<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
- -------------
RUSSELL FUNDS
- -------------
1998 Annual Report
CLASS C, CLASS E, & CLASS S
DIVERSIFIED EQUITY FUND
EQUITY INCOME FUND
QUANTITATIVE EQUITY FUND
INTERNATIONAL SECURITIES FUND
DIVERSIFIED BOND FUND
MULTISTRATEGY BOND FUND
DECEMBER 31, 1998
[RUSSELL LOGO]
<PAGE>
Frank Russell Investment
Company
Frank Russell Investment Company
is a "series mutual fund" with 28
different investment portfolios.
These financial statements report
on six 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, 1998
Table of Contents
Page
Letter to Our Clients................................................ 2
Diversified Equity Fund.............................................. 3
Equity Income Fund................................................... 19
Quantitative Equity Fund............................................. 31
International Securities Fund........................................ 45
Diversified Bond Fund................................................ 65
Multistrategy Bond Fund.............................................. 85
Notes to Financial Statements........................................ 102
Report of Independent Accountants.................................... 113
Tax Information...................................................... 114
Matters Submitted to a Vote of Shareholders.......................... 115
Manager, Money Managers and Service Providers........................ 118
Frank Russell Investment Company - Russell Funds
Copyright (C) Frank Russell Company 1999. 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
We are pleased to present the Frank Russell Investment Company 1998 Annual
Report. This report covers information on six of the Funds and represents our
seventeenth year in operation.
We remain committed to providing our clients with superior investment solutions
through the benefits of multi-manager, multi-style diversification used in
structuring our Funds. The commitment proved worthwhile in 1998, 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 (FRIMCo) continuously evaluates the
Funds we offer our clients. Each of these Funds is carefully monitored by
Russell investment professionals to ensure that the most appropriate investment
advisors and strategies are utilized within each Fund. The advisors are
monitored by FRIMCo, using the expertise and advice of the Investment Policy and
Research group of Frank Russell Company.
Since the close of 1997, we have implemented changes in our Funds' structure
which we believe will benefit current and potential investors. The former Class
C shares of the Russell Funds have been renamed Russell Fund Class E shares, and
their fee structure now aligns with the Russell LifePoints(R) Funds' Class E
shares. Additionally, the Russell LifePoints(R) Funds' Class D shares were
opened for investment in March 1998.
FRIMCo's decision to retain Boston Financial Data Services(BFDS) to assist in
the transfer agent process in June 1998 has enhanced the level of services
provided to our clients.
We are also pleased to announce the recent acquisition of Frank Russell Company
by The Northwestern Mutual Life Insurance Company, the U.S. leader in both
individual life insurance sold annually and total life insurance in force. We
believe this is a very positive development for both Russell and the Funds,
given the financial strength and image of Northwestern.
Thank you for your continued confidence and investment with Frank Russell
Investment Company. We look forward to 1999 and continuing to earn your support.
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 Investment Company Frank Russell Investment Company
<PAGE>
DIVERSIFIED EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide income and capital growth by investing principally in
equity securities.
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 ten managers with three separate and distinct investment
styles.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Diversified Equity Class S Russell 1000(R)** Lipper(R) Growth & Income++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,907 $13,042 $12,243
1990 $12,002 $12,499 $11,694
1991 $15,728 $16,627 $15,063
1992 $17,036 $18,130 $16,310
1993 $18,830 $19,970 $18,140
1994 $18,828 $20,046 $17,953
1995 $25,451 $27,617 $23,448
1996 $31,378 $33,817 $28,311
1997 $41,207 $44,927 $35,979
1998 $51,554 $57,067 $41,494
- ------------------------------------------------------------------------------------------------------------------------------------
Total $254,921 $273,742 $230,635
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED EQUITY FUND - CLASS S RUSSELL 1000(R) INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ------------------ ---------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
1 Year $12,511 25.11% 1 Year $12,702 27.02%
5 Years $27,379 22.32%(S) 5 Years $28,576 23.37%(S)
10 Years $51,554 17.83%(S) 10 Years $57,067 19.03%(S)
<CAPTION>
DIVERSIFIED EQUITY FUND - CLASS E ++++ LIPPER(R) GROWTH & INCOME FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- --------------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $12,459 24.59% 1 Year $11,533 15.33%
5 Years $27,145 22.11%(S) 5 Years $22,875 18.00%(S)
10 Years $51,114 17.73%(S) 10 Years $41,494 15.29%(S)
</TABLE>
3 Diversified Equity Fund
<PAGE>
DIVERSIFIED EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Diversified Equity Fund Class S and
Class E shares reflected total returns of 25.1% and 24.6%, respectively, as
compared to the Russell 1000(R) Index results of 27%. The Fund trailed the Index
primarily due to its underweighting of large cap stocks and to the weak
market-relative results produced by its value-oriented managers. However,
performance compared very favorably with the 15.3% average return of mutual
funds tracked in the Lipper(R) Growth and Income Funds Benchmark.
PORTFOLIO HIGHLIGHTS
The performance of stocks in 1998 was characterized by unprecedented differences
in returns between various sectors of the market. Stocks provided investors with
returns in excess of 20% -- the first time the market has ever produced four
consecutive years of gains in excess of 20% per annum. Despite the market's
strength, volatility was extreme with a deep swoon in prices during the third
quarter. Large cap issues dominated once again with the largest 50 stocks of the
Russell 1000 Index up 40% while small cap stocks in the Russell 2000(R) Index
fell 2.5% during the year - another unprecedented margin. Valuation sensitivity
proved a liability for investors as value stocks in the Russell 1000 Index
trailed their growth counterparts by more than 20 percentage points - the
largest such differential since the inception of the indices. Technology stocks
led the market advance, as anything and everything associated with the Internet
attracted investors. As a result, the technology sector gained 75% for the year.
Energy and raw materials stocks were laggards as commodity prices trended lower
throughout the year.
The Diversified Equity Fund fared better than the majority of its peers in the
Lipper(R) Growth and Income Funds Benchmark. Its multi-manager mix afforded it
some opportunities not shared by funds with more focused approaches to the
growth and income style. The Fund's growth-oriented managers produced very
strong results, aided by their exposure to many of the market's strongest
performers. However, even these managers found valuations on many issues out of
their reach. The more value-oriented managers were frustrated by the market's
apparent indifference to valuation. Their valuation sensitivity left them
underweighted in large cap issues and Internet-related stocks. Overall, good
security selection in the Technology and the Producer Durables sectors helped
narrow the Fund's margin of underperformance relative to the Russell 1000 Index.
<TABLE>
<CAPTION>
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
<S> <C>
Microsoft Corp. 1.9%
Cisco Systems, Inc. 1.9
Intel Corp. 1.9
Tyco International, Ltd. 1.6
Home Depot, Inc. (The) 1.5
International Business Machines Corp. 1.5
Pfizer, Inc. 1.5
Dell Computer Corp. 1.4
MCI WorldCom, Inc. 1.4
Merck & Co., Inc. 1.4
<CAPTION>
PORTFOLIO CHARACTERISTICS
December 31, 1998
<S> <C>
Current P/E Ratio 30.4x
Portfolio Price/Book Ratio 4.43x
Market Capitalization - $-Weighted Average 64.38 Bil
Number of Holdings 585
<CAPTION>
MONEY MANAGERS STYLES
<S> <C>
Alliance Capital Management L.P. Growth
Barclays Global Investors, N.A Market-Oriented
Equinox Capital Management, Inc. Value
INVESCO Capital Management, Inc. Market-Oriented
Lincoln Capital Management Co. Growth
Morgan Stanley Dean Witter Investment
Management, Inc. Market-Oriented
Peachtree Asset Management Market-Oriented
Sanford C. Bernstein & Co., Inc. Value
Suffolk Capital Management, Inc. Market-Oriented
Trinity Investment Management Corporation Value
</TABLE>
* Assumes initial investment on January 1, 1989.
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $158.3 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select. The Russell 1000(R) Index return reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates.
++ Lipper(R) Growth & Income Funds Benchmark 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 E - For the period, May 26, 1997
(commencement of operations) to May 15, 1998, shareholder service and Rule
12b-1 distribution fees were charged. From May 16, 1998 through December
31, 1998 only shareholder service 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 E to provide historical
perspective.
(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.
Diversified Equity Fund 4
<PAGE>
DIVERSIFIED EQUITY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Common Stocks - 93.1%
Auto and Transportation - 4.8%
Airborne Freight Corp. 2,800 101
AMR Corp. (a) 50,600 3,004
Burlington Northern, Inc. 139,700 4,715
Comair Holdings, Inc. 10,400 349
Continental Airlines, Inc. Class B (a) 93,000 3,116
Cooper Tire & Rubber Co. 212,300 4,339
CSX Corp. 9,700 403
Dana Corp. 52,510 2,146
Delta Air Lines, Inc. 144,400 7,509
Eaton Corp. 4,500 318
FDX Corp. (a) 21,200 1,887
Ford Motor Co. 183,000 10,739
General Motors Corp. 103,300 7,392
Genuine Parts Co. 11,400 381
Goodyear Tire & Rubber Co. 7,100 358
Harley-Davidson, Inc. 35,000 1,658
Kansas City Southern Industries, Inc. 7,500 369
KLM Royal Dutch Airlines 69,872 2,096
Lear Corp. (a) 41,400 1,594
Meritor Automotive, Inc. 20,300 430
Navistar International Corp. (a) 47,200 1,345
Nordic American Tanker
Shipping, Ltd. 42,413 488
Norfolk Southern Corp. 135,000 4,278
Northwest Airlines Corp. Class A (a) 108,200 2,752
PACCAR, Inc. 14,500 593
Trinity Industries, Inc. 7,500 289
TRW, Inc. 5,700 320
UAL Corp. (a) 48,300 2,883
Union Pacific Corp. 9,200 415
Walbro Corp. (a) 9,481 59
-------
66,326
-------
Consumer Discretionary - 11.7%
Abercrombie & Fitch Co. Class A (a) 24,600 1,740
AC Nielsen Corp. (a) 4,400 124
Amazon.com, Inc. (a) 800 257
American Greetings Corp. Class A 7,400 304
AutoZone, Inc. (a) 130,000 4,282
Avon Products, Inc. 29,300 1,297
Barry (R.G.) Corp. (a) 22,200 244
Bed Bath & Beyond, Inc. (a) 82,000 2,793
Belo (A.H.) Corp. Class A 7,700 154
Best Buy Co. (a) 7,500 460
BJ's Wholesale Club, Inc. (a) 3,900 181
Borders Group, Inc. (a) 5,300 132
Brinker International, Inc. (a) 1,000 29
Browning-Ferris Industries, Inc. 57,500 1,635
Brunswick Corp. 3,400 84
Carnival Corp. Class A 42,000 2,016
Chancellor Media Corp. (a) 90,400 4,322
Circuit City Stores, Inc. 14,100 704
Clear Channel
Communications, Inc. (a) 50,100 2,730
Corrections Corp. America (a) 2,300 41
Costco Cos., Inc. (a) 35,200 2,541
Cracker Barrel Old Country Store, Inc. 17,400 405
Danka Business Systems - ADR 2,102 9
Darden Restaurants, Inc. 37,100 668
Dayton Hudson Corp. 62,600 3,396
Deluxe Corp. 7,800 285
Dillard's, Inc. Class A 10,600 301
Dollar Tree Stores, Inc. (a) 1,425 62
Eastman Kodak Co. 56,891 4,096
Federated Department Stores, Inc. (a) 35,800 1,560
Fortune Brands, Inc. 14,500 459
Fred Meyer, Inc. (a) 22,000 1,326
Fruit of the Loom, Inc. Class A (a) 19,100 264
Furniture Brands International, Inc. (a) 2,900 79
Gap, Inc. 90,700 5,102
General Nutrition Cos., Inc. (a) 7,700 125
Harrah's Entertainment, Inc. (a) 15,300 240
Hasbro, Inc. 109,000 3,938
Heftel Broadcasting Corp. Class A (a) 2,400 118
Hollinger International, Inc. Class A 11,600 162
Home Depot, Inc. (The) 334,400 20,461
International Game Technology 6,800 165
Interpublic Group Cos., Inc. 2,400 191
Jacor Communications, Inc. (a) 900 58
JC Penney & Co., Inc. 54,300 2,545
Kellwood Co. 2,000 50
King World Productions, Inc. (a) 18,900 556
Kmart Corp. (a) 70,600 1,081
Kohl's Corp. (a) 82,600 5,075
Liberty Media Group Series A (a) 113,450 5,226
Limited, Inc. (The) 152,000 4,427
Lowe's Cos., Inc. 186,700 9,557
Mattel, Inc. 243,541 5,556
May Department Stores Co. 19,700 1,189
Maytag Corp. 18,300 1,139
McDonald's Corp. 27,200 2,084
McGraw-Hill, Inc. 4,700 479
MediaOne Group, Inc. (a) 62,700 2,947
Metromedia International
Group, Inc. (a) 2,100 11
Neiman-Marcus Group, Inc. (a) 7,900 197
New York Times Co. Class A 9,100 316
Newell Co. 900 37
Nielsen Media Research (a) 15,833 285
5 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
-------- -------
<S> <C> <C>
Nordstrom, Inc. 600 21
Office Depot, Inc. (a) 10,400 384
OfficeMax, Inc. (a) 48,100 589
Ogden Corp. 2,600 65
Omnicom Group, Inc. 32,200 1,868
PanAmSat Corp. (a) 3,100 121
Payless ShoeSource, Inc. (a) 3,200 152
Petroleum Heat & Power, Inc.
Class A (a) 224,564 168
Premark International, Inc. 4,400 152
Promus Hotel Corp. New (a) 4,495 146
Pulitzer Publishing Co. 3,500 303
QUALCOMM, Inc. (a) 700 36
Royal Caribbean Cruises, Ltd. 63,200 2,338
Rubbermaid, Inc. 6,300 198
Russell Corp. 5,100 104
Saks, Inc. (a) 15,400 486
Sears Roebuck & Co. 57,900 2,460
Service Corp. International 14,700 560
Shaw Industries, Inc. 15,600 378
Staples, Inc. (a) 12,700 555
Starwood Hotels & Resorts Worldwide,
Inc. 13,000 295
Time Warner, Inc. 140,800 8,738
TJX Cos., Inc. 62,000 1,798
Toys "R" Us, Inc. (a) 26,100 440
Tribune Co. 42,400 2,797
Tricon Global Restaurants, Inc. (a) 9,800 491
Tupperware Corp. 11,400 187
Univision Communications, Inc.
Class A (a) 7,600 275
USA Networks, Inc. (a) 2,600 86
V.F. Corp. 17,600 825
Viacom, Inc. Class B (a) 20,400 1,510
Viad Corp. 39,400 1,197
Wal-Mart Stores, Inc. 187,800 15,294
Warnaco Group, Inc. Class A 300 8
Wendy's International, Inc. 18,100 395
Whirlpool Corp. 50,700 2,808
-------
160,525
-------
Consumer Staples - 6.4%
American Stores Co. 6,000 222
Anheuser-Busch Cos., Inc. 25,000 1,641
Bestfoods 37,500 1,997
Brown-Forman Distillers, Inc. Class B 600 45
Campbell Soup Co. 21,200 1,166
Clorox Co. 600 70
Coca-Cola Co. (The) 123,400 8,252
Coca-Cola Enterprises, Inc. 37,100 1,326
Colgate-Palmolive Co. 66,300 6,158
ConAgra, Inc. 85,700 2,700
CVS Corp. 85,400 4,697
Dean Foods Co. 7,800 318
Dial Corp. 3,500 101
Dole Food Co., Inc. 24,600 738
General Mills, Inc. 35,400 2,752
Gillette Co. 56,400 2,725
Hannaford Brothers Co. 4,500 239
Hormel Foods Corp. 30,100 986
IBP, Inc. 32,600 949
International Flavors
& Fragrances, Inc. 6,900 305
Interstate Bakeries Corp. 35,400 936
Kroger Co. (a) 34,600 2,093
PepsiCo, Inc. 140,600 5,756
Philip Morris Cos., Inc. 335,400 17,943
Procter & Gamble Co. 124,000 11,323
Quaker Oats Co. 12,300 732
Ralston-Purina Group 14,200 460
Rite Aid Corp. 75,700 3,752
RJR Nabisco Holdings Corp. 14,300 425
Safeway, Inc. (a) 32,400 1,974
SuperValu, Inc. 75,100 2,103
SYSCO Corp. 1,400 38
Tyson Foods, Inc. Class A 21,400 455
Unilever NV 32,100 2,662
Universal Corp. 11,300 397
Weis Markets, Inc. 800 31
-------
88,467
-------
Financial Services - 17.4%
ACE, Ltd. 9,400 324
AFLAC, Inc. 223,400 9,830
Allstate Corp. 228,516 8,826
Ambac Financial Group, Inc. 15,400 927
American Bankers Insurance
Group, Inc. 2,300 111
American Express Co. 30,100 3,078
American Financial Group, Inc. 11,200 491
American General Corp. 7,300 569
American International Group, Inc. 144,814 13,993
AMRESCO, Inc. (a) 9,800 86
AmSouth Bancorp 31,350 1,430
Arden Realty Group, Inc. 2,200 51
Associates First Capital Corp. Class A 151,914 6,437
Automatic Data Processing, Inc. 109,700 8,797
Bank One Corp. 98,700 5,040
BankAmerica Corp. 218,336 13,127
BankBoston Corp. 47,700 1,857
BB&T Corp. 5,800 234
Berkshire Hathaway, Inc. Class A (a) 6 420
</TABLE>
Diversified Equity Fund 6
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
<TABLE>
<CAPTION>
December 31, 1998
Market
Number Value
of (000)
Shares $
-------- -------
<S> <C> <C>
Canadian Hotel Income Properties 500 3
CarrAmerica Realty Corp. 2,500 60
CCB Financial Corp. 900 51
Centura Banks, Inc. 1,000 74
Charter One Financial, Inc. 47,420 1,313
Chase Manhattan Corp. 196,200 13,354
Chubb Corp. (The) 6,000 389
Citigroup, Inc. 56,750 2,809
City National Corp. 9,100 379
Comdisco, Inc. 8,100 137
Comerica, Inc. 29,700 2,025
Commerce Bancshares, Inc. 29,069 1,228
Conseco, Inc. 183,668 5,613
Countrywide Credit Industries, Inc. 14,400 723
Crescent Real Estate Equities, Inc. 1,000 23
Dime Bancorp, Inc. 51,900 1,372
Dow Jones & Co., Inc. 21,000 1,011
DST Systems, Inc. (a) 13,500 770
Duke Realty Investments, Inc. 800 19
Dun & Bradstreet Corp. 11,200 354
Edwards (A.G.), Inc. 2,400 89
Equifax, Inc. 1,400 48
Equitable Cos., Inc. 11,200 648
Everest Reinsurance Holdings, Inc. 13,600 530
Federal Home Loan Mortgage Corp. 114,100 7,352
Federal National Mortgage Association 80,100 5,927
Fifth Third Bancorp 33,400 2,382
First American Corp. 67,100 2,978
First Data Corp. 180,200 5,710
First Union Corp. 91,300 5,552
Firstar Corp. 6,424 599
Fleet Financial Group, Inc. 152,300 6,806
Fremont General Corp. 29,000 718
General Re Corp. 5,400 1,081
Golden West Financial Corp. 5,500 504
Hartford Financial Services
Group, Inc. (The) 62,500 3,430
Highwoods Properties, Inc. 2,000 52
Horace Mann Educators Corp. 26,900 767
Household International Corp. 111,300 4,410
Huntington Bancshares, Inc. 2,000 60
Jefferson-Pilot Corp. 10,700 803
KeyCorp 14,800 474
Lehman Brothers Holdings, Inc. 10,500 463
Lincoln National Corp. 6,500 532
Local Financial Corp. (a) 129,300 1,164
Loews Corp. 23,800 2,338
MBIA, Inc. 102,000 6,687
MBNA Corp. 529,218 13,196
Mercantile Bancorp, Inc. 6,400 295
Merrill Lynch & Co., Inc. 4,500 300
MGIC Investment Corp. 65,000 2,588
Morgan (J.P.) & Co., Inc. 5,200 546
Morgan Stanley Dean Witter, Discover &
Co 83,200 5,907
National City Corp. 49,540 3,592
National Commerce Bancorp 400 7
North Fork Bancorp, Inc. 30,600 732
Old Kent Financial Corp. 2,485 116
Old Republic International Corp. 75,000 1,688
Pacific Century Financial Corp. 25,000 609
PaineWebber Group, Inc. 34,650 1,338
Patriot American Hospitality, Inc. 1,500 9
Paychex, Inc. 44,900 2,310
PIMCO Advisors Holdings, L.P. 9,900 308
PMI Group, Inc. (The) 2,400 119
PNC Bank Corp. 10,800 585
Post Properties, Inc. 700 27
Progressive Corp. 11,000 1,863
Provident Cos., Inc. 8,100 336
Providian Financial Corp. 38,850 2,914
Reinsurance Group of America, Inc. 7,700 468
Reliance Group Holdings, Inc. 34,100 439
Ryder System, Inc. 30,200 785
Schwab (Charles) Corp. 9,300 523
SLM Holding Corp. 12,400 595
SouthTrust Corp. 11,700 431
Sovereign Bancorp, Inc. 35,600 503
Spieker Properties, Inc. 23,300 807
State Street Corp. 6,600 459
SunTrust Banks, Inc. 22,000 1,683
Torchmark Corp. 31,400 1,109
Transamerica Financial Corp. 16,000 1,848
Travelers Property Casualty Corp.
Class A 9,200 285
U.S. Bancorp 106,400 3,777
UnionBanCal Corp. 5,600 191
UNUM Corp. 11,400 665
Waddell & Reed Financial, Inc.
Class B (a) 606 14
Washington Mutual, Inc. 210,296 8,031
Wells Fargo Co. (a) 207,300 8,279
Zions Bancorp 5,500 343
-------
240,059
-------
Health Care - 11.0%
Abbott Laboratories 37,000 1,813
Aetna, Inc. 44,600 3,507
Allergan, Inc. 19,500 1,263
ALZA Corp. (a) 42,500 2,221
American Home Products Corp. 66,200 3,728
</TABLE>
7 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
-------- -------
<S> <C> <C>
Amgen, Inc. (a) 35,000 3,658
Bausch & Lomb, Inc. 20,600 1,236
Baxter International, Inc. 100,500 6,463
Becton, Dickinson & Co. 43,000 1,836
Bergen Brunswig Corp. Class A 3,150 110
Beverly Enterprises, Inc. New (a) 18,800 127
Biogen, Inc. (a) 700 58
Biomet, Inc. 97,500 3,918
Bristol-Myers Squibb Co. 105,000 14,049
Cardinal Health, Inc. 56,100 4,257
Columbia/HCA Healthcare Corp. 303,500 7,512
DENTSPLY International, Inc. 2,500 64
Genzyme Corp. (a) 10,600 527
HBO & Co. 196,600 5,640
IVAX Corp. (a) 50,100 623
Johnson & Johnson 83,800 7,029
Lilly (Eli) & Co. 69,500 6,177
Mallinckrodt, Inc. 26,700 823
Medtronic, Inc. 39,400 2,925
Merck & Co., Inc. 126,000 18,608
Mylan Laboratories, Inc. 241,200 7,598
PacifiCare Health Systems, Inc.
Class B (a) 28,300 2,248
Pfizer, Inc. 158,900 19,931
Pharmacia & Upjohn, Inc. 28,000 1,586
Quintiles Transnational Corp. (a) 28,300 1,509
Safeskin Corp. (a) 2,800 67
Schering-Plough Corp. 240,900 13,310
St. Jude Medical, Inc. (a) 7,400 205
Stryker Corp. 3,900 215
Tenet Healthcare Corp. (a) 9,500 249
US Bioscience, Inc. (a) 514 4
Warner-Lambert Co. 80,800 6,075
Watson Pharmaceuticals, Inc. (a) 500 31
-------
151,200
-------
Integrated Oils - 2.8%
Amerada Hess Corp. NPV 57,600 2,866
Amoco Corp. 87,700 5,174
Ashland, Inc. 50,700 2,453
Atlantic Richfield Co. 28,900 1,886
Chevron Corp. 5,200 431
Coastal Corp. 49,300 1,722
Crown Central Petroleum Corp.
Class B (a) 11,500 81
Exxon Corp. 144,700 10,580
Kerr-McGee Corp. 7,800 298
Lyondell Petrochemical Co. 11,200 202
Mobil Corp. 36,500 3,180
Phillips Petroleum Co. 20,900 891
Royal Dutch Petroleum Co. 6,400 306
Texaco, Inc. 52,400 2,771
Unocal Corp. 5,200 152
USX-Marathon Group 86,500 2,606
YPF Sociedad Anonima
Class D - ADR (a) 110,000 3,073
-------
38,672
-------
Materials and Processing - 5.9%
Air Products & Chemicals, Inc. 47,600 1,904
Albemarle Corp. 2,300 55
Alcan Aluminum, Ltd. 10,600 287
Allegheny Teldyne, Inc. 2,300 47
Aluminum Co. of America 6,867 512
American Standard Cos., Inc. (a) 8,800 317
Archer-Daniels-Midland Co. 23,300 400
Armstrong World Industries, Inc. 7,900 476
Cabot Corp. 9,600 268
Catellus Development Corp. (a) 16,600 238
Centex Corp. 9,400 424
Champion International Corp. 8,400 340
Consolidated Papers, Inc. 11,500 316
Corning, Inc. 400 18
Crown Cork & Seal Co., Inc. 58,200 1,793
Dow Chemical Co. 6,000 546
du Pont (E.I.) de Nemours & Co. 28,100 1,491
Eastman Chemical Co. 42,800 1,915
Engelhard Corp. 27,900 544
Fluor Corp. 33,000 1,405
FMC Corp. (a) 14,500 812
Fort James Corp. 81,700 3,268
Freeport-McMoRan Copper
& Gold, Inc. Class B 13,000 136
Gaylord Container Corp. Class A (a) 71,900 440
Georgia-Pacific Timber Group 22,500 536
Getty Realty Corp. 6,500 95
Goodrich (B.F.) Co. 20,100 721
Great Lakes Chemical Corp. 109,600 4,384
Illinois Tool Works, Inc. 31,700 1,839
IMC Global, Inc. 8,800 188
International Paper Co. 66,400 2,976
International Specialty
Products, Inc. (a) 1,300 18
Johns Manville Corp. 5,000 82
Lafarge Corp. 19,800 802
Louisiana Pacific Corp. 12,100 222
Mead Corp. 2,100 62
Millennium Chemicals, Inc. 6,000 119
Minnesota Mining
& Manufacturing Co. 6,200 441
Monsanto Co. 88,300 4,194
Nalco Chemical Co. 8,800 273
Diversified Equity Fund 8
</TABLE>
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
-------- -------
<S> <C> <C>
Newmont Mining Corp. 4,300 78
Nucor Corp. 8,900 385
Owens Corning 44,800 1,588
Pentair, Inc. 7,100 283
Phelps Dodge Corp. 100,000 5,089
Praxair, Inc. 69,000 2,432
Reynolds Metals Co. 47,700 2,513
Rohm & Haas Co. 19,100 575
Rouse Co. (The) 21,200 583
Sealed Air Corp. New (a) 37,000 1,889
Sherwin-Williams Co. 3,200 94
Sigma Aldrich Corp. 10,800 316
Solutia, Inc. 19,500 436
Sonoco Products Co. 75,320 2,231
Temple-Inland, Inc. 5,400 320
Timken Co. 30,900 583
Tyco International, Ltd. 294,700 22,232
Union Camp Corp. 5,100 344
Union Carbide Corp. 8,100 344
USG Corp. 9,000 458
USX-U.S. Steel Group 34,900 803
Vulcan Materials Co. 2,800 368
W.R. Grace & Co. New (a) 54,400 853
Waters Corp. (a) 3,100 270
Westvaco Corp. 11,500 308
Weyerhaeuser Co. 600 30
Willamette Industries, Inc. 9,700 325
-------
80,634
-------
Miscellaneous - 0.4%
AMB Property Corp. 500 11
Archstone Communities Trust 800 16
Avalonbay Communities, Inc. 2,100 72
Crestline Capital Corp. (a) 3,710 54
Equity Office Properties Trust 6,200 149
Equity Residential Properties Trust 5,500 222
FBR Asset Investment Corp. (a) 30,600 490
Host Marriott Corp. (a) 37,100 512
HRPT Properties Trust 3,500 49
IndyMac Mortgage Holdings, Inc. 15,600 165
Meditrust Cos. 2,300 35
ProLogis Trust 2,200 46
Public Storage, Inc. 2,500 68
Simon Property Group, Inc. 2,700 77
TeleTech Holdings, Inc. (a) 8,400 84
Waste Management, Inc. 63,900 2,979
-------
5,029
-------
Other Energy - 0.9%
Apache Corp. 19,000 481
Baker Hughes, Inc. 19,700 348
BEC Energy 6,200 255
BJ Services Co. (a) 800 13
Burlington Resources, Inc. 6,700 240
Calenergy, Inc. (a) 24,300 843
Conoco, Inc. Class A (a) 115,900 2,419
Enron Oil & Gas Co. 4,800 83
ENSCO International, Inc. 24,300 260
Halliburton Co. 400 12
Occidental Petroleum Corp. 20,100 339
Sempra Energy 44,700 1,134
Sunoco, Inc. (a) 55,900 2,016
Tidewater, Inc. 29,500 684
Tosco Corp. 86,100 2,228
Transocean Offshore, Inc. 10,800 290
Ultramar Diamond Shamrock Corp. 30,400 737
Valero Energy Corp. 2,600 55
Vastar Resources, Inc. 900 39
-------
12,476
-------
Producer Durables - 5.6%
Aeroquip-Vickers, Inc. 8,700 260
Allied Waste Industries, Inc. (a) 14,200 335
AlliedSignal, Inc. 28,000 1,241
AMP, Inc. 27,800 1,447
Applied Materials, Inc. (a) 5,300 226
Case Corp. 3,600 79
Caterpillar, Inc. 82,000 3,772
Cordant Technologies, Inc. 10,600 398
Crane Co. 58,650 1,770
Cummins Engine Co., Inc. 5,800 206
EG&G, Inc. 15,600 434
Elsag Bailey Process
Automation NV (a) 69,300 2,711
Emerson Electric Co. 900 54
Foster Wheeler Corp. 48,100 634
General Electric Co. 157,100 16,034
Gulfstream Aerospace Corp. (a) 23,700 1,262
Honeywell, Inc. 3,500 264
Hubbell, Inc. Class B 300 11
Ingersoll-Rand Co. 81,250 3,814
Johnson Controls, Inc. 21,900 1,292
Knoll, Inc. (a) 21,700 643
Lexmark International Group, Inc.
Class A (a) 14,600 1,467
Litton Industries, Inc. (a) 23,400 1,527
Lockheed Martin Corp. 76,800 6,509
Miller (Herman), Inc. 2,700 72
Molex, Inc. 4,075 155
National Service Industries, Inc. 12,100 460
Northern Telecom, Ltd. 44,600 2,236
</TABLE>
9 Diversified Equity Fund
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
-------- -------
<S> <C> <C>
Northrop Grumman Corp. 18,800 1,375
Parker-Hannifin Corp. 2,800 92
Philips Electronics NV - ADR 29,500 1,997
Pitney Bowes, Inc. 12,100 799
Pulte Corp. 5,600 156
Raytheon Co. Class A 2,111 109
Solectron Corp. (a) 1,800 167
Tektronix, Inc. 10,150 305
Thermo Instrument Systems, Inc. (a) 6,000 90
Thomas & Betts Corp. 14,200 615
U.S. Filter Corp. (a) 95,400 2,182
Uniphase Corp. (a) 1,400 97
United Technologies Corp. 60,300 6,558
Xerox Corp. 116,200 13,713
-------
77,568
-------
Technology - 17.1%
3Com Corp. (a) 111,800 5,010
ADC Telecommunications, Inc. (a) 13,600 469
Adobe Systems, Inc. 11,800 552
Altera Corp. (a) 23,200 1,409
America Online, Inc. 24,300 3,888
Andrew Corp. (a) 800 13
Apple Computer, Inc. (a) 133,700 5,473
Arrow Electronics, Inc. (a) 35,600 950
Ascend Communications, Inc. (a) 34,300 2,255
Autodesk, Inc. 9,700 413
Avnet, Inc. 5,400 327
BMC Software, Inc. (a) 32,300 1,439
Cisco Systems, Inc. (a) 279,425 25,935
Citrix Systems, Inc. (a) 400 39
COMPAQ Computer Corp. 422,800 17,731
Computer Associates
International, Inc. 92,000 3,922
Computer Sciences Corp. 5,400 348
Compuware Corp. (a) 33,300 2,599
Cooper Industries, Inc. 15,100 720
Dell Computer Corp. (a) 268,700 19,666
Electronic Data Systems Corp. 81,638 4,102
EMC Corp. (a) 114,300 9,716
Galileo International, Inc. 3,900 170
General Instrument Corp. (a) 14,600 495
General Motors Corp. Class H (a) 17,100 679
Hewlett-Packard Co. 75,000 5,123
IMS Health, Inc. 58,100 4,383
Informix Corp. (a) 26,200 258
Intel Corp. 217,000 25,716
International Business
Machines Corp. 110,250 20,369
Intuit, Inc. (a) 700 51
Learning Co., Inc. (The) (a) 61,700 1,600
Loral Space
& Communications, Ltd. (a) 14,700 262
LSI Logic Corp. (a) 300 5
Lucent Technologies, Inc. 106,900 11,759
Microchip Technology, Inc. (a) 2,400 89
Micron Technology, Inc. (a) 15,500 784
Microsoft Corp. (a) 187,600 25,993
Motorola, Inc. 8,900 543
National Semiconductor Corp. (a) 12,100 163
NCR Corp. (a) 600 25
Netscape Communications Corp. (a) 29,000 1,747
Network Associates, Inc. (a) 100 7
Novell, Inc. (a) 57,400 1,040
Oracle Systems Corp. (a) 193,000 8,323
Parametric Technology Corp. (a) 14,100 229
Qwest Communications
International, Inc. (a) 35,500 1,773
SCI Systems, Inc. (a) 4,800 277
Seagate Technology (a) 21,500 650
Sterling Software, Inc. (a) 22,600 612
Sun Microsystems, Inc. (a) 69,800 5,972
Synopsys, Inc. (a) 8,400 455
Tech Data Corp. (a) 7,200 289
Texas Instruments, Inc. 79,000 6,759
Textron, Inc. 6,800 516
Unisys Corp. (a) 5,500 189
Vishay Intertechnology, Inc. (a) 13,235 192
Vitesse Semiconductor Corp. (a) 3,300 150
Yahoo!, Inc. (a) 3,000 711
-------
235,334
-------
Utilities - 9.1%
Airtouch Communications, Inc. (a) 188,300 13,581
Allegheny Energy, Inc. 13,900 480
Alltel Corp. 21,900 1,310
Ameren Corp. 23,000 982
American Electric Power Co., Inc. 8,700 409
American Water Works, Inc. 14,400 486
Ameritech Corp. 9,200 583
AT&T Corp. 145,600 10,956
Baltimore Gas & Electric Co. 63,800 1,970
Bell Atlantic Corp. 95,100 5,040
BellSouth Corp. 17,000 848
Carolina Power & Light Co. 9,900 466
Central & Southwest Corp. 67,400 1,849
Century Telephone Enterprises, Inc. 24,250 1,637
Cincinnati Bell, Inc. 11,800 446
Citizens Utilities Co. Class B (a) 3,435 28
Comcast Corp. Class A 4,300 247
Comcast Corp. Special Class A 38,600 2,265
Consolidated Edison, Inc. 52,700 2,787
Diversified Equity Fund 10
</TABLE>
<PAGE>
Diversified Equity Fund
Statement of Net Assets, continued
<TABLE>
<CAPTION>
December 31, 1998
Market
Number Value
of (000)
Shares $
-------- -------
<S> <C> <C>
DTE Energy Co. 61,700 2,645
Energy East Corp. 15,600 881
Entergy Corp. 24,000 747
FirstEnergy Corp. 17,100 557
Florida Progress Corp. 3,800 170
FPL Group, Inc. 25,700 1,584
Frontier Corp. 2,800 95
GPU, Inc. 500 22
GTE Corp. 93,037 6,047
Houston Industries, Inc. 20,700 665
Kansas City Power & Light Co. 25,400 752
KeySpan Energy (a) 10,192 316
MCI WorldCom, Inc. (a) 268,300 19,252
MCN Corp. 11,500 219
Montana Power Co. 23,700 1,341
National Fuel & Gas Co. 2,000 90
New England Electric System 7,700 371
NICOR, Inc. 200 8
Nokia Corp. - ADR 146,000 17,584
OGE Energy Corp. 7,100 206
PacifiCorp 118,000 2,485
Paging Network, Inc. (a) 148,200 685
Peco Energy Co. 43,500 1,811
PG&E Corp. 114,500 3,607
Pinnacle West Capital Corp. 24,800 1,051
Public Service Enterprise Group, Inc. 4,200 168
Questar Corp. 600 12
SBC Communications, Inc. 125,700 6,741
Sprint Corp. 33,900 2,852
Tele-Communications, Inc.
Class A (a) 26,000 1,438
U.S. West, Inc. 1,500 97
Unicom Corp. 57,200 2,206
United States Cellular Corp. (a) 400 15
UtiliCorp United, Inc. 2,600 95
Williams Cos. (The) 44,100 1,375
Wisconsin Energy Corp. 10,900 343
---------
124,903
---------
Total Common Stocks
(cost $938,459) 1,281,193
---------
Preferred Stocks - 0.2%
Elsag Bailey Financing Trust (conv.)(a) 12,600 764
News Corp., Ltd. - ADR 7,600 188
Sealed Air Corp. Series A New (conv.)(a) 29,700 1,541
----------
Total Preferred Stocks
(cost $1,913) 2,493
---------
<CAPTION>
Principal
Amount
(000)
$
----------
<S> <C> <C>
Short-Term Investments - 6.3%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 79,369 79,369
United States Treasury Notes
6.250% due 03/31/99 (c) 6,700 6,726
----------
Total Short-Term Investments
(cost $86,096) 86,095
----------
Total Investments - 99.6%
(identified cost $1,026,468)(d) 1,369,781
Other Assets and Liabilities,
Net - 0.4% 6,242
----------
Net Assets - 100.0% 1,376,023
==========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral 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
The accompanying notes are an integral part of the financial statements.
11 Diversified Equity Fund
<PAGE>
DIVERSIFIED EQUITY FUND
Statement of Net Assets, continued
December 31, 1998
Unrealized
Number Appreciation
of (Depreciation)
Contracts* (000)
------------ ---------------
Future Contracts
(Notes 2 and 3)
S&P 500 Index
expiration date 03/99 268 $ 3,253
--------
Total Unrealized Appreication
(Depreciation) on Open Futures
Contracts Purchased (S) $ 3,253
========
(S) At December 31, 1998, United States Treasury Notes valued at
$6,726 were held as collateral in connection with futures contracts
purchased by the Fund.
* Each contract represents $100,000 notional value.
The accompanying notes are an integral part of the financial statements.
Diversified Equity Fund 12
<PAGE>
DIVERSIFIED EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
Assets
<S> <C>
Investments at market (identified cost $1,026,468)(Note 2) .............................................. $ 1,369,781
Cash .................................................................................................... 1,644
Foreign currency holdings (identified cost $36) ......................................................... 36
Receivables:
Dividends and interest ................................................................................ 1,737
Investments sold ...................................................................................... 8,218
Fund shares sold ...................................................................................... 3,194
Daily variation margin on futures contracts (Notes 2 and 3) ........................................... 228
Short-term investments held as collateral for securities loaned, at market (Note 3) ..................... 23,467
-----------
Total Assets ......................................................................................... 1,408,305
Liabilities
Payables:
Investments purchased .................................................................. $ 3,665
Fund shares redeemed ................................................................... 3,968
Accrued fees to affiliates (Note 4) ................................................... 1,026
Other accrued expenses ................................................................. 156
Payable upon return of securities loaned, at market (Note 3).............................. 23,467
-------------
Total Liabilities ................................................................................... 32,282
-------------
Net Assets .............................................................................................. $ 1,376,023
=============
Net Assets Consist of:
Undistributed net investment income ..................................................................... $ 109
Accumulated net realized gain (loss) ................................................................... 25,608
Unrealized appreciation (depreciation) on:
Investments ........................................................................................... 343,313
Futures contracts ..................................................................................... 3,253
Foreign currency-related transactions ................................................................. 1
Shares of beneficial interest ........................................................................... 268
Additional paid in capital............................................................................... 1,003,471
-------------
Net Assets .............................................................................................. $ 1,376,023
==============
Net Asset Value, offering and redemption price per share:
Class S ($1,367,016,418 divided by 26,601,470 shares of $.01 par value
shares of beneficial interest outstanding) ......................................................... $ 51.39
Class E ($9,006,643 divided by 175,240 shares of $.01 par value ==============
shares of beneficial interest outstanding) ......................................................... $ 51.40
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
DIVERSIFIED EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividends ..................................................................................... $ 15,610
Dividends from Money Market Fund (Note 5) .................................................... 3,085
Interest ...................................................................................... 232
-------------------
Total Investment Income ..................................................................... 18,927
EXPENSES (Notes 1, 2 and 4):
Advisory fees ................................................................... $ 9,524
Administrative fees ............................................................. 56
Custodian fees .................................................................. 548
Distribution fees - Class E ..................................................... 5
Transfer agent fees ............................................................. 795
Professional fees ............................................................... 62
Registration fees - Class S ..................................................... 164
Registration fees - Class E ..................................................... 1
Shareholder servicing fees - Class E ............................................ 12
Trustees' fees .................................................................. 4
Miscellaneous ................................................................... 83
------------------
Total Expenses ................................................................................... 11,254
-------------------
Net investment income ................................................................................ 7,673
-------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ............................................................................. 84,911
Futures contracts ....................................................................... 7,901
Foreign currency-related transactions ................................................... 8 92,820
Net change in unrealized appreciation or depreciation of:
Investments ............................................................................. 171,349
Futures contracts ....................................................................... 3,102
Foreign currency-related transactions ................................................... 1 174,452
-------------------
Net gain (loss) on investments ............................................................................... 267,272
-------------------
Net increase (decrease) in net assets resulting from operations ............................................... $ 274,945
===================
</TABLE>
<PAGE>
DIVERSIFIED EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Amounts in thousands Years Ended December 31, 1998
1998 1997
------------ -----------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ..................................................... $ 7,673 $ 7,062
Net realized gain (loss) ................................................. 92,820 179,083
Net change in unrealized appreciation or depreciation ..................... 174,452 46,630
----------- -----------
Net increase (decrease) in net assets resulting from operations ........ 274,945 232,775
----------- -----------
From Distributions to Shareholders:
Net investment income
Class S ................................................................. (7,563) (7,061)
Class E ................................................................. (9) (1)
In excess of net investment income
Class S ................................................................. -- (22)
Class E ................................................................. -- (1)
Net realized gain on investments
Class S ................................................................. (66,093) (192,410)
Class E ................................................................. (334) (475)
In excess of net realized gain on investments
Class S ................................................................. -- (752)
Class E ................................................................. -- (2)
----------- -----------
Total Distributions to Shareholders .................................... (73,999) (200,724)
----------- -----------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) 129,618 313,717
----------- -----------
Total Net Increase (decrease) in Net Assets ................................ 330,564 345,768
Net Assets
Beginning of period ................................................... 1,045,459 699,691
----------- -----------
End of period (including undistributed net investment income of
$109 at December 31, 1998) ....................................... $ 1,376,023 $ 1,045,459
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 Diversified Equity Fund
<PAGE>
DIVERSIFIED EQUITY FUND
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................. $ 43.64 $ 41.45 $ 38.62 $ 32.26 $ 34.88
---------- ---------- --------- --------- ---------
Income From Investment Operations:
Net investment income (a) ........................... .30 .37 .48 .60 .58
Net realized and unrealized gain (loss) on investments 10.34 12.06 8.15 10.63 (.49)
---------- ---------- --------- --------- ---------
Total Income From Investment Operations ........... 10.64 12.43 8.63 11.23 .09
---------- ---------- --------- --------- ---------
Distributions: (.29) (.37) (.48) (.60) (.58)
Net realized gain on investments ..................... (2.60) (9.83) (5.32) (4.27) (1.87)
In excess of net realized gain on investments ........ -- (.04) -- -- (.26)
---------- ---------- --------- --------- ---------
Total Distributions ................................ (2.89) (10.24) (5.80) (4.87) (2.71)
---------- ---------- --------- --------- ---------
Net Asset Value, End of Period ........................ $ 51.39 $ 43.64 $ 41.45 $ 38.62 $ 32.26
========== ========== ========= ========= =========
Total Return (%) ...................................... 25.11 31.32 23.29 35.17 (.01)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) .......... 1,367,016 1,042,620 699,691 530,645 414,036
Ratios to average net assets (%):
Operating expenses ................................. .91 .92 .94 .95 .95
Net investment income .............................. .62 .80 1.18 1.56 1.73
Portfolio turnover rate (%) .......................... 100.31 114.11 99.90 92.53 57.53
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
<PAGE>
DIVERSIFIED EQUITY FUND
Financial Highlights - Class E
<TABLE>
<CAPTION>
The following table includes selected data for a share outstanding throughout each period and other performance
information derived from the financial statements.
Years Ended December 31,
------------------------
1998 1997*
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period .............................................................. $ 43.64 $ 45.55
-------- --------
Income From Investment Operations:
Net investment income (c) ....................................................................... .10 .06
Net realized and unrealized gain (loss) on investments ........................................... 10.34 7.97
-------- --------
Total Income From Investment Operations ........................................................ 10.44 8.03
-------- --------
Distributions:
Net investment income ............................................................................ (.08) (.06)
In excess of net investment income ............................................................... -- (.01)
Net realized gain on investments ................................................................. (2.60) (9.83)
In excess of net realized gain on investments .................................................... -- (.04)
-------- --------
Total Distributions ............................................................................ (2.68) (9.94)
-------- --------
Net Asset Value, End of Period .................................................................... $ 51.40 $ 43.64
======== =========
Total Return (%)(a) .............................................................................. 24.59 15.99
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ........................................................ 9,007 2,839
Ratios to average net assets (%)(b):
Operating expenses ............................................................................. 1.33 1.63
Net investment income .......................................................................... .21 .10
Portfolio turnover rate (%)(b) .................................................................. 100.31 114.11
</TABLE>
* For the period May 27, 1997 (commencement of sale) to December 31, 1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1997 are annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
<PAGE>
Equity Income Fund
Portfolio Management Discussion
December 31, 1998 (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(R)Equity Income++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,561 $12,519 $12,050
1990 $11,694 $11,507 $11,295
1991 $14,912 $14,338 $14,269
1992 $16,629 $16,318 $15,608
1993 $18,828 $19,276 $17,757
1994 $18,957 $18,892 $17,308
1995 $25,545 $26,138 $22,459
1996 $31,027 $31,794 $26,630
1997 $41,447 $42,979 $33,962
1998 $46,832 $49,697 $37,725
- ----------------------------------------------------------------------------------------------------------------
Total $248,432 $253,458 $219,063
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Equity Income Fund - Class S Russell 1000(R) Value Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
1 Year $11,299 12.99% 1 Year $11,563 15.63%
5 Years $24,873 19.99%(S) 5 Years $25,782 20.86%(S)
10 Years $46,832 16.70%(S) 10 Years $49,697 17.39%(S)
</TABLE>
<TABLE>
<CAPTION>
Equity Income Fund - Class E ++++ Lipper(R) Equity Income Funds Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
1 Year $11,241 12.41% 1 Year $11,108 11.08%
5 Years $24,548 19.68%(S) 5 Years $21,246 16.27%(S)
10 Years $46,219 16.54%(S) 10 Years $37,725 14.20%(S)
</TABLE>
19 Equity Income Fund
<PAGE>
Equity Income Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
Performance Review
For the year ended December 31, 1998, the Equity Income Fund Class S and Class E
shares reflected total returns of 13% and 12.4%, respectively, as compared to
the Russell 1000(R) Value Index, which rose 15.6%. The Fund's underperformance
relative to the Index was primarily due to negative cap effect and poor results
from holdings in the energy sectors. However, the Fund did outperform the
average return of funds in the Lipper(R) Equity Income Funds Benchmark, which
gained 11% for the year.
Portfolio Highlights
The market's strong performance in 1998 was heavily biased towards growth
stocks. As a result, value-oriented stocks finished the year significantly
behind their growth counterparts, with the Russell 1000 Value Index up 15.6%
versus the 38.7% return of the Russell 1000(R) Growth Index. The strong
performance of technology stocks as well as weakness in the energy sectors
proved to be the biggest factors in the margin of underperformance for value
shares. Investor behavior that continued to pay little heed to valuation was
also a trend in favor of growth shares, particularly those with larger
capitalizations.
