 1,798
----------
Total Short-Term Investments
(cost $28,843) 28,843
----------
Total Investments
(identified cost $853,147)(d) - 112.4% 1,110,229
Other Assets and Liabilities,
Net - (12.4%) (122,469)
----------
Net Assets - 100.0% $ 987,760
==========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
NV - Nonvoting
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S&P 400 Midcap Index Futures Contracts
expiration date 03/98 17 $ 59
S&P 500 Index Futures Contracts
expiration date 03/98 92 337
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 396
==============
</TABLE>
(S) At December 31, 1997, United States Treasury Notes valued at $1,798 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
52 Equity Q Fund
<PAGE>
Equity Q Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $853,147)(Note 2) ..................................................... $ 1,110,229
Receivables:
Dividends and interest ................................................................................... 1,797
Investments sold ......................................................................................... 3,573
Fund shares sold ......................................................................................... 7,197
Daily variation margin on futures contracts (Notes 2 and 3) .............................................. 14
--------------------
Total Assets .......................................................................................... 1,122,810
Liabilities
Payables:
Investments purchased .............................................................. $ 2,461
Fund shares redeemed ............................................................... 131,946
Accrued fees to affiliates (Note 4) ................................................ 582
Other accrued expenses ............................................................. 61
------------------
Total Liabilities ..................................................................................... 135,050
--------------------
Net Assets ................................................................................................... $ 987,760
====================
Net Assets consist of:
Undistributed net investment income .......................................................................... $ 49
Accumulated net realized gain (loss).......................................................................... 18,106
Unrealized appreciation (depreciation) on:
Investments ................................................................................................ 257,082
Futures contracts .......................................................................................... 396
Shares of beneficial interest ................................................................................ 275
Additional paid-in capital ................................................................................... 711,852
--------------------
Net Assets ................................................................................................... $ 987,760
====================
Net Asset Value, offering and redemption price per share:
($987,760,320 divided by 27,518,047 shares of $.01 par value
shares of beneficial interest outstanding) ............................................................... $ 35.90
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Q Fund 53
<PAGE>
Equity Q Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Dividends ................................................................................................ $ 17,603
Dividends from Money Market Fund (Note 5) ................................................................ 1,017
Interest ................................................................................................. 73
--------------------
Total Investment Income ............................................................................... 18,693
Expenses (Notes 2 and 4):
Management fees .................................................................... $ 6,050
Custodian fees ..................................................................... 387
Transfer agent fees ................................................................ 257
Bookkeeping service fees ........................................................... 14
Professional fees .................................................................. 21
Registration fees .................................................................. 46
Trustees' fees ..................................................................... 4
Miscellaneous ...................................................................... 68
------------------
Total Expenses ........................................................................................ 6,847
--------------------
Net investment income ........................................................................................ 11,846
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ........................................................................ 175,622
Futures contracts .................................................................. 5,301 180,923
------------------
Net change in unrealized appreciation or depreciation of:
Investments ........................................................................ 93,322
Futures contracts .................................................................. 457 93,779
------------------ --------------------
Net gain (loss) on investments ............................................................................... 274,702
--------------------
Net increase (decrease) in net assets resulting from operations .............................................. $ 286,548
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
54 Equity Q Fund
<PAGE>
Equity Q Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income .................................................................. $ 11,846 $ 13,142
Net realized gain (loss) ............................................................... 180,923 91,060
Net change in unrealized appreciation or depreciation .................................. 93,779 54,875
------------------ -----------------
Net increase (decrease) in net assets resulting from operations ..................... 286,548 159,077
------------------ -----------------
From Distributions to Shareholders:
Net investment income .................................................................. (11,797) (13,142)
In excess of net investment income ..................................................... -- (120)
Net realized gain on investments ....................................................... (185,330) (85,727)
------------------ -----------------
Total Distributions to Shareholders ................................................. (197,127) (98,989)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ............ 80,058 137,934
------------------ -----------------
Total Net Increase (Decrease) in Net Assets ................................................ 169,479 198,022
Net Assets
Beginning of period .................................................................... 818,281 620,259
------------------ -----------------
End of period (including undistributed net investment income of
$49 at December 31, 1997) ............................................................. $ 987,760 $ 818,281
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Q Fund 55
<PAGE>
Equity Q Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................................ $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income ....................................................... .44 .58 .59 .69 .66
Net realized and unrealized gain (loss) on investments ...................... 10.01 6.33 8.52 (.41) 2.71
-------- -------- -------- -------- --------
Total Income From Investment Operations .................................. 10.45 6.91 9.11 0.28 3.37
-------- -------- -------- -------- --------
Less Distributions:
Net investment income ....................................................... (.44) (.58) (.61) (.69) (.66)
In excess of net investment income .......................................... -- (.01) -- -- --
Net realized gain on investments ............................................ (7.05) (3.78) (2.53) (.97) (1.85)
In excess of net realized gain on investments ............................... -- -- -- (.22) (.06)
-------- -------- -------- -------- --------
Total Distributions ...................................................... (7.49) (4.37) (3.14) (1.88) (2.57)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .................................................. $ 35.90 $ 32.94 $ 30.40 $ 24.43 $ 26.03
======== ======== ======== ======== ========
Total Return (%)(a) ............................................................. 33.07 23.67 37.91 .99 13.80
Ratios/Supplemental Data:
Net assets, end of period ($000 omitted) .................................... 987,760 818,281 620,259 430,661 382,939
Ratios to average net assets (%)(a):
Operating expenses ....................................................... .68 .71 .58 .11 .15
Net investment income .................................................... 1.17 1.80 2.07 2.74 2.50
Portfolio turnover rate (%) ................................................. 94.89 74.59 74.00 45.87 54.69
Average commission rate paid per share
of security ($ omitted) ................................................... .0350 .0332 N/A N/A N/A
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
56 Equity Q Fund
<PAGE>
International Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide favorable total return and diversification for US
investors.
Invests in: Primarily the equity securities of non-US companies in developed
foreign markets.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns than its benchmark index with moderate risk by employing the investment
management services of seven managers with separate and distinct investment
approaches. The Fund's primary source of added value is intended to be stock
selection with only moderate country allocations relative to the index to
capture the diversification benefits of international investment in an asset
allocation context.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lipper(C)
Dates International ++ MSCI EAFE** International+++
- ----- ---------------- ----------- -----------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $12,013 $12,859 $11,658
1989 $14,904 $14,247 $14,281
1990 $12,528 $10,943 $12,575
1991 $14,216 $12,310 $14,138
1992 $13,348 $10,851 $13,553
1993 $18,095 $14,426 $18,918
1994 $19,069 $15,589 $18,727
1995 $21,110 $17,390 $20,455
1996 $22,794 $18,497 $22,818
1997 $22,925 $18,877 $23,989
</TABLE>
Yearly periods ended December 31
International Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ------------------ ------------ --------------
<S> <C> <C>
1 Year $ 10,058 0.58%
5 Years $ 17,174 11.42%(S)
10 Years $ 22,925 8.65%(S)
</TABLE>
Salomon Brothers Broad Market Index (BMI) ex-US +
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ------------------ ------------ --------------
<S> <C> <C>
1 Year $ 10,261 2.61%
5 Years $ 17,584 1l.95%(S)
</TABLE>
MSCI EAFE Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- -------------- ------------ -------------
<S> <C> <C>
1 Year $ 10,206 2.06%
5 Years $ 17,396 11.71%(S)
10 Years $ 18,877 6.56%(S)
</TABLE>
Lipper(C) International Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- -------------- ------------ ------------
<S> <C> <C>
1 Year $ 10,513 5.13%
5 Years $ 17,700 12.10%(S)
10 Years $ 23,989 9.14%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Morgan Stanley Capital International Europe, Australia, Far East (MSCI
EAFE) Index is an index composed of an arithmetic, market value-weighted
average of the performance of approximately 1,600 securities listed on
the stock exchanges of the countries of Europe, Australia, and the Far
East. The index is calculated on a total-return basis, which includes
reinvestment of gross dividends before deduction of withholding taxes.
++ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but
gross of any investment services fees. Information concerning these fees
can be obtained from the fund's managers upon request.
+++ Lipper(C) International Funds Average is the average total return for the
universe of funds within the International Funds investment objective.
The total return for the funds reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
+ Salomon Brothers BMI Index ex-US is a comprehensive float-weighted equity
index consisting of every company with an investable market
capitalization of over $100 million in 22 countries. This Index has
broader representation than the MSCI EAFE benchmark. However, 10 years of
historical performance information is not available because it was
constructed on June 30, 1989.
(S) Annualized.
58 International Fund
<PAGE>
International Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the International Fund had a total return
of 0.6% as compared to the Salomon Brothers Broad Market Index ex-US, which
gained 2.6% for the year. The Fund's shortfall to the benchmark was primarily
due to its overweighting in midcap stocks during a year in which large caps
dominated globally.
Portfolio Highlights
The consequences of the economic crises sweeping Asia during the last four
months of the year were felt in virtually all developed markets as well. Already
in a recession attributed to a poorly timed increase in consumption taxes,
prospects for Japan's economy worsened when the weakening economies of its Asian
trading partners diminished prospects for Japan's export business. Several major
corporate failures in Japan provided some indications of the severity of the
situation. Japanese stocks dropped 28% during the year. Although European
economies seemed much healthier, the uncertain exposure of European companies to
these markets dampened enthusiasm during the fourth quarter. However, European
stocks still gained 24% for the year.
While security selection helped offset some of the impact, the overweighting to
midcap stocks had a significant negative impact on the Fund's performance during
the year. While a modest overweighting in Japan also detracted from performance,
the Fund's underweighting in the UK had a bigger impact over the course of the
year.
<TABLE>
<CAPTION>
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
<S> <C>
Telecom Italia SPA (Italy) 1.5%
Sony Corp. (Japan) 1.5
Royal Dutch Petroleum Co. (Netherlands) 1.4
Roche Holdings
Genusscheine AG NPV (Switzerland) 1.3
Nestle SA (Switzerland) 1.3
Novartis AG (Switzerland) 0.9
Veba AG (Germany) 0.8
Glaxo Wellcome PLC (UK) 0.8
British Petroleum Co. PLC (UK) 0.8
Shell Transportation & Trading PLC (UK) 0.8
<CAPTION>
Portfolio Characteristics
December 31, 1997
<S> <C>
Current P/E Ratio 21.8x
Portfolio Price/Book Ratio 2.21x
Market Capitalization - $-Weighted Average 20.9 Bil
Number of Holdings 805
<CAPTION>
Money Managers Styles
<S> <C>
J.P. Morgan Investment Management, Inc. Market-Oriented
Marathon Asset Management, Ltd. Value
Mastholm Asset Management, L.L.C. Growth
Oechsle International Advisors Growth
Rowe Price-Fleming International, Inc. Market-Oriented
Sanford C. Bernstein & Co., Inc. Value
The Boston Company Asset Management, Inc. Value
</TABLE>
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
International Fund 59
<PAGE>
International Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
---------- ------------
<S> <C> <C>
Common Stocks - 91.7%
Argentina - 0.3%
Banco de Galicia y Buenos Aires
Class B - ADR 6,637 $ 171
Banco Frances del Rio la Plata - ADR 6,973 191
Naviera Perez Companc Class B 42,662 305
Sociedad Comercial del Plata - ADR 1,606 25
Telecom Argentina SA Class B - ADR 15,400 551
Telefonica de Argentina Class B - ADR 9,780 364
YPF Sociedad Anonima Class D - ADR 36,948 1,263
----------
2,870
----------
Australia - 2.8%
Amcor, Ltd. 232,800 1,024
Australia & New Zealand Bank
Group, Ltd. 744,828 4,922
Australian Gas & Light Co. 48,966 342
Australian National Industries, Ltd. 79,483 73
Australian Provincial Newspapers
Holdings, Ltd. 131,600 196
Boral, Ltd. 766,284 1,938
Brambles Industries, Ltd. 5,000 99
Broken Hill Proprietary Co. 150,005 1,393
Caltex Australia 100,000 311
Commonwealth Bank of Australia 36,371 417
CSR, Ltd. 162,000 549
Eastern Aluminum 236,000 200
Eltin, Ltd. 272,754 206
Fairfax (John) 79,000 165
Foster's Brewing Group, Ltd. 297,300 566
FXF Trust (Units) (a) 41,030 7
GIO Australia Holdings 277,113 709
ICI Australia, Ltd. 50,500 354
Lend Lease Corp. 13,289 260
Mayne Nickless, Ltd. 80,285 424
Morgan & Banks, Ltd. 32,100 210
National Australia Bank, Ltd. 34,092 476
News Corp. 400,120 2,209
Pasminco, Ltd. 130,000 149
PMP Communications, Ltd 196,000 434
Publishing Broadcasting, Ltd. 41,030 185
QBE Insurance Group 110,950 499
RGC, Ltd 179,077 273
Santos, Ltd. 327,000 1,347
Southcorp Holdings, Ltd. 247,500 819
Tabcorp Holdings, Ltd. 45,000 211
Telstra Corp., Ltd. (a) 161,000 340
Wesfarmers 36,111 303
Western Mining Corp., Ltd. 514,626 1,794
Westfield Trust 588,000 1,123
Westpac Banking Corp. 211,699 1,354
Woodside Petroleum, Ltd. 35,000 247
Woolworth's Ltd. 243,228 813
----------
26,941
----------
Austria - 0.1%
Bank Austria AG 3,100 157
Brau-Union Goess-Reininghaus-
Osterreichische Brau 2,528 128
Oester Brau Beteil 1,562 78
Voest-Alpine Stahl AG 13,000 502
Wienerberger Baustoff 1,600 307
----------
1,172
----------
Belgium - 0.5%
Algem Maatsch Voor Nijverheidskredit
Almanij NPV 20,500 1,035
Credit Communal Holding/Dexia NPV 7,302 980
Generale de Banque NPV 1,199 522
Kredietbank NPV (a) 3,090 1,297
PetroFina SA NPV 1,220 450
UCB Capital NV 99 327
Virgin Express Holdings PLC - ADR (a) 19,000 394
----------
5,005
----------
Brazil - 0.4%
Banco Bradesco SA NPV Rights (a) 1,268,292 5
CEMIG SA - ADR 6,844 277
Centrais Eletricas Brasileiras Electrobras
SA - ADR (a) 2,000 50
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar (Regd) - GDR 6,240 121
Eletrobras (centrais) NPV 6,281,300 313
Telecomunicacoes Brasileiras - ADR 20,460 2,382
Telecomunicacoes de Sno Paulo - NPV (a) 61,873 14
Uniao de Bancos Brasileiros SA - GDR (a) 9,166 295
Usinas Siderurgicas de Minas - ADR 24,555 145
White Martins SA - NPV 31,010 45
----------
3,647
----------
Canada - 3.3%
Air Canada, Inc. (a) 229,500 2,369
Alcan Aluminum, Ltd. 44,220 1,219
</TABLE>
60 International Fund
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
---------- ------------
<S> <C> <C>
ATI Technologies, Inc. (a) 9,700 $ 224
Avenor, Inc. 40,000 571
Barrick Gold Corp. 33,700 628
Barrick Gold Corp. (US Regd) 29,300 546
BCE, Inc. 43,800 1,459
BCE, Inc. NPV 31,400 1,047
Canadian Airlines Corp. (a) 59,000 139
Canadian Imperial Bank of Commerce 45,336 1,415
Canadian National Railway Co. 9,100 430
Canadian Pacific, Ltd. 45,100 1,215
Dofasco, Inc. NPV 32,701 526
Donohue, Inc. Class A 29,000 527
Edperbrascan Corp. Class A 31,000 561
Geac Computer Corp., Ltd. (a) 13,700 451
Hudson's Bay Co. 50,000 1,114
Imasco, Ltd. IF 61,470 2,172
Imperial Oil, Ltd. New 25,147 1,619
Inco, Ltd. 82,731 1,406
Laidlaw, Inc. 58,700 801
Leitch Technology Corp. (a) 8,000 238
Magna International, Inc. Class A 15,000 941
Moore Corp., Ltd. 128,800 1,948
National Bank of Canada 149,300 2,466
Noranda, Inc. 39,600 682
Nova Scotia Power, Inc. 50,200 611
Philip Services Corp. (a) 18,400 265
Potash Corp. of Saskatchewan, Inc. 4,700 390
Renaissance Energy, Ltd. (a) 18,900 390
Rogers Communications, Inc. Class B (a) 80,000 386
Royal Bank of Canada 24,850 1,315
Stelco, Inc. Series A 65,000 430
Suncor, Inc. NPV 10,656 365
Torstar Corp. Class B 18,400 644
Westcoast Energy, Inc. 24,000 554
----------
32,064
----------
Chile - 0.1%
Chilectra SA - ADR 6,335 162
Chilgener SA- ADR 5,811 142
Enersis SA - ADR 5,809 168
Santa Isabel SA - ADR 16,900 296
----------
768
----------
China - 0.1%
Huaneng Power International, Inc. - ADR
Series N(a) 21,400 496
----------
496
----------
Czech Republic - 0.0%
SPT Telecom AS (a) 690 72
----------
72
----------
Denmark - 0.4%
Bang & Olufsen Holding Series B 14,000 834
Coloplast AS Class B (Regd) 7,350 569
Den Danske Bank 2,350 313
Tele Danmark AS Series B 1,700 105
Tele Danmark Class B - ADR 60,600 1,867
Unidanmark Class A (Regd) 2,490 183
----------
3,871
----------
Finland - 0.8%
Aamulehti Group 6,100 204
Enso OY Series A 71,000 550
Finnair Oyj 71,900 580
Kesko 10,000 158
Kymmene OY 67,200 1,344
Metsa-Serla Oyj Series B 90,000 702
Nokia AB Series A 17,508 1,243
Outokumpu OY Class A 47,500 579
OY Tamro AB 41,300 227
Pohjola Series B 11,300 419
Rauma Group (The) 11,500 179
Rautaruukki OY 123,200 994
Valmet Corp. Series A 49,700 686
----------
7,865
----------
France - 9.5%
Accor SA 24,866 4,623
Alcatel Alsthom 9,738 1,238
Alcatel Alsthom Compagnie Generale
d'Electricite - ADR 63,500 1,607
Assurances Generales de France 4,065 215
AXA - UAP 44,026 3,407
Banque Nationale Paris 22,400 1,191
Boiron 3,000 163
Bongrain SA 391 165
Canal Plus 1,510 281
Carrefour SA 1,551 809
Chargeurs International SA 4,200 251
Cie de St. Gobain 13,142 1,867
Cie Finance Paribas Class A (BR) 33,795 2,937
Clarins 3,460 266
Credit Commercial de France 4,030 276
</TABLE>
International Fund 61
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- ----------
<S> <C> <C>
Credit Local de France (Regd) 1,775 $ 206
Credit National 4,916 287
D.M.C. Dollfuss-Mieg (a) 3,100 55
Dexia France 13,634 1,579
Dexia France (Regd) 1,180 137
Eaux (cie Generale) 42,086 5,874
Elf Aquitaine - ADR 35,700 2,093
Elf Aquitaine SA 15,580 1,812
Eridania Beghin-Say 10,718 1,676
France Telecom SA (a) 28,089 1,019
Galeries Lafayette 600 331
Groupe Andre SA (a) 2,800 281
Groupe Danone 29,883 5,338
GTM - Entrepose 1,840 124
Guilbert SA 1,891 270
Havas 1,790 129
L'Air Liquide 5,652 885
L'Oreal (Societe) 568 222
Lafarge Corp. SA (BR) 7,545 495
Lagardere Groupe (Regd) 61,100 2,020
Lapeyre (BR) 3,460 191
Legrand 1,519 303
Legris Industries SA 4,600 160
LVMH Moet-Hennessy 709 118
Lyonnais Eaux Dumez 36,906 4,084
M6 Metropole Television 3,300 361
Michelin (Cie Gen) Class B (Regd) 39,236 1,975
Nord-Est 15,000 299
Pathe SA 1,136 220
Pechiney International Class A 39,953 1,577
Peugeot SA 10,990 1,386
Pinault-Printemps Redoute SA 2,621 1,398
Primagaz CIE 2,655 222
Renault (a) 141,993 3,994
Rhone Poulenc SA - ADR 25,200 1,118
Rhone-Poulenc SA Class A - ADR 58,325 2,613
Sanofi SA 33,875 3,771
Schneider SA 76,096 4,132
Scor SA 15,000 717
Sefimeg (Regd) 2,100 105
SEITA 14,250 511
SGS Thomson Microelectronics (a) 9,957 616
Simco (Regd) 3,900 262
Societe Generale 16,128 2,197
Sodexho 1,004 538
Sodexho Alliance SA (a) 111 58
Sylea 2,800 267
Thomson-CSF 88,540 2,791
Total Co. SA Class B 44,631 4,857
TV Francaise (TFI) 22,633 2,313
Union des Assurances Federales 5,404 709
Usinor Sacilor 176,506 2,549
Valeo 31,410 2,130
Vallourec (Usin) 460 27
----------
92,698
----------
Germany - 6.8%
Adidas AG 10,900 1,434
Allianz AG (Regd) 3,690 956
BASFAG 14,874 527
Bayer AG 74,591 2,786
Bayer-Motoren Werk 472 353
Bayerische Hypotheken-und
Wechsel Bank AG 12,619 616
Bayerische Vereinsbank AG 8,865 580
Berliner Kraft-und Licht (Bewag)
- Aktiengesellschaft Class A 37,600 1,137
Bilfinger & Berger BAU AG 16,050 498
Buderus AG 1,447 648
Commerzbank AG 30,160 1,187
Continental AG 25,280 558
Daimler-Benz AG 76,315 5,354
Deutsche Bank AG 56,591 3,995
Deutsche Lufthansa AG (a) 119,940 2,300
Deutsche Telekom AG 18,183 342
Douglas Holding AG 20,700 625
Dresdner Bank AG 10,220 472
Fresenius Medical Care AG - ADR (a) 41,360 900
GEA AG 3,797 1,435
Gehe AG 15,830 792
Gerresheimer Glas AG 11,350 158
Hannover Rueckversicherungs AG 15,970 1,491
Henkel KGAA 17,700 994
Hoechst AG 121,870 4,268
Hornback Baumarkt AG 1,949 55
IKB Deutsche Industriebank AG 2,250 44
Karstadt AG 1,300 444
M.A.N. AG 600 174
Mannesmann AG 11,304 5,712
Merck KGAA 14,400 468
Metro AG 12,720 456
MobilCom AG (a) 3,162 478
Muenchener Rueckversicherungs-
GesellschaftAG 3,160 1,191
ProSieben Media AG - ADR (a) 1,410 33
</TABLE>
62 International Fund
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ----------
<S> <C> <C>
Rhoen - Klinikum AG 2,872 $ 281
SAP AG 7,670 2,330
Schering AG 5,000 482
Sero Entsorgung AG 4,800 100
SGL Carbon AG 1,414 182
Siemens AG 94,181 5,576
Tarkett AG 38,184 881
Veba AG 117,116 7,975
Viag AG 3,250 1,751
Volkswagen International AG 5,425 3,052
Wella Aktiengesellschaft 350 250
----------
66,321
----------
Hong Kong - 2.0%
Cathay Pacific Airways 176,000 143
Cheung Kong Holdings, Ltd. 26,000 170
China Light & Power 39,000 216
Dao Heng Bank Group, Ltd. 103,000 257
First Pacific Co. 402,154 195
Great Eagle Holdings 78,510 110
Great Eagle Holdings
1998 Warrants (a) 15,702 2
Guangshen Railway Co., Ltd. 3,485,000 922
Guoco Group, Ltd. 207,000 506
Hang Lung Development Co. 250,000 352
Hong Kong & China Gas Co., Ltd. 451,824 875
Hong Kong Electric Holding, Ltd. 743,000 2,824
HSBC Holdings (UK Regd) PLC 86,038 2,121
Hutchison Whampoa, Ltd. 670,000 4,202
National Mutual Asia 555,000 551
New World Development Co., Ltd. 788,232 2,726
Orient Overseas International, Ltd. 143,000 77
Sun Hung Kai Properties, Ltd. 235,200 1,639
Swire Pacific, Ltd. Class A 81,000 444
Swire Pacific, Ltd. Class B 489,000 495
Tai Cheung Holdings 73,000 29
Television Broadcast 184,000 525
Wharf Holdings 204,000 448
----------
19,829
----------
Ireland - 0.3%
Allied Irish Banks 143,000 1,364
Independent Newspapers PLC 125,000 685
Waterford Wedgwood (Units) 465,000 629
----------
2,678
----------
Italy - 4.9%
Assicurazioni Generali SPA 21,000 516
Banca Commerciale Italiana 543,500 1,889
Banca Pop di Bergamo CV 3,500 61
Banca Pop di Milano 201,343 1,263
Banco di Roma (a) 433,000 437
Credito Italiano 1,956,256 6,032
Edison 62,000 375
ENI SPA - ADR 22,000 1,255
Ente Nazionale Idrocarburi SPA (Regd) 466,973 2,648
Fiat SPA 218,900 637
Fiat SPA di Risp 388,248 642
Fila Holdings SPA - ADR 12,400 250
Finmeccanica SPA (a) 306,455 152
First Banco S. Paolo 115,000 1,099
Gewiss SPA 19,000 360
Gucci Group NV 6,088 255
Industrie Natuzzi SPA - ADR 36,372 750
Istituto Mobiliare Italiano SPA 128,168 1,521
Istituto Mobiliare Italiano SPA - ADR 24,000 858
Istituto Nazionale Delle Assicurazioni 383,000 776
Italgas (Soc. Ital.) 48,591 201
Luxottica Group SPA - ADR 11,400 713
Magneti Marelli SPA 52,500 90
Mediaset SPA 432,740 2,126
Mediolanum SPA 28,881 544
Mondadori (Arnoldo) Editore SPA 111,000 872
Montedison SPA 1,050,000 943
Montefibre di Risp 90,000 55
Parmalat Finanziaria SPA 355,000 508
Pirelli SPA 1,216,427 3,253
Rinascente (LA) 15,500 116
Simint SPA (a) 100,000 726
SOFAP (a) 125,000 99
Telecom Italia Mobile SPA 292,246 1,349
Telecom Italia Mobile SPA - di Risp 57,518 164
Telecom Italia SPA (a) 2,536,553 13,939
----------
47,474
----------
Japan - 18.8%
Acom Co., Ltd. 9,000 496
Advantest 2,730 155
Alps Electric Co. 25,000 236
Amada Co., Ltd. 49,000 182
Aoki International 27,000 134
Aoyama Trading Co. 68,000 1,213
Apic Yamada Corp. 25,200 218
</TABLE>
International Fund 63
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ----------
<S> <C> <C>
Bank of Kyoto, Ltd. 53,000 $ 199
Bank Of Tokyo - Mitsubishi, Ltd. 176,000 2,426
Bank of Yokohama 100,000 263
Bridgestone Tire Corp. 87,000 1,886
Brother Industries 165,000 377
Canon Sales Co., Inc. 16,000 183
Canon, Inc. 305,000 7,101
Chugai Pharmaceutical Co. 110,000 564
Citizen Watch Co., Ltd. 34,000 228
Credit Saison Co. 80,000 1,973
CSK Corp., Ltd. 18,000 460
Dai Ichi Kangyo Bank 116,000 684
Dai Ichi Pharmaceutical Co. 84,000 946
Dai Nippon Screen Manufacturing Co. 41,000 188
Dai-Tokyo Fire & Marine 378,000 1,297
Daifuku Machinery Co. 11,000 54
Daito Trust Construction 59,990 366
Daiwa Bank 134,000 286
Daiwa Danchi Co., Ltd. (a) 85,000 125
Daiwa House Industries Co. 128,000 676
Daiwa Kosho Lease Co., Ltd. 164,000 666
DDI Corp. 384 1,015
East Japan Railway 563 2,540
Ebara Corp. 52,000 550
Eisai Co. 100 2
Ezaki Glico Co. 76,000 491
Fanuc Co. 10,500 397
Fuji Machine Manufacturing Co. 30,000 724
Fuji Oil Co. 78,000 256
Fuji Photo Film Co. 28,000 1,072
Fujitsu, Ltd. 63,000 675
Fujitsu, Ltd. 1999 Warrants Series 2 (a) 29 58
Furukawa Electric Co. 170,000 728
Gakken Co. 82,000 115
General Sekiyu KK 32,000 135
Heiwa Corp. 52,000 450
Hitachi Credit Co., Ltd. 43,000 708
Hitachi Zosen Corp. 72,000 115
Hitachi, Ltd. 667,000 4,751
Hokkaido Electric 24,400 344
Honda Motor Co., Ltd. 44,000 1,614
Inax Corp. 25,000 73
Intec, Inc. 52,000 293
Ishihara Sangyo (a) 168,000 187
Ishikawajima-Harima Heavy Industries 274,000 409
Ito-Yokado Co., Ltd. 108,000 5,500
Japan Tobacco, Inc. 138 979
Jeol 50,000 159
Kamei Corp. 44,000 303
Kao Corp. 290,000 4,176
Kawasho Corp. 97,000 126
Keiyo Bank, Ltd. 83,000 172
Kinki Coca-Cola Bottling 32,000 341
Kirin Beverage Corp. 28,000 463
Kissei Pharmaceutical Co. 35,000 504
Koa Fire & Marine 83,000 311
Kokuyo Co., Ltd. 22,000 379
Komatsu Forklift Co., Ltd. 61,000 306
Komori Corp. 17,000 253
Kumagai Gumi Co. 48,000 26
Kuraray Co., Ltd. 46,000 380
Kurimoto Iron Works 97,000 275
Kyocera Corp. 24,000 1,088
Kyushu Electric Power 13,100 189
Mabuchi Motor Co. 37,300 1,894
Makita Corp. 138,000 1,321
Marui Co., Ltd. 49,000 762
Maruichi Steel Tube 51,000 621
Matsumotokiyoshi 23,900 915
Matsushita Electric Industrial Co., Ltd. 236,000 3,452
Mazda Motor Corp. (a) 446,000 1,059
Mikuni Coca-Cola Bottling 34,000 424
Minebea Co., Ltd. 197,000 2,112
Ministop Co., Ltd. 9,000 232
Mitsubishi Corp. 179,000 1,412
Mitsubishi Estate Co., Ltd. 76,000 827
Mitsubishi Heavy Industries 708,000 2,950
Mitsubishi Paper Mills 35,000 49
Mitsubishi Rayon 102,000 250
Mitsubishi Trust & Banking 160,000 1,605
Mitsui & Co. 105,000 621
Mitsui Fudosan Co., Ltd. 256,000 2,470
Mitsui Marine & Fire Insurance Co., Ltd. 37,000 189
Mitsui Mining & Smelting 109,000 437
Mitsui Petrochemical Industry 23,000 42
Mitsui Trust & Banklng 123,000 238
Murata Manufacturing Co., Ltd. 128,000 3,215
Nagase & Co. 31,000 90
Namco 58,000 1,684
National House Industrial 13,000 89
NEC Corp. 131,000 1,395
Nichido Fire & Marine 400 2
Nichiei Co., Ltd. 18,500 1,969
Nichimo Co. 73,000 68
Nippon Denso Co. 216,000 3,888
Nippon Fire & Marine 113,000 423
</TABLE>
64 International Fund
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- ----------
<S> <C> <C>
Nippon Hodo Co. 13,000 $ 42
Nippon Oil Co. 184,000 475
Nippon Steel Corp. 700,000 1,035
Nippon Telegraph & Telephone Corp. 771 6,613
Nishimatsu Construction 229,000 719
Nissan Motor Co., Ltd. 168,000 695
Nissho Iwai Corp. 98,600 172
Nomura Securities 325,000 4,331
Noritake Co. 18,000 86
North Pacific Bank 100,000 342
NTT Data Communication Systems Corp. 70 3,769
Okamura Corp. 74,000 182
Pioneer Electronics Corp. 220,000 3,387
Promise Co., Ltd. 8,170 453
Ricoh Co., Ltd. 94,000 1,166
Rinnai Corp. 55,500 837
Rohm Co. 33,000 3,361
Roland Corp. 4,000 74
Sakura Bank, Ltd. 136,000 389