These factors posed significant challenges to managers in the Equity Income
Fund, given valuation disciplines that favored midcap shares. Valuation
sensitivity had the undesirable effect of limiting the Fund's exposure to
higher-priced sectors. However, portfolio disciplines helped moderate the impact
by maintaining exposure to some higher-priced sectors such as Technology. Cap
effect was also a negative contributor to Fund performance, as large cap stocks
generally carried higher valuations after leading the market over the last few
years.
<TABLE>
<CAPTION>
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1998
<S> <C>
International Business Machines Corp. 4.0%
GTE Corp. 2.7
Exxon Corp. 2.1
SBC Communications, Inc. 1.9
PG&E Corp. 1.7
BankAmerica Corp. 1.7
Ford Motor Co. 1.6
Fleet Financial Group, Inc. 1.5
Washington Mutual, Inc. 1.5
Bank One Corp. 1.5
</TABLE>
<TABLE>
<CAPTION>
Portfolio Characteristics
December 31, 1998
<S> <C>
Current P/E Ratio 19.2x
Portfolio Price/Book Ratio 2.76x
Market Capitalization - $-Weighted Average 38.99 Bil
Number of Holdings 193
</TABLE>
<TABLE>
<CAPTION>
MONEY MANAGERS STYLES
<S> <C>
Equinox Capital Management, Inc. Value
Trinity Investment Management Corp. Value
Westpeak Investment Advisors, L.P. Large Cap-Value
</TABLE>
* The Equity Income Fund - Class S assumes initial investment on January 1,
1989.
** 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.
The Russell 1000 Value Index return reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
++ Lipper(R) Equity Income Funds Benchmark 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 E - For the period, November 4, 1996
(commencement of sales) to May 15, 1998, shareholder service and Rule 12b-1
distribution fees were charged. From May 16, 1998 through December 31,
1998, only shareholder service 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 E to provide historical perspective.
(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.
Equity Income Fund 20
<PAGE>
EQUITY INCOME FUND
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
<S> <C> <C>
COMMON STOCKS - 95.1%
AUTO AND TRANSPORTATION - 6.0%
AMR Corp. (a) 18,900 1,122
Burlington Northern Santa Fe Corp. 5,900 199
CSX Corp. 2,800 116
Dana Corp. 12,100 495
Delta Air Lines, Inc. 36,500 1,898
Ford Motor Co. 66,400 3,897
General Motors Corp. 42,700 3,056
Mascotech, Inc. 13,800 236
Navistar International Corp. (a) 27,000 770
Trinity Industries, Inc. 24,900 959
UAL Corp. (a) 16,200 967
USAirways Group, Inc. (a) 23,800 1,237
------
14,952
------
CONSUMER DISCRETIONARY - 8.3%
Alberto Culver Co. Class B 9,700 259
American Greetings Corp. Class A 24,400 1,002
Browning-Ferris Industries, Inc. 20,700 589
Deluxe Corp. 20,500 750
Dillard's, Inc. Class A 12,600 358
Eastman Kodak Co. 38,693 2,786
Federated Department Stores, Inc. (a) 15,300 667
Fortune Brands, Inc. 11,100 351
Fort James Corp. 20,600 824
Hasbro, Inc. 22,600 816
JC Penney & Co., Inc. 19,400 909
King World Productions, Inc. (a) 16,100 474
Kmart Corp. (a) 91,500 1,401
Knight-Ridder, Inc. 9,700 496
Limited, Inc. (The) 1,200 35
Saks, Inc. (a) 5,500 174
Sears Roebuck & Co. 28,400 1,207
Service Corp. International 18,000 685
Time Warner, Inc. 17,700 1,099
Tribune Co. 16,300 1,076
Tupperware Corp. 17,200 283
V.F. Corp. 7,600 356
Viacom, Inc. Class B (a) 23,700 1,754
Wendy's International, Inc. 37,700 822
Whirlpool Corp. 32,200 1,782
------
20,955
------
CONSUMER STAPLES - 4.3%
Anheuser-Busch Cos., Inc. 23,200 1,523
ConAgra, Inc. 39,800 1,254
Dole Food Co., Inc. 25,400 762
Heinz (H.J.) Co. 14,100 798
Hormel Foods Corp. 15,400 504
Interstate Bakeries Corp. 20,500 542
PepsiCo, Inc. 25,300 1,036
Philip Morris Cos., Inc. 49,500 2,648
Pilgrim's Pride Corp. 10,600 211
SuperValu, Inc. 36,400 1,019
UST Corp. 15,400 537
------
10,834
------
FINANCIAL SERVICES - 26.5%
Aetna, Inc. 20,400 1,604
Allstate Corp. 39,340 1,520
Ambac Financial Group, Inc. 11,800 710
American General Corp. 19,400 1,513
Associates First Capital Corp. Class A 21,330 904
Bank One Corp. 72,100 3,682
BankAmerica Corp. 69,184 4,160
Chase Manhattan Corp. 45,036 3,065
CIGNA Corp. 17,800 1,376
Comerica, Inc. 19,000 1,296
Commerce Bancorp, Inc. 12,700 667
Conseco, Inc. 32,000 978
Countrywide Credit Industries, Inc. 25,800 1,295
Dime Bancorp, Inc. 60,100 1,589
Dow Jones & Co., Inc. 2,100 101
Federal National Mortgage Association 27,900 2,065
First American Corp. 40,500 1,797
First American Financial Corp. 5,600 180
First Data Corp. 14,900 472
First Union Corp. 41,300 2,512
Fleet Financial Group, Inc. 86,500 3,865
Fremont General Corp. 36,400 901
Hartford Financial Services Group, Inc.
(The) 39,600 2,173
Horace Mann Educators Corp. 26,600 758
Household International Corp. 26,200 1,038
KeyCorp 39,300 1,258
Lehman Brothers Holdings, Inc. 1,500 66
Lincoln National Corp. 1,300 106
MBIA, Inc. 33,200 2,177
Morgan Stanley Dean Witter & Co. 42,300 3,003
National Bancorp of Alaska, Inc. 8,200 277
National City Corp. 43,900 3,183
Old Republic International Corp. 73,600 1,656
Park National Corp. 900 93
PMI Group, Inc. (The) 13,700 676
PNC Bank Corp. 16,100 871
Reliance Group Holdings, Inc. 70,100 903
Ryder System, Inc. 35,500 923
Sovereign Bancorp, Inc. 49,700 702
Spieker Properties, Inc. 6,400 222
</TABLE>
21 Equity Income Fund
<PAGE>
EQUITY INCOME FUND
STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
<S> <C> <C>
SunTrust Banks, Inc. 10,000 765
Torchmark Corp. 11,700 413
Transamerica Financial Corp. 7,200 832
Transatlantic Holdings, Inc. 9,900 748
Trustmark Corp. 13,000 291
U.S. Bancorp 35,400 1,257
United Bankshares, Inc. 13,400 356
Washington Mutual, Inc. 100,988 3,856
Wells Fargo Co. (a) 43,100 1,720
-------
66,575
-------
HEALTH CARE - 2.8%
Allergan, Inc. 11,200 725
Baxter International, Inc. 22,700 1,460
Bristol-Myers Squibb Co. 11,750 1,572
Columbia/HCA Healthcare Corp. 82,000 2,030
Integrated Health Services, Inc. (a) 22,400 316
PacifiCare Health Systems, Inc.
Class B (a) 12,500 992
-------
7,095
-------
INTEGRATED OILS - 7.5%
Amerada Hess Corp. 29,900 1,488
Amoco Corp. 5,300 313
Ashland, Inc. 29,800 1,442
Atlantic Richfield Co. 14,600 953
Chevron Corp. 8,600 713
Coastal Corp. 23,900 835
Enron Corp. 14,500 827
Exxon Corp. 71,200 5,207
Kerr-McGee Corp. 30,700 1,174
Mobil Corp. 22,500 1,960
Phillips Petroleum Co. 2,700 115
Texaco, Inc. 32,600 1,724
USX-Marathon Group 70,400 2,120
-------
18,871
-------
MATERIALS AND PROCESSING - 4.9%
Aluminum Co. of America 2,300 171
Eastman Chemical Co. 28,300 1,266
Fluor Corp. 29,700 1,264
FMC Corp. (a) 9,500 532
Freeport-McMoRan Copper & Gold, Inc.
Class B 55,700 581
International Paper Co. 28,800 1,291
Lafarge Corp. 16,200 656
Mead Corp. 41,300 1,211
NL Industries, Inc. 75,100 1,065
Olin Corp. 7,300 207
Praxair, Inc. 9,900 349
Reynolds Metals Co. 24,800 1,307
Rohm & Haas Co. 16,800 506
Timken Co. 29,500 557
USG Corp. 7,900 402
USX-U.S. Steel Group 37,500 863
-------
12,228
-------
MISCELLANEOUS - 0.8%
Equity Residential Properties Trust 10,500 425
Liberty Property Trust 21,400 527
Rouse Co. (The) 43,800 1,205
------
2,157
------
OTHER ENERGY - 2.9%
Calenergy, Inc. (a) 27,200 944
Conoco, Inc. Class A (a) 60,200 1,257
Sempra Energy 23,900 606
Sunoco, Inc. (a) 37,100 1,338
Tidewater, Inc. 24,200 561
Tosco Corp. 68,500 1,772
Transocean Offshore, Inc. 8,700 233
Ultramar Diamond Shamrock Corp. 10,300 250
USEC, Inc. 19,700 273
------
7,234
------
PRODUCER DURABLES - 5.7%
Caterpillar, Inc. 4,500 207
Cordant Technologies, Inc. 19,400 728
D.R. Horton, Inc. 4,200 97
EG&G, Inc. 44,900 1,249
Foster Wheeler Corp. 23,500 310
Honeywell, Inc. 9,400 708
Ingersoll-Rand Co. 22,700 1,065
JLG Industries, Inc. 7,000 109
Johnson Controls, Inc. 27,700 1,634
Lexmark International Group, Inc. Class
A (a) 7,800 784
Lockheed Martin Corp. 18,000 1,526
NACCO Industries, Inc. Class A 6,100 561
Northrop Grumman Corp. 9,700 709
Philips Electronics NV 7,400 501
Sundstrand Corp. 22,300 1,157
Thomas & Betts Corp. 16,400 710
Xerox Corp. 20,100 2,372
------
14,427
------
TECHNOLOGY - 6.0%
Advanced Micro Devices, Inc. (a) 8,000 232
COMPAQ Computer Corp. 24,000 1,007
Electronic Data Systems Corp. 42,362 2,129
</TABLE>
Equity Income Fund 22
<PAGE>
EQUITY INCOME FUND
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
<S> <C> <C>
International Business Machines Corp. 53,700 9,921
Unisys Corp. (a) 48,500 1,669
-------
14,958
-------
UTILITIES - 19.4%
AT&T Corp. 39,400 2,965
Baltimore Gas & Electric Co. 30,400 939
BCE, Inc. 28,200 1,070
Bell Atlantic Corp. 42,372 2,246
BellSouth Corp. 50,200 2,504
Century Telephone Enterprises, Inc. 16,700 1,127
Columbia Energy Group 14,100 814
Consolidated Edison, Inc. 22,700 1,200
DTE Energy Co. 68,300 2,928
FirstEnergy Corp. 6,500 212
FPL Group, Inc. 13,300 820
GTE Corp. 102,572 6,667
Kansas City Power & Light Co. 20,500 607
LG&E Energy Corp. 39,300 1,113
MCI WorldCom, Inc. (a) 42,400 3,042
Minnesota Power & Light Co. 14,300 629
Niagara Mohawk Power Corp. (a) 47,100 759
PacifiCorp 61,200 1,289
Peco Energy Co. 22,600 941
PG&E Corp. 133,400 4,202
QUALCOMM, Inc. (a) 5,000 258
Questar Corp. 16,800 326
SBC Communications, Inc. 86,700 4,649
Sprint Corp. 34,500 2,902
U.S. West, Inc. 24,600 1,590
Unicom Corp. 54,700 2,109
Western Resources, Inc. 26,500 880
-------
48,788
-------
TOTAL COMMON STOCKS
(cost $203,749) 239,074
--------
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
SHORT-TERM INVESTMENTS - 4.7%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 10,100 10,100
United States Treasury Notes
6.250% due 03/31/99(c) 1,650 1,657
-------
TOTAL SHORT-TERM INVESTMENTS
(cost $11,757) 11,757
-------
TOTAL INVESTMENTS - 99.8%
(identified cost $215,506)(d) 250,831
-------
OTHER ASSETS AND LIABILITIES,
NET - 0.2% 405
--------
NET ASSETS - 100.0% 251,236
========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral 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.
23 Equity Income Fund
<PAGE>
EQUITY INCOME FUND
STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- ----------------
<S> <C> <C>
FUTURE CONTRACTS
(Notes 2 and 3)
S&P Barra Value Index
expiration date 03/99 37 $ 253
Sap 500 Index
expiration date 03/99 22 37
------
Total Unrealized
Appreciation (Depreciation)
on Open Futures
Contracts Purchased(S) $ 290
======
</TABLE>
(S) At December 31, 1998, United States Treasury Notes valued at $1,657 were
held as collateral in connection with futures contracts purchased by the
Fund.
The accompanying notes are an integral part of the financial statements.
Equity Income Fund 24
<PAGE>
Equity Income Fund
Statement of Assets and Liabilities
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments at market (identified cost $215,506)(Note 2)............. $250,831
Receivables:
Dividends and interest ............................................ 551
Fund shares sold................................................... 891
Daily variation margin on futures contracts (Notes 2 and 3)........ 33
Short-term investments held as collateral for securities
loaned, at market (Note 3)......................................... 813
--------
Total Assets .................................................... 253,119
Liabilities
Payables:
Fund shares redeemed ............................ $ 803
Accrued fees to affiliates (Note 4).............. 208
Other accrued expenses .......................... 59
Payable upon return of securities loaned, at
market (Note 3)................................... 813
-------
Total Liabilities ............................................... 1,883
--------
Net Assets ......................................................... $251,236
========
Net Assets Consist of:
Undistributed net investment income ................................ $ 37
Accumulated net realized gain (loss)................................ 6,282
Unrealized appreciation (depreciation) on:
Investments ...................................................... 35,325
Futures contracts ................................................ 290
Shares of beneficial interest ...................................... 61
Additional paid-in capital ......................................... 209,241
--------
Net Assets ......................................................... $251,236
========
Net Asset Value, offering and redemption price per share:
Class S ($250,491,233 divided by 6,070,608 shares of $.01 par value
shares of beneficial interest outstanding)....................... $ 41.26
========
Class E ($744,528 divided by 17,961 shares of $.01 par value
shares of beneficial interest outstanding)....................... $ 41.45
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
25 Equity Income Fund
<PAGE>
Equity Income Fund
Statement of Operations
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
Investment Income:
<S> <C>
Dividends ......................................................... $5,190
Dividends from Money Market Fund (Note 5).......................... 682
Interest .......................................................... 58
------
Total Investment Income ........................................ 5,930
Expenses (Notes 1, 2 and 4):
Advisory fees ......................................... $ 2,029
Administrative fees ................................... 11
Custodian fees ........................................ 164
Distribution fees - Class E ........................... 1
Transfer agent fees ................................... 273
Professional fees ..................................... 26
Registration fees - Class S ........................... 48
Shareholder servicing fees - Class E .................. 1
Trustees' fees ........................................ 4
Miscellaneous ......................................... 38
----------
Total Expenses ................................................... 2,595
-----
Net investment income ................................................ 3,335
-----
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ............................................ 23,796
Futures contracts ...................................... 3,210 27,006
------
Net change in unrealized appreciation or depreciation of:
Investments ........................................... (756)
Futures contracts ..................................... 218 (538)
------ --------
Net gain (loss) on investments .......................... 26,468
--------
Net increase (decrease) in net assets resulting from
operations ............................................ $ 29,803
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity Income Fund 26
<PAGE>
Equity Income Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Amounts in thousands YEARS ENDED DECEMBER 31,
1998 1997
----------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ............................. $ 3,335 $ 3,241
Net realized gain (loss) .......................... 27,006 50,220
Net change in unrealized appreciation or
depreciation ..................................... (538) 8,353
-------- --------
Net increase (decrease) in net assets
resulting from operations ...................... 29,803 61,814
-------- --------
From Distributions to Shareholders:
Net investment income
Class S ......................................... (3,291) (3,241)
Class E ......................................... (7) --
In excess of net investment income
Class S ......................................... -- (46)
Net realized gain on investments
Class S ......................................... (25,440) (52,197)
Class E ......................................... (56) (78)
------- --------
Total Distributions to Shareholders ........... (28,794) (55,562)
------- --------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ...................... 22,937 25,784
-------- --------
Total Net Increase (Decrease) in Net Assets ........ 23,946 32,036
Net Assets
Beginning of period ............................... 227,290 195,254
-------- -------
End of period (including undistributed net
investment income of $37 at December 31, 1998)... $ 251,236 $ 227,290
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
27 Equity Income Fund
<PAGE>
Equity Income Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .......... $41.08 $40.22 $38.43 $32.21 $35.90
------ ------ ------ ------ ------
Income From Investment Operations:
Net investment income (a)..................... .55 .69 .82 .94 .90
Net realized and unrealized gain (loss) on
investments .................................. 4.49 12.11 7.03 10.08 (.70)
------ ------ ------ ------ ------
Total Income From Investment Operations .... 5.04 12.80 7.85 11.02 .20
------ ------ ------ ------ ------
Distributions:
Net investment income ........................ (.53) (.69) (.82) (.97) (.89)
In excess of net investment income ........... -- (.01) (.01) -- --
Net realized gain on investments ............. (4.33) (11.24) (5.23) (3.83) (3.00)
------ ------ ------ ------ ------
Total Distributions ........................ (4.86) (11.94) (6.06) (4.80) (3.89)
------ ------ ------ ------ ------
Net Asset Value, End of Period ................ $41.26 $41.08 $40.22 $38.43 $32.21
====== ====== ====== ====== ======
Total Return (%)............................... 12.99 33.59 21.45 34.76 .69
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)...... 250,491 226,952 195,132 180,116 144,285
Ratios to average net assets (%):
Operating expenses ......................... 1.01 1.04 1.07 1.06 1.04
Net investment income ...................... 1.30 1.51 2.03 2.51 2.56
Portfolio turnover rate (%)................... 149.63 139.33 106.40 92.40 89.91
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Equity Income Fund 28
<PAGE>
Equity Income Fund
Financial Highlights - Class E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996*
------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $ 41.43 $ 40.22 $ 41.86
------- ------- -------
Income From Investment Operations:
Net investment income (c) .................. .37 .32 .10
Net realized and unrealized gain (loss) on
investments ................................ 4.49 12.20 2.39
------- ------- -------
Total Income From Investment Operations ... 4.86 12.52 2.49
------- ------- -------
Distributions:
Net investment income ....................... (.51) (.07) (.18)
Net realized gain on investments ............ (4.33) (11.24) (3.95)
------- ------- -------
Total Distributions ....................... (4.84) (11.31) (4.13)
------- ------- -------
Net Asset Value, End of Period ............... $ 41.45 $ 41.43 $ 40.22
======= ======= =======
Total Return (%)(a)........................... 12.41 32.68 6.23
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)..... 745 338 122
Ratios to average net assets (%)(b):
Operating expenses ........................ 1.42 1.74 1.77
Net investment income ..................... .90 .77 1.50
Portfolio turnover rate (%)(b)............... 149.63 139.33 106.40
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
29 Equity Income Fund
<PAGE>
QUANTITATIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (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 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 the
Russell 1000(R) Index. The Fund employed the investment management services of
three managers using three distinctive quantitative approaches to investment.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Quantitative Equity - Class S Russell 1000(R)** Lipper(R)Growth & Income++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,608 $13,042 $12,243
1990 $11,902 $12,499 $11,694
1991 $15,675 $16,627 $15,063
1992 $17,034 $18,130 $16,310
1993 $19,174 $19,970 $18,140
1994 $19,209 $20,046 $17,953
1995 $26,451 $27,617 $23,448
1996 $32,556 $33,817 $28,311
1997 $43,201 $44,927 $35,979
1998 $53,920 $57,067 $41,494
- ---------------------------------------------------------------------------------------------------------------------------------
Total $261,730 $273,742 $230,635
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY FUND - CLASS S RUSSELL 1000(R) INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------- ----------------- ----------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
1 Year $12,482 24.82% 1 Year $12,702 27.02%
5 Years $28,122 22.97%(S) 5 Years $28,576 23.37%(S)
10 Years $53,920 18.35%(S) 10 Years $57,067 19.03%(S)
<CAPTION>
QUANTITATIVE EQUITY FUND - CLASS E ++++ LIPPER(R) GROWTH & INCOME FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------- ----------------- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1 Year $12,434 24.34% 1 Year $11,533 15.33%
5 Years $27,773 22.66%(S) 5 Years $22,875 18.00%(S)
10 Years $53,251 18.20%(S) 10 Years $41,494 15.29%(S)
</TABLE>
31 Quantitative Equity Fund
<PAGE>
QUANTITATIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Quantitative Equity Fund Class S and
Class E shares reflected total returns of 24.8% and 24.3%, respectively, as
compared to the Russell 1000(R) Index, which rose 27%. The Fund was unable to
keep pace with the Index due to the negative impact of the managers' valuation
sensitivity. However, it still finished the year well ahead of the average of
funds in the Lipper(R) Growth & Income Funds Benchmark, which gained only 15.3%
for the year.
PORTFOLIO HIGHLIGHTS
For the fourth consecutive year, the stock market favored large capitalization
stocks over midcap and small cap alternatives. This made it very difficult for
most growth and income funds to keep pace with the market indexes, which were
increasingly dominated by large cap issues. The Quantitative Equity Fund's
economic sector and cap size-neutral strategy helped maintain its exposure to
many of these stocks, particularly higher-priced issues within the Technology
sector, which led the market's gain.
The Fund's managers were very effective in their security selection decisions
during the year, although their valuation disciplines generally limited exposure
to many of the largest cap issues. The resulting underweighting of these
stocks, and the cumulative effect of being modestly underweighted in the growth
sectors in favor of more attractively-priced cyclical stocks, were critical
factors in the Fund's performance relative to the Russell 1000(R) Index.
<TABLE>
<CAPTION>
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
<S> <C>
Intel Corp. 2.4%
AT&T Corp. 2.4
BankAmerica Corp. 2.1
Merck & Co., Inc. 2.0
MCI WorldCom, Inc. 2.0
Bristol-Myers Squibb Co. 1.9
Cisco Systems, Inc. 1.6
Citigroup, Inc. 1.6
American International Group, Inc. 1.6
Microsoft Corp. 1.6
<CAPTION>
PORTFOLIO CHARACTERISTICS
December 31, 1998
<S> <C>
Current P/E Ratio 28.0x
Portfolio Price/Book Ratio 4.33x
Market Capitalization - $-Weighted Average 68.45 Bil
Number of Holdings 508
<CAPTION>
MONEY MANAGERS STYLES
<S> <C>
Barclays Global Investors, N.A. Market-Oriented
Franklin Portfolio Associates, LLC Market-Oriented
J.P. Morgan Investment Management, Inc. Market-Oriented
</TABLE>
* Quantitative Equity Fund - Class S assumes initial investment on January 1,
1989.
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $158.3 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select. The Russell 1000 Index return reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates.
++ Lipper(R) Growth & Income Funds Benchmark 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.
++++ Quantitative Equity Fund - Class E - For the period, November 4, 1996
(commencement of sales) to May 15, 1998, shareholder service and Rule 12b-1
distribution fees were charged. From May 16, 1998 through December 31,
1998, only shareholder service 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 E to provide historical perspective.
(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.
Quantitative Equity Fund 32
<PAGE>
Quantitative Equity Fund
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
OF (000)
Shares $
------------ -----------
Common Stocks - 97.3%
Auto and Transportation - 3.1%
<S> <C> <C>
AMR Corp. (a) 95,400 5,663
Burlington Northern, Inc. 13,500 456
CNF Transportation, Inc. 4,900 184
Consolidated Freightways Corp. (a) 1,300 21
Cooper Tire & Rubber Co. 9,000 184
CSX Corp. 21,900 909
Dana Corp. 72,400 2,959
Delta Air Lines, Inc. 10,800 562
Eaton Corp. 11,700 827
FDX Corp. (a) 4,800 427
Ford Motor Co. 134,600 7,899
General Motors Corp. 88,900 6,362
Genuine Parts Co. 11,800 395
Goodyear Tire & Rubber Co. 30,600 1,543
Hertz Corp. Class A 15,600 712
Hunt (JB) Transportation
Services, Inc. 6,500 149
Kansas City Southern Industries, Inc. 114,000 5,607
Lear Corp. (a) 14,900 574
Meritor Automotive, Inc. 46,100 977
Modine Manufacturing Co. 10,900 394
Navistar International Corp. (a) 88,100 2,511
Norfolk Southern Corp. 17,900 567
PACCAR, Inc. 2,900 119
Trinity Industries, Inc. 14,300 551
Union Pacific Corp. 25,500 1,149
Wisconsin Central
Transportation Corp. (a) 2,900 49
-----------
41,750
-----------
Consumer Discretionary - 12.3%
AC Nielsen Corp. (a) 28,600 808
AnnTaylor Stores Corp. (a) 23,100 911
AutoZone Inc. (a) 28,100 926
Best Buy Co. (a) 16,400 1,007
BHC Communications, Inc. Class A 1,000 122
BJ's Wholesale Club, Inc. (a) 4,100 190
Black & Decker Corp. 6,900 387
Browning-Ferris Industries, Inc. 30,700 873
Buffets, Inc. (a) 1,500 18
Callaway Golf Co. 4,800 49
Cendant Corp. (a) 356,800 6,802
Circuit City Stores, Inc. 18,200 909
Circus Circus Enterprises, Inc. (a) 15,300 175
Corporate Express, Inc. (a) 15,700 80
Costco Cos, Inc. (a) 21,100 1,523
Darden Restaurants, Inc. 42,300 761
Dayton Hudson Corp. 359,900 19,524
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER VALUE
OF (000)
SHARES $
------------ -----------
<S> <C> <C>
Deluxe Corp. 15,700 574
Department 56, Inc. (a) 14,700 552
Dillard's, Inc. Class A 19,900 565
Disney (Walt) Co. 394,000 11,819
Donnelley (R.R.) & Sons Co. 71,000 3,111
Eastman Kodak Co. 48,500 3,492
Enesco Group, Inc. 3,300 77
Extended Stay America, Inc. (a) 11,100 117
Federated Department Stores, Inc. (a) 39,500 1,721
Fortune Brands, Inc. 7,600 240
Fruit of the Loom, Inc. Class A (a) 158,100 2,184
Furniture Brands International, Inc. (a) 8,700 237
Gannett Co., Inc. 77,100 4,973
Gap, Inc. 17,100 962
General Nutrition Companies, Inc. (a) 28,500 461
Grand Casinos, Inc. (a) 6,500 52
Hasbro, Inc. 31,000 1,120
Hilton Hotels Corp. 38,700 740
Home Depot, Inc. (The) 245,900 15,045
Huffy Corp. 1,500 25
International Game Technology 29,200 710
JC Penney & Co., Inc. 22,600 1,059
Kmart Corp. (a) 323,600 4,955
Knight-Ridder, Inc. 16,800 859
La-Z-Boy Inc. 18,400 328
Leggett & Platt, Inc. 37,800 832
Lowe's Cos., Inc. 1,200 61
Mattel, Inc. 61,000 1,392
McDonald's Corp. 2,400 184
MediaOne Group, Inc. (a) 114,800 5,396
MGM Grand, Inc. (a) 8,500 231
Micro Warehouse, Inc. (a) 8,800 297
Mirage Resorts, Inc. (a) 46,300 692
New York Times Co. Class A 31,100 1,079
Nine West Group, Inc. (a) 2,900 45
Oakley, Inc. (a) 18,600 176
Ogden Corp. 59,900 1,501
Payless ShoeSource, Inc. (a) 28,400 1,345
Premark International, Inc. 21,600 748
QUALCOMM, Inc. (a) 41,200 2,130
Reebok International, Ltd. (a) 10,800 161
Rubbermaid, Inc. 105,300 3,310
Sears Roebuck & Co. 73,100 3,107
Service Corp. International 65,200 2,482
Shaw Industries, Inc. 38,800 941
Snyder Communications, Inc. (a) 19,500 658
Sunglass Hut International, Inc. (a) 51,800 359
Tele-Communictions, Inc.
Liberty Media Group Series A (a) 14,300 659
Time Warner, Inc. 107,100 6,647
Times Mirror Co. Series A 1,100 62
</TABLE>
33 Quantitative Equity Fund
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
<TABLE>
<CAPTION>
December 31, 1998
Market
Number Value
of (000)
Shares $
------------ -----------
<S> <C> <C>
TJX Cos., Inc. 90,800 2,633
Toys "R" Us, Inc. (a) 89,200 1,505
Tribune Co. 27,000 1,782
Tricon Global Restaurants, Inc. (a) 159,100 7,974
True North Communications, Inc. 5,500 148
Tupperware Corp. 28,400 467
Viacom, Inc. Class B (a) 66,600 4,928
Viad Corp. 98,200 2,983
Wal-Mart Stores, Inc. 157,800 12,850
Washington Post Co. Class B 600 347
Whirlpool Corp. 42,300 2,342
-----------
163,497
-----------
Consumer Staples - 7.2%
Albertson's, Inc. 75,000 4,777
American Stores Co. 44,800 1,655
Block Drug Co., Inc. Class A 4,866 210
Campbell Soup Co. 38,600 2,123
Coca-Cola Co. (The) 77,800 5,203
Dean Foods Co. 1,500 61
Fleming Cos., Inc. 14,100 146
General Mills, Inc. 14,900 1,158
Gillette Co. 7,400 358
Hannaford Brothers Co. 7,600 403
Hershey Foods Corp. 11,500 715
IBP, Inc. 226,500 6,597
Interstate Bakeries Corp. 15,600 412
Kroger Co. (a) 35,400 2,142
Nabisco Holdings Corp. Class A 4,000 166
PepsiCo, Inc. 211,600 8,662
Philip Morris Cos., Inc. 231,800 12,401
Procter & Gamble Co. 140,200 12,803
Quaker Oats Co. 71,100 4,230
Ralston-Purina Group 28,900 936
Rite Aid Corp. 1,000 50
Safeway, Inc. (a) 205,970 12,551
Sara Lee Corp. 8,600 242
Seagram Co., Ltd. 91,900 3,492
SuperValu, Inc. 12,000 336
Tyson Foods, Inc. Class A 30,700 652
Unilever NV 134,400 11,147
Universal Corp. 40,000 1,405
Walgreen Co. 3,000 176
----------
95,209
----------
Financial Services - 16.2%
Allstate Corp. 149,458 5,773
Ambac Financial Group, Inc. 25,000 1,505
American Express Co. 34,500 3,528
American General Corp. 21,700 1,693
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER VALUE
OF (000)
SHARES $
------------ -----------
<S> <C> <C>
American International Group, Inc. 219,300 21,190
American National Insurance Co. 500 41
AmSouth Bancorp 41,050 1,873
AON Corp. 8,800 487
Arden Realty Group, Inc. 900 21
Associated Banc-Corp. 5,000 171
Associates First Capital Corp. Class A 72,928 3,090
Astoria Financial Corp. 6,300 288
Bank One Corp. 20,658 1,055
BankAmerica Corp. 469,592 28,233
BankBoston Corp. 10,700 417
Bankers Trust New York Corp. 11,300 965
Bear Stearns Cos., Inc. 35,326 1,320
Block (H&R) Co., Inc. 14,400 648
Capital One Financial Corp. 8,100 932
CarrAmerica Realty Corp. 22,800 547
CCB Financial Corp. 2,200 125
Centura Banks, Inc. 2,600 193
Charter One Financial, Inc. 12,700 352
Chase Manhattan Corp. 17,900 1,218
Chubb Corp. (The) 15,300 993
CIGNA Corp. 35,600 2,752
CIT Group, Inc. (The) 6,000 191
Citigroup, Inc. 429,257 21,247
City National Corp. 21,500 895
Colonial BancGroup, Inc. 6,000 72
Comerica, Inc. 72,450 4,940
Compass Bancshares, Inc. 5,400 205
Conseco, Inc. 86,400 2,641
Crestar Financial Corp. 14,100 1,015
Dime Bancorp, Inc. 8,700 230
DST Systems, Inc. (a) 4,200 240
Dun & Bradstreet Corp. 7,500 237
Equifax, Inc. 35,900 1,227
Equitable Companies, Inc. 13,400 776
Federal Home Loan Mortgage Corp. 157,700 10,162
Federal National Mortgage Association 80,200 5,935
Financial Security Assurance Holdings,
Ltd. 600 33
FINOVA Group, Inc. 4,200 227
First American Corp. 17,100 759
First Data Corp. 58,900 1,866
First Security Corp. 52,200 1,217
First Union Corp. 114,100 6,939
FirstMerit Corp. 100 3
Fleet Financial Group, Inc. 36,080 1,612
Fremont General Corp. 10,000 248
GATX Corp. 18,900 716
Golden West Financial Corp. 16,300 1,495
Greenpoint Financial Corp. 7,500 263
</TABLE>
Quantitative Equity Fund 34
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
<TABLE>
<CAPTION>
December 31, 1998
Market
Number Value
OF (000)
Shares $
------------ ------------
<S> <C> <C>
Hibernia Corp. 64,000 1,112
Household International Corp. 30,600 1,213
Huntington Bancshares, Inc. 2,500 75
Kansas City Life Insurance Co. 1,300 106
KeyCorp 33,900 1,085
Lehman Brothers Holdings, Inc. 8,500 375
Liberty Property Trust 42,700 1,051
Lincoln National Corp. 7,900 646
Marsh & McLennan Cos., Inc. 165,250 9,656
Marshall & Ilsley Corp. 8,000 462
MBIA, Inc. 12,300 806
Mellon Bank Corp. 9,500 653
Mercantile Bancorp, Inc. 11,900 549
Mercantile Bankshares Corp. 3,300 127
Mercury General Corp. 7,900 346
Metris Companies, Inc. 10,059 502
Morgan (J.P.) & Co., Inc. 9,400 988
Morgan Stanley Dean Witter & Co. 149,950 10,645
National City Corp. 33,260 2,411
National Commerce Bancorp 6,700 124
North Fork Bancorporation, Inc. 6,050 145
Ocwen Financial Corp. (a) 4,000 49
Ohio Casualty Corp. 1,100 45
Old Republic International Corp. 22,350 503
Pacific Century Financial Corp. 6,800 166
Paychex, Inc. 1,000 51
Peoples Heritage Financial Group 6,900 138
PMI Group, Inc. (The) 25,700 1,269
PNC Bank Corp. 36,105 1,954
Popular, Inc. 29,100 982
Provident Financial Group, Inc. 3,400 127
Providian Financial Corp. 28,500 2,138
Public Storage, Inc. 15,000 406
Republic of New York Corp. 29,600 1,349
Ryder System, Inc. 6,800 177
SAFECO Corp. 15,500 666
SLM Holding Corp. 3,000 144
SouthTrust Corp. 75,750 2,793
Sovereign Bancorp, Inc. 13,100 185
Spieker Properties, Inc. 2,300 80
St. Paul Cos., Inc. 33,700 1,171
Summit Bancorp 12,400 542
SunTrust Banks, Inc. 101,500 7,764
TCF Financial Corp. 6,600 160
Torchmark Corp. 11,800 417
Transamerica Financial Corp. 3,500 404
Travelers Property Casualty Corp.
Class A 89,400 2,771
U.S. Bancorp 21,200 753
Union Planters Corp. 10,000 453
UNUM Corp. 18,900 1,103
Waddell & Reed Financial, Inc.
Class A 1,100 26
Class B (a) 4,800 112
Washington Federal, Inc. 4,300 115
Washington Mutual, Inc. 93,300 3,563
Wells Fargo Co. (a) 86,300 3,447
-----------
213,901
-----------
HEALTH CARE - 12.3%
Abbott Laboratories 89,700 4,395
Aetna, Inc. 9,200 723
Allergan, Inc. 59,900 3,879
ALZA Corp. (a) 47,500 2,482
American Home Products Corp. 245,700 13,836
Amgen, Inc. (a) 22,600 2,362
Bausch & Lomb, Inc. 11,000 660
Bergen Brunswig Corp. Class A 41,000 1,430
Beverly Enterprises, Inc. New (a) 20,600 139
Biogen, Inc. (a) 20,100 1,666
Bristol-Myers Squibb Co. 184,500 24,687
Cardinal Health, Inc. 71,925 5,457
Chiron Corp. (a) 14,100 368
Columbia/HCA Healthcare Corp. 59,300 1,468
Forest Labs, Inc. (a) 75,800 4,032
Genzyme Corp. (a) 62,400 3,101
Genzyme Molecular Oncology (a) 6,742 21
HBO & Co. 110,400 3,167
HCR Manor Care, Inc. (a) 15,200 447
HEALTHSOUTH Corp. (a) 109,000 1,683
Humana, Inc. (a) 59,000 1,051
Immune Response Corp. (a) 800 9
Immunex Corp. (a) 16,900 2,117
Integrated Health Services, Inc. (a) 22,700 321
IVAX Corp. (a) 29,500 367
Johnson & Johnson 203,400 17,060
Lilly (Eli) & Co. 10,400 924
Mallinckrodt, Inc. 80,300 2,474
McKesson Corp. 51,300 4,056
MedImmune, Inc. (a) 15,000 1,491
Merck & Co., Inc. 179,470 26,504
Mylan Laboratories, Inc. 139,000 4,379
Omnicare, Inc. 26,500 921
PacifiCare Health Systems, Inc.
Class B (a) 49,400 3,924
Pfizer, Inc. 1,000 125
Pharmacia & Upjohn, Inc. 33,100 1,874
Schering-Plough Corp. 169,800 9,381
Tenet Healthcare Corp. (a) 48,100 1,263
United Healthcare Corp. 63,500 2,734
Warner-Lambert Co. 37,700 2,835
</TABLE>
35 Quantitative Equity Fund
<PAGE>
QUANTITATIVE EQUITY FUND
Statement of Net Assets, continued
<TABLE>
<CAPTION>
December 31, 1998
Market
Number Value
of (000)
Shares $
--------- --------
<S> <C> <C>
Wellpoint Health Networks, Inc.
Class A (a) 38,500 3,350
-----------
163,163
-----------
INTEGRATED OILS - 4.7%
Ashland, Inc. 34,400 1,664
Atlantic Richfield Co. 22,700 1,481
Coastal Corp. 108,900 3,805
Enron Corp. 134,300 7,663
Exxon Corp. 243,744 17,825
Lyondell Petrochemical Co. 7,400 133
Mobil Corp. 128,700 11,213
Pennzoil-Quaker State Co. (a) 17,700 262
Phillips Petroleum Co. 34,000 1,449
Royal Dutch Petroleum Co. 250,200 11,979
Tenneco, Inc. 105,900 3,607
Tesoro Petroleum Corp. (a) 30,500 370
Unocal Corp. 22,900 668
-----------
62,119
-----------
MATERIALS AND PROCESSING - 5.5%
Alcan Aluminum, Ltd. 36,300 982
Allegheny Teldyne, Inc. 31,500 644
Aluminum Co. of America 7,800 582
Boise Cascade Corp. 3,300 102
Bowater, Inc. 6,300 261
Consolidated Papers, Inc. 10,000 275
Crompton & Knowles Corp. 6,000 124
Cytec Industries, Inc. (a) 3,000 64
Dow Chemical Co. 104,800 9,529
du Pont (E.I.) de Nemours & Co. 49,200 2,611
Engelhard Corp. 117,800 2,297
Fluor Corp. 62,100 2,643
FMC Corp. (a) 4,300 241
Fort James Corp. 41,400 1,656
Georgia Gulf Corp. 1,800 29
Georgia-Pacific Group 13,600 796
Goodrich (B.F.) Co. 6,500 233
Harsco Corp. 15,800 481
Homestake Mining Co. 38,300 352
Illinois Tool Works, Inc. 5,000 290
IMC Global, Inc. 13,600 291
Johns Manville Corp. 46,900 771
Kimberly-Clark Corp. 173,000 9,429
Lafarge Corp. 12,700 514
Louisiana Pacific Corp. 13,500 247
Masco Corp. 12,700 365
Monsanto Co. 170,900 8,118
Owens-Corning Fiberglas Corp. 13,900 493
Pentair, Inc. 11,600 462
Pioneer Hi-Bred International, Inc. 7,300 197
Praxair, Inc. 22,900 807
Reynolds Metals Co. 12,500 659
Rohm & Haas Co. 54,300 1,636
Schulman (A.), Inc. 2,800 63
Sealed Air Corp. New (a) 57,700 2,946
Sherwin-Williams Co. 18,300 538
Sigma Aldrich Corp. 25,200 737
Smurfit-Stone Container Corp. (a) 43,065 678
Solutia, Inc. 52,900 1,184
Temple-Inland, Inc. 8,500 504
Tyco International, Ltd. 112,100 8,457
UCAR International, Inc. (a) 3,900 69
Unifi, Inc. 10,600 207
Union Camp Corp. 8,900 601
Union Carbide Corp. 12,600 536
USEC, Inc. 9,900 137
USG Corp. 104,000 5,298
Waters Corp. (a) 13,700 1,195
Worthington Industries, Inc. 79,700 996
-----------
72,327
-----------
MISCELLANEOUS - 0.2%
Avalonbay Communities, Inc. 2,800 96
Crestline Capital Corp. (a) 13,160 192
Host Marriott Corp. (a) 131,600 1,818
-----------
2,106
-----------
OTHER ENERGY - 0.4%
Apache Corp. 6,900 175
Baker Hughes, Inc. 16,200 287
BEC Energy 8,800 362
Diamond Offshore Drilling, Inc. 7,500 178
El Paso Energy Corp. 33,100 1,152
ENSCO International, Inc. 22,900 245
Global Marine, Inc. (a) 18,700 172
Input/Output, Inc. (a) 2,800 20
ONEOK, Inc. 3,700 134
PennzEnergy Co. (a) 17,700 289
R&B Falcon Corp. (a) 23,000 175
Sempra Energy 19,700 500
Sunoco, Inc. (a) 600 22
Tidewater, Inc. 13,000 301
Tosco Corp. 46,800 1,210
Union Pacific Resources Group, Inc. 11,700 106
Valero Energy Corp. 7,000 149
-----------
5,477
-----------
</TABLE>
36 Quantitative Equity Fund
<PAGE>
QUANTITATIVE EQUITY FUND
Statement of Net Assets, continued
<TABLE>
<CAPTION>
December 31, 1998
Market
Number Value
oF (000)
Shares $
-------- --------
<S> <C> <C>
PRODUCER DURABLES - 7.1%
Allied Waste Industries, Inc. (a) 25,000 591
AlliedSignal, Inc. 97,400 4,316
Boeing Co. 28,000 914
Boston Scientific Corp. (a) 35,400 949
Briggs & Stratton Corp. 9,900 494
Case Corp. 2,700 59
Caterpillar, Inc. 135,100 6,214
Coltec Industries, Inc. (a) 13,400 261
Cordant Technologies, Inc. 1,800 68
Deere & Co. 34,800 1,153
EG&G, Inc. 27,300 759
Emerson Electric Co. 8,100 490
Foster Wheeler Corp. 4,900 65
General Electric Co. 172,400 17,595
Grainger (W.W.), Inc. 26,300 1,095
Gulfstream Aerospace Corp. (a) 27,000 1,438
Honeywell, Inc. 12,900 972
Ingersoll-Rand Co. 145,950 6,851
ITT Industries, Inc. 20,400 811
Johnson Controls, Inc. 33,400 1,971
Lexmark International Group, Inc. Class
A (a) 89,400 8,984
Lockheed Martin Corp. 40,600 3,441
Milacron, Inc. 3,600 69
Miller (Herman), Inc. 12,900 345
Mine Safety Appliances Co. 600 40
Northern Telecom, Ltd. 85,000 4,261
Parker-Hannifin Corp. 26,300 861
Perkin-Elmer Corp. 6,300 615
Pitney Bowes, Inc. 104,800 6,923
Raytheon Co. Class A 12,600 651
Republic Industries, Inc. (a) 42,800 631
Rockwell International Corp. 8,100 393
Sensormatic Electronics Corp. (a) 15,900 110
Solectron Corp. (a) 8,800 818
Sundstrand Corp. 21,600 1,121
Tektronix, Inc. 25,200 758
Thermo Electron Corp. (a) 19,000 322
Thermo Instrument Systems, Inc. (a) 87,000 1,310
Thomas & Betts Corp. 18,100 784
United Technologies Corp. 83,700 9,101
Waste Management, Inc. 104,600 4,877
-----------
93,481
-----------
TECHNOLOGY - 15.9%
3Com Corp. (a) 12,600 565
ADC Telecommunications, Inc. (a) 7,300 252
Adobe Systems, Inc. 8,300 388
America Online, Inc. 29,400 4,704
Anixter International, Inc. (a) 35,700 725
Apple Computer, Inc. (a) 247,700 10,140
Autodesk, Inc. 24,500 1,044
C-Cube Microsystems, Inc. (a) 9,200 250
Cirrus Logic, Inc. (a) 21,000 205
Cisco Systems, Inc. (a) 234,600 21,773
COMPAQ Computer Corp. 138,319 5,801
CompUSA, Inc. (a) 16,500 216
Computer Associates
International, Inc. 106,900 4,557
Computer Sciences Corp. 19,300 1,244
Comverse Technology, Inc. (a) 70,000 4,966
Cooper Industries, Inc. 17,300 825
Dell Computer Corp. (a) 86,100 6,301
Electronic Data Systems Corp. 99,300 4,990
EMC Corp. (a) 116,300 9,886
General Dynamics Corp. 33,800 1,982
General Instrument Corp. (a) 44,100 1,497
General Motors Corp. Class H (a) 3,100 123
Glenayre Technologies, Inc. (a) 9,400 41
Harris Corp. 14,200 520
Informix Corp. (a) 21,200 209
Ingram Micro, Inc. Class A (a) 27,300 952
Intel Corp. 270,200 32,018
International Business
Machines Corp. 92,700 17,125
Lucent Technologies, Inc. 163,700 18,006
Micron Technology, Inc. (a) 13,000 657
Microsoft Corp. (a) 149,000 20,645
Motorola, Inc. 53,300 3,255
NCR Corp. (a) 22,200 927
Novell, Inc. (a) 138,400 2,509
Oracle Systems Corp. (a) 64,500 2,782
Parametric Technology Corp. (a) 2,000 33
PeopleSoft, Inc. (a) 900 17
Rational Software Corp. New (a) 15,000 396
Seagate Technology (a) 23,100 699
Sterling Software, Inc. (a) 30,700 831
Structural Dynamics
Research Corp. (a) 1,700 34
Sun Microsystems, Inc. (a) 72,400 6,195
Sybase, Inc. (a) 23,900 176
Symantec Corp. (a) 5,200 112
Symbol Technologies, Inc. 19,550 1,250
Tandy Corp. 18,800 774
Tellabs, Inc. (a) 34,700 2,379
Texas Instruments, Inc. 128,300 10,977
Unisys Corp. (a) 124,100 4,274
Xilinx, Inc. (a) 5,000 325
-----------
210,552
-----------
</TABLE>
37 Quantitative Equity Fund
<PAGE>
QUANTITATIVE EQUITY FUND
Statement of Net Assets, continued
<TABLE>
<CAPTION>
December 31, 1998
Market
Number Value
of (000)
Shares $
-------- --------
<S> <C> <C>
UTILITIES - 12.4%
Airtouch Communications, Inc. (a) 86,800 6,260
Allegheny Energy, Inc. 17,900 618
Ameren Corp. 38,300 1,635
American Water Works, Inc. 2,100 71
Ameritech Corp. 61,600 3,904
AT&T Corp. 414,700 31,205
Baltimore Gas & Electric Co. 17,700 546
Bell Atlantic Corp. 282,212 14,956
BellSouth Corp. 89,000 4,439
Carolina Power & Light Co. 7,400 348
Central & Southwest Corp. 90,500 2,483
Cincinnati Bell, Inc. 74,000 2,798
CINergy Corp. 6,000 206
CMS Energy Corp. 12,300 596
Columbia Energy Group 13,550 783
Comcast Corp. Special Class A 52,400 3,075
Consolidated Natural Gas Co. 11,400 616
DTE Energy Co. 84,900 3,640
Edison International 42,000 1,171
Energy East Corp. 5,500 311
Entergy Corp. 29,400 915
Florida Progress Corp. 23,600 1,058
FPL Group, Inc. 59,900 3,691
Frontier Corp. 8,700 296
GTE Corp. 168,800 10,972
Houston Industries, Inc. 83,900 2,695
Illinova Corp. 8,500 213
K N Energy, Inc. 5,200 189
Kansas City Power & Light Co. 4,100 121
KeySpan Energy (a) 68,700 2,130
LG&E Energy Corp. 96,200 2,724
MCI WorldCom, Inc. (a) 366,207 26,274
New England Electric System 7,700 371
NICOR, Inc. 1,600 68
Northeast Utilities (a) 7,400 118
Northern States Power Co. 17,400 483
OGE Energy Corp. 28,400 824
PG&E Corp. 255,300 8,042
PP&L Resources, Inc. 19,900 555
Public Service Enterprise Group, Inc. 54,100 2,164
SBC Communications, Inc. 154,490 8,285
Southern Co. 158,000 4,592
Southwest Gas Corp. 6,900 185
Sprint Corp. 9,200 774
TECO Energy, Inc. 7,300 206
Tele-Communications TCI Ventures Group
Series A (a) 89,700 2,114
Tele-Communications, Inc.