Sangetsu Co. 6,000 62
Sankyo Co. 49,000 1,107
Sankyo Co., Ltd. 53,000 775
Sankyo Seiko Co. 100,000 180
Santen Pharmaceutical Co., Ltd. 25,000 287
Sanwa Bank 113,000 1,142
Secom Co. 18,000 1,150
Sega Enterprises 8,300 150
Sekisui Chemical Co., Ltd. 233,000 1,183
Sekisui House, Ltd. 143,000 919
Seven-Eleven Japan NPV 9,300 658
Sharp Corp. 99,000 681
Shiga Bank, Ltd. 41,000 176
Shikoku Electric Power 8,900 127
Shimachu Co., Ltd. 15,000 236
Shin Etsu Chemical 2000 Warrants (a) 158 217
Shin-Etsu Chemical Co. 74,400 1,419
Shiseido Co., Ltd. 110,000 1,500
Shohkoh Fund & Co., Ltd. 900 274
Showa Shell Sekiyu 60,000 301
Sony Corp. 155,600 13,824
Stanley Electric 116,000 320
Sumitomo Bank 163,000 1,860
Sumitomo Corp. 82,000 458
Sumitomo Electric Industries 105,000 1,431
Sumitomo Forestry 135,000 661
Sumitomo Marine & Fire 33,000 174
Sumitomo Metal Industries, Ltd. 400,000 512
Sumitomo Realty & Development 510,000 2,929
Sumitomo Rubber Industries 76,000 321
Sumitomo Trust & Banking 533,000 2,768
Tadano 45,000 122
Takeda Chemical Industries 40,000 1,140
TDK Corp. 29,000 2,185
Teijin, Ltd. 106,000 222
Toc Co. 49,000 372
Toda Corp. 70,000 190
Toho Bank 100,000 398
Tohoku Electric Power 19,700 299
Tokio Marine & Fire Insurance Co. 20,000 227
Tokyo Broadcasting 74,000 935
Tokyo Electric Power 71,000 1,294
Tokyo Electronics 9,900 317
Tokyo Gas Co. 423,000 959
Tokyo Steel Manufacturing 25,000 84
Toppan Printing 55,000 716
Torii Pharmaceutical Co., Ltd. 22,800 384
Toshiba Corp. 602,000 2,504
Tostem Corp. 22,000 236
Toyo Trust & Banking 123,000 725
Toyota Motor Corp. 154,000 4,411
Tsubakimoto Chain 74,000 266
UNY Co., Ltd. 20,000 274
West Japan Railway Co. 132 421
Yamaha Motor Co. 38,000 255
Yamanouchi Pharmaceutical 71,000 1,523
Yamato Kogyo Co. 42,000 253
Yamato Transport 93,000 1,246
Yasuda Fire & Marine
Insurance Co., Ltd. (The) 88,000 376
Yodogawa Steel Works, Ltd. 71,000 289
Yoshitomi Pharmaceutical 52,000 182
Yurtec Corp. 11,550 71
----------
182,725
----------
Malaysia - 0.5%
Berjaya Sports 94,000 241
Carlsberg Brewery Malaysia Berhad 301,000 929
Commerce Asset Holdings 59,232 28
Gamuda Berhad 364,100 202
IND Oxygen, Inc. 294,470 94
Kumpulan Guthrie 804,000 517
Malakoff Bhd 223,000 465
Petronas Dagangan 1999 Warrants (a) 139,000 19
Renong Berhad (a) 774,000 358
</TABLE>
International Fund 65
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- ----------
<S> <C> <C>
Resorts World Berhad 731,000 $ 1,231
Tanjong PLC 298,000 494
----------
4,578
----------
Mexico - 0.5%
Cemex SA de CV - ADR (a) 19,000 172
Cemex SA de CV Class B NPV (a) 24,709 132
Cifra SA de CV - ADR 2,570 63
Compania Cervecerias Unidas SA - ADR 3,214 95
Empresa Nacional de Electric - ADR 9,929 176
Fomento Economico Mexicano SA de CV
Series B NPV 38,557 308
Gruma SA - ADR (a) 10,354 164
Gruma SA Series B NPV (a) 45,148 179
Grupo Financiero Banamex AC
Series B NPV (a) 58,052 174
Grupo Financiero Banamex AC
Series L NPV (a) 3,655 9
Grupo Industrial Durango SA
de CV - ADR (a) 27,500 392
Grupo Industrial Maseca Series B NPV 131,263 136
Grupo Modelo SA Series C 27,752 233
Grupo Television SA de CV - GDR (a) 25,909 1,002
Kimberly-Clark, Mexico Class A NPV 61,044 299
Panamerican Beverages, Inc. Class A 12,354 403
Telefonos de Mexico SA Series L - ADR 15,479 868
TV Azteca SA de CV - ADR (a) 11,900 268
Vitro Sociedad Anonima - ADR 14,400 188
----------
5,261
----------
Netherlands - 6.4%
ABN Amro Holdings NV 117,464 2,288
Aegon 16,379 1,458
AKZO Nobel NV 27,459 3,275
Apothekers Cooperatie OPG 7,700 230
Baan Co. NV (a) 15,154 496
Benckiser NV Class B (a) 17,700 732
Boskalis Westminster CVA 16,564 294
CSM NV CVA 14,527 645
DOCdata NV (a) 20,500 354
Elsevier NV 117,388 1,899
European Vinyls Corp. International NV 7,200 160
Fortis Amev NV 17,022 742
Heineken Holding NV Class A 2,500 385
Hollandsche Beton Groep NV (a) 51,580 959
Hunter Douglas NV (a) 29,816 1,044
ING Groep NV 126,243 5,317
KNP BT (Kon) NV 66,442 1,530
Koninklijke Ahold NV 43,986 1,148
Koninklijke Emballage Industrie Van Leer 10,700 220
Koninklijke Nutricia Verenigde
Bedrijven NV (a) 11,280 342
Nedlloyd Groep NV 35,000 794
Nutreco Holding NV (a) 14,400 328
Otra NV 3,590 51
Philips Electronics 75,689 4,539
Philips Electronics - ADR 17,200 1,041
Polygram 31,706 1,517
Royal Dutch Petroleum Co. 239,651 13,155
Royal PTT Nederland NV 78,111 3,259
Royal PTT Nederland NV - ADR 29,382 1,219
Stork NV 12,500 432
Unilever NV 41,980 2,588
Verenigde Nederlandse
Uitgeversbedrijven Verenigd Bezit 208,737 5,888
Wereldhave NV 7,900 496
Wolters Kluwer CVA 25,748 3,326
----------
62,151
----------
New Zealand - 0.2%
Air New Zealand Class B 228,787 458
Fletcher Challenge Building 58,502 120
Fletcher Challenge Energy 151,373 530
Lion Nathan, Ltd. 104,700 235
Telecom Corp. of New Zealand, Ltd. 111,400 540
Wrightson, Ltd. 300,000 139
----------
2,022
----------
Norway - 0.8%
Bergesen DY AS Series A 4,130 97
Kvaerner Industries AS Series B 10,000 464
Norsk Hydro AS 46,906 2,283
Orkla AS New 17,629 1,516
Orkla AS Series B Free 8,083 628
Rieber & Son ASA Series B 25,000 677
Saga Petroleum AS Series B 8,070 122
Schibsted AS 69,600 1,192
Storebrand ASA Series A (a) 75,000 529
----------
7,508
----------
</TABLE>
66 International Fund
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Panama - 0.0%
Banco Latinoamericano de
Exportaciones SA Class E 1,820 $ 75
----------
75
----------
Peru-0.0%
Credicorp, Ltd. 3,720 67
Telefonica Del Peru SA
Class B - ADR 3,440 80
----------
147
----------
Portugal - 0.3%
Banco Totta e Acores (Regd) 87,400 1,716
Estabelecimentos Jeronimo
Martins & Filho (a) 20,610 654
Jeronimo Martins SGPS 13,740 436
Telecel-Comunicacaoes Pessoaissa (a) 4,600 490
-----------
3,296
----------
Russia - 0.0%
Gazprom - ADR 2,780 67
Lukoil Oil Co. - ADR 1,400 129
-----------
196
Singapore - 0.7%
City Developments 18,000 83
Creative Technology, Ltd. (a) 5,000 109
Development Bank of Singapore, Ltd.
(Alien Market) 134,000 1,145
Hong Kong Land Holdings, Ltd. (a) 243,282 467
Jardine Strategic Holdings, Ltd. (a) 541,437 1,429
Jardine Strategic Holdings, Ltd.
1998 Warrants (a) 11,437 1
Jurong Shipyard 140,000 664
Mandarin Oriental International, Ltd. (a) 624,878 419
Overseas Chinese Banking
(Alien Market) 15,600 91
Overseas Union Bank (Alien Market) 43,200 165
Singapore Airlines, Ltd. (Alien Market) 118,000 770
Singapore Land 84,000 185
Singapore Press Holdings
(Alien Market) 30,600 383
United Overseas Bank, Ltd.
(Alien Market) 149,779 831
-----------
6,742
-----------
South Korea - 0.0%
Sarusung Electronics, Ltd. 4,042 92
-----------
92
-----------
Spain - 2.8%
Acerinox SA 4,500 667
Argentaria 14,102 858
Banco Bilbao Vizcaya SA 58,290 1,886
Banco Popular Espanol SA 21,248 1,485
Banco Santander SA (Regd) 19,964 667
Centros Commerciales Pryca 39,100 583
Corp. Fin. Reunida (a) 200,000 1,070
Corporacion Bancaria de Espana SA 65,100 1,990
Cubiertas Y Mzov 5,500 897
Dragados y Construcciones SA 6,600 141
Empresa Nacional de Electricidad SA (a) 74,056 1,315
Fomento de Construcciones y
Contratas SA (a) 10,700 407
Fuerzas Electricat Series A 73,300 611
Gas Natural SDG SA (a) 5,362 278
Gas Y Electricidad SA Series 2 21,741 1,570
Hidroelectrica del Cantabrico SA 12,490 548
Iberdrola SA 123,243 1,622
Prosegur CIA de Seguridad SA (Regd) 55,000 552
Repsol - ADR 45,800 1,949
Repsol SA 36,643 1,563
Tabacalera SA Series A (Regd) 25,097 2,034
Telefonica de Espana 143,058 4,085
Union Electrica Fenosa 13,000 125
Viscofan Envoltura 25,500 640
-----------
27,543
-----------
Sweden - 2.7%
ABB AB Series A (a) 30,000 355
ABB AB Series B (a) 110,300 1,299
Astra AB Series A (a) 62,701 1,086
Astra AB Series B (a) 83,044 1,396
Atlas Copco AB Series B 17,190 512
Autoliv, Inc. 44,930 1,463
Avesta-Sheffield 54,500 360
BT Industries AB 49,000 981
Diligentia AB (a) 22,930 306
Electrolux AB Series B 39,984 2,775
Esselte AB Series B 3,570 72
Granges AB (a) 5,155 81
Hennes and Mauritz AB Series B (a) 41,240 1,818
Hoganas AB B Shares 18,300 560
Incentive AB Series A 7,700 693
</TABLE>
International Fund 67
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Incentive AB Series B 17,800 $ 1,607
Marieberg Tidnings Series A 47,000 1,101
Munksjo AB 50,800 483
Nordbanken Holding AB (a) 131,668 745
OM Gruppen AB 21,200 772
Pharmacia & Upjohn, Inc. 44,300 1,623
Sandvik AB Series A 3,360 96
Sandvik AB Series B 15,420 441
Scandic Hotels AB (a) 18,700 457
Scania AB Series B 7,000 157
Scania Aktiebolag - ADR Series A 14,200 312
Scania Aktiebolag - ADR Series B 6,200 136
Scribona AB Series B Free 4,140 46
SKF AB Series A 24,273 486
Stora Kopparbergs Bergslags Aktiebolag
Series A 87,000 1,096
Svenska Celluosa Series B Free 19,000 427
Svenska Handeisbank Series A 40,400 1,397
Telefonaktiebolaget Ericsson (LM) Series B 21,420 805
Tornet Fastighets AB 52,000 740
--------
26,684
Switzerland - 6.0%
ABB AG(a) 1,166 1,464
Adecco SA 2,299 666
Baloise Holding, Ltd. (a) 725 1,341
Bobst AG (BR) 600 883
Bobst AG 425 307
Ciba Specialty Chemicals AG (a) 11,307 1,346
Credit Suisse Group (Regd) 9,255 1,431
Danzas Holding AG 2,100 412
Fischer (Georg) AG (BR) 250 342
Fischer (Georg) AG (Regd) 350 93
Forbo Holding AG (Regd) 1,700 695
Generali (Schweiz) Holding (a) 5,000 1,035
Liechtenstein Global Trust AG 1,523 943
Lindt & Spruengli AG 270 647
Nestle SA (Regd) 8,010 12,000
Novartis AG (Regd) 5,076 8,233
Phoenix Mecano (BR) 800 408
Publicitas Holdings SA (Regd) 2,000 437
Roche Holdings Genusscheine AG NPV 1,233 12,240
Sarna Kunststoff Holdings AG (Regd) 250 325
Schweiz Bankgesellsch (BR) 3,080 4,452
Schweiz Ruckversicher (Regd) 1,160 2,169
Schweizerischer Bankverein (Regd) 10,210 3,172
SGS Holding (BR) 450 862
SMH AG Neuenburg (Regd) 8,900 1,200
Suizer AG (Regd) 1,650 1,046
--------
58,149
United Kingdom - 19.7%
Abbey National PLC 63,000 1,134
Airtours PLC 65,000 1,324
Allied Colloids PLC 174,057 475
Amersham International PLC 10,100 375
Anglian Water PLC 97,400 1,328
Argos PLC 63,404 572
ASDA-MH Group PLC 1,120,790 3,297
Associated British Ports PLC 122,000 603
B.A.T. Industries PLC 130,600 1,191
Barclays Bank PLC 100,200 2,668
BASS PLC 54,000 840
Berisford PLC 300,000 921
BG PLC 60,441 272
Billiton PLC (a) 206,300 529
BOC Group PLC 214,493 3,527
BPB Industries PLC 43,800 245
British Aerospace PLC 153,503 4,374
British Airways PLC 107,000 984
British Petroleum Co. PLC 558,481 7,388
British Steel PLC 343,600 739
British Telecom PLC 217,007 1,710
British-Borneo Petroleum Syndicate PLC 30,200 211
BTR PLC 818,466 2,474
Bunzl PLC 387,500 1,505
Burmah Castrol PLC 39,000 680
Cable & Wireless Communications PLC (a) 100,500 436
Cable & Wireless PLC 567,006 4,983
Cable & Wireless PLC - ADR 19,567 532
Cadbury Schweppes PLC 141,228 1,425
Caradon PLC 127,423 370
Centrica PLC (a) 68,500 101
Coats Viyella PLC 290,000 433
Commercial Union Assurance Co. PLC 148,000 2,064
Compass Group PLC 136,600 1,681
Costain Group PLC (a) 8,200 3
Courtaulds Textile Co. PLC 130,000 762
Cowie Group PLC 149,166 843
Dalgety PLC 300,000 1,360
</TABLE>
68 International Fund
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Devro International PLC 210,000 $ 1,300
ED&F Man Group PLC 140,000 572
Electrocomponents PLC 42,000 313
EMI Group PLC (a) 99,000 826
Enterprise Oil PLC 39,200 373
First Leisure Corp. PLC 120,000 590
Flextech PLC (a) 80,000 686
General Accident PLC 41,500 746
General Electric Co. PLC 44,100 286
GKN PLC 9,000 184
Glaxo Weilcome PLC 330,079 7,869
Glynwed International PLC 75,200 320
Granada Group PLC 131,700 2,012
Great University Stores PLC 105,000 1,323
Guardian Royal Exchange PLC 371,000 2,015
Guinness PLC 599,180 5,482
Hanson PLC 87,375 390
Heywood Williams Group PLC 21,666 74
Hillsdown Holdings PLC 369,876 899
HSBC Holdings PLC 82,000 2,128
Hyder PLC 37,333 594
Imperial Chemical Industries PLC 142,512 2,226
Imperial Tobacco Group PLC 139,000 874
Kingfisher PLC 186,457 2,603
Ladbroke Group, Ltd. PLC 870,163 3,773
Laing (John) PLC Class A NV 35,800 189
Laird Group PLC 190,830 1,395
Lloyds TSB Group PLC 304,408 3,960
London Clubs International 200,000 1,068
LucasVarity PLC 1,548,218 5,467
Manchester United PLC 500,000 1,314
Medeva PLC 293,000 780
MEPC PLC 56,000 467
MFI Furniture Group PLC 363,641 720
Mirror Group News PLC 625,000 2,002
National Power PLC 37,000 365
National Westminster Bank PLC 349,427 5,808
Next PLC 54,800 626
Northern Rock PLC (a) 50,600 496
Pace Micro Technology PLC 190,000 147
Pearson PLC 88,700 1,152
Pilkington Brothers PLC 221,000 463
Powell Duffryn PLC 68,000 575
Powergen PLC 190,230 2,475
Premier Consolidated Oil PLC 605,000 527
Premier Farnell PLC 73,000 525
Provident Financial PLC 104,000 1,367
Prudential Corp. PLC 130,000 1,583
Racal Electronics PLC 356,800 1,565
Railtrack Group PLC 100,000 1,588
Rank Group PLC 159,750 889
Redland PLC 23,033 129
Reed International 333,080 3,173
Rio Tinto Corp. PLC (Regd) 241,953 2,983
Rolls-Royce PLC 155,470 600
Royal & Sun Alliance Insurance
Group PLC 438,732 4,417
Royal Bank of Scotland Group PLC 201,500 2,569
Safeway PLC 432,153 2,435
Sainsbury (J.) PLC 218,432 1,841
Scottish Media Group PLC 20,200 221
Scottish Power PLC 186,000 1,644
Shell Transportation &
Trading PLC (Regd) 1,022,000 7,168
Smith & Nephew PLC 757,000 2,238
Smith (David S.) Holdings PLC 77,000 251
SmithKline Beecham PLC 292,380 3,013
Somerfield PLC 426,000 1,469
South West Water PLC 93,100 1,414
Stagecoach Holdings PLC 113,333 1,554
Stakis PLC 618,442 965
Tarmac, Ltd. PLC 547,261 1,025
Taylor Woodrow PLC 235,000 687
Tesco Store Holdings PLC 89,463 738
Thames Water PLC 13,000 194
Thorn PLC 261,428 678
Tomkins PLC 950,210 4,495
Trinity Holdings PLC 100,000 509
Unilever PLC 224,040 1,927
United Newspaper, Ltd. PLC 151,200 1,721
Vendome PLC 87,000 686
Vickers, Ltd. PLC 115,700 448
Vodafone Group PLC 742,232 5,364
Wessex Water PLC 115,000 969
Williams Holdings PLC 116,666 648
WPP Group PLC 230,000 1,024
Zeneca Group PLC 43,000 1,523
-----------
191,050
-----------
Venezuela - 0.0%
CIA Anon Nacional Telefonos de
Venezuela - ADR 5,282 220
-----------
220
-----------
Total Common Stocks
(cost $840,957) 892,210
-----------
</TABLE>
International Fund 69
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Preferred Stocks - 1.3%
Australia - 0.2%
News Corp., Ltd. 184,769 $ 914
Sydney Harbour Casino
Holdings, Ltd. (a) 1,041,762 988
--------
1,902
--------
Austria - 0.2%
Bank Austria (a) 24,332 1,083
Bank Austria AG (a) 22,000 993
Z Landerbank Bank Austria AG 4,300 204
--------
2,280
--------
Brazil - 0.2%
Banco Bradesco SA NPV 29,664,054 292
Banco Itau SA (Regd) 301,000 162
Brahma (cia Cervej) NPV 325,724 219
Brasmotor SA NPV 529,000 52
CEMIG SA 4,869,699 212
Cim Port Itau (Cia) 370,920 71
Coteminas (Cia Tec) NPV 288,490 103
Lojas Americanas NPV (a) 5,224,000 24
Petroleo Brasileiro SA NPV 1,961,080 459
Telecomunicacoes - NPV 1,670,792 445
Telecomunicacoes de Minas Gerais
Class B NPV 828,000 105
Telecomunicacoes de Minas Gerais
Series B NPV (a) 10,270 1
Telecomunicacoes do Rio de
Janeiro SA NPV 872,476 91
Usiminas Uni Sd Mg NPV 7,598 45
--------
2,281
--------
Germany - 0.6%
Bayer Motoren Werk 900 460
Draegerwerk AG 750 14
Dyckerhoff AG 250 66
Fielmann AG 2,133 47
Fresenius AG 1,010 186
Henkel KGAA 3,300 208
Hombach Holding AG 2,060 143
Hugo Boss 550 703
Jungheinrich 900 135
Krones AG NV 800 249
M.A.N. AG 250 56
Porsche AG 900 1,501
ProSieben Media AG NV (a) 11,555 539
RWE AG 13,000 549
SAP AG 660 216
Wella AG 100 76
--------
5,148
--------
Italy - 0.0%
Fiat SPA 171,397 262
--------
262
Netherlands - 0.0%
International Nederlanden CVA 2,901 14
--------
14
United States - 0.1%
WBK STRYPES Trust (conv.) 18,900 633
--------
633
Total Preferred Stocks
(cost $10,710) 12,520
--------
<CAPTION>
Principal
Amount
(000)
-------------
<S> <C> <C>
Long-Term Investments - 0.2%
Belgium - 0.0%
Kredietbank
5.750% due 12/31/03 (conv.) BEF 20,000 84
--------
84
--------
Japan - 0.2%
Bank of Tokyo - Cayman
Finance, Ltd. (Perpetual
Maturity)
4.250% due 03/29/49 JPY 50,000 419
STE Cayman Capital, Ltd.
0.500% due 10/01/07 (conv.) 5,000 29
Sumitomo Wiring Systems
0.900% due 09/30/08 45,000 276
Yamanouchi Pharmaceutical
1.250% due 03/31/14 (conv.) 90,000 976
--------
1,700
--------
Total Long-Term Investments
(cost $2,035) 1,784
--------
</TABLE>
70 International Fund
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
------------- ----------
<S> <C> <C>
Short-Term Investments - 3.5%
United States - 3.5%
Frank Russell Investment Company
Money Market Fund,
due on demand (b) $ 25,019 $ 25,019
United States Treasury Notes
5.125% due 04/30/98 (c) 8,850 8,839
-----------
Total Short-Term Investments
(cost $33,863) 33,858
-----------
Total Investments
(identified cost $887,565)(d) - 96.7% $ 940,372
Other Assets and Liabilities,
Net - 3.3% 32,363
-----------
Net Assets - 100.0% $ 972,735
===========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
GDS - Global Depositary Share
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
Foreign Currency Abbreviations:
AUD - Australian dollar
BEF - Belgian franc
CHF - Swiss franc
DEM - German mark
ESP - Spanish peseta
FIM - Finnish markka
FRF - French franc
GBP - British pound
HKD - Hong Kong dollar
ITL - Italian lira
JPY - Japanese yen
NLG - Dutch guilder
NZD - New Zealand dollar
USD - U.S. dollar
The accompanying notes are an integral part of the financial statements.
International Fund 71
<PAGE>
International Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
FTSE - 100 Index
Futures Contracts (UK)
expiration date 03/98 106 $ (176)
TOPIX Index
Futures Contracts (Japan)
expiration date 03/98 255 (845)
-------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ (1,021)
=============
</TABLE>
(S) At December 31, 1997, United States Treasury Notes valued at $8,839 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
<TABLE>
<CAPTION>
% of Market
Net Value
Industry Diversification Assets (000)
- ------------------------ ---------- ----------
<S> <C> <C>
Auto & Transportation 5.4% $ 52,983
Consumer Discretionary 16.7 162,008
Consumer Staples 6.9 67,398
Financial Services 17.3 168,448
Health Care 6.0 58,455
Integrated Oils 3.7 36,038
Material & Processing 11.1 107,770
Miscellaneous 5.2 50,429
Other Energy 2.4 23,025
Producer Durables 6.9 67,322
Technology 3.0 28,968
Utilities 8.4 81,886
Long-Term Investments 0.2 1,784
Short-Term Investments 3.5 33,858
---------- ----------
Total Investments 96.7 940,372
Other Assets and Liabilities, Net 3.3 32,363
---------- ----------
Net Assets 100% $ 972,735
========== ==========
<CAPTION>
% of Market
Net Value
Geographic Diversification Assets (000)
- -------------------------- ---------- -----------
<S> <C> <C>
Europe 43.2% $ 420,200
Japan 19.0 184,425
United Kingdom 19.6 191,050
Pacific Basin 6.4 62,606
Latin America 1.6 15,268
United States (Short-Term Investments) 3.5 33,858
Other 3.4 32,965
---------- -----------
Total Investments 96.7 940,372
Other Assets and Liabilities, Net 3.3 32,363
---------- -----------
Net Assets 100% $ 972,735
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
72 International Fund
<PAGE>
International Fund
Foreign Currency Exchange Contracts (Note 2)
December 31, 1997
Foreign Currency Exchange Spot Contracts
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
- ---------------- ------------- ------------ ----------------
<S> <C> <C> <C>
USD 193 AUD 294 01/02/98 $ (1)
USD 54 AUD 82 01/05/98 (1)
USD 227 AUD 347 01/07/98 (1)
USD 19 AUD 29 01/08/98 --
USD 358 DEM 637 01/02/98 (4)
USD 86 FRF 512 01/30/98 (1)
USD 140 GBP 85 01/06/98 (1)
USD 123 JPY 16,016 01/05/98 (1)
USD 155 JPY 20,122 01/07/98 (1)
CHF 568 DEM 700 01/05/98 --
AUD 3 FIM 10 01/02/98 --
FRF 7,302 USD 1,222 01/30/98 9
DEM 792 USD 443 01/05/98 2
ESP 181,143 USD 1,206 01/02/98 17
GBP 519 USD 860 01/07/98 7
HKD 1,589 USD 205 01/02/98 --
ITH 502,730 USD 288 01/05/98 4
ITH 1,116,934 USD 636 01/08/98 5
NLG 469 USD 233 01/05/98 2
NLG 485 USD 241 01/06/98 2
NZD 84 USD 49 01/05/98 __
---------
$ 37
=========
</TABLE>
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
- ---------------- ------------- ------------ ----------------
<S> <C> <C> <C>
USD 30,548 GBP 18,600 03/20/98 $ (117)
USD 30,993 JPY 3,900,000 03/20/98 (772)
DEM 17,680 USD 10,034 03/18/98 162
GBP 6,000 USD 9,953 03/20/98 137
JPY 2,470,000 USD 19,648 02/25/98 574
JPY 1,200,000 USD 9,391 03/20/98 92
---------
$ 76
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Fund 73
<PAGE>
International Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
-----------------
<S> <C> <C>
Assets
Investments at market (identified cost $887,565)(Note 2)...................................................... $ 940,372
Cash.......................................................................................................... 589
Foreign currency holdings (identified cost $9,650)............................................................ 9,481
Foreign currency exchange spot contracts (cost $7,529)(Note 2)................................................ 7,518
Forward foreign currency exchange contracts (cost $110,567)(Note 2)........................................... 109,678
Receivables:
Dividends and interest...................................................................................... 1,642
Investments sold............................................................................................ 15,979
Fund shares sold............................................................................................ 12,101
Foreign taxes recoverable................................................................................... 768
--------------------
Total Assets........................................................................................... 1,098,128
Liabilities
Payables:
Investments purchased................................................................ $ 5,540
Fund shares redeemed................................................................. 1,620
Accrued fees to affiliates (Note 4).................................................. 698
Other accrued expenses............................................................... 411
Daily variation margin on futures contracts (Notes 2 and 3).......................... 41
Foreign currency exchange spot contracts (cost $7,529)(Note 2)......................... 7,481
Forward foreign currency exchange contracts (cost $110,567)(Note 2).................... 109,602
-------------------
Total Liabilities...................................................................................... 125,393
--------------------
Net Assets.................................................................................................... $ 972,735
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income.................................................. $ (6,243)
Accumulated distributions in excess of net realized gains..................................................... (10,659)
Unrealized appreciation (depreciation) on:
Investments................................................................................................. 52,807
Futures contracts........................................................................................... (1,021)
Foreign currency-related transactions....................................................................... (194)
Shares of beneficial interest................................................................................. 281
Additional paid-in capital.................................................................................... 937,764
--------------------
Net Assets.................................................................................................... $ 972,735
====================
Net Asset Value, offering and redemption price per share:
($972,734,906 divided by 28,109,698 shares of $.01 par value
shares of beneficial interest outstanding).................................................................. $ 34.60
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
74 International Fund
<PAGE>
International Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Dividends................................................................................................. $ 19,890
Dividends from Money Market Fund (Note 5)................................................................. 3,404
Interest.................................................................................................. 717
Less foreign taxes withheld............................................................................... (2,354)
--------------------
Total Investment Income................................................................................ 21,657
Expenses (Notes 2 and 4):
Management fees..................................................................... $ 7,577
Custodian fees...................................................................... 1,962
Transfer agent fees................................................................. 326
Bookkeeping service fees............................................................ 105
Professional fees................................................................... 51
Registration fees................................................................... 53
Trustees' fees...................................................................... 5
Miscellaneous....................................................................... 79
------------------
Total Expenses......................................................................................... 10,158
--------------------
Net investment income......................................................................................... 11,499
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments........................................................................... 43,391
Futures contracts..................................................................... 3,386
Foreign currency-related transactions................................................. (4,800) 41,977
------------------
Net change in unrealized appreciation or depreciation of:
Investments........................................................................... (46,808)
Futures contracts..................................................................... (44)
Foreign currency-related transactions................................................. 65 (46,787)
------------------ --------------------
Net gain (loss) on investments................................................................................ (4,810)
--------------------
Net increase (decrease) in net assets resulting from operations............................................... $ 6,689
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Fund 75
<PAGE>
International Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
----------------- ------------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.................................................................. $ 11,499 $ 10,544
Net realized gain (loss)............................................................... 41,977 36,433
Net change in unrealized appreciation or depreciation.................................. (46,787) 20,126
----------------- ------------------
Net increase (decrease) in net assets resulting from operations..................... 6,689 67,103
----------------- ------------------
From Distributions to Shareholders:
Net investment income.................................................................. (9,488) (8,574)
In excess of net investment income..................................................... (4,696) --
Net realized gain on investments....................................................... (50,573) (33,014)
In excess of net realized gain on investments.......................................... (12,206) --
----------------- ------------------
Total Distributions to Shareholders................................................. (76,963) (41,588)
----------------- ------------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)............ 98,629 122,088
----------------- ------------------
Total Net Increase (Decrease) in Net Assets................................................ 28,355 147,603
Net Assets
Beginning of period.................................................................... 944,380 796,777
----------------- ------------------
End of period (including accumulated distributions in excess of
net investment income of $6,243 and $2,011, respectively)............................. $ 972,735 $ 944,380
================= ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
76 International Fund
<PAGE>
International Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......................................... $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92
------- ------- -------- ------- -------
Income From Investment Operations:
Net investment income...................................................... .46 .44 .48 .61 .58
Net realized and unrealized gain (loss) on investments..................... (.28) 2.41 3.16 .65 9.63
------- ------- -------- ------- -------
Total Income From Investment Operations................................. .18 2.85 3.64 1.26 10.21
------- ------- -------- ------- -------
Distributions:
Net investment income...................................................... (.37) (.35) (.64) (.36) (.57)
In excess of net investment income......................................... (.18) -- (.08) -- (.16)
Net realized gain on investments........................................... (1.95) (1.37) (.94) (3.73) (1.06)
In excess of net realized gain on investments.............................. (.47) -- -- (.23) --
------- ------- -------- ------- -------
Total Distributions..................................................... (2.97) (1.72) (1.66) (4.32) (1.79)
------- ------- -------- ------- -------
Net Asset Value, End of Period................................................ $ 34.60 $ 37.39 $ 36.26 $ 34.28 $ 37.34
======= ======= ======== ======= =======
Total Return (%)(a)........................................................... .58 7.98 10.71 5.38 35.56
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................................... 972,735 944,380 796,777 674,180 562,497
Ratios to average net assets (%)(a):
Operating expenses, net................................................. 1.00 1.04 .88 .32 .39
Operating expenses, gross............................................... 1.00 1.05 .89 .34 .41
Net investment income................................................... 1.14 1.20 1.41 1.63 1.83
Portfolio turnover rate (%)................................................ 79.45 42.69 36.78 71.09 62.04
Average commission rate paid per share
of security ($ omitted)(b)............................................... .0055 .0038 N/A N/A N/A
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
(b) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.
International Fund 77
<PAGE>
Fixed Income I Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide effective diversification against equities and a stable
level of cash flow.
Invests in: Fixed-income securities.
Strategy: The Fund uses a multi-style, multi-manager strategy and employed three
managers with distinct approaches to managing portfolios of intermediate-
maturity, investment-grade fixed income securities.
Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Lipper(C)
Dates Fixed I ++ LB Aggregate** Intermediate +++
- ----- ---------- -------------- ----------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $10,876 $10,789 $10,696
1989 $12,328 $12,357 $11,910
1990 $13,388 $13,464 $12,752
1991 $15,532 $15,619 $14,689
1992 $16,659 $16,775 $15,679
1993 $18,401 $18,410 $17,169
1994 $17,855 $17,873 $16,596
1995 $21,074 $21,175 $19,348
1996 $21,865 $21,944 $19,963
1997 $23,925 $24,062 $21,648
</TABLE>
Yearly periods ended December 31
<TABLE>
<CAPTION>
Fixed Income I Fund Lehman Brothers Aggregate Bond Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- ------------------- ----------- ----------- --------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,942 9.42% 1 Year $ 10,966 9.66%
5 Years $ 14,361 7.51%(S) 5 Years $ 14,345 7.48%(S)
10 Years $ 23,925 9.12%(S) 10 Years $ 24,062 9.18%(S)
</TABLE>
Lipper (C) Intermediate Investment Grade Debt Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ------------------- ----------- -----------
<S> <C> <C>
1 Year $ 10,844 8.44%
5 Years $ 13,807 6.66%(S)
10 Years $ 21,648 8.03%(S)
</TABLE>
* Assumes initial investment on January 1, 1988
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
++ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but
gross of any investment services fees. Information concerning these fees
can be obtained from the fund's managers upon request.
+++ Lipper(C) Intermediate (5-10 Yr.) Investment Grade Debt Funds Average is
the average total return for the universe of funds within the Intermediate
Investment Grade Debt Funds investment objective. The total return for the
funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates.
(S) Annualized.
78 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Fixed Income I Fund reflected a total
return of 9.4% as compared to the Lehman Brothers Aggregate Bond Index, which
gained 9.7%. The Index outperformed the Fund primarily due to the Fund's shorter
duration through part of the year which reflected some of the uncertainty in the
market, with Fed intervention an almost constant concern. With yields falling on
intermediate- and longer-maturity bonds, the best returns were produced by
longer duration strategies. The bellwether 30-year treasury bond returns
exceeded 15% for the year.
Portfolio Highlights
Interest rates declined throughout the year as signs of disinflation, or even
deflation, helped ease yields. Although quite volatile again in 1997, the trend
in falling yields was quite strong with the yield on the long bond reaching its
lowest point since its introduction in 1977. The Federal Reserve Board added
uncertainty to the market, but made only one interest rate move during the year,
a 1/4% increase in the first quarter. With trends in the economy suggesting
stable growth and no inflation, investors found appealing opportunities in
several segments of the bond markets, including lower quality corporate issues.
Uncertainties in the marketplace for bonds created some challenging
opportunities to add value. The Fund generated positive returns through security
selection, with a focus on exploiting favorable yield spreads, particularly in
mortgage-backed securities. However, mortgage-backed securities appeared exposed
to prepayments late in the year as rates on mortgages reached very attractive
levels. Contrary to these expectations, the sector proved to be the best
performer versus duration-equivalent alternatives. Reflecting the benefit of
multiple manager perspectives, PIMCO was able to maintain an overweighting in
the sector by focusing on securities less vulnerable to prepayment concerns,
helping offset the reduction in mortgage-backed positions by Standish, Ayer &
Wood. While the strong performance of corporate issues throughout the first
three quarters also contributed positively to the Fund's performance, the
market's flight to quality in the fourth quarter produced weak returns from
lower quality issues in the sector.
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
United States Treasury 24.3%
Federal National Mortgage Association 12.3
Federal Home Loan Mortgage 9.0
Government National Mortgage Association 7.3
Government Backed Trust Certificates 1.1
Premier Auto Trust 0.8
Fingerhut Master Trust 0.7
Resolution Funding Corp. 0.7
World Omni Automobile Lease 0.6
Citicorp 0.6
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AAA
Weighted Average Years-to-Maturity 9.0 Years
Weighted Average Duration 4.7 Years
Current Yield (SEC 30-day standardized) 6.1%
Number of Issues 762
Number of Issuers 511
Money Managers Styles
Lincoln Capital Management Co. Enhanced Core
Pacific Investment Management Co. Broad Market-Sector
Rotation
Standish, Ayer & Wood, Inc. Broad Market-Sector
Rotation
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Fixed Income I Fund 79
<PAGE>
Fixed Income I Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Long-Term Investments - 95.0%
Asset-Backed Securities - 11.2%
Advanta Home Equity Loan Trust
Series 1991-1 Class A
9.000% due 02/25/06 $ 54 $ 56
Advanta Mortgage Loan Trust
Series 1997-3 Class A7
6.920% due 10/25/28 1,200 1,218
AFC Home Equity Loan Trust
Series 1996-2 Class 1 A3
7.590% due 09/25/27 2,030 2,053
American Express Credit Account Master Trust
Series 1997-1 Class A
6.400% due 04/15/05 2,000 2,021
Arcadia Automobile Receivables Trust
Series 1997-C Class A3
6.250% due 11/15/01 2,000 2,007
Associates Manufactured
Housing Pass-thru Certificates
Series 1997-2 Class A3
6.250% due 03/15/28 2,000 2,000
BankAmerica Manufactured Housing Contract
Series 1997-1 Class A4
6.200% due 06/10/10 (c) 1,000 1,003
California Infrastructure PG&E-1
Series 1997-1 Class A4
6.160% due 06/25/03 1,480 1,480
Capita Equipment Receivables Trust
Series 1996-1 Class A4
6.280% due 06/15/00 1,030 1,032
Case Equipment Loan Trust
Series 1996-B Class A3
6.650% due 09/15/03 4,410 4,443
Chase Manhattan Credit Card Master Trust
Series 1997-3 Class A
6.777% due 05/15/07 1,200 1,202
Chevy Chase Auto Receivables Trust
Series 1997-1 Class A
6.500% due 10/15/03 783 787
Circuit City Credit Card Master Trust
8.000% due 11/15/03 2,340 2,418
Citibank Credit Card Master Trust I
Series 1997-3 Class A
6.839% due 02/10/04(c) 1,100 1,117
Contimortgage Home Equity Loan Trust
Mortgage Pass-thru Certificate
Series 1994-4 Class A6
8.270% due 12/15/24 519 536
Series 1996-4 Class A-9
6.880% due 0l/15/28 1,500 1,515
Series 1997-2 Class A6
7.120% due 03/15/16 825 846
Discover Card Trust
Series 1992-B Class A
6.800% due 06/16/00 468 467
Fleetwood Credit Corporation
Grantor Trust
Series 1997-B Class A
6.400% due 05/15/13 (c) 4,713 4,748
Green Tree Financial Corp.
Series 1997-1 Class M1
7.220% due 03/15/28 (c) 1,300 1,311
Series 1997-7 Class A5
6.540% due 07/15/19 2,300 2,313
Green Tree Recreational Equipment
Series 1997-3 Class A1
6.550% due 07/15/28 3,763 3,777
IMC Home Equity Loan Trust
Series 1997-5 Class M1
7.080% due 11/20/28 (c) 1,500 1,535
Key Auto Finance Trust
Series 1997-1 Class A3
6.150% due 03/15/04 720 722
Metris Master Trust
Series 1996-1 Class A
6.450% due 02/20/02 6,300 6,333
Series 1997-1 Class A
6.870% due 10/20/05 840 864
Navistar Financial Owner Trust
Series 1997-A Class A3
6.750% due 03/15/02 1,770 1,793
Series 1997-B Class A3
6.200% due 03/15/01 2,500 2,503
Oakwood Mortgage Investors, Inc.
Series 1996-B Class A2
6.800% due 10/15/26 (c) 1,500 1,521
Series 1997-D Class A3
6.500% due 02/15/28 1,110 1,108
Onyx Acceptance Grantor Trust
Series 1997-1 Class A
6.550% due 09/15/03 (c) 1,801 1,813
Series 1997-4 Class A
6.300% due 05/15/04 2,280 2,284
Preferred Credit Corp.
Series 1997-1 Class A6
7.590% due 07/25/26 1,050 1,101
Premier Auto Trust
Series 1996-4 Class A4
6.400% due 10/06/01 3,470 3,489
Series 1997-2 Class A5
6.320% due 03/06/02 3,380 3,400
</TABLE>
80 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Providian Master Trust
6.250% due 06/15/07 $ 1,830 $ 1,842
Saxon Asset Securities Trust Co.
Series 1997-1 Class AF2
7.085% due 07/25/20 2,500 2,526
Sears Credit Account Master Trust
Series 1997-1 Class A
6.200% due 07/16/07 3,625 3,623
Sears Credit Account Master Trust II
Series 1996-2 Class A
6.500% due 10/15/03 535 539
Sears Mortgage Securities Corp.
Series 1992 Class A
7.587% due 10/25/22 (c) 2,200 2,244
Team Fleet Financing Corp.
Series 1997-1 Class A
7.350% due 05/15/03 1,975 2,048
The Money Store Home Equity Loan Trust
Series 1994-D Class A4
8.750% due 09/15/20 150 156
Series 1996-A Class A5
6.850% due 06/15/19 1,050 1,064
Series 1996-B Class A5
7.180% due 12/15/14 425 434
Wal-Mart Stores, Inc.
Series 1994-B3
8.800% due 12/30/14 360 431
WFS Financial Owner Trust
Series 1997-B Class A3
6.300% due 06/20/99 1,950 1,963
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A2
6.200% due 11/15/02 774 775
Series 1997-A Class A2
6.750% due 06/25/03 (c) 2,000 2,018
Series 1997-A Class B
7.300% due 06/25/03 (144A)(c) 850 863
Series 1997-B Class A3
6.180% due 11/25/03 1,830 1,831
---------
89,173
---------
Bankers Acceptance Notes - 0.2%
Mellon Bank, NA
7.625% due 09/15/07 510 551
Signet Bank
7.800% due 09/15/06 750 813
---------
1,364
---------
Corporate Bonds and Notes - 16.2%
Ahmanson Capital Trust I, Series A
8.360% due 12/01/26 525 565
Air Products & Chemicals, Inc.
8.750% due 04/15/21 300 370
Allegiance Corp.
7.300% due 10/15/06 900 939
America West Airlines, Series A
6.850% due 07/02/09 584 593
American Express Co.
8.500% due 08/15/01 45 48
American General Finance Corp.
8.500% due 06/15/99 800 825
American Health Properties
7.050% due 01/15/02 650 662
American Stores Co.
8.000% due 06/01/26 875 979
Analog Devices, Inc.
6.625% due 03/01/00 225 226
Appalachian Power Co.
6.800% due 03/01/06 1,250 1,278
Aristar, Inc.
6.300% due 07/15/00 1,040 1,042
Associates Corp. of North America
Series H (MTN)
6.250% due 03/15/99 1,520 1,523
6.500% due 07/15/02 400 404
7.090% due 04/11/03 400 416
AT&T Corp.
8.625% due 12/01/31 440 484
Atlantic Richfield Co.
9.125% due 08/01/31 700 920
AVCO Financial Services, Inc.
7.250% due 07/l5/99 415 422
8.500% due 10/15/99 655 680
6.000% due 08/15/02 400 395
Baltimore Gas & Electric Co.
6.500% due 02/15/03 550 558
Banc One Corp.
7.250% due 08/0l/02 790 819
Bank of New York, Inc.
7.875% due 11/15/02 500 534
</TABLE>
Fixed Income I Fund 81
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Bank One, Columbus, Ohio
7.375% due 12/01/02 $ 195 $ 204
BankAmerica Corp.
6.850% due 03/01/03 425 433
Barnett Bank, Inc.
6.900% due 09/01/05 665 681
Baxter International, Inc.
7.650% due 02/01/27 200 220
Bell Telephone Co. of Pennsylvania
8.350% due 12/15/30 645 803
BellSouth Telecommunications
7.000% due 12/01/95 295 307
Beneficial Corp.
8.400% due 05/15/08 757 877
Carolina Power & Light Co.
6.875% due 08/15/23 250 243
Case Corp.
7.250% due 08/01/05 395 411
7.250% due 0l/15/16 400 418
Caterpillar Financial Services (MTN)
9.500% due 02/06/07 80 97
Caterpillar, Inc.
8.000% due 02/15/23 750 857
Central Fidelity Banks, Inc.
8.150% due 11/15/02 280 302
Central Power & Light Co.
Series FF
6.875% due 02/01/03 550 567
Champion International Corp.
6.400% due 02/15/26 570 567
Chesapeake & Potomac Telephone Co.
8.375% due 10/01/29 405 502
Chevron Corp.
Profit Sharing Savings Plan Trust Fund
8.110% due 12/01/04 385 411
Chrysler Corp.
7.450% due 03/01/27 475 508
Chrysler Financial Corp.
9.500% due 12/15/99 445 473
Cincinnati Gas & Electric Co.
7.200% due 10/01/23 250 251
CIT Group Holdings, Inc. (MTN)
6.625% due 06/28/99 1,575 1,590
6.700% due 05/02/00 500 506
6.700% due 06/02/00 300 304
6.375% due 10/01/02 975 975
Citicorp
6.000% due 05/24/01 (MTN)(c) 3,000 3,000
9.500% due 02/01/02 195 217
7.125% due 06/01/03 485 504
Coca Cola Enterprises, Inc.
7.000% due 10/01/26 665 700
Colonial Realty LP (MTN)
6.980% due 09/26/05 500 513
Commercial Credit Group, Inc.
6.000% due 06/15/00 500 498
5.750% due 07/15/00 255 252
7.875% due 07/15/04 500 539
8.700% due 06/15/10 795 944
Commonwealth Edison Co. Series 85
7.375% due 09/15/02 1,120 1,164
Conagra, Inc. (MTN)
8.100% due 05/20/02 300 321
Consolidated Natural Gas Co.
8.625% due 12/01/11 54 57
Consolidated Rail Corp.
Pass-thru Certificate Structured Note
Series 1995 Class A
6.760% due 05/25/15 577 583
Constitution Capital Trust I
9.150% due 04/15/27 700 788
CoreStates Capital Corp.
5.875% due 10/15/03 750 731
Crown Cork & Seal Finance PLC
7.000% due 12/15/06 850 873
Dayton Hudson Co.
6.400% due 02/15/03 415 415
Discover Credit Corp. (MTN)
8.350% due 04/27/99 465 478
Dole Food Co., Inc.
6.750% due 07/15/00 280 282
Duke Power Co.
7.000% due 07/01/33 1,030 1,013
Equitable Life Assurance Society
7.700% due 12/01/15 975 1,049
Excel Realty Trust, Inc.
6.875% due 10/15/04 925 928
Federal Express Corp.
7.600% due 07/01/97 400 421
Federal Realty Investment Trust
7.480% due 08/15/26 500 526
Finova Capital Corp.
7.125% due 05/0l/02 1,100 1,131
</TABLE>
82 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
First Bank Systems, Inc.
8.000% due 07/02/04 $ 650 $ 703
First Chicago Corp.
8.875% due 03/15/02 600 656
First Interstate Bancorp (MTN)
9.375% due 01/23/02 225 247
First Union Institutional Capital Trust I
8.040% due 12/01/26 100 105
First Union National Bank, Newark (MTN)
7.125% due 10/15/06 555 579
Fleet Financial Group, Inc.
8.125% due 07/0l/04 675 734
Florida Residential Property & Casualty
Insurance Co., Series A
7.250% due 07/0l/02 2,100 2,165
Ford Motor Credit Co.
8.375% due 0l/l5/00 425 442
Ford Motor Credit Co. (MTN)
6.000% due 02/27/01 1,450 1,442
6.290% due 03/05/01 865 867
Fort James Corporation
6.625% due 09/15/04 900 903
Fortune Brands, Inc.
8.625% due 11/15/21 500 600
7.875% due 0l/15/23 100 112
General Electric Capital Corp.
8.300% due 09/20/09 470 543
6.660% due 05/01/18 (c) 1,025 1,038
General Motors Acceptance Corp.
6.625% due 10/01/02 2,270 2,301
Grand Metropolitan Investment Corp.
7.450% due 04/15/35 425 475
Great Atlantic & Pacific Tea, Inc.
7.750% due 04/15/07 2,050 2,161
Heller Financial Inc.
6.440% due 10/06/02 1,100 1,093
Series G (MTN)
6.005% due 08/25/00 (c) 3,400 3,410
Hertz Corp.
7.625% due 08/01/02 450 470
9.000% due 11/01/09 390 461
Household Finance Corp.
6.375% due 06/30/00 750 752
Hutchison Whampoa Finance, Ltd.
7.450% due 08/01/17 1,625 1,572
ICI Wilmington, Inc.
6.950% due 09/15/04 725 746
International Lease Finance Corp.
5.750% due 01/15/99 685 683
6.375% due 08/01/01 300 301
6.375% due 02/15/02 1,200 1,202
International Paper Co.
9.400% due 06/01/02 600 671
IRT Property Co.
7.250% due 08/l5/07 1,325 1,373
ITT Corp. (New)
6.250% due 11/15/00 700 688
ITT Flnancial Corp.
7.400% due 11/15/25 865 907
Jackson National Life Insurance Co.
8.150% due 03/l5/27 1,150 1,263
JC Penney & Co., Inc.
7.250% due 04/01/02 1,050 1,087
JPM Capital Trust I
7.540% due 01/15/27 285 290
Kansas Gas & Electric Co.
6.500% due 08/01/05 200 201
Kern River Funding Corp. Series B
6.720% due 09/30/01 1,025 1,043
Key Corporation
7.500% due 06/15/06 875 931
Lasmo USA, Inc.
7.500% due 06/30/06 455 481
Liberty Mutual Insurance Co.
8.500% due 05/15/25 500 579
7.875% due 10/15/26 500 537
7.697% due 10/15/97 850 895
Lockheed Martin Corp.
7.750% due 05/01/26 800 887
Martin Marietta Corp.
7.000% due 03/15/11 325 321
Mashantucket Western Pequot
6.910% due 09/01/12 1,200 1,259
Mellon Capital II Series B
7.995% due 0l/l5/27 370 397
Morgan Stanley Group, Inc.
8.875% due 10/15/01 175 190
8.100% due 06/24/02 175 187
Nabisco, Inc.
6.700% due 06/15/02 325 329
New England Telephone & Telegraph Co.
7.875% due 11/15/29 430 501
News America Holdings, Inc.
7.750% due 01/20/24 400 420
</TABLE>
Fixed Income I Fund 83
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Northwestern Bell Telephone Co.
7.750% due 05/01/30 $ 455 $ 506
Norwest Corp. Series H (MTN)
6.750% due 06/l5/07 150 153
Norwest Financial, Inc.
6.375% due 11/15/01 750 753
6.250% due 11/01/02 425 425
6.375% due 11/15/03 650 653
NYNEX Corp.
9.550% due 05/01/10 582 677
Occidental Petroleum Corp.
10.125% due 11/15/01 255 288
Occidental Petroleum Corp. (MTN)
8.500% due 11/09/01 295 317
Pacific Bell
7.500% due 02/01/33 660 679
Pennsylvania Power & Light Co.
6.875% due 03/01/04 1,200 1,234
Pennzoil Co.
10.125% due 11/15/09 215 269
PepsiCo, Inc.
7.625% due 12/18/98 360 365
Philadelphia Electric Co. Series 1992
7.500% due 0l/15/99 200 203
Philip Morris Cos., Inc.
6.950% due 06/01/06 380 394
7.650% due 07/01/08 395 419
Pitney Bowes Credit Corp.
8.550% due 09/15/09 780 919
Praxair, Inc.
6.850% due 06/15/05 880 906
Ralston Purina Co.
7.875% due 06/15/25 845 934
Raytheon Co.
6.450% due 08/15/02 920 925
Realty Income Corp.
7.750% due 05/06/07 1,500 1,561
Republic New York Corp.
9.750% due 12/01/00 130 142
8.250% due 11/01/01 240 256
7.875% due 12/12/01 300 317
RJR Nabisco, Inc.
8.625% due 12/01/02 400 426
Rockwell International Corp.
8.875% due 09/15/99 300 313
Salomon Smith Barney Holdings
6.625% due 07/01/02 500 505
7.000% due 03/15/04 800 825
Seagram Co., Ltd.
8.350% due 01/15/22 740 860
Sears Roebuck Acceptance Corp.
Series II (MTN)
6.690% due 04/30/01 975 989
Service Corp. International
6.750% due 06/01/01 400 405
7.375% due 04/15/04 550 575
Shopping Center Associates
6.750% due 01/15/04 750 757
Simon Debartolo Group LP
6.875% due 10/27/05 1,000 1,011
6.875% due 11/15/06 500 510
Socgen Real Estate Co. LLC
7.640% due 12/29/49 540 564
Spieker Properties (MTN)
8.000% due 07/19/05 800 861
Summit Properties Inc.
7.200% due 08/l5/07 550 566
Suntrust Banks, Inc.
7.375% due 07/01/02 575 599
Temple Inland, Inc.
7.250% due 09/15/04 575 599
Tenneco Corp.
10.200% due 03/15/08 725 911
Texaco Capital, Inc.
9.750% due 03/15/20 225 306
8.875% due 09/01/21 440 557
Texas Utilities Electric Co.
9.500% due 08/01/99 1,370 1,437
TIG Capital Trust I
8.597% due 01/15/27 1,225 1,358
Time Warner, Inc.
7.975% due 08/15/04 450 479
8.110% due 08/15/06 900 974
8.180% due 08/l5/07 900 980
Union Carbide Chemicals & Plastics
7.875% due 04/01/23 835 877
Union Oil Co. (MTN)
9.400% due 02/15/11 390 483
Union Pacific Corp.
7.600% due 05/01/05 350 368
Union Pacific Railroad Trust
Pass-thru Certificate
Series 1996-A2
7.060% due 05/15/03 450 466
United Technologies Corp.
8.750% due 03/01/21 445 553
</TABLE>
84 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
US Bank National - Minnesota
6.079% due 12/19/01 (c) $ 3,000 $ 2,997
US West Capital Funding, Inc.
7.900% due 02/01/27 950 1,040
USA Waste Services, Inc.
6.500% due 12/15/02 475 474
Virginia Electric & Power Co.
8.750% due 04/01/21 335 360
Wachovia Corp.
6.800% due 06/01/05 280 287
Wells Fargo & Co.
6.875% due 04/0l/06 500 511
Whirlpool Corp.
9.500% due 06/15/00 400 428
Willamette Industries, Inc.
7.850% due 07/01/26 750 841
World Financial Properties Tower
Series 1996 WBF-B
6.910% due 09/0l/13 1,312 1,363
---------
129,026
---------
Eurodollar Bonds - 0.4%
Finland, Republic of
5.875% due 02/27/06 325 321
Ontario, Province of
7.375% due 01/27/03 450 474
Skandinaviska Enskilda Banken
8.125% due 09/06/49 (g) 1,000 1,079
Videotron Holdings PLC Step Up Bond
11.125% due 07/01/04 1,100 1,048
---------
2,922
---------
Mortgage-Backed Securities - 34.1%
ACLC Franchise Loan Receivables
1997 Pass-thru Class Al
7.120% due 03/15/12 980 1,009
BKD Commercial Mortgage Trust
Series 1997-Cl Class B
7.218% due 04/25/00 (c) 1,897 1,900
Chase Commercial Mortgage Securities Corp.
Series 1997-1 Class E
7.370% due 12/19/07 (c) 1,000 1,006
Commercial Mortgage Acceptance Corp.
Series 1997-ML1 Class Al
6.500% due 11/15/04 (c) 1,405 1,415
CSFB Finance Co., Ltd.
Series 1995-A Class A
7.542% due 11/15/05 (c) 450 460
Delta Funding Home Equity Loan Trust
Series 1997-3 Class MlF
7.080% due 10/25/28 1,200 1,208
Federal Home Loan Mortgage Corp. (b)
6.000% 15 Year TBA Gold 2,335 2,297
6.500% 15 Year TBA 2,120 2,123
6.500% 30 Year TBA 16,370 16,181
7.000% 30 Year TBA 1,170 1,180
7.500% 30 Year TBA 4,325 4,429
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.000% due 2003 23 23
7.000% due 2008 82 83
6.500% due 2009 567 570
7.500% due 2009 179 185
7.500% due 2009 1,994 2,051
8.000% due 2009 188 194
6.000% due 2010 276 273
8.000% due 2010 954 987
6.000% due 2011 3,327 3,288
6.500% due 20ll 2,598 2,613
7.500% due 20ll 90 93
8.000% due 2011 88 91
6.000% due 2012 195 192
6.500% due 2012 1,239 1,242
7.500% due 2012 404 415
8.000% due 2012 570 588
12.000% due 2014 196 223
6.500% due 2016 532 535
9.000% due 2016 1,499 1,605
12.500% due 20l6 212 244
9.000% due 2017 39 41
9.000% due 2018 2,342 2,527
9.000% due 2020 1,458 1,567
7.500% due 2022 274 282
6.500% due 2024 4,127 4,097
7.500% due 2024 2,170 2,228
8.000% due 2024 635 659
8.500% due 2025 282 295
9.000% due 2025 1,188 1,267
6.000% due 2026 1,045 1,008
8.000% due 2026 1,343 1,390
8.500% due 2026 427 445
9.000% due 2026 30 32
6.000% due 2027 197 190
6.500% due 2027 1,210 1,196
</TABLE>
Fixed Income I Fund 85
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
6.500% due 2027 $ 4,345 $ 4,295
7.OOO% due 2027 1,110 1,122
8.000% due 2027 9,133 9,453
Federal Home Loan Mortgage Corp.