Class A (a) 24,500 1,355
Texas Utilities Co. 41,600 1,942
U.S. West, Inc. 6,300 407
UtiliCorp United, Inc. 2,800 103
Western Resources, Inc. 7,300 243
Wisconsin Energy Corp. 13,300 418
-----------
164,188
-----------
TOTAL COMMON STOCKS
(cost $915,177) 1,287,770
-----------
Principal
Amount
(000)
$
-----------
SHORT-TERM INVESTMENTS - 2.7%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 31,804 31,804
United States Treasury Notes (c)
6.250% due 03/31/99 4,266
4,250 -----------
TOTAL SHORT-TERM INVESTMENTS
(cost $36,074) 36,070
-----------
TOTAL INVESTMENTS - 100.0%
(identified cost $951,251)(d) 1,323,840
OTHER ASSETS AND LIABILITIES,
NET - 0.0% (310)
-----------
1,323,530
NET ASSETS - 100.0% -----------
-----------
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral 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.
38 Quantitative Equity Fund
<PAGE>
Quantitative Equity Fund
Statement of Net Assets, continued
December 31, 1998
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
----------- --------------
Futures Contracts
(Notes 2 and 3)
S&P 500 Index
expiration date 03/99 101 $ 1,345
S&P 400 Midcap Index
expiration date 03/99 27 536
-----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contacts Purchased (S) $ 1,881
===========
(S) At December 31, 1998, United States Treasury Notes valued at $4,266 were
held as collateral in connection with futures contracts purchased by the Fund.
The accompanying notes are an integral part of the financial statements.
39 Quantitative Equity Fund
<PAGE>
QUANTITATIVE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments at market (identified cost $951,251)(Note 2) ........ $1,323,840
Receivables:
Dividends and interest .......................................... 1,808
Investments sold ................................................ 6,594
Fund shares sold ................................................ 3,038
Daily variation margin on futures contracts (Notes 2 and 3) .... 232
Short-term investments held as collateral for securities
loaned, at market (Note 3) ...................................... 14,154
---------
Total Assets .................................................. 1,349,666
LIABILITIES
Payables:
Investments purchased ...........................$ 6,441
Fund shares redeemed ............................ 4,391
Accrued fees to affiliates (Note 4) ............ 998
Other accrued expenses .......................... 152
Payable upon return of securities loaned, at
market (Note 3) ................................. 14,154
----------
Total Liabilities ............................................ 26,136
------------
NET ASSETS ....................................................... $1,323,530
============
NET ASSETS CONSIST OF:
Undistributed net investment income .............................. $ 3
Accumulated net realized gain (loss) ............................ 26,184
Unrealized appreciation (depreciation) on:
Investments ..................................................... 372,589
Futures contracts ............................................... 1,881
Shares of beneficial interest .................................... 311
Additional paid-in capital ....................................... 922,562
----------
NET ASSETS ....................................................... $1,323,530
==========
NET ASSET VALUE, offering and redemption price per share:
Class S ($1,316,050,647 divided by 30,946,516 shares of $.01
par value
shares of beneficial interest outstanding) ................... $ 42.53
==========
Class E ($7,479,606 divided by 175,983 shares of $.01 par
value
shares of beneficial interest outstanding) .................... $ 42.50
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Quantitative Equity Fund 40
<PAGE>
QUANTITATIVE EQUITY FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends .......................................................... $16,743
Dividends from Money Market Fund (Note 5) .......................... 1,726
Interest ........................................................... 130
----------
Total Investment Income .......................................... 18,599
EXPENSES (Notes 1, 2 and 4):
Advisory fees ....................................$ 9,002
Administrative fees .............................. 54
Custodian fees ................................... 466
Distribution fees - Class E ...................... 4
Transfer agent fees .............................. 783
Professional fees ................................ 56
Registration fees - Class S ...................... 149
Registration fees - Class E ...................... 2
Shareholder servicing fees - Class E ............. 9
Trustees' fees ................................... 4
Miscellaneous .................................... 72
-----------
Total Expenses .................................................. 10,601
----------
Net investment income .............................................. 7,998
----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ..................................... 96,324
Futures contracts ............................... 6,208 102,532
----------
Net change in unrealized appreciation or
depreciation of:
Investments ..................................... 148,121
Futures contracts ............................... 1,763 149,884
------------ ----------
Net gain (loss) on investments ................... 252,416
----------
Net increase (decrease) in net assets resulting
from operations ................................. $260,414
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
41 Quantitative Equity Fund
<PAGE>
QUANTITATIVE EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ........................... $ 7,998 $ 8,796
Net realized gain (loss) ....................... 102,532 131,310
Net change in unrealized appreciation or
depreciation .................................... 149,884 93,591
------------ -----------
Net increase (decrease) in net assets
resulting from operations ..................... 260,414 233,697
------------ -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
Class S ....................................... (7,962) (8,794)
Class E ....................................... (13) (2)
In excess of net investment income
Class S ....................................... (20) (23)
Net realized gain on investments
Class S ....................................... (81,881) (145,647)
Class E ....................................... (384) (311)
------------ -----------
Total Distributions to Shareholders ......... (90,260) (154,777)
------------ -----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) .................... 154,152 256,057
------------ -----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ...... 324,306 334,977
NET ASSETS
Beginning of period ............................. 999,224 664,247
------------ -----------
End of period (including undistributed net
investment income of $3 and accumulated
distributions in excess of net investment
income of $23, respectively) ................... $ 1,323,530 $ 999,224
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Quantitative Equity Fund 42
<PAGE>
QUANTITATIVE EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ...................................... $36.78 $33.05 $30.76 $24.84 $26.44
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) ................. .27 .38 .51 .50 .49
Net realized and unrealized
gain (loss) on investments ................. 8.55 10.00 6.24 8.72 (.19)
------ ------ ------ ------ ------
Total Income From
Investment Operations .................... 8.82 10.38 6.75 9.22 .30
------ ------ ------ ------ ------
DISTRIBUTIONS:
Net investment income ...................... (.27) (.38) (.51) (.51) (.49)
Net realized gain on
investments ................................ (2.80) (6.27) (3.95) (2.79) (1.41)
------ ------ ------ ------ ------
Total Distributions ...................... (3.07) (6.65) (4.46) (3.30) (1.90)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD .............. $42.53 $36.78 $33.05 $30.76 $24.84
====== ====== ======== ======= =======
TOTAL RETURN (%) ........................... 24.82 32.70 23.08 37.69 .19
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period
($000 omitted) ............................ 1,316,051 996,880 663,925 488,948 380,592
Ratios to average net assets (%):
Operating expenses ....................... .91 .91 .93 .93 .94
Net investment income .................... .69 1.04 1.59 1.71 1.95
Portfolio turnover rate (%) ................ 77.23 87.67 74.33 78.83 45.97
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
43 Quantitative Equity Fund
<PAGE>
QUANTITATIVE EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996*
------ ------ ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........ $36.80 $33.05 $33.81
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (c) ................. .12 .14 .05
Net realized and unrealized gain (loss) on
investments ................................ 8.54 9.95 1.87
------ ------ ------
Total Income From Investment Operations .. 8.66 10.09 1.92
------ ------ ------
DISTRIBUTIONS:
Net investment income ...................... (.16) (.07) (.08)
Net realized gain on investments ........... (2.80) (6.27) (2.60)
------ ------ ------
Total Distributions ...................... (2.96) (6.34) (2.68)
------ ------ ------
NET ASSET VALUE, END OF PERIOD .............. $42.50 $36.80 $33.05
====== ====== ======
TOTAL RETURN (%)(a) ........................ 24.34 31.70 5.91
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) .. 7,479 2,344 322
Ratios to average net assets (%)(b):
Operating expenses ....................... 1.31 1.59 1.65
Net investment income .................... .30 .33 .81
Portfolio turnover rate (%)(b) ............ 77.23 87.67 74.33
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
Quantitative Equity Fund 44
<PAGE>
INTERNATIONAL SECURITIES FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide favorable total return and additional 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.
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
Dates International Securities - Class S MSCIEAFE ** Lipper(R) International++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,225 $11,080 $12,250
1990 $10,350 $8,510 $10,787
1991 $11,591 $9,573 $12,128
1992 $10,785 $8,439 $11,626
1993 $14,395 $11,219 $16,228
1994 $15,094 $12,124 $16,064
1995 $16,634 $13,524 $17,546
1996 $17,900 $14,384 $19,574
1997 $17,947 $14,680 $20,578
1998 $20,260 $17,665 $23,235
- ------------------------------------------------------------------------------------------------------------------------
Total $157,181 $131,198 $170,016
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES FUND - CLASS S MSCI EAFE INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $11,290 12.90% 1 Year $12,033 20.33%
5 Years $14,074 7.08%(S) 5 Years $15,746 9.51%(S)
10 Years $20,260 7.32%(S) 10 Years $17,665 5.86%(S)
INTERNATIONAL SECURITIES FUND - CLASS E ++++ LIPPER(R) INTERNATIONAL FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------------- --------------------------------------------------
1 Year $11,253 12.53% 1 Year $11,291 12.91%
5 Years $13,920 6.84%(S) 5 Years $14,318 7.44%(S)
10 Years $20,038 7.20%(S) 10 Years $23,235 8.80%(S)
SALOMON SMITH BARNEY BROAD MARKET INDEX (BMI)
EX-US +
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
--------------------------------------------------
1 Year $11,724 17.24%
5 Years $15,787 9.56%(S)
</TABLE>
45 International Securities Fund
<PAGE>
INTERNATIONAL SECURITIES FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the International Securities Fund Class S
and Class E shares reflected total returns of 12.9% and 12.5%, respectively, as
compared to the Salomon Smith Barney Broad Market Index ex-US, which gained
17.2%. The Fund's shortfall to the benchmark was primarily due to its
underweighting in large capitalization stocks during a year in which large caps
outperformed globally.
PORTFOLIO HIGHLIGHTS
Dominant trends in the non-US developed markets were similar to those evident in
the US market. Investors showed a strong preference for larger cap issues as a
defensive investment amid fears of deteriorating global economic fundamentals.
Growth-oriented investments also fared better for this reason. On the surface,
international market performance looked quite similar to 1997, with continental
European markets the strongest performers. The European Monetary Union continued
to foster optimism in the stock market. The United Kingdom performed well, but
lagged the majority of its European Union neighbors. Asian markets posted strong
fourth quarter gains due to strong currency appreciation, but were generally
poor performers for most of the year.
Underweightings in large cap issues and growth stocks resulted in the
International Securities Fund trailing the benchmark. While the Fund's two large
cap, growth-oriented managers performed well, the other managers struggled for
much of the year. Country allocations were generally favorable with continental
European markets overweighted in the Fund. However, the underweighting in large
cap, growth issues in Europe reflected the managers' reluctance to buy stocks
with often extreme valuations, given perceived risks. Performance also reflected
tactical bets toward more cyclical companies early in the year, and an
underweighting in Japanese bank shares, which rallied late in the year as talk
of banking reform improved investors' sentiment towards the sector.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Novartis AG (Regd) (Switzerland) 1.2%
Suez Lyonnaise Des Eaux (France) 1.1
British Petroleum Co. PLC (United Kingdom) 1.1
Diageo PLC (United Kingdom) 1.1
Vivendi (France) 1.0
Glaxo Wellcome PLC (United Kingdom) 1.0
Vodafone Group PLC (United Kingdom) 0.9
Railtrack Group PLC (United Kingdom) 0.9
Nestle SA (Regd) (Switzerland) 0.8
Siemens AG (Germany) 0.8
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
December 31, 1998
<S> <C>
Current P/E Ratio 22.38x
Portfolio Price/Book Ratio 2.27x
Market Capitalization - $-Weighted Average 23.8 Bil
Number of Holdings 733
MONEY MANAGERS STYLES
J.P. Morgan Investment Management, Inc. Market-Oriented
Marathon Asset Management, Ltd. Value
Mastholm Asset Management, LLC 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>
* International Securities Fund - Class S assumes initial investment on
January 1, 1989.
** 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 exchange 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(R) International Funds Benchmark 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 E - For the period, November 4, 1996
(commencement of sales) to May 15, 1998, shareholder service and Rule 12b-1
distribution fees were charged. From May 16, 1998 through December 31,
1998, only shareholder service 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 E to provide historical perspective.
+ Salomon Smith Barney 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 Index. However, 10 years of historical
performance information is not available because it 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 46
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
COMMON STOCKS - 91.8%
ARGENTINA - 0.1%
Banco Frances del Rio la Plata - ADR 5,554 115
Sociedad Comercial del
Plata - ADR (a) 1,296 9
Telefonica de Argentina
Class B - ADR 5,550 155
YPF Sociedad Anonima
Class D - ADR 11,612 324
-------
603
-------
AUSTRALIA - 2.4%
Amcor, Ltd. 134,000 573
AMP, Ltd. (a) 40,909 518
Australia & New Zealand Bank Group,
Ltd 999,220 6,539
Australian Gas & Light Co. 20,133 145
Boral, Ltd. 564,549 803
Brambles Industries, Ltd. 20,436 498
Broken Hill Proprietary Co. 85,387 629
Caltex Australia 100,000 245
Colonial, Ltd 60,791 209
Commonwealth Bank of Australia 16,837 239
CSR, Ltd. 324,200 793
Eastern Aluminum 272,000 232
Eltin, Ltd. 204,565 148
Fairfax (John) 26,000 53
Foster's Brewing Group, Ltd. 125,600 340
Goodman Fielder Wattie 304,200 308
Lend Lease Corp. 51,114 689
National Australia Bank, Ltd. 59,077 891
News Corp. 272,421 1,800
Pacific Dunlop, Ltd. 522,833 846
Pasminco, Ltd. 70,000 53
Pioneer International, Ltd. 146,750 310
PMP Communications, Ltd. 165,000 303
Publishing Broadcasting, Ltd. 36,360 159
Santos, Ltd. 300,000 805
Tabcorp. Holdings, Ltd. 22,000 135
Telstra Corp., Ltd. NPV (a) 150,094 702
Western Mining Corp., Ltd. 91,100 275
Westfield Trust (Units) 360,277 795
Westfield Trust (Units) New (a) 16,536 35
Westpac Banking Corp. 272,897 1,826
Westralian Sands, Ltd. NPV 91,070 217
Woolworth's, Ltd. 163,384 555
-------
22,668
-------
AUSTRIA - 0.2%
Bank Austria AG 18,881 960
Voest-Alpine Stahl AG 11,000 285
Wienerberger Baustoff 1,300 259
-------
1,504
-------
BELGIUM - 0.7%
Credit Communal Holding
Dexia NPV 1,287 214
Delhaize-Le Lion NPV 7,500 660
Fortis AG 1,463 527
KBC Bancassurance Holding NPV 14,050 1,105
Tractebel Investments
International NPV 21,528 4,154
UCB Capital NPV 29 177
-------
6,837
-------
BRAZIL - 0.1%
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar (Regd) - GDR 4,750 74
Telecomunicacoes Brasileiras
SA - ADR (a) 12,624 923
Uniao de Bancos Brasileiros
SA - GDR 3,974 57
-------
1,054
-------
CANADA - 3.0%
Abitibi-Consolidated, Inc. 67,000 622
Air Canada, Inc. (a) 100,000 402
Alcan Aluminum, Ltd. 4,640 126
Algoma Steel, Inc. (a) 30,000 42
Barrick Gold Corp. 25,100 489
Barrick Gold Corp. NPV 12,200 238
BCE, Inc. 49,800 1,885
Bombardier, Inc. Class B 197,300 2,840
Canadian Airlines Corp. (a) 45,000 56
Canadian Hunter Exploration, Ltd. (a) 17,900 117
Canadian Imperial Bank of Commerce 15,216 378
Canadian Natural Resources, Ltd. (a) 35,900 540
Canadian Pacific, Ltd. 46,900 882
CGI Group, Inc. Class A (a) 32,000 633
CGI Group, Inc. Class A
Sub Voting (a) 88,600 1,724
Dofasco, Inc. NPV 27,601 354
EdperBrascan Corp. Class A 26,500 369
Finning International, Inc. New (a) 17,000 122
Geac Computer Corp., Ltd. (a) 17,300 450
Hudson's Bay Co. 50,000 633
Imasco, Ltd. 60,670 1,298
Imperial Oil, Ltd. 59,796 960
Inco, Ltd. 61,287 647
47 International Securities Fund
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Moore Corp., Ltd. 97,000 1,063
National Bank of Canada 65,500 1,063
Newcourt Credit Group, Inc. 14,900 522
Nexfor, Inc. (a) 31,217 124
Noranda, Inc. New (a) 71,600 714
Northern Telecom, Ltd. 3,900 195
Nova Scotia Power, Inc. 22,500 268
Potash Corp. of Saskatchewan, Inc. 16,500 1,063
QLT PhotoTherapeutics, Inc. (a) 22,000 510
Rigel Energy Corp. (a) 62,000 406
Rogers Communications, Inc.
Class B (a) 70,000 625
Royal Bank of Canada 36,520 1,829
Stelco, Inc. Class A 56,800 297
Suncor, Inc. NPV 3,790 114
Talisman Energy, Inc. (a) 7,800 138
The Seagram Co., Ltd. 49,900 1,902
Thomson Corp. (The) 46,000 1,081
Torstar Corp. Class B 31,200 369
Westcoast Energy, Inc. 20,881 418
-------
28,508
-------
CHILE - 0.0%
Chilectra SA - ADR 95 4,271
DENMARK - 0.7%
Bang & Olufsen Holding Series B 10,000 610
Coloplast AS Class B (Regd) 5,250 627
Danisco 14,300 775
Den Danske Bank 1,285 173
Great Nordic Store Nord A/S 16,500 583
Jyske Bank AS (Regd) 9,200 892
Tele Danmark AS Series B 840 113
Tele Danmark Class B - ADR 41,200 2,796
Unidanmark Class A (Regd) 1,120 102
-------
6,671
-------
FINLAND - 1.3%
Enso OY Series A 82,500 738
KCI Konecranes International PLC 14,600 659
Kesko Oyj 91,300 1,361
Merita, Ltd. Series A 89,500 565
Metsa-Serla Oyj Series B 91,000 741
Nokia Oyj Series A 20,088 2,443
Outokumpu Oyj Class A 37,200 341
OY Tamro AB 34,700 150
Pohjola Series B 9,600 523
Rauma Group (The) 9,300 135
Rautaruukki OY 46,200 298
Sampo Insurance Co., Ltd. Series A 26,000 987
Stora Enso Oyj Class A (a) 111,900 1,226
UPM-Kymmene Oyj 46,000 1,281
Valmet Corp. Series A 66,600 887
-------
12,335
-------
FRANCE - 10.4%
Accor SA 12,089 2,616
Alcatel Alsthom 21,028 2,573
Alstom - ADR New (a) 33,250 773
Assurances Generales de France 10,700 639
AXA - UAP 15,621 2,263
Banque Nationale Paris 44,295 3,646
Bongrain SA 2,320 1,037
Bouygues 12,900 2,658
Carrefour SA 3,102 2,341
Castorama Dubois 2,600 593
Chargeurs International SA 3,500 193
Cie de St. Gobain 8,144 1,149
Clarins 10,960 785
Credit Commercial de France 3,834 356
Dexia France 900 139
Dexia France New (a) 1,347 207
Dexia France (Regd) 15,569 2,398
Elf Aquitaine - ADR 31,200 1,767
Elf Aquitaine SA 17,910 2,069
Eridania Beghin-Say SA 1,605 278
Galeries Lafayette 3,585 3,847
Groupe Danone 7,648 2,189
GTM - Entrepose 12,185 1,264
Guyenne et Gascogne 2,795 1,253
L'Air Liquide 10,237 1,877
L'Oreal (Societe) 321 232
Lafarge SA (BR) 7,567 719
Lagardere Groupe (Regd) 22,600 960
Lapeyre (BR) 1,620 116
Legrand 739 196
Legris Industries SA 3,900 191
LVMH Moet-Hennessy 12,387 2,450
M6 Metropole Television 4,500 769
Michelin (Cie Gen) Class B (Regd) 39,538 1,581
Omnicom SA (a) 8,256 913
Paribas (a) 12,980 1,128
Pathe SA 469 131
Pechiney International Class A 53,682 1,752
Peugeot SA 2,315 358
Pinault-Printemps-Redoute SA (a) 5,490 1,049
Primagaz CIE 71 7
Renault 33,333 1,496
Rhodia SA (a) 45,485 692
Sanofi SA 18,025 2,966
Schneider SA 52,648 3,192
International Securities Fund 48
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Scor SA 26,000 1,718
Sefimeg (Regd) 2,000 141
SGS Thomson Microelectronics (a) 16,010 1,260
Sidel SA 10,000 848
Simco (Regd) 3,300 299
Societe Generale 19,884 3,219
Sodexho 4,190 937
Suez Lyonnaise Des Eaux 51,533 10,581
Sylea 2,400 133
Thomson-CSF 53,524 2,298
Total Co. SA Class B 21,478 2,174
TV Francaise (TFI) 5,972 1,063
Union des Assurances Federales 3,622 480
Usinor Sacilor 173,542 1,925
Valeo 22,494 1,771
Vallourec (Usin) 360 14
Vivendi 36,026 9,342
-------
98,011
-------
GERMANY - 7.3%
Adidas AG 7,000 760
Allianz AG (Regd) 5,650 2,071
BASF AG 28,350 1,082
Bayer AG 63,029 2,630
Bayer Motoren Werk 381 296
Bayerische Motoren Werke AG (a) 76 56
Bayerische Vereinsbank AG 28,954 2,267
Berliner Kraft-und Licht (Bewag) -
Aktiengesellschaft Class A 48,600 1,312
Bilfinger & Berger BAU AG 9,000 230
Buderus AG 1,093 398
Commerzbank AG 34,800 1,100
Continental AG 62,978 1,738
DaimlerChrysler AG (a) 17,519 1,729
Deutsche Bank AG 37,084 2,182
Deutsche Lufthansa AG 66,650 1,472
Deutsche Pfandbrief & Hypothekenbank AG 7,000 613
Deutsche Telekom AG 27,169 893
Dresdner Bank AG 34,056 1,430
Fresenius Medical Care AG - ADR 47,240 1,110
GEA AG (a) 39,320 1,187
Gehe AG 12,085 834
Gerresheimer Glas AG 10,500 153
Hannover Rueckversicherungs AG 4,900 522
Hochtief AG 14,900 581
Hoechst AG 51,730 2,145
Holzmann (Philipp) (a) 2,730 430
Hornback Baumarkt AG 1,135 41
IKB Deutsche Industriebank AG 1,750 36
Karstadt AG 2,075 1,083
KM Europa Metal AG (a) 9,000 518
Krones AG (a) 1,623 52
Mannesmann AG (a) 53,484 6,130
Mannheimer Aktiengesellschaft 400 252
Merck KGAA 49,500 2,228
Muenchener
Rueckversicherungs-Gesellschaft AG (a) 3,941 1,918
Phoenix AG 10,000 190
Preussag AG 6,070 2,743
Rhoen - Klinikum AG 1,574 156
RWE AG 28,900 1,582
SAP AG 3,800 1,642
Schering AG 9,400 1,180
SGL Carbon AG 4,279 257
Siemens AG 119,864 7,732
SKW Trostberg AG 21,200 541
Tarkett AG 18,923 230
Veba AG 114,400 6,844
Viag AG 1,450 850
Volkswagen AG 27,150 2,167
Wella Aktiengesellschaft 1,530 1,073
-------
68,666
-------
HONG KONG - 1.9%
Cathay Pacific Airways 410,000 407
Cheung Kong Holdings, Ltd. 303,000 2,180
China Telecom (Hong Kong) Ltd. (a) 50,000 86
CLP Holdings, Ltd. 191,800 956
First Pacific Co. 707,608 338
Great Eagle Holdings 559,041 685
Guangshen Railway Co., Ltd. 1,794,500 208
Hang Lung Development Co. 192,000 206
Hang Seng Bank 111,000 992
Henderson Investment, Ltd. 1,325,000 778
Henderson Land Development Co., Ltd. 39,000 202
Hong Kong & China Gas
1999 Warrants (a) 16,236 1
Hong Kong & China Gas Co., Ltd. 441,192 561
Hong Kong Electric Holding, Ltd. 671,500 2,037
Hong Kong Telecommunications, Ltd. 79,600 139
HSBC Holdings (UK Regd) PLC 24,158 602
Hutchison Whampoa, Ltd. 276,000 1,950
Hysan Development 427,035 637
Jardine Strategic Holdings, Ltd. (a) 486,375 705
National Mutual Asia 596,000 446
New World Development Co., Ltd. 259,000 652
Orient Overseas International, Ltd. 121,000 31
QPL International Holdings, Ltd. 600,000 46
Sun Hung Kai Properties, Ltd. 166,000 1,211
Tai Cheung Holdings 56,000 14
49 International Securities Fund
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Television Broadcast 456,000 1,177
Vitasoy International Holdings, Ltd. 250,000 92
VTech Holdings, Ltd. 110,000 481
---------
17,820
---------
IRELAND - 0.3%
CBT Group Public, Ltd. - ADR (a) 8,304 124
Greencore Group PLC 107,300 495
Independent Newspapers PLC 178,000 715
Irish Life PLC 111,000 1,047
Jefferson Smurfit Group PLC 206,300 371
Waterford Wedgwood (Units) 539,000 457
---------
3,209
---------
ISRAEL - 0.2%
ForSoft, Ltd. (a) 25,700 265
Gilat Satellite Networks, Ltd. (a) 29,600 1,632
---------
1,897
---------
ITALY - 5.3%
Assicurazioni Generali SPA 37,340 1,558
Banca Commerciale Italiana 242,000 1,669
Banca Nazionale del Lavoro (a) 763,430 2,283
Banca Pop di Bergamo CV 3,000 73
Banca Pop di Milano 297,400 2,698
Banco di Roma (a) 1,215,986 2,059
ENI SPA - ADR 29,700 2,012
Ente Nazionale Idrocarburi SPA (Regd) 629,940 4,115
Fiat SPA di Risp 179,300 358
Fila Holdings SPA - ADR 8,000 62
Gucci Group NV 2,626 128
Industrie Natuzzi SPA - ADR 27,412 682
Istituto Bancario San Paolo di
Torino - ADR (a) 18,847 674
Istituto Mobiliare Italiano SPA (a) 274,914 4,855
Istituto Nazionale Delle Assicurazioni 141,000 372
Italgas (Soc. Ital.) 22,000 119
Luxottica Group SPA - ADR 49,500 594
Magneti Marelli SPA 56,000 97
Mediaset SPA 424,837 3,443
Mediolanum SPA (a) 202,880 1,504
Mondadori (Arnoldo) Editore SPA 130,600 1,726
Montefibre di Risp 67,000 54
Montefibre SPA 240,000 195
Rinascente (LA) 13,100 135
Telecom Italia Mobile SPA 124,534 919
Telecom Italia SPA 1,116,653 7,024
Telecom Italia SPA di Risp 898,985 7,665
Unicredito Italiano 590,613 3,498
---------
50,571
---------
JAPAN - 17.8%
Acom Co., Ltd. 17,000 1,092
Advantest 2,620 166
Alps Electric Co. 9,000 165
Amada Co., Ltd. 42,000 203
Aoki International 32,000 142
Aoyama Trading Co. 45,500 1,272
Apic Yamada Corp. 17,300 70
Asahi Bank, Ltd. 204,000 747
Bank of Kyoto, Ltd. 120,000 605
Bank of Yokohama 210,000 503
Bridgestone Tire Corp. 48,000 1,089
Canon Chemicals, Inc. 15,400 157
Canon, Inc. 213,000 4,550
Chubu Electric Power Co., Inc. 31,000 625
Chugai Pharmaceutical Co., Ltd. 89,000 890
Citizen Watch Co., Ltd. 12,000 72
Credit Saison Co. 80,750 1,989
CSK Corp., Ltd. 79,000 1,817
Dai Ichi Kangyo Bank 175,000 932
Dai Ichi Pharmaceutical Co. 125,000 2,111
Dai-Tokyo Fire & Marine 383,000 1,355
Daito Trust Construction 51,350 445
Daiwa House Industries Co. 22,000 234
Daiwa Kosho Lease Co., Ltd. 87,000 357
Daiwa Securities 95,000 324
DDI Corp. 291 1,081
Deodeo Corp. 15,000 144
East Japan Railway Co. 114 636
Ebara Corp. 48,000 413
Eisai Co. 60,900 1,185
Ezaki Glico Co. 69,000 395
Fanuc Co. 19,800 678
Fuji Machine Manufacturing Co. 45,000 1,421
Fuji Oil Co. 60,000 368
Fujitsu Support and Service, Inc. 9,000 649
Fujitsu, Ltd. 198,000 2,636
Furukawa Electric Co. 200,000 681
General Sekiyu KK 26,000 95
Heiwa Corp. 19,000 212
Hitachi Koki Co. 71,000 236
Hitachi, Ltd. 535,000 3,313
Hokkaido Electric Power Co., Inc. 20,700 348
Honda Motor Co., Ltd. 105,000 3,446
Hoya Corp. 30,000 1,460
Intec, Inc. 40,000 363
Ito-Yokado Co., Ltd. 100,000 6,988
Itochu Corp. 150,000 289
International Securities Fund 50
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Japan Tobacco, Inc. 223 2,229
Jeol 50,000 241
Kandenko Co., Ltd. 51,000 345
Kao Corp. 194,000 4,376
Kawasaki Steel Corp. 395,000 590
Kinki Coca-Cola Bottling 27,000 358
Kirin Beverage Corp. 17,000 335
Kirin Brewery Co. 52,000 662
Kissei Pharmaceutical Co. 34,000 600
Koa Fire & Marine 82,000 255
Kojima Co., Ltd. 18,700 354
Kokuyo Co., Ltd. 11,000 148
Komatsu Forklift Co., Ltd. 36,000 189
Komori Corp. 10,000 211
Kuraray Co., Ltd. 26,000 287
Kurimoto Iron Works 90,000 302
Kyocera Corp. 19,900 1,051
Kyushu Electric Power 13,900 264
Laox 10,000 73
Mabuchi Motor Co., Ltd. 26,000 1,989
Makita Corp. 107,000 1,192
Marubeni Corp. 765,000 1,313
Marui Co., Ltd. 27,000 519
Maruichi Steel Tube 38,000 490
Matsumotokiyoshi 31,500 1,218
Matsushita Electric Industrial Co.,
Ltd 285,000 5,039
Minebea Co., Ltd. 237,000 2,713
Mitsubishi Chemical 387,000 815
Mitsubishi Corp. 115,000 661
Mitsubishi Estate Co., Ltd. 123,000 1,102
Mitsubishi Heavy Industries 440,000 1,713
Mitsui Fudosan Co., Ltd. 165,000 1,248
Mitsui Marine & Fire Insurance Co.,
Ltd 30,000 158
Mitsui O.S.K. Lines 156,000 251
Mitsui Trust & Banking Co., Ltd. 214,000 244
Murata Manufacturing Co., Ltd. 67,000 2,780
Namco 37,600 755
Nanto Bank 57,000 296
NEC Corp. 71,000 653
Nichido Fire & Marine 450 2
Nichiei Co., Ltd. 33,900 2,699
Nikko Securities Co., Ltd. 255,000 711
Nintendo Co., Ltd. 6,000 581
Nippon Denso Co. 131,000 2,422
Nippon Fire & Marine 80,000 294
Nippon Oil Co. 156,000 544
Nippon System Development 22,000 681
Nippon Telegraph & Telephone Corp. 752 5,800
Nippon Yusen 320,000 1,011
Nishimatsu Construction 310,000 1,810
Nomura Securities Co., Ltd. 190,000 1,655
Noritake Co. 98,000 506
NTT Mobile Communication Network, Inc.
(a) 175 7,198
Olympus Optical Co. 169,000 1,942
Osaka Gas Co. 138,000 475
Pioneer Electronics Corp. 79,000 1,324
Ricoh Co., Ltd. 68,000 627
Rinnai Corp. 76,000 1,328
Rohm Co. 34,000 3,095
Roland Corp. 26,000 644
Ryohin Keikaku Co., Ltd. 5,300 706
Sakura Bank, Ltd. 695,000 1,592
Sangetsu Co. 6,000 90
Sankyo Co., Ltd. 30,000 655
Sankyo Co., Ltd. GUNMA 49,000 819
Sankyo Seiko Co. 96,000 262
Sanwa Bank 175,000 1,348
Sekisui Chemical Co., Ltd. 258,000 1,734
Sekisui House, Ltd. 71,000 751
Seven-Eleven Japan NPV 3,200 258
Sharp Corp. 50,000 451
Shin-Etsu Chemical Co. 21,050 506
Shiseido Co., Ltd. 87,000 1,117
Shohkoh Fund & Co., Ltd. 1,570 506
Showa Shell Sekiyu 42,000 236
Skylark Co. 53,900 801
Sony Corp. 75,000 5,460
Sony Music Entertainment, Inc. 21,500 989
Stanley Electric 88,000 293
Sumitomo Bank 73,000 749
Sumitomo Corp. 45,000 219
Sumitomo Electric Industries 64,000 720
Sumitomo Forestry 77,000 552
Sumitomo Trust & Banking 298,000 791
Suzuki Motor Corp. 53,000 628
Taiyo Yuden Co., Ltd. 58,000 686
Takashimaya Co. 49,000 412
Takeda Chemical Industries 35,000 1,347
Takefuji Corp. 18,100 1,321
TDK Corp. 9,000 822
Toc Co. 42,000 380
Toda Corp. 40,000 194
Toho Bank 83,000 344
Tohoku Electric Power 16,500 292
Tokio Marine & Fire Insurance Co. 17,000 203
Tokyo Broadcasting 46,000 514
Tokyo Electric Power 81,900 2,021
Tokyo Electronics 4,800 182
Tokyo Gas Co. 768,000 2,018
51 International Securities Fund
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Tokyo Steel Manufacturing 67,400 337
Toppan Printing 78,000 952
Torii Pharmaceutical Co., Ltd. 16,200 438
Toshiba Corp. 391,000 2,328
Tostem Corp. 39,000 773
Toyo Seikan Kaisha, Ltd. 24,000 407
Toyota Motor Corp. 93,000 2,526
UNY Co., Ltd. 12,000 219
West Japan Railway Co. 285 1,261
Yamaha Motor Co. 10,000 64
Yamanouchi Pharmaceutical 93,000 2,994
Yamato Kogyo Co. 34,000 197
Yodogawa Steel Works, Ltd. 61,000 230
-------
168,012
-------
LUXEMBOURG - 0.0%
Societe Europeene des Satellites (a) 621 95
-------
MALAYSIA - 0.2% (e)
Berjaya Leisure Berhad 50,000 17
Carlsberg Brewery Malaysia Berhad 149,000 299
Commerce Asset Holdings 160,000 87
Golden Hope Plantation 45,000 34
Kumpulan Guthrie 344,000 155
Malayan Banking Berhad 205,000 291
Malaysian Airline System 41,000 16
Oriental Holdings Berhad 25,000 27
Perlis Plantations 189,000 136
Resorts World Berhad 481,000 388
Technical Resource Industries Berhad 349,000 126
-------
1,576
-------
MEXICO - 0.1%
Cemex SA de CV - ADR 18,000 79
Cemex SA de CV Class B NPV (a) 21,360 54
Cemex SA de CV NPV (a) 640 1
Fomento Economico Mexicano
SA de CV 40,310 110
Gruma SA (a) 8,262 82
Gruma SA Series B NPV (a) 28,131 71
Grupo Industrial Maseca
Series B NPV 88,656 72
Grupo Television SA de CV -
GDR (a) 5,556 137
Telefonos de Mexico SA
Series L - ADR (a) 8,675 422
-------
1,028
-------
NETHERLANDS - 5.7%
ABN Amro Holdings NV 102,204 2,149
AKZO Nobel NV 2,300 105
AKZO Nobel NV - ADR 29,500 1,316
ASM Lithography Holding NV (a) 11,410 349
Benckiser NV Class B 15,000 982
Buhrmann NV (a) 54,901 982
CSM NV CVA 7,592 438
Elsevier NV 57,804 809
European Vinyls Corp.
International NV 6,100 48
Fortis Amev NV 10,637 881
Heineken Holding NV Class A 13,125 629
Hollandsche Beton Groep NV 64,303 794
Hunter Douglas NV 42,203 1,397
ING Groep NV 58,206 3,547
Koninklijke Ahold NV 114,374 4,225
Koninklijke Boskalis Westminster NV 20,856 336
Koninklijke KPN NV 142,925 7,151
Koninklijke KPN NV- ADR 31,255 1,571
Koninklijke Nedlloyd NV 40,000 543
Koninklijke Numico NV 20,571 980
Laurus NV (a) 31,897 805
Pakhoed Kon NV CVA 6,000 151
Philips Electronics NV 56,411 3,783
Philips Electronics NV - ADR 18,600 1,259
Royal Dutch Petroleum Co. 47,428 2,360
Stork NV 38,234 873
TNT Post Group NV 32,933 1,061
TNT Post Group NV - ADR 23,521 764
Unilever NV 27,480 2,348
Vedior 13,000 256
Vendex NV (a) 45,568 1,106
Verenigde Nederlandse
Uitgeversbedrijven Verenigd Bezit 86,939 3,276
Wereldhave NV 6,966 396
Wolters Kluwer CVA 29,481 6,306
-------
53,976
-------
NEW ZEALAND - 0.3%
Fletcher Challenge Paper 815,588 545
Lion Nathan, Ltd. 61,200 156
Telecom Corp. of New Zealand, Ltd. 665,088 1,452
Telecom Corp. of New Zealand, Ltd. NPV 190,964 829
Wrightson, Ltd. 250,000 55
-------
3,037
-------
NORWAY - 0.5%
Bergesen DY AS Series A 3,510 42
Christiania Bank OG Kreditkasse 44,000 153
Fred. Olsen Energy ASA (a) 42,700 264
International Securities Fund 52
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Kvaerner Industries AS 1,000 20
Kvaerner Industries AS Series B 1,000 16
Norsk Hydro AS 20,024 677
Norske Skogindustrier AS Class A 4,000 117
Nycomed Amersham PLC 90,400 631
Orkla ASA Class A (a) 41,024 613
Orkla ASA Class B (a) 26,628 349
Rieber & Son ASA Series B 40,000 295
Saga Petroleum AS Series A 20,610 188
Schibsted AS 45,100 570
Storebrand ASA Series A (a) 81,500 616
-------
4,551
-------
PORTUGAL - 0.5%
Bco Pinto & Sotto Mayor SA 91,792 1,741
Jeronimo Martins SGPS 9,432 516
Portugal Telecom SA 52,691 2,417
-------
4,674
-------
SINGAPORE - 0.6%
City Developments 105,000 455
Creative Technology, Ltd. (a) 12,000 180
Development Bank of Singapore, Ltd.
(Alien Market) 185,600 1,675
Jurong Shipyard 87,000 379
Mandarin Oriental
International, Ltd. (a) 491,026 309
Overseas Union Bank (Alien Market) 60,000 262
Overseas Union Enterprises 192,000 381
Singapore Land 40,000 89
Singapore Press Holdings, Ltd. (a) 153,185 1,670
Straits Steamship Land, Ltd. 95,000 103
-------
5,503
-------
SPAIN - 3.8%
Acciona SA (a) 18,300 1,531
Acerinox SA 28,500 663
Banco Bilbao Vizcaya SA 73,070 1,144
Banco Popular Espanol SA 29,940 2,254
Banco Santander SA (Regd) 23,121 459
Centros Commerciales Pryca 36,800 1,139
Corp. Fin. Reunida (a) 30,000 436
Corporacion Bancaria de Espana SA 22,500 1,159
Corporacion Bancaria de Espana SA
(Regd) 272,731 7,052
Dragados y Construcciones SA 5,300 195
Endesa SA 91,796 2,429
Fomento de Construcciones y Contratas
SA 9,800 727
Gas Natural SDG SA 2,767 301
Gas Y Electricidad SA Series 2 19,124 1,897
Hidroelectrica del Cantabrico SA 4,630 256
Iberdrola SA 62,243 1,163
Prosegur CIA de Seguridad SA (Regd) 40,000 466
Repsol SA 29,500 1,571
Repsol SA - ADR 43,200 2,360
Tabacalera SA Class A (Regd) 160,611 4,046
Telefonica SA 88,206 3,916
Telefonica SA 1999 Rights (a) 88,206 78
Union Electrica Fenosa SA 17,000 294
Viscofan Envoltura 15,750 509
-------
36,045
-------
SWEDEN - 2.3%
ABB AB Series A 41,890 446
ABB AB Series B 63,000 667
Astra AB Series A 17,600 359
Astra AB Series B 48,600 987
Atlas Copco AB Series B 9,840 213
Autoliv, Inc. 92,270 3,305
BT Industries AB 19,000 276
Celsius Industrier AB Series B 12,000 162
Electrolux AB Series B (a) 201,200 3,455
Esselte AB Series B 3,090 51
Gambro AB Series B (a) 35,000 379
Granges AB 4,420 64
Hennes and Mauritz AB Series B 10,560 860
Hoganas AB B Shares 21,000 342
Munksjo AB 40,900 282
NetCom Systems AB Series B (a) 13,200 536
Nordbanken Holding AB 133,432 854
Om Gruppen AB (a) 46,000 577
Pharmacia & Upjohn, Inc. 19,000 1,076
Sandvik AB Series A 3,420 59
Sandvik AB Series B 8,760 151
Scandic Hotels AB 24,090 884
Scania AB Series A 25,300 464
Svenska Celluosa Series B 13,700 298
Svenska Handelsbank Series A 39,000 1,642
Telefonaktiebolaget Ericsson (LM)
Series B 84,920 2,017
Tornet Fastighets AB 52,500 766
Volvo AB Series B 39,000 892
-------
22,064
-------
SWITZERLAND - 5.0%
ABB AG 299 350
Adecco SA 1,422 649
Baloise Holding, Ltd. 1,100 1,141
Barry Callebaut AG (Regd) 3,135 712
53 International Securities Fund
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Bobst AG (BR) 250 309
Credit Suisse Group (Regd) 2,495 390
Forbo Holding AG (Regd) 3,250 1,420
Holderbank Financiere
Glarus AG (BR) 600 710
Lindt & Spruengli AG 120 314
Lindt & Spruengli AG (Regd) 10 262
Nestle SA (Regd) 3,571 7,773
Novartis AG (Regd) 5,671 11,146
Phoenix Mecano (BR) 400 240
Publicitas Holdings SA - (Regd) 1,000 306
Roche Holdings
Genusscheine AG NPV 260 3,172
Sarna Kunststoff Holdings AG (Regd) 200 288
Schweiz Ruckversicher (Regd) 370 965
Schweizerische Lebensversicherungs-und
Rentenanstalt 1,648 1,224
SGS Holding (BR) 675 661
Sulzer AG (Regd) 2,200 1,339
Swisscom AG (Regd) (a) 5,200 2,177
Swisslog Holding AG 8,292 785
The Swatch Group AG 7,700 1,153
UBS AG (a) 21,431 6,584
Valora Holding AG (Regd) 800 216
Zurich Allied AG (a) 3,600 2,665
-------
46,951
-------
UNITED KINGDOM - 21.1%
Abbey National PLC 29,000 617
Airtours PLC 159,000 1,017
Allied Zurich AG (a) 127,235 1,912
Anglian Water PLC (a) 84,227 1,170
Arriva PLC 220,416 1,377
ASDA-MFI Group PLC 820,708 2,202
Barclays Bank PLC 109,000 2,363
Bass PLC 53,071 768
Berisford PLC 285,000 852
BG PLC 33,176 213
Billiton PLC (a) 246,000 490
BOC Group PLC 100,336 1,439
British Aerospace PLC 544,317 4,639
British Airways PLC 149,281 1,027
British Airways PLC - ADR 4,350 295
British American Tobacco PLC 144,435 1,272
British Petroleum Co. PLC 668,731 9,955
British Sky Broadcasting Group PLC 256,413 1,943
British Steel PLC 367,600 557
British Telecom PLC 172,160 2,606
BTR PLC 883,437 1,813
Bunzl PLC 383,000 1,495
Burmah Castrol PLC 17,000 243
Cable & Wireless
Communications PLC (a) 143,600 1,310
Cable & Wireless PLC 241,700 2,955
Cadbury Schweppes PLC 102,918 1,761
Caradon PLC 77,624 133
Centrica PLC (a) 58,000 119
Coats Viyella PLC 268,000 120
Commercial Union
Assurance Co. PLC 284,787 4,490
Compass Group PLC 130,000 1,484
Courtaulds Textile Co. PLC 111,200 299
Devro International PLC 162,000 466
Diageo PLC 891,198 9,883
E D & F Man Group PLC 110,000 640
Elan Corp. PLC - ADR (a) 10,000 696
Electrocomponents PLC 24,000 158
EMI Group PLC 137,000 917
Energis PLC (a) 36,100 804
Fairview Holdings PLC (a) 67,262 99
First Leisure Corp. PLC 196,000 664
Flextech PLC (a) 70,000 709
Gallaher Group PLC 80,000 536
GKN PLC 14,000 186
Glaxo Wellcome PLC 270,170 9,300
Glynwed International PLC 138,200 383
Granada Group PLC 242,400 4,249
Great University Stores PLC 90,000 949
Guardian Royal Exchange PLC 402,857 2,256
Halifax PLC 75,000 1,061
Hanson PLC 176,750 1,407
Hays 34,000 299
Heywood Williams Group PLC 21,041 75
Hillsdown Holdings PLC (a) 134,524 168
HSBC Holdings PLC 17,000 468
Hyder PLC 133,109 1,681
Imperial Chemical Industries PLC 79,000 684
Independent Newspapers PLC 145,670 617
Kingfisher PLC 276,284 2,993
Ladbroke Group, Ltd. PLC 271,500 1,092
Laing (John) PLC Class A NV 31,000 129
Laird Group PLC 230,868 625
LASMO PLC 298,000 495
Lloyds TSB Group PLC 304,620 4,337
London Clubs International 110,000 300
LucasVarity PLC 1,495,804 4,995
Medeva PLC 268,000 476
MEPC PLC 38,660 257
MFI Furniture Group PLC 352,076 205
Mirror Group News PLC 866,000 2,162
Misys PLC (a) 192,700 1,415
Monsoon PLC 79,000 76
International Securities Fund 54
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Morgan Crucible PLC 230,120 1,055
National Power PLC 82,568 712
National Westminster Bank PLC 145,000 2,807
Northern Rock PLC 64,000 597
Nycomed Amersham PLC 42,652 294
Pearson PLC 37,000 736
PIC International Group PLC (a) 235,000 297
Pilkington Brothers PLC 226,000 225
Powell Duffryn PLC 55,000 423
PowerGen PLC (a) 219,989 2,906
Premier Consolidated Oil PLC 848,396 226
Premier Farnell PLC 43,000 114
Provident Financial PLC 85,649 1,256
Prudential Corp. PLC 106,000 1,617
Racal Electronics PLC 366,400 2,118
Railtrack Group PLC 316,382 8,253
Rank Group PLC 25,500 97
Reed International 492,880 3,914
Rentokil Initial PLC 40,000 302
Rio Tinto Corp. PLC (Regd) 285,724 3,323
Rolls-Royce PLC 37,037 154
Royal & Sun Alliance Insurance Group
PLC 466,327 3,796
Royal Bank of Scotland Group PLC 80,200 1,311
Safeway PLC 420,729 2,111
Sainsbury (J.) PLC 108,595 879
Shell Transportation & Trading PLC
(Regd) 697,100 4,285
Siebe PLC 69,000 271
Smith & Nephew PLC 713,000 2,168
Smith (David S.) Holdings PLC 38,500 68
SmithKline Beecham PLC 303,100 4,201
Somerfield PLC 656,362 4,384
South West Water PLC 74,246 1,436
Stagecoach Holdings PLC (a) 706,365 2,828
Stakis PLC 623,302 1,025
Standard Chartered Bank Group PLC 162,000 1,879
Storehouse PLC 466,367 1,054
Tarmac, Ltd. PLC 924,137 1,727
Tate & Lyle, Ltd. PLC 40,000 215
Taylor Woodrow PLC 215,376 533
Terranova Foods PLC (a) 67,262 123
Tesco Store Holdings PLC 153,543 446
Thames Water PLC (a) 52,250 1,007
Tomkins PLC 792,098 3,764
Trinity PLC 40,000 266
Unilever PLC 125,200 1,408
United Newspaper, Ltd. PLC 47,200 410
Vickers PLC 119,800 356
Vodafone Group PLC 543,866 8,837
WPP Group PLC 420,600 2,552
Zeneca Group PLC 66,900 2,915
-------
199,529
-------
TOTAL COMMON STOCKS
(cost $749,824) 867,490
-----------
PREFERRED STOCKS - 1.0%
AUSTRALIA - 0.1%
News Corp., Ltd. 78,149 476
Sydney Harbour Casino Holdings, Ltd.