Series K Class K-5
7.760% due 05/0l/12 1,649 1,744
Series 1552 Class D
5.500% due 02/l5/14 626 624
Federal Housing Authority: Project 68
7.430% due 06/27/21 1,477 1,513
Federal National Mortgage
Association Pools
7.000% due 1999 952 958
7.500% due 1999 (c) 140 143
7.000% due 2000 643 648
8.000% due 2002 898 912
7.000% due 2003 637 645
7.500% due 2003 1,383 1,412
8.000% due 2003 384 391
6.500% due 2004 292 293
8.000% due 2004 90 92
8.000% due 2005 56 57
6.500% due 2008 1,310 1,316
6.500% due 2009 9,396 9,446
10.500% due 2010 5 6
6.000% due 2011 1,881 1,851
7.000% due 2011 596 606
8.000% due 20ll 236 244
6.000% due 2012 805 792
6.500% due 2012 614 614
7.000% due 20l2 45 46
7.500% due 2012 470 483
8.000% due 20l7 56 58
8.000% due 2022 260 272
8.000% due 2023 131 137
6.500% due 2024 4,644 4,606
7.000% due 2024 7,063 7,145
7.500% due 2024 2,026 2,080
7.000% due 2025 7,795 7,880
8.500% due 2025 1,828 1,915
6.500% due 2026 4,587 4,548
7.000% due 2026 817 825
8.500% due 2026 3,223 3,367
9.000% due 2026 58 62
6.500% due 2027 1,323 1,307
7.000% due 2027 7,935 7,992
8.000% due 2027 321 333
9.000% due 2027 203 216
Federal National Mortgage Association (b)
6.500% 30 Year TBA 20,175 19,923
7.500% 30 Year TBA 6,975 7,138
8.000% 30 Year TBA 4,205 4,353
9.000% 30 year TBA 1,925 2,047
Federal National Mortgage Association
(REMIC)
Series 1992-158 Class ZZ
7.750% due 08/25/22 441 479
Series 1994-81 Class PJ
8.000% due 07/25/23 1,925 2,093
Series G92-36 Class A
7.000% due 04/25/15 283 284
Federal National Mortgage Association
Principal Only Strip
Zero Coupon due 03/01/20 178 145
First Union Lehman Brothers Commercial Trust
Series 1997-C1 Class C
7.440% due 04/18/07 950 989
Government National Mortgage
Association Pools
8.500% due 2005 60 63
6.500% due 2008 135 137
6.500% due 2009 765 773
6.500% due 2010 176 177
7.000% due 2011 250 256
9.000% due 2016 2,056 2,238
9.500% due 2016 204 222
8.000% due 2017 152 160
9.000% due 2020 11 12
10.500% due 2020 979 1,101
10.500% due 2021 111 125
6.500% due 2023 944 937
6.875% due 2023 (c) 3,071 3,154
7.000% due 2023 3,557 3,598
7.500% due 2023 1,394 1,432
6.875% due 2024 (c) 3,154 3,244
7.000% due 2024 9,015 9,114
7.500% due 2024 2,229 2,288
8.000% due 2025 3,010 3,120
7.500% due 2026 3,204 3,282
8.000% due 2026 3,331 3,452
8.500% due 2026 830 872
5.500% due 2027 9,849 9,909
</TABLE>
86 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
6.500% due 2027 $ 4,895 $ 4,988
7.500% due 2027 5,338 5,468
8.000% due 2027 1,175 1,218
Government National Mortgage
Association (b)
6.500% 30 Year TBA 270 267
Greenwich Capital Acceptance, Inc.
Mortgage Pass-thru Certificate
Series 1993 Class LB-1
7.430% due 04/25/23 (c) 738 745
Guaranteed Export Trust
Series 1996-A
6.550% due 06/l5/04 845 864
Housing Securities, Inc.
Series 1994-2 Class A1
6.500% due 07/25/09 1,107 1,102
Lehman Pass-thin Securities, Inc.
Series 1991-2 Class A-1
8.000% due 03/20/99 76 76
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class D
8.190% due 06/15/21 (c) 717 736
Series 1996-C2 Class A1
6.690% due 11/21/28 573 575
Series l997-C1 Class A1
6.950% due 06/18/29 (c) 1,512 1,547
Mid-St Trust II Class A-3 CMO
9.350% due 04/01/98 127 127
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class A2B
7.900% due 02/15/06 950 1,009
Norwest Asset Securities Corp.
Series 1997-9 Class A5
7.000% due 06/25/12 1,128 1,142
Series 1997-14 Class A4
6.750% due 10/25/27 1,344 1,350
PNC Mortgage Securities Corp.
Series 1994-3 Class A-1
7.500% due 06/18/10 94 94
Prudential Home Mortgage Securities Co.
Series 1992-38 Class A8
6.950% due 11/25/22 1,640 1,571
Series 1993-52 Class A1
8.450% due 11/25/23 (c) 2,303 2,368
Residential Accredited Loans, Inc.
Series 1996-QSl Class A14
6.900% due 01/25/26 3,000 3,039
Residential Funding Mortgage Securities
Series 1997-S4 Class A5
7.000% due 03/25/12 1,360 1,377
Series 1997-S10 Class A-5
7.000% due 07/25/12 985 1,003
Residential Funding Mortgage Services I
Series 1997-S12 Class A13
6.750% due 08/25/27 1,200 1,223
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1992-C2 Class A-1
9.000% due 10/25/22 6 6
Series 1994-C1 Class C
8.000% due 06/25/26 1,200 1,238
Series 1994-C2 Class D
8.000% due 04/25/25 278 284
Series 1995-C1 Class C
6.900% due 02/25/27 (c) 400 399
Series 1995-C1 Class D
6.900% due 02/25/27 900 894
Salomon Brothers Mortgage
Securities VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16
8.440% due 11/25/24 (c) 1,416 1,467
Sears Savings Bank
Mortgage Pass-thru Certificate
Series 1992-A Class A
8.670% due 05/25/32 (c) 738 735
United States Department of Veteran
Affairs REMIC
Series 1992-1 Class 2-E
7.750% due 03/15/16 775 801
---------
273,206
---------
Non-US Bonds - 0.4%
Great Britain Treasury
7.250% due 12/07/07 GBP 1,800 3,166
---------
3,166
---------
United States Government
Agencies - 4.3%
Federal Home Loan Bank
6.450% due 03/13/02 $ 2,625 2,648
</TABLE>
87 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Federal National Mortgage
Association (MTN)
5.790% due 10/12/99 $ 3,000 $ 3,000
6.100% due 10/06/00 1,910 1,912
6.250% due 11/20/02 1,955 1,958
6.170% due 12/30/03 1,755 1,735
7.780% due 09/29/06 255 261
6.940% due 03/19/07 1,550 1,584
6.900% due 08/21/07 3,650 3,728
Government Backed Trust Certificates
Class 1-C
9.250% due 11/15/01 4,542 4,833
Series 2E
9.400% due 05/15/02 1,968 2,090
Series T-3
9.625% due 05/15/02 (c) 2,093 2,222
Resolution Funding Corp.
8.875% due 07/15/20 2,275 3,006
8.625% due 01/15/21 1,700 2,200
8.625% due 01/15/30 240 322
Tennessee Valley Authority
Series E
6.250% due 12/15/17 640 640
6.750% due 11/01/25 1,920 2,031
---------
34,170
---------
United States Government
Treasuries - 25.8%
United States Treasury Bonds
10.750% due 05/15/03 2,835 3,480
10.750% due 08/15/05 21,765 28,315
11.750% due 02/15/10 2,425 3,244
12.750% due 11/15/10 7,575 10,812
13.875% due 05/l5/ll 3,365 5,121
12.000% due 08/15/13 2,275 3,352
13.250% due 05/15/14 365 584
9.875% due 11/15/15 915 1,302
7.250% due 05/l5/16 1,785 2,033
7.500% due 11/15/16 8,905 10,394
8.875% due 08/15/17 8,525 11,316
8.125% due 08/15/19 (f) 8,745 10,942
8.125% due 05/l5/21 105 132
8.125% due 08/15/21 6,275 7,915
8.000% due 11/15/21 8,685 10,828
7.250% due 08/l5/22 1,575 1,819
7.125% due 02/l5/23 6,565 7,494
6.250% due 08/15/23 1,485 1,530
7.500% due 11/15/24 3,500 4,187
6.000% due 02/15/26 4,010 4,005
6.750% due 08/15/26 6,290 6,925
6.500% due 11/15/26 9,000 9,608
United States Treasury Notes
5.625% due 0l/31/98 1,200 1,200
5.375% due 05/31/98 1,150 1,149
5.625% due 11/30/98 (f) 6,445 6,445
5.875% due 02/28/99 1,100 1,103
6.375% due 04/30/99 3,570 3,602
6.750% due 06/30/99 1,000 1,015
6.375% due 07/15/99 2,950 2,983
8.000% due 08/l5/99 995 1,030
5.875% due 08/31/99 145 145
6.875% due 08/31/99 2,835 2,888
5.875% due 11/15/99 840 843
7.750% due 11/30/99 325 337
7.750% due 01/31/00 280 291
5.875% due 02/15/00 835 838
7.125% due 02/29/00 1,420 1,461
6.875% due 03/31/00 5,075 5,200
6.250% due 08/31/00 2,295 2,326
5.750% due 10/31/00 1,115 1,116
6.250% due 10/31/01 16,610 16,893
6.250% due 02/28/02 3,405 3,467
6.625% due 04/30/02 3,165 3,269
6.500% due 10/15/06 3,400 3,560
---------
206,499
---------
Yankee Bonds - 2.4%
African Development Bank
9.750% due 12/15/03 425 500
6.875% due 10/15/15 775 802
8.800% due 09/0l/19 535 676
Alberta, Province of
9.250% due 04/01/00 265 282
Asian Development Bank
8.000% due 04/30/01 295 311
8.500% due 05/02/01 295 315
6.250% due 10/24/05 400 404
CE Electric UK Funding Co.
6.853% due 12/30/04 1,200 1,212
Hydro Quebec
Series GH
8.250% due 04/15/26 605 705
International American Development Bank
7.000% due 06/15/25 1,770 1,905
6.950% due 08/01/26 220 235
</TABLE>
88 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
International Bank for Reconstruction &
Development
8.625% due 10/15/16 $ 350 $ 440
Manitoba, Province of
Series CD
9.250% due 04/0l/20 335 443
Metropolitano de Lisboa
7.420% due 10/15/16 1,000 1,070
National Westminster Bank PLC
7.750% due 04/29/49 (g) 1,050 1,131
New Brunswick, Province of
7.125% due 10/01/02 500 521
9.750% due 05/15/20 320 441
Newfoundland, Province of
10.000% due 12/01/20 150 205
Noranda Forest, Inc.
6.875% due 11/15/05 350 354
Nova Scotia, Province of
9.125% due 05/01/21 685 877
Quebec, Province of
7.125% due 02/09/24 770 793
Saskatchewan, Province of
6.625% due 07/15/03 100 102
8.000% due 07/15/04 1,290 1,408
Societe Generale
7.850% due 04/29/49 (g) 1,825 1,978
Svenska Handelsbanken
7.125% due 03/29/49 (g) 1,000 1,032
Wharf International Finance, Ltd.
7.625% due 03/13/07 1,050 979
--------
19,121
--------
Total Long-Term Investments
(cost $737,011) 758,647
--------
<CAPTION>
Number Market
of Value
Contracts (000)
--------- --------
<S> <C> <C>
Options Purchased - 0.0%
United States Treasury Bond (e)
Feb 100.72 Put 25* $ 20
Mar 100.l6 Call 31* 22
United States Treasury Notes
Mar 104.22 Call (e) 37* 22
--------
Total Options Purchased
(cost $117) 64
--------
<CAPTION>
Number
of
Shares
---------
<S> <C> <C>
Preferred Stocks - 0.5%
Banco Bilbao Vizcaya International - ADR 10,000 281
Credit Lyonnais Capital 100,000 2,600
TIG Holdings, Inc. 7,500 798
--------
Total Preferred Stocks
(cost $3,774) 3,679
--------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Short-Term Investments - 10.9%
Frank Russell Investment Company
Money Market Fund, due on demand (a) $ 80,905 80,905
International Bank for
Reconstruction & Development
5.500% due 01/21/98 (a) 3,250 3,240
Merrill Lynch & Co., Inc.
5.550% due 0l/12/98 (a) 1,000 998
Norfolk Southern Corp.
5.750% due 01/26/98 (a) 500 498
Sigma Finance Corp.
5.550% due 01/26/98 (a) 1,000 997
--------
Total Short-Term Investments
(cost $86,638) 86,638
--------
</TABLE>
Fixed Income I Fund 89
<PAGE>
Fixed Income I Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Market
Value
(000)
---------
<S> <C>
Total Investments
(identified cost $827,540)(d) - 106.4% $ 849,028
Other Assets and Liabilities,
Net, Including Options Written - (6.4%) (50,776)
---------
Net Assets - 100.0% $ 798,252
=========
</TABLE>
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2.
(c) Adjustable or floating rate securities.
(d) See Note 2 for federal income tax information.
(e) Nonincome-producing security.
(f) Held as collateral by the custodian in connection with options written by
the Fund.
* Each contract represents $100,000 notional value.
Abbreviations:
ADR - American Depositary Receipt
CMO - Collateralized Mortgage Obligation
LLC - Limited Liability Corporation
LP - Limited Partnership
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
Foreign Currency Abbreviations:
CAD - Canadian dollar
GBP - British pound
<TABLE>
<CAPTION>
Number Market
of Value
Contracts (000)
--------- --------
<S> <C> <C>
Options Written
(Notes 2 and 3)
United States Treasury Bonds
Jul 112.19 Call 22 $ 5
Nov 109.00 Call 25 11
Feb 101.95 Put 47 28
Mar 98.68 Put 31 7
Jul 97.22 Put 22 2
Nov 95.27 Put 25 7
United States Treasury Notes
Mar 106.22 Call 37 7
---------
Total Liability for Options Written
(premiums received $136)(S) $ 67
=========
</TABLE>
(S) At December 31, 1997, United States Government Securities valued at
$9,573 were held as collateral by the custodian in connection with options
written by the Fund.
Forward Foreign Currency Exchange Contracts
(Note 2)
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
------------ ----------- ---------- --------------
<S> <C> <C> <C>
USD 31 CAD 41 03/10/98 $ (2)
CAD 41 USD 29 03/10/98 --
--------------
$ (2)
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
90 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
---------------------
<S> <C> <C>
Assets
Investments at market (identified cost $827,540)(Note 2).............................................. $ 849,028
Cash.................................................................................................. 984
Forward foreign currency exchange contracts (cost $60)(Note 2)........................................ 58
Receivables:
Dividends and interest............................................................................ 9,285
Investments sold (regular settlement)............................................................. 1,913
Investments sold (delayed settlement)(Note 2)..................................................... 27,136
Fund shares sold.................................................................................. 8,373
--------------------
Total Assets................................................................................... 896,777
Liabilities
Payables:
Investments purchased (regular settlement).................................. $ 10,398
Investments purchased (delayed settlement)(Note 2).......................... 86,642
Fund shares redeemed........................................................ 947
Accrued fees to affiliates (Note 4)......................................... 254
Other accrued expenses...................................................... 158
Forward foreign currency exchange contracts (cost $60)(Note 2).............. 59
Options written, at market value (premiums received $136)(Notes 2 and 3)........ 67
------------------
Total Liabilities.............................................................................. 98,525
--------------------
Net Assets............................................................................................ $ 798,252
====================
Net Assets consist of:
Undistributed net investment income................................................................... $ 1,141
Accumulated net realized gain (loss).................................................................. (8,458)
Unrealized appreciation (depreciation) on:
Investments......................................................................................... 21,488
Options written..................................................................................... 69
Foreign currency-related transactions............................................................... 7
Shares of beneficial interest......................................................................... 371
Additional paid-in capital............................................................................ 783,634
--------------------
Net Assets............................................................................................ $ 798,252
====================
Net Asset Value, offering and redemption price per share:
($798,252,421 divided by 37,104,289 shares of $.01 par value
shares of beneficial interest outstanding)........................................................ $ 21.51
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income I Fund 91
<PAGE>
Fixed Income I Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Interest........................................................................................... $ 46,097
Dividends from Money Market Fund (Note 5).......................................................... 3,587
Dividends.......................................................................................... 637
--------------------
Total Investment Income......................................................................... 50,321
Expenses (Notes 2 and 4):
Management fees............................................................... $ 2,149
Custodian fees................................................................ 439
Transfer agent fees........................................................... 264
Bookkeeping service fees...................................................... 34
Professional fees............................................................. 29
Registration fees............................................................. 65
Trustees' fees................................................................ 5
Miscellaneous................................................................. 61
------------------
Total Expenses.................................................................................. 3,046
--------------------
Net investment income.................................................................................. 47,275
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments................................................................... 5,008
Options written............................................................... 22
Foreign currency-related transactions......................................... 105 5,135
------------------
Net change in unrealized appreciation or depreciation of:
Investments................................................................... 14,091
Options written............................................................... 69
Foreign currency-related transactions......................................... (56) 14,104
------------------ --------------------
Net gain (loss) on investments......................................................................... 19,239
--------------------
Net increase (decrease) in net assets resulting from operations........................................ $ 66,514
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
92 Fixed Income I Fund
<PAGE>
Fixed Income I Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income............................................................... $ 47,275 $ 43,329
Net realized gain (loss)............................................................ 5,135 244
Net change in unrealized appreciation or depreciation............................... 14,104 (19,436)
------------------ -----------------
Net increase (decrease) in net assets resulting from operations.................. 66,514 24,137
------------------ -----------------
From Distributions to Shareholders:
Net investment income............................................................... (47,931) (42,773)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)......... 116,770 43,218
------------------ -----------------
Total Net Increase (Decrease) in Net Assets............................................. 135,353 24,582
Net Assets
Beginning of period................................................................. 662,899 638,317
------------------ -----------------
End of period (including undistributed net investment income of
$1,141 and $1,343, respectively)................................................... $ 798,252 $ 662,899
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income I Fund 93
<PAGE>
Fixed Income I Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......................................... $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income................................................... 1.37 1.38 1.42 1.46 1.50
Net realized and unrealized gain (loss) on investments.................. .54 (.62) 2.02 (2.06) .72
------- ------- ------- ------- -------
Total Income From Investment Operations............................... 1.91 .76 3.44 (.60) 2.22
------- ------- ------- ------- -------
Less Distributions:
Net investment income.................................................... (1.39) (1.36) (1.44) (1.44) (1.50)
In excess of net investment income....................................... -- -- -- -- (.01)
Net realized gain on investments......................................... -- -- -- -- (.58)
In excess of net realized gain on investments............................ -- -- -- (.11) --
------- ------- ------- ------- -------
Total Distributions................................................... (1.39) (1.36) (1.44) (1.55) (2.09)
------- ------- ------- ------- -------
Net Asset Value, End of Period............................................... $ 21.51 $ 20.99 $ 21.59 $ 19.59 $ 21.74
======= ======= ======= ======= =======
Total Return (%)(a).......................................................... 9.42 3.75 18.03 (2.97) 10.46
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................................. 798,252 662,899 638,317 496,038 533,696
Ratios to average net assets (%)(a):
Operating expenses.................................................... .42 .42 .35 .10 .09
Net investment income................................................. 6.54 6.57 6.82 7.06 6.71
Portfolio turnover rate (%).............................................. 165.81 147.31 138.05 173.97 173.27
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
94 Fixed Income I Fund
<PAGE>
Fixed Income II Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To preserve capital and generate current income consistent with the
preservation of capital.
Invests in: Fixed-income securities with low-volatility characteristics.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk relative to other short-term bond
investments. The Fund employed the investment management services of three
managers using three approaches to investment in short-term fixed income
securities.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Years Fixed II+ ML 1-2.99** Lipper Short 1-5 Yr++
----- --------- ----------- ---------------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $10,820 $10,622 $10,687
1989 $12,009 $11,777 $11,768
1990 $13,175 $12,922 $12,719
1991 $14,796 $14,431 $14,231
1992 $15,202 $15,341 $15,042
1993 $16,264 $16,171 $15,968
1994 $16,397 $16,263 $15,910
1995 $18,028 $18,052 $17,620
1996 $18,886 $18,950 $18,405
1997 $20,023 $20,212 $19,529
</TABLE>
Fixed Income II Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- --------------- ---------------- ------------
<S> <C> <C>
1 Year $ 10,602 6.02%
5 Years $ 13,171 5.66%(S)
10 Years $ 20,023 7.19%(S)
</TABLE>
Merrill Lynch 1-2.99 Years Treasury Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- --------------- -------------
<S> <C> <C>
1 Year $ 10,666 6.66%
5 Years $ 13,175 5.67%(S)
10 Years $ 20,212 7.29%(S)
</TABLE>
Lipper(C) Short Investment Grade Debt Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ---------------- --------------- -------------
<S> <C> <C>
1 Year $ 10,611 6.11%
5 Years $ 12,983 5.36%(S)
10 Years $ 19,529 6.92%(S)
</TABLE>
* Assumes initial investment on January 1, 1988
** Merrill Lynch 1-2.99 Years Treasury Index is an index composed of
approximately 160 issues in the form of publicly placed, coupon-bearing US
Treasury debt. Issues must carry a term to maturity of at least one year,
and par amounts outstanding must be no less than $10 million at the start
and at the close of the performance measurement periods.
+ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but gross
of any investment services fees. Information concerning these fees can be
obtained from the fund's managers upon request.
++ Lipper(C) Short (1-5 Yr.) Investment Grade Debt Funds Average is the average
total return for the universe of funds within the Short Investment Grade
Debt Funds investment objective. The total return for the funds reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates. This type of fund which invests at least 65% of
assets in investment grade debt issues (rated in top four grades) with
average maturities of five years or less.
(S) Annualized.
96 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Fixed Income II Fund reflected a total
return of 6.0%, as compared to the Merrill Lynch 1-2.99 Years Treasury Index
which rose 6.7%. The Fund modestly underperformed the Index as the managers in
the Fund maintained conservative duration positions throughout most of the year
due to concerns over Fed intervention. Weak returns from corporate bonds late in
the year, as the market's flight to defensive sectors favored treasuries, also
contributed to the Fund's modest underperformance.
Portfolio Highlights
Indications of the US economy's ability to sustain strong growth without
inflation benefited bonds increasingly throughout 1997. However, two factors
diminished the attractiveness of short-term bonds for much of the year. The
first proved to be the Federal Reserve Board which threatened to increase rates
during much of the year, but acted only once, late in the first quarter, when it
increased the Fed Funds rate 1/4%. The second threat was directly attributable
to the problems facing Asian economies during the last four months of the year.
As major holders of short-term US treasuries, it was feared that Korean and
Japanese investors would be forced to redeem their investments to support
weakened businesses in their own countries. Although some withdrawals appeared
to occur late in the year, fears of massive selling of T-bills were not
realized.
The Fund was impacted by these factors in several ways. The Fed's inflammatory
comments about the economy's strength and inflation risk kept the Fund's
investment managers conservatively positioned in terms of portfolio duration
during the first half of the year. The market's flight to quality sectors of the
market in reaction to Asia's problems later in the year favored US treasuries.
Other sectors were negatively impacted, particularly where credit weakness was
perceived. Lower quality corporate issues lagged as yield spreads widened.
Credit-sensitive asset- and mortgage-backed securities holdings were also
underperformers in the fourth quarter. The Fund was able to offset some of these
influences. The bond managers captured some value by extending portfolio
duration in the third quarter as economic fundamentals stabilized and the Fed
became less of a factor.
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
United States Treasury 15.9%
World Omni Automobile Lease 3.3
Barnett Auto Trust 3.3
Sears Credit Account Master Trust 3.1
Olympic Automobile Receivables Trust 2.5
General Electric Capital Corporation 2.4
Associates Corp. North America 2.4
Sears Roebuck Acceptance 2.4
First Chicago Master Trust 2.2
PNC Student Loan Trust 2.2
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 2.7 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day standardized) 5.6%
Number of Issues 157
Number of Issuers 118
Money Managers Styles
BlackRock Financial Management Mortgage/Asset-Backed
Specialist
STW Fixed Income Management, Inc. Sector Rotation Core
Standish, Ayer & Wood, Inc. Corporate Specialist
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Fixed Income II Fund 97
<PAGE>
Fixed Income II Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Long-Term Investments - 92.1%
Asset-Backed Securities - 35.6%
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 $ 39 $ 38
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 0l/20/13 386 379
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 12/25/27 350 350
Associates Manufactured Housing
Pass-thru Certificate
Series 1996-1 Class A3
7.000% due 03/15/27 850 862
Banc One Auto Grantor Trust
Series 1997 -A Class A
6.270% due 11/20/03 3,703 3,712
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 7,500 7,495
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 4,479 4,514
Chase Manhattan Grantor Trust
Series 1996-B Class A
6.610% due 09/15/02 1,204 1,211
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 970 967
Series 1997-2 Class A
6.350% due 01/15/04 842 845
Series 1997-3 Class A
6.200% due 03/20/04 (c) 653 654
Contimortgage Home Equity Loan Trust
Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 500 499
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 40 40
Series 1994-1 Class A
5.800% due 03/15/09 316 313
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25 729 732
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/0l 4,500 4,580
First Omni Credit Card Master Trust
Series 1996-A Class A
6.650% due 09/15/03 930 945
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 998 1,000
Ford Credit Auto Lease Trust
Series 1996-1 Class A2
5.800% due 05/15/99 1,168 1,167
Green Tree Financial Corp.
Series 1996-6 Class A4
7.050% due 09/15/27 500 507
Series 1997-3 Class A2
6.490% due 07/15/28 750 752
Green Tree Securitized Net Interest Margin
Trust
Series 1994-A Class A
6.900% due 02/15/04 528 533
Series 1995-A Class A
7.250% due 07/15/05 413 414
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00 346 346
Series 1997-B Class A
5.950% due 05/15/03 1,200 1,198
IMC Home Equity Loan Trust
Series 1997-5 Class Al
6.5 10% due 02/20/06 (c) 765 765
Nationsbank Auto Owner Trust
Series 1996-A Class A3
6.375% due 07/15/00 2,750 2,756
Nationsbank Credit Card Master Trust
Series 1995-1 Class A
6.450% due 04/15/03 3,850 3,887
Newcourt Receivables Asset Trust
Series 1996-2 Class A
6.870% due 06/20/04 208 212
Nissan Auto Receivables Grantor Trust
Series 1997-1 Class A
6.150% due 02/17/03 372 373
Olympic Automobile Receivables
Series 1996-B Class A4
6.700% due 03/15/02 1,000 1,009
Series 1996-D Class CTFS
6.125% due 11/15/04 3,759 3,749
Series 1997-A Class A2
6.125% due 0l/01/99 902 903
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 0l/25/01 5,000 5,041
</TABLE>
98 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 0l/06/01 $ 5,000 $ 5,011
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 558 558
Sears Credit Account Master Trust II
Series 1995-3 Class A
7.000% due 10/15/04 900 919
Series 1995-4 Class A
6.250% due 01/15/03 4,000 4,004
Series 1996-2 Class A
6.500% due 10/15/03 1,500 1,510
Series 1997-1 Class A
6.200% due 07/16/07 500 500
SMS Student Loan Trust
Series 1997-A Class A
6.030% due 10/27/25 (c) 500 505
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 336 340
Student Loan Marketing Association
Series 1997-3 Class CTFS
6.259% due 08/25/12 (c) 500 494
The Money Store Home Equity Loan Trust
Series 1993-D Class Al
5.675% due 12/15/08 389 383
Series 1996-B Class A3
6.820% due 03/15/10 124 125
TLFC IV Equipment Lease Trust
Series 1996-1 Class A
5.980% due 11/20/02 361 360
TMS Small Business Administration Loan Trust
Series 1997-1 Class A
6.240% due 01/15/25 (c) 995 993
Series 1997-1 Class B
6.719% due 01/15/25 (c) 497 495
UCFC Home Equity Loan Trust
Series 1996-Dl Class A3
6.541% due 11/15/13 675 677
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 4,500 4,508
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 1,098 1,099
Series 1996-B Class B
6.850% due 11/15/02 (c) 350 352
World Omni Automobile Lease
Securitization Trust
Series 1997-A Class A2
6.750% due 06/25/03 (c) 5,500 5,549
Series 1997-A Class A4
6.900% due 06/25/03 500 508
---------
81,638
---------
Corporate Bonds and Notes - 25.0%
Ahmanson (H.F.)
9.875% due 11/15/99 875 930
Aristar Inc.
6.125% due 12/01/00 725 722
Associates Corp North America
6.375% due 08/15/00 5,500 5,531
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99 2,075 2,063
Bear Stearns Co., Inc.
7.625% due 09/15/99 1,125 1,151
Chase Manhattan Corp.
10.125% due 11/01/00 259 285
Chrysler Financial Corp. Series P (MTN)
6.230% due 07/17/98 500 501
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 5,000 4,987
Cox Enterprises, Inc.
6.250% due 08/26/99 1,400 1,400
Crescent Real Estate Equities
6.625% due 09/15/02 750 749
Enterprise Rent-A-Car USA Finance Co. (MTN)
7.875% due 03/15/98 1,100 1,104
ERP Operating, L.P.
8.500% due 05/15/99 1,050 1,079
Finova Capital Corp.
6.450% due 06/01/00 400 401
First Chicago Corp.
9.000% due 06/15/99 500 519
First Union Corp.
6.750% due 01/15/98 750 750
6.600% due 06/15/00 1,000 1,008
Franchise Finance Corp.
7.000% due 11/30/00 1,000 1,010
General Electric Capital Corporation (MTN)
6.120% due 08/15/00 5,500 5,545
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 988 999
</TABLE>
Fixed Income II Fund 99
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
General Motors Acceptance Corp. (MTN)
7.500% due 07/22/99 $ 925 $ 944
7.465% due 07/25/19 1,438 1,448
Heller Financial, Inc. (MTN)
5.928% due 03/01/99 (c) 1,000 1,003
Hertz Corp.
6.500% due 04/01/00 450 453
Homeside Lending, Inc. (MTN)
6.875% due 06/30/02 2,000 2,037
ITT Corp.
6.250% due 11/15/00 1,075 1,057
JC Penney & Co., Inc. (MTN)
6.375% due 09/15/00 1,125 1,134
Lehman Brothers Holdings, Inc. (MTN)
Series E
7.110% due 09/27/99 1,500 1,524
Series IBC
7.000% due 05/13/99 800 810
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 1,000 1,010
Merrill Lynch & Co., Inc. (MTN)
7.260% due 03/25/02 (c) 1,425 1,457
Midlantic Corp.
9.250% due 09/01/99 375 392
Occidental Petroleum Corp. (MTN)
5.950% due 11/09/98 950 948
Salomon, Inc.
7.750% due 05/15/00 1,000 1,032
6.700% due 07/05/00 500 505
Salomon, Inc. (MTN)
5.718% due 04/05/99(c) 1,100 1,100
Sears Roebuck Acceptance (MTN)
6.160% due 09/20/00 5,500 5,501
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 750 755
Taubman Realty Group, L.P.
8.000% due 06/15/99 250 256
USF&G Corp.
7.000% due 05/15/98 1,975 1,982
Wellsford Residential Property Trust (MTN)
6.195% due 11/24/99 (c) 1,300 1,302
---------
57,384
---------
Eurodollar Bonds - 2.3%
ALPS Pass-thru Trust
Series 1994-1 Class A2
7.150% due 09/15/04 (c) 280 281
Chase Manhattan Corp.