(a) 797,517 705
-----------
1,181
-----------
BRAZIL - 0.0%
Banco Itau SA NPV 151,000 74
Petroleo Brasileiro SA NPV 1,642,669 186
-----------
260
-----------
FINLAND - 0.3%
Nokia Corp. - ADR 21,900 2,638
-----------
GERMANY - 0.4%
Bayer Motoren Werk 300 140
Bayerische Motoren Werke AG (a) 120 51
Draegerwerk AG 950 15
Dyckerhoff AG 200 55
Fielmann AG 2,271 109
Fresenius AG 5,120 1,078
Hornbach Holding AG 1,130 67
Hugo Boss 200 384
M.A.N. AG 200 40
ProSieben Media AG NV 9,543 441
Rheinmetall AG 25,800 485
SAP AG 1,062 507
Volkswagen AG 6,900 344
-----------
3,716
-----------
ITALY - 0.0%
Fiat SPA 135,300 261
-----------
JAPAN - 0.2%
Sanwa International Financial Bermuda
Trust (conv.) 204,000,000 1,398
-----------
TOTAL PREFERRED STOCKS
(cost $8,983) 9,454
-----------
55 International Securities Fund
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- ------
LONG-TERM INVESTMENTS - 0.1%
JAPAN - 0.1%
Sumitomo Wiring Systems
0.900% due 09/30/08 JPY 20,000 143
Yamanouchi Pharmaceutical
(conv.)
1.250% due 03/31/14 JPY 30,000 487
TOTAL LONG-TERM INVESTMENTS
(cost $489) 630
SHORT-TERM INVESTMENTS - 6.1%
UNITED STATES - 6.1%
Frank Russell Investment Company
Money Market Fund,
due on demand (b) 49,706 49,706
United States Treasury Notes
6.250% due 03/31/99 (c) 8,400 8,433
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $58,138) 58,139
--------
TOTAL INVESTMENTS - 99.0%
(identified cost $817,434)(d) 935,713
OTHER ASSETS AND LIABILITIES,
NET - 1.0% 9,497
--------
NET ASSETS - 100.0% 945,210
========
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures contracts purchased by the
Fund.
(d) See Note 2 for federal income tax information.
(e) The securities have been determined to be illiquid because they are
restricted or because there is an exceptionally low trading volume in their
primary trading market at December 31, 1998.
Abbreviations:
ADR - American Depositary Receipt
BR - Bearer
GDR - Global Depositary Receipt
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
Foreign Currency Abbreviations:
DEM - German mark
FRF - French franc
GBP - British pound
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 Securities Fund 56
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
----------- ---------------
FUTURES CONTRACTS
(Notes 2 and 3)
CAC-40 Index (France)
expiration date 03/99 330 $471
DAX Index (Germany)
expiration date 03/99 43 782
FTSE - 100 Index (UK)
expiration date 03/99 152 393
TOPIX Index (Japan)
expiration date 03/99 121 (482)
--------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $1,164
========
(S) At December 31, 1998, United States Treasury Notes valued at $8,433 were
held as collateral in connection with futures contracts purchased by the
Fund.
DECEMBER 31, 1998
MARKET
INDUSTRY % OF VALUE
DIVERSIFICATION NET (000)
(Unaudited) ASSETS $
- ------------------------ -------- --------
Auto & Transportation 5.9% 55,666
Consumer Discretionary 18.8 177,432
Consumer Staples 6.5 61,450
Financial Services 17.9 168,861
Health Care 6.8 64,274
Integrated Oils 2.2 21,129
Materials & Processing 10.6 100,569
Miscellaneous 1.0 9,682
Other Energy 2.7 25,047
Producer Durables 7.2 67,743
Technology 3.3 31,317
Utilities 9.9 93,774
Short-Term Investments 6.1 58,139
Long-term Investments 0.1 630
------- -------
Total Investments 99.0 935,713
Other Assets and Liabilities, Net 1.0 9,497
------- -------
NET ASSETS 100.0% 945,210
======= =======
MARKET
% OF VALUE
GEOGRAPHIC DIVERSIFICATION NET (000)
(Unaudited) ASSETS $
- ---------------------------- -------- -------
Europe 44.7% 422,775
Japan 18.1 170,040
United Kingdom 21.1 199,529
Pacific Basin 5.5 51,785
Latin America 0.3 3,040
United States (Short-Term
Investments) 6.1 58,139
Other 3.2 30,405
------- -------
Total Investments 99.0 935,713
Other Assets and Liabilities, Net 1.0 9,497
------- -------
NET ASSETS 100.0% 945,210
======= =======
57 International Securities Fund
<PAGE>
INTERNATIONAL SECURITIES FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
FOREIGN CURRENCY EXCHANGE SPOT CONTRACTS
(Note 2)
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
DELIVER FOR SETTLEMENT (DEPRECIATION)
(000) (000) DATE (000)
- --------------------------------------------------------------------------------
USD 4 NGL 7 01/04/99 $ --
FRF 610 USD 108 01/29/99 (1)
------
$ (1)
======
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
(Note 2)
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
DELIVER FOR SETTLEMENT (DEPRECIATION)
(000) (000) DATE (000)
- --------------------------------------------------------------------------------
USD 25,229 DEM 41,950 03/19/99 $39
USD 15,961 GBP 9,550 03/19/99 (131)
USD 11,585 JPY 1,325,000 03/19/99 259
JPY 1,440,000 USD 12,063 02/26/99 (771)
JPY 968,975 USD 7,000 08/05/99 (1,819)
NZD3,160 USD 1,681 03/04/99 17
-------
$(2,406)
=======
International Securities Fund 58
<PAGE>
International Securities Fund
Statement of Assets and Liabilities
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<S> <C>
Assets
Investments at market (identified cost $817,434)(Note 2) ............................. $ 935,713
Foreign currency holdings (identified cost $6,690) ................................... 6,742
Forward foreign currency exchange contracts (cost $73,519)(Note 2) ................... 73,686
Foreign currency exchange spot contracts (cost $112)(Note 2) ......................... 112
Receivables:
Dividends and interest ............................................................... 1,061
Investments sold ..................................................................... 4,019
Fund shares sold ..................................................................... 2,761
Foreign taxes recoverable ............................................................ 888
Short-term investments held as collateral for securities loaned, at market (Note 3) .. 25,642
----------
Total Assets ....................................................................... 1,050,624
Liabilities
Payables:
Investments purchased ................................................... $ 929
Fund shares redeemed .................................................... 1,510
Accrued fees to affiliates (Note 4) .................................... 879
Other accrued expenses .................................................. 244
Daily variation margin on futures contracts (Notes 2 and 3) ............ 5
Forward foreign currency exchange contracts (cost $73,519)(Note 2)........ 76,092
Foreign currency exchange spot contracts (cost $112)(Note 2) ............ 113
Payable upon return of securities loaned, at market (Note 3) ............ 25,642
---------
Total Liabilities .................................................................. $ 105,414
---------
Net Assets ............................................................................ $ 945,210
=========
Net Assets consist of:
Accumulated distributions in excess of net investment income .......................... $ (2,960)
Accumulated net realized gain (loss) ................................................. 4,572
Unrealized appreciation (depreciation) on:
Investments .......................................................................... 118,279
Futures contracts .................................................................... 1,164
Foreign currency-related transactions ................................................ (2,292)
Shares of beneficial interest ......................................................... 155
Additional paid-in capital ............................................................ 826,292
---------
Net Assets ............................................................................ $ 945,210
=========
Net Asset Value, offering and redemption price per share:
Class S ($940,779,489 divided by 15,459,331 shares of $.01 par value
shares of beneficial interest outstanding) ........................................ $ 60.86
=========
Class E ($4,430,588 divided by 73,015 shares of $.01 par value
shares of beneficial interest outstanding) ........................................ $ 60.68
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
59 International Securities Fund
<PAGE>
International Securities Fund
Statement of Operations
Amounts in thousands Year Ended December 31, 1998
<TABLE>
<S> <C>
Investment Income:
Dividends ............................................................. $ 21,384
Dividends from Money Market Fund (Note 5) ............................. 2,454
Interest .............................................................. 604
Less foreign taxes withheld ........................................... (2,190)
---------
Total Investment Income ............................................. 22,252
Expenses (Notes 1, 2 and 4):
Advisory fees ....................................... $8,820
Administrative fees ................................. 39
Custodian fees ...................................... 1,672
Distribution fees - Class E ......................... 2
Transfer agent fees ................................. 736
Professional fees ................................... 68
Registration fees - Class S ......................... 68
Registration fees - Class E ......................... 1
Shareholder servicing fees - Class E ................ 5
Trustees' fees ...................................... 4
Miscellaneous ....................................... 67
------
Total Expenses ........................................................ 11,482
------
Net investment income .................................................... 10,770
------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ........................................... 24,707
Futures contracts ..................................... (1,356)
Foreign currency-related transactions ................. (592) 22,759
---------
Net change in unrealized appreciation or
depreciation of:
Investments ........................................... 73,019
Futures contracts ..................................... 2,439
Foreign currency-related transactions ................. (1,722) 73,736
--------- -----------
Net gain (loss) on investments ..................................... 96,495
-----------
Net increase (decrease) in net assets
resulting from operations ......................................... $ 107,265
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
International Securities Fund 60
<PAGE>
International Securities Fund
Statement of Changes in Net Assets
Amounts in thousands
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ............................... $ 10,770 $ 7,468
Net realized gain (loss) ........................... 22,759 25,520
Net change in unrealized appreciation or
depreciation ........................................ 73,736 (33,866)
--------- ---------
Net increase (decrease) in net assets
resulting from operations ......................... 107,265 (878)
--------- ---------
From Distributions to Shareholders:
Net investment income
Class S ........................................... (5,142) (5,261)
Class E ........................................... (22) (3)
In excess of net investment income
Class S ........................................... (4,633) (3,871)
Class E ........................................... (20) (3)
Net realized gain on investments
Class S ........................................... (3,176) (31,097)
Class E ........................................... (5) (45)
In excess of net realized gain on investments
Class S ........................................... -- (15,023)
Class E ........................................... -- (22)
--------- ---------
Total Distributions to Shareholders ............. (12,998) (55,325)
--------- ---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ...................... 9,906 153,002
--------- ---------
Total Net Increase (Decrease) in Net Assets .......... 104,173 96,799
Net Assets
Beginning of period ................................. 841,037 744,238
--------- ---------
End of period (including accumulated distributions
in excess of net investment income of $2,960
and $5,606, respectively) ........................ $ 945,210 $ 841,037
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
61 International Securities Fund
<PAGE>
International Securities Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $54.69 $58.48 $56.61 $53.96 $57.95
------ ------ ------ ------ ------
Income From Investment Operations:
Net investment income (a) ............................. .69 .56 .53 .56 .44
Net realized and unrealized gain (loss) on investments.. 6.32 (.46) 3.72 4.89 1.23
------ ------ ------ ------ ------
Total Income From Investment
Operations ......................................... 7.01 .10 4.25 5.45 1.67
------ ------ ------ ------ ------
Distributions:
Net investment income .................................. (.34) (.37) (.31) (.88) (.04)
In excess of net investment income ..................... (.30) (.27) (.17) (.23) (.02)
Net realized gain on investments ....................... (.20) (2.19) (1.90) (1.69) (5.60)
In excess of net realized gain on investments .......... -- (1.06) -- -- --
------ ------ ------ ------ ------
Total Distributions .................................. (.84) (3.89) (2.38) (2.80) (5.66)
------ ------ ------ ------ ------
Net Asset Value, End of Period .......................... $60.86 $54.69 $58.48 $56.61 $53.96
====== ====== ====== ====== ======
Total Return (%) ........................................ 12.90 .26 7.63 10.20 4.86
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ............... 940,779 839,767 743,615 622,389 563,333
Ratios to average net assets (%):
Operating expenses, net .............................. 1.22 1.26 1.30 1.30 1.30
Operating expenses, gross ............................ 1.22 1.26 1.31 1.31 1.33
Net investment income ................................ 1.15 .91 .91 .97 .70
Portfolio turnover rate (%) ........................... 68.46 73.54 42.43 42.96 72.23
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
International Securities Fund 62
<PAGE>
International Securities Fund
Financial Highlights - Class E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1998 1997 1996*
-------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $54.64 $58.47 $58.56
------ ------ ------
Income From Investment Operations:
Net investment income (c) .................. .28 .35 (.03)
Net realized and unrealized gain (loss) on
investments ................................. 6.53 (.64) 1.68
------ ------ ------
Total Income From Investment Operations ... 6.81 (.29) 1.65
------ ------ ------
Distributions:
Net investment income ....................... (.30) (.14) (.27)
In excess of net investment income .......... (.27) (.15) (.16)
Net realized gain on investments ............ (.20) (2.19) (1.31)
In excess of net realized gain on investments -- (1.06) --
------ ------ ------
Total Distributions ....................... (.77) (3.54) (1.74)
------ ------ ------
Net Asset Value, End of Period ............... $60.68 $54.64 $58.47
====== ====== ======
Total Return (%)(a)........................... 12.53 (.41) 2.86
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)..... 4,431 1,271 623
Ratios to average net assets (%)(b):
Operating expenses ........................ 1.64 1.96 2.00
Net investment income ..................... .49 .19 (.61)
Portfolio turnover rate (%)(b)............... 68.46 73.54 42.43
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
63 International Securities Fund
<PAGE>
DIVERSIFIED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.
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.
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
Dates Diversified Bond - Class S LB Aggregate ** Lipper(R) Intermediate++
<S> <C> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $11,253 $11,453 $11,135
1990 $12,106 $12,480 $11,923
1991 $13,959 $14,477 $13,734
1992 $14,874 $15,548 $14,659
1993 $16,363 $17,064 $16,053
1994 $15,832 $16,566 $15,517
1995 $18,643 $19,627 $18,090
1996 $19,281 $20,340 $18,665
1997 $21,034 $22,303 $20,240
1998 $22,737 $24,241 $21,745
- ------------------------------------------------------------------------------------------------------------------------
Total $176,082 $184,099 $171,761
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED BOND FUND - CLASS S LEHMAN BROTHERS AGGREGATE BOND INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ---------- -------------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
1 Year $10,809 8.09% 1 Year $10,869 8.69%
5 Years $13,895 6.80%(S) 5 Years $14,206 7.27%(S)
10 Years $22,737 8.56%(S) 10 Years $24,241 9.26%(S)
LIPPER(R) INTERMEDIATE INVESTMENT GRADE DEBT FUNDS
DIVERSIFIED BOND FUND - CLASS E ++++ BENCHMARK
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ---------- -------------- ---------------- --------------- ---------------------
1 Year $10,763 7.63% 1 Year $10,744 7.44%
5 Years $13,727 6.54%(S) 5 Years $13,546 6.26%(S)
10 Years $22,462 8.43%(S) 10 Years $21,745 8.08%(S)
</TABLE>
65 Diversified Bond Fund
<PAGE>
DIVERSIFIED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Diversified Bond Fund Class S and
Class E shares reflected total returns of 8.1% and 7.6%, respectively, as
compared to the Lehman Brothers Aggregate Bond Index, which gained 8.7%. The
Index outperformed primarily due to the Fund's emphasis on yield sectors, which
lagged treasuries in virtually all categories. However, performance was
favorable versus the Lipper(R) Intermediate Investment Grade Debt Funds
Benchmark, which finished the year with a return of 7.4%.
PORTFOLIO HIGHLIGHTS:
Bonds produced returns slightly above long-term expectations in 1998. Falling
yields and a flight to quality resulted in the outperformance of US treasuries
relative to other sectors of the US bond market during the year. Spread
sectors, including corporate bonds and mortgage- and asset-backed securities
lagged due to severe credit spread widening during the third quarter. After
trending toward historic lows over the past few years, credit spreads widened to
their largest level in two decades, driven by increasing fears of a global
recession. The Federal Reserve Board intervened during the third and fourth
quarters, applying three separate interest rate cuts, which added a degree of
liquidity to the market. Although this helped restore investor confidence, the
subsequent narrowing of credit spreads failed to fully offset third quarter
widening.
Given their emphasis on spread sectors to add value, the unexpected sudden and
dramatic widening of credit spreads eroded the performance of most bond funds.
The Diversified Bond Fund, which was overweighted in lower quality corporates
and mortgage-backed securities, also found this to be true. However, the impact
to the Fund's performance was minimal, due to effective security selection and
yield curve strategies, as well as being longer in duration versus the Index for
much of the year.
<TABLE>
<CAPTION>
TOP TEN ISSUERS
(as a percent of Total Investments) December 31, 1998
<S> <C>
United States Treasury 15.4%
Federal National Mortgage Association 14.6
Government National Mortgage Association 10.9
Federal Home Loan Mortgage Corp. 8.4
Merrill Lynch & Co. 1.4
Green Tree 1.5
Tennessee Valley Authority 1.2
Onyx Acceptance Grantor Trust 0.9
General Motors Acceptance Corp. 0.8
Ford Motor Credit Co. 0.7
PORTFOLIO CHARACTERISTICS
December 31, 1998
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 9.4 Years
Weighted Average Duration 4.7 Years
Current Yield (SEC 30-day standardized)
Class S 5.4%
Class E 5.1%
Number of Issues 938
Number of Issuers 619
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
</TABLE>
* The Diversified Bond Fund - Class S assumes initial investment on January
1, 1989.
** 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(R) Intermediate (5-10 Yr.) Investment Grade Debt Funds Benchmark
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 E - For the period, November 4, 1996
(commencement of sales) to May 15, 1998, shareholder service and Rule 12b-1
distribution fees were charged. From May 16, 1998 through December 31,
1998, only shareholder service 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 E to provide historical perspective.
(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.
Diversified Bond Fund 66
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 98.4%
ASSET-BACKED SECURITIES - 10.5%
Advanta Home Equity Loan Trust
Series 1991-1 Class A
9.000% due 02/25/06 37 37
AFC Home Equity Loan Trust
Series 1996-2 Class 1 A3
7.590% due 09/25/27 933 934
Arcadia Automobile Receivables Trust
Series 1998-A Class A4
6.000% due 11/17/03 315 317
Series 1998-B Class A3
5.950% due 11/15/02 610 617
Series 1998-B Class A4
6.000% due 11/15/03 215 219
Series 1998-D Class A3
5.800% due 08/15/06 675 677
BankAmerica Manufactured Housing
Contract
Series 1997-1 Class A4
6.195% due 06/10/10 (c) 1,000 1,020
Case Equipment Loan Trust
Series 1998-A Class A4
5.830% due 02/15/05 2,185 2,210
Chase Funding Mortgage Loan
Series 1998-2 Class IIA2
5.875% due 03/25/17 1,700 1,700
Circuit City Credit Card Master Trust
Series 1994-2 Class A
8.000% due 11/15/03 2,030 2,078
Citibank Credit Card Master Trust I
Series 1997-3 Class A
6.840% due 02/10/04 (c) 980 1,003
Series 1998-6 Class A
5.850% due 04/10/03 2,535 2,560
Contimortgage Home Equity Loan Trust
Mortgage Pass-thru Certificate
Series 1994-4 Class A6
8.270% due 12/15/24 168 174
Series 1996-4 Class A-9
6.880% due 01/15/28 (d) 825 837
Series 1997-2 Class A6
7.120% due 03/15/16 825 844
Discover Card Master Trust I
Series 1998-7 Class A
5.600% due 05/15/06 1,225 1,227
EQCC Home Equity Loan Trust
Series 1997-1 Class A4
7.160% due 03/15/13 900 911
Fleetwood Credit Corporation
Grantor Trust
Series 1997-B Class A
6.400% due 05/15/13 (c) 2,889 2,940
Ford Credit Auto Owner Trust
Series 1998-C Class A5
5.860% due 10/15/02 1,150 1,164
Green Tree Financial Corp.
Series 1996-9 Class A5
7.200% due 01/15/28 1,000 1,027
Series 1997-1 Class M1
7.220% due 03/15/28 (c) 1,200 1,221
Series 1997-4 Class M1
7.220% due 02/15/29 925 978
Green Tree Home Improvement
Loan Trust
Series 1997-A Class HEA5
7.210% due 03/15/28 1,465 1,499
Series 1997-E Class HEA6
6.620% due 01/15/29 1,370 1,398
Series 1998-D Class HIA2
5.940% due 06/15/29 345 346
Series 1998-E Class HIA1
5.907% due 08/15/07 1,205 1,207
Green Tree Lease Finance
Series 1998-1 Class A4
5.740% due 01/20/04 540 543
Green Tree Recreational,
Equipment & Consumer Loan Trust
Series 1997-3 Class A1
6.550% due 07/15/28 2,245 2,279
Series 1998-A Class A1C
6.180% due 06/15/19 470 479
Series 1998-C Class A4
6.170% due 02/15/11 1,850 1,883
J.C. Penney Master Credit Card Trust
Series E Class A
5.500% due 06/15/07 900 894
Metris Master Trust
Series 1996-1 Class A
6.450% due 02/20/02 1,877 1,884
Series 1997-1 Class A
6.870% due 10/20/05 2,695 2,810
Newcourt Equipment Trust Securities
Series 1998-1 Class A4
5.393% due 05/20/04 3,500 3,491
</TABLE>
67 Diversified Bond Fund
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Oakwood Mortgage Investors, Inc.
Series 1997-D Class A3
6.500% due 02/15/28 605 614
Series 1998-A Class A2
6.100% due 05/15/28 715 716
Onyx Acceptance Grantor Trust
Series 1997-1 Class A
6.550% due 09/15/03 (c) 72 73
Series 1998-1 Class A
5.950% due 07/15/04 2,217 2,225
Series 1998-A Class A3
5.850% due 08/15/02 2,580 2,594
Series 1998-C Class A2
5.550% due 09/15/01 1,500 1,499
Series 1998-C Class A3
5.650% due 04/15/02 1,465 1,467
Pacificamerica Home Equity Loan
Series 1998-2 Class AF
6.590% due 06/26/28 (c) 1,534 1,583
Preferred Credit Corp.
Series 1997-1 Class A6
7.590% due 07/25/26 850 895
Premier Auto Trust
Series 1997-2 Class A5
6.320% due 03/06/02 1,785 1,821
Series 1998-3 Class A4
5.960% due 10/08/02 910 922
Series 1998-5 Class A4
5.190% due 04/08/03 1,455 1,447
Provident Bank Home Equity Loan Trust
Series 1998-4 Class A2
5.970% due 11/25/13 1,095 1,095
Series 1998-4 Class A4
6.170% due 04/25/22 1,070 1,070
Providian Master Trust
Series 1997-4 Class A
6.250% due 06/15/07 2,065 2,108
Saxon Asset Securities Trust
Series 1998-4 Class AF3
6.265% due 07/25/23 1,290 1,297
Series 1998-4 Class AF6
6.400% due 01/25/30 1,600 1,613
Sears Credit Account Master Trust
Series 1998-1 Class A
5.800% due 08/15/05 110 110
Student Loan Marketing Association
Series 1996-3 Class A1
5.240% due 10/25/04 (c) 1,764 1,762
Team Fleet Financing Corp.
Series 1997-1 Class A
7.350% due 05/15/03 1,800 1,851
The Money Store Home Equity Loan Trust
Series 1998-A Class AF5
6.370% due 12/15/23 1,170 1,181
UCFC Home Equity Loan
Series 1996-B1 Class A4
7.525% due 12/15/17 725 740
Union Acceptance Corp.
Series 1998-B Class A4
5.900% due 02/09/04 1,440 1,459
USAA Auto Loan Grantor Trust
Series 1998-1 Class A
5.800% due 01/15/05 2,630 2,659
Wal-Mart Stores, Inc.
Series 1994-B3
8.800% due 12/30/14 315 399
WFS Financial Owner Trust
Series 1998-A Class A4
5.950% due 05/20/03 2,610 2,645
Series 1998-B Class A4
6.050% due 04/20/03 855 874
World Financial Network
Credit Card Master Trust
Series 1996-A Class A
6.700% due 02/15/04 (c) 2,425 2,499
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A2
6.200% due 11/15/02 767 770
Series 1997-A Class B
6.088% due 06/25/03 (c) 747 761
Series 1997-B Class A3
6.180% due 11/25/03 1,564 1,573
------
85,730
------
BANKERS ACCEPTANCE NOTES - 0.0%
Mellon Bank, NA
7.625% due 09/15/07 355 401
-----
CORPORATE BONDS AND NOTES - 20.1%
Air Products & Chemicals, Inc.
8.750% due 04/15/21 250 319
Allegiance Corp.
7.300% due 10/15/06 875 927
7.000% due 10/15/26 130 138
America West Airlines
Series A
6.850% due 07/02/09 471 488
</TABLE>
Diversified Bond Fund 68
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
American Express Co.
8.500% due 08/15/01 255 274
American Health Properties, Inc.
7.050% due 01/15/02 550 572
American Stores Co.
8.000% due 06/01/26 690 812
Analog Devices, Inc.
6.625% due 03/01/00 125 126
Archer Daniels Co.
8.375% due 04/15/17 665 831
Aristar, Inc.
6.300% due 07/15/00 1,270 1,279
7.750% due 06/15/01 500 521
Associates Corp. of North America
6.500% due 10/15/02 450 465
Series H (MTN)
7.090% due 04/11/03 400 424
AT&T Capital Corp.
5.438% due 04/01/99 (c) 2,000 1,999
AT&T Corp.
8.625% due 12/01/31 220 247
Atlantic Richfield Co.
9.125% due 08/01/31 550 752
Avco Financial Services, Inc.
5.750% due 01/23/01 (MTN) 1,280 1,285
6.000% due 08/15/02 800 809
Baltimore Gas & Electric Co.
7.250% due 07/01/02 500 529
6.500% due 02/15/03 840 873
Banco De Latinoamerica
6.500% due 04/02/01 1,225 1,248
Bank of New York, Inc.
7.875% due 11/15/02 350 379
Bank One, Columbus, Ohio
7.375% due 12/01/02 120 128
BankAmerica Corp.
6.850% due 03/01/03 425 445
6.875% due 06/01/03 260 272
Barnett Bank, Inc.
6.900% due 09/01/05 405 433
Baxter International Inc.
6.630% due 02/15/28 825 828
Bear Stearns Co Inc. (MTN)(c)
5.737% due 02/16/01 2,000 1,997
Bell Telephone Co. of Pennsylvania
8.350% due 12/15/30 355 462
BellSouth Telecommunications
7.000% due 12/01/95 385 422
Beneficial Corp.
8.400% due 05/15/08 1,235 1,429
Boeing Co.
8.750% due 08/15/21 550 696
Campbell Soup Co.
8.875% due 05/01/21 420 558
Cardinal Health, Inc.
6.250% due 07/15/08 500 513
Carolina Power & Light Co.
6.875% due 08/15/23 410 431
Case Corp.
7.250% due 08/01/05 330 341
7.250% due 01/15/16 295 297
Caterpillar Financial Services (MTN)
9.500% due 02/06/07 420 516
Caterpillar, Inc.
8.000% due 02/15/23 200 237
Central Fidelity Banks, Inc.
8.150% due 11/15/02 170 186
Central Power & Light Co.
Series FF
6.875% due 02/01/03 600 631
Champion International Corp.
6.400% due 02/15/26 460 472
Chase Manhattan Corp.
6.500% due 08/01/05 300 311
Chesapeake & Potomac Telephone Co.
8.375% due 10/01/29 230 299
Choice Hotels International, Inc.
7.125% due 05/01/08 1,075 1,112
Chrysler Financial Corp.
5.875% due 02/07/01 1,000 1,012
6.080% due 03/12/01 (MTN) 900 915
5.569% due 06/11/01 (MTN)(c) 2,000 1,993
Cincinnati Bell Telephone Co.
6.300% due 12/01/28 600 606
Cincinnati Gas & Electric Co.
7.200% due 10/01/23 410 421
CIT Group, Inc.
6.150% due 12/15/02 (MTN) 500 508
5.625% due 10/15/03 1,920 1,919
Citicorp
5.375% due 05/24/01 (MTN)(c) 2,000 2,000
9.500% due 02/01/02 120 133
7.125% due 06/01/03 390 412
Citigroup, Inc.
6.875% due 02/15/98 790 788
City National Bank
6.375% due 01/15/08 600 618
</TABLE>
69 Diversified Bond Fund
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Coca Cola Enterprises Inc.
7.000% due 10/01/26 675 739
6.750% due 01/15/38 250 258
Colonial Realty, L.P. (MTN)
6.980% due 09/26/05 450 433
Comerica Bank
6.000% due 10/01/08 400 406
Commercial Credit Group, Inc.
5.750% due 07/15/00 295 297
7.875% due 07/15/04 805 890
6.500% due 06/01/05 540 563
8.700% due 06/15/10 380 463
Commonwealth Edison Co.
Series 85
7.375% due 09/15/02 945 997
Conagra, Inc. (MTN)
8.100% due 05/20/02 300 323
Consolidated Rail Corp.
Pass-thru Certificate Structured Note
Series 1995 Class A
6.760% due 05/25/15 448 462
Constitution Capital Trust I
9.150% due 04/15/27 400 518
CoreStates Capital Corp.
5.875% due 10/15/03 400 404
Cox Communications, Inc.
6.500% due 11/15/02 550 569
6.690% due 09/20/04 (MTN) 400 420
Crown Cork & Seal Finance PLC
7.000% due 12/15/06 750 755
CSX Corp.
7.900% due 05/01/17 400 451
DaimlerChrysler AG
7.450% due 03/01/27 800 918
Dillards Inc.
6.430% due 08/01/04 1,025 1,027
Dole Food Co., Inc.
6.750% due 07/15/00 170 170
Duke Power Co.
7.000% due 07/01/33 695 724
Eastman Chemical Co.
7.250% due 01/15/24 300 296
Excel Realty Trust, Inc.
6.875% due 10/15/04 775 810
Federal Express Corp.
7.600% due 07/01/97 300 300
Federated Department Stores Inc.
6.125% due 09/01/01 900 910
Finova Capital Corp.
5.875% due 10/15/01 500 500
7.125% due 05/01/02 925 959
First Bank Systems, Inc.
8.000% due 07/02/04 700 777
First Chicago Corp.
5.502% due 11/14/01 (MTN)(c) 3,000 2,967
8.875% due 03/15/02 505 554
First Interstate Bancorp (MTN)
9.375% due 01/23/02 135 150
First Tennessee Bank
Series BKNT
5.750% due 12/01/08 1,225 1,211
First Union Institutional Capital Trust I
8.040% due 12/01/26 225 248
First Union National Bank
5.800% due 12/01/08 600 599
First Union National Bank, Newark (MTN)
7.125% due 10/15/06 500 548
Fleet Financial Group, Inc.
6.875% due 03/01/03 300 312
8.125% due 07/01/04 595 665
Florida Residential Property & Casualty
Insurance Co.
Series A
7.375% due 07/01/03 1,700 1,805
Florida Windstorm
6.500% due 08/25/02 925 955
Ford Motor Credit Co.
5.500% due 03/21/01 (MTN)(c) 4,000 4,000
6.125% due 04/28/03 1,830 1,869
7.500% due 06/15/04 300 326
6.750% due 05/15/05 350 370
Fort James Corp.
6.625% due 09/15/04 895 911
Fortune Brands, Inc.
7.875% due 01/15/23 380 436
General Electric Capital Corp.
8.300% due 09/20/09 235 288
6.660% due 05/01/18 (c) 775 790
General Motors Acceptance Corp.
5.480% due 12/16/02 (MTN) 2,535 2,531
6.750% due 03/15/03 4,000 4,175
Grand Metropolitan Investment Corp.
7.450% due 04/15/35 300 347
GTE California, Inc.
6.750% due 05/15/27 550 584
</TABLE>
Diversified Bond Fund 70
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Hertz Corp.
7.625% due 08/01/02 550 582
9.000% due 11/01/09 230 278
Homeside, Inc.
11.250% due 05/15/03 1,025 1,180
Household Finance Corp. (MTN)
6.125% due 07/15/02 1,200 1,197
IMC Global, Inc.
6.500% due 08/01/03 500 488
Interamerican Development Bank
6.375% due 10/22/07 300 324
International Business Machines Corp.
7.125% due 12/01/96 780 874
International Lease Finance Corp.
6.375% due 08/01/01 400 408
6.375% due 02/15/02 400 408
8.375% due 12/15/04 1,000 1,129
IRT Property Co.
7.250% due 08/15/07 450 439
ITT Financial Corp.
7.400% due 11/15/25 955 945
Jackson National Life Insurance Co.
8.150% due 03/15/27 950 1,091
JC Penney & Co., Inc.
7.600% due 04/01/07 550 605
JPM Capital Trust I
7.540% due 01/15/27 225 236
Kansas Gas & Electric Co.
7.600% due 12/15/03 200 215
6.500% due 08/01/05 450 459
Key Bank Corp.
8.000% due 07/01/04 150 167
7.500% due 06/15/06 750 829
6.500% due 04/15/08 750 790
Lehman Brothers Holdings, Inc. (MTN)
6.000% due 02/26/01 1,000 998
Liberty Mutual Insurance Co.
7.697% due 10/15/97 1,650 1,706
Lincoln National Corp.
7.250% due 05/15/05 450 480
7.000% due 03/15/18 450 472
Loral Corp.
7.000% due 09/15/23 675 706
Lowes Companies, Inc.
6.875% due 02/15/28 680 714
Mattel, Inc.
6.000% due 07/15/03 500 505
May Department Stores Co.
6.875% due 11/01/05 480 517
Mellon Capital II
Series B
7.995% due 01/15/27 320 356
Merck & Co., Inc.
5.950% due 12/01/28 1,225 1,223
Merrill Lynch & Co.
6.000% due 02/12/03 800 812
Mirage Resorts, Inc.
6.625% due 02/01/05 955 927
Nabisco, Inc.
6.375% due 02/01/35 850 823
Natexis Ambs Co. LLC
Series A
8.440% due 12/29/49 150 142
Nationsbank Corp.
7.750% due 08/15/04 450 496
New England Telephone & Telegraph Co.
7.875% due 11/15/29 235 290
News America Holdings, Inc.
8.875% due 04/26/23 500 606
7.750% due 01/20/24 450 485
7.125% due 04/08/28 250 249
Northwestern Bell Telephone Co.
7.750% due 05/01/30 630 726
Norwest Corp.
Series H (MTN)
6.750% due 06/15/07 300 320
Norwest Financial, Inc.
6.250% due 11/01/02 525 539
6.375% due 11/15/03 575 596
6.000% due 02/01/04 600 611
6.750% due 06/01/05 200 211
NYNEX Capital Funding Co.
8.750% due 12/01/04 450 522
NYNEX Corp. (MTN)
9.550% due 05/01/10 349 432
Occidental Petroleum Corp.
8.500% due 11/09/01 (MTN) 245 260
10.125% due 11/15/01 210 230
Panamsat Corp.
6.125% due 01/15/05 600 590
Pennsylvania Power & Light Co.
6.875% due 03/01/04 1,000 1,052
Philadelphia Electric Company
7.125% due 09/01/02 550 577
Philip Morris Cos., Inc.
6.950% due 06/01/06 295 314
7.200% due 02/01/07 1,000 1,086
7.650% due 07/01/08 310 350
</TABLE>
71 Diversified Bond Fund
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Pitney Bowes Credit Corp.
8.550% due 09/15/09 460 568
PNC Funding Corp.
6.875% due 07/15/07 800 854
Praxair, Inc.
6.850% due 06/15/05 700 715
Procter & Gamble Co. Sharing ESOP
Series A
9.360% due 01/01/21 90 120
Provident Cos., Inc.
6.375% due 07/15/05 1,000 1,031
Ralston Purina Co.
7.875% due 06/15/25 615 696
Raytheon Co.
6.300% due 03/15/05 880 902
Realty Income Corp.
7.750% due 05/06/07 1,175 1,113
Reliastar Financial Corp.
6.500% due 11/15/08 600 607
Republic of New York Corp.
9.750% due 12/01/00 190 205
8.250% due 11/01/01 150 161
Rite Aid Corp.
6.700% due 12/15/01 950 974
Ryder System, Inc.
Series P
6.600% due 11/15/05 600 602
Safeway, Inc.
6.050% due 11/15/03 440 443
Salomon Smith Barney Holdings, Inc.
6.250% due 06/15/05 650 656
Sears Roebuck Acceptance Corp.
6.750% due 01/15/28 800 806
Series II (MTN)
6.690% due 04/30/01 375 385
Service Corp. International
6.750% due 06/01/01 250 256
7.375% due 04/15/04 560 594
6.000% due 12/15/05 300 297
Shopping Center Associates
6.750% due 01/15/04 750 741
Socgen Real Estate Co., LLC
Series A
7.640% due 12/29/49 (g) 430 403
Southern California Edison Co.
6.375% due 01/15/06 575 602
Spieker Properties (MTN)
8.000% due 07/19/05 700 722
Sprint Capital Corp.
6.125% due 11/15/08 3,155 3,224
Star Banc Corp.
5.875% due 11/01/03 300 302
Summit Properties Partnership, L.P.
7.200% due 08/15/07 475 453
Suntrust Banks, Inc.
7.375% due 07/01/02 700 742
6.250% due 06/01/08 150 156
Texaco Capital, Inc.
9.750% due 03/15/20 1,290 1,799
8.875% due 09/01/21 220 283
TIG Capital Trust I
8.597% due 01/15/27 1,050 1,185
Time Warner, Inc.
7.975% due 08/15/04 300 333
8.110% due 08/15/06 600 684
8.180% due 08/15/07 600 695
6.875% due 06/15/18 950 995
Union Carbide Chemicals & Plastics
7.875% due 04/01/23 590 608
Union Oil Co. (MTN)
9.400% due 02/15/11 470 605
Union Pacific Corp.
7.600% due 05/01/05 120 129
Union Pacific Railroad Trust
Pass-thru Certificate
Series 1996-A2
7.060% due 05/15/03 500 534
Union Planters Bank
6.500% due 03/15/18 670 686
United Technologies Corp.
8.750% due 03/01/21 380 496
US Bank National Association Minnesota
5.647% due 12/19/01 (c) 2,000 2,016
5.625% due 11/30/05 1,500 1,496
US West Communications, Inc.
5.625% due 11/15/08 200 202
USA Waste Services, Inc.
6.500% due 12/15/02 825 838
USX Marathon Group
8.500% due 03/01/23 800 882
Virginia Electric & Power Co.
8.750% due 04/01/21 200 217
Wachovia Corp.
6.800% due 06/01/05 305 323
5.625% due 12/15/08 1,225 1,218
Wal-Mart Stores, Inc.
7.500% due 05/15/04 300 332
</TABLE>
Diversified Bond Fund 72
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Walt Disney Co.
Series E (MTN)
5.125% due 12/15/03 600 597
Wells Fargo & Co.
6.875% due 04/01/06 500 532
7.125% due 08/15/06 1,125 1,223
Wellsford Residential Property Trust
9.375% due 02/01/02 750 804
Westvaco Corp.
9.750% due 06/15/20 115 154
Whirlpool Corp.
9.500% due 06/15/00 250 263
Willamette Industries, Inc.
7.850% due 07/01/26 520 565
Wilmington Trust
10.370% due 01/02/07 1,647 1,742
Wisconsin Central Transportation Corp.
6.625% due 04/15/08 850 863
World Financial Properties Tower
Series 1996 WBF-B
6.910% due 09/01/13 1,169 1,188
Worldcom, Inc.
6.400% due 08/15/05 2,550 2,651
6.950% due 08/15/28 500 538
-------
163,191
-------
EURODOLLAR BONDS - 1.7%
Australian Gas Light Co.
6.400% due 04/15/08 1,600 1,627
Caterpillar Financial Services Corp.
5.492% due 02/12/01 (MTN)(c) 4,000 3,997
Hutchison Whampoa Finance, Ltd.
7.450% due 08/01/17 775 671
Merita Bank, LTD
7.500% due 12/29/49 (g) 850 830
Nationsbank Corp.
5.371% due 06/17/02 (MTN)(c) 3,000 2,978
Ontario, Province of
7.375% due 01/27/03 525 565
5.500% due 10/01/08 3,225 3,237
-------
13,905
-------
MORTGAGE-BACKED SECURITIES - 39.7%
ACLC Franchise Loan Receivables 1997
Pass Thru Class A1
7.120% due 03/15/12 818 851
American Southwest Financial Corp.
Series G Class G-4 CMO
12.250% due 11/01/14 194 203
BKB Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 314 314
Capita Equipment Receivables Trust
Series 1996-1 Class A4
6.280% due 06/15/00 860 865
Chase Commercial Mortgage Securities Corp.
Series 1997-1 Class E
7.370% due 12/19/07 (c) 800 767
Chase Mortgage Finance Corp.
Series 1998-S4 Class A4
6.550% due 08/25/28 2,000 2,003
Citicorp Mortgage Securities, Inc.
Series 1992-1 Class A-5
8.000% due 04/25/21 6 6
Collateralized Mortgage Obligation
Trust 56 Class B CMO
9.985% due 12/01/18 192 200
Commercial Mortgage Acceptance Corp.
Series 1997-ML1 Class A1
6.500% due 11/15/04 (c) 1,157 1,190
Credit Suisse First Boston
Mortgage Securities Corp.
Series 1998-C2 Class A1
5.960% due 12/15/07 2,645 2,675
Delta Funding Home Equity Loan Trust
Series 1997-3 Class M1F
7.080% due 10/25/28 500 479
DLJ Commercial Mortgage Corp.
Series 1998-CF2 Class A1A
5.880% due 11/12/31 2,255 2,269
DLJ Mortgage Acceptance Corp.
Series 1993 Class A-2 CMO
7.650% due 09/18/03 2,500 2,531
Federal Home Loan Mortgage Corp. (b)
6.500% 15 Year TBA 215 218
6.500% 30 Year TBA 8,400 8,507
7.500% 30 Year TBA 3,000 3,124
6.000% 30 Year TBA Gold 8,800 8,693
Federal Home Loan Mortgage Corp.
Participation Certificate
7.500% due 2001 137 137
7.000% due 2002 67 68
6.500% due 2003 92 93
7.000% due 2003 248 251
6.750% due 2007 311 317
7.500% due 2007 595 612
7.000% due 2008 454 463
8.000% due 2008 94 97
</TABLE>
73 Diversified Bond Fund
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
8.500% due 2008 130 135
6.500% due 2009 1,335 1,356
7.500% due 2009 (c) 98 101
7.500% due 2009 1,600 1,647
8.000% due 2009 177 183
6.500% due 2010 101 102
7.000% due 2010 205 208
7.500% due 2010 38 40
8.000% due 2010 32 33
6.000% due 2011 4,100 4,121
6.500% due 2011 740 752
7.000% due 2011 114 116
7.500% due 2011 382 393
8.000% due 2011 369 380
6.000% due 2012 85 86
7.500% due 2012 568 583
8.000% due 2012 233 240
6.500% due 2013 5,562 5,643
7.000% due 2013 582 594
12.000% due 2014 87 98
12.000% due 2015 46 52
9.000% due 2016 539 568
12.500% due 2016 61 70
8.000% due 2017 579 599
9.000% due 2017 3 3
9.000% due 2018 1,064 1,135
9.000% due 2020 530 567
9.000% due 2022 173 183
6.500% due 2024 3,007 3,030
9.000% due 2024 633 671
8.000% due 2025 2,819 2,946
8.500% due 2025 623 652
9.000% due 2025 386 409
9.000% due 2026 16 17
7.500% due 2027 2,151 2,209
8.500% due 2027 2,777 2,907
6.000% due 2028 2,773 2,740
6.500% due 2028 3,501 3,526
7.000% due 2028 1,889 1,926
7.500% due 2028 (h) 1,591 1,634
8.000% due 2028 641 663
8.500% due 2028 337 353
Federal Home Loan Mortgage Corp.
Participation Certificate
Series 1053 Class
7.000% due 03/15/21 1,252 1,278
Federal National Mortgage Association
7.790% due 09/27/06 775 786
7.280% due 05/23/07 (MTN) 655 694
6.000% due 05/15/08 (h) 2,680 2,829
Federal National Mortgage Association (b)
6.000% 15 Year TBA 1,840 1,845
6.500% 15 Year TBA 1,845 1,871
6.000% 30 Year TBA 6,270 6,188
6.500% 30 Year TBA 10,965 11,037
7.000% 30 Year TBA 20,465 20,874
Federal National Mortgage
Association Pools
7.000% due 1999 163 163
7.500% due 1999 1,485 1,525
8.500% due 1999 74 77
7.000% due 2000 573 575
9.500% due 2001 29 30
8.000% due 2002 282 286
9.500% due 2002 52 54
6.000% due 2003 388 390
7.000% due 2003 413 417
7.500% due 2003 590 597
8.000% due 2003 118 120
9.500% due 2003 93 97
6.500% due 2004 23 23
8.000% due 2004 145 147
9.500% due 2005 93 97
9.500% due 2006 84 88
7.000% due 2007 105 107
7.200% due 2007 993 1,087
6.500% due 2008 585 593
7.000% due 2008 332 339
6.500% due 2009 4,358 4,424
7.000% due 2009 455 465
6.500% due 2010 423 429
8.000% due 2010 23 24
10.500% due 2010 23 24
7.500% due 2011 138 142
8.000% due 2011 79 82
6.500% due 2012 417 423
7.000% due 2012 786 803
7.500% due 2012 106 109
6.500% due 2013 1,179 1,196
9.000% due 2016 20 21
8.000% due 2017 509 530
9.000% due 2017 547 582
8.000% due 2020 27 28
7.500% due 2022 881 906
6.500% due 2024 4,872 4,908
7.500% due 2024 395 406
8.000% due 2024 2,366 2,452
</TABLE>
Diversified Bond Fund 74
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
8.500% due 2025 227 238
8.000% due 2026 876 908
8.500% due 2026 4,267 4,468
9.000% due 2026 411 434
7.500% due 2027 7,621 7,829
8.000% due 2027 1,696 1,756
8.500% due 2027 1,245 1,304
6.000% due 2028 2,744 2,708
6.500% due 2028 4,189 4,217
7.500% due 2028 6,929 7,117
8.000% due 2028 2,427 2,513
Federal National Mortgage Association
REMIC
Series 1992-10 Class ZD
8.000% due 11/25/21 1,778 1,896
Federal National Mortgage Association
Aces
6.250% due 01/25/08 1,250 1,290
Federal National Mortgage Association
Interest Only Inverse Floater
Series 1993-208 Class SA
0.251% due 02/25/23 (c)(i) 29,236 237
Federal National Mortgage Association
Principal Only Strip
Zero Coupon due 03/01/20 105 89
First Union Lehman Brothers Commercial
Trust
Series 1997-C1 Class C
7.440% due 04/18/07 750 796
Government National Mortgage Association (b)
6.500% 15 Year TBA 2,025 2,063
6.500% 30 Year TBA 5,500 5,555
7.000% 30 Year TBA 3,715 3,801
Government National Mortgage Association
6.000% due 1999 1,200 1,190
6.500% due 1999 2,910 2,940
6.500% due 2008 153 156
6.500% due 2009 1,416 1,443
7.000% due 2011 19 19
9.000% due 2016 1,302 1,398
9.500% due 2016 70 75
8.000% due 2017 1,185 1,244
9.000% due 2017 1,976 2,124
9.000% due 2020 58 62
10.500% due 2020 244 268
10.500% due 2021 55 60
7.000% due 2022 573 587
8.500% due 2022 238 253
6.875% due 2023 (c) 2,703 2,746
7.000% due 2023 2,231 2,284
7.000% due 2023 (c) 5,201 5,277
7.500% due 2023 4,495 4,638
6.875% due 2024 (c) 1,112 1,125
7.000% due 2024 6,460 6,611
7.500% due 2024 1,070 1,104
7.500% due 2025 1,529 1,576
8.000% due 2025 2,333 2,425
9.000% due 2025 4,500 4,833
6.500% due 2026 251 254
7.000% due 2026 323 330
7.500% due 2026 338 348
8.000% due 2026 5,077 5,276
7.000% due 2027 3,264 3,340
7.500% due 2027 1,695 1,747
8.000% due 2027 5,667 5,890
6.000% due 2028 4,928 4,865
6.500% due 2028 6,099 6,160
7.000% due 2028 6,895 7,055
Government National Mortgage
Association
Series 1998-23 Class ZA
6.500% due 09/20/28 5,082 4,926
GS Mortgage Securities Corp. II
Series 1997-GL Class A2A
6.940% due 07/13/30 2,004 2,051
Series 1998-C1 Class A1
6.060% due 10/18/30 2,549 2,582
Series 1998-GLII Class A1
6.312% due 04/13/31 (c) 930 952
Housing Securities, Inc.
Series 1994-2 Class A1
6.500% due 07/25/09 791 797
LB Commercial Conduit Mortgage Trust
Series 1998-C4 Class A1A
5.870% due 08/15/06 (c) 1 1
Lehman Brothers Mortgage Trust, Inc.
Series 1991-2 Class A-1
8.000% due 03/20/99 7 7
Merrill Lynch Mortgage Investors, Inc.
Series 1996-C2 Class A1
6.690% due 11/21/28 438 449
Series 1996-C2 Class A2
6.820% due 11/21/28 2,400 2,515
Series 1997-C1 Class A1
6.950% due 06/18/29 (c) 7,337 7,625
Series 1998-C3 Class A1
5.650% due 12/15/30 1,175 1,181
Morgan Stanley Capital I
Series 1998-HF1 Class A2
6.520% due 01/15/08 1,200 1,252
</TABLE>
75 Diversified Bond Fund
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class A2B
7.900% due 02/15/06 775 855
Norwest Asset Securities Corp.
Series 1997-9 Class A5
7.000% due 06/25/12 941 963
Series 1998-18 Class A4
6.250% due 08/25/28 2,385 2,329
Norwest Integrated Structured Assets, Inc.
Series 1998-1 Class 2A4
7.000% due 06/25/28 1,620 1,657
Residential Accredited Loans, Inc.
Series 1997-QS1 Class A11
7.500% due 02/25/27 1,956 2,002
Residential Funding Mortgage Securities I
Series 1997-S4 Class A5
7.000% due 03/25/12 929 948
Series 1997-S10 Class A-5
7.000% due 07/25/12 945 965
Series 1997-S18 Class A7
6.750% due 11/25/12 718 732
Series 1998-S20 Class A24
6.750% due 09/25/28 1,000 1,013
Resolution Trust Corp.
Series 1994-C1 Class C
8.000% due 06/25/26 975 1,018
Series 1994-C2 Class D
8.000% due 04/25/25 366 376
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 01/01/19 1,697 1,740
Structured Asset Securities Corp.
Mortgage Pass-thru Certificate
Series 1996-CFL Class C
6.525% due 02/25/28 300 306
United States Department
of Veteran Affairs REMIC
Series 1992-1 Class 2-E
7.750% due 03/15/16 550 559
-------
322,265
-------
MUNICIPAL BONDS - 0.3%
Austin, Texas Revenue Bond
5.250% due 05/15/20 525 548
Central Puget Sound, Washington
Regional Transit Authority Sales Tax
and Motor Revenue
5.250% due 02/01/21 1,250 1,303
Georgia, State of, General Obligation,
Series D, semiannual demand
5.250% due 10/01/15 570 608
-------
2,459
-------
NON-US BONDS - 0.0%
Italy, Republic of
6.875% due 09/27/23 ITL 150 167
------
UNITED STATES GOVERNMENT AGENCIES - 7.2%
Federal Home Loan Bank
5.570% due 08/17/00 5,000 5,045
6.450% due 03/13/02 (h) 4,250 4,315
5.915% due 08/25/08 2,975 3,093
Federal Home Loan Mortgage Corp.
5.750% due 07/15/03 (h) 600 615
5.125% due 10/15/08 4,435 4,396
Federal National Mortgage Association
5.790% due 10/12/99 (MTN) 4,000 4,026
6.100% due 10/06/00 (MTN) 1,305 1,315
6.250% due 11/20/02 (MTN) 1,335 1,360
6.010% due 07/17/03 (MTN) 2,000 2,022
7.780% due 09/29/06 (MTN) 665 677
6.940% due 03/19/07 (MTN) 1,065 1,112
6.900% due 08/21/07 (MTN) 2,155 2,255
6.780% due 10/22/07 (MTN) 2,010 2,102
6.160% due 08/07/28 150 157
6.080% due 09/01/28 (MTN) 2,275 2,358
6.210% due 08/06/38 2,850 2,989
Government Backed Trust Certificates
Series 1C
9.250% due 11/15/01 2,341 2,494
Series 2E
9.400% due 05/15/02 681 720
Series T3
9.625% due 05/15/02 (c) 2,551 2,699
Resolution Funding Corp.
8.875% due 07/15/20 1,855 2,607
8.625% due 01/15/21 715 986
8.625% due 01/15/30 390 562
</TABLE>
Diversified Bond Fund 76
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Tennessee Valley Authority
Series A
6.375% due 06/15/05 2,730 2,902
Series C
6.000% due 03/15/13 3,775 3,951
Series E
6.250% due 12/15/17 610 645
6.750% due 11/01/25 2,900 3,276
-------
58,679
-------
UNITED STATES GOVERNMENT TREASURIES - 16.5%
United States Treasury Bonds
10.750% due 05/15/03 1,130 1,394
10.375% due 11/15/09 685 875
12.750% due 11/15/10 10,730 15,585
10.375% due 11/15/12 980 1,352
12.000% due 08/15/13 3,500 5,344
11.750% due 11/15/14 195 303
9.875% due 11/15/15 1,240 1,865
7.500% due 11/15/16 8,155 10,130
8.750% due 05/15/17 7,430 10,336
8.875% due 08/15/17 7,225 10,177
8.000% due 11/15/21 10,660 14,253
7.625% due 11/15/22 6,575 8,523
6.875% due 08/15/25 540 654
6.500% due 11/15/26 5,315 6,180
6.625% due 02/15/27 (h) 2,475 2,927
United States Treasury Notes
7.125% due 02/29/00 2,710 2,783
5.750% due 11/15/00 1,865 1,901
5.625% due 11/30/00 3,395 3,455
5.250% due 01/31/01 30 30
5.375% due 02/15/01 505 514
6.375% due 03/31/01 920 954
5.875% due 11/30/01 50 52
6.250% due 01/31/02 30 31
6.250% due 02/28/02 2,055 2,148
6.500% due 05/31/02 330 348
3.625% due 07/15/02 (h) 1,100 1,092
5.750% due 11/30/02 22,585 23,414
7.500% due 02/15/05 6,100 6,985
6.625% due 05/15/07 600 675
-------
134,280
-------
YANKEE BONDS - 2.4%
Abbey National PLC
6.700% due 06/29/49 (g) 2,125 2,083
Abitibi-Consolidated, Inc.
7.400% due 04/01/18 400 373
7.500% due 04/01/28 750 681
African Development Bank
9.750% due 12/15/03 325 385
6.750% due 10/01/04 300 317
6.875% due 10/15/15 1,245 1,319
8.800% due 09/01/19 295 378
Alberta, Province of
9.250% due 04/01/00 160 167
Asian Development Bank
8.000% due 04/30/01 175 186
8.500% due 05/02/01 180 193
6.250% due 10/24/05 315 330
Canadian National Railway Co.
6.800% due 07/15/18 450 462
Canadian Occidental Petroleum Ltd.
7.400% due 05/01/28 900 840
Carter Holt Harvey Ltd.
8.875% due 12/01/04 350 383
Diageo Capital PLC
6.125% due 08/15/05 600 620
Hydro Quebec
Series GH
8.250% due 04/15/26 505 624
International American Development Bank
6.950% due 08/01/26 155 173
Manitoba, Province of
Series CB
8.800% due 01/15/20 200 268
Series CD
9.250% due 04/01/20 200 279
Merita Bank, Ltd.
7.150% due 12/29/49 (g) 250 242
National Westminster Bank PLC
7.750% due 04/29/49 (g) 1,875 1,978
New Brunswick, Province of
7.125% due 10/01/02 400 427
9.750% due 05/15/20 190 274
Newfoundland, Province of
10.000% due 12/01/20 90 127
Noranda Forest, Inc.
6.875% due 11/15/05 250 241
Nova Scotia, Province of
9.125% due 05/01/21 690 933
Quebec, Province of
7.125% due 02/09/24 985 1,076
Royal Caribbean Cruises, Ltd.
7.250% due 03/15/18 640 615
</TABLE>
77 Diversified Bond Fund
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
Saskatchewan, Province of
8.000% due 07/15/04 1,045 1,173
Societe Generale
7.850% due 04/29/49 (g) 1,100 1,121
Tyco International Group SA
6.375% due 06/15/05 700 714
Wharf International Finance, Ltd.
7.625% due 03/13/07 850 714
-------
19,696
-------
TOTAL LONG-TERM INVESTMENTS
(cost $783,122) 800,773
-------
NOTIONAL
AMOUNT
(000)
$
----------
OPTIONS PURCHASED - 0.2%
United States Treasury 10 Year Notes (e)*
Jan 97.56 Call 15,000 601
Feb 104.39 Call 2,400 17
United States Treasury 30 Year Bonds (e)*
Jan 97.25 Call 10,000 390
Jan 110.43 Call 1,200 28
Feb 103.40 Call 3,500 123
Apr 110 Call 2,500 22
Apr 110.25 Call 3,500 29
May 113.44 Call 1,200 35
TOTAL OPTIONS PURCHASED
(cost $1,260) 1,245
------
NUMBER
OF
SHARES
----------
PREFERRED STOCKS - 0.2%
Credit Lyonnais Capital S.C.A. - ADR 16 341
Equity Office Properties Trust
Series B 22 873
TIG Holdings, Inc. 7 735
-----
TOTAL PREFERRED STOCKS
(cost $2,192) 1,949
-------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 9.3%
Cummins Engine, Inc. Yrs 3 & 4
5.600% due 02/01/99 2,000 1,990
Federal Home Loan Mortgage Corp.
Discount Note
5.080% due 01/14/99 (a)(f) 1,200 1,198
Frank Russell Investment Company Money
Market Fund
due on demand (a) 72,599 72,599
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $75,786) 75,787
---------
TOTAL INVESTMENTS - 108.1%
(cost $862,361)(d) 879,754
---------
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS WRITTEN - (8.1%) (66,290)
----------
NET ASSETS - 100.0% 813,464
=========
</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 in connection with options written by the Fund.
(i) Represents notional amounts.
* $100,000 notional amount represents 1 contract
Abbreviations:
ADR - American Depository Receipt
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
Foreign Currency Abbreviations:
ITL - Italian lira
The accompanying notes are an integral part of the financial statements.
Diversified Bond Fund 78
<PAGE>
DIVERSIFIED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NOTIONAL MARKET
AMOUNT VALUE
(000) (000)
$ $
---------- --------
<S> <C> <C>
Options Written
(Notes 2 and 3)
United States Treasury 30 Year Bonds*
Jan 110.43 Call 1,200 28
Feb 96.39 Put 2,400 2
Mar 111.14 Call 2,100 22
Apr 114.08 Call 2,500 6
Apr 114.33 Call 3,500 7
-------
Total Liability for Options Written
(premiums received $167)((S)) 65
=======
</TABLE>
(S) At December 31, 1998, United States Government Securities valued at $6,849
were held as collateral in connection with options written by the Fund.
* $100,000 notional amount represents 1 contract.
The accompanying notes are an integral part of the financial statements.
79 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Assets and Liabilities
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments at market (identified cost $862,361)(Note 2) ...................................... $ 879,754
Cash ........................................................................................... 1,381
Receivables:
Dividends and interest ....................................................................... 8,085
Investments sold (regular settlement) ....................................................... 13,136
Investments sold (delayed settlement)(Note 2) ............................................... 5,048
Fund shares sold ............................................................................. 3,381
Short-term investments held as collateral for securities loaned, at market (Note 3) ........... 92,754
-----------
Total Assets .............................................................................. 1,003,539
Liabilities
Payables:
Investments purchased (regular settlement) ................................... $ 11,434
Investments purchased (delayed settlement)(Note 2) ........................... 83,583
Fund shares redeemed .......................................................... 1,750
Accrued fees to affiliates (Note 4) .......................................... 370
Other accrued expenses ........................................................ 119
Options written, at market value (premiums received $167)(Notes 2 and 3) ....... 65
Payable upon return of securities loaned, at market (Note 3) ................... 92,754
-----------
Total Liabilities ......................................................................... 190,075
-----------
Net Assets ..................................................................................... $ 813,464
===========
Net Assets Consist of:
Accumulated distributions in excess of net realized gains ...................................... (5,628)
Unrealized appreciation (depreciation) on:
Investments ................................................................................. 17,393
Options written ............................................................................. 102
Shares of beneficial interest .................................................................. 346
Additional paid-in capital ..................................................................... 801,251
-----------
Net Assets ..................................................................................... $ 813,464
===========
Net Asset Value, offering and redemption price per share:
Class S ($808,761,068 divided by 34,373,382 shares of $.01 par value
shares of beneficial interest outstanding) ........................................... $ 23.53
===========
Class E ($4,702,956 divided by 196,601 shares of $.01 par value
shares of beneficial interest outstanding) ........................................... $ 23.92
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Bond Fund 80
<PAGE>
Diversified Bond Fund
Statement of Operations
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
<S> <C>
Investment Income:
Interest .................................................................................................. $ 44,990
Dividends from Money Market Fund (Note 5) ................................................................ 4,424
Dividends ................................................................................................. 158
--------
Total Investment Income ................................................................................ 49,572
Expenses (Notes 1, 2 and 4):
Advisory fees ....................................................................... $ 3,373
Administrative fees ................................................................. 35
Custodian fees ...................................................................... 387
Distribution fees - Class E ......................................................... 5
Transfer agent fees ................................................................. 410
Professional fees ................................................................... 51
Registration fees - Class S ......................................................... 83
Registration fees - Class E ......................................................... 1
Shareholder servicing fees - Class E ................................................ 9
Trustees' fees ...................................................................... 4
Miscellaneous ....................................................................... 47
--------
Total Expenses ......................................................................................... 4,405
--------
Net investment income ....................................................................................... 45,167
--------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ......................................................................... 14,661
Options written ..................................................................... 722
Foreign currency-related transactions ............................................... (2) 15,381
--------
Net change in unrealized appreciation or depreciation of:
Investments ......................................................................... (217)
Options written ..................................................................... 44
Foreign currency-related transactions ............................................... (10) (183)
-------- --------
Net gain (loss) on investments .............................................................................. 15,198
--------
Net increase (decrease) in net assets resulting from operations ............................................. $ 60,365
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
81 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Amounts in thousands Years Ended December 31,
1998 1997
---------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income .................................................................... $ 45,167 $ 39,108
Net realized gain (loss) ................................................................ 15,381 4,407
Net change in unrealized appreciation or depreciation .................................... (183) 11,285
---------- ---------
Net increase (decrease) in net assets resulting from operations ........................ 60,365 54,800
---------- ---------
From Distributions to Shareholders:
Net investment income
Class S .................................................................................. (44,831) (39,001)
Class E .................................................................................. (236) (45)
In excess of net investment income
Class S .................................................................................. (906) (514)
Class E .................................................................................. (5) --
Net realized gain on investments
Class S .................................................................................. (7,014) --
Class E .................................................................................. (40) --
In excess of net realized gain on investments
Class S .................................................................................. (4,666) (2,393)
Class E .................................................................................. (27) (8)
---------- ---------
Total Distributions to Shareholders .................................................... (57,725) (41,961)
---------- ---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ............. 121,024 121,196
---------- ---------
Total Net Increase (Deecrease in Net Assets ................................................. 123,664 134,035
Net Assets
Beginning of period ...................................................................... 689,800 555,765
---------- ---------
End of period (including accumulated distributions in excess of
net investment income of $100 at December 31, 1997) ................................... $ 813,464 $ 689,800
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Diversified Bond Fund 82
<PAGE>
Diversified Bond Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...................... $ 23.43 $ 22.97 $ 23.69 $ 21.53 $ 23.73
---------- ---------- ---------- ---------- ----------
Income From Investment Operations:
Net investment income (a) .............................. 1.38 1.45 1.47 1.54 1.46
Net realized and unrealized gain (loss) on investments.. .47 .56 (.71) 2.18 (2.22)
---------- ---------- ---------- ---------- ----------
Total Income From Investment Operations .............. 1.85 2.01 .76 3.72 (.76)
---------- ---------- ---------- ---------- ----------
Distributions:
Net investment income .................................... (1.37) (1.45) (1.48) (1.56) (1.42)
In excess of net investment income ....................... (.03) (.02) -- -- --
Net realized gain on investments ......................... (.21) -- -- -- --
In excess of net realized gain on investments ............ (.14) (.08) -- -- (.02)
---------- ---------- ---------- ---------- ----------
Total Distributions .................................... (1.75) (1.55) (1.48) (1.56) (1.44)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ............................ $ 23.53 $ 23.43 $ 22.97 $ 23.69 $ 21.53
========== ========== ========== ========== ==========
Total Return (%) .......................................... 8.09 9.09 3.43 17.76 (3.25)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) .............. 808,761 687,331 554,804 513,808 525,315
Ratios to average net assets (%):
Operating expenses ..................................... .57 .60 .61 .59 .56
Net investment income .................................. 5.83 6.35 6.46 6.69 6.57
Portfolio turnover rate (%) ........................... 216.88 172.43 138.98 135.85 153.21
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
83 Diversified Bond Fund
<PAGE>
Diversified Bond Fund
Financial Highlights - Class E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996*
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................... $ 24.06 $ 22.98 $ 23.16
-------- -------- --------
Income From Investment Operations:
Net investment income (c)................................... 1.32 1.22 .25
Net realized and unrealized gain (loss) on investments...... .45 .66 (.09)
-------- -------- --------
Total Income From Investment Operations................... 1.77 1.88 .16
-------- -------- --------
Distributions:
Net investment income....................................... (1.53) (.72) (.34)
In excess of net investment income.......................... (.03) -- --
Net realized gain on investments............................ (.21) -- --
In excess of net realized gain on investments............... (.14) (.08) --
-------- -------- --------
Total Distributions....................................... (1.91) (.80) (.34)
-------- -------- --------
Net Asset Value, End of Period................................. $ 23.92 $ 24.06 $ 22.98
======== ======== ========
Total Return (%)(a)............................................ 7.63 8.35 .67
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).................... 4,703 2,469 962
Ratios to average net assets (%)(b):
Operating expenses........................................ .98 1.29 1.31
Net investment income..................................... 5.42 5.64 5.75
Portfolio turnover rate (%)(b).............................. 216.88 172.43 138.98
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
Diversified Bond Fund 84
<PAGE>
Multistrategy Bond Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
Objective: 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.
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, each employing a distinct approach to the Broad Market-Sector Rotation
style.
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
Dates Multistrategy Bond LB Aggregate ** Lipper(R) 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
1998 $15,055 $15,297 $14,833
- --------------------------------------------------------------------------------------------------------------
Total $85,568 $85,815 $85,247
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Multistrategy Bond Fund - Class S Lehman Brothers Aggregate Bond Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ------------- ------------ ------------------ --------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C>
1 Year $10,679 6.79% 1 Year $10,869 8.69%
5 Years $13,845 6.72%(S) 5 Years $14,206 7.27%(S)
Inception* $15,055 7.16%(S) Inception* $15,297 7.45%(S)
Lipper(R) Intermediate Investment Grade Debt Funds
Multistrategy Bond Fund - Class E ++++ Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ------------- ------------ ------------------ --------------- ------------------ ---------------------
1 Year $10,659 6.59% 1 Year $10,744 7.44%
5 Years $13,819 6.68%(S) 5 Years $13,546 6.26%(S)
Inception* $15,026 7.12%(S) Inception* $14,833 6.79%(S)
</TABLE>
85 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
Performance Review
For the year ended December 31, 1998, the Multistrategy Bond Fund Class S and
Class E shares reflected total returns of 6.8% and 6.6%, respectively, as
compared to the Lehman Brothers Aggregate Bond Index results of 8.7%. The Fund's
performance was negatively impacted by the weak returns of non-investment grade
and emerging markets debt holdings during the year.
Portfolio Highlights
The year proved unusual in the "across the board" outperformance of treasuries
versus other sectors of the bond market, particularly extended sectors. Emerging
markets debt proved to be the worst performers during the year, with worries
over economic problems, as well as a significant decline in investment during
the third quarter as investors fled riskier investments. Severe credit spread
widening during the third quarter also eroded the performance of corporate,
mortgage- and asset-backed securities. This included high yield US corporate
bonds as yield spreads changed from historically narrow levels to their widest
levels in 20 years before reversing moderately in the fourth quarter.
These trends boded poorly for the Multistrategy Bond Fund, which employs
strategies focused on spread sectors, including emerging markets debt and high
yield US corporates. The Fund lagged the index by a significant margin for the
year, primarily reflecting the weakness of its emerging markets debt and
corporate holdings. Duration strategies added value during the year, however,
longer duration holdings during the fourth quarter proved disadvantageous given
rising yields. It was exacerbated by a bulleted yield curve strategy as yields
on intermediate maturity bonds rose by more than either shorter or longer
maturities.
<TABLE>
Top Ten Issuers
(as a percent of Total Investments) December 31, 1998
<S> <C>
Government National Mortgage Association 14.8%
Federal National Mortgage Association 13.8
United States Treasury 7.2
Federal Home Loan Mortgage Corp. 4.7
Ford Motor Credit Co. 2.0
Green Tree Trust 1.5
AT&T Capital Corp. 1.1
Time Warner, Inc. 1.0
Citicorp 0.9
CMC Securities Corp. III 0.8
Portfolio Characteristics
December 31, 1998
<S> <C>
Weighted Average Quality Diversification AA3
Weighted Average Years-to-Maturity 10.2 Years
Weighted Average Duration 4.8 Years
Current Yield (SEC 30-day standardized)
Class S 6.0%
Class E 5.7%
Number of Issues 472
Number of Issuers 361
Money Managers Styles
BEA Associates, Inc. Broad Market-Sector
Rotation
Pacific Investment Management Co. Broad Market-Sector
Rotation
Standish, Ayer & Wood, Inc. Broad Market-Sector
Rotation
* 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(R) Intermediate (5-10 Yr.) Investment Grade Debt Funds Benchmark 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 fund
which invests at least 65% of assets in U.S. Treasury Bills, Notes and
Bonds with average maturities of five to ten years.
++++ Multistrategy Bond Fund - Class E Shares - for the period September 11,
1998 (commencement of sales) to December 31, 1998, shareholder servicing
and 12b-1 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 E to provide historical perspective.
</TABLE>
(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.
Multistrategy Bond Fund 86
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
LONG-TERM INVESTMENTS - 102.3%
ASSET-BACKED SECURITIES - 4.8%
ACLC Franchise Loan Receivables
Series 1997-B Class A1
6.728% due 04/15/14 969 986
Cityscape Home Equity Loan Trust
Pass-thru Certificate
Series 1996-2 Class A2
7.200% due 04/25/11 495 506
Contimortgage Home Equity Loan Trust
Series 1996-4 Class A8
7.220% due 01/15/28 370 378
Series 1998-1 Class A5
6.430% due 04/15/16 870 880
Discover Card Master Trust I
Series 1998-7 Class A
5.600% due 05/16/06 1,800 1,803
Federal Housing Authority
7.430% due 07/01/22 1,688 1,737
First Plus Home Loan Trust Step Up Bond
Series 1998-5 Class A3
6.060% due 09/10/11 (b) 3,000 3,006
Fleetwood Credit Corp. Grantor Trust
Series 1994-B Class A
6.750% due 03/15/10 264 266
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A1
5.400% due 09/25/09 63 62
Green Tree Financial Corp.
Series 1995-5 Class A3
6.250% due 10/15/25 238 238
Series 1995-6 Class A3
6.650% due 11/15/25 447 448
Series 1998-3 Class B1
7.290% due 03/01/30 1,200 1,178
Series 1998-4 Class A3
5.980% due 08/01/08 1,800 1,804
Series 1998-6 Class M1
6.630% due 05/01/28 (b) 1,800 1,752
Series 1998-8 Class B1
7.690% due 09/01/30 2,115 2,033
Green Tree Home Equity Loan Trust
Series 1998-C Class A2
6.030% due 07/15/29 2,100 2,105
Green Tree Recreational, Equipment &
Consumer Trust
Series 1998-B Class A3
6.050% due 10/15/10 800 810
Greenwich Capital Acceptance, Inc.
Series 1994 Class A1
8.749% due 11/25/24 (b) 77 77
IMC Home Equity Loan Trust
Series 1998-3 Class A3
6.160% due 05/20/14 490 489
MBNA Master Credit Card Trust
Series 1994-B Class A
4.964% due 01/15/02 (b) 2,000 1,997
New Century Home Equity Loan Trust
Series 1997-NC6 Class A4
6.730% due 07/25/22 300 293
Southern Pacific Secured Assets Corp.
Series 1998-1 Class A2
6.270% due 02/25/18 1,000 1,006
Student Loan Marketing Association
Series 1997-3 Class A1
5.352% due 04/25/06 (b) 2,455 2,425
UCFC Home Equity Loan Trust
Series 1996-B1 Class A7
8.200% due 09/15/27 320 342
------------
26,621
------------
CORPORATE BONDS AND NOTES - 32.6%
A.H. Belo Corp.
6.875% due 06/01/02 900 922
Ackerly Group, Inc.
9.000% due 01/15/09 375 381
Adelphia Communications Corp.
9.250% due 10/01/02 200 211
8.375% due 02/01/08 120 124
Allied Waste North America
7.375% due 01/01/04 550 553
7.625% due 01/01/06 825 835
7.875% due 01/01/09 450 456
American Airlines, Inc.
Series 1990-H
9.800% due 01/02/08 1,190 1,423
Series 91-A Class A-1
9.710% due 01/02/07 315 362
American General Institutional Capital
Series B
8.125% due 03/15/46 1,130 1,305
87 Multistrategy Bond Fund
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
American Standard Co.
7.375% due 04/15/05 1,675 1,694
AMR Corp.
9.950% due 03/07/01 (MTN) 1,000 1,078
Amresco, Inc.
Series 98-A
9.875% due 03/15/05 650 455
Aramark Corp.
6.750% due 08/01/04 1,450 1,468
Archibald Candy Corp.
10.250% due 07/01/04 230 233
AT&T Capital Corp.
5.438% due 04/01/99 (b) 3,000 2,999
6.920% due 04/29/99 (MTN) 205 206
6.410% due 08/13/99 (MTN) 310 311
6.470% due 12/03/99 (MTN) 480 482
6.480% due 12/03/99 (MTN) 1,100 1,112
Banesto Delaware, Inc.
8.250% due 07/28/02 500 534
Bankamerica Corp.
5.240% due 03/05/01 (MTN)(b) 5,000 4,988
Bankers Trust Corp.
5.502% due 05/11/03 (b) 2,000 1,964
Banque Paribas New York
6.950% due 07/22/13 1,060 1,036
Bay View Capital Corp.
9.125% due 08/15/07 550 528
Beaver Valley Funding Corp.
9.000% due 06/01/17 1,470 1,679
BellSouth Capital Funding Corp.
6.040% due 11/15/26 2,020 2,088
Beneficial Corp.
5.286% due 04/02/02 (MTN)(b) 2,000 1,988
Building Materials Corp.
8.000% due 10/15/07 1,400 1,379
California Energy Co., Inc.
Step Up Bond
10.250% due 01/15/04 (b) 2,250 2,367
Cencall Communications Corp.
Step Up Bond
Zero Coupon due 01/15/04 (b) 160 157
Chancellor Media Corp.
8.000% due 11/01/08 90 92
Chase Manhattan Corp.
6.000% due 11/01/05 220 223
6.750% due 09/15/06 (MTN) 320 338
6.375% due 04/01/08 680 702
Circus Circus Enterprise, Inc.
9.250% due 12/01/05 50 51
Citicorp
5.490% due 08/13/02 (MTN)(b) 2,000 1,988
6.375% due 11/15/08 (MTN) 750 776
Classic Cable, Inc.
9.875% due 08/01/08 100 105
Clear Channel Communications
6.875% due 06/15/18 450 437
Cleveland Electric Illumination Co.
7.430% due 11/01/09 260 267
Colonial Realty LP
7.500% due 07/15/01 775 779
Columbia/HCA Healthcare Corp.
8.020% due 08/05/02 (MTN) 2,000 2,035
8.360% due 04/15/24 680 711
Commercial Federal Corp.
7.950% due 12/01/06 100 99
Conmed Corp.
9.000% due 03/15/08 350 340
Connecticut Light & Power Co.
7.750% due 06/01/02 195 202
7.875% due 10/01/24 975 1,011
Conseco Finance Trust II
8.700% due 11/15/26 875 799
Conseco Finance Trust III
8.796% due 04/01/27 1,250 1,200
Contifinancial Corp.
8.375% due 08/15/03 900 657
Continental Airlines, Inc.
9.500% due 12/15/01 1,445 1,514
CP Limited Partnership
8.750% due 03/02/00 500 517
Crescent Real Estate Equities
6.625% due 09/15/02 900 837
7.125% due 09/15/07 1,000 908
Crown Central Petroleum Corp.
10.875% due 02/01/05 95 92
CS Wireless Systems, Inc.
Step Up Bond Series B
Zero Coupon due 03/01/06 (b) 360 72
CSC Holdings, Inc.
7.875% due 12/15/07 890 923
7.250% due 07/15/08 210 213
7.625% due 07/15/18 1,000 993
CSX Corp.
6.250% due 10/15/08 900 913
Delco Remy International, Inc.
10.625% due 08/01/06 145 154
Multistrategy Bond Fund 88
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Dime Bancorp Trust I
Series A
9.330% due 05/06/27 325 351
Dresser Industries, Inc.
7.600% due 08/15/96 910 1,073
EOP Operating, Ltd.
6.376% due 02/15/02 1,610 1,595
ERAC USA Finance Co.
6.350% due 01/15/01 (MTN) 725 727
ERP Operating, LP
8.500% due 05/15/99 350 353
Felcor Suites, LP
7.625% due 10/01/07 570 526
First Republic Bancorp
7.750% due 09/15/12 750 739
First Security Corp.
5.875% due 11/01/03 3,400 3,403
First Union National Bank
6.500% due 12/01/28 900 881
Fleet Credit Card LLC
6.450% due 10/30/00 700 712
Forcenergy, Inc.
Series B
8.500% due 02/15/07 100 73
Ford Motor Co.
6.625% due 10/01/28 1,245 1,279
Ford Motor Credit Co.
5.471% due 03/05/01 (MTN)(b) 5,000 4,998
8.200% due 02/15/02 2,755 2,971
Fox/Liberty Networks LLC
8.875% due 08/15/07 890 908
Step Up Bond
Zero Coupon due 08/15/07 (b) 560 381
Fugi JGB Investment LLC
9.870% due 12/31/49 (b) 3,515 2,566
Global Crossing Holdings, Ltd.
9.625% due 05/15/08 700 728
Goldman Sachs Group
5.480% due 02/22/02 (MTN)(b) 5,000 4,970
Granite Broadcasting Corp.
8.875% due 05/15/08 95 90
Grove Holdings, LLC
Step Up Bond
11.625% due 05/01/09 (b) 250 115
Grove Worldwide, LLC
9.250% due 05/01/08 150 138
GS Escrow Corp.
7.000% due 08/01/03 1,700 1,666
7.125% due 08/01/05 1,400 1,395
GTE Corp.
6.840% due 04/15/18 650 693
6.940% due 04/15/28 1,020 1,108
Haven Capital Trust I
10.460% due 02/01/27 350 425
Hayes Lemmerz International, Inc.
11.000% due 07/15/06 50 56
8.250% due 12/15/08 280 280
Health Care REIT, Inc.
7.625% due 03/15/08 825 849
Hilton Hotels
7.950% due 04/15/07 345 362
HMH Properties, Inc.
Series C
8.450% due 12/01/08 165 165
IMC Global, Inc.
7.400% due 11/01/02 450 457
7.625% due 11/01/05 900 921
Imperial Capital Trust I
Series B
9.980% due 12/31/26 250 274
Imperial Credit Industries, Inc.,
Series B
9.875% due 01/15/07 525 404
Integrated Health Services
5.750% due 01/01/01 275 239
Intermedia Communications, Inc.
Series B
8.500% due 01/15/08 140 133
Interpool Capital Trust
Series B
9.875% due 02/15/27 500 524
ITC Deltacom, Inc.
11.000% due 06/01/07 145 159
Jackson Products, Inc.
9.500% due 04/15/05 100 100
James Cable Partners, LP
10.750% due 08/15/04 215 224
K Mart Corp.
7.820% due 01/02/02 (MTN) 700 707
7.840% due 01/02/02 (MTN) 900 910
7.770% due 07/02/02 (MTN) 700 707
7.470% due 07/31/02 (MTN) 500 501
9.780% due 01/05/20 1,000 1,094
Kaufman and Broad Home Corp.
7.750% due 10/15/04 800 800
Lehman Brothers Holdings, Inc.
5.801% due 01/19/00 (MTN)(b) 3,000 2,987
7.625% due 06/01/06 475 500
89 Multistrategy Bond Fund
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Level 3 Communications, Inc.
9.125% due 05/01/08 290 287
Loewen Group International, Inc.
Series 4
8.250% due 10/15/03 275 236
Series 7
7.600% due 06/01/08 425 343
Long Island Savings Bank
7.000% due 06/13/02 600 610
MCI Communications Corp.
6.125% due 04/15/02 650 660
Mcleodusa, Inc.
8.375% due 03/15/08 825 825
Merck & Co., Inc.
Series B
5.760% due 05/03/37 (MTN) 2,765 2,870
Merita Bank, Ltd.
7.150% due 12/29/49 (e) 1,200 1,161
Merrill Lynch & Co.
5.520% due 08/03/00 (MTN)(b) 5,000 5,002
Metromedia Fiber Network
10.000% due 11/15/08 125 128
MMI Capital Trust I
Series B
7.625% due 12/15/27 1,425 1,398
Natexis Ambs Co. LLC
Series A
8.440% due 12/29/49 (e) 425 401
National Westminster Bank
9.375% due 11/15/03 295 341
New England Education Loan Marketing
Corp.
5.411% due 06/11/01 (MTN)(b) 4,000 3,985
News America, Inc.
7.300% due 04/30/28 450 461
7.625% due 11/30/28 1,300 1,387
Nextel Communications, Inc.
Step Up Bond (b)
Zero Coupon due 08/15/04 1,745 1,693
Zero Coupon due 09/15/07 2,470 1,587
Zero Coupon due 02/15/08 425 255
Nextlink Communications, Inc.
9.625% due 10/01/07 145 140
10.750% due 11/15/08 1,200 1,221
Step Up Bond
Zero Coupon due 04/15/08(b) 625 359
Niagara Mohawk Power Corp.
8.750% due 04/01/22 500 545
Series B
7.000% due 10/01/00 3,000 3,038
Norfolk Southern Corp.
7.050% due 05/01/37 915 990
North Atlantic Energy Corp.
Series A
9.050% due 06/01/02 981 1,019
Northwest Airlines Inc.
7.625% due 03/15/05 2,370 2,228
Ocwen Federal Bank
12.000% due 06/15/05 300 284
Ocwen Financial Corp.
11.875% due 10/01/03 725 651
Optel, Inc.
11.500% due 07/01/08 825 804
Orion Capital Trust
7.700% due 04/15/28 100 91
8.730% due 01/01/37 125 139
Paging Network, Inc.
8.875% due 02/01/06 55 50
10.125% due 08/01/07 370 355
10.000% due 10/15/08 440 418
Pantry, Inc.
10.250% due 10/15/07 70 73
Pathmark Stores
9.625% due 05/01/03 105 102
Paxson Communications Corp.
11.625% due 10/01/02 550 558
Philip Morris Cos., Inc.
6.150% due 03/15/00 3,000 3,025
Phillips Van-Heusen Corp.
9.500% due 05/01/08 95 95
Premier Parks, Inc. Step Up Bond
Zero Coupon due 04/01/08 (b) 375 254
Prime Succession Acquisition Co.
10.750% due 08/15/04 400 392
Providian Capital I
Series A
9.525% due 02/01/27 500 511
Prudential Insurance Co. of America
6.875% due 04/15/03 700 724
6.375% due 07/23/06 155 159
Psinet, Inc.
11.500% due 11/01/08 145 152
PX Escrow Corp. Step Up Bond
Zero Coupon due 02/01/06 (b) 1,650 908
Multistrategy Bond Fund 90
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Qwest Communications International
7.250% due 11/01/08 200 205
Regal Cinemas, Inc.
9.500% due 06/01/08 95 98
Revlon Worldwide
Series B
Zero Coupon due 03/15/01 2,375 1,366
Rose Hills Corp.
9.500% due 11/15/04 500 485
Salomon Smith Barney Holdings
7.980% due 03/01/00 400 411
Seagate Technology, Inc.
7.450% due 03/01/37 1,085 1,051
Simon Debartolo Group LP
6.625% due 06/15/03 500 494
6.750% due 07/15/04 850 839
Sinclair Broadcast Group, Inc.
8.750% due 12/15/07 375 378
Socgen Real Estate Co. LLC
Series A
7.640% due 12/29/49 (e) 325 299
Societe Generale
7.850% due 04/29/49 (e) 300 306
Spieker Properties, LP
6.950% due 12/15/02 500 506
Summit Properties Partnership
7.200% due 08/15/07 625 596
Sun Healthcare Group, Inc.
9.500% due 07/01/07 625 506
Tele-Communications Inc.
4.795% due 09/11/00 (MTN)(b) 2,000 1,981
6.340% due 02/01/02 570 584
9.650% due 03/31/27 630 778
Tenet Healthcare Corp.
8.000% due 01/15/05 500 517
6.000% due 12/01/05 1,425 1,208
7.625% due 06/01/08 50 51
8.125% due 12/01/08 225 231
Time Warner, Inc.
7.975% due 08/15/04 225 250
8.110% due 08/15/06 450 513
8.180% due 08/15/07 450 521
9.125% due 01/15/13 565 715
8.050% due 01/15/16 900 1,048
6.850% due 01/15/26 2,600 2,684
6.625% due 05/15/29 800 814
Tokai Preferred Capital Co. LLC
9.980% due 12/29/49 (b) 1,500 1,274
Toledo Edison Co.
8.700% due 09/01/02 500 525
Toll Brothers Corp.
7.750% due 09/15/07 1,175 1,162
Trenwick Capital Trust I
8.820% due 02/01/37 625 684
Tricon Global Restaurants, Inc.
7.450% due 05/15/05 825 850
TU Electrical Capital V
8.175% due 01/30/37 830 906
Union Planters Bank
6.500% due 03/15/18 475 486
United Companies Financial Corp.
8.375% due 07/01/05 625 325
Unum Corp.
6.750% due 12/15/28 950 933
US Air, Inc.
9.625% due 02/01/01 995 1,032
Valero Energy
6.750% due 12/15/02 820 828
Walt Disney Co.
Series E
5.125% due 12/15/03 (MTN) 1,350 1,342
Webster Capital Trust I
9.360% due 01/29/27 250 279
Wellsford Residential Property Trust
9.375% due 02/01/02 475 509
Wheeling-Pittsburgh Corp.
9.250% due 11/15/07 140 132
Wireless One, Inc. Step-Up Bond
Zero Coupon due 08/01/06 (b) 220 32
Worldcom, Inc.
8.875% due 01/15/06 850 929
6.950% due 08/15/28 1,405 1,507
------------
179,568
------------
EURODOLLAR BONDS - 8.0%
Amvescap PLC
6.600% due 05/15/05 750 781
Argentina, Republic of
9.164% due 04/10/05 (b) 3,450 3,105
Series 10
5.313% due 04/01/00 (b) 244 229
Series L
6.188% due 03/31/05 (b) 1,476 1,254
Arisco Productos Alimenticios
10.750% due 05/22/05 110 101
Auxiliaire Credit Foncier
5.281% due 09/25/02 (b) 1,070 1,015
91 Multistrategy Bond Fund
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Brazil, Republic of
6.125% due 04/15/24 (b) 1,265 734
Citicorp
5.300% due 06/27/02 (MTN)(b) 3,000 2,975
Credit Lyonnais
5.813% due 07/10/00 (b) 4,000 3,945
6.563% due 09/19/49 (e) 1,170 936
Ford Motor Credit Co. (b)
5.468% due 01/17/02 2,175 2,153
5.525% due 02/13/03 2,000 1,982
ForeningsSparbanken AB
7.500% due 11/29/49 (e) 480 488
Globo Communicacoes e Participacoes SA
10.625% due 12/05/08 750 482
Household Bank Nevada NA
5.376% due 10/22/03 (MTN)(b) 4,000 3,926
Hutchison Whampoa Finance, Ltd.
7.450% due 08/01/17 325 281
Korea, Republic of
8.188% due 04/08/00 3,000 2,790
Morgan Stanley Dean Witter
5.429% due 03/11/03 (MTN)(b) 1,700 1,692
Okobank (e)
6.794% due 10/29/49 90 90
5.739% due 09/29/49 (MTN) 750 713
Panama, Republic of
8.875% due 09/30/27 1,450 1,356
Philippines, Republic of
6.500% due 12/01/17 (b) 1,000 870
Poland, Republic of
Step Up Bond
5.000% due 10/27/14 (b) 4,265 3,972
Santander Finnish Issuances
6.213% due 09/30/49 (e) 500 453
Sibneft
9.407% due 08/15/00 (b) 600 512
Skandinaviska Enskilda Banken (e)
6.625% due 03/29/49 (MTN) 510 506
7.500% due 03/29/49 910 938
8.125% due 09/06/49 475 522
6.500% due 12/29/49 2,200 2,145
Tata Electric Co.
8.500% due 08/19/17 625 473
Telefonica De Argentina SA
9.125% due 05/07/08 750 690
Tyco International Group SA
6.125% due 11/01/08 1,300 1,304
Venezuela, Republic of
Series DL
5.938% due 12/18/07 (b) 643 407
------------
43,820
------------
MORTGAGE-BACKED SECURITIES - 44.7%
Advanta Mortgage Loan Trust
Series 97-4 Class M1
7.040% due 01/25/29 1,600 1,652
Bear Stearns Mortgage Securities Inc.
Series 1998-2 Class B
6.750% due 04/30/30 (b) 1,715 1,740
Chase Commercial Mortgage Securities Corp.
Series 1997-2 Class D
6.600% due 12/19/07 1,500 1,430
CMC Securities Corp. III
Series 1998-1 Class A19
6.750% due 05/25/28 5,000 5,030
Collateralized Mortgage Securities Corp.
Series J Class J-5 CMO
7.985% due 05/01/17 1,451 1,450
Delta Funding Home Equity Loan Trust
Series 1997-3 Class M1F
7.080% due 10/25/28 1,250 1,198
Federal Home Loan Mortgage Corp.
6.500% 30 Year TBA (d) 1,100 1,108
6.000% 30 Year TBA Gold (d) 12,700 12,545
Series 1037 Class Z
9.000% due 02/15/21 1,062 1,119
Federal Home Loan Mortgage Corp.
Participation Certificate
7.000% due 2009 413 422
8.500% due 2025 1,040 1,089
8.500% due 2027 5,421 5,674
6.000% due 2028 1,175 1,160
7.500% due 2028 4,993 5,127
7.500% due 2028 (f) 1,541 1,582
8.500% due 2028 (f) 764 800
Federal National Mortgage Association
6.000% due 2003 217 218
10.000% due 2005 185 193
7.733% due 2023(b) 640 655
7.673% due 2026(b) 4,922 5,020
8.500% due 2026 2,694 2,821
6.000% 15 Year TBA (d) 6,980 6,997
6.500% 15 Year TBA (d) 3,600 3,651
6.000% 30 Year TBA (d) 29,500 29,113
6.500% 30 Year TBA (d) 8,425 8,480
Multistrategy Bond Fund 92
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
7.000% 30 Year TBA (d) 13,400 13,668
8.000% 30 Year TBA (d) 16,750 17,347
Federal National Mortgage Association
Series 1997-16 Class M
Zero Coupon due 2/25/23 950 796
Federal National Mortgage Association
(REMIC)
Series 1992-10 Class ZD
8.000% due 11/25/21 1,736 1,851
GMAC Commercial Mortgage Securities
Inc.
Series 1996-C1 Class F
7.860% due 11/15/06 (b) 500 415
Series 1997-C1 Class A2
6.850% due 09/15/06 (b) 230 243
Government National Mortgage Association
9.000% due 2017 2,478 2,662
7.000% due 2023 (b) 1,091 1,107
6.875% due 2023 (b) 1,351 1,372
7.000% due 2023 730 747
7.000% due 2023 (f) 1,085 1,111
7.000% due 2024 (b) 5,566 5,642
7.000% due 2024 696 713
8.000% due 2024 305 317
7.000% due 2025 931 953
7.500% due 2025 807 832
7.500% due 2025 (f) 905 933
8.000% due 2025 957 995
7.000% due 2026 370 378
7.000% due 2026(b) 2,293 2,322
7.500% due 2026 808 833
8.000% due 2026 5,323 5,533
8.500% due 2026 2,239 2,366
6.500% due 2027 (b) 1,347 1,365
6.875% due 2027 (b) 2,970 3,008
7.500% due 2027 991 1,022
8.000% due 2027 10,084 10,481
7.500% due 2028 1,631 1,683
8.000% due 2028 497 516
6.000% 30 Year TBA (d) 11,500 11,562
6.500% 30 Year TBA (d) 40,540 40,946
Kidder Peabody Acceptance Corp.
Series 1994-C1 Class B
6.850% due 02/01/06 1,065 1,091
Midland Realty Acceptance Corp.
Series 1996-C2 Class A2
7.233% due 01/25/29 1,000 1,056
Morgan Stanley Capital I
Series 1998-HF1 Class A2
6.520% due 01/15/08 1,800 1,878
Nomura Asset Securities Corp.
Series 1999-2
6.500% due 01/01/29 3,000 2,988
Paine Webber Mortgage
Acceptance Corp. IV
Series 1995-M1 Class A
6.700% due 01/15/07 720 745
Residential Funding Mortgage Securities
II
Series 1997-HS5 Class M1
7.010% due 05/25/27 1,400 1,425
Resolution Trust Corp.
Series 1994 - C2 Class G
8.000% due 04/25/25 247 253
Series 1994-1 Class M-2
7.750% due 09/25/29 387 393
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1995-1 Class 2-C
7.500% due 10/25/28 (b) 319 319
Salomon Brothers Mortgage Securities
VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16 Class A
8.254% due 11/25/24 (b) 507 511
Series 1997 Class A2
7.174% due 03/25/25 855 900
Structured Asset Securities Corp.
Mortgage Pass-thru Certificate
Series 1996-CFL Class A1C
5.944% due 02/25/28 98 99
Series 1996-CFL Class C
6.525% due 02/25/28 250 255
------------
245,906
------------
MUNICIPAL BONDS - 0.9%
Florida, State of, Board of Education
Capital Outlay
Series B
4.750% due 06/01/23 715 699
Massachusetts Bay Transportation
Authority
4.750% due 03/01/21 440 424
Massachusetts State Water Reserve
Authority
4.750% due 08/01/27 280 267
Municipal Electric Authority of Georgia
5.000% due 01/01/26 780 769
93 Multistrategy Bond Fund
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Nevada, State of
4.750% due 05/15/26 920 875
New York City, New York Municipal Water
Finance Authority Water and Sewer
System Revenue
4.750% due 06/15/25 565 540
New York, Metropolitan Transportation
Authority
4.750% due 04/01/28 490 468
North Texas, Thruway Authority Dallas
North Thruway System Revenue
4.750% due 01/01/29 520 494
Ohio, State of, Turnpike Common
Turnpike Revenue Series B
4.750% due 02/15/28 350 334
Triborough Bridge & Tunnel Authority of
New York Series A
4.750% due 01/01/24 310 296
------------
5,166
------------
UNITED STATES GOVERNMENT
AGENCIES - 0.7%
Federal Home Loan Mortgage Corp.