6.062% due 12/05/09 (c) 200 195
Export-Import Bank of Korea
7.125% due 09/20/01 300 249
Procter & Gamble
9.625% due 0l/14/01 3,020 3,271
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/01/04 1,375 1,310
---------
5,306
---------
Mortgage-Backed Securities - 11.6%
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 925 923
BKD Commercial Mortgage Trust
Series 1997-Cl Class B
7.218% due 04/25/00 (c) 850 851
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class A1
6.500% due 11/25/27 650 652
CMC Securities Corp. II
Series 1993-2G Class A1
7.194% due 11/25/23 (c) 885 898
Countrywide Home Loans
Series 1997-6 Class A1
6.750% due 11/25/27 675 679
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.500% due 2000 657 663
7.500% due 2002 150 152
9.000% due 2005 192 200
7.375% due 2006 (c) 174 179
6.250% due 2007 101 100
7.500% due 2007 276 281
8.500% due 2017 622 648
Federal Home Loan Mortgage Corp.
Series 1714 Class E
6.250% due 09/15/18 650 651
Federal National Mortgage
Association Pools
8.500% due 2001 450 469
7.000% due 2004 833 844
8.500% due 2008 115 118
7.500% due 2009 593 607
8.000% due 2009 896 932
8.500% due 2010 790 824
</TABLE>
100 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Federal National Mortgage Association
Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 $ 1,332 $ 1,324
GE Capital Mortgage Services, Inc.
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 1,125 1,131
Government National Mortgage
Association Pools
9.500% due 2025 567 615
7.250% due 2026 1,328 1,359
Merrill Lynch Credit Corp. Mortgage
Investors Inc.
Series 1996-B Class A
6.150% due 07/15/21 (c) 789 806
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 636 640
Residential Accredited Loans, Inc.
Series 1997-QS7 Class Al
7.500% due 07/25/27 505 510
Residential Asset Securitization Trust
Mortgage Pass-thru Certificates
Series 1996-A8 Class Al
8.000% due 12/25/26 594 601
Series 1997-A1 Class A
7.000% due 03/25/27 665 667
Series 1997-A5 Class A3
7.125% due 07/25/27 1,277 1,284
Series 1997-A9 Class Al
7.250% due 11/25/27 1,226 1,236
Residential Funding Mortgage Securities I
Series 1997-S12 Class Al0
6.700% due 08/25/27 1,500 1,510
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-M3 Class Al
7.750% due 07/25/30 66 66
Series 1994-Cl Class D
8.000% due 06/25/26 (c) 876 892
Series 1995-2 Class Cl
7.450% due 05/25/29 (c) 238 240
SASCO LLC
Series 1997-N1 Class D
6.217% due 09/25/28 (c) 800 800
Sequoia Mortgage Trust
Series 1 Class Al
6.028% due 07/04/27(c) 1,197 1,197
Wilshire Funding Corporation
Series 1997-WFC1 Class Al
7.250% due 08/25/27 1,024 1,035
---------
26,584
---------
Municipal Bonds - 0.4%
Philadelphia, Pennsylvania Authority for
Industrial Development Class A
6.480% due 06/15/04 861 883
---------
883
---------
United States Government
Treasuries - 15.7%
United States Treasury Notes
5.625% due 11/30/98 700 700
5.750% due 09/30/99 1,250 1,252
5.875% due 11/15/99 100 100
5.875% due 02/15/00 16,000 16,063
6.875% due 03/31/00 175 179
5.625% due 11/30/00 850 848
6.375% due 03/31/0l 480 489
6.250% due 06/30/02 3,070 3,131
3.625% due 07/15/02 11,545 11,487
5.750% due 11/30/02 340 340
5.750% due 08/15/03 1,500 1,502
---------
36,091
---------
Yankee Bonds - 1.5%
Household International
5.250% due 10/15/98 1,150 1,144
Ontario, Province of
ll.500% due 03/10/13 760 800
Quebec, Province of
13.250% due 09/15/14 450 520
Westpac Banking, Ltd.
7.875% due 10/15/02 1,000 1,060
---------
3,524
---------
Total Long-Term Investments
(cost $211,058) 211,410
---------
</TABLE>
Fixed Income II Fund 101
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Short-Term Investments - 6.7%
Chrysler Financial Corp. (MTN)
Series P
6.250% due 06/29/98 $ 1,300 $ 1,302
Frank Russell Investment Company
Money Market Fund, due on demand (a) 13,320 13,320
Hertz Corp.
9.500% due 05/15/98 675 684
---------
Total Short-Term Investments
(cost $15,348) 15,306
---------
Total Investments
(identified cost $226,406)(b) - 98.8% 226,716
Other Assets and Liabilities,
Net - 1.2% 2,754
---------
Net Assets - 100.0% $ 229,470
=========
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate security.
Abbreviations:
LLC - Limited Liability Corporation
L.P. - Limited Partnership
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
102 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $226,406)(Note 2).................................................... $ 226,716
Receivables:
Dividends and interest.................................................................................. 2,368
Investments sold........................................................................................ 376
Fund shares sold........................................................................................ 974
--------------------
Total Assets......................................................................................... 230,434
Liabilities
Payables:
Fund shares redeemed............................................................. $ 795
Accrued fees to affiliates (Note 4).............................................. 123
Other accrued expenses........................................................... 46
------------------
Total Liabilities.................................................................................... 964
--------------------
Net Assets.................................................................................................. $ 229,470
====================
Net Assets consist of:
Undistributed net investment income......................................................................... $ 609
Accumulated net realized gain (loss)........................................................................ (7,705)
Unrealized appreciation (depreciation) on investments....................................................... 310
Shares of beneficial interest............................................................................... 125
Additional paid-in capital.................................................................................. 236,131
--------------------
Net Assets.................................................................................................. $ 229,470
====================
Net Asset Value, offering and redemption price per share:
($229,469,933 divided by 12,506,712 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 18.35
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 103
<PAGE>
Fixed Income II Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Interest.................................................................................................. $ 14,201
Dividends from Money Market Fund (Note 5)................................................................. 889
--------------------
Total Investment Income.............................................................................. 15,090
Expenses (Notes 2 and 4):
Management fees..................................................................... $ 1,185
Custodian fees...................................................................... 142
Transfer agent fees................................................................. 144
Bookkeeping service fees............................................................ 15
Professional fees................................................................... 17
Registration fees................................................................... 31
Trustees' fees...................................................................... 4
Miscellaneous....................................................................... 25
------------------
Total Expenses....................................................................................... 1,563
--------------------
Net investment income....................................................................................... 13,527
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments................................................................... (118)
Net change in unrealized appreciation or depreciation of investments........................................ 487
--------------------
Net gain (loss) on investments.............................................................................. 369
--------------------
Net increase (decrease) in net assets resulting from operations............................................. $ 13,896
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
104 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statements of changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
--------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.......................................................... $ 13,527 $ 11,273
Net realized gain (loss)....................................................... (118) (1,911)
Net change in unrealized appreciation or depreciation.......................... 487 (86)
--------------- --------------
Net increase (decrease) in net assets resulting from operations.............. 13,896 9,276
--------------- --------------
From Distributions to Shareholders:
Net investment income.......................................................... (13,676) (11,259)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6).... 6,267 41,389
--------------- --------------
Total Net Increase (Decrease) in Net Assets...................................... 6,487 39,406
Net Assets
Beginning of period............................................................ 222,983 183,577
--------------- --------------
End of period (including undistributed net investment income of $609 and $402,
respectively)................................................................ $ 229,470 $ 222,983
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 105
<PAGE>
Fixed Income II Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................................... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income................................................. 1.08 1.04 1.16 1.21 .84
Net realized and unrealized gain (loss) on investments................ -- (.19) .59 (1.07) .44
-------- -------- -------- -------- --------
Total Income From Investment Operations............................. 1.08 .85 1.75 .14 1.28
-------- -------- -------- -------- --------
Less Distributions:
Net investment income................................................. (1.09) (1.04) (1.18) (1.15) (.71)
Tax return of capital................................................. -- -- -- -- (.14)
-------- -------- -------- -------- --------
Total Distributions................................................. (1.09) (1.04) (1.18) (1.15) (.85)
-------- -------- -------- -------- --------
Net Asset Value, End of Period........................................... $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99
======== ======== ======== ======== ========
Total Return (%)(a)...................................................... 6.02 4.76 9.95 .82 6.98
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).............................. 229,470 222,983 183,577 144,030 138,619
Ratios to average net assets (%)(a):
Operating expenses................................................. .66 .70 .58 .19 .16
Net investment income.............................................. 5.70 5.70 6.41 6.52 6.16
Portfolio turnover rate (%)........................................... 213.14 264.40 269.31 233.75 229.07
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
106 Fixed Income II Fund
<PAGE>
Fixed Income III Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide maximum total return through capital appreciation and by
assuming a higher level of volatility than is ordinarily expected from broad
fixed-income market portfolios.
Invests in: Fixed-income securities.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns by assuming the additional risk of investment in non-
investment grade US fixed income securities, and foreign bonds including
emerging markets debt in addition to US investment grade fixed income
instruments. The Fund employed the investment management services of three
managers with three separate approaches to bond market investment.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Fixed III+ LB Aggregate** Lipper(C) Intermediate++
---- --------- -------------- ------------------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1993 $11,022 $10,768 $10,950
1994 $10,593 $10,454 $10,585
1995 $12,499 $12,386 $12,340
1996 $13,109 $12,835 $12,732
1997 $14,372 $14,075 $13,807
</TABLE>
Fixed Income III Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- ----------------- ------------- ----------
<S> <C> <C>
1 Year $ 10,964 9.64%
Inception $ 14,372 7.65%(S)
</TABLE>
Lehman Brothers Aggregate Bond Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- ----------
<S> <C> <C>
1 Year $ 10,966 9.66%
Inception $ 14,075 7.20%(S)
</TABLE>
Lipper(C) Intermediate Investment Grade Debt Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- ----------
<S> <C> <C>
1 Year $ 10,844 8.44%
Inception $ 13,807 6.66%(S)
</TABLE>
* Assumes initial investment on January 29, 1993. Lehman Brothers Index
comparison for the initial investment began February 1, 1993. Lipper Index
comparison for the initial investment began January 1, 1993.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
+ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but
gross of any investment services fees. Information concerning these fees
can be obtained from the fund's managers upon request.
++ Lipper(C) Intermediate (5-10 Yr.) Investment Grade Debt Funds Average is
the average total return for the universe of funds within the Intermediate
Investment Grade Debt Funds investment objective. The total return for the
funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates. This type of funds
invests at least 65% of assets in U.S. Treasury Bills, Notes and Bonds
with average maturities of five to ten years.
(S) Annualized.
108 Fixed Income III Fund
<PAGE>
Fixed Income III Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Fixed Income III Fund reflected a
total return of 9.6%, roughly even with the Lehman Brothers Aggregate Bond
Index. The Fund's performance was aided by its longer duration relative to the
benchmark and the strong performance of non-investment grade and emerging
markets debt holdings during the first three quarters of the year.
Portfolio Highlights
Although 1997 produced reasonably strong returns from fixed income investments,
it was once again a difficult year for fixed income investors. Continuing the
trend from the previous year, high yield US corporate bonds and emerging markets
debt securities produced the strongest returns. However, the trend ended just
prior to the start of the fourth quarter, as economic crises in Asia created
concerns around the globe. The resulting flight to safer investments had two
divergent effects on bonds. The first was a shift of stock market assets into
bonds, particularly among mutual funds. The second was a preference for "safe"
bonds that resulted in a widening of yield spreads by quality. This had the
consequence of weakening the demand for high yield US bonds. It also caused a
selloff of emerging markets debt. High yield bonds still fared relatively well
due to the continued creditworthiness of US corporations and a sound domestic
economy, and as a result, ended the year as the best performing US bond sector.
Although emerging markets debt securities produced losses for the quarter, their
gains earlier in the year were sufficient to maintain their status as the year's
best performers.
Despite the erosion of opportunities in the fourth quarter, the Fixed Income III
Fund performed well in 1997. The market for fixed income securities was again
marked by limited opportunities to generate significant returns from investment
grade bonds. Alternatives in other segments of the market offered better
returns. Although they were the source of the Fund's weakness in the fourth
quarter, the Fund benefited from its emerging markets and high yield holdings
for the year. In addition to generating healthy returns from both high yield and
emerging markets securities, the Fund managers' mortgage-backed securities
holdings also produced above average returns. Duration strategies were
conservative for most of the year due to the Fed's comments and the lack of
clear economic signals. This resulted in some opportunity cost as yields fell
during the year, particularly in the fourth quarter.
- --------------------------------------------------------------------------------
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
United States Treasury 14.2%
Federal Home Loan Mortgage Corp. 12.8
Government National Mortgage Association 6.5
Federal National Mortgage Association 5.8
Great Britain Treasury 1.8
Time Warner, Inc. 1.4
Salomon, Inc. 1.3
Bankers Trust Company 0.7
Coca Cola Co. 0.7
Citicorp 0.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AA3
Weighted Average Years-to-Maturity 8.7 Years
Weighted Average Duration 4.9 Years
Current Yield (SEC 30-day standardized) 5.8%
Number of Issues 335
Number of Issuers 262
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers Styles
BEA Associates Broad Market-Sector
Rotation
Pacific Investment Management Co. Broad Market-Sector
Rotation
Standish, Ayer & Wood, Inc. Broad Market-Sector
Rotation
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Fixed Income III Fund 109
<PAGE>
Fixed Income III Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Long-Term Investments -86.2%
Asset-Backed Securities - 6.4%
Advanta Credit Card Master Trust
Series 1995-F Class A2
6.170% due 08/01/03 (b) $ 2,100 $ 2,099
Aesop Funding II
Series 1997-1 Class A-2
6.400% due 10/20/03 2,350 2,354
American Airlines, Inc.
Series 1990-P
10.600% due 03/04/09 1,013 1,335
Series 1991-A
9.710% due 01/02/07 333 370
American Express Credit Account
Master Trust
Series 1997-1 Class A
6.400% due 04/15/05 490 495
Asset Securitization Corp.
Series 1996-MD6 Class A1C
7.040% due 11/13/26 905 934
California Infrastructure SDG&E
Series 1997-1 Class A6
6.310% due 09/25/08 270 270
Series 1997-1 Class A7
6.370% due 12/26/09 280 280
Cityscape Home Equity Loan Trust
Pass-thru Certificate
Series 1996-2 Class A2
7.200% due 04/25/11 850 859
First USA Credit Card Master Trust
Series 1997-6 Class A
6.420% due 03/17/05 1,005 1,019
Fleetwood Credit Corp. Grantor Trust
Series 1994-B Class A
6.750% due 03/15/10 354 356
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A-1
5.400% due 09/25/09 80 75
Green Tree Financial Corp.
Series 1995-5 Class A3
6.250% due 10/15/25 600 600
Series 1995-6 Class A3
6.650% due 11/15/25 560 562
Series 1995-8 Class A2
6.150% due 12/15/26 (b) 537 538
Mellon Bank Credit Card Master Trust
Series 1995-A Class A
6.170% due 04/15/03 (b) 1,650 1,652
Metris Master Trust,
Series 1997-1 Class A
6.870% due 10/20/05 1,010 1,039
Prudential Home Mortgage Securities Co.
Mortgage Pass-thru Certificate
Series 189
10.000% due 11/01/19 7 7
Series 1992-51 Class A-8
8.000% due 02/25/23 267 268
Residential Funding Mortgage Securities II
Series 1997-HSS Class M1
7.0l0% due 05/25/27 1,368 1,390
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1994-C2 Class G
8.000% due 04/25/25 283 285
Series 1994-1 Class M-2
7.750% due 09/25/29 407 418
Series 1995-1 Class 2-C
7.500% due 10/25/28 (b) 325 330
Series 1995-C1 Class C
6.900% due 02/25/27 (b) 300 299
Salomon Brothers Mortgage Securities VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16 Class A
8.440% due 11/25/24 (b) 566 587
Series 1997 Class A2
7.174% due 03/25/25 790 818
Sears Credit Account Master Trust
Series 1997-1 Class A
6.200% due 07/16/07 970 969
Standard Credit Card Master Trust
Series 1994-2 Class A
7.250% due 04/07/06 600 635
Series 1994-4 Class A
8.250% due 11/07/03 735 787
Structured Asset Securities Corp.
Mortgage Pass-thru Certificate
Series 1996-CFL Class A1C
5.944% due 02/25/28 393 391
Series 1996-CFL Class C
6.525% due 02/25/28 300 299
The Money Store Home Equity Loan Trust
Series 1996-A Class AS
6.850% due 06/15/19 800 811
Series 1996-B Class AS
7.180% due 02/15/15 825 842
Toyota Auto Lease Trust
Series 1997-A Class A2
6.350% due 04/26/04 525 526
</TABLE>
110 Fixed Income III Fund
<PAGE>
Fixed Income III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
UCFC Home Equity Loan Trust
Series 1994-B Class A-6
7.100% due 06/10/23 $ 124 $ 126
---------
24,625
---------
Corporate Bonds and Notes - 22.7%
AT&T Capital Corp. (MTN)
6.470% due 12/03/99 400 401
A.H. Belo Corp.
6.875% due 06/01/02 850 866
Aames Financial Corp.
9.125% due 11/01/03 475 467
Advanta National Bank
6.450% due 10/30/00 825 823
AK Steel Corp.
10.750% due 04/01/04 300 320
Albank Capital Trust
9.270% due 06/06/27 600 655
American General Institutional Capital
Series B
8.125% due 03/15/46 1,145 1,262
Amerus Capital I Series A
8.850% due 02/01/27 475 523
AMR Corp. (MTN)
9.950% due 03/07/01 1,000 1,105
Azteca Holdings SA
11.000% due 06/15/02 900 928
Banesto Delaware, Inc.
8.250% due 07/28/02 1,000 1,068
Bank United Corp.
8.875% due 05/01/07 1,050 1,157
Bear Stearns Capital Trust I
7.000% due 0l/15/27(b) 475 481
Beaver Valley Funding Corp.
9.000% due 06/01/17 1,480 1,658
BellSouth Capital Funding Corp.
6.040% due 11/15/26 1,190 1,201
BellSouth Telecommunications, Inc.
5.850% due 11/15/45 670 674
BNP US Funding LLC
7.738% due 12/31/49 (b) 580 589
Building Materials Corp.
8.000% due 10/15/07 1,325 1,328
Cablevision Systems Corp.
7.875% due 12/15/07 470 480
CBS Inc.
7.125% due 11/01/23 675 612
Citicorp (MTN)
5.956% due 06/27/02 (b) 3,000 2,987
Cliffs Drilling Co. Series B
10.250% due 05/15/03 200 216
Coast Savings Financial, Inc.
10.000% due 03/01/00 275 292
Colonial Realty LP
7.500% due 07/15/01 825 851
Compass Trust I Series A
8.230% due 0l/15/27 350 373
Conseco Finance Trust III
8.796% due 04/01/27 675 762
Contifinancial Corp.
8.375% due 08/15/03 1,050 1,087
Continental Airlines, Inc.
9.500% due 12/15/01 795 835
Crescent Real Estate Equities
6.625% due 09/15/02 850 852
7.125% due 09/15/07 925 938
CS Wireless System, Inc. Step Up Bond
Zero Coupon due 03/01/06 (b) 340 92
Dime Capital Trust I Series A
9.330% due 05/06/27 300 339
Equitable Life Assurance Society
7.700% due 12/01/15 500 538
Equity Residential Properties
7.125% due 10/15/17 325 325
ERAC USA Finance Co. (MTN)
6.350% due 0l/15/0l 800 801
ERP Operating, LP
8.500% due 05/15/99 425 437
Federal Realty Investment Trust
8.875% due 0l/15/00 725 761
Felcor Suites, Ltd.
7.625% due 10/01/07 770 778
First Nationwide Holdings
12.500% due 04/15/03 1,625 1,844
10.625% due 10/01/03 450 503
First Republic Bancorp
7.750% due 09/15/12 700 715
First Tennessee Capital I
Series A
8.070% due 01/06/27 575 605
First USA Bank
5.850% due 02/22/01 475 470
Fox/Liberty Networks LLC
8.875% due 08/15/07 835 833
Fox/Liberty Networks LLC Step Up Bond
Zero Coupon due 08/15/07 (b) 280 179
Gaylord Container Corp. Step Up Bond
Zero Coupon due 05/15/05 (b) 330 353
GMAC (MTN)
7.375% due 04/15/99 750 762
8.500% due 0l/31/00 600 627
6.625% due 04/24/00 600 606
</TABLE>
Fixed Income III Fund 111
<PAGE>
Fixed Income III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Goldman Sachs Group, LP
6.375% due 06/15/00 $ 1,050 $ 1,058
Great Atlantic & Pacific Tea, Inc.
7.750% due 04/15/07 1,125 1,186
Haven Capital Trust I
10.460% due 02/01/27 350 371
Homeside, Inc.
11.250% due 05/15/03 241 287
Imperial Capital Trust I
Series B
9.980% due 12/31/26 250 284
Imperial Credit Industries, Inc.,
Series B
9.875% due 0l/15/07 700 686
Interpool Capital Trust Series B
9.875% due 02/15/27 500 584
ISP Holdings, Inc. Series B
9.000% due 10/15/03 250 259
Kaufman and Broad Home Corp.
7.750% due 10/15/04 1,325 1,312
Long Island Lighting Co.
9.000% due 11/01/22 735 821
Markel Capital Trust I Series B
8.710% due 0l/01/46 325 354
Mashantucket Western Pequot
6.910%due09/01/12 1,225 1,285
Merck and Co. Series B (MTN)
5.760% due 05/03/37 1,630 1,670
Merita Bank, Ltd.
7.150% due 12/29/49 (b) 1,200 1,215
Merrill Lynch & Co., Inc.
6.000% due 0l/15/0l 300 299
MMI Trups
7.625% due 12/15/27 1,300 1,295
National Westminster
6.062% due 12/31/99 (b) 10 9
Nextel Communications Step Up Bond (b)
Zero Coupon due 10/31/07 275 169
Zero Coupon due 09/15/07 590 372
Niagara Mohawk Power Corporation
8.750% due 04/01/22 350 376
Noranda, Inc.
8.625% due 07/15/02 775 839
Norfolk Southern Corp.
7.050% due 05/01/37 750 793
North Atlantic Energy Corp. Series A
9.050% due 06/01/02 680 699
NWA Trust
13.875% due 06/21/08 90 109
Ocwen Federal Bank
1l.875% due 10/01/03 650 731
12.000% due 06/15/05 325 357
Onbank Capital Trust I
9.250% due 02/01/27 450 529
Paxson Communications Corp.
11.625% due 10/01/02 450 486
Prime Succession Acquisition Co.
10.750% due 08/15/04 400 439
Providian Capital I Series A
9.525% due 02/01/27 500 546
Prudential Insurance Co. of America
6.875% due 04/15/03 700 712
Public Service Co., New Hampshire
Series B
9.170% due 05/15/98 1,500 1,509
Revlon Worldwide
Zero Coupon due 03/15/01 1,600 1,116
Rose Hills Corp.
9.500% due 11/15/04 475 494
Salomon Smith Barney Holdings
7.980% due 03/01/00 325 337
Salomon, Inc.
7.000% due 05/15/99 250 252
7.125% due 08/01/99 425 431
7.750% due 05/15/00 500 516
Salomon, Inc. (MTN)
6.625% due 11/30/00 625 631
Seagate Technology, Inc.
7.450% due 03/01/37 1,100 1,130
Simon Debartolo Group LP
6.750% due 07/15/04 875 881
Sinclair Broadcast Group, Inc.
8.750% due 12/15/07 950 957
Sovereign Capital Trust I
9.000% due 04/01/27 975 1,057
Spieker Properties, LP
6.950% due 12/15/02 500 505
Summit Properties Partnership
7.200% due 08/15/07 575 592
Sun Healthcare Group, Inc.
9.500% due 07/01/07 300 309
Tanger Properties LP
8.750% due 03/ll/0l 350 360
Taubman Realty Group, LP
8.000% due 06/15/99 450 460
TCI Communications, Inc. (MTN)
6.355% due 09/11/00(b) 2,000 1,985
Tenet Healthcare Corp.
9.625% due 09/01/02 260 282
7.875% due 01/15/03 170 175
8.625% due 12/01/03 330 344
8.000% due 01/15/05 1,275 1,296
</TABLE>
112 Fixed Income III Fund
<PAGE>
Fixed Income III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Time Warner, Inc.
7.975% due 08/15/04 $ 375 $ 399
8.1l0% due 08/15/06 750 812
8.180% due 08/15/07 750 816
7.570% due 02/01/24 585 612
6.850% due 0l/15/26 2,245 2,298
Toledo Edison Co.
8.700% due 09/01/02 500 526
Toledo Edison Co. (MTN)
8.000% due 12/31/98 500 505
Toll Brothers Corp.
7.750% due 09/15/07 1,200 1,182
Trenwick Capital Trust I
8.820% due 02/01/37 575 642
TU Electrical Capital V
8.175% due 0l/30/37 600 643
UCC Investors Holding, Inc. Step Up Bond
Zero Coupon due 05/01/05 (b) 230 224
Union Planters Trust Capital
8.200% due 12/15/26 675 716
United Companies Financial Corp.
8.375% due 07/01/05 575 596
United Technologies Corp.
8.875% due 11/15/19 170 213
USAir, Inc.
10.000% due 07/01/03 760 783
USF&G Corp.
8.375% due 06/15/0l 250 264
Valero Energy
6.750% due 12/15/02 535 538
Viacom, Inc.
7.750% due 06/01/05 1,000 1,017
Webster Capital Trust I
9.360% due 01/29/27 225 251
Wellsford Residential Property Trust
9.375% due 02/01/02 475 522
Wireless One, Inc. Step Up Bond
Zero Coupon due 08/01/06 (b) 200 42
---------
86,711
---------
Eurodollar Bonds - 4.8%
Aiberton Oil Company
9.875% due 08/15/00 (b) 240 228
Argentina, Republic of
Series 10
5.718% due 04/0l/00 (b) 366 345
Series L
6.687% due 03/31/05 (b) 1,920 1,716
Arisco Productos Alimenticios
10.750% due 05/22/05 100 97
Auxiliaire Credit Foncier
5.687% due 09/25/02 (b) 600 578
Brazil, Federal Republic of
6.812% due 01/01/01 (b) 1,609 1,529
Brazil, Republic of
1.000% due 04/15/14 1,126 884
Cemex SA (MTN)
8.500% due 08/31/00 1,000 1,003
Credit Fonc France
8.000% due 01/14/02 560 587
Credit Lyonnais
7.125% due 09/19/49 (e) 360 355
Fifth Mexican Acceptance Corp. Class A
8.000% due 12/15/98 800 224
Hutchison Whampoa Finance, Ltd.
7.450% due 08/0l/17 1,350 1,306
Hutchison Whampoa Finance, Ltd.
Series C
7.500% due 08/01/27 575 550
Mexico (United Mexican States)
6.250% due 12/31/19 1,750 1,454
6.692% due 12/31/19 (b) 250 231
Midland Bank
6.062% due 12/31/49 (e) 60 51
Okobank Series E (MTN)
6.406% due 09/29/49 (e) 700 693
Poland, Republic of, Step Up Bond
4.000% due 10/27/14 (b) 2,155 1,861
Skandinaviska Enskilda Series 1 (MTN)
6.625% due 03/29/49 (e) 490 488
Skandinaviska Enskilda Banken (e)
7.500% due 03/29/49 600 600
8.125% due 09/06/49 475 513
Tata Electric Co.
8.500% due 08/19/17 600 535
TFM SA de CV Step Up Bond (b)
Zero Coupon due 06/15/09 445 280
Zero Coupon due 06/15/09 (144A) 1,090 676
Venezuela, Republic of
Series A
6.750% due 03/31/07 (b) 1,131 1,015
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/01/04 (b) 650 619
---------
18,418
---------
Mortgage-Backed Securities - 30.7%
Asset Securitization Corporation
Series 1997-D5 Class A1D
6.850% due 02/14/41 850 862
Chase Commercial Mortgage Securities Corp.
6.600% due 12/19/07 1,325 1,283
</TABLE>
Fixed Income III Fund 113
<PAGE>
Fixed Income III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Collateralized Mortgage Securities Corp.
Series J Class J-5 CMO
7.985% due 05/0l/17 $ 1,575 $ 1,598
Federal Home Loan Mortgage Corp. (d)
6.500% 15 Year TBA 5,420 5,428
7.000% 15 Year TBA 150 152
6.500% 30 Year TBA 25,000 24,711
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.000% due 2009 474 484
6.000% due 2011 2,824 2,793
7.000% due 2011 1,383 1,409
6.000% due 2012 1,393 1,374
7.000% due 2012 1,578 1,604
8.500% due 2017 2,476 2,615
8.500% due 2020 319 337
7.000% due 2025 1,489 1,508
7.500% due 2026 761 780
8.500% due 2027 911 962
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.950% due 2020 605 621
8.500% due 2020 1,759 1,787
Federal Home Loan Mortgage Corp.
Series 1037 Class Z
9.000% due 02/15/21 1,562 1,669
Series 1934 Class AB
6.000% due 08/15/07 1,350 1,341
Federal National Mortgage
Association Pools
8.500% due 1999 412 439
6.000% due 2003 317 314
10.000% due 2005 268 282
7.000% due 2009 471 480
7.000% due 20ll 2,083 2,119
6.000% due 2012 1,925 1,894
7.000% due 2024 1,166 1,180
7.799% due 2024 (b) 1,608 1,653
7.000% due 2025 7,196 7,275
Federal National Mortgage
Association (REMIC)
Series 1992-10 Class ZD
8.000% due 11/25/21 1,603 1,759
Federal National Mortgage Association (d)
6.000% 7 Year TBA 2,350 2,324
6.500% 30 Year TBA 10,780 10,645
Government National Mortgage
Association Pools
6.875% due 2023 (b) 1,553 1,596
7.000% due 2023 (b) 559 574
7.000% due 2023 890 900
6.875% due 2024 (b) 4,101 4,219
7.000% due 2024 (b) 3,869 3,966
7.500% due 2024 413 424
6.500% due 2026 (b) 4,516 4,635
7.000% due 2026 1,584 1,596
Government National Mortgage Association
6.500% 30 Year TBA (d) 10,470 10,362
Greenwich Capital Acceptance, Inc.
Series 1994-LB6 Class A-i
8.890% due 11/25/24 (b) 157 160
Kidder Peabody Acceptance Corp.
Series 1994-C1 Class B
6.850% due 02/01/06 1,050 1,062
Merrill Lynch Mortgage Investors, Inc.
Mortgage Pass-thru Certificate
Series 1995-C2 Class D
8.190% due 06/15/21 (b) 2,071 2,126
Morgan Stanley Capital I, Inc.