5.750% due 07/15/03 (f) 875 897
Federal National Mortgage Association
6.000% due 5/18/08 (f) 1,725 1,821
Tennessee Valley Authority
5.880% due 04/01/36 865 918
------------
3,636
------------
UNITED STATES GOVERNMENT TREASURIES -
8.6%
United States Treasury Bonds
7.250% due 05/15/16 1,000 1,211
8.875% due 08/15/17 500 704
9.125% due 05/15/18 3,000 4,340
8.875% due 02/15/19 2,000 2,848
8.125% due 08/15/19 2,265 3,025
8.125% due 08/15/21 7,000 9,459
6.875% due 08/15/25 1,005 1,218
6.625% due 02/15/27 (f) 7,395 8,747
United States Treasury Notes
5.875% due 11/15/99 675 682
5.375% due 02/15/01 1,020 1,036
6.625% due 06/30/01 4,625 4,838
6.625% due 04/30/02 100 106
6.250% due 06/30/02 4,400 4,619
3.625% due 07/15/02 (f) 1,700 1,687
6.250% due 02/15/07 2,100 2,303
United States Treasury
Principal Only Strip
Zero Coupon due 11/15/99 465 447
------------
47,270
------------
YANKEE BONDS - 2.0%
Amvescap PLC
6.600% due 05/15/05 175 175
Argentina, Republic of
14.250% due 11/30/02 (b) 675 655
Brazil, Republic of,
Series EI-L
6.125% due 04/15/06 (b) 1,104 713
Colombia, Republic of
12.243% due 08/13/05 (b) 1,420 1,299
Colt Telecom Group PLC Step Up Bond
Zero Coupon due 12/15/06 (b) 600 501
Crown Packaging Enterprise, Ltd. Step
Up Bond
Zero Coupon due 08/01/06 (b) 300 15
Diamond Cable Communication PLC
Step Up Bond
Zero Coupon due 02/15/07 (b) 490 348
Edperbrason Corp.
7.125% due 12/16/03 925 961
Grupo Iusacell SA de CV
10.000% due 07/15/04 750 651
Grupo Televisa SA Step Up Bond
Zero Coupon due 05/15/08 (b) 550 408
Petro-Canada
7.000% due 11/15/28 900 888
Petroleum Geo-Services
7.125% due 03/30/28 300 280
Royal Caribbean Cruises Ltd.
7.500% due 10/15/27 1,400 1,348
St. George Bank, Ltd.
7.150% due 10/01/05 700 727
TFM SA de CV Step Up Bond
Zero Coupon due 06/15/09 (b) 1,530 797
TV Azteca SA de CV
10.125% due 02/15/04 800 680
YPF Sociedad Anonima
7.250% due 03/15/03 80 75
8.000% due 02/15/04 550 523
------------
11,044
------------
TOTAL LONG-TERM INVESTMENTS
(cost $562,482) 563,031
------------
Multistrategy Bond Fund 94
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
OPTIONS PURCHASED - 0.1%
Japan Government Bond (h)**
July 99.38 Put JPY1,393,550 328
United States Treasury Bonds (h)*
January 110.43 Call 1,800 42
February 103.40 Call 5,400 188
February 111.03 Call 3,400 76
April 108.13 Call 550 9
April 110.25 Call 5,400 45
April 110.00 Call 3,700 33
May 113.44 Call 1,800 53
------------
TOTAL OPTIONS PURCHASED
(cost $689) 774
------------
NUMBER
OF
SHARES
--------------
PREFERRED STOCKS - 1.7%
American RE Capital 18,100 468
Australia & New Zealand Banking Group,
Ltd. 5,300 148
California Federal Preferred
Capital Corp. Series A 104,800 2,653
Centaur Funding Corp. 700 700
Citigroup, Inc. 10,550 559
Credit Lyonnais Capital S.C.A. - ADR 6,400 139
El Paso Electric Co. Series A
Payment in Kind Preferred Stock 4,867 522
Equity Office Properties Trust
Series B 18,000 731
Global Crossing Holdings, Ltd. 10,000 975
NB Capital Corp. 28,000 730
Pinto Totta International Finance, Ltd. 1,250 1,139
Primedia Inc. 5,000 485
------------
TOTAL PREFERRED STOCKS
(cost $9,540) 9,249
------------
WARRANTS - 0.0%
EOP Operating, Ltd.
1999 Warrants (h) 1,325 11
Capital Pacific Holdings, Inc. 1,817 1
2002 Warrants (h) ------------
TOTAL WARRANTS
(cost $11) 12
------------
SHORT-TERM INVESTMENTS - 17.6%
AT&T Capital Corp.
5.627% due 01/15/99 (MTN)(a)(b) 2,000 2,000
Browning Ferris Industries, Inc.
5.500% due 01/05/99 (a) 2,000 1,999
Frank Russell Investment Company Money
Market Fund,
due on demand (a) 84,455 84,455
Norfolk Southern Corp.
5.500% due 1/11/99 (a) 4,000 3,994
Occidental Petroleum Corp.
5.460% due 01/04/99 (a) 3,600 3,598
United States Treasury Bills (f)(g)
3.740% due 01/07/99 (a) 170 170
4.310% due 05/27/99 570 560
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $96,776) 96,776
------------
TOTAL INVESTMENTS - 121.7%
(identified cost $669,498)(c) 669,842
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS
WRITTEN - (21.7%) (119,485)
------------
NET ASSETS - 100.0% 550,357
============
(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 in connection with futures contract purchased (sold
and options written by the Fund.
(g) Rate noted is yield-to-maturity (unaudited)
(h) Nonincome-producing security.
* Each contract represents $100,000 notional value.
** Represents 1 OTC contract.
The accompanying notes are an integral part of the financial statements.
95 Multistrategy Bond Fund
<PAGE>
MULTISTRATEGY BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS* (000)
-------------- --------------
FUTURES CONTRACTS
(Notes 2 and 3)
LONG POSITIONS
Eurodollar Financial
expiration date 12/99 17 $ (9)
expiration date 03/00 17 (4)
expiration date 06/00 17 (2)
expiration date 09/00 21 7
expiration date 12/00 4 6
expiration date 03/01 4 6
expiration date 06/01 4 6
expiration date 09/01 12 18
United States Treasury 5 Year Note
expiration date 03/99 184 (10)
Unites States Treasury 10 Year Note
expiration date 03/99 307 (411)
United States Treasury 30 Year Bond
expiration date 03/99 82 (61)
SHORT POSITIONS
United States Treasury 5 Year Note
expiration date 03/99 12 2
United States Treasury 10 Year Note
expiration date 03/99 273 (73)
-----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts (S) $ (525)
===========
((S)) At December 31, 1998, United States Government Securities valued at
$18,308 were held as collateral in connection with futures contracts purchased
(sold) and options written by the Fund.
* Each contract represents $100,000 notional value.
NOTIONAL MARKET
AMOUNT VALUE
(000) (000)
$ $
---------- ----------
OPTIONS WRITTEN
(Notes 2 and 3)
United States Treasury Bonds*
January 110.43 Call 1,800 42
March 111.14 Call 2,900 30
April 112.25 Call 550 3
April 114.08 Call 3,700 9
April 114.33 Call 5,400 11
January 102.30 Put 1,800 --
April 103.56 Put 550 6
----------
Total Liability for Options Written
(premiums received $251)((S)) 101
==========
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
(Note 2)
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
DELIVER FOR SETTLEMENT (DEPRECIATION)
(000) (000) DATE (000)
- --------------------------------------------------------
JPY 31,219 USD 271 03/18/99 $ (8)
=============
Abbreviations:
ADR - American Depositary Receipt
CMO - Collateralized Mortgage Obligation
MTN - Medium Term Note
PLC - Public Limited Company
REIT - Real Estate Investment Trust
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
Foreign Currency Abbreviations:
JPY - Japanese yen
USD - U.S. dollar
The accompanying notes are an integral part of the financial statements.
Multistrategy Bond Fund 96
<PAGE>
Multistrategy Bond Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
<S> <C>
Assets
Investments at market (identified cost $669,498)(Note 2) ............................... $ 669,842
Cash .................................................................................... 285
Forward foreign currency exchange contracts (cost $271)(Note 2) ......................... 271
Receivables:
Dividends and interest ................................................................. 6,343
Investments sold (regular settlement) ................................................. 22,621
Investments sold (delayed settlement)(Note 2) ......................................... 69,568
Fund shares sold ....................................................................... 2,309
Short-term investments held as collateral for securities loaned, at market (Note 3)....... 33,211
-----------
Total Assets ......................................................................... 804,450
Liabilities
Payables:
Due from Custodian ......................................................... $ 130
Investments purchased (regular settlement) ................................ 3,541
Investments purchased (delayed settlement)(Note 2).......................... 214,948
Fund shares redeemed ....................................................... 1,435
Accrued fees to affiliates (Note 4) ....................................... 340
Other accrued expenses ..................................................... 92
Daily variation margin on futures contracts (Notes 2 and 3) ................ 16
Forward foreign currency exchange contracts (cost $271)(Note 2)................... 279
Options written, at market value (premiums received $251)(Notes 2 and 3).......... 101
Payable upon return of securities loaned, at market (Note 3) ..................... 33,211
--------
Total Liabilities ...................................................................... 254,093
---------
Net Assets ................................................................................... $ 550,357
=========
Net Assets consist of:
Accumulated distributions in excess of net investment income .................................. $ (350)
Accumulated distributions in excess of net realized gain ...................................... (912)
Unrealized appreciation (depreciation) on:
Investments .................................................................................. 344
Futures contracts ............................................................................ (525)
Options written .............................................................................. 150
Foreign currency-related transactions ........................................................ (5)
Shares of beneficial interest ................................................................. 545
Additional paid-in capital .................................................................... 551,110
---------
Net Assets .................................................................................... $ 550,357
=========
Net Asset Value, offering and redemption price per share:
Class S ($547,746,639 divided by 54,194,723 shares of $.01 par value
shares of beneficial interest outstanding)............................................... $ 10.11
Class E ($2,609,914 divided by 258,416 shares of $.01 par =========
value shares of beneficial interest outstanding)......................................... $ 10.10
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
97 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Statement of Operations
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
<S> <C>
Investment Income:
Interest ................................................................................... $ 28,262
Dividends from Money Market Fund (Note 5)................................................... 4,658
Dividends .................................................................................. 651
----------
Total Investment Income ................................................................ 33,571
Expenses (Notes 2 and 4):
Advisory fees ............................................................ $ 3,218
Administrative fees ...................................................... 23
Custodian fees ........................................................... 284
Transfer agent fees ...................................................... 455
Professional fees ........................................................ 39
Registration fees - Class S .............................................. 84
Registration fees - Class E .............................................. 1
Shareholder servicing fees - Class E ..................................... 1
Trustees' fees ........................................................... 4
Miscellaneous ............................................................ 42
----------
Expenses before reductions ............................................... 4,151
Expense reductions (Note 4)............................................... (57)
----------
Expenses, net .......................................................................... 4,094
----------
Net investment income ........................................................................ 29,477
----------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments .............................................................. 4,347
Futures contracts ........................................................ 5,780
Options written .......................................................... 267
Foreign currency-related transactions..................................... 121 10,515
----------
Net change in unrealized appreciation or depreciation of:
Investments ............................................................. (6,039)
Futures contracts ....................................................... (684)
Options written ......................................................... 71
Foreign currency-related transactions .................................. (122) (6,774)
----------
Net gain (loss) on investments ................................................................ 3,741
----------
Net increase (decrease) in net assets resulting from operations ............................... $ 33,218
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Multistrategy Bond Fund 98
<PAGE>
Multistrategy Bond Fund
Statement of Changes in Net Assets
Amounts in thousands
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
------------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ............................... $ 29,477 $ 21,669
Net realized gain (loss) ........................... 10,515 8,182
Net change in unrealized appreciation or
depreciation ........................................ (6,774) 4,081
--------- ---------
Net increase (decrease) in net assets
resulting from operations ......................... 33,218 33,932
--------- ---------
From Distributions to Shareholders:
Net investment income
Class S ........................................... (29,426) (21,584)
Class E ........................................... (42) --
In excess of net investment income
Class S ........................................... (557) (670)
Class E ........................................... (1) --
Net realized gain on investments
Class S ........................................... (11,128) (6,734)
Class E ........................................... (45) --
In excess of net realized gain on investments
Class S ........................................... (701) --
Class E ........................................... (3) --
--------- ---------
Total Distributions to Shareholders ............. (41,903) (28,988)
--------- ---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ........................ 121,730 126,940
--------- ---------
Total Net Increase (Decrease) in Net Assets .......... 113,045 131,884
Net Assets
Beginning of period ................................. 437,312 305,428
--------- ---------
End of period (including accumulated distributions
in excess of net investment income of $350 and $9,
respectively) .................................... $ 550,357 $ 437,312
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
99 Multistrategy Bond Fund
<PAGE>
Multistrategy Bond Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 10.26 $ 10.11 $ 10.25 $ 9.29 $ 10.31
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income (a)..................................... .60 .60 .61 .65 .58
Net realized and unrealized gain (loss) on investments........ .08 .33 (.12) .97 (1.03)
------- ------- ------- ------- -------
Total Income From Investment Operations................... .68 .93 .49 1.62 (.45)
------- ------- ------- ------- -------
Distributions:
Net investment income ........................................ (.59) (.60) (.61) (.66) (.57)
In excess of net
investment income ............................................ (.01) (.01) (.01) -- --
Net realized gain on investments ............................. (.22) (.17) (.01) -- --
In excess of net realized gain on investments ................ (.01) -- -- -- --
------- ------- ------- ------- -------
Total Distributions ...................................... (.83) (.78) (.63) (.66) (.57)
------- ------- ------- ------- -------
Net Asset Value, End of Period ................................... $ 10.11 $ 10.26 $ 10.11 $ 10.25 $ 9.29
======= ======= ======= ======= =======
Total Return (%) ................................................. 6.79 9.50 4.97 17.92 (4.35)
Ratios/Supplemental Data:
Net Assets, end of
period ($000 omitted)............................................ 547,747 437,312 305,428 218,765 173,035
Ratios to average net assets
Operating expenses, net ....................................... .80 .80 .81 .85 .85
Operating expenses, gross ..................................... .81 .83 .88 .89 .90
Net investment income ......................................... 5.76 5.93 6.19 6.61 6.26
Portfolio turnover rate (%) ..................................... 334.86 263.75 145.38 142.26 136.39
(a) For the period ended December 31, 1998, average month-end shares outstanding were used for this calculation.
</TABLE>
Multistrategy Bond Fund 100
<PAGE>
Multistrategy Bond Fund
Financial Highlights - Class E
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1998*
--------
<S> <C>
Net Asset Value, Beginning of Period .............................. $ 10.30
-------
Income From Investment Operations:
Net investment income (c) ..................................... .16
Net realized and unrealized gain (loss) on investments ......... .07
-------
Total Income From Investment Operations .................... .23
-------
Distributions:
Net investment income .......................................... (.20)
Net realized gain on investments ............................... (.22)
In excess of net realized gain on investments .................. (.01)
-------
Total Distributions ........................................ (.43)
-------
Net Asset Value, End of Period .................................... $ 10.10
=======
Total Return (%)(a) .............................................. 1.89
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ........................ 2,610
Ratios to average net assets (%)(b):
Operating expenses ............................................. --
Net investment income .......................................... --
Portfolio turnover rate (%)(b) .................................. 334.86
</TABLE>
* For the period September 11, 1998 (commencement of sale) to December 31,
1998.
(a) Periods less than one year are not annualized.
(b) The ratios are not meaningful due to the Fund's short period of operation.
(c) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
101 Multistrategy Bond Fund
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 six 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.
Effective May 18, 1998, pursuant to approval of the Investment Company's
Board of Trustees, Class C shares were renamed Class E shares. As of July 8,
1996, the six Funds that are reported in these financial statements have
available Class S and Class E 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 E shares are charged a shareholder servicing fee of
0.25% of average net assets. Class S shares are charged no such fees. Prior
to May 18, 1998 Class E shares were charged a 12b-1 distribution fee and a
shareholder servicing fee of 0.40% and 0.25% of average net assets,
respectively.
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 as approved by the
Board of Trustees on April 27, 1998.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All premiums and discounts, including original
issue discounts, for the Funds are amortized/ accreted for both tax and
financial reporting purposes.
Notes to Financial Statements 102
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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, 1998 to December 31,
1998, the Multistrategy Bond Fund incurred net realized capital losses of
$838,719. As permitted by tax tax regulations, the Multistrategy Bond Fund
intends to elect to defer this loss and treat it as arising in the year
ending December 31, 1999.
At December 31, 1998, 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:
12/31/06
------------
International Securities $2,107,743
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, 1998 are as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
-------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Diversified Equity $997,217,030 $405,249,121 $(32,684,811) $372,564,310
Equity Income 215,542,173 42,951,986 (7,663,151) 35,288,835
Quantitative Equity 934,538,593 415,655,995 (26,354,004) 389,301,991
International Securities 812,152,036 191,283,128 (67,721,884) 123,561,244
Diversified Bond 870,507,927 10,380,609 (1,151,539) 9,229,070
Multistrategy Bond 670,804,429 12,142,169 (13,104,146) (961,977)
</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.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1998:
<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) PAID-IN CAPITAL
---------------- -------------- -----------------
<S> <C> <C> <C>
Diversified Equity $ 8,070 $ (8,070) $ --
Equity Income (155) 155 --
Quantitative Equity 22,981 (22,981) --
International
Securities 1,692,385 (1,692,385) --
Diversified Bond 911,140 (951,141) 40,001
Multistrategy Bond 207,746 (207,746) --
</TABLE>
103 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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 "Advisor"). 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 E shares will pay shareholder servicing fees
along with other expenses that may be attributable to that Class. Prior to May
18, 1998, Class E shares were charged a 12b-1 distribution fee.
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,
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.
Notes to Financial Statements 104
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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
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, 1998, 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 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.
105 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1998, 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 $ 1,220,679,491 $ 1,166,820,834 International
Securities $ 599,820,626 $ 592,146,325
Equity Income 363,694,210 359,639,843 Diversified
Bond 260,183,984 150,521,097
Quantitative Equity 952,843,498 867,074,100 Multistrategy
Bond 344,694,046 213,754,594
</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 $1,524,952,209 $1,494,941,147
Multistrategy Bond 1,505,461,027 1,408,915,702
</TABLE>
WRITTEN OPTIONS AND FUTURES CONTRACTS: Fund transactions in written options and
futures contracts for the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
DIVERSIFIED EQUITY FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- --------------
<S> <C> <C>
Outstanding December 31, 1997 218 $ 49,118,032
Opened 1,420 376,322,624
Closed (1,370) (345,244,911)
--------- -----------------
Outstanding December 31, 1998 268 $80,195,745
========= =================
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- --------------
<S> <C> <C>
Outstanding December 31, 1997 56 $10,247,020
Opened 433 98,566,960
Closed (430) (97,087,891)
------------- ------------------
Outstanding December 31, 1998 59 $11,726,089
============= =================
</TABLE>
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
-------------- ----------------
<S> <C> <C>
Outstanding December 31, 1997 108 $23,847,309
Opened 930 234,557,881
Closed (910) (223,548,439)
-------------- ----------------
Outstanding December 31, 1998 128 $34,856,751
============== ================
</TABLE>
(1) The aggregate face value of contracts is computed on the date each contract
was opened.
Notes to Financial Statements 106
<PAGE>
Frank Russell Investment Company
Russell Funds
Notes to Financial Statements, continued
December 31, 1998
<TABLE>
<CAPTION>
INTERNATIONAL SECURITIES FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
-------------- ----------------
<S> <C> <C>
Outstanding December 31, 1997 409 $ 52,115,383
Opened 3,465 299,623,950
Closed (3,228) (301,799,165)
-------------- ----------------
Outstanding December 31, 1998 646 $ 49,940,168
=============== ===============
<CAPTION>
DIVERSIFIED BOND WRITTEN OPTIONS
NUMBER OF PREMIUMS
CONTRACTS (2) RECEIVED
------------ --------------
<S> <C> <C>
Outstanding December 31, 1997 177 $ 114,076
Opened 34 355,995
Closed (10) (93,256)
Expired (84) (209,284)
------------ --------------
Outstanding December 31, 1998 117 $ 167,531
============ ==============
<CAPTION>
MULTISTRATEGY BOND WRITTEN OPTIONS
NUMBER OF PREMIUMS
CONTRACTS (2) RECEIVED
------------ --------------
<S> <C> <C>
Outstanding December 31, 1997 241 $ 157,083
Opened 54 522,493
Closed (18) (160,559)
Expired (110) (267,565)
------------ --------------
Outstanding December 31, 1998 167 $ 251,452
============ ==============
</TABLE>
<TABLE>
<CAPTION>
FUTURES CONTRACTS FUTURES CONTRACTS
MULTISTRATEGY BOND SOLD SHORT PURCHASED
AGGREGATE AGGREGATE
NUMBER OF FACE VALUE OF NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1) CONTRACTS CONTRACTS (1)
------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1997 -- $ -- 557 $ 65,554,916
Opened (656) (76,853,614) 3,432 417,807,079
Closed 371 43,034,809 (3,320) (392,224,178)
------------- ---------------- -------------- -----------------
Outstanding December 31, 1998 (285) $ (33,818,805) 669 $ 91,137,817
============= =============== ============== =================
</TABLE>
(1) The aggregate face value of contracts is computed on the date each contract
was opened.
(2) Each contract represents $100,000 notional value.
SECURITIES LENDING: Effective April 27, 1998, the Investment Company resumed
its securities lending program. The program allows each Fund to loan securities
with a value up to 33 1/3% of its total assets to certain brokers. The Fund
receives cash (U.S. currency), U.S. Government or U.S. Government agency
obligations as collateral against the loaned securities. To the extent that a
loan is secured by cash collateral, such collateral shall be invested by Morgan
Stanley Trust Company ("MSTC") in short-term instruments, money market mutual
funds, and such other short-term investments, provided the investments meet
certain quality and diversification requirements. Under the securities-lending
arrangement, the collateral received is recorded on the Fund's statement of
assets and liabilities along with the related obligation to return the
collateral. In those situations where the Company has relinquished control of
securities transferred, it derecognizes the securities and records a receivable
from the counterparty.
Income generated from the investment of cash collateral, less negotiated rebate
fees paid to participating brokers and transaction costs, is divided between
the Fund and MSTC and is included as interest income for the Fund. To the
extent that a loan is secured by non-cash collateral, brokers pay the Fund
negotiated lenders' fees, which are divided between the Fund and MSTC and are
107 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
included as interest income for the Fund. All collateral received will be in an
amount at least equal to 100% (for fixed income securities), 102% (for loans of
U.S. securities) or 105% (for non-U.S. equity securities) of the market value
of the loaned securities at the inception of each loan. This collateral must be
maintained at not less than the above respective percentages of the market
value of the loaned securities during the period of the loan. Should the
borrower of the securities fail financially, there is a risk of delay in
recovery of the securities or loss of rights in the collateral. Consequently,
loans are made only to borrowers which are deemed to be of good financial
standing. As of December 31, 1998, the value of outstanding securities on loan
and the value of collateral amounted to as follows:
<TABLE>
<CAPTION>
VALUE OF VALUE OF
SECURITIES ON VALUE OF SECURITIES ON VALUE OF
LOAN COLLATERAL LOAN COLLATERAL
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Diversified Equity $23,954,014 $23,467,370 International Securities $26,058,167 $25,642,082
Equity Income 812,700 812,700 Diversified Bond 88,211,731 92,753,500
Quantitative Equity 14,140,692 14,154,154 Multistrategy Bond 31,625,280 33,210,750
</TABLE>
4. RELATED PARTIES
ADVISOR: FRIMCo operates and administers all of the Funds which comprise the
Investment Company, and advises 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, a
wholly owned subsidiary of The Northwestern Mutual Life Insurance Company.
Frank Russell Company 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, 1998, the advisory fee paid to FRIMCo, for
the Funds listed below, in accordance with the Investment Company's Advisory
Agreement with that firm, amounted to $35,965,721 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. Effective
December 1, 1998, the advisory fee annual rates were reduced by the
Administrator fee of .05%; the new rates are:
<TABLE>
<CAPTION>
ANNUAL RATE ANNUAL RATE
------------- -------------
<S> <C> <C> C>
Diversified Equity 0.73% International Securities .90%
Equity Income 0.75 Diversified Bond .40
Quantitative Equity 0.73 Multistrategy Bond .60
</TABLE>
The Advisor contract also provides that if any Fund's expenses (exclusive of
interest and taxes) exceed specified limits imposed by the Advisor on an annual
basis, such excess will be paid by FRIMCo.
The Advisor has voluntarily agreed to waive a portion of its 0.60% advisory fee
for the Multistrategy Bond Fund, up to the full amount of that fee, equal to
the amount by which the Fund's total operating expenses exceed 0.80% of the
Fund's average daily net assets on an annual basis. The total amount of the
waiver for the year ended December 31, 1998 was $57,035.
FRIMCo calculates its advisory fee based on average daily net assets for each
Fund, less any advisory fee incurred on assets invested in the Money Market
Fund (see Note 5) thereby eliminating any duplication of fees.
ADMINISTRATOR: Effective December 1, 1998, the Investment Company's Board of
Trustees approved a plan to pay a .05% fee of the average daily net assets of
the Funds to FRIMCo, in accordance with the Investment Company's Advisory
Agreement with that firm. The fee paid to FRIMCo for the Funds listed above
amounted to $218,586 before waivers.
ANALYTIC SERVICES: Fees for analytic services provided to the Funds are paid or
accrued to Russell/Mellon Analytical Services, an affiliate of the Investment
Company. Russell/Mellon Analytical Services provides TruVP System to the Funds,
pursuant to a written Service Agreement. The TruVP System provides analytics
used by the investment department.
TRANSFER AGENT: The Funds have a contract with FRIMCo to provide transfer agent
services to the Investment Company. Total fees for the twelve months ended
December 31, 1998 were $3,452,286.
DISTRIBUTOR AND SHAREHOLDER SERVICING: Prior to May 18, 1998, the Investment
Company had a Distribution Plan pursuant to Rule 12b-1 (the "Plan") under the
1940 Act. Under this Plan, the Investment Company was 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
Notes to Financial Statements 108
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
related expenses incurred which were primarily intended to result in the sale
of the Class C shares subject to the Distribution Plan. Effective May 18, 1998,
Class C shares were renamed Class E shares and the 12b-1 fee was eliminated.
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 E 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 prior to May 18, 1998 for distribution services relating to
Class E are included in the accompanying Statements of Operations. Currently,
the Distributor receives no compensation from the Investment Company for its
services relating to distributing the Class S and Class E shares.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which the Funds 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 E shares of the Funds. The amounts paid to the
Distributor for shareholder services relating to Class E are included in the
accompanying Statements of Operations.
The shareholder servicing payments shall not exceed 0.25% of the average daily
net assets of a Fund's Class E shares on an annual basis.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1998 WERE AS FOLLOWS:
<TABLE>
<CAPTION>
SHAREHOLDER
SERVICING &
ADVISORY ADMINISTRATION ANALYTIC TRANSFER DISTRIBUTION
FEES FEES SERVICE FEES AGENT FEES FEES TOTALS
-------- -------------- ------------ ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Diversified Equity $ 815,251 $ 56,159 $ 7,336 $ 142,520 $ 4,773 $ 1,026,039
Equity Income 161,459 10,825 1,843 33,872 446 208,445
Quantitative Equity 790,827 54,357 2,302 146,931 4,037 998,454
International Securities 706,163 39,381 10,273 121,028 2,357 879,202
Diversified Bond 270,858 34,525 86 61,662 2,824 369,955
Multistrategy Bond 246,966 23,339 30 67,889 1,331 339,555
--------- ------------- ------------ --------- ------------ ---------------
$2,991,524 $218,586 $21,870 $ 573,902 $15,768 $ 3,821,650
========== ============ ============ ========= =========== ===============
</TABLE>
BROKERAGE COMMISSIONS: The Funds may effect portfolio transactions through
Frank Russell Securities, Inc., an affiliate of the Advisor, 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, 1998 were as
follows:
<TABLE>
<S> <C> <C> <C>
Diversified Equity $330,393 Quantitative Equity $ 12,196
Equity Income 119,448 International Securities 190,265
</TABLE>
Additionally, the Funds paid brokerage commissions to non-affiliated brokers
who provided brokerage and research services to the Advisor.
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 $21,407 for the year ended December 31,
1998, and were allocated to each Fund and Class, where appropriate, on a pro
rata basis, including 22 other affiliated Funds not presented 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, 1998,
$328,033,000 of the Money Market Fund's net assets represents investments by
these Funds and $447,833,000 represents the investments of other affiliated
Funds not presented herein.
109 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
6. FUND SHARE TRANSACTIONS
Share transactions for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
SHARES DOLLARS
-------------------------------------------------------------
1998 1997 1998 1997
DIVERSIFIED EQUITY -------------------------------------------------------------
CLASS S
<S> <C> <C> <C> <C>
Proceeds from shares
sold 9,507,360 8,086,088 $448,918,371 $375,766,850
Proceeds from
reinvestment of
distributions 1,274,778 3,725,974 59,998,451 158,438,737
Payments for shares
redeemed (8,070,726) (4,802,360) (384,258,751) (223,615,053)
------------ ----------- ------------- -------------
Net increase
(decrease) 2,711,412 7,009,702 124,658,071 310,590,534
------------ ----------- ------------- -------------
CLASS E (a)(b)
Proceeds from shares
sold 123,298 66,243 5,594,639 3,187,196
Proceeds from
reinvestment of
distributions 5,378 2 256,859 89
Payments for shares
redeemed (18,482) (1,200) (891,748) (62,020)
------------ ----------- ------------- -------------
Net increase
(decrease) 110,194 65,045 4,959,750 3,125,265
------------ ----------- ------------- -------------
Total increase
(decrease) 2,821,606 7,074,747 $129,617,821 $313,715,799
============ =========== ============ ============
EQUITY INCOME
CLASS S
Proceeds from shares
sold 2,229,736 1,660,711 $93,207,934 $73,122,240
Proceeds from
reinvestment of
distributions 512,914 911,813 20,628,554 36,860,520
Payments for shares
redeemed (2,196,713) (1,899,151) (91,317,526) (84,411,404)
------------ ----------- ------------- -------------
Net increase
(decrease) 545,937 673,373 22,518,962 25,571,356
------------ ----------- ------------- -------------
CLASS E (b)
Proceeds from shares
sold 22,270 11,673 939,958 500,212
Proceeds from
reinvestment of
distributions 547 4 21,592 177
Payments for shares
redeemed (13,005) (6,565) (543,167) (288,276)
------------ ----------- ------------- -------------
Net increase
(decrease) 9,812 5,112 418,383 212,113
------------ ----------- ------------- -------------
Total increase
(decrease) 555,749 678,485 $22,937,345 $25,783,469
============ =========== ============ ============
QUANTITATIVE EQUITY
CLASS S
Proceeds from shares
sold 10,401,417 9,083,437 $411,246,920 $338,711,998
Proceeds from
reinvestment of
distributions 1,801,116 3,377,853 71,013,427 119,025,818
Payments for shares
redeemed (8,361,539) (5,466,417) (332,333,211) (203,662,362)
------------ ----------- ------------- -------------
Net increase
(decrease) 3,840,994 6,994,873 149,927,136 254,075,454
------------ ----------- ------------- -------------
CLASS E (b)
Proceeds from shares
sold 135,230 57,845 5,166,521 2,137,628
Proceeds from
reinvestment of
distributions 7,335 3 292,332 102
Payments for shares
redeemed (30,285) (3,888) (1,233,765) (155,726)
------------ ----------- ------------- -------------
Net increase
(decrease) 112,280 53,960 4,225,088 1,982,004
------------ ----------- ------------- -------------
Total increase
(decrease) 3,953,274 7,048,833 $154,152,224 $256,057,458
============ =========== ============ ============
</TABLE>
(a) Share transactions for Class E for the year ended December 31, 1997 are for
the period May 27, 1997 (commencement of sale of shares) to December 31,
1997.
(b) Effective May 18, 1998, Class C was renamed Class E.
Notes to Financial Statements 110
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
<TABLE>
<CAPTION>
SHARES DOLLARS
------------------------------------------------------------
INTERNATIONAL 1998 1997 1998 1997
SECURITIES ------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS S
Proceeds from shares
sold 5,496,045 5,602,508 $326,448,206 $329,786,927
Proceeds from
reinvestment of
distributions 171,775 778,773 10,072,223 42,316,642
Payments for shares
redeemed (5,562,388) (3,744,190) (329,404,774) (219,850,134)
----------- ---------- ------------- ------------
Net increase
(decrease) 105,432 2,637,091 7,115,655 152,253,435
----------- ---------- ------------- ------------
CLASS E (b)
Proceeds from shares
sold 59,331 15,385 3,346,399 911,652
Proceeds from
reinvestment of
distributions 588 1 34,441 48
Payments for shares
redeemed (10,159) (2,782) (590,863) (161,903)
----------- ---------- ------------- ------------
Net increase
(decrease) 49,760 12,604 2,789,977 749,797
----------- ---------- ------------- ------------
Total increase
(decrease) 155,192 2,649,695 $9,905,632 $153,003,232
============ =========== ============ ============
DIVERSIFIED BOND
CLASS S
Proceeds from shares
sold 15,009,859 12,348,179 $355,143,003 $285,135,050
Proceeds from
reinvestment of
distributions 1,508,462 1,005,608 35,660,201 23,212,199
Payments for shares
redeemed (11,474,358) (8,175,529) (272,067,167) (188,567,724)
----------- ---------- ------------- ------------
Net increase
(decrease) 5,043,963 5,178,258 118,736,037 119,779,525
----------- ---------- ------------- ------------
CLASS E (b)
Proceeds from shares
sold 155,188 71,904 3,756,793 1,676,993
Proceeds from
reinvestment of
distributions 6,059 1 145,944 14
Payments for shares
redeemed (67,274) (11,128) (1,614,546) (260,392)
----------- ---------- ------------- ------------
Net increase
(decrease) 93,973 60,777 2,288,191 1,416,615
----------- ---------- ------------- ------------
Total increase
(decrease) 5,137,936 5,239,035 $121,024,228 $121,196,140
============ =========== ============ ============
MULTISTRATEGY BOND
CLASS S
Proceeds from shares
sold 22,246,273 19,095,215 $228,941,847 $195,040,097
Proceeds from
reinvestment of
distributions 3,444,172 2,374,546 35,248,098 24,254,657
Payments for shares
redeemed (14,104,977) (9,058,823) (145,115,530) (92,355,378)
----------- ---------- ------------- ------------
Net increase
(decrease) 11,585,468 12,410,938 119,074,415 126,939,376
----------- ---------- ------------- ------------
CLASS E (b)(c)
Proceeds from shares
sold 253,909 -- 2,610,567 --
Proceeds from
reinvestment of
distributions 8,900 -- 90,421 --
Payments for shares
redeemed (4,393) -- (45,171) --
----------- ---------- ------------- ------------
Net increase
(decrease) 258,416 -- 2,655,817 --
----------- ---------- ------------- ------------
Total increase
(decrease) 11,843,884 12,410,938 $121,730,232 $126,939,376
============ =========== ============ =============
</TABLE>
(b) Effective May 18, 1998, Class C was renamed Class E.
(c) Share transactions for Class E for the year ended December 31, 1998 are for
the period September 11, 1998 (commencement of sale of shares) to December
31, 1998.
111 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
RUSSELL FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
7. DIVIDENDS
On February 1, 1999, the Board of Trustees declared the following dividends
from net investment income payable on February 4, 1999, to shareholders of
record on February 2, 1999:
<TABLE>
<S> <C> <C> <C>
Multistrategy Bond - Class S $0.0504 Diversified Bond - Class S $0.1101
Multistrategy Bond - Class E 0.0482 Diversified Bond - Class E 0.1049
Multistrategy Bond - Class C 0.0498 Diversified Bond - Class C 0.1084
</TABLE>
8. BENEFICIAL INTEREST
As of December 31, 1998, the following Funds have one or more shareholders
with shares of beneficial interest greater than 10% of the total outstanding
shares of each respective Fund or Class: Diversified Bond - Class S 15.5%,
Diversified Bond - Class E 23.9% and 63.4%, Diversified Equity - Class E
17.8% and 49.5%, Equity Income - Class E 35.5% and 48.8%, Multistrategy
Bond -Class E 29.6%, International Securities - Class E 15.2%, 19.8% and
19.9% and Quantitative Equity - Class E 12.9%, 20.8% and 28.0%.
9. SUBSEQUENT EVENTS
On January 15, 1999, the Funds began offering Class C shares under a
Distribution Plan with a 12b-1 fee payment of up to 0.75% of the average
daily net assets of a Fund's Class C shares. Under the Plan, the Class C
shares of the Funds do not pay for unreimbursed expenses of the Distributor
including amounts expended by the Distributor in excess of amounts received
by it from the Funds, 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 Funds under the Distribution Plan.
Notes to Financial Statements 112
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders
of Frank Russell Investment Company:
In our opinion, the accompanying statements of assets and liabilities, including
the statements of net assets, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the series of Frank Russell
Investment Company (in this report comprised of Diversified Equity, Equity
Income, Quantitative Equity, International Securities, Diversified Bond, and
Multistrategy Bond (the "Funds")) at December 31, 1998, and the results of their
operations, the changes in their net assets and the financial highlights for the
periods indicated therein, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at December 31, 1998 by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
113 Report of Independent Accountants
<PAGE>
Frank Russell Investment Company
Russell Funds
Tax Information
December 31, 1998 (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, 1998:
<TABLE>
<CAPTION>
Total Long-Term
Capital Gains
---------------
<S> <C>
Diversified Equity $49,066,087
Equity Income 16,279,166
Quantitative Equity 67,909,606
International Securities 3,180,464
Multistrategy Bond 5,622,540
Diversified Bond 4,591,036
</TABLE>
Tax Information 114
<PAGE>
Frank Russell Investment Company
Russell Funds
Matter Submitted to a Vote of Shareholders
December 31, 1998
There was a Special Meeting in Lieu of Annual Meeting of Shareholders of the
Frank Russell Investment Company (the "Investment Company") held at 909 A
Street, Tacoma, Washington on November 19, 1998.
THE FOLLOWING MATTERS WERE VOTED UPON AT THE MEETING
The results of each vote accompany the description of each matter
- -----------------------------------------------------------------
1. This item number was reserved for a matter affecting another FRIC Fund of
the Investment Company.
2. To elect the members of the Board of Trustees of the Investment Company.
<TABLE>
<CAPTION>
VOTE:
-----
For Withheld
-------------------- ---------------
<S> <C> <C>
Lynn L. Anderson 1,142,054,288.045 2,131,664.459
Paul E. Anderson 1,139,319,894.878 2,166,057.626
Paul Anton, PhD. 1,141,736,993.856 2,448,958.648
William E. Baxter 1,141,722,018.319 2,463,934.185
Lee C. Gingrich 1,142,034,296.045 2,161,656.459
Eleanor W. Palmer 1,141,728,049.319 2,457,903.185
</TABLE>
3. To ratify the selection of PricewaterhouseCoopers LLP as the Investment
Company's independent accountants.
VOTE:
-----
<TABLE>
<CAPTION>
Abstain/Broker
For Against Non-Vote
- ------------------- ------------------ ---------------
<S> <C> <C>
1,141,762,608.691 732,463.728 1,690,880.085
</TABLE>
4. To approve a proposed advisory agreement with Frank Russell Investment
Management Company ("FRIMCo"), the current investment manager of the
Investment Company, restructuring the manner in which services are provided
to the Funds, providing for compensation to FRIMCo for managing certain
additional assets of the Funds.
VOTE:
-----
<TABLE>
<CAPTION> Abstain/Broker
For Against Non-Vote
-------------- ----------- --------------
<S> <C> <C> <C>
Diversified Equity Fund 21,150,994.475 226,722.351 150,293.425
Equity Income Fund 4,481,926.359 67,306.068 76,147.984
Quantitative Equity Fund 24,415,989.225 149,201.516 197,817.530
International Securities Fund 12,377,629.156 98,582.932 68,230.961
Diversified Bond Fund 29,354,115.044 132,849.724 227,985.858
Multistrategy Bond Fund 39,090,853.106 131,938.517 245,012.272
</TABLE>
115 Matter Submitted to a Vote of Shareholders
<PAGE>
Frank Russell Investment Company
Russell Funds
Matter Submitted to a Vote of Shareholders, continued
December 31, 1998
5. To approve a proposed advisory agreement with FRIMCo, to take effect upon
the closing of the acquisition of Frank Russell Company by The Northwestern
Mutual Life Insurance Company.
VOTE:
-----
<TABLE>
<CAPTION>
Abstain/Broker
For Against Non-Vote
------------ ----------- -------------
<S> <C> <C> <C>
Diversified Equity Fund 21,115,167.404 263,346.972 149,495.874
Equity Income Fund 4,497,756.986 94,267.254 33,356.171
Quantitative Equity Fund 24,404,857.031 195,633.258 162,517.982
International Securities Fund 12,351,617.717 116,595.866 76,229.466
Diversified Bond Fund 29,420,400.694 162,229.949 132,319.983
Multistrategy Bond Fund 39,002,219.176 154,258.183 311,326.536
</TABLE>
6. To approve a change to the Funds' fundamental investment restrictions
limiting borrowing activities, authorizing a higher borrowing level for the
purpose of meeting shareholder redemption requests.
VOTE:
-----
<TABLE>
<CAPTION>
Abstain/Broker
For Against Non-Vote
------------ ----------- -------------
<S> <C> <C> <C>
Diversified Equity Fund 16,651,273.910 389,073.029 129,650.311
Equity Income Fund 3,968,466.956 122,296.440 32,274.015
Quantitative Equity Fund 19,658,448.638 326,635.239 151,233.394
International Securities Fund 10,400,165.655 183,567.852 65,087.542
Diversified Bond Fund 26,336,412.126 240,289.059 126,483.414
Multistrategy Bond Fund 33,679,940.657 293,444.081 277,742.157
</TABLE>
7. To approve the elimination of certain fundamental investment restrictions
applicable to the Funds.
VOTE:
-----
a) elimination of restriction on investing in interests of oil and gas:
<TABLE>
<CAPTION>
Abstain/Broker
For Against Non-Vote
------------ ----------- -------------
<S> <C> <C> <C>
Diversified Equity Fund 14,680,700.221 1,050,917.877 1,438,379.152
Equity Income Fund 3,757,024.475 212,285.916 153,727.020
Quantitative Equity Fund 17,393,076.359 1,023,040.741 1,720,200.171
International Securities Fund 9,163,748.065 462,589.723 1,022,483.261
Diversified Bond Fund 17,475,683.536 7,567,749.518 1,659,751.572
Multistrategy Bond Fund 28,463,894.981 1,462,170.603 4,325,061.311
</TABLE>
Matter Submitted to a Vote of Shareholders 116
<PAGE>
Frank Russell Investment Company
Russell Funds
Matter Submitted to a Vote of Shareholders, continued
December 31, 1998
b) elimination of restriction on investing in issuers in operation for less
than three years:
<TABLE>
<CAPTION>
Abstain/Broker
For Against Non-Vote
-------------- ------------- --------------
<S> <C> <C> <C>
Diversified Equity Fund 15,907,546.632 1,119,472.223 142,978.395
Equity Income Fund 3,871,065.258 219,013.138 32,959.015
Quantitative Equity Fund 18,872,528.389 1,098,429.403 165,359.479
International Securities Fund 10,083,612.540 491,416.057 73,792.452
Diversified Bond Fund 18,910,496.668 7,652,390.517 140,297.441
Multistrategy Bond Fund 32,329,024.641 1,621,185.173 300,917.081
</TABLE>
c) elimination of restriction on investing in issuers beneficially owned by
affiliated persons:
<TABLE>
<CAPTION>
Abstain/Broker
For Against Non-Vote
-------------- ------------- ----------------
<S> <C> <C> <C>
Diversified Equity Fund 15,723,651.773 1,292,163.379 154,182.098
Equity Income Fund 3,778,649.532 311,671.864 32,716.015
Quantitative Equity Fund 18,624,919.557 1,338,025.006 173,372.708
International Securities Fund 9,979,805.013 593,335.573 75,680.463
Diversified Bond Fund 18,703,957.269 7,864,678.024 134,549.333
Multistrategy Bond Fund 31,938,140.116 2,008,733.091 304,253.688
</TABLE>
d) elimination of restriction on investing in warrants not listed on the NYSE
or ASE:
<TABLE>
<CAPTION>
Abstain/Broker
For Against Non-Vote
-------------- --------------- --------------
<S> <C> <C> <C>
Diversified Equity Fund 15,877,248.902 1,138,975.178 153,773.170
Equity Income Fund 3,816,801.091 271,510.305 34,726.015
Quantitative Equity Fund 18,816,617.169 1,145,916.004 173,784.098
Multistrategy Bond Fund 32,368,641.922 1,586,875.892 295,609.081
</TABLE>
8. This item number was reserved for a matter affecting another FRIC Fund of
the Investment Company.
To act upon any other business as may legally have come before the Special
Meeting or any adjournment thereof.
VOTE:
-----
<TABLE>
<CAPTION>
Grant Withheld
-------------- -------------
<S> <C> <C>
Diversified Equity Fund 20,259,727.374 1,268,282.876
Equity Income Fund 4,271,931.380 353,449.031
Quantitative Equity Fund 23,667,356.308 1,095,651.963
International Securities
Fund 11,638,845.888 905,597.161
Diversified Bond Fund 28,210,514.108 1,504,436.518
Multistrategy Bond Fund 37,927,986.961 1,539,816.934
</TABLE>
117 Matter Submitted to a Vote of Shareholders
<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
Mark E. Swanson, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
Manager, Transfer and Dividend Paying 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
PricewaterhouseCoopers LLP
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 Investors, N.A., San Francisco, CA
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc., Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Morgan Stanley Asset Management, Inc., New York, NY
Peachtree Asset Management, Atlanta, GA
Sanford C. Bernstein & Co., Inc., New York, NY
Suffolk Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Equity Income
Equinox Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Westpeak Investment Advisors, L.P., Boulder, Co
Quantitative Equity
Barclays Global Investors, N.A., 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, LLC, 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
Multistrategy Bond
BEA Associates, Inc., 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 118
<PAGE>
[RUSSELL LOGO]
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402-5120
253-627-7001
800-972-0700
Fax: 253-591-3495
A-5147(299) 36-08-019
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS FUNDS
1998 Annual Report
CLASS C, CLASS D, & CLASS E
EQUITY BALANCED STRATEGY FUND
AGGRESSIVE STRATEGY FUND
BALANCED STRATEGY FUND
MODERATE STRATEGY FUND
CONSERVATIVE STRATEGY FUND
December 31, 1998
[RUSSELL LOGO]
<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, 1998
TABLE OF CONTENTS
Page
Letter to Our Clients ........................................ 2
Portfolio Management Discussion .............................. 3
Equity Balanced Strategy Fund ................................ 9
Aggressive Strategy Fund ..................................... 14
Balanced Strategy Fund ....................................... 19
Moderate Strategy Fund ....................................... 24
Conservative Strategy Fund ................................... 29
Notes to Financial Statements ................................ 34
Report of Independent Accountants ............................ 41
Tax Information .............................................. 42
Matters Submitted to a Vote of Shareholders .................. 43
Manager, Money Managers and Service Providers ................ 46
FRANK RUSSELL INVESTMENT COMPANY - LIFEPOINTS(R) FUNDS
Copyright (C) Frank Russell Company 1999. 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
We are pleased to present the Frank Russell Investment Company 1998 Annual
Report. This report covers information on five of the Funds and represents our
seventeenth year in operation.
We remain committed to providing our clients with superior investment solutions
through the benefits of multi-manager, multi-style diversification used in
structuring our Funds. The commitment proved worthwhile in 1998, 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 (FRIMCo) continuously evaluates the
Funds we offer our clients. Each of these Funds is carefully monitored by
Russell investment professionals to ensure that the most appropriate investment
advisors and strategies are utilized within each Fund. The advisors are
monitored by FRIMCo, using the expertise and advice of the Investment Policy and
Research group of Frank Russell Company.
Since the close of 1997, we have implemented changes in our Funds' structure
which we believe will benefit current and potential investors. The former Class
C shares of the Russell Funds have been renamed Russell Fund Class E shares, and
their fee structure now aligns with the Russell LifePoints(R) Funds' Class E
shares. Additionally, the Russell LifePoints(R) Funds' Class D shares were
opened for investment in March 1998.
FRIMCo's decision to retain Boston Financial Data Services(BFDS) to assist in
the transfer agent process in June 1998 has enhanced the level of services
provided to our clients.