Series 1996-WFl Class X
1.420% due 01/15/13 (b) 3,450 252
Series HFI Class A2
7.270% due 07/15/29 400 416
Series WFI Class A2
7.220% due 05/15/07 500 519
Paine Webber Mortgage
Acceptance Corp. IV
Mortgage Pass-thru Certificate
Series 1995-Mi Class A
6.700% due 0l/15/07 720 730
Ryland Mortgage Securities Corp. CMO
Series 1993-8 Class A
8.060% due 09/25/23 (b) 367 372
---------
117,591
---------
Municipal Bonds - 0.6%
Municipal Electric Authority of Georgia
5.000% due 01/01/26 1,200 1,172
New Jersey Economic Development Authority
Series A
7.425% due 02/15/29 900 986
Series B
Zero Coupon due 02/15/08 540 286
---------
2,444
---------
</TABLE>
114 Fixed Income III Fund
<PAGE>
Fixed Income III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Non-US Bonds - 2.5%
Australian Government
10.000% due 10/15/07 AUD 2,000 $ 1,689
Great Britain Treasury
7.250% due 12/07/07 GBP 4,500 7,916
---------
9,605
---------
United States Government
Agencies - 0.3%
Tennessee Valley Authority
5.880% due 04/01/36 $ 1,090 1,128
---------
1,128
---------
United States Government
Treasuries - 16.0%
United States Treasury Bonds
7.625% due 02/15/25 8,550 10,376
8.125% due 08/15/19 2,900 3,629
United States Treasury Notes
5.625% due 0l/31/98 475 475
5.125% due 11/30/98 2,150 2,141
5.625% due 11/30/98 (f) 5,625 5,625
5.750% due 12/31/98 1,350 1,352
6.000% due 06/30/99 1,100 1,106
6.875% due 07/31/99 250 254
5.875% due 10/31/99 880 879
7.750% due 11/30/99 8,020 8,317
8.500% due 02/15/00 350 369
7.125% due 02/29/00 425 437
6.125% due 07/31/00 400 404
5.750% due 10/31/00 155 155
5.625% due 11/30/00 400 399
6.375% due 03/31/01 650 662
6.250% due 04/30/01 400 406
6.625% due 06/30/01 (f) 7,650 7,862
6.250% due 10/31/01 (f) 12,075 12,281
6.625% due 04/30/02 475 491
5.750% due 08/15/03 2,775 2,777
United States Treasury
Interest Only Strips
Zero Coupon due 02/15/19 2,050 575
---------
60,972
---------
Yankee Bonds - 2.2%
Argentina, Republic of
9.500% due 11/30/02 (b) 1,150 1,142
Bell Cablemedia PLC Step Up Bond
Zero Coupon due 09/15/05 (b) 935 829
Brazil Media Trust
6.688% due 09/15/07 (b) 226 192
Brazil, Republic of, Series EI-L
6.688% due 04/15/06 (b) 59 51
Crown Packaging Enterprise, Ltd.
Step Up Bond
14.000% due 08/0l/06 300 15
Diamond Cable Communication PLC
Step Up Bond
Zero Coupon due 02/15/07 (b) 135 93
Indah Kiat International Finance Co.
ll.875% due 06/15/02 330 314
Industrial Credit & Investment Corporation
7.550% due 08/15/07 160 143
Korea Development Bank
7.900% due 02/01/02 185 156
Midland Bank
6.187% due 12/31/99 (b) 390 333
National Australia Bank
6.400% due 12/10/07 (b) 410 412
Repap New Brunswick
10.625% due 04/15/05 665 632
Rogers Cantel, Inc.
9.375% due 06/01/08 505 533
Royal Caribbean Cruises
7.500% due 10/15/27 1,325 1,349
Santander Finnish Issuances
6.962% due 09/30/49 (b) 250 245
St. George Bank, Ltd.
7.150% due 10/01/05 775 798
Tata Engineering & Locomotive, Ltd.
7.875% due 07/15/07 575 567
Videotron Holdings PLC Step Up Bond
Zero Coupon due 08/15/05 (b) 395 349
---------
8,153
---------
Total Long-Term Investments
(cost $325,104) 329,647
---------
<CAPTION>
Number
of
Contracts*
----------
<S> <C> <C>
Options Purchased -0.0%
United States Treasury Bond (h)
Mar 100.16 Call 34 24
Feb 100.72 Put 27 21
United States Treasury Notes (h)
Mar 104.22 Call 39 24
---------
Total Options Purchased
(cost $126) 69
---------
</TABLE>
Fixed Income III Fund 115
<PAGE>
Fixed Income III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
---------- ---------
<S> <C> <C>
Preferred Stocks - 1.9%
American RE Capital 18,100 $ 469
Australia & New Zealand
Banking Group, Ltd. 7,200 199
California Federal Preferred Capital Corp.
Series A 64,150 1,684
Chancellor Media Corporation 9,000 1,037
Credit Lyonnais Capital S.C.A. -- ADR 3,500 92
El Paso Electric Co. Series A8
Payment in Kind Preferred Stock 4,351 481
Long Island Lighting Co. Series QQ 16,900 425
Pinto Totta International Finance, Ltd. 1,192 1,229
Primedia, Inc. 400 401
Time Warner, Inc. 1,091 1,222
---------
Total Preferred Stocks
(cost $5,394) 7,239
---------
Warrants - 0.0%
Capital Pacific Holdings, Inc.
2002 Warrants (h) 2,212 1
---------
Total Warrants
(cost $0) 1
---------
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Short-Term Investments - 25.2%
AT&T Capital Corp. Series 4 (MTN)
6.275% due 06/09/98 $ 1,050 1,051
Bankers Trust Company
5.900% due 07/07/98 3,000 2,999
Canada Treasury Bill
3.513% due 01/29/98 (a)(g) CAD 1,900 1,326
Coca Cola Co.
5.470% due 01/29/98 (a)(g) $ 3,000 2,987
Federal Home Loan Bank Consolidated
Discount Notes
5.570% due 01/07/98 (a)(g) 900 899
Federal Home Loan Mortgage Corp.
5.950% due 06/19/98 5,000 5,009
Federal Home Loan Mortgage
Discount Notes
5.420% due 01/05/98 (a)(g) 1,000 999
Frank Russell Investment Company
Money Market Fund,
due on demand (a) 76,367 76,367
Imperial Chemical Industrial PLC
6.000% due 09/05/98 (b) 2,000 2,000
Salomon, Inc.
5.813% due 10/20/98 2,000 1,998
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
United States Treasury Bills (f)(g)
5.190% due 01/12/98 (a) $ 90 $ 89
5.020% due 02/05/98 (a) 130 129
5.090% due 02/05/98 (a) 75 74
5.160% due 02/05/98 (a) 35 35
5.185% due 03/12/98 100 99
5.175% due 04/16/98 250 246
---------
Total Short-Term Investments
(cost $96,333) 96,307
---------
Total Investments
(identified cost $426,957)(c) - 113.3% 433,263
Other Assets and Liabilities,
Net, Including Options Written - (13.3%) (50,830)
---------
Net Assets - 100.0% $ 382,433
=========
</TABLE>
(a) At cost, which approximates market.
(b) Adjustable or floating rate security.
(c) See Note 2 for federal income tax information.
(d) Forward Commitment. See Note 2.
(e) Perpetual floating rate note.
(f) Held as collateral by the custodian in connection with futures contracts
purchased and options written by the Fund.
(g) Rate noted is yield-to-maturity.
(h) Nonincome-producing security.
* Each contract represents $100,000 notional value.
Abbreviations:
ADR - American Depositary Receipt
CMO - Collateralized Mortgage Obligation
LLC - Limited Liability Corporation
LP - Limited Partnership
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
Foreign Currency Abbreviations:
AUD - Australian dollar
CAD - Canadian dollar
GBP - British pound
The accompanying notes are an integral part of the financial statements.
116 Fixed Income III Fund
<PAGE>
Fixed Income III Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Unrealized
of Appreciation
Contracts* (Depreciation)
(000)
---------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
Eurodollar Financial
Futures Contracts
expiration date 03/98 10 $ 9
United States Treasury 5 Year Note
Futures Contracts
expiration date 03/98 17 5
United States Treasury 10 Year Note
Futures Contracts
expiration date 03/98 246 15
United States Treasury 20 Year Bond
Futures Contracts
expiration date 03/98 101 36
United States Treasury 30 Year Bond
Futures Contracts
expiration date 03/98 55 51
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S)(S) $ 116
==============
</TABLE>
(S)(S) At December 31, 1997, United States Government Securities valued at
$26,440 were held as collateral by the custodian in connection with
futures contracts purchased and options written by the Fund.
* Each contract represents $100,000 notional value.
<TABLE>
<CAPTION>
Number Market
of Value
Contracts* (000)
---------- ------
<S> <C> <C>
Options Written
(Notes 2 and 3)
United States Treasury 5 Year Notes
Mar 98.68 Put 34 $ 7
United States Treasury 10 Year Notes
Mar 106.22 Call 39 8
Jul 112.19 Call 24 5
Nov 109.00 Call 27 12
Feb 101.95 Put 51 30
Jul 97.22 Put 24 2
Nov 95.27 Put 27 8
------
Total Liability for Options Written
(premiums received $146)(S)(S) $ 72
======
</TABLE>
Foreign Currency Exchange Spot Contracts
(Note 2)
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
- ------------ ----------- ---------- --------------
<S> <C> <C> <C>
GBP 110 USD 182 01/02/98 $ 2
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income III Fund 117
<PAGE>
Fixed Income III Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $426,957)(Note 2) ..................................................... $ 433,263
Foreign currency holdings (identified cost $255) ............................................................. 252
Foreign currency exchange spot contracts (cost $182)(Note 2) ................................................. 182
Receivables:
Dividends and interest ..................................................................................... 4,147
Investments sold (regular settlement) ...................................................................... 806
Investments sold (delayed settlement)(Note 2) .............................................................. 14,858
Fund shares sold ........................................................................................... 8,047
Daily variation margin on futures contracts (Notes 2 and 3) ................................................ 175
--------------------
Total Assets ............................................................................................. 461,730
Liabilities
Payables:
Investments purchased (regular settlement) ........................................... $ 228
Investments purchased (delayed settlement)(Note 2) ................................... 78,225
Fund shares redeemed ................................................................. 287
Accrued fees to affiliates (Note 4) .................................................. 212
Other accrued expenses ............................................................... 92
Foreign currency exchange spot contracts (cost $182)(Note 2) ........................... 181
Options written, at market value (premiums received $146)(Note 2) ...................... 72
------------------
Total Liabilities ........................................................................................ 79,297
--------------------
Net Assets ................................................................................................... $ 382,433
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income ................................................. $ (28)
Accumulated net realized gain (loss) ......................................................................... 881
Unrealized appreciation (depreciation) on:
Investments ................................................................................................ 6,306
Futures contracts .......................................................................................... 116
Options written ............................................................................................ 74
Foreign currency-related transactions ...................................................................... 117
Shares of beneficial interest ................................................................................ 367
Additional paid-in capital ................................................................................... 374,600
--------------------
Net Assets ................................................................................................... $ 382,433
--------------------
Net Asset Value, offering and redemption price per share:
($382,433,194 divided by 36,713,395 shares of $.01 par value
shares of beneficial interest outstanding) ............................................................... $ 10.42
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
118 Fixed Income III Fund
<PAGE>
Fixed Income III Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Interest ................................................................................................. $ 19,135
Dividends from Money Market Fund (Note 5) ................................................................ 3,353
Dividends ................................................................................................ 540
--------------------
Total Investment Income ............................................................................... 23,028
Expenses (Notes 2 and 4):
Management fees ................................................................... $ 1,836
Custodian fees ................................................................... 216
Transfer agent fees ............................................................... 181
Bookkeeping service fees .......................................................... 19
Professional fees ................................................................. 18
Registration fees ................................................................. 51
Trustees' fees .................................................................... 4
Amortization of deferred organization expenses .................................... 6
Miscellaneous ..................................................................... 32
------------------
Total Expenses ........................................................................................ 2,363
--------------------
Net investment income ........................................................................................ 20,665
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ......................................................................... 4,340
Futures contracts ................................................................... 2,097
Options written ..................................................................... 29
Foreign currency-related transactions ............................................... 256 6,722
------------------
Net change in unrealized appreciation or depreciation of:
Investments ......................................................................... 3,776
Futures contracts ................................................................... 375
Options written ..................................................................... 67
Foreign currency-related transactions ............................................... (131) 4,087
------------------- --------------------
Net gain (loss) on investments ............................................................................... 10,809
--------------------
Net increase (decrease) in net assets resulting from operations .............................................. $ 31,474
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income III Fund 119
<PAGE>
Fixed Income III Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
----------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income .................................................................. $ 20,665 $ 17,058
Net realized gain (loss) ............................................................... 6,722 (496)
Net change in unrealized appreciation or depreciation .................................. 4,087 (2,840)
----------------- -----------------
Net increase (decrease) in net assets resulting from operations ..................... 31,474 13,722
----------------- -----------------
From Distributions to Shareholders:
Net investment income .................................................................. (20,551) (17,125)
In excess of net investment income ..................................................... (798) (262)
Net realized gain on investments ....................................................... (1,962) __
----------------- -----------------
Total Distributions to Shareholders ................................................. (23,311) (17,387)
----------------- -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ............ 82,193 43,277
----------------- -----------------
Total Net Increase (Decrease) in Net Assets ................................................ 90,356 39,612
Net Assets
Beginning of period .................................................................... 292,077 252,465
----------------- -----------------
End of period (including accumulated distributions in excess of
net investment income of $28 and $114, respectively) ................................. $ 382,433 $ 292,077
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
120 Fixed Income III Fund
<PAGE>
Fixed Income III Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993*
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................................ $ 10.17 $ 10.34 $ 9.37 $ 10.44 $ 10.00
-------- -------- ------- ------- -------
Income From Investment Operations:
Net investment income ....................................................... .63 .64 .67 .66 .49
Net realized and unrealized gain (loss) on investments ...................... .32 (.16) .97 (1.07) .52
-------- -------- ------- ------- -------
Total Income From Investment Operations .................................. .95 .48 1.64 (.41) 1.01
-------- -------- ------- ------- -------
Less Distributions:
Net investment income ....................................................... (.62) (.64) (.67) (.66) (.48)
In excess of net investment income .......................................... (.02) (.01) -- -- --
Net realized gain on investments ............................................ (.06) -- -- -- (.08)
In excess of net realized gain on investments ............................... -- -- -- -- (.01)
-------- -------- ------- ------- -------
Total Distributions ...................................................... (.70) (.65) (.67) (.66) (.57)
-------- -------- ------- ------- -------
Net Asset Value, End of Period .................................................. $ 10.42 $ 10.17 $ 10.34 $ 9.37 $ 10.44
======== ======== ======= ======= =======
Total Return (%)(a)(b) .......................................................... 9.64 4.88 17.99 (3.89) 10.22
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) .................................... 382,433 292,077 252,465 166,620 124,234
Ratios to average net assets (%)(b)(c):
Operating expenses, net ................................................... .70 .73 .61 .20 .20
Operating expenses, gross ................................................. .70 .73 .61 .20 .40
Net investment income ..................................................... 6.13 6.32 6.83 7.02 6.30
Portfolio turnover rate (%)(c) .............................................. 274.84 144.26 141.37 134.11 181.86
</TABLE>
* For the period January 29, 1993 (commencement of operations) to
December 31, 1993.
(a) Periods less than one year are not annualized.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
(c) The ratios for the period ended December 31, 1993 are annualized.
Fixed Income III Fund 121
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements
December 31, 1997
1. Organization
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on eight Funds, each of which has distinct
investment objectives and strategies. The Investment Company is registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. It is organized and operates as a
Massachusetts business trust under an amended master trust agreement dated
July 26, 1984. The Investment Company's master trust agreement permits the
Board of Trustees to issue an unlimited number of full and fractional shares
of beneficial interest at a $.01 par value.
2. Significant Accounting Policies
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Funds in the preparation of these financial
statements.
Security valuation: United States equity and fixed-income securities listed
and traded principally on any national securities exchange are valued on the
basis of the last sale price or, lacking any sale, at the closing bid price,
on the primary exchange on which the security is traded. United States
over-the-counter equity and fixed-income securities and options are valued
on the basis of the closing bid price. Futures contracts are valued on the
basis of the last sale price. Many fixed-income securities do not trade each
day and, thus, last sale or bid prices are frequently not available.
Fixed-income securities, therefore, may be valued using prices provided by a
pricing service when such prices are believed to reflect the fair market
value of such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair market
value of such securities.
Short-term investments held by the Funds maturing within 60 days of the
valuation date are valued at "amortized cost" unless the Board of Trustees
determines that amortized cost does not represent fair value.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
Investment transactions: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of specific identified cost incurred by each money
manager within a particular fund. The Funds may lend portfolio securities
but have not done so during the year ended December 31, 1997.
Investment income: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
Amortization and accretion: All zero-coupon bond discounts and original
issue discounts are accreted for both tax and financial reporting purposes.
All short-term premiums/discounts are amortized/accreted for both tax and
financial reporting purposes.
Federal income taxes: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Funds.
122 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
At December 31, 1997, certain Funds had net tax basis capital loss
carryforwards which may be applied against any net realized taxable gains in
each succeeding year or until their respective expiration dates, whichever
occurs first. Available capital loss carryforwards and expiration dates are
as follows:
<TABLE>
<CAPTION>
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 Totals
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income I $ -- $ 8,058,364 $ -- $ -- $ -- $ 8,058,364
Fixed Income II 948,478 3,534,633 698,949 1,746,912 538,227 7,467,199
</TABLE>
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income
tax purposes as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Federal Tax Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Equity I $ 931,003,455 $ 240,355,559 $ (32,557,642) $ 207,797,917
Equity II 383,978,584 113,984,876 (14,408,186) 99,576,690
Equity III 200,543,429 48,028,141 (7,553,705) 40,474,436
Equity Q 854,046,700 276,975,005 (20,792,705) 256,182,300
International 900,627,553 142,445,029 (102,700,284) 39,744,745
Fixed Income I 828,309,283 21,692,785 (974,521) 20,718,264
Fixed Income II 226,510,548 617,290 (412,006) 205,284
Fixed Income III 427,344,115 7,319,023 (1,400,278) 5,918,745
</TABLE>
Dividends and distributions to shareholders: For all Funds, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend
date. Dividends are generally declared and paid quarterly, except for the
International Fund, which generally declares and pays dividends annually.
Capital gain distributions are generally declared and paid annually. An
additional distribution may be paid by the Funds to avoid imposition of
federal income tax on any remaining undistributed capital gains and net
investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from GAAP. As a result, net investment income and net
realized gain (or loss) on investment and foreign currency-related
transactions for a reporting period may differ significantly from
distributions during such period. The differences between tax regulations
and GAAP primarily relate to investments in options, futures, forward
contracts, passive foreign investment companies, foreign-denominated
investments, mortgage-backed securities, and certain securities sold at a
loss. Accordingly, a Fund may periodically make a reclassification among
certain of its capital accounts without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
Undistributed Accumulated
Net Investment Net Realized
Income Gain (Loss)
------------------ ----------------
<S> <C> <C>
Equity I $ 25,616 $ (25,616)
Equity III 43,151 (43,151)
International (1,546,612) 1,546,612
Fixed Income I 453,723 (453,723)
Fixed Income II 356,118 (356,118)
Fixed Income III 770,175 (770,175)
</TABLE>
Notes to Financial Statements 123
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Expenses: The Funds will pay their own expenses other than those expressly
assumed by the Management Company. Most expenses can be directly attributed
to the individual Funds. Expenses which cannot be directly attributed are
allocated among all Funds principally based on their relative net assets.
Deferred organization expenses: Organization and initial registration costs
of the Fixed Income III Fund were deferred and were amortized over 60 months
on a straight-line basis.
Repurchase agreements: The Funds may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of underlying securities as collateral. Each Fund's Money
Manager will monitor repurchase agreements daily to determine that the
market value (including accrued interest) of the underlying securities at
Fedwire closing time remains at least equal to 102% of the repurchase price.
The Money Manager will notify the Seller to immediately increase the
collateral on the repurchase agreement to 102% of the repurchase price if
collateral value falls below 102%.
Foreign currency translations: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts and transactions of the
Funds are translated into U.S. dollars on the following basis:
(a) Market value of investment securities, other assets and liabilities
at the closing rate of exchange on the valuation date.
(b) Outstanding purchases and sales of investment securities and income
at the closing rate of exchange prevailing on the respective trade
dates of such transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from: sales and maturities of short-term securities;
sales of foreign currencies; currency gains or losses realized between the
trade and settlement dates on securities transactions; the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized gains or losses from foreign
currency-related transactions arise from changes in the value of assets and
liabilities, other than investments in securities, at period-end, as a
result of changes in the exchange rates.
It is not practical to isolate that portion of the results of operations of
the Funds that arises as a result of changes in exchange rates from that
portion that arises from changes in market prices of investments during the
year. Such fluctuations are included with the net realized and unrealized
gain or loss from investments. However, for federal income tax purposes the
Funds do isolate the effects of changes in foreign exchange rates from the
fluctuations arising from changes in market prices for realized gain (or
loss) on debt obligations.
Derivatives: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement
of Additional Information, the Funds may participate in various
derivative-based transactions. Derivative securities are instruments or
agreements whose value is derived from an underlying security or index. They
include options, futures, swaps, forwards, structured notes and stripped
securities. These instruments offer unique characteristics and risks that
assist the Funds in meeting their investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
"market-like" returns with their excess and liquidity reserve cash balances.
Hedging is used by some funds to limit or control risks, such as adverse
movements in exchange rates and interest rates. Return enhancement can be
accomplished through the use of derivatives in a Fund. By purchasing certain
instruments, Funds may more effectively achieve the desired portfolio
characteristics that assist them in meeting their investment objectives.
Depending on how the derivatives are structured and utilized, the risks
associated with them may vary widely. These risks are generally categorized
as market risk, liquidity risk and counterparty or credit risk.
Foreign currency exchange contracts: In connection with portfolio purchases
and sales of securities denominated in a foreign currency, certain Funds may
enter into foreign currency exchange spot contracts and forward foreign
currency exchange contracts ("contracts"). The International Fund may enter
into foreign currency forward overlays on liquidity reserve balances.
Additionally, from time to time the International, Fixed Income I, Fixed
Income II and Fixed Income III Funds may enter into contracts to
124 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
hedge certain foreign currency-denominated assets. Contracts are recorded at
market value. Certain risks may arise upon entering into these contracts
from the potential inability of counterparties to meet the terms of their
contracts and are generally limited to the amount of unrealized gain on the
contracts, if any, that are recognized in the Statement of Assets and
Liabilities. Realized gains or losses arising from such transactions are
included in net realized gain (or loss) from foreign currency-related
transactions. Open contracts at December 31, 1997, are presented on the
Statement of Net Assets for the applicable Funds.
Forward commitments: The Funds may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (i.e., a
"forward commitment," "delayed settlement" or "when issued" transaction,
e.g., to be announced ("TBA")) consistent with a Fund's ability to manage
its investment portfolio and meet redemption requests. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. The Funds may
dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short-term gains (or losses) upon such
sale. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund in a dollar amount sufficient to make payment for
the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled. A
forward commitment transaction involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date or the other
party to the transaction fails to complete the transaction.
Options: The Funds may purchase and sell (write) call and put options on
securities and securities indices, provided such options are traded on a
national securities exchange or in an over-the-counter market. These Funds
may also purchase and sell call and put options on foreign currencies. The
domestic equity Funds may utilize options to equitize liquidity reserve
balances.
When a Fund writes a covered call or a put option, an amount equal to the
premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. The Fund receives a premium on the sale of a
call option but gives up the opportunity to profit from any increase in
stock value above the exercise price of the option, and when the Fund writes
a put option it is exposed to a decline in the price of the underlying
security. If an option which the Fund has written either expires on its
stipulated expiration date or the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss, if the cost of a closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is extinguished. If a call option
which the Fund has written is exercised, the Fund realizes a capital gain or
loss from the sale of the underlying security, and the proceeds from such
sale are increased by the premium originally received. When a put option
which a Fund has written is exercised, the amount of the premium originally
received will reduce the cost of the security which a Fund purchases upon
exercise of the option. Realized gains (losses) on purchased options are
included in net realized gain (loss) from investments.
The Funds' use of written options involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statement of Assets
and Liabilities. The face or contract amounts of these instruments reflect
the extent of the Funds' exposure to off balance sheet risk. The risks may
be caused by an imperfect correlation between movements in the price of the
instrument and the price of the underlying securities and interest rates.
The Funds' activities in written options are conducted through regulated
exchanges, which do not result in counterparty credit risks.
Futures: The domestic and international equity Funds utilize futures to
equitize liquidity reserve balances. Fixed Income III Fund may utilize
futures contracts (i.e., interest rate, foreign currency and index futures
contracts) to a limited extent. The face or contract amounts of these
instruments reflect the extent of the Funds' exposure to off balance sheet
risk. The primary risks associated with the use of futures contracts are an
imperfect correlation between the change in market value of the securities
held by the Fund and the prices of futures contracts, and the possibility of
an illiquid market. Changes in the initial settlement values of futures
contracts are accounted for as unrealized appreciation (depreciation) until
the contracts are terminated, at which time realized gains and losses are
recognized.
Notes to Financial Statements 125
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
3. Investment Transactions
Securities: During the year ended December 31, 1997, purchases and sales of
investment securities (excluding U.S. Government and Agency obligations,
short-term investments, options, futures and repurchase agreements) were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------- --------------
<S> <C> <C>
Equity I $1,134,920,919 $1,243,132,354
Equity II 418,691,957 413,483,080
Equity III 287,149,520 325,286,786
Equity Q 929,016,839 938,570,345
<CAPTION>
Purchases Sales
-------------- --------------
<S> <C> <C>
International $ 768,999,576 $ 736,612,186
Fixed Income I 216,787,071 134,956,589
Fixed Income II 184,987,217 118,869,348
Fixed Income III 190,472,280 142,098,848
</TABLE>
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------- --------------
<S> <C> <C>
Fixed Income I $1,000,996,939 $1,015,386,160
Fixed Income II 301,898,763 348,018,256
Fixed Income III 691,775,189 685,920,712
</TABLE>
Options Written and Futures Contracts: Fund transactions in written options
and futures contracts for the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Equity I Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
------------- -----------------
<S> <C> <C>
Outstanding December 31, 1996 72 $ 20,605,325
Opened 1,160 364,722,114
Closed (1,056) (346,304,134)
------------- -----------------
Outstanding December 31, 1997 176 $ 39,023,305
============= =================
</TABLE>
<TABLE>
<CAPTION>
Equity II Written Options Futures Contracts
Aggregate
Number of Premiums Number of Face Value of
Contracts Received Contracts Contracts (1)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1996 30 $ 18,659 130 $ 24,957,997
Opened -- -- 861 171,658,373
Closed (30) (18,659) (845) (170,502,026)
-------------- -------------- -------------- --------------
Outstanding December 31, 1997 -- $ -- 146 $ 26,114,344
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Equity III Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
------------- -----------------
<S> <C> <C>
Outstanding December 31, 1996 23 $ 6,578,350
Opened 264 79,649,170
Closed (248) (79,037,170)
------------- -----------------
Outstanding December 31, 1997 39 $ 7,190,350
============= =================
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
126 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Equity Q Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
--------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 38 $ 8,595,511
Opened 568 175,845,154
Closed (497) (159,468,546)
--------------- ---------------
Outstanding December 31, 1997 109 $ 24,972,119
=============== ===============
<CAPTION>
International Futures Contracts
Aggregate
Number of Face Value of
Contracts Contracts (1)
--------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 474 $ 67,936,821
Opened 3,496 468,943,969
Closed (3,609) (489,902,555)
--------------- ---------------
Outstanding December 31, 1997 361 $ 46,978,235
=============== ===============
<CAPTION>
Fixed Income I Written Options
Number of Premiums
Contracts Received
--------------- ---------------
<S> <C> <C>
Outstanding December 31, 1996 -- $ --
Opened 263 176,474
Closed (22) (12,203)
Expired (32) (28,758)
--------------- ---------------
Outstanding December 31, 1997 209 $ 135,513
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Fixed Income III Written Options Futures Contracts
Aggregate
Number of Premiums Number of Face Value of
Contracts Received Contracts Contracts (1)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1996 20 $ 7,893 301 $ 33,297,875
Opened 282 188,802 1,760 197,727,541
Closed (24) (13,313) (1,632) (180,555,633)
Expired (52) (36,650) -- --
--------------- --------------- --------------- ---------------
Outstanding December 31, 1997 226 $ 146,732 429 $ 50,469,783
=============== =============== =============== ===============
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
4. Related Parties
Manager: Frank Russell Investment Management Company ("FRIMCo" or "Manager")
operates and administers all of the Funds which comprise the Investment
Company, and manages the Money Market and the U.S. Government Money Market
Funds (the Money Market and the U.S. Government Money Market Funds are a
series of the Investment Company that are not presented in this report).
FRIMCo is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to FRIMCo, and to the Investment Company, one or
more investment management organizations to manage the portfolio of each
Fund.
Notes to Financial Statements 127
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
For the year ended December 31, 1997, the management fee paid to FRIMCo, for
the Funds listed below, in accordance with the Investment Company's
Management Agreement with that firm, amounted to $29,861,529 before waivers.
Such fee is payable monthly and is equal to the annual rate, by Fund, shown
in the table below, of the average daily net assets of the applicable Fund.
<TABLE>
<CAPTION>
Annual Rate Annual Rate
----------- -----------
<S> <C> <C> <C>
Equity I 0.60% International 0.75%
Equity II 0.75 Fixed Income I 0.30
Equity III 0.60 Fixed Income II 0.50
Equity Q 0.60 Fixed Income III 0.55
</TABLE>
The management contract also provides that if any Fund's expenses (exclusive
of interest and taxes) exceed specified limits imposed by the Manager on an
annual basis, such excess will be paid by FRIMCo. The Manager of the Fixed
Income III Fund voluntarily agreed to waive a portion of its 0.55%
management fee, to the extent total fund level expenses for the Fund exceed
0.75% of its average daily net assets on an annual basis. There were no
waivers for the Fixed Income III Fund for the period ended December 31,
1997.
Effective October 15, 1997, FRIMCo began calculating its management fee
based on average daily net assets for each Fund less any management fee
incurred on assets invested in the Money Market Fund (see Note 5) thereby
eliminating any duplication of fees. Prior to October 15, 1997, FRIMCo
calculated its management fee based on average daily net assets for each
Fund, which may have included an investment in the Money Market Fund. Prior
to October 15, 1997, the Money Market Fund waived all management fees.