We are also pleased to announce the recent acquisition of Frank Russell Company
by The Northwestern Mutual Life Insurance Company, the U.S. leader in both
individual life insurance sold annually and total life insurance in force. We
believe this is a very positive development for both Russell and the Funds,
given the financial strength and image of Northwestern.
Thank you for your continued confidence and investment with Frank Russell
Investment Company. We look forward to 1999 and continuing to earn your support.
Sincerely,
/s/ George Russell /s/ Lynn L. Anderson
George F. Russell, Jr. Lynn L. Anderson
Chairman President and Chief Executive Officer
Frank Russell Investment Company Frank Russell Investment Company
<PAGE>
LIFEPOINTS(R) FUNDS
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the performance of the LifePoints Funds
exceeded their respective Lipper benchmarks, led by strong stock fund
performance. US stocks provided investors with returns in excess of 20% for an
unprecedented fourth consecutive year. Despite the strong gains, the year
provided significant challenges to fund managers. Investors continued to direct
assets toward large cap growth stocks, despite extreme valuations.
The result was the largest performance differential on record between the
largest 50 stocks of the Russell 1000(R) Index (up 40.4% for the year) and small
cap stocks in the Russell 2000(R) Index (down 2.5% for the year). The US funds
in the LifePoints strategies fared significantly better than the average of
funds in their respective peer groups. However, the strength of larger cap
growth issues resulted in the Funds trailing their respective index benchmarks.
The European Monetary Union continued to be a catalyst for strong stock market
performance of markets on the European continent. The Salomon Smith Barney Broad
Market Index (BMI) of continental European markets rose more than 30% in 1998.
As in the US, large cap stocks dominated the performance of these markets. The
BMI's United Kingdom segment lagged its neighboring markets but still rose 17%.
Pacific Basin markets were plagued by economic weakness through most the year.
The region rose only 3.8% for the year, with currency appreciation versus the
dollar driving a 5.7% loss in local currencies.
Interest rates continued to decline during the year, as signs of disinflation
and moderating economic growth continued to ease yields. Third quarter
volatility reflected a flight to quality, as investors expressed fears of a
global recession. It also led to severe credit spread widening that eroded the
returns of corporate and mortgage-backed securities. Intervention by the Federal
Reserve Board helped restore confidence in the economy but failed to completely
reverse the spread widening. As a result, treasuries outperformed other sectors
of the bond market.
The 1998 annual returns of the Underlying Funds (Class S shares) are as follows:
Diversified Equity Fund had a total return of 25.2%, Special Growth Fund
returned 0.4%, Quantitative Equity Fund gained 24.8%, International Securities
Fund returned 12.9%, Emerging Markets Fund lost 27.6%, Real Estate Securities
Fund lost 15.9%, Multistrategy Bond Fund gained 6.8%, Volatility Constrained
Bond Fund gained 6.1%, and Diversified Bond Fund returned 8.1%.
3 LifePoints(R) Funds
3
<PAGE>
EQUITY BALANCED STRATEGY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: Equity Balanced Strategy Fund seeks to achieve high, long-term
capital appreciation, while recognizing the possibility of high fluctuations in
year to year market values.
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.
LifePoints(R)Equity Equity Balanced Equity Balanced
Balanced Strategy Strategy Composite Lipper(R)Composite
Dates Fund - Class E Benchmark++++ Benchmark++
Inception* $10,000 $10,000 $10,000
1997 $9,758 $9,918 $9,765
1998 $11,099 $11,700 $10,665
- -------------------------------------------------------------------------------
Total $30,857 $31,618 $30,430
===============================================================================
EQUITY BALANCED STRATEGY FUND - CLASS E
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- --------------------------------------------
1 Year $11,375 13.75%
Inception $11,099 8.69%(S)
EQUITY BALANCED STRATEGY FUND - CLASS D +
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- --------------------------------------------
1 Year $11,381 13.81%
Inception $10,940 8.64%(S)
EQUITY BALANCED LIPPER(R) COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- --------------------------------------------------
1 Year $10,922 9.22%
Inception $10,665 5.28%(S)
EQUITY BALANCED STRATEGY COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- --------------------------------------------------
1 Year $11,796 17.96%
Inception $11,700 13.38%(S)
* The Fund commenced operations on September 30, 1997. Index comparison began
October 1, 1997.
++ The Equity Balanced Lipper(R) Composite Benchmark is comprised of the
following fund averages:
60% Lipper(R) Growth & Income
20% Lipper(R) International
10% Lipper(R) Small Co. Growth
5% Lipper(R) Emerging Markets
5% Lipper(R) Real Estate
++++ The Equity Balanced Strategy Composite Index is comprised of the following
indices:
60% Russell 1000(R) Index
20% Salomon Smith Barney BMI Ex-US
10% Russell 2500(TM) Index
5% Baring Extended Emerging Markets Index
5% NAREIT Equity REIT Index
+ Equity Balanced Strategy Fund - Class D Shares - for the period March 24,
1998 (commencement of sales) to December 31, 1998, shareholder servicing and
12b-1 fees were charged. Total return would have been lower had these fees
been in effect during prior reporting periods. Class E performance linked
with Class D to provide historical perspective.
(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 in not indicative of future results.
Equity Balanced Strategy Fund 4
4
<PAGE>
AGGRESSIVE STRATEGY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: Aggressive Strategy Fund seeks to achieve high, long-term capital
appreciation, with low current income while recognizing the possibility of
substantial fluctuations in year to year market values.
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.
LifePoints(R) Aggressive
Aggressive Strategy Aggressive Strategy Lipper(R)Composite
Dates Fund - Class E Composite Benchmark++++ Benchmark++
Inception* $10,000 $10,000 $10,000
1997 $9,981 $9,926 $9,795
1998 $11,148 $11,407 $10,606
- ------------------------------------------------------------------------------
Total $31,129 $31,333 $30,401
==============================================================================
AGGRESSIVE STRATEGY FUND - CLASS E
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $11,169 11.69%
Inception $11,148 8.79%(S)
AGGRESSIVE STRATEGY FUND - CLASS D +
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $11,152 11.52%
Inception $11,300 8.65%(S)
AGGRESSIVE LIPPER(R) COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- --------------------------------------------
1 Year $10,828 8.28%
Inception $10,606 4.82%(S)
AGGRESSIVE STRATEGY COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- --------------------------------------------
1 Year $11,493 14.93%
Inception $11,407 11.11%(S)
* The Fund commenced operations on September 16, 1997. Index comparison began
October 1, 1997.
++ The Aggressive Lipper(R) Composite Benchmark is comprised of the following
fund averages:
42% Lipper(R) Growth & Income
19% Lipper(R) International
18% Lipper(R) Intermediate Investment Grade Debt
11% Lipper(R) Small Co. Growth
5% Lipper(R) Emerging Markets
5% Lipper(R) Real Estate
++++ The Aggressive Strategy Composite Index is comprised of the following
indices:
42% Russell 1000(R) Index
19% Salomon Smith Barney BMI Ex-US
18% Lehman Brothers Aggregate Bond Index
11% Russell 2500(TM) Index
5% Baring Extended Emerging Markets Index
5% NAREIT Equity REIT Index
+ Aggressive Strategy Fund - Class D Shares - for the period March 24, 1998
(commencement of sales) to December 31, 1998, shareholder servicing and 12b-1
fees were charged. Total return would have been lower had these fees been in
effect during prior reporting periods. Class E performance linked with Class
D to provide historical perspective.
(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 in not indicative of future results.
5 Aggressive Strategy Fund
5
<PAGE>
BALANCED STRATEGY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (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.
LifePoints(R)
Balanced Strategy Balanced Strategy Balanced Lipper(R)
Dates Fund - Class E Composite Benchmark++++ Composite Benchmark++
Inception* $10,000 $10,000 $10,000
1997 $10,104 $10,053 $9,944
1998 $11,282 $11,447 $10,820
- -------------------------------------------------------------------------------
Total $31,386 $31,500 $30,764
===============================================================================
BALANCED STRATEGY FUND - CLASS E
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $11,166 11.66%
Inception $11,282 9.80%(S)
BALANCED STRATEGY FUND - CLASS D +
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $11,154 11.54%
Inception $12,700 9.71%(S)
BALANCED LIPPER(R) COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $10,881 8.81%
Inception $10,820 6.51%(S)
BALANCED STRATEGY COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $11,386 13.86%
Inception $11,447 11.41%(S)
* The Fund commenced operations on September 16, 1997. Index comparison began
October 1, 1997.
++ The Balanced Lipper(R) Composite Benchmark is comprised of the following fund
averages:
41% Lipper(R) Intermediate Investment Grade Debt
32% Lipper(R) Growth & Income
14% Lipper(R) International
5% Lipper(R) Real Estate
5% Lipper(R) Small Capitalization
3% Lipper(R) Emerging Markets
++++ The Balanced Strategy Composite Index is comprised of the following
indices:
41% Lehman Brothers Aggregate Bond Index
32% Russell 1000(R) Index
14% Salomon Smith Barney BMI Ex-US
5% NAREIT Equity REIT Index
5% Russell 2500(TM) Index
3% Baring Extended Emerging Markets Index
+ Balanced Strategy Fund - Class D Shares - for the period March 24, 1998
(commencement of sales) to December 31, 1998, shareholder servicing and 12b-1
fees were charged. Total return would have been lower had these fees been in
effect during prior reporting periods. Class E performance linked with Class
D to provide historical perspective.
(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 in not indicative of future results.
Balanced Strategy Fund 6
6
<PAGE>
MODERATE STRATEGY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: Moderate Strategy Fund seeks to achieve moderate long-term capital
appreciation with high current income while recognizing the possibility of
moderate fluctuations in year to year market values.
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.
LifePoints(R)
Moderate Strategy Moderate Strategy Moderate Lipper(R)
Dates Fund - Class E Composite Benchmark++++ Composite Benchmark++
Inception* $10,000 $10,000 $10,000
1997 $9,994 $10,102 $10,018
1998 $11,012 $11,252 $10,790
- ------------------------------------------------------------------------------
Total $31,006 $31,354 $30,808
==============================================================================
MODERATE STRATEGY FUND - CLASS E
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $11,019 10.19%
Inception $9,994 8.04%(S)
MODERATE STRATEGY FUND - CLASS D +
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $10,991 9.91%
Inception $9,840 7.82%(S)
MODERATE LIPPER(R) COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $10,770 7.70%
Inception $10,790 6.27%(S)
MODERATE STRATEGY COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $11,139 11.39%
Inception $11,252 9.90%(S)
* The Fund commenced operations on October 2, 1998. Index comparison began
October 1, 1997.
++ The Moderate Lipper(R) Composite Benchmark is comprised of the following fund
averages:
33% Lipper(R) Short Investment Grade Debt
27% Lipper(R) Intermediate Investment Grade Debt
22% Lipper(R) Growth & Income
9% Lipper(R) International
5% Lipper(R) Real Estate
2% Lipper(R) Emerging Markets
2% Lipper(R) Small Co. Growth
++++ The Moderate Strategy Composite Index is comprised of the following
indices:
33% Merrill Lynch 1-2.99 Year Treasury Index
27% Lehman Brothers Aggregate Bond Index
22% Russell 1000(R) Index
9% Salomon Smith Barney BMI Ex-US
5% NAREIT Equity REIT Index
2% Baring Extended Emerging Markets Index
2% Russell 2500(TM) Index
+ Moderate Strategy Fund - Class D Shares - for the period March 24, 1998
(commencement of sales) to December 31, 1998, shareholder servicing and 12b-1
fees were charged. Total return would have been lower had these fees been in
effect during prior reporting periods. Class E performance linked with Class
D to provide historical perspective.
(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 in not indicative of future results.
7 Moderate Strategy Fund
7
<PAGE>
CONSERVATIVE STRATEGY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (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.
LifePoints(R)
Conservative Strategy Conservative Strategy Conservative Lipper(R)
Dates Fund - Class E Composite Benchmark++++ Composite Benchmark++
Inception* $10,000 $10,000 $10,000
1997 $10,136 $10,140 $10,082
1998 $10,917 $11,029 $10,728
- ---------------------------------------------------------------------------
Total $31,053 $31,169 $30,810
===========================================================================
CONSERVATIVE STRATEGY FUND - CLASS E
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $10,770 7.70%
Inception $10,917 7.95%(S)
CONSERVATIVE STRATEGY FUND - CLASS D +
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $10,747 7.47%
Inception $8,930 7.74%(S)
CONSERVATIVE LIPPER(R) COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- ----------------------------------------
1 Year $10,641 6.41%
Inception $10,728 5.79%(S)
CONSERVATIVE STRATEGY COMPOSITE BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------------
1 Year $10,876 8.76%
Inception $11,029 8.15%(S)
* The Fund commenced operations on November 7, 1997. Index comparison began
October 1, 1997.
++ The Conservative Lipper(R) Composite Benchmark is comprised of the following
fund averages:
60% Lipper(R) Short Investment Grade Debt
18% Lipper(R) Intermediate Investment Grade Debt
11% Lipper(R) Growth & Income
5% Lipper(R) International
5% Lipper(R) Real Estate
1% Lipper(R) Emerging Markets
++++ The Conservative Strategy Composite Index is comprised of the following
indices:
60% Merrill Lynch 1-2.99 Year Treasury Index
18% Lehman Brothers Aggregate Bond Index
11% Russell 1000(R) Index
5% Salomon Smith Barney BMI Ex-US
5% NAREIT Equity REIT Index
1% Baring Extended Emerging Markets Index
+ Conservative Strategy Fund - Class D Shares - for the period March 24, 1998
(commencement of sales) to December 31, 1998, shareholder servicing and 12b-1
fees were charged. Total return would have been lower had these fees been in
effect during prior reporting periods. Class E performance linked with Class
D to provide historical perspective.
(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 in not indicative of future results.
Conservative Strategy Fund 8
8
<PAGE>
EQUITY BALANCED STRATEGY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES $
-------- ------------
<S> <C> <C>
INVESTMENTS
Portfolios of the Frank Russell Investment
Company Series Mutual
Fund - Class S Shares
DOMESTIC EQUITIES - 72.6%
Diversified Equity Fund 541,460 27,841,895
Quantitative Equity Fund 654,173 27,821,957
Real Estate Securities Fund 193,400 4,726,699
Special Growth Fund 221,223 9,587,824
-----------
69,978,375
-----------
INTERNATIONAL EQUITIES - 24.2%
Emerging Markets Fund 550,433 4,667,672
International Securities Fund 305,664 18,602,721
-----------
23,270,393
-----------
SHORT-TERM INVESTMENTS - 3.3%
Money Market Fund
due on demand (b) 3,219,000 3,219,000
-----------
TOTAL INVESTMENTS - 100.1%
(identified cost $90,936,220)(a) 96,467,768
-----------
OTHER ASSETS AND LIABILITIES
Deferred organization expenses (Note 2) 24,241
Other assets (Note 4) 219,198
Due to Custodian (174,297)
Other liabilities (Note 4) (154,572)
-----------
TOTAL OTHER ASSETS AND LIABILITIES,
NET - (0.1%) (85,430)
-----------
NET ASSETS - 100.0% 96,382,338
===========
<CAPTION>
MARKET
VALUE
$
------------
<S> <C>
NET ASSETS CONSIST OF:
Accumulated distributions in excess
of net investment income (800)
Accumulated net realized gain (loss) 1,163,868
Unrealized appreciation (depreciation)
on investments 5,531,548
Shares of beneficial interest 98,334
Additional paid-in capital 89,589,388
-----------
NET ASSETS 96,382,338
===========
NET ASSET VALUE, offering and redemption price
per share:
Class E ($91,459,662 divided by 9,331,387
shares of $.01 par value shares of beneficial
interest outstanding) 9.80
===========
Class D ($4,922,676 divided by 502,014
shares of $.01 par value shares of beneficial
interest outstanding) 9.81
===========
</TABLE>
(a) See Note 2 for federal income tax information.
(b) At cost, which approximates market.
The accompanying notes are an integral part of the financial statements.
9 Equity Balanced Strategy Fund
<PAGE>
EQUITY BALANCED STRATEGY FUND
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME:
Income distributions from Underlying Funds ...................... $ 318,756
EXPENSES (Notes 1, 2 and 4):
Advisory fees ........................................$ 148,121
Administrative fees .................................. 3,832
Custodian fees ....................................... 25,846
Distribution fees - Class D .......................... 5,319
Transfer agent fees .................................. 6,501
Professional fees .................................... 5,324
Registration fees - Class E .......................... 20,760
Registration fees - Class D .......................... 1,084
Shareholder servicing fees - Class E ................. 146,635
Shareholder servicing fees - Class D ................. 5,319
Trustees' fees ....................................... 3,274
Amortization of deferred organization expenses ....... 6,468
Miscellaneous ........................................ 5,212
-----------
Expenses before reductions ........................... 383,695
Expense reductions (Note 4) ......................... (226,423)
-----------
Expenses, net ................................................. 157,272
-----------
Net investment income ............................................ 161,484
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments .......................................... (483,646)
Capital gain distributions from Underlying Funds ..... 3,022,303 2,538,657
----------
Net change in unrealized appreciation or
depreciation of investments ...................................... 5,748,823
-----------
Net gain (loss) on investments ................................... 8,287,480
-----------
Net increase (decrease) in net assets
resulting from operations ...................................... $ 8,448,964
===========
The accompanying notes are an integral part of the financial statements.
Equity Balanced Strategy Fund 10
<PAGE>
EQUITY BALANCED STRATEGY FUND
STATEMENT OF OPERATIONS
Years Ended December 31,
1998 1997*
----------- ----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................... $ 161,484 $ 8,083
Net realized gain (loss) ........................... 2,538,657 202,018
Net change in unrealized appreciation or
depreciation ........................................ 5,748,823 (217,275)
----------- ----------
Net increase (decrease) in net assets
resulting from operations ......................... 8,448,964 (7,174)
----------- ----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
Class E ........................................... (158,583) (8,083)
Class D ........................................... (2,101) --
In excess of net investment income
Class E ........................................... (869,817) (79,767)
Class D ........................................... (11,526) --
Net realized gain on investments
Class E ........................................... (430,626) (163,073)
Class D ........................................... (23,598) --
----------- ----------
Total Distributions to Shareholders ............. (1,496,251) (250,923)
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ........................ 86,444,463 3,243,259
----------- ----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .......... 93,397,176 2,985,162
NET ASSETS
Beginning of period ................................. 2,985,162 --
----------- ----------
End of period (including accumulated distributions
in excess of net investment income of $800 and
$800, respectively) .............................. $96,382,338 $2,985,162
=========== ==========
* For the period September 30, 1997 (commencement of operations) to December
31, 1997.
The accompanying notes are an integral part of the financial statements.
11 Equity Balanced Strategy Fund
<PAGE>
EQUITY BALANCED STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997*
---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD .......... $ 8.83 $ 10.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (e) ................... .03 .09
Net realized and unrealized gain
(loss) on investments ... 1.18 (.33)
---------- ----------
Total Income From Investment Operations .... 1.21 (.24)
---------- ----------
DISTRIBUTIONS:
Net investment income ........................ (.03) (.09)
In excess of net investment income ........... (.16) (.24)
Net realized gain on investments ............. (.05) (.60)
---------- ----------
Total Distributions ........................ (.24) (.93)
---------- ----------
NET ASSET VALUE, END OF PERIOD ................ $ 9.80 $ 8.83
========== ==========
TOTAL RETURN (%)(a) .......................... 13.75 (2.42)
RATIOS/SUPPLEMENTAL Data:
Net Assets, end of period ($000 omitted) .... 91,459 2,985
Ratios to average net assets (%):
Operating expenses, net (b)(c) ............ .25 .25
Operating expenses, gross (c)(d) .......... .62 3.58
Net investment income (d) ................. .28 .45
Portfolio turnover rate (%)(b) .............. 73.95 48.30
* 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 for the period ended December 31, 1997 has not been annualized
due to the Fund's short period of operation.
(e) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Equity Balanced Strategy Fund 12
<PAGE>
EQUITY BALANCED STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS D
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
1998*
---------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 9.92
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (d) ...................................... .01
Net realized and unrealized gain (loss) on investments ......... .10
---------
Total Income From Investment Operations ...................... .11
---------
DISTRIBUTIONS:
Net investment income .......................................... (.03)
In excess of net investment income ............................. (.14)
Net realized gain on investments ............................... (.05)
---------
Total Distributions .......................................... (.22)
---------
NET ASSET VALUE, END OF PERIOD .................................. $ 9.81
=========
TOTAL RETURN (%)(a) ............................................ 1.17
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ...................... 4,923
Ratios to average net assets (%)(b):
Operating expenses, net (c) ................................. .50
Operating expenses, gross (c) ............................... .89
Net investment income ........................................ .01
Portfolio turnover rate (%) ................................... 73.95
* For the period March 24, 1998 (commencement of sale) to December 31, 1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) See Note 4 for current period amounts.
13 Equity Balanced Strategy Fund
<PAGE>
AGGRESSIVE STRATEGY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES $
-------- -----------
<S> <C> <C>
INVESTMENTS
Portfolios of the Frank Russell Investment
Company Series Mutual
Fund - Class S Shares
DOMESTIC EQUITIES - 55.1%
Diversified Equity Fund 256,526 13,190,551
Quantitative Equity Fund 305,192 12,979,813
Real Estate Securities Fund 127,198 3,108,715
Special Growth Fund 161,352 6,992,976
-----------
36,272,055
-----------
INTERNATIONAL EQUITIES - 22.5%
Emerging Markets Fund 364,471 3,090,718
International Securities Fund 192,030 11,686,969
-----------
14,777,687
-----------
BONDS - 16.8%
Multistrategy Bond Fund 1,092,627 11,046,456
-----------
SHORT-TERM INVESTMENTS - 2.9%
Money Market Fund
due on demand (b) 1,931,000 1,931,000
-----------
TOTAL INVESTMENTS - 97.3%
(identified cost $62,936,586)(a) 64,027,198
-----------
OTHER ASSETS AND LIABILITIES
Deferred organization expenses (Note 2) 24,010
Other assets (Note 4) 1,879,092
Liabilities (Note 4) (93,588)
-----------
TOTAL OTHER ASSETS AND LIABILITIES,
NET - 2.7% 1,809,514
-----------
NET ASSETS - 100.0% 65,836,712
==========
<CAPTION>
MARKET
VALUE
$
-----------
<S> <C>
NET ASSETS CONSIST OF:
Undistributed net investment income 3,828
Accumulated net realized gain (loss) 710,725
Unrealized appreciation (depreciation)
on investments 1,090,612
Shares of beneficial interest 66,232
Additional paid-in capital 63,965,315
-----------
NET ASSETS 65,836,712
===========
NET ASSET VALUE, offering and redemption price
per share:
Class E ($62,188,081 divided by 6,256,445
shares of $.01 par value shares of beneficial
interest outstanding) 9.94
===========
Class D ($3,648,631 divided by 366,766
shares of $.01 par value shares of beneficial
interest outstanding) 9.95
===========
</TABLE>
(a) See Note 2 for federal income tax information.
(b) At cost, which approximates market.
The accompanying notes are an integral part of the financial statements.
Aggressive Strategy Fund 14
<PAGE>
AGGRESSIVE STRATEGY FUND
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Income distributions from Underlying Funds ................. $ 821,770
EXPENSES (Notes 1, 2 and 4):
Advisory fees ................................ $ 93,665
Administrative fees .......................... 2,591
Custodian fees ............................... 26,164
Distribution fees - Class D .................. 4,738
Transfer agent fees .......................... 6,569
Professional fees ............................ 366
Registration fees - Class E .................. 15,021
Registration fees - Class D .................. 1,129
Shareholder servicing fees - Class E ......... 91,518
Shareholder servicing fees - Class D ......... 4,738
Trustees' fees ............................... 3,274
Amortization of deferred organization expenses 6,468
Miscellaneous ................................ 3,439
-----------
Expenses before reductions ................... 259,680
Expense reductions (Note 4) ................. (158,682)
-----------
Expenses, net ............................................ 100,998
------------
Net investment income. ...................................... 720,772
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments....................................... (427,250)
Capital gain distributions from Underlying Funds..1,587,467 1,160,217
-----------
Net change in unrealized appreciation or depreciation of
investments. ................................................ 1,402,719
------------
Net gain (loss) on investments. ............................. 2,562,936
------------
Net increase (decrease) in net assets resulting from
operations................................................... $3,283,708
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 Aggressive Strategy Fund
<PAGE>
AGGRESSIVE STRATEGY FUND
STATEMENT OF CHANGES IN NET ASSETS
Years Ended December 31,
1998 1997*
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ...................... $ 720,772 $ 22,778
Net realized gain (loss) .................. 1,160,217 304,411
Net change in unrealized appreciation or
depreciation ............................... 1,402,719 (312,107)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ................ 3,283,708 15,082
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
Class E .................................. (685,110) (22,778)
Class D .................................. (38,378) --
In excess of net investment income
Class E .................................. (283,634) (119,617)
Class D .................................. (15,889) --
Net realized gain on investments
Class E .................................. (73,262) (250,558)
Class D .................................. (4,399) --
------------ ------------
Total Distributions to Shareholders .... (1,100,672) (392,953)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from
Fund share transactions (Note 6) .......... 58,346,402 5,685,145
------------ ------------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS . 60,529,438 5,307,274
NET ASSETS
Beginning of period ........................ 5,307,274 --
------------ ------------
End of period (including undistributed net
investment income of $3,828 and $2,716,
respectively)............................... $65,836,712 $ 5,307,274
============ ============
* For the period September 16, 1997 (commencement of operations) to December 31,
1997.
The accompanying notes are an integral part of the financial statements.
Aggressive Strategy Fund 16
<PAGE>
AGGRESSIVE STRATEGY FUND
FINANCIAL HIGHLIGHTS--CLASS E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997*
----------- ----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ......... $ 9.14 $ 10.00
----------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (e) .................. .19 .10
Net realized and unrealized gain (loss) on
investments ................................. .87 (.11)
----------- ----------
Total Income From Investment Operations ... 1.06 (.01)
----------- ----------
DISTRIBUTIONS:
Net investment income ....................... (.18) (.10)
In excess of net investment income .......... (.07) (.21)
Net realized gain on investments ............ (.01) (.54)
----------- ----------
Total Distributions ....................... (.26) (.85)
----------- ----------
NET ASSET VALUE, END OF PERIOD ............... $ 9.94 $ 9.14
=========== ==========
TOTAL RETURN (%)(a) ......................... 11.69 (.19)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ... 62,188 5,307
Ratios to average net assets (%):
Operating expenses, net (b)(c) ........... .25 .25
Operating expenses, gross (c)(d) ......... .66 2.88
Net investment income (d) ................ 1.88 .97
Portfolio turnover rate (%)(b) ............. 93.08 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 for the period ended December 31, 1997 has not been annualized
due to the Fund's short period of operation.
(e) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
17 AGGRESSIVE STRATEGY FUND
<PAGE>
AGGRESSIVE STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS D
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1998*
---------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .............................. $ 10.09
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (d) ....................................... .13
Net realized and unrealized gain (loss) on investments ........... (.05)
Total Income From Investment Operations ........................ .08
DISTRIBUTIONS:
Net investment income ............................................ (.15)
In excess of net investment income ............................... (.06)
Net realized gain on investments ................................. (.01)
---------
Total Distributions ............................................ (.22)
---------
NET ASSET VALUE, END OF PERIOD .................................... $ 9.95
=========
TOTAL RETURN (%)(a) .............................................. .96
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ........................ 3,649
Ratios to average net assets (%)(b):
Operating expenses, net (c) ................................... .50
Operating expenses, gross (c) ................................. .93
Net investment income .......................................... 1.74
Portfolio turnover rate (%) ..................................... 93.08
</TABLE>
* For the period March 24, 1998 (commencement of sale) to December 31, 1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) See Note 4 for current period amounts.
(d) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
Aggressive Strategy Fund 18
<PAGE>
BALANCED STRATEGY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES $
--------- ------------
<S> <C> <C>
INVESTMENTS
Portfolios of the Frank Russell Investment
Company Series Mutual
Fund - Class S Shares
DOMESTIC EQUITIES - 40.5%
Diversified Equity Fund 505,024 25,968,314
Quantitative Equity Fund 601,564 25,584,514
Real Estate Securities Fund 314,791 7,693,489
Special Growth Fund 187,076 8,107,866
------------
67,354,183
------------
INTERNATIONAL EQUITIES - 16.3%
Emerging Markets Fund 563,834 4,781,311
International Securities Fund 366,145 22,283,579
------------
27,064,890
------------
BONDS - 38.8%
Diversified Bond Fund 1,672,186 39,346,545
Multistrategy Bond Fund 2,475,708 25,029,403
------------
64,375,948
------------
SHORT-TERM INVESTMENTS - 1.5%
Money Market Fund
due on demand (b) 2,442,000 2,442,000
------------
TOTAL INVESTMENTS - 97.1%
(identified cost $157,938,443)(a) 161,237,021
------------
OTHER ASSETS AND LIABILITIES
Deferred organization expenses (Note 2) 24,011
Other assets (Note 4) 5,199,463
Liabilities (Note 4) (398,892)
------------
TOTAL OTHER ASSETS AND LIABILITIES,
NET - 2.9% 4,824,582
------------
NET ASSETS - 100.0% 166,061,603
============
<CAPTION>
MARKET
VALUE
$
------------
<C> <S>
NET ASSETS CONSIST OF:
Undistributed net investment income 5,633
Accumulated net realized gain (loss) 1,769,348
Unrealized appreciation (depreciation)
on investments 3,298,578
Shares of beneficial interest 164,137
Additional paid-in capital 160,823,907
------------
NET ASSETS 166,061,603
============
NET ASSET VALUE, offering and redemption price
per share:
Class E ($161,108,486 divided by 15,924,472
shares of $.01 par value shares of beneficial
interest outstanding) 10.12
============
Class D ($4,953,117 divided by 489,196
shares of $.01 par value shares of beneficial
interest outstanding) 10.13
============
</TABLE>
(a) See Note 2 for federal income tax information.
(b) At cost, which approximates market.
The accompanying notes are an integral part of the financial statements.
19 Balanced Strategy Fund
<PAGE>
BALANCED STRATEGY FUND
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME:
Income distributions from Underlying Funds.................... $ 3,663,807
EXPENSES (Notes 1, 2 and 4):
Advisory fees................................. $ 270,609
Administrative fees........................... 6,591
Custodian fees................................ 26,918
Distribution fees - Class D................... 3,851
Transfer agent fees........................... 13,028
Professional fees............................. 9,798
Registration fees - Class E................... 56,576
Registration fees - Class D................... 734
Shareholder servicing fees - Class E.......... 273,349
Shareholder servicing fees - Class D.......... 3,851
Trustees' fees................................ 3,274
Amortization of deferred organization
expenses.................................... 6,468
Miscellaneous................................. 9,228
---------
Expenses before reductions.................... 684,275
Expense reductions (Note 4)................... (403,340)
---------
Expenses, net............................................... 280,935
-----------
Net investment income.......................................... 3,382,872
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments................................... (318,718)
Capital gain distributions from Underlying
Funds......................................... 4,084,106 3,765,388
-----------
Net change in unrealized appreciation or depreciation of
investments................................................... 3,463,095
-----------
Net gain (loss) on investments................................ 7,228,483
-----------
Net increase (decrease) in net assets resulting from
operations.................................................... $10,611,355
===========
The accompanying notes are an integral part of the financial statements.
Balanced Strategy Fund 20
<PAGE>
BALANCED STRATEGY FUND
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, 1998
1998 1997
------------ ----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income......................... $ 3,382,872 $ 21,081
Net realized gain (loss)...................... 3,765,388 174,597
Net change in unrealized appreciation or
depreciation.................................. 3,463,095 (164,517)
------------ ----------
Net increase (decrease) in net assets
resulting from operations................... 10,611,355 31,161
------------ ----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
Class E..................................... (3,333,407) (21,081)
Class D..................................... (55,098) --
In excess of net investment income
Class E..................................... (1,440,336) (56,712)
Class D..................................... (23,808) --
Net realized gain on investments
Class E..................................... (493,631) (129,168)
Class D..................................... (15,716) --
------------ ----------
Total Distributions to Shareholders....... (5,361,996) (206,961)
------------ ----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from
Fund share transactions (Note 6)............. 157,257,748 3,730,296
------------ ----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS.... 162,507,107 3,554,496
NET ASSETS
Beginning of period........................... 3,554,496 --
----------- ----------
End of period (including undistributed net
investment income of $5,633 and $5,633,
respectively)................................. $166,061,603 $3,554,496
============ ==========
* For the period September 16, 1997 (commencement of operations) to December 31,
1997.
The accompanying notes are an integral part of the financial statements.
21 Balanced Strategy Fund
<PAGE>
BALANCED STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997*
----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 9.46 $ 10.00
----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (e).................... .31 .09
Net realized and unrealized gain (loss)
on investments............................... .78 .02
----------- -----------
Total Income From Investment Operations.... 1.09 .11
----------- -----------
DISTRIBUTIONS:
Net investment income........................ (.28) (.09)
In excess of net investment income........... (.12) (.15)
Net realized gain on investments............. (.03) (.41)
----------- -----------
Total Distributions........................ (.43) (.65)
----------- -----------
NET ASSET VALUE, END OF PERIOD................ $ 10.12 $ 9.46
=========== ===========
TOTAL RETURN (%)(a)........................... 11.66 1.04
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted)..... 161,108 3,554
Ratios to average net assets (%):
Operating expenses, net (b)(c)............. .25 .25
Operating expenses, gross (c)(d)........... .61 4.03
Net investment income (d).................. 3.05 1.30
Portfolio turnover rate (%)(b)............... 78.85 29.58
* 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 for the period ended December 31, 1997 has not been annualized due
to the Fund's short period of operation.
(e) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
Balanced Strategy Fund 22
<PAGE>
BALANCED STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS D
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
1998
---------
NET ASSET VALUE, BEGINNING OF PERIOD............................... $ 10.22
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (d). . . . . . . . . . . . . . . . . . . . . .24
Net realized and unrealized gain (loss) on investments. . .. . . . .07
---------
Total Income From Investment Operations. . . . . . . . . . . . . .31
---------
DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . (.26)
In excess of net investment income. . . . . . . . . . . . .. . . . (.11)
Net realized gain on investments. . . . . . . . . . . . . .. . . . (.03)
---------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . (.40)
---------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 10.13
=========
TOTAL RETURN (%)(a). . . . . . . . . . . . . . . . . . . . .. . . . 3.23
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted). . . . . . . . . .. . . . 4,953
Ratios to average net assets (%)(b):
Operating expenses, net (c). . . . . . . . . . . . . . . . . . . .50
Operating expenses, gross (c). . . . . . . . . . . . . . . . . . .86
Net investment income. . . . . . . . . . . . . . . . . . . . . . 3.18
Portfolio turnover rate (%). . . . . . . . . . . . . . . . . . . . 78.85
* For the period March 24, 1998 (commencement of sale) to December 31, 1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) See Note 4 for current period amounts.
(d) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
23 Balanced Strategy Fund
<PAGE>
MODERATE STRATEGY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES $
-------- -----------
<S> <C> <C>
INVESTMENTS
Portfolios of the Frank Russell Investment
Company Series Mutual
Fund - Class S Shares
DOMESTIC EQUITIES - 28.9%
Diversified Equity Fund 43,907 2,257,692
Quantitative Equity Fund 52,380 2,227,726
Real Estate Securities Fund 39,909 975,373
Special Growth Fund 9,537 413,352
-----------
5,874,143
-----------
INTERNATIONAL EQUITIES - 10.9%
Emerging Markets Fund 47,846 405,732
International Securities Fund 29,786 1,812,787
-----------
2,218,519
-----------
BONDS - 58.5%
Diversified Bond Fund 229,127 5,391,349
Volatility Constrained Bond Fund 340,366 6,524,819
-----------
11,916,168
-----------
SHORT-TERM INVESTMENTS - 1.1%
Money Market Fund
due on demand (b) 215,000 215,000
-----------
TOTAL INVESTMENTS - 99.4%
(identified cost $19,666,415)(a) 20,223,830
-----------
OTHER ASSETS AND LIABILITIES
Deferred organization expenses (Note 2) 24,276
Other assets (Note 4) 140,414
Liabilities (Note 4) (35,487)
-----------
TOTAL OTHER ASSETS AND LIABILITIES,
NET - 0.6% 129,203
-----------
NET ASSETS - 100.0% 20,353,033
===========
<CAPTION>
MARKET
VALUE
$
-----------
<S> <C>
NET ASSETS CONSIST OF:
Undistributed net investment income 745
Accumulated net realized gain (loss) (28,126)
Unrealized appreciation (depreciation)
on investments 557,415
Shares of beneficial interest 20,053
Additional paid-in capital 19,802,946
-----------
NET ASSETS 20,353,033
===========
NET ASSET VALUE, offering and redemption price
per share:
Class E ($18,573,197 divided by 1,829,982
shares of $.01 par value shares of beneficial
interest outstanding) 10.15
===========
Class D ($1,779,836 divided by 175,286
shares of $.01 par value shares of beneficial
interest outstanding) 10.15
===========
</TABLE>
(a) See Note 2 for federal income tax information.
(b) At cost, which approximates market.
The accompanying notes are an integral part of the financial statements.
Moderate Strategy Fund 24
<PAGE>
MODERATE STRATEGY FUND
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME:
Income distributions from Underlying Funds ...................... $ 481,068
EXPENSES (Notes 1, 2 and 4):
Advisory fees ....................................... $ 29,524
Administrative fees ................................. 836
Custodian fees ...................................... 23,554
Distribution fees - Class D ......................... 2,378
Transfer agent fees ................................. 2,683
Professional fees ................................... 3,914
Registration fees - Class E ......................... 7,708
Registration fees - Class D ......................... 533
Shareholder servicing fees - Class E ................ 27,983
Shareholder servicing fees - Class D ................ 2,378
Trustees' fees ...................................... 3,274
Amortization of deferred organization expenses ...... 6,468
Miscellaneous ....................................... 4,092
-----------
Expenses before reductions .......................... 115,325
Expense reductions (Note 4) ........................ (82,582)
-----------
Expenses, net ................................................. 32,743
-----------
Net investment income ............................................ 448,325
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ......................................... (208,968)
Capital gain distributions from Underlying Funds .... 273,576 64,608
-----------
Net change in unrealized appreciation or
depreciation of investments .................................... 570,808
-----------
Net gain (loss) on investments ................................... 635,416
-----------
Net increase (decrease) in net assets
resulting from operations ..................................... $ 1,083,741
===========
The accompanying notes are an integral part of the financial statements.
25 Moderate Strategy Fund
<PAGE>
MODERATE STRATEGY FUND
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
1998 1997*
----------- -----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income .......................... $ 448,325 $ 2,421
Net realized gain (loss) ...................... 64,608 12,847
Net change in unrealized appreciation or
depreciation ................................... 570,808 (13,393)
----------- -----------
Net increase (decrease) in net assets
resulting from operations .................... 1,083,741 1,875
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
Class E ...................................... (411,121) (2,421)
Class D ...................................... (38,395) --
In excess of net investment income
Class E ...................................... (67,616) (2,985)
Class D ...................................... (6,315) --
Net realized gain on investments
Class E ...................................... (16,063) (9,109)
Class D ...................................... (1,557) --
----------- -----------
Total Distributions to Shareholders ........ (541,067) (14,515)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ................... 19,425,232 397,767
----------- -----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ..... 19,967,906 385,127
NET ASSETS
Beginning of period ............................ 385,127 --
----------- -----------
End of period (including undistributed net
investment income of $745 and $1,191,
respectively) ................................ $20,353,033 $ 385,127
----------- -----------
* For the period October 2, 1997 (commencement of operations) to December 31,
1997.
The accompanying notes are an integral part of the financial statements.
Moderate Strategy Fund 26
<PAGE>
MODERATE STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
YEARS ENDED DECEMBER 31,
------------------------
1998 1997*
---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 9.61 $ 10.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (f) ......................... .39 .07
Net realized and unrealized gain (loss) on
investments......................................... .57 (.08)
---------- ----------
Total Income From Investment Operations .......... .96 (.01)
---------- ----------
DISTRIBUTIONS:
Net investment income .............................. (.36) (.07)
In excess of net investment income ................. (.05) (.07)
Net realized gain on investments ................... (.01) (.24)
---------- ----------
Total Distributions .............................. (.42) (.38)
---------- ----------
NET ASSET VALUE, END OF PERIOD ...................... $ 10.15 $ 9.61
========== ==========
TOTAL RETURN (%)(a) ................................ 10.19 (.06)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) .......... 18,573 385
Ratios to average net assets (%):
Operating expenses, net (b)(c) .................. .25 .25
Operating expenses, gross (c)(d) ................ .94 --
Net investment income (e) ........................ 3.71 1.01
Portfolio turnover rate (%)(b) .................... 175.58 9.66
* 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 for the period ended December 31, 1997 is not meaningful due to
the Fund's short period of operation.
(e) The ratio for the period ended December 31, 1997 has not been annualized
due to the Fund's short period of operation.
(f) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
27 Moderate Strategy Fund
<PAGE>
MODERATE STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS D
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
1998*
---------
NET ASSET VALUE, BEGINNING OF PERIOD ........................... $ 10.18
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (d) ..................................... .26
Net realized and unrealized gain (loss) on investments ........ .09
---------
Total Income From Investment Operations ..................... .35
---------
DISTRIBUTIONS:
Net investment income ......................................... (.32)
In excess of net investment income ............................ (.05)
Net realized gain on investments .............................. (.01)
---------
Total Distributions ......................................... (.38)
---------
NET ASSET VALUE, END OF PERIOD ................................. $ 10.15
=========
TOTAL RETURN (%)(a) ............................................ 3.57
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ...................... 1,780
Ratios to average net assets (%)(b):
Operating expenses, net (c) ................................. .50
Operating expenses, gross (c) ............................... 1.01
Net investment income ....................................... 3.41
Portfolio turnover rate (%) ................................... 175.58
* For the period March 24, 1998 (commencement of sale) to December 31, 1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) See Note 4 for current period amounts.
(d) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Moderate Strategy Fund 28
<PAGE>
CONSERVATIVE STRATEGY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE
SHARES $
--------- ----------
<S> <C> <C>
INVESTMENTS
Portfolios of the Frank Russell Investment
Company Series Mutual
Fund - Class S Shares
DOMESTIC EQUITIES - 16.1%
Diversified Equity Fund 5,033 258,816
Quantitative Equity Fund 7,209 306,583
Real Estate Securities Fund 10,072 246,161
----------
811,560
----------
INTERNATIONAL EQUITIES - 6.1%
Emerging Markets Fund 6,019 51,042
International Securities Fund 4,174 254,006
----------
305,048
----------
BONDS - 77.0%
Diversified Bond Fund 38,029 894,821
Volatility Constrained Bond Fund 155,280 2,976,716
----------
3,871,537
----------
TOTAL INVESTMENTS - 99.2%
(identified cost $4,926,642)(a) 4,988,145
----------
OTHER ASSETS AND LIABILITIES
Other assets (Note 4) 90,007
Liabilities (Note 4) (49,154)
----------
TOTAL OTHER ASSETS AND LIABILITIES,
NET - 0.8% 40,853
----------
NET ASSETS - 100.0% 5,028,998
==========
<CAPTION>
MARKET
VALUE
$
----------
<S> <C>
NET ASSETS CONSIST OF:
Undistributed net investment income 74
Accumulated net realized gain (loss) (763)
Unrealized appreciation (depreciation)
on investments 61,503
Shares of beneficial interest 4,909
Additional paid-in capital 4,963,275
----------
NET ASSETS 5,028,998
==========
NET ASSET VALUE, offering and redemption price
per share:
Class E ($4,411,473 divided by 430,700
shares of $.01 par value shares of beneficial
interest outstanding) 10.24
==========
Class D ($617,525 divided by 60,247
shares of $.01 par value shares of beneficial
interest outstanding) 10.25
==========
</TABLE>
(a) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
29 Conservative Strategy Fund
<PAGE>
CONSERVATIVE STRATEGY FUND
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME:
Income distributions from Underlying Funds ......................... $ 119,794
EXPENSES (Notes 1, 2 and 4):
Advisory fees ...........................................$ 6,257
Administrative fees ..................................... 208
Custodian fees .......................................... 19,776
Distribution fees - Class D ............................. 1,147
Professional fees ....................................... 8,570
Registration fees - Class E ............................. 9,267
Registration fees - Class D ............................. 969
Shareholder servicing fees - Class E .................... 5,318
Shareholder servicing fees - Class D .................... 1,147
Trustees' fees .......................................... 3,274
Miscellaneous ........................................... 5,097
---------
Expenses before reductions ......................................... 61,030
Expense reductions (Note 4) ....................................... (53,419)
---------
Expenses, net .................................................... 7,611
---------
Net investment income ............................................... 112,183
---------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ............................................. (23,397)
Capital gain distributions from Underlying Funds ........ 33,542 10,145
---------
Net change in unrealized appreciation or
depreciation of investments ....................................... 61,843
---------
Net gain (loss) on investments ...................................... 71,988
---------
Net increase (decrease) in net assets
resulting from operations ......................................... $ 184,171
=========
The accompanying notes are an integral part of the financial statements.
Conservative Strategy Fund 30
<PAGE>
CONSERVATIVE STRATEGY FUND
STATEMENT OF CHANGES IN NET ASSETS
Years Ended December 31,
1998 1997*
----------- -----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ........................... $ 112,183 $ 149
Net realized gain (loss) ....................... 10,145 501
Net change in unrealized appreciation or
depreciation .................................... 61,843 (340)
Net increase (decrease) in net assets
resulting from operations ..................... 184,171 310
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
Class E ....................................... (95,177) (149)
Class D ....................................... (17,084) --
In excess of net investment income
Class E ....................................... (8,699) (72)
Class D ....................................... (1,561) --
Net realized gain on investments
Class E ....................................... (504) (351)
Class D ....................................... (70) --
----------- -----------
Total Distributions to Shareholders ......... (123,095) (572)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) .................... 4,945,302 22,882
----------- -----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ...... 5,006,378 22,620
NET ASSETS
Beginning of period ............................. 22,620 --
----------- -----------
End of period (including undistributed net
investment income of $74 and $78,
respectively) ................................. $ 5,028,998 $ 22,620
=========== ===========
* For the period November 7, 1997 (commencement of operations) to December 31,
1997.
The accompanying notes are an integral part of the financial statements.
31 Conservative Strategy Fund
<PAGE>
CONSERVATIVE STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
YEARS ENDED DECEMBER 31,
-----------------------
1998 1997*
--------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD ................... $ 9.88 $ 10.00
--------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (f) ............................ .46 .07
Net realized and unrealized gain (loss) on
investments............................................ .29 .07
--------- ---------
Total Income From Investment Operations ............. .75 .14
--------- ---------
DISTRIBUTIONS:
Net investment income ................................. (.36) (.07)
In excess of net investment income .................... (.03) (.03)
Net realized gain on investments ...................... -- (.16)
--------- ---------
Total Distributions ................................. (.39) (.26)
--------- ---------
NET ASSET VALUE, END OF PERIOD ......................... $ 10.24 $ 9.88
========= =========
TOTAL RETURN (%)(a) ................................... 7.70 1.36
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ............. 4,411 23
Ratios to average net assets (%):
Operating expenses, net (b)(c) ..................... .25 .25
Operating expenses, gross (c)(d) ................... 2.50 --
Net investment income (e) .......................... 4.41 .67
Portfolio turnover rate (%)(b) ....................... 169.79 0.00
* 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 for the period ended December 31, 1997 is not meaningful due to
the Fund's short period of operation.
(e) The ratio for the period ended December 31, 1997 has not been annualized due
to the Fund's short period of operation.
(f) For the period ended December 31, 1998, average month-end shares outstanding
were used for this calculation.
Conservative Strategy Fund 32
<PAGE>
CONSERVATIVE STRATEGY FUND
FINANCIAL HIGHLIGHTS - CLASS D
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
1998*
-------
NET ASSET VALUE, BEGINNING OF PERIOD ........................... $ 10.20
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (d) ..................................... .32
Net realized and unrealized gain (loss) on investments ........ .06
-------
Total Income From Investment Operations ..................... .38
-------
DISTRIBUTIONS:
Net investment income ......................................... (.30)
In excess of net investment income ............................ (.03)
-------
Total Distributions ......................................... (.33)
-------
NET ASSET VALUE, END OF PERIOD ................................. $ 10.25
=======
TOTAL RETURN (%)(a) ............................................ 3.77
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ...................... 618
Ratios to average net assets (%)(b):
Operating expenses, net (c) ................................. .50
Operating expenses, gross (c) ............................... 1.73
Net investment income ....................................... 3.99
Portfolio turnover rate (%) ................................... 169.79
* For the period March 24, 1998 (commencement of sale) to December 31, 1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) See Note 4 for current period amounts.