Bookkeeping services: Fees for bookkeeping and analytic services provided to
the Funds are paid or accrued to Frank Russell Company, an affiliate of the
Investment Company. Frank Russell Company provides its Portfolio
Verification System ("PVS") and TruVP System to the Funds, pursuant to a
written Service Agreement. The PVS computerized database system records
detailed transactions data for each of the Funds necessary to prepare
various financial and Internal Revenue Service accounting reports, whereas
the TruVP System provides analytics used by the investment department. The
Funds' fees for the year ended December 31, 1997 were $259,140. The PVS
System portion of the service agreement was terminated during 1997.
Transfer agent: The Funds have a contract with FRIMCo, to provide transfer
agent services to the Investment Company. Total fees for the year ended
December 31, 1997 were $1,914,751.
Distributor: Russell Fund Distributors, Inc. (the "Distributor"), a wholly
owned subsidiary of FRIMCo, is the principal Distributor for Investment
Company shares. The Distributor receives no compensation from the Funds for
its services.
Accrued fees payable to affiliates as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Management Bookkeeping Transfer
Fees Service Fees Agent Fees Totals
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Equity I $ 575,879 $ 27,704 $ 44,207 $ 647,790
Equity II 295,580 18,509 30,354 344,443
Equity III 121,924 9,680 21,006 152,610
Equity Q 562,965 8,853 9,944 581,762
International 622,131 33,338 42,821 698,290
Fixed Income I 194,909 15,650 43,031 253,590
Fixed Income II 96,560 10,196 16,741 123,497
Fixed Income III 167,993 12,242 31,514 211,749
------------ -------------- -------------- ------------
$ 2,637,941 $ 136,172 $ 239,618 $ 3,013,731
============ ============== ============== ============
</TABLE>
128 Notes to Financial Statements
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Brokerage commissions: The Funds may effect portfolio transactions through
Frank Russell Securities, Inc., an affiliate of the Manager, when a money
manager determines that the Fund will receive competitive execution, price,
and commissions. Upon completion of such transactions, Frank Russell
Securities, Inc. will refund up to 70% of the commissions paid by that Fund
after reimbursement for research services provided to FRIMCo. Amounts
retained by Frank Russell Securities, Inc. for the year ended December 31,
1997 were as follows:
Equity I $ 119,588 Equity III $ 45,847
Equity II 13,291 International 247,081
Additionally, the Funds paid brokerage commissions to non-affiliated brokers
who provided brokerage and research services to the Manager.
Board of Trustees: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the year ended
December 31, 1997, and were allocated to each Fund on a pro rata basis,
including 20 affiliated funds not represented herein.
5. Money Market Fund
The Funds are permitted to invest their cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Funds' objectives) in
the Frank Russell Investment Company Money Market Fund (a series of Frank
Russell Investment Company not presented herein). As of December 31, 1997,
$295,347,000 of the Money Market Fund's net assets represents investments by
these Funds and $412,585,000 represents the investments of other affiliated
funds not presented herein.
6. Fund Share Transactions
Share transactions for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
Shares Dollars
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Equity I
Proceeds from shares sold 9,571,549 8,775,051 $ 318,926,605 $ 259,990,186
Proceeds from reinvestment
of distributions 8,403,086 3,653,485 251,274,449 107,746,730
Payments for shares redeemed (12,432,666) (7,566,740) (416,468,295) (228,747,218)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 5,541,969 4,861,796 $ 153,732,759 $ 138,989,698
=============== =============== =============== ===============
Equity II
Proceeds from shares sold 4,308,084 3,958,072 $ 138,867,923 $ 119,536,766
Proceeds from reinvestment
of distributions 1,960,489 1,337,201 61,436,762 38,886,095
Payments for shares redeemed (3,821,842) (2,794,591) (128,686,967) (86,009,252)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 2,446,731 2,500,682 $ 71,617,718 $ 72,413,609
=============== =============== =============== ===============
Equity III
Proceeds from shares sold 1,592,374 1,683,661 $ 53,105,282 $ 50,259,727
Proceeds from reinvestment
of distributions 1,960,469 1,116,778 57,577,559 32,500,662
Payments for shares redeemed (2,899,571) (2,974,943) (93,209,130) (90,321,893)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 653,272 (174,504) $ 17,473,711 $ (7,561,504)
=============== =============== =============== ===============
</TABLE>
Notes to Financial Statements 129
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Shares Dollars
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Equity Q
Proceeds from shares sold 8,963,096 7,321,433 $ 322,888,554 $ 234,003,820
Proceeds from reinvestment
of distributions 5,185,592 2,845,096 181,290,822 90,801,198
Payments for shares redeemed (11,469,089) (5,729,549) (424,121,094) (186,870,315)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 2,679,599 4,436,980 $ 80,058,282 $ 137,934,703
=============== =============== =============== ===============
International
Proceeds from shares sold 10,420,072 7,697,721 $ 390,495,912 $ 288,204,022
Proceeds from reinvestment
of distributions 1,995,915 1,016,218 68,774,542 37,375,538
Payments for shares redeemed (9,560,991) (5,431,548) (360,640,598) (203,491,100)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 2,854,996 3,282,391 $ 98,629,856 $ 122,088,460
=============== =============== =============== ===============
Fixed Income I
Proceeds from shares sold 13,731,606 10,114,528 $ 290,844,536 $ 213,565,349
Proceeds from reinvestment
of distributions 1,875,831 1,613,448 39,542,171 33,578,468
Payments for shares redeemed (10,089,965) (9,711,571) (213,616,474) (203,926,174)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 5,517,472 2,016,405 $ 116,770,223 $ 43,217,643
=============== =============== =============== ===============
Fixed Income II
Proceeds from shares sold 7,036,585 4,900,949 $ 129,655,206 $ 90,321,507
Proceeds from reinvestment
of distributions 641,394 518,160 11,742,346 9,481,619
Payments for shares redeemed (7,319,010) (3,169,389) (135,131,042) (58,413,181)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 358,969 2,249,720 $ 6,266,510 $ 41,389,945
=============== =============== =============== ===============
Fixed Income III
Proceeds from shares sold 16,294,869 11,479,120 $ 168,283,128 $ 116,456,798
Proceeds from reinvestment
of distributions 2,096,517 1,651,840 21,580,122 16,602,395
Payments for shares redeemed (10,407,484) (8,829,297) (107,669,883) (89,782,456)
--------------- --------------- --------------- ---------------
Total net increase (decrease) 7,983,902 4,301,663 $ 82,193,367 $ 43,276,737
=============== =============== =============== ===============
</TABLE>
7. Beneficial Interest
The following Funds have one or more shareholders with an interest greater
than 10% of the total outstanding shares as of December 31, 1997: Equity I
12.3%, Equity III 12.4% and 12.8%, Equity Q 24.3%, Fixed Income I 15.6% and
14.1%, Fixed Income III 29.5%, and International 23.2%.
8. Subsequent Events
On August 10, 1998, Frank Russell Company entered into an agreement with The
Northwestern Mutual Life Insurance Co., an insurance organization, pursuant
to which Northwestern Mutual Life will acquire all of the outstanding common
stock of Frank Russell Company.
At its meeting on April 27, 1998, the Investment Company's Board of
Trustees, in an effort to meet the best interests of shareholders of the
Volatility Constrained Bond Fund and the Fixed Income II Fund (a series of
the Investment Company not presented herein) approved a plan of
reorganization for the merger of the two Funds. The merger is subject to
shareholder approval at a meeting scheduled for November 19, 1998.
130 Notes to Financial Statements
<PAGE>
Report of Independent Accountants
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of assets and liabilities and
statements of net assets of each of the series of Frank Russell Investment
Company (in this report comprised of Equity I, Equity II, Equity III, Equity Q,
International, Fixed Income I, Fixed Income II and Fixed Income III (the
"Funds")), as of December 31, 1997, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Funds' 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 securities owned as of
December 31, 1997, 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 the
Funds enumerated above as of December 31, 1997, the results of their operations,
the changes in their net assets and the financial highlights for each of the
periods indicated therein in conformity with generally accepted accounting
principles.
Seattle, Washington
February 17, 1998,
except for Note 8
as to which the
date is August 10, 1998
/s/ PricewaterhouseCoopers LLP
Report of Independent Accountants 131
<PAGE>
Frank Russell Investment Company
Tax Information
December 31, 1997 (Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following amounts as long-term capital gain dividends for their taxable year
ended December 31, 1997:
<TABLE>
<CAPTION>
Total Long-Term 20%
Capital Gains Capital Gains
--------------- ---------------
<S> <C> <C>
Equity I $ 150,250,083 $ 65,043,173
Equity II 40,385,281 18,152,983
Equity III 31,289,965 12,438,608
Equity Q 131,064,519 48,567,347
International 53,676,887 24,862,378
Fixed Income III 1,962,429 1,420,225
</TABLE>
132 Tax Information
<PAGE>
Frank Russell Investment Company
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627--7001
Trustees
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
Officers
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
Manager and Transfer Agent
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Consultant
Frank Russell Company
909 A Street
Tacoma, WA 98402
Custodian
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Office of Shareholder Inquires
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
2600 -- One Commerce Square
Philadelphia, PA 19103--7098
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
Distributor
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Money Managers
Equity I
Alliance Capital Management L.P., Minneapolis, MN
Barclays Global Fund Advisors, San Francisco, CA
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc., Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Peachtree Asset Management, Atlanta, GA
Schneider Capital Management, Wayne, PA
Suffolk Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Equity II
Delphi Management, Inc., Boston, MA
Fiduciary International, Inc., New York, NY
GlobeFlex Capital, L.P., San Diego, CA
Jacobs Levy Equity Management, Inc., Roseland, NJ
Sirach Capital Management, Inc., Seattle, WA
Wellington Management Company LLP, Boston, MA
Equity III
Brandywine Asset Management, Inc., Wilmington, DE
Equinox Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Equity Q
Barclays Global Fund Advisors, San Francisco, CA
Franklin Portfolio Associates, LLC, Boston, MA
J.P. Morgan Investment Management, Inc., New York, NY
International
J.P. Morgan Investment Management, Inc., New York, NY
Marathon Asset Management Limited, London, England
Mastholm Asset Management, L.L.C., Bellevue, WA
Oechsle International Advisors, Boston, MA
Rowe Price-Fleming International, Inc., Baltimore, MD
Sanford C. Bernstein & Co., Inc., New York, NY
The Boston Company Asset Management, Inc., Boston, MA
Fixed Income I
Lincoln Capital Management Company, Chicago, IL
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
Fixed Income II
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Ltd., Hamilton, Bermuda
Fixed Income III
BEA Associates, New York, NY
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
Manager, Money Managers and Service Providers 133
<PAGE>
[LOGO OF RUSSELL]
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, WA 98402
800-832-6688
IN13(198)INST
<PAGE>
[ARTWORK]
FRANK RUSSELL INVESTMENT COMPANY
1997 ANNUAL REPORT
LIFEPOINTS/R/ FUNDS EQUITY BALANCED STRATEGY FUND
AGGRESSIVE STRATEGY FUND
BALANCED STRATEGY FUND
MODERATE STRATEGY FUND
CONSERVATIVE STRATEGY FUND
December 31, 1997
[LOGO OF RUSSELL]
<PAGE>
Frank Russell Investment Company
Frank Russell Investment Company is a "series mutual fund" with 28 different
investment portfolios. These financial statements report on five Funds, each of
which has distinct investment objectives and strategies.
Frank Russell Investment Management Company
Responsible for overall management and administration of the Funds.
Frank Russell Company
Consultant to Frank Russell
Investment Management Company.
<PAGE>
Frank Russell Investment Company
LifePoints(R) Funds
Annual Report
December 31, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Our Clients.................................................. 1
Portfolio Management Discussion........................................ 2
Equity Balanced Strategy Fund.......................................... 8
Aggressive Strategy Fund............................................... 12
Balanced Strategy Fund................................................. 16
Moderate Strategy Fund................................................. 20
Conservative Strategy Fund............................................. 24
Notes to Financial Statements.......................................... 29
Report of Independent Accountants...................................... 34
Tax Information........................................................ 35
Manager, Money Managers and Service Providers.......................... 36
</TABLE>
Frank Russell Investment Company - LifePoints(R) Funds
Copyright(C) Frank Russell Company 1998. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. Frank Russell Company is the owner of the
trademarks, service marks, and copyrights related to its respective indexes.
This material must be accompanied or preceded by a current Frank Russell
Investment Company Prospectus containing complete information concerning the
investment objectives and operations of the Company, charges, and expenses. The
Prospectus should be read carefully before an investment is made. The
performance quoted represents past performance and the investment return and
principal value of an investment will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost. Investments in securities of
non-US issuers and foreign currencies involve investment risks different than
those of US issuers; the Prospectus contains further information and details
regarding these risks. Russell Fund Distributors, Inc., is the distributor of
Frank Russell Investment Company.
<PAGE>
To Our Clients
Frank Russell Investment Company is pleased to present its 1997 Annual Report.
This report covers information on five of the Funds which were opened in the
last quarter of 1997 and represents the Funds' sixteenth year of operation.
During the past year we have continued our focus on the benefits of
multi-manager, multi-style diversification in structuring the Funds. We remain
committed to providing our clients with superior investment solutions across
each of our multiple manager and style Funds. These efforts proved worthwhile in
1997 as our Funds, in general, provided solid returns as compared to their
respective benchmarks and attracted many new investors, both creating
significant growth in assets.
Frank Russell Investment Management Company continuously evaluates the Funds we
offer our clients. Each of these Funds is carefully monitored by Russell's
investment professionals to ensure that the most appropriate investment advisors
and strategies are utilized within each Fund. The Advisors are monitored by the
Frank Russell Investment Management Company, using the expertise and advice of
the consulting group of Frank Russell Company.
During the past year, the Frank Russell Investment Company opened five new
LifePoints Funds; Equity Balanced Strategy Fund, Aggressive Strategy Fund,
Balanced Strategy Fund, Moderate Strategy Fund and Conservative Strategy Fund.
The LifePoints Funds diversify their assets by investing in shares of six to
eight Funds of the Frank Russell Investment Company, referred to as the
Underlying Funds. Each LifePoints Fund has a different investment objective
which it seeks to achieve by investing in different combinations of the
Underlying Funds. We are excited to offer these new products which we believe
will provide additional diversification and convenience through a built-in asset
allocation strategy.
We look forward to having the opportunity to work with you over the upcoming
year and continuing to earn your support by exceeding your expectations. Thank
you for your continued confidence and investment with Frank Russell Investment
Company.
Sincerely,
/s/ George Russell /s/ Lynn L. Anderson
George F. Russell, Jr. Lynn L. Anderson
Chairman President and Chief Executive Officer
Frank Russell Company Frank Russell Investment Company
<PAGE>
LifePoints(R) Funds
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
During 1997, Frank Russell Investment Company launched the LifePoints(R) Funds
to meet the investment objectives of investors with varying degrees of risk
tolerance. The Funds have an objective to outperform a composite benchmark,
reflecting the performance of broadly based indices of US and international
equities and US fixed income securities.
For the year ended December 31, 1997, the performance of domestic stocks once
again defied expectations. Stocks provided investors with returns in excess of
30%--the first time the market has ever produced three consecutive years of
gains in excess of 20%. Despite the market's strength, a year-end flight to
defensive sectors made it a difficult year for fund managers to keep pace with
market indices. The market's rotation away from segments emphasized by the
"active" managers produced particularly weak fourth quarter results. The
dominance of large capitalization stocks appeared to be at an end by mid year,
but resumed again in the fourth quarter, resulting in the largest 50 stocks of
the Russell 1000(R) Index outperforming small cap stocks in the Russell 2000(R)
Index by nearly 14% for the year.
The consequences of the economic crises sweeping Asia during the last four
months of the year were felt in virtually all developed markets. Already in a
recession attributed to a poorly timed increase in consumption taxes, prospects
for Japan's economy worsened when the weakening economies of its Asian trading
partners diminished prospects for Japan's export business. Several major
corporate failures in Japan provided some indications of the severity of the
situation. Japanese stocks dropped 28% during the year. Although European
economies seemed much healthier, the uncertain exposure of European companies to
these markets dampened enthusiasm during the fourth quarter. However, European
stocks still gained 24% for the year.
Interest rates declined throughout the year as signs of disinflation, or even
deflation, helped ease yields. Although quite volatile again in 1997, the trend
in falling yields was quite strong with the yield on the long bond reaching its
lowest point since its introduction in 1977. The Federal Reserve Board added
uncertainty to the market, but made only one interest rate move during the year,
a 1/4% increase in the first quarter. With trends in the economy suggesting
stable growth and no inflation, investors found appealing opportunities in
several segments of the bond markets, including lower quality corporate issues.
2
<PAGE>
Equity Balanced Strategy Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: Equity Balanced Strategy Fund seeks to achieve high, long-term
capital appreciation, by assuming a higher level of volatility in year-to-year
market values of the Fund.
Strategy: Each LifePoints(R) Fund allocates its assets by investing in a
diversified group of Underlying Funds. By investing in the multi-managed
Underlying Funds, the LifePoints Funds seek to maintain different allocations
between classes of domestic equity, international equity, and fixed income,
depending on the LifePoints Fund's investment objective and risk profile.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates LifePoints(R) Equity Balanced Strategy Fund - Class E Equity Balanced Lipper(C) Benchmark++
<S> <C> <C>
* $10,000 $10,000
1997 $9,758 $9,765
</TABLE>
<TABLE>
<CAPTION>
Equity Balanced Strategy Fund Equity Balanced Lipper(C) Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- -------------- --------- ------ ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Inception $ 9,758 (2.42)% Inception $ 9,765 (2.35)%
</TABLE>
* The Fund commenced operations on September 30, 1997. Index comparison began
October 1, 1997.
++ The Equity Balanced Lipper(C) Benchmark is comprised of the following fund
averages:
60% Lipper(C) Growth & Income
20% Lipper(C) International
10% Lipper(C) Small Co. Growth
5% Lipper(C) Emerging Markets
5% Lipper(C) Real Estate
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Equity Balanced Strategy Fund 3
<PAGE>
Aggressive Strategy Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: Aggressive Strategy Fund seeks to achieve high, long-term capital
appreciation, with low current income while assuming substantial volatility in
year-to-year market values of the Fund.
Strategy: Each LifePoints(R) Fund allocates its assets by investing in a
diversified group of Underlying Funds. By investing in the multi-managed
Underlying Funds, the LifePoints Funds seek to maintain different allocations
between classes of domestic equity, international equity, and fixed income,
depending on the LifePoints Fund's investment objective and risk profile.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates LifePoints(R) Aggressive Strategy Fund - Class E Aggressive Lipper(C) Benchmark++
<S> <C> <C>
Inception* $10,000 $10,000
1997 $9,981 $9,795
</TABLE>
<TABLE>
<CAPTION>
Aggressive Strategy Fund Aggressive Lipper(C) Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- -------------- --------- ------ ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Inception $ 9,981 (0.19)% Inception $ 9,795 (2.05)%
</TABLE>
* The Fund commenced operations on September 16, 1997. Index comparison began
October 1, 1997.
++ The Aggressive Lipper(C) Benchmark is comprised of the following fund
averages:
42% Lipper(C) Growth & Income
19% Lipper(C) International
18% Lipper(C) Intermediate Investment Grade Debt
11% Lipper(C) Small Co. Growth
5% Lipper(C) Emerging Markets
5% Lipper(C) Real Estate
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
4 Aggressive Strategy Fund
<PAGE>
Balanced Strategy Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: Balanced Strategy Fund seeks a moderate level of current income and,
over time, above-average capital appreciation with moderate risk.
Strategy: Each LifePoints(r) Fund allocates its assets by investing in a
diversified group of Underlying Funds. By investing in the multi-managed
Underlying Funds, the LifePoints Funds seek to maintain different allocations
between classes of domestic equity, international equity, and fixed income,
depending on the LifePoints Fund's investment objective and risk profile.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates LifePoints(R) Balanced Strategy Fund - Class E Aggressive Lipper(C) Benchmark++
<S> <C> <C>
* $10,000 $10,000
1997 $10,104 $9,944
</TABLE>
<TABLE>
<CAPTION>
Balanced Strategy Fund Balanced Lipper(C) Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- -------------- -------- ------ ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Inception $ 10,104 1.04% Inception $ 9,944 (0.56)%
</TABLE>
* The Fund commenced operations on September 16, 1997. Index comparison began
October 1, 1997.
++ The Balanced Lipper(C) Benchmark is comprised of the following fund
averages:
41% Lipper(C) Intermediate Investment Grade Debt
32% Lipper(C) Growth & Income
14% Lipper(C) International
5% Lipper(C) Real Estate
5% Lipper(C) Small Capitalization
3% Lipper(C) Emerging Markets
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Balanced Strategy Fund 5
<PAGE>
Moderate Strategy Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: Moderate Strategy Fund seeks to achieve moderate long-term capital
appreciation with high current income while assuming moderate volatility in
year-to-year market values of the Fund.
Strategy: Each LifePoints(R) Fund allocates its assets by investing in a
diversified group of Underlying Funds. By investing in the multi-managed
Underlying Funds, the LifePoints Funds seek to maintain different allocations
between classes of domestic equity, international equity, and fixed income,
depending on the LifePoints Fund's investment objective and risk profile.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates LifePoints(R) Moderate Strategy Fund - Class E Moderate Lipper(C) Benchmark++
<S> <C> <C>
* $10,000 $10,000
1997 $9,994 $10,018
</TABLE>
<TABLE>
<CAPTION>
Moderate Strategy Fund Moderate Lipper(C) Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- -------------- -------- ------ ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Inception $ 9,994 (0.06)% Inception $ 10,018 0.18%
</TABLE>
* The Fund commenced operations on October 2, 1997. Index comparison began
October 1, 1997.
++ The Moderate Lipper(C) Benchmark is comprised of the following fund
averages:
33% Lipper(C) Short Investment Grade Debt
27% Lipper(C) Intermediate Investment Grade Debt
22% Lipper(C) Growth & Income
9% Lipper(C) International
5% Lipper(C) Real Estate
2% Lipper(C) Emerging Markets
2% Lipper(C) Small Co. Growth
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
6 Moderate Strategy Fund
<PAGE>
Conservative Strategy Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: Conservative Strategy Fund seeks to achieve a moderate rate of return
through low capital appreciation and reinvestment of a high level of current
income.
Strategy: Each LifePoints(R) Fund allocates its assets by investing in a
diversified group of Underlying Funds. By investing in the multi-managed
Underlying Funds, the LifePoints Funds seek to maintain different allocations
between classes of domestic equity, international equity, and fixed income,
depending on the LifePoints Fund's investment objective and risk profile.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates LifePoints(R) Conservative Strategy Fund - Class E Conservative Lipper(C) Benchmark++
<S> <C> <C>
* $10,000 $10,000
1997 $10,136 $10,082
</TABLE>
<TABLE>
<CAPTION>
Conservative Strategy Fund Conservative Lipper(C) Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- -------------- -------- ------ ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Inception $ 10,136 1.36% Inception $ 10,082 0.82%
</TABLE>
* The Fund commenced operations on November 7, 1997. Index comparison began
October 1, 1997.
++ The Conservative Lipper(C) Benchmark is comprised of the following fund
averages:
60% Lipper(C) Short Investment Grade Debt
18% Lipper(C) Intermediate Investment Grade Debt
11% Lipper(C) Growth & Income
5% Lipper(C) International
5% Lipper(C) Real Estate
1% Lipper(C) Emerging Markets
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Conservative Strategy Fund 7
<PAGE>
Equity Balanced Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- --------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 80.9%
Diversified Equity Fund 22,124 $ 965,494
Quantitative Equity Fund 26,217 964,263
Real Estate Securities Fund 5,205 160,614
Special Growth Fund 7,097 324,497
-----------
2,414,868
-----------
International Equities - 26.8%
Emerging Markets Fund 13,628 160,677
International Securities Fund 11,704 640,069
-----------
800,746
-----------
Total Investments - 107.7%
(identified cost $3,432,889)(a) 3,215,614
-----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,709
Other assets 69,218
Bank overdraft (129,389)
Other liabilities (Note 4) (200,990)
-----------
Total Other Assets and Liabilities, Net - (7.7%) (230,452)
-----------
Net Assets - 100.0% $ 2,985,162
===========
</TABLE>
<TABLE>
<CAPTION>
Market
Value
--------
<S> <C>
Net Assets consist of:
Accumulated distributions in excess
of net investment income $ (800)
Accumulated distributions in excess
of net realized gains (40,022)
Unrealized appreciation (depreciation)
on investments (217,275)
Shares of beneficial interest 3,381
Additional paid-in capital 3,239,878
-----------
Net Assets $ 2,985,162
===========
Net Asset Value, offering and redemption price
per share ($2,985,162 divided by 338,132 shares
of $.01 par value shares of beneficial
interest outstanding) $ 8.83
===========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements
8 Equity Balanced Strategy Fund
<PAGE>
Equity Balanced Strategy Fund
Statement of Operations
For the Period September 30, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ..................................... $ 9,147
Expenses (Notes 2 and 4):
Management fees .................................................. $ 1,140
Professional fees ................................................ 11,242
Registration fees ................................................ 48,806
Shareholder servicing fees ....................................... 1,064
Amortization of deferred organization expenses ................... 1,648
Miscellaneous .................................................... 100
---------
Expenses before reductions ....................................... 64,000
Expense reductions (Note 4) ...................................... (62,936)
---------
Total Expenses ............................................................... 1,064
-----------
Net investment income ............................................................ 8,083
-----------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ...................................................... (40,012)
Capital gain distributions from Underlying Funds ................. 242,030 202,018
---------
Net change in unrealized appreciation or depreciation of investments.............. (217,275)
-----------
Net gain (loss) on investments ................................................... (15,257)
-----------
Net increase (decrease) in net assets resulting from operations .................. $ (7,174)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Balanced Strategy Fund 9
<PAGE>
Equity Balanced Strategy Fund
Statement of Changes in Net Assets
For the Period September 30, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.................................................................... $ 8,083
Net realized gain (loss)................................................................. 202,018
Net change in unrealized appreciation or depreciation.................................... (217,275)
-----------
Net increase (decrease) in net assets resulting from operations........................ (7,174)
-----------
From Distributions to Shareholders:
Net investment income.................................................................... (8,083)
In excess of net investment income....................................................... (79,767)
Net realized gain on investments......................................................... (163,073)
-----------
Total Distributions to Shareholders.................................................... (250,923)
-----------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5).............. 3,243,259
-----------
Total Net Increase (Decrease) in Net Assets................................................ 2,985,162
Net Assets
Beginning of period...................................................................... --
-----------
End of period (including accumulated distributions in excess of
net investment income of $800)......................................................... $ 2,985,162
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 Equity Balanced Strategy Fund
<PAGE>
Equity Balanced Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
-------------
<S> <C>
Net Asset Value, Beginning of Period ............................ $ 10.00
-------------
Income From Investment Operations:
Net investment income ........................................ .09
Capital gain distributions from Underlying Funds ............. 2.73
Net realized and unrealized gain (loss) on investments ....... (3.06)
-------------
Total Income From Investment Operations ................... (.24)
-------------
Less Distributions:
Net investment income ........................................ (.09)
In excess of net investment income ........................... (.24)
Net realized gain on investments ............................. (.60)
-------------
Total Distributions ....................................... (.93)
-------------
Net Asset Value, End of Period .................................. $ 8.83
=============
Total Return (%)(a) ............................................. (2.42)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ..................... 2,985
Ratios to average net assets (%):
Operating expenses, net (b)(c) ............................ .25
Operating expenses, gross (c)(d) .......................... 358
Net investment income (d) ................................. .45
Portfolio turnover rate (%)(b) ............................... 48.30
</TABLE>
* For the period September 30, 1997 (commencement of operations) to December
31, 1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period September 30, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio has not been annualized due to the Fund's short period of
operation.
Equity Balanced Strategy Fund 11
<PAGE>
Aggressive Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- --------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 61.7%
Diversified Equity Fund 27,156 $1,185,069
Quantitative Equity Fund 32,180 1,183,567
Real Estate Securities Fund 9,126 281,631
Special Growth Fund 13,688 625,818
----------
3,276,085
----------
International Equities - 25.4%
Emerging Markets Fund 23,897 281,745
International Securities Fund 19,497 1,066,282
----------
1,348,027
----------
Bonds - 19.1%
Multistrategy Bond Fund 98,877 1,014,483
----------
Total Investments - 106.2%
(identified cost $5,950,702)(a) 5,638,595
----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,478
Other assets 108,296
Bank overdraft (154,179)
Other liabilities (Note 4) (315,916)
----------
Total Other Assets and Liabilities, Net - (6.2%) (331,321)
----------
Net Assets - 100.0% $5,307,274
==========
</TABLE>
<TABLE>
<CAPTION>
Market
Value
--------
<S> <C>
Net Assets consist of:
Undistributed net investment income $ 2,716
Accumulated distributions in excess of
net realized gains (68,480)
Unrealized appreciation (depreciation)
on investments (312,107)
Shares of beneficial interest 5,805
Additional paid-in capital 5,679,340
----------
Net Assets $5,307,274
==========
Net Asset Value, offering and redemption price
per share: ($5,307,274 divided by 580,464
shares of $.01 par value shares of beneficial
interest outstanding) $ 9.14
==========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
12 Aggressive Strategy Fund
<PAGE>
Aggressive Strategy Fund
Statement of Operations
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ............................................. $ 24,429
Expenses (Notes 2 and 4):
Management fees .................................................... $ 1,727
Professional fees .................................................. 13,368
Registration fees .................................................. 49,109
Shareholder servicing fees ......................................... 1,651
Amortization of deferred organization expenses ..................... 1,878
Miscellaneous ...................................................... 100
----------
Expenses before reductions ......................................... 67,833
Expense reductions (Note 4) ........................................ (66,182)
----------
Total Expenses ..................................................................... 1,651
------------
Net investment income .................................................................. 22,778
------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ........................................................ (68,437)
Capital gain distributions from Underlying Funds ................... 372,848 304,411
----------
Net change in unrealized appreciation or depreciation of investments ................... (312,107)
------------
Net gain (loss) on investments ......................................................... (7,696)
------------
Net increase (decrease) in net assets resulting from operations ........................ $ 15,082
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Aggressive Strategy Fund 13
<PAGE>
Aggressive Strategy Fund
Statement of Changes in Net Assets
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income...................................................................... $ 22,778
Net realized gain (loss)................................................................... 304,411
Net change in unrealized appreciation or depreciation...................................... (312,107)
-----------
Net increase (decrease) in net assets resulting from operations.......................... 15,082
-----------
From Distributions to Shareholders:
Net investment income...................................................................... (22,778)
In excess of net investment income......................................................... (119,617)
Net realized gain on investments........................................................... (250,558)
-----------
Total Distributions to Shareholders...................................................... (392,953)
-----------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5)................ 5,685,145
-----------
Total Net Increase (Decrease) in Net Assets.................................................. 5,307,274
Net Assets
Beginning of period........................................................................ --
-----------
End of period (including undistributed net investment income of $2,716).................... $ 5,307,274
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 Aggressive Strategy Fund
<PAGE>
Aggressive Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
----------
<S> <C>
Net Asset Value, Beginning of Period........................... $ 10.00
----------
Income From Investment Operations:
Net investment income........................................ .10
Capital gain distributions from Underlying Funds............. 1.66
Net realized and unrealized gain (loss) on investments....... (1.77)
----------
Total Income From Investment Operations.................... (.01)
----------
Less Distributions:
Net investment income........................................ (.10)
In excess of net investment income........................... (.21)
Net realized gain on investments............................. (.54)
----------
Total Distributions........................................ (.85)
Net Asset Value, End of Period................................. $ 9.14
==========
Total Return (%)(a)............................................ (.19)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)..................... 5,307
Ratios to average net assets (%):
Operating expenses, net (b)(c)............................. .25
Operating expenses, gross (c)(d)........................... 2.88
Net investment income (d).................................. .97
Portfolio turnover rate (%)(b)............................... 56.88
</TABLE>
* For the period September 16, 1997 (commencement of operations) to December
31, 1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period September 16, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio has not been annualized due to the Fund's short period of
operation.
Aggressive Strategy Fund 15
<PAGE>
Balanced Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
----------- ----------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 44.1%
Diversified Equity Fund 13,687 $ 597,294
Quantitative Equity Fund 16,231 596,990
Real Estate Securities Fund 6,013 185,556
Special Growth Fund 4,122 188,468
----------
1,568,308
----------
International Equities - 17.6%
Emerging Markets Fund 9,488 111,860
International Securities Fund 9,397 513,949
----------
625,809
----------
Bonds - 42.3%
Diversified Bond Fund 39,232 919,195
Multistrategy Bond Fund 57,004 584,857
----------
1,504,052
----------
Total Investments - 104.0%
(identified cost $3,862,686)(a) 3,698,169
----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,478
Other assets 34,224
Liabilities (Note 4) (208,375)
----------
Total Other Assets and Liabilities, Net-(4.0%) (143,673)
----------
Net Assets - 100.0% $3,554,496
==========
<CAPTION>
Market
Value
-----------
<S> <C>
Net Assets consist of:
Undistributed net investment income $ 5,633
Accumulated distributions in excess of
net realized gains (16,916)
Unrealized appreciation (depreciation)
on investments (164,517)
Shares of beneficial interest 3,756
Additional paid-in capital 3,726,540
-----------
Net Assets $ 3,554,496
===========
Net Asset Value, offering and redemption price per share:
($3,554,496 divided by 375,568 shares of $.01 par value
shares of beneficial interest outstanding) $ 9.46
===========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
16 Balanced Strategy Fund
<PAGE>
Balanced Strategy Fund
Statement of Operations
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ............................................. $ 22,231
Expenses (Notes 2 and 4):
Management fees ........................................................ $ 1,187
Professional fees ...................................................... 12,044
Registration fees ...................................................... 48,934
Shareholder servicing fees ............................................. 1,150
Amortization of deferred organization expenses ......................... 1,878
Miscellaneous .......................................................... 100
-----------
Expenses before reductions ............................................. 65,293
Expense reductions (Note 4) ............................................ (64,143)
-----------
Total Expenses ..................................................................... 1,150
-----------
Net investment income .................................................................. 21,081
-----------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ............................................................ (16,936)
Capital gain distributions from Underlying Funds ....................... 191,533 174,597
-----------
Net change in unrealized appreciation or depreciation of investments ................... (164,517)
-----------
Net gain (loss) on investments ......................................................... 10,080
-----------
Net increase (decrease) in net assets resulting from operations ........................ $ 31,161
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Balanced Strategy Fund 17
<PAGE>
Balanced Strategy Fund
Statement of Changes in Net Assets
For the Period September 16, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income....................................................................... $ 21,081
Net realized gain (loss).................................................................... 174,597
Net change in unrealized appreciation or depreciation....................................... (164,517)
--------------
Net increase (decrease) in net assets resulting from operations........................... 31,161
--------------
From Distributions to Shareholders:
Net investment income....................................................................... (21,081)
In excess of net investment income.......................................................... (56,712)
Net realized gain on investments............................................................ (129,168)
--------------
Total Distributions to Shareholders....................................................... (206,961)
--------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5)................. 3,730,296
--------------
Total Net Increase (Decrease) in Net Assets................................................... 3,554,496
Net Assets
Beginning of period......................................................................... --
--------------
End of period (including undistributed net investment income of $5,633)..................... $ 3,554,496
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 Balanced Strategy Fund
<PAGE>
Balanced Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
------------
<S> <C>
Net Asset Value, Beginning of Period ......................... $ 10.00
------------
Income From Investment Operations:
Net investment income ...................................... .09
Capital gain distributions from Underlying Funds ........... .85
Net realized and unrealized gain (loss) on investments ..... (.83)
------------
Total Income From Investment Operations .................. .11
------------
Less Distributions:
Net investment income ...................................... (.09)
In excess of net investment income ......................... (.15)
Net realized gain on investments ........................... (.41)
------------
Total Distributions ...................................... (.65)
------------
Net Asset Value, End of Period ............................... $ 9.46
============
Total Return (%)(a) .......................................... 1.04
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ................... 3,554
Ratios to average net assets (%):
Operating expenses, net (b)(c) ........................... .25
Operating expenses, gross (c)(d) ......................... 4.03
Net investment income (d) ................................ 1.30
Portfolio turnover rate (%)(b) ............................. 29.58
</TABLE>
* For the period September 16, 1997 (commencement of operations) to December
31, 1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period September 16, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio has not been annualized due to the Fund's short period of
operation.
Balanced Strategy Fund 19
<PAGE>
Moderate Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- ----------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 30.6%
Diversified Equity Fund 1,028 $ 44,865
Quantitative Equity Fund 1,218 44,795
Real Estate Securities Fund 650 20,051
Special Growth Fund 179 8,188
----------
117,899
----------
International Equities - 11.4%
Emerging Markets Fund 691 8,150
International Securities Fund 654 35,765
----------
43,915
----------
Bonds - 61.5%
Diversified Bond Fund 4,502 105,478
Volatility Constrained Bond Fund 6,881 131,144
----------
236,622
----------
Total Investments - 103.5%
(identified cost $411,829)(a) 398,436
----------
Other Assets and Liabilities
Deferred organization expenses (Note 2) 30,744
Other assets 37,716
Liabilities (Note 4) (81,769)
----------
Total Other Assets and Liabilities, Net - (3.5%) (13,309)
----------
Net Assets - 100.0% $ 385,127
==========
<CAPTION>
Market
Value
----------
<S> <C>
Net Assets consist of:
Undistributed net investment income $ 1,191
Accumulated distributions in excess of
net realized gains (438)
Unrealized appreciation (depreciation)
on investments (13,393)
Shares of beneficial interest 401
Additional paid-in capital 397,366
----------
Net Assets $ 385,127
==========
Net Asset Value, offering and redemption price per share
($385,127 divided by 40,074 shares of $.01 par value
shares of beneficial interest outstanding) $ 9.61
==========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
20 Moderate Strategy Fund
<PAGE>
Moderate Strategy Fund
Statement of Operations
For the Period October 2, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ..................................... $ 2,562
Expenses (Notes 2 and 4):
Management fees .................................................... $ 151
Professional fees .................................................. 6,822
Registration fees .................................................. 48,301
Shareholder servicing fees ......................................... 141
Amortization of deferred organization expenses ..................... 1,613
Miscellaneous ...................................................... 50
--------
Expenses before reductions ......................................... 57,078
Expense reductions (Note 4) ........................................ (56,937)
--------
Total Expenses ............................................................... 141
---------
Net investment income .......................................................... 2,421
---------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ........................................................ (439)
Capital gain distributions from Underlying Funds ................... 13,286 12,847
--------
Net change in unrealized appreciation or depreciation of investments ............. (13,393)
---------
Net gain (loss) on investments ................................................... (546)
---------
Net increase (decrease) in net assets resulting from operations .................. $ 1,875
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Moderate Strategy Fund 21
<PAGE>
Moderate Strategy Fund
Statement of Changes in Net Assets
For the Period October 2, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ..................................................... $ 2,421
Net realized gain (loss) .................................................. 12,847
Net change in unrealized appreciation or depreciation ..................... (13,393)
---------
Net increase (decrease) in net assets resulting from operations ......... 1,875
---------
From Distributions to Shareholders:
Net investment income ..................................................... (2,421)
In excess of net investment income ........................................ (2,985)
Net realized gain on investments .......................................... (9,109)
---------
Total Distributions to Shareholders ..................................... (14,515)
---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5) 397,767
---------
Total Net Increase (Decrease) in Net Assets ................................. 385,127
Net Assets
Beginning of period ....................................................... --
---------
End of period (including undistributed net investment income of $1,191) ... $ 385,127
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
22 Moderate Strategy Fund
<PAGE>
Moderate Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
-----------
<S> <C>
Net Asset Value, Beginning of Period ........................... $ 10.00
-----------
Income From Investment Operations:
Net investment income ........................................ .07
Capital gain distributions from Underlying Funds ............. .38
Net realized and unrealized gain (loss) on investments ....... (.46)
----------
Total Income From Investment Operations .................... (.01)
----------
Less Distributions:
Net investment income ........................................ (.07)
In excess of net investment income ........................... (.07)
Net realized gain on investments ............................. (.24)
----------
Total Distributions ........................................ (.38)
----------
Net Asset Value, End of Period ................................. $ 9.61
==========
Total Return (%)(a) ............................................ (.06)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ..................... 385
Ratios to average net assets (%):
Operating expenses, net (b)(c) ............................. .25
Operating expenses, gross (c)(d) ........................... --
Net investment income (e) .................................. 1.01
Portfolio turnover rate (%)(b) ............................... 9.66
</TABLE>
* For the period October 2, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period October 2, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio is not meaningful due to the Fund's short period of operation.
(e) The ratio has not been annualized due to the Fund's short period of
operation.
Moderate Strategy Fund 23
<PAGE>
Conservative Strategy Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Value
-------- ---------
<S> <C> <C>
Investments
Portfolios of the Frank Russell
Investment Company Series Mutual Fund
- Class S Shares
Domestic Equities - 16.7%
Diversified Equity Fund 27 $ 1,182
Quantitative Equity Fund 38 1,414
Real Estate Securities Fund 39 1,189
---------
3,785
---------
International Equities - 6.2%
Emerging Markets Fund 20 239
International Securities Fund 21 1,162
---------
1,401
---------
Bonds - 79.2%
Diversified Bond Fund 176 4,125
Volatility Constrained Bond Fund 723 13,789
---------
17,914
Total Investments - 102.1%
(identified cost $23,440)(a) 23,100
Other Assets and Liabilities,
Net - (2.1%) (480)
---------
Net Assets - 100.0% $ 22,620
=========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
24 Conservative Strategy Fund
<PAGE>
Conservative Strategy Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C>
Assets
Investments at market (identified cost $23,440)(Note 2) ............... $ 23,100
Receivable from manager (Note 4) ...................................... 72,645
---------
Total Assets ...................................................... 95,745
Liabilities
Payables:
Accrued fees to affiliates (Note 4) ...................... $ 66,072
Other accrued expenses ................................... 7,053
---------
Total Liabilities ................................................. 73,125
---------
Net Assets ............................................................ $ 22,620
=========
Net Assets consist of:
Undistributed net investment income ................................... $ 78
Unrealized appreciation (depreciation) on investments ................. (340)
Shares of beneficial interest ......................................... 23
Additional paid-in capital ............................................ 22,859
---------
Net Assets ............................................................ $ 22,620
=========
Net Asset Value, offering and redemption price per share:
($22,620 divided by 2,289 shares of $ 01 par value
shares of beneficial interest outstanding) ............................ $ 9.88
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Conservative Strategy Fund 25
<PAGE>
Conservative Strategy Fund
Statement of Operations
For the Period November 7, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Income distributions from Underlying Funds ............................................... $ 157
Expenses(Notes 2 and 4):
Management fees .............................................................. $ 8
Professional fees ............................................................ 6,523
Registration fees ............................................................ 48,237
Shareholder servicing fees ................................................... 8
Amortization of deferred organization expenses ............................... 32,357
Miscellaneous ................................................................ 51
--------
Expenses before reductions ................................................... 87,184
Expense reductions (Note 4) .................................................. (87,176)
--------
Total Expenses ......................................................................... 8
--------
Net investment income ...................................................................... 149
--------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from capital gain distributions from Underlying Funds.............. 501
Net change in unrealized appreciation or depreciation of investments ....................... (340)
--------
Net gain (loss) on investments ............................................................. 161
--------
Net increase (decrease) in net assets resulting from operations ............................ $ 310
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
26 Conservative Strategy Fund
<PAGE>
Conservative Strategy Fund
Statement of Changes in Net Assets
For the Period November 7, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ...................................................... $ 149
Net realized gain (loss) ................................................... 501
Net change in unrealized appreciation or depreciation ...................... (340)
--------
Net increase (decrease) in net assets resulting from operations .......... 310
--------
From Distributions to Shareholders:
Net investment income ...................................................... (149)
In excess of net investment income ......................................... (72)
Net realized gain on investments ........................................... (351)
--------
Total Distributions to Shareholders ...................................... (572)
--------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 5). 22,882
--------
Total Net Increase (Decrease) in Net Assets .................................. 22,620
Net Assets
Beginning of period ........................................................ --
--------
End of period (including undistributed net investment income of $78) ....... $ 22,620
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Conservative Strategy Fund 27
<PAGE>
Conservative Strategy Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997(*)
----------
<S> <C>
Net Asset Value, Beginning of Period .............................. $ 10.00
---------
Income From Investment Operations:
Net investment income ........................................... .07
Capital gain distributions from Underlying Funds ................ .23
Net realized and unrealized gain (loss) on investments .......... (.16)
---------
Total Income From Investment Operations ....................... .14
---------
Less Distributions:
Net investment income ........................................... (.07)
In excess of net investment income .............................. (.03)
Net realized gain on investments ................................ (.16)
---------
Total Distributions ........................................... (.26)
---------
Net Asset Value, End of Period .................................... $ 9.88
=========
Total Return (%)(a) ............................................... 1.36
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ........................ 23
Ratios to average net assets (%):
Operating expenses, net (b)(c) ................................ .25
Operating expenses, gross (c)(d) .............................. --
Net investment income (e) ..................................... .67
Portfolio turnover rate (%)(b) .................................. 0.00
</TABLE>
* For the period November 7, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period November 7, 1997 (commencement of operations) to
December 31, 1997 are annualized.
(c) See Note 4 for current period amounts.
(d) The ratio is not meaningful due to the Fund's short period of operation.
(e) The ratio has not been annualized due to the Fund's short period of
operation.
28 Conservative Strategy Fund
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements
December 31, 1997
1. Organization
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on five LifePoints(R) Funds, each of which
has distinct investment objectives and strategies. The Investment Company is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. It is organized and
operates as a Massachusetts business trust under an amended master trust
agreement dated July 26, 1984. The Investment Company's master trust
agreement permits the Board of Trustees to issue an unlimited number of full
and fractional Class E shares of beneficial interest at a $.01 par value. The
Investment Company has available Class D shares of the Fund as of August 18,
1997; however, shares have not been offered on this class as of the date of
these financial statements.
Each of the LifePoints Funds allocates its assets by investing in a
combination of Class S shares of the Investment Company's portfolios (the
"Underlying Funds"). Each of the LifePoints Funds will adjust its investments
within set limits based on Frank Russell Investment Management Company's
("FRIMCo" or "Manager") outlook for the economy, financial markets and
relative market valuation of the asset classes represented by each Underlying
Fund. However, the LifePoints Funds may deviate from set limits when, in
FRIMCo's opinion, it is necessary to do so to pursue a LifePoints Fund's
investment objective. The amounts allocated to each Underlying Fund by each
LifePoints Fund will generally vary within 10% of the percentages specified
below: LifePoints(R) Funds
<TABLE>
<CAPTION>
Asset Allocation Ranges
--------------------------------------------------------------------
Equity
Balanced Aggressive Balanced Moderate Conservative
Strategy Strategy Strategy Strategy Strategy
Asset Class/Underlying Funds Fund Fund Fund Fund Fund
- ---------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equities
US Equities
Diversified Equity 30% 21% 16% 11% 5%
Special Growth 10 11 5 2 -
Quantitative Equity 30 21 16 11 6
Real Estate Securities 5 5 5 5 5
International Equities
International Securities 20 19 14 9 5
Emerging Markets 5 5 3 2 1
Bonds
Diversified Bond - - 25 27 18
Volatility Constrained Bond - - - 33 60
Multistrategy Bond - 18 16 - -
</TABLE>
Objectives of the Underlying Funds:
Diversified Equity Fund: To provide income and capital growth by investing
principally in equity securities.
Special Growth Fund: To maximize total return primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from the Diversified Equity Fund, by investing in equity securities.
Quantitative Equity Fund: To provide a total return greater than the total
return of the US stock market as measured by the Russell 1000(R) Index over a
market cycle of four to six years, while maintaining volatility and
diversification similar to the Index by investing in equity securities.
Real Estate Securities Fund: To achieve a high level of total return
generated through above-average current income, while maintaining the
potential for capital appreciation by investing primarily in the equity
securities of companies in the real estate industry.
Notes to Financial Statements 29
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
International Securities Fund: To provide favorable total return and
additional diversification for US investors by investing primarily in equity
and fixed-income securities of non-US companies, and securities issued by
non-US governments.
Emerging Markets Fund: To maximize total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from developed market international portfolios.
Diversified Bond Fund: To provide effective diversification against equities
and a stable level of cash flow by investing in fixed-income securities.
Volatility Constrained Bond Fund: To preserve capital and generate current
income consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.
Multistrategy Bond Fund: To provide maximum total return, primarily through
capital appreciation and by assuming a higher level of volatility than is
ordinarily expected from broad fixed-income market portfolios, by investing
in fixed-income securities.
Financial statements of the Underlying Funds can be obtained by calling the
Office of Shareholder Inquiries at (800) RUSSEL4, (800) 787-7354.
2. Significant Accounting Policies
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
followed by the Funds in the preparation of these financial statements.
Security valuation: Investments in Underlying Funds are valued at the net
asset value per share of each Underlying Fund as of the close of regular
trading on the New York Stock Exchange. Short-term investments having a
maturity of sixty days or less are valued at amortized cost.
Investment transactions: Securities transactions of the Underlying Funds are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the basis of specific identified cost.
Investment income: Distributions of income and capital gains from the
Underling Funds are recorded on the ex-dividend date. Interest income is
recorded on the accrual basis.
Federal income taxes: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Funds.
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income tax
purposes as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Net Unrealized
Federal Tax Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
--------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Equity Balanced Strategy $ 3,432,889 $ -- $ (217,275) $ (217,275)
Aggressive Strategy 5,950,702 -- (312,107) (312,107)
Balanced Strategy 3,862,686 437 (164,954) (164,517)
Moderate Strategy 411,829 192 (13,585) (13,393)
Conservative Strategy 23,440 16 (356) (340)
</TABLE>
30 Notes to Financial Statements
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
Dividends and distributions to shareholders: Income dividends are generally
declared and paid quarterly. Capital gain distributions are generally
declared and paid annually. An additional distribution may be paid by the
Funds to avoid imposition of federal income tax on any remaining
undistributed capital gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations which
may differ from GAAP. As a result, net investment income and net realized
gain (or loss) from investment transactions for a reporting period may differ
significantly from distributions during such period. The differences between
tax regulations and GAAP relate primarily to certain securities sold at a
loss. Accordingly, the Funds may periodically make reclassifications among
certain of their capital accounts without impacting their net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
Undistributed Accumulated
Net Investment Net Realized
Income Gain (Loss)
---------------- ---------------
<S> <C> <C>
Equity Balanced Strategy $ 78,967 $ (78,967)
Aggressive Strategy 122,333 (122,333)
Balanced Strategy 62,345 (62,345)
Moderate Strategy 4,176 (4,176)
Conservative Strategy 150 (150)
</TABLE>
Expenses: The Funds incur shareholder servicing fees, management fees, and
other operating expenses other than those expressly assumed by FRIMCo.
Certain expenses not directly attributable to any one Fund but applicable to
all Funds, such as Trustee fees, insurance, legal and other expenses will be
allocated to each Fund based on each Fund's net assets. Expenses included in
the accompanying financial statements reflect the expenses of each Fund and
do not include any expenses associated with the Underlying Funds.
Deferred organization expenses: Organization and initial registration costs
of the Equity Balanced Strategy Fund, Aggressive Strategy Fund, Balanced
Strategy Fund, and Moderate Strategy Fund have been deferred and are being
amortized over 60 months on a straight-line basis.
3. Investment Transactions
Securities: During the period ended December 31, 1997, purchases and sales of
the Underlying Funds were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Equity Balanced Strategy $ 3,674,885 $ 201,985
Aggressive Strategy 6,454,589 435,450
Balanced Strategy 4,031,433 151,810
Moderate Strategy 418,874 6,606
Conservative Strategy 23,440 --
</TABLE>
4. Related Parties
Manager: The Investment Company has an investment advisory agreement with the
Manager under which the Manager directs the investments of the Fund in
accordance with its investment objectives, policies, and limitations. The
Funds are charged a fee by the Manager equal to 0.25% of average daily net
assets. For the period ended December 31, 1997, the Manager voluntarily
agreed to waive the management fee of 0.25% of average daily net assets.
The manager has voluntarily agreed to reimburse the Funds for all expenses
excluding manager fees and shareholder servicing fees.
Notes to Financial Statements 31
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
The waivers and reimbursements as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Management Reimbursed Total Expense
Fees Waived by FRIMCo Reductions
-------------- ---------- ---------------
<S> <C> <C> <C>
Equity Balanced Strategy $ 1,140 $ 61,796 $ 62,936
Aggressive Strategy 1,727 64,455 66,182
Balanced Strategy 1,187 62,956 64,143
Moderate Strategy 151 56,786 56,937
Conservative Strategy 8 87,168 87,176
</TABLE>
Transfer agent: The Funds have a contract with FRIMCo to provide transfer
agent services to the Investment Company. The Funds were not charged a fee
for this service for the period ended December 31, 1997.
Distributor and Shareholder Servicing: Pursuant to the Distribution Agreement
with Investment Company, Russell Fund Distributors, Inc. ("Distributor"), a
wholly owned subsidiary of the Administrator, serves as distributor for all
Investment Company portfolio shares, including the Funds.
The Investment Company has adopted a Shareholder Services Plan ("Services
Plan") under which it may make payments to the distributor or any investment
advisors, banks, broker-dealers, financial planners or other financial
institutions ("Servicing Agents") for any activities or expenses primarily
intended to assist, support or service the Servicing Agents' clients who
beneficially own shares of the LifePoints Funds. Payments under the Services
Plan are calculated daily and paid quarterly by the Investment Company, at an
annual rate of 0.25% of the average daily net assets of a LifePoints Fund's
Shares.
Accrued fees payable to affiliates as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Other Fees
Payable to Shareholder
Manager Servicing Fees Totals
------------ -------------- ------------
<S> <C> <C> <C>
Equity Balanced Strategy $ 54,732 $ 1,064 $ 55,796
Aggressive Strategy 50,356 1,651 52,007
Balanced Strategy 51,854 1,150 53,004
Moderate Strategy 60,007 141 60,148
Conservative Strategy 66,064 8 66,072
------------ -------------- ------------
$ 283,013 $ 4,014 $ 287,027
============ ============== ============
</TABLE>
Receivable from Manager for reimbursement of expenses as of December 31, 1997
were as follows:
<TABLE>
<S> <C>
Equity Balanced Strategy $ 35,941
Aggressive Strategy 34,224
Balanced Strategy 34,224
Moderate Strategy 36,206
Conservative Strategy 72,645
------------
$ 213,240
============
</TABLE>
Board of Trustees: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the period ended December
31, 1997, and were allocated to each Fund on a pro rata basis, including 23
other affiliated funds not represented herein. The LifePoints Funds have been
reimbursed by FRIMCo for this expense.
32 Notes to Financial Statements
<PAGE>
LifePoints(R) Funds
Notes to Financial Statements, continued
5. Fund Share Transactions
Share transactions for the period ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Shares Dollars
------------ ------------
<S> <C> <C>
Equity Balanced Strategy (b)
Proceeds from Shares Sold 313,780 $ 3,028,465
Proceeds from reinvestment
of distributions 27,548 244,906
Payments for shares redeemed (3,196) (30,112)
------------ ------------
Total net increase (decrease) 338,132 $ 3,243,259
============ ============
Aggressive Strategy (a)
Proceeds from Shares Sold 552,413 $ 5,431,416
Proceeds from reinvestment
of distributions 35,751 329,624
Payments for shares redeemed (7,700) (75,895)
------------ ------------
Total net increase (decrease) 580,464 $ 5,685,145
============ ============
Balanced Strategy (a)
Proceeds from Shares Sold 358,855 $ 3,571,839
Proceeds from reinvestment
of distributions 19,490 185,933
Payments for shares redeemed (2,777) (27,476)
------------ ------------
Total net increase (decrease) 375,568 $ 3,730,296
============ ============
Moderate Strategy (c)
Proceeds from Shares Sold 39,036 $ 387,800
Proceeds from reinvestment
of distributions 1,213 11,694
Payments for shares redeemed (175) (1,727)
------------ ------------
Total net increase (decrease) 40,074 $ 397,767
============ ============
Conservative Strategy (d)
Proceeds from Shares Sold 2,231 $ 22,309
Proceeds from reinvestment
of distributions 58 573
------------ ------------
Total net increase (decrease) 2,289 $ 22,882
============ ============
</TABLE>
(a) For the period September 16, 1997 (commencement of sale of shares) to
December 31, 1997.
(b) For the period September 30, 1997 (commencement of sale of shares) to
December 31, 1997.
(c) For the period October 2, 1997 (commencement of sale of shares) to
December 31, 1997.
(d) For the period November 7, 1997 (commencement of sale of shares) to
December 31, 1997.
6. Beneficial Interest
As of December 31, 1997 the following Funds have one or more shareholders
with beneficial interest of greater than 10% of the total outstanding shares
of each respective Fund: Equity Balanced Strategy 24.8%, and 16.7%,
Aggressive Strategy 19.2% and 11.6%, Balanced Strategy 27.6%, Moderate
Strategy 27.3%, 19.0%, and 17.7%, and Conservative Strategy 98.5%.
7. Subsequent Event
On August 10, 1998, Frank Russell Company entered into an agreement with The
Northwestern Mutual Life Insurance Co., an insurance organization, pursuant
to which Northwestern Mutual Life will acquire all of the outstanding common
stock of Frank Russell Company.
Notes to Financial Statements 33
<PAGE>
Report of Independent Accountants
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of net assets of each of the series
of Frank Russell Investment Company (in this report comprised of Equity Balanced
Strategy, Aggressive Strategy, Balanced Strategy, Moderate Strategy, and
Conservative Strategy ("the Funds")), and the statement of assets and
liabilities of the Conservative Strategy Fund as of December 31, 1997, and the
related statements of operations, the statements of changes in net assets and
the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit 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 securities owned as of December 31, 1997, by
correspondence with the custodian. 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
audit provides 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 the
Funds enumerated above as of December 31, 1997, the results of their operations,
the changes in their net assets and the financial highlights for each of the
periods indicated therein in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 17, 1998,
except for Note 7 as
to which the date is
August 10, 1998 /s/ PricewaterhouseCoopers LLP
34 Report of Independent Accountants
<PAGE>
LifePoints(R) Funds
Tax Information
December 31, 1997 (Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following amounts as long-term capital gain dividends for their taxable year
ended December 31, 1997:
<TABLE>
<CAPTION>
Total Long-Term 20%
Capital Gains Capital Gains
--------------- --------------
<S> <C> <C>
Equity Balanced Strategy $ 163,073 $ 78,018
Conservative Strategy 351 165
Aggressive Strategy 250,558 122,013
Balanced Strategy 129,168 62,815
Moderate Strategy 9,109 4,326
</TABLE>
Tax Information 35
<PAGE>
Frank Russell Investment Company
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
Trustees
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
Officers
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
Manager and Transfer Agent
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Consultant
Frank Russell Company
909 A Street
Tacoma, WA 98402
Custodian
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Office of Shareholder Inquires
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103-7098
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
Distributor
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Money Managers of Underlying Funds
Diversified Equity
Alliance Capital Management L.P., Minneapolis, MN
Barclays Global Fund Advisors, San Francisco, CA
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc., Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Peachtree Asset Management, Atlanta, GA
Schneider Capital Management, Wayne, PA
Suffolk Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Special Growth
Delphi Management, Inc., Boston, MA
Fiduciary International, Inc., New York, NY
GlobeFlex Capital, L.P., San Diego, CA
Jacobs Levy Equity Management, Inc., Roseland, NJ
Sirach Capital Management, Inc., Seattle, WA
Wellington Management Company LLP, Boston, MA
Quantitative Equity
Barclays Global Fund Advisors, San Francisco, CA
Franklin Portfolio Associates, LLC, Boston, MA
J.P. Morgan Investment Management, Inc., New York, NY
International Securities
J.P. Morgan Investment Management, Inc., New York, NY
Marathon Asset Management Limited, London, England
Mastholm Asset Management, L.L.C., Bellevue, WA
Oechsle International Advisors, Boston, MA
Rowe Price-Fleming International, Inc., Baltimore, MD
Sanford C. Bernstein & Co., Inc., New York, NY
The Boston Company Asset Management, Inc., Boston, MA
Emerging Markets
Genesis Asset Management, Ltd., London
J.P. Morgan Investment Management, Inc., New York, NY
Montgomery Asset Management, L.P., San Francisco, CA
Real Estate Securities
AEW Capital Management, L.P., Boston, MA
Cohen & Steers Capital Management, New York, NY
Diversified Bond
Lincoln Capital Management Company, Chicago, IL
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
Volatility Constrained Bond
BlackRock Financial Management, New York, NY
STW Fixed Income Management, Ltd., Hamilton, Bermuda
Standish, Ayer & Wood, Inc., Boston, MA
Multistrategy Bond
BEA Associates, New York, NY
Pacific Investment Management Company, Newport Beach, CA
Standish, Ayer & Wood, Inc., Boston, MA
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
36 Manager, Money Managers and Service Providers
<PAGE>
[LOGO OF RUSSELL]
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, WA 98402
800-832-6688
IN13(198)FF