(d) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
33 Conservative Strategy Fund
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 shares of beneficial interest at a $.01 par value.
Beginning March 24, 1998 the Funds made available Class D shares in addition
to their Class E 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 D
shares are charged a 12b-1 distribution fee not to exceed 0.25% and a
shareholder servicing fee of 0.25%. Class E shares are charged a shareholder
servicing fee of 0.25%.
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 "Advisor") 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:
<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 Equity 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 34
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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.
At its meeting on April 27, 1998, the Investment Company's Board of Trustees,
in an effort to meet the best interests of shareholders Volatility
Constrained Bond Fund and the Fixed Income II Fund (both part of the series
of the Investment Company not presented herein) approved a plan of
reorganization for the merger of the two Funds. The newly formed Fund will be
the Short-Term Bond Fund. The merger was approved by the shareholders at a
meeting on November 19, 1998. The effective date for the merger is expected
to be February 26, 1999.
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
consistently 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
Underlying 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, 1998 were as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Equity Balanced Strategy $ 91,531,345 $ 6,108,723 $ (1,172,300) $ 4,936,423
Aggressive Strategy 63,421,203 1,344,704 (738,709) 605,995
Balanced Strategy 158,468,744 5,034,353 (2,266,076) 2,768,277
Moderate Strategy 19,866,882 433,506 (76,558) 356,948
Conservative Strategy 4,946,499 56,356 (14,710) 41,646
</TABLE>
35 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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, 1998:
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED
INCOME GAIN (LOSS)
------------- --------------
Equity Balanced Strategy $ 880,543 $ (880,543)
Aggressive Strategy 303,351 (303,351)
Balanced Strategy 1,469,777 (1,469,777)
Moderate Strategy 74,675 (74,675)
Conservative Strategy 10,335 (10,335)
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, legal and other expenses will be allocated
to each Fund based on each Fund's net assets. In addition, Class D and Class
E will pay shareholder servicing fees and Class D will pay 12b-1 distribution
fees. 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 costs of the Funds, except
Conservative Strategy Fund, have been deferred and are being amortized over
60 months on a straight-line basis.
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1998, purchases and sales of
the Underlying Funds were as follows:
PURCHASES SALES
------------ ------------
Equity Balanced Strategy $136,115,934 $ 48,128,956
Aggressive Strategy 95,033,151 37,622,016
Balanced Strategy 247,261,314 92,866,839
Moderate Strategy 41,763,641 22,300,086
Conservative Strategy 9,586,952 4,660,353
4. RELATED PARTIES
ADVISOR: The Investment Company has an Advisory Agreement with FRIMCo under
which FRIMCo directs the investments of the Fund in accordance with its
investment objectives, policies, and limitations. FRIMCo is a wholly owned
subsidiary of Frank Russell Company, a wholly owned subsidiary of The
Northwestern Mutual Life Insurance Company. Prior to December 1, 1998, the
Funds were charged an advisory fee equal to 0.25% of average daily net
assets. Beginning December 1, 1998, the Funds were charged an advisory fee
equal to 0.20% of average daily net assets and an Administrator fee equal to
0.05% of average daily net assets. For the year ended December 31, 1998, the
Advisor voluntarily agreed to waive both the advisory fee and the
administrative fee.
The Advisor has voluntarily agreed to reimburse the Funds for all expenses
excluding advisory fees, shareholder servicing fees, and 12b-1 distribution
fees.
Notes to Financial Statements 36
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
The waivers and reimbursements as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
TOTAL
ADVISORY FEES ADMINISTRATOR REIMBURSED EXPENSE
WAIVED FEES WAIVED BY FRIMCO REDUCTIONS
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Equity Balanced Strategy $148,121 $ 3,832 $ 74,470 $226,423
Aggressive Strategy 93,665 2,591 62,426 158,682
Balanced Strategy 270,609 6,591 126,140 403,340
Moderate Strategy 29,525 836 52,221 82,582
Conservative Strategy 6,257 208 46,954 53,419
</TABLE>
TRANSFER AGENT: The Funds have a contract with FRIMCo to provide transfer
agent services to the Investment Company.
DISTRIBUTOR AND SHAREHOLDER SERVICING: Pursuant to the Distribution Agreement
with the Investment Company, Russell Fund Distributors, Inc. ("Distributor"),
a wholly owned subsidiary of FRIMCo, serves as distributor for all Investment
Company portfolio shares, including Class E and Class D of the Funds.
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 D shares subject to the Distribution Plan.
The 12b-1 fee payments shall not exceed 0.25% of the average daily net assets
of a Fund's Class D shares on an annual basis.
The Investment Company has adopted a Shareholder Services Plan ("Services
Plan") under which the Funds 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 Class E and Class D shares of the 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 Fund's Class E and Class D shares.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1998 WERE AS FOLLOWS:
TRANSFER SHAREHOLDER
AGENT SERVICING AND
FEES DISTRIBUTION FEES TOTALS
-------- ----------------- --------
Equity Balanced Strategy $ 89 $ 56,613 $ 56,702
Aggressive Strategy 260 38,963 39,223
Balanced Strategy 2,968 93,848 96,816
Moderate Strategy 148 13,492 13,640
Conservative Strategy 71 3,473 3,544
-------- -------- --------
$ 3,536 $206,389 $209,925
======== ======== ========
RECEIVABLE FROM ADVISOR FOR REIMBURSEMENT OF EXPENSES AS OF DECEMBER 31, 1998
WERE AS FOLLOWS:
Equity Balanced Strategy $ 74,470
Aggressive Strategy 62,426
Balanced Strategy 126,140
Moderate Strategy 52,221
Conservative Strategy 46,954
--------
$362,211
========
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 $16,369 for the year ended December 31,
1998, and were allocated to each Fund and Class on a pro rata basis,
including 23 other affiliated Funds not presented herein. The Funds have been
reimbursed by FRIMCo for this expense.
37 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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, 1998, $7,807,000
of the Money Market Fund's net assets represents investments by these Funds
and $768,059,000 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
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
EQUITY BALANCED STRATEGY
CLASS E (b)
Proceeds from shares sold 9,545,046 313,780 $ 86,677,483 $ 3,028,465
Proceeds from reinvestment of distributions 150,876 27,548 1,443,025 244,906
Payments for shares redeemed (702,666) (3,196) (6,451,225) (30,112)
------------- ------------- ------------- -------------
Net increase (decrease) 8,993,256 338,132 81,669,283 3,243,259
------------- ------------- ------------- -------------
CLASS D (e)
Proceeds from shares sold 502,893 -- 4,784,572 --
Proceeds from reinvestment of distributions 3,888 -- 36,704 --
Payments for shares redeemed (4,767) -- (46,096) --
------------- ------------- ------------- -------------
Net increase (decrease) 502,014 -- 4,775,180 --
------------- ------------- ------------- -------------
Total increase (decrease) 9,495,270 338,132 $ 86,444,463 $ 3,243,259
============= ============= ============= =============
AGGRESSIVE STRATEGY
CLASS E (a)
Proceeds from shares sold 6,093,738 552,413 $ 58,657,811 $ 5,431,416
Proceeds from reinvestment of distributions 99,583 35,751 955,622 329,624
Payments for shares redeemed (517,340) (7,700) (4,851,956) (75,895)
------------- ------------- ------------- -------------
Net increase (decrease) 5,675,981 580,464 54,761,477 5,685,145
------------- ------------- ------------- -------------
CLASS D (e)
Proceeds from shares sold 450,907 -- 4,313,477 --
Proceeds from reinvestment of distributions 5,923 -- 57,363 --
Payments for shares redeemed (90,064) -- (785,915) --
------------- ------------- ------------- -------------
Net increase (decrease) 366,766 -- 3,584,925 --
------------- ------------- ------------- -------------
Total increase (decrease) 6,042,747 580,464 $ 58,346,402 $ 5,685,145
============= ============= ============= =============
BALANCED STRATEGY
CLASS E (a)
Proceeds from shares sold 17,549,534 358,855 $ 172,155,708 $ 3,571,839
Proceeds from reinvestment of distributions 523,953 19,490 5,173,243 185,933
Payments for shares redeemed (2,524,583) (2,777) (24,860,635) (27,476)
------------- ------------- ------------- -------------
Net increase (decrease) 15,548,904 375,568 152,468,316 3,730,296
------------- ------------- ------------- -------------
</TABLE>
(a) For the period ended December 31, 1997. Fund share transactions are for the
period September 16, 1997 (commencement of sale of shares) to December 31,
1997.
(b) For the period ended December 31, 1997. Fund share transactions are for the
period September 30, 1997 (commencement of sale of shares) to December 31,
1997.
(e) For the period March 24, 1998 (commencement of sale of shares) to December
31, 1998.
Notes to Financial Statements 38
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
<TABLE>
<CAPTION>
SHARES DOLLARS
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCED STRATEGY
CLASS D (e)
Proceeds from shares sold 504,049 -- $ 4,926,188 $ --
Proceeds from reinvestment of distributions 8,519 -- 84,433 --
Payments for shares redeemed (23,373) -- (221,190) --
------------- ------------- ------------- -------------
Net increase (decrease) 489,195 -- 4,789,431 --
------------- ------------- ------------- -------------
Total increase (decrease) 16,038,099 375,568 $ 157,257,747 $ 3,730,296
============= ============= ============= =============
MODERATE STRATEGY
CLASS E (c)
Proceeds from shares sold 2,231,041 39,036 $ 22,075,376 $ 387,800
Proceeds from reinvestment of distributions 44,242 1,213 438,860 11,694
Payments for shares redeemed (485,375) (175) (4,821,156) (1,727)
------------- ------------- ------------- -------------
Net increase (decrease) 1,789,908 40,074 17,693,080 397,767
------------- ------------- ------------- -------------
CLASS D (e)
Proceeds from shares sold 195,126 -- 1,928,847 --
Proceeds from reinvestment of distributions 4,649 -- 46,186 --
Payments for shares redeemed (24,489) -- (242,881) --
------------- ------------- ------------- -------------
Net increase (decrease) 175,286 -- 1,732,152 --
------------- ------------- ------------- -------------
Total increase (decrease) 1,965,194 40,074 $ 19,425,232 $ 397,767
============= ============= ============= =============
CONSERVATIVE STRATEGY
CLASS E (d)
Proceeds from shares sold 511,083 2,231 $ 5,168,551 $ 22,309
Proceeds from reinvestment of distributions 9,863 58 99,711 573
Payments for shares redeemed (92,535) -- (935,823) --
------------- ------------- ------------- -------------
Net increase (decrease) 428,411 2,289 4,332,439 22,882
------------- ------------- ------------- -------------
CLASS D (e)
Proceeds from shares sold 71,083 -- 722,509 --
Proceeds from reinvestment of distributions 1,849 -- 18,714 --
Payments for shares redeemed (12,685) -- (128,360) --
------------- ------------- ------------- -------------
Net increase (decrease) 60,247 -- 612,863 --
------------- ------------- ------------- -------------
Total increase (decrease) 488,658 2,289 $ 4,945,302 $ 22,882
============= ============= ============= =============
</TABLE>
(c) For the period ended December 31, 1997. Fund share transactions are for the
period October 2, 1997 (commencement of sale of shares) to December 31,
1997.
(d) For the period ended December 31, 1997. Fund share transactions are for the
period November 7, 1997 (commencement of sale of shares) to December 31,
1997.
(e) For the period March 24, 1998 (commencement of sale of shares) to December
31, 1998.
8. BENEFICIAL INTEREST
As of December 31, 1998, the following Funds have one or more shareholders
with shares of beneficial interest of greater than 10% of the total
outstanding shares of each respective Fund or Class: Equity Balanced Strategy
- Class E 13.8% and 43.0%, Equity Balanced Strategy - Class D 68.6%,
Aggressive Strategy - Class E 13.8% and 23.0%, Aggressive Strategy - Class D
11.9%, 19.3% and 39.4%, Balanced Strategy - Class E 13.3%, 15.1% and 33.7%,
Balanced Strategy - Class D 18.4% and 52.2%, Moderate Strategy - Class E
47.6%, Moderate Strategy - Class D 82.6%, Conservative Strategy - Class E
15.5% and 43.9% and Conservative Strategy - Class D 17.0% and 77.9%.
39 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
9. SUBSEQUENT EVENTS
On January 15, 1999, the Funds began offering Class C shares under a
Distribution Plan with a 12b-1 fee payment of up to 0.75% of the average
daily net assets of a Fund's Class C shares. Under the Plan, the Class C
shares of the Funds do not pay for unreimbursed expenses of the Distributor
including amounts expended by the Distributor in excess of amounts received
by it from the Funds, 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 Funds under the Distribution Plan.
Notes to Financial Statements 40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Frank Russell Investment Company:
In our opinion, the accompanying statements of net assets, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
each of the series of Frank Russell Investment Company (in this report comprised
of LifePoints Funds: Equity Balanced Strategy, Aggressive Strategy, Balanced
Strategy, Moderate Strategy, and Conservative Strategy (the "Funds")) at
December 31, 1998, and the results of their operations, the changes in their net
assets and the financial highlights for the periods indicated therein, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments owned at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
41 Report of Independent Accountants
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
TAX INFORMATION
December 31, 1998 (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, 1998:
TOTAL LONG-TERM
CAPITAL GAINS
-----------------
Equity Balanced Strategy $714,267
Aggressive Strategy 68,111
Balanced Strategy 500,476
Moderate Strategy 10,768
Tax Information 42
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS
December 31, 1998
There was a Special Meeting in Lieu of Annual Meeting of Shareholders of the
Frank Russell Investment Company (the "Investment Company") held at 909 A
Street, Tacoma, Washington on November 19, 1998.
THE FOLLOWING MATTERS WERE VOTED UPON AT THE MEETING
THE RESULTS OF EACH VOTE ACCOMPANY THE DESCRIPTION OF EACH MATTER
- -----------------------------------------------------------------
1. This item number was reserved for a matter affecting another FRIC Fund of the
Investment Company.
2. To elect the members of the Board of Trustees of the Investment Company.
VOTE:
-----
FOR WITHHELD
----------------- -------------
Lynn L. Anderson 1,142,054,288.045 2,131,664.459
Paul E. Anderson 1,139,319,894.878 2,166,057.626
Paul Anton, PhD. 1,141,736,993.856 2,448,958.648
William E. Baxter 1,141,722,018.319 2,463,934.185
Lee C. Gingrich 1,142,034,296.045 2,161,656.459
Eleanor W. Palmer 1,141,728,049.319 2,457,903.185
3. To ratify the selection of PricewaterhouseCoopers LLP as the Investment
Company's independent accountants.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
----------------- ----------- -----------------
1,141,762,608.691 732,463.728 1,690,880.085
4. To approve a proposed advisory agreement with Frank Russell Investment
Management Company ("FRIMCo"), the current investment manager of the
Investment Company, restructuring the manner in which services are provided
to the Funds, providing for compensation to FRIMCo for managing certain
additional assets of the Funds.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
------------------ ------------ ----------------
Aggressive Strategy Fund 3,621,161.995 2,917.000 70,578.385
Balanced Strategy Fund 11,806,218.171 2,806.824 31,033.835
Moderate Strategy Fund 1,264,187.490 1,363.265 392.673
Conservative Strategy Fund 327,590.748 5,752.000 502.000
Equity Balanced Strategy Fund 7,245,266.699 0.000 233,319.230
43 Matter Submitted to a Vote of Shareholders
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
5. To approve a proposed advisory agreement with FRIMCo, to take effect upon
the closing of the acquisition of Frank Russell Company by The Northwestern
Mutual Life Insurance Company.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ----------- -----------------
Aggressive Strategy Fund 3,636,185.995 2,917.000 55,554.385
Balanced Strategy Fund 11,816,569.171 2,806.824 20,682.835
Moderate Strategy Fund 1,264,187.490 1,363.265 392.673
Conservative Strategy Fund 327,590.748 5,752.000 502.000
Equity Balanced Strategy Fund 7,245,266.699 0.000 233,319.230
6. To approve a change to the Funds' fundamental investment restrictions
limiting borrowing activities, authorizing a higher borrowing level for the
purpose of meeting shareholder redemption requests.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
-------------- ----------- -----------------
Aggressive Strategy Fund 3,436,813.995 17,941.000 55,554.385
Balanced Strategy Fund 11,407,349.171 54,405.824 20,682.835
Moderate Strategy Fund 1,201,463.490 19,557.265 392.673
Conservative Strategy Fund 324,889.748 5,752.000 502.000
Equity Balanced Strategy Fund 7,135,002.699 0.000 233,319.230
7. To approve the elimination of certain fundamental investment restrictions
applicable to the Funds.
VOTE:
-----
a) elimination of restriction on investing in interests of oil and gas:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
-------------- ----------- -----------------
Aggressive Strategy Fund 2,873,768.053 132,945.498 503,595.829
Balanced Strategy Fund 11,201,365.519 117,161.944 163,910.367
Moderate Strategy Fund 1,175,012.351 34,971.822 11,429.255
Conservative Strategy Fund 314,874.748 15,767.000 502.000
Equity Balanced Strategy Fund 6,432,692.409 61,832.217 873,797.303
Matter Submitted to a Vote of Shareholders 44
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
LIFEPOINTS(R) FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
b) elimination of restriction on investing in issuers in operation for less
than three years:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ----------- ---------------
Aggressive Strategy Fund 3,360,531.485 118,150.955 31,626.940
Balanced Strategy Fund 11,340,417.902 134,953.569 7,066.359
Moderate Strategy Fund 1,186,048.933 34,578.009 786.486
Conservative Strategy Fund 315,521.748 15,622.000 0.000
Equity Balanced Strategy Fund 7,313,462.594 25,926.246 28,933.089
c) elimination of restriction on investing in issuers beneficially owned by
affiliated persons:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ----------- ----------------
Aggressive Strategy Fund 3,265,493.721 216,452.262 28,363.397
Balanced Strategy Fund 11,312,874.203 149,474.643 20,088.984
Moderate Strategy Fund 1,184,122.250 36,898.505 392.673
Conservative Strategy Fund 314,511.577 16,632.17 0.000
Equity Balanced Strategy Fund 7,086,643.566 267,157.25 14,521.118
8. This item number was reserved for a matter affecting another FRIC Fund of the
Investment Company.
To act upon any other business as may legally have come before the Special
Meeting or any adjournment thereof.
VOTE:
-----
GRANT WITHHELD
--------------- ----------------
Aggressive Strategy Fund 3,396,702.167 297,955.213
Balanced Strategy Fund 11,371,783.578 468,275.252
Moderate Strategy Fund 1,240,308.349 25,635.079
Conservative Strategy Fund 307,277.509 26,567.239
Equity Balanced Strategy Fund 7,173,395.441 305,190.488
45 Matter Submitted to a Vote of Shareholders
<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
Mark E. Swanson, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
MANAGER, TRANSFER AND DIVIDEND PAYING 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
PricewaterhouseCoopers LLP
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 Investors, N.A., San Francisco, CA
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc., Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Morgan Stanley Asset Management, Inc., New York, NY
Peachtree Asset Management, Atlanta, GA
Sanford C. Bernstein & Co., Inc., New York, NY
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
Westpeak Investment Advisors, L.P., Boulder, Co
QUANTITATIVE EQUITY
Barclays Global Investors, N.A., 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, LLC, 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 Managers Limited, London, England
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
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Ltd., Hamilton, Bermuda
MULTISTRATEGY BOND
BEA Associates, Inc., 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 46
<PAGE>
[RUSSELL LOGO]
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402-5120
253-627-7001
800-972-0700
Fax: 253-591-3495
A-5147(299) 36-08-022
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
- -------------------------
INSTITUTIONAL FUNDS
- -------------------------
1998 Annual Report
FRANK RUSSELL INVESTMENT COMPANY
1998 Annual Report
CLASS E AND CLASS I
EQUITY I FUND
EQUITY II FUND
EQUITY III FUND
EQUITY Q FUND
INTERNATIONAL FUND
FIXED INCOME I FUND
FIXED INCOME III FUND
DECEMBER 31, 1998
[RUSSELL LOGO]
<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
INSTITUTIONAL FUNDS
ANNUAL REPORT
DECEMBER 31, 1998
TABLE OF CONTENTS
Page
Letter to Our Clients .................................................... 2
Equity I Fund ............................................................ 3
Equity II Fund ........................................................... 17
Equity III Fund .......................................................... 35
Equity Q Fund ............................................................ 45
International Fund ....................................................... 57
Fixed Income I Fund ...................................................... 75
Fixed Income III Fund .................................................... 93
Notes to Financial Statements ............................................ 109
Report of Independent Accountants ........................................ 118
Tax Information .......................................................... 119
Matters Submitted to a Vote of Shareholders .............................. 120
Manager, Money Managers and Service Providers ............................ 123
FRANK RUSSELL INVESTMENT COMPANY - INSTITUTIONAL FUNDS
Copyright (C) Frank Russell Company 1999. 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% off 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
We are pleased to present the Frank Russell Investment Company 1998 Annual
Report. This report covers information on seven of the Funds and represents our
seventeenth year in operation.
We remain committed to providing our clients with superior investment solutions
through the benefits of multi-manager, multi-style diversification used in
structuring our Funds. The commitment proved worthwhile in 1998, 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 (FRIMCo) continuously evaluates the
Funds we offer our clients. Each of these Funds is carefully monitored by
Russell investment professionals to ensure that the most appropriate investment
advisors and strategies are utilized within each Fund. The advisors are
monitored by FRIMCo, using the expertise and advice of the Investment Policy and
Research group of Frank Russell Company.
Since the close of 1997, we have implemented changes in our Funds' structure
which we believe will benefit current and potential investors. The former Class
C shares of the Russell Funds have been renamed Russell Fund Class E shares, and
their fee structure now aligns with the Russell LifePoints(R) Funds' Class E
shares. Additionally, the Russell LifePoints(R) Funds' Class D shares were
opened for investment in March 1998.
FRIMCo's decision to retain Boston Financial Data Services(BFDS) to assist in
the transfer agent process in June 1998 has enhanced the level of services
provided to our clients.
We are also pleased to announce the recent acquisition of Frank Russell Company
by The Northwestern Mutual Life Insurance Company, the U.S. leader in both
individual life insurance sold annually and total life insurance in force. We
believe this is a very positive development for both Russell and the Funds,
given the financial strength and image of Northwestern.
Thank you for your continued confidence and investment with Frank Russell
Investment Company. We look forward to 1999 and continuing to earn your support.
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 Investment Company Frank Russell Investment Company
<PAGE>
EQUITY I FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide income and capital growth by investing principally in
equity securities.
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 ten managers with three separate and distinct investment
styles.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Equity I++ Russell 1000(R)** Lipper(R)Growth & Income++++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $13,080 $13,042 $12,243
1990 $12,342 $12,499 $11,694
1991 $16,196 $16,627 $15,063
1992 $17,657 $18,130 $16,310
1993 $19,706 $19,970 $18,140
1994 $19,860 $20,046 $17,953
1995 $26,998 $27,617 $23,448
1996 $33,366 $33,817 $28,311
1997 $44,053 $44,927 $35,979
1998 $55,107 $57,067 $41,494
- --------------------------------------------------------------------------------------------------------------------
Total $268,365 $273,742 $230,635
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
EQUITY I FUND RUSSELL 1000(R) INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ------------ ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 Year $ 12,510 25.10% 1 Year $ 12,702 27.02%
5 Years $ 27,964 22.83%(S) 5 Years $ 28,576 23.37%(S)
10 Years $ 55,107 18.61%(S) 10 Years $ 57,067 19.03%(S)
<CAPTION>
LIPPER(R) GROWTH & INCOME FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
------------- ------------- --------------
<S> <C> <C>
1 Year $ 11,533 15.33%
5 Years $ 22,875 18.00%(S)
10 Years $ 41,494 15.29%(S)
</TABLE>
3 Equity I Fund
<PAGE>
EQUITY I FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Equity I Fund reflected a total return
of 25.1%, as compared to the Russell 1000(R) Index results of 27%. The Fund
trailed the Index primarily due to its underweighting of large cap stocks and to
the weak market-relative results produced by its value-oriented managers.
However, performance compared very favorably with the 15.3% average return of
mutual funds tracked in the Lipper(R) Growth and Income Funds Benchmark.
PORTFOLIO HIGHLIGHTS
The performance of stocks in 1998 was characterized by unprecedented differences
in returns between various sectors of the market. Stocks provided investors with
returns in excess of 20% -- the first time the market has ever produced four
consecutive years of gains in excess of 20% per annum. Despite the market's
strength, volatility was extreme with a deep swoon in prices during the third
quarter. The market's advance favored large cap growth issues. Valuation
sensitivity proved a liability for investors as value stocks in the Russell 1000
Index trailed their growth counterparts by more than 20 percentage points - the
largest such differential since the inception of the indices. Technology stocks
led the market advance, as anything and everything associated with the Internet
attracted investors. As a result, the sector gained 75% for the year. The
laggards were led by energy and raw materials as commodity prices trended lower
throughout the year. Large cap issues dominated once again, with the largest 50
stocks of the Russell 1000 Index up 40% while small cap stocks in the Russell
2000(R) Index fell 2.5% during the year - another unprecedented margin.
The Equity I Fund fared better than the majority of its peers in the Lipper(R)
Growth and Income Funds Benchmark in 1998. Its multi-manager mix afforded it
some opportunities not shared by funds with more focused approaches to the
growth and income style. The Fund's growth-oriented managers produced very
strong results, aided by their exposure to many of the market's strongest
performers. However, even these managers found valuations on many issues out of
their reach. The more value-oriented managers were frustrated by the market's
apparent indifference to valuation. Their valuation sensitivity left them
underweighted in large cap issues and Internet-related stocks. Overall, good
security selection in the Technology and the Producer Durables sectors helped
narrow the Fund's margin of underperformance relative to the Russell 1000 Index.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Microsoft Corp. 1.9%
Intel Corp. 1.9
Cisco Systems, Inc. 1.9
Tyco International, Ltd. 1.6
International Business Machines Corp. 1.6
Home Depot, Inc. (The) 1.5
MCI WorldCom, Inc. 1.5
Pfizer, Inc. 1.5
Dell Computer Corp. 1.4
Merck & Co., Inc. 1.4
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 30.1x
Portfolio Price/Book Ratio 4.36x
Market Capitalization - $-Weighted Average 63.29 Bil
Number of Holdings 581
MONEY MANAGERS STYLES
Alliance Capital Management L.P. Growth
Barclays Global Investors, N.A. Market-Oriented
Equinox Capital Management, Inc. Value
INVESCO Capital Management, Inc. Market-Oriented
Lincoln Capital Management Co. Growth
Morgan Stanley Dean Witter Investment
Management, Inc. Market-Oriented
Peachtree Asset Management Market-Oriented
Sanford C. Bernstein & Co., Inc. Value
Suffolk Capital Management, Inc. Market-Oriented
Trinity Investment Management Corp. Value
* Assumes initial investment on January 1, 1989.
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $158.3 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select. The Russell 1000 Index return reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates.
+ 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 Advisor upon request.
++ Lipper(R) Growth & Income Funds Benchmark 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.
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 4
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
COMMON STOCKS - 95.1%
AUTO AND TRANSPORTATION - 5.1%
Airborne Freight Corp. 4,500 162
AMR Corp. (a) 44,800 2,660
Burlington Northern, Inc. 136,700 4,614
Comair Holdings, Inc. 17,200 577
Continental Airlines, Inc. Class B (a) 97,200 3,256
Cooper Tire & Rubber Co. 205,200 4,194
CSX Corp. 9,600 398
Dana Corp. 64,474 2,635
Delta Air Lines, Inc. 151,400 7,873
Eaton Corp. 1,100 78
FDX Corp. (a) 18,300 1,629
Ford Motor Co. 184,300 10,816
General Motors Corp. 110,500 7,908
Genuine Parts Co. 11,300 378
Goodyear Tire & Rubber Co. 7,100 358
Harley-Davidson, Inc. 54,000 2,558
Kansas City Southern Industries, Inc. 7,900 389
KLM Royal Dutch Airlines 75,991 2,280
Lear Corp. (a) 47,100 1,813
Meritor Automotive, Inc. 2,800 59
Navistar International Corp. (a) 53,000 1,511
Nordic American Tanker Shipping, Ltd. 76,374 878
Norfolk Southern Corp. 129,500 4,104
Northwest Airlines Corp. Class A (a) 112,700 2,867
PACCAR, Inc. 18,700 764
Trinity Industries, Inc. 31,200 1,201
TRW, Inc. 7,900 444
UAL Corp. (a) 56,100 3,348
Union Pacific Corp. 9,100 410
-------
70,162
-------
CONSUMER DISCRETIONARY - 12.0%
Abercrombie & Fitch Co. Class A (a) 23,000 1,627
AC Nielsen Corp. (a) 3,100 88
Alberto Culver Co. Class B 11,500 307
Amazon.com, Inc. (a) 800 257
AutoZone, Inc. (a) 114,000 3,755
Avon Products, Inc. 24,100 1,066
Bed Bath & Beyond, Inc. (a) 80,900 2,756
Belo (A.H.) Corp. Class A 13,800 275
Best Buy Co. (a) 9,200 565
BJ's Wholesale Club, Inc. (a) 4,700 218
Borders Group, Inc. (a) 5,800 145
Brinker International, Inc. (a) 100 3
Browning-Ferris Industries, Inc. 30,700 873
Brunswick Corp. 3,300 82
Carnival Corp. Class A 42,000 2,016
Central Newspapers, Inc. Class A 300 21
Chancellor Media Corp. (a) 101,300 4,843
Circuit City Stores, Inc. 12,800 639
Clear Channel Communications, Inc. (a) 46,900 2,556
Corrections Corp. America (a) 2,700 48
Costco Cos., Inc. (a) 32,200 2,324
Darden Restaurants, Inc. 45,200 814
Dayton Hudson Corp. 71,300 3,868
Deluxe Corp. 8,300 303
Dillard's, Inc. Class A 10,600 301
Dollar Tree Stores, Inc. (a) 5,325 232
Eastman Kodak Co. 60,089 4,326
Federated Department Stores, Inc. (a) 33,200 1,446
Fortune Brands, Inc. 17,500 553
Fred Meyer, Inc. (a) 20,900 1,259
Fruit of the Loom, Inc. Class A (a) 22,500 311
Furniture Brands International, Inc. (a) 6,400 174
Gap, Inc. 93,000 5,231
General Nutrition Cos., Inc. (a) 10,600 172
Harrah's Entertainment, Inc. (a) 15,200 238
Hasbro, Inc. 120,500 4,353
Heftel Broadcasting Corp. Class A (a) 2,400 118
Hollinger International, Inc. Class A 11,200 156
Home Depot, Inc. (The) 342,300 20,944
International Game Technology 12,300 299
Jacor Communications, Inc. (a) 900 58
JC Penney & Co., Inc. 43,000 2,016
King World Productions, Inc. (a) 34,200 1,007
Kmart Corp. (a) 69,600 1,066
Kohl's Corp. (a) 85,600 5,259
Legacy Hotels Real Estate Investment Trust (Units) 8,600 36
Liberty Media Group Series A (a) 113,800 5,242
Limited, Inc. (The) 159,900 4,657
Lowe's Cos., Inc. 170,600 8,733
Mark Bros. Jewelers, Inc. (a) 1,500 28
Mattel, Inc. 208,643 4,760
May Department Stores Co. 19,100 1,153
Maytag Corp. 14,100 878
McDonald's Corp. 24,900 1,908
McGraw-Hill, Inc. 1,500 153
MediaOne Group, Inc. (a) 74,200 3,487
Neiman-Marcus Group, Inc. (a) 8,800 219
New York Times Co. Class A 125,000 4,336
Newell Co. 2,000 83
Nielsen Media Research (a) 16,899 304
Nordstrom, Inc. 3,700 128
Office Depot, Inc. (a) 8,500 314
OfficeMax, Inc. (a) 71,300 873
Ogden Corp. 35,400 887
5 Equity I Fund
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Omnicom Group, Inc. 34,900 2,024
PanAmSat Corp. (a) 3,200 124
Payless ShoeSource, Inc. (a) 5,200 246
Petroleum Heat & Power, Inc. Class A (a) 317,562 238
Premark International, Inc. 3,400 118
Promus Hotel Corp. New (a) 1,725 56
Pulitzer Publishing Co. 3,300 286
QUALCOMM, Inc. (a) 1,300 67
Royal Caribbean Cruises, Ltd. 78,300 2,897
Rubbermaid, Inc. 8,500 267
Russell Corp. 5,100 104
Saks, Inc. (a) 27,400 865
Sears Roebuck & Co. 59,500 2,529
Shaw Industries, Inc. 22,600 548
Staples, Inc. (a) 12,700 555
Starwood Hotels & Resorts Worldwide, Inc. 14,400 327
Time Warner, Inc. 148,200 9,198
TJX Cos., Inc. 51,900 1,505
Toys "R" Us, Inc. (a) 23,600 398
Tribune Co. 44,100 2,911
Tricon Global Restaurants, Inc. (a) 9,100 456
Tupperware Corp. 13,100 215
Unisource Worldwide, Inc. 8,600 62
Univision Communications, Inc. Class A (a) 7,200 261
USA Networks, Inc. (a) 2,000 66
V.F. Corp. 11,800 553
Viacom, Inc. Class B (a) 22,200 1,643
Viad Corp. 41,400 1,258
Wal-Mart Stores, Inc. 186,100 15,156
Wendy's International, Inc. 42,300 923
Whirlpool Corp. 52,600 2,913
-------
165,916
-------
CONSUMER STAPLES - 6.2%
American Stores Co. 9,300 344
Anheuser-Busch Cos., Inc. 25,000 1,641
Bestfoods 34,000 1,811
Brown-Forman Distillers, Inc. Class B 300 23
Campbell Soup Co. 20,100 1,106
Clorox Co. 1,600 187
Coca-Cola Co. (The) 114,300 7,644
Coca-Cola Enterprises, Inc. 35,000 1,251
Colgate-Palmolive Co. 64,600 6,000
ConAgra, Inc. 89,000 2,804
CVS Corp. 82,400 4,532
Dial Corp. 1,700 49
Dole Food Co., Inc. 25,200 756
General Mills, Inc. 34,900 2,712
Gillette Co. 53,600 2,590
Hannaford Brothers Co. 3,200 170
Hormel Foods Corp. 9,900 324
IBP, Inc. 31,900 929
International Flavors & Fragrances, Inc. 6,900 305
Interstate Bakeries Corp. 17,600 465
Kroger Co. (a) 34,100 2,063
McCormick & Co., Inc. 30,700 1,035
PepsiCo, Inc. 136,600 5,592
Philip Morris Cos., Inc. 334,300 17,885
Procter & Gamble Co. 116,100 10,600
Quaker Oats Co. 15,400 916
Ralston-Purina Group 13,200 427
Rite Aid Corp. 76,400 3,787
RJR Nabisco Holdings Corp. 14,300 425
Safeway, Inc. (a) 32,000 1,950
SuperValu, Inc. 63,200 1,770
SYSCO Corp. 1,200 33
Tyson Foods, Inc. Class A 21,000 446
Unilever NV 29,400 2,438
Universal Corp. 13,000 457
UST Corp. 10,100 352
Weis Markets, Inc. 2,200 86
-------
85,905
-------
FINANCIAL SERVICES - 18.0%
ACE, Ltd. 8,800 303
AFLAC, Inc. 233,000 10,252
Allstate Corp. 201,432 7,780
Ambac Financial Group, Inc. 36,500 2,197
American Bankers Insurance Group, Inc. 2,100 102
American Express Co. 32,200 3,292
American General Corp. 7,300 569
American International Group, Inc. 150,100 14,503
AMRESCO, Inc. (a) 11,300 99
AmSouth Bancorp 55,650 2,539
Arden Realty Group, Inc. 2,300 53
Associates First Capital Corp. Class A 154,722 6,556
Automatic Data Processing, Inc. 110,600 8,869
Bank One Corp. 101,100 5,162
BankAmerica Corp. 215,973 12,985
BankBoston Corp. 58,900 2,293
BB&T Corp. 6,000 242
Berkshire Hathaway, Inc. Class A (a) 10 700
Canadian Hotel Income Properties 34,500 181
CarrAmerica Realty Corp. 2,500 60
Charter One Financial, Inc. 58,465 1,619
Chase Manhattan Corp. 194,884 13,264
Chubb Corp. (The) 6,000 389
Equity I Fund 6
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Citigroup, Inc. 61,900 3,064
City National Corp. 2,000 83
Comdisco, Inc. 11,600 196
Comerica, Inc. 40,500 2,762
Commerce Bancshares, Inc. 27,179 1,148
Conseco, Inc. 219,844 6,719
Countrywide Credit Industries, Inc. 14,100 708
Crescent Real Estate Equities, Inc. 1,000 23
Dime Bancorp, Inc. 59,100 1,562
Dow Jones & Co., Inc. 31,400 1,511
DST Systems, Inc. (a) 15,600 890
Duke Realty Investments, Inc. 1,500 35
Dun & Bradstreet Corp. 11,200 354
Edwards (A.G.), Inc. 3,500 130
Equitable Cos., Inc. 12,200 706
Everest Reinsurance Holdings, Inc. 14,700 572
Federal Home Loan Mortgage Corp. 122,700 7,906
Federal National Mortgage Association 81,700 6,046
Fifth Third Bancorp 33,300 2,375
First American Corp. 25,600 1,136
First Data Corp. 161,100 5,105
First Union Corp. 83,800 5,096
Firstar Corp. 1,800 168
Fleet Financial Group, Inc. 147,600 6,596
Fremont General Corp. 32,400 802
GATX Corp. 500 19
General Re Corp. 3,800 760
Golden West Financial Corp. 7,700 706
Hartford Financial Services Group, Inc. (The) 61,800 3,391
Highwoods Properties, Inc. 13,600 350
Horace Mann Educators Corp. 27,900 795
Household International Corp. 83,700 3,317
Huntington Bancshares, Inc. 1,000 30
Jefferson-Pilot Corp. 12,250 919
KeyCorp 21,300 682
Lehman Brothers Holdings, Inc. 11,000 485
Lincoln National Corp. 6,200 507
Local Financial Corp. (a) 157,900 1,421
Loews Corp. 22,300 2,191
M & T Bank Corp. 300 156
MBIA, Inc. 102,300 6,707
MBNA Corp. 545,568 13,605
Mercantile Bancorp, Inc. 6,400 295
Merrill Lynch & Co., Inc. 4,200 280
MGIC Investment Corp. 48,000 1,911
Morgan (J.P.) & Co., Inc. 5,100 536
Morgan Stanley Dean Witter, Discover & Co. 91,290 6,482
National City Corp. 66,400 4,814
North Fork Bancorp, Inc. 17,700 424
Old Kent Financial Corp. 735 34
Old Republic International Corp. 129,975 2,924
Pacific Century Financial Corp. 26,000 634
PaineWebber Group, Inc. 43,850 1,694
Patriot American Hospitality, Inc. 1,500 9
Paychex, Inc. 43,600 2,243
PIMCO Advisors Holdings, L.P. 8,000 249
PMI Group, Inc. (The) 200 10
PNC Bank Corp. 21,800 1,180
Post Properties, Inc. 1,200 46
Progressive Corp. 10,800 1,829
Provident Cos., Inc. 8,100 336
Providian Financial Corp. 38,700 2,903
Reinsurance Group of America, Inc. 7,400 450
Reliance Group Holdings, Inc. 39,700 511
Ryder System, Inc. 39,200 1,019
Schwab (Charles) Corp. 8,100 455
SLM Holding Corp. 10,900 523
SouthTrust Corp. 26,450 975
Sovereign Bancorp, Inc. 80,000 1,130
Spieker Properties, Inc. 26,000 900
State Street Corp. 10,000 696
SunTrust Banks, Inc. 22,000 1,683
Torchmark Corp. 14,800 523
Transamerica Financial Corp. 17,300 1,998
Travelers Property Casualty Corp. Class A 9,200 285
U.S. Bancorp 120,000 4,261
UnionBanCal Corp. 4,600 157
UNUM Corp. 11,400 665
Wachovia Corp. 15,000 1,312
Waddell & Reed Financial, Inc. Class B (a) 1,102 26
Washington Mutual, Inc. 226,124 8,635
Wells Fargo Co. (a) 202,600 8,092
Zions Bancorp 5,200 324
-------
249,196
-------
HEALTH CARE - 10.9%
Abbott Laboratories 37,000 1,813
Aetna, Inc. 46,300 3,640
Allegiance Corp. 400 19
Allergan, Inc. 20,500 1,327
ALZA Corp. (a) 39,200 2,048
American Home Products Corp. 62,200 3,503
Amgen, Inc. (a) 33,500 3,501
Bard (C.R.), Inc. 1,400 69
Bausch & Lomb, Inc. 18,800 1,128
Baxter International, Inc. 111,100 7,145
Becton, Dickinson & Co. 45,200 1,929
7 Equity I Fund
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Bergen Brunswig Corp. Class A 3,200 112
Beverly Enterprises, Inc. New (a) 22,800 154
Biomet, Inc. 69,600 2,797
Bristol-Myers Squibb Co. 98,460 13,175
Cardinal Health, Inc. 60,900 4,621
Columbia/HCA Healthcare Corp. 290,600 7,192
DENTSPLY International, Inc. 900 23
Genzyme Corp. (a) 10,000 497
HBO & Co. 202,800 5,818
Integrated Health Services, Inc. (a) 31,300 442
IVAX Corp. (a) 89,000 1,107
Johnson & Johnson 85,000 7,129
Lilly (Eli) & Co. 73,500 6,532
Mallinckrodt, Inc. 24,000 740
Medtronic, Inc. 38,500 2,859
Merck & Co., Inc. 126,100 18,623
Mylan Laboratories, Inc. 233,500 7,355
PacifiCare Health Systems, Inc. Class B (a) 21,900 1,740
Pfizer, Inc. 158,800 19,919
Pharmacia & Upjohn, Inc. 25,000 1,416
Quintiles Transnational Corp. (a) 27,700 1,477
Safeskin Corp. (a) 3,300 79
Schering-Plough Corp. 228,900 12,647
St. Jude Medical, Inc. (a) 7,500 208
Stryker Corp. 5,900 325
Tenet Healthcare Corp. (a) 9,500 249
United Healthcare Corp. 4,600 198
Warner-Lambert Co. 91,300 6,866
Wellpoint Health Networks, Inc. Class A (a) 706 61
-------
150,483
-------
INTEGRATED OILS - 2.8%
Amerada Hess Corp. NPV 61,100 3,040
Amoco Corp. 92,700 5,469
Ashland, Inc. 53,100 2,569
Atlantic Richfield Co. 30,500 1,990
Chevron Corp. 5,200 431
Coastal Corp. 50,600 1,768
Crown Central Petroleum Corp. Class B (a) 16,400 115
Exxon Corp. 150,120 10,978
Kerr-McGee Corp. 34,700 1,327
Lyondell Petrochemical Co. 10,600 191
Mobil Corp. 25,800 2,248
Phillips Petroleum Co. 9,800 418
Royal Dutch Petroleum Co. 6,400 306
Texaco, Inc. 54,800 2,897
Unocal Corp. 4,400 128
USX-Marathon Group 86,500 2,606
YPF Sociedad Anonima Class D - ADR (a) 80,800 2,257
-------
38,738
-------
MATERIALS AND PROCESSING - 6.1%
Air Products & Chemicals, Inc. 59,300 2,372
Albemarle Corp. 2,300 55
Alcan Aluminum, Ltd. 10,600 287
Allegheny Teldyne, Inc. 1,700 35
Aluminum Co. of America 7,431 554
American Standard Cos., Inc. (a) 8,800 317
Archer-Daniels-Midland Co. 23,200 399
Armstrong World Industries, Inc. 9,400 567
Bowater, Inc. 1,800 75
Cabot Corp. 9,600 268
Catellus Development Corp. (a) 19,200 275
Centex Corp. 16,000 721
Champion International Corp. 8,400 340
Consolidated Papers, Inc. 11,500 316
Corning, Inc. 2,300 104
Crompton & Knowles Corp. 1,100 23
Crown Cork & Seal Co., Inc. 67,100 2,068
Dow Chemical Co. 6,000 546
du Pont (E.I.) de Nemours & Co. 26,800 1,422
Eastman Chemical Co. 40,100 1,794
Ecolab, Inc. 300 11
Engelhard Corp. 29,400 573
Fluor Corp. 41,100 1,749
FMC Corp. (a) 18,100 1,014
Fort James Corp. 91,300 3,652
Freeport-McMoRan Copper & Gold, Inc. Class B 13,600 142
Gaylord Container Corp. Class A (a) 15,100 92
Georgia-Pacific Timber Group 23,300 555
Goodrich (B.F.) Co. 23,000 825
Great Lakes Chemical Corp. 108,800 4,352
Hexcel Corp. (a) 21,100 177
Illinois Tool Works, Inc. 31,300 1,815
IMC Global, Inc. 8,400 180
International Paper Co. 70,500 3,159
Johns Manville Corp. 4,300 71
Lafarge Corp. 19,900 806
Louisiana Pacific Corp. 15,000 275
Millennium Chemicals, Inc. 6,000 119
Minnesota Mining & Manufacturing Co. 6,200 441
Mohawk Industries, Inc. (a) 13,100 551
Monsanto Co. 80,600 3,829
Nalco Chemical Co. 8,800 273
Newmont Mining Corp. 3,100 56
Nucor Corp. 8,400 363
Equity I Fund 8
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Olin Corp. 23,500 665
Owens Corning 54,800 1,942
Pentair, Inc. 5,100 203
Phelps Dodge Corp. 105,000 5,342
Praxair, Inc. 71,100 2,505
Reynolds Metals Co. 50,600 2,666
Rohm & Haas Co. 4,600 139
Rouse Co. (The) 29,200 803
Sealed Air Corp. New (a) 39,400 2,011
Sherwin-Williams Co. 1,400 41
Sigma Aldrich Corp. 10,800 316
Solutia, Inc. 20,000 448
Sonoco Products Co. 80,990 2,399
Temple-Inland, Inc. 5,400 320
Timken Co. 31,600 596
Tyco International, Ltd. 290,500 21,914
Union Camp Corp. 5,100 344
Union Carbide Corp. 8,000 340
USG Corp. 11,600 591
USX-U.S. Steel Group 38,500 886
Vulcan Materials Co. 2,700 355
W.R. Grace & Co. New (a) 42,600 668
Waters Corp. (a) 3,300 288
Westvaco Corp. 11,500 308
Willamette Industries, Inc. 9,600 322
Witco Corp. 14,400 230
-------
84,260
-------
MISCELLANEOUS - 0.4%
AMB Property Corp. 900 20
Archstone Communities Trust 800 16
Avalonbay Communities, Inc. 2,100 72
Crestline Capital Corp. (a) 4,120 60
Equity Office Properties Trust 6,300 151
FBR Asset Investment Corp. (a) 32,600 522
Host Marriott Corp. (a) 41,200 569
HRPT Properties Trust 3,300 46
IndyMac Mortgage Holdings, Inc. 2,500 26
Legacy Hotels Real Estate Investment Trust 21,400 90
Meditrust Cos. 3,300 50
ProLogis Trust 2,400 50
Public Storage, Inc. 2,600 70
ServiceMaster Co. 500 11
TeleTech Holdings, Inc. (a) 6,500 65
Waste Management, Inc. 74,200 3,460
-------
5,278
-------
OTHER ENERGY - 0.9%
Apache Corp. 20,200 511
Baker Hughes, Inc. 10,800 191
BEC Energy 4,500 185
Burlington Resources, Inc. 6,000 215
Calenergy, Inc. (a) 24,800 860
Conoco, Inc. Class A (a) 122,900 2,566
Enron Oil & Gas Co. 5,200 90
ENSCO International, Inc. 23,500 251
Halliburton Co. 5,000 148
Noble Drilling Corp. (a) 500 6
Occidental Petroleum Corp. 20,000 338
Santa Fe Energy Resources, Inc. (a) 2,600 19
Sempra Energy 17,900 454
Sunoco, Inc. (a) 69,900 2,521
Tidewater, Inc. 16,300 378
Tosco Corp. 84,300 2,182
Transocean Offshore, Inc. 25,000 670
Ultramar Diamond Shamrock Corp. 20,000 485
Vastar Resources, Inc. 1,500 65
-------
12,135
-------
PRODUCER DURABLES - 5.8%
Aeroquip-Vickers, Inc. 15,600 467
Allied Waste Industries, Inc. (a) 14,000 331
AlliedSignal, Inc. 27,600 1,223
AMP, Inc. 28,100 1,463
Applied Materials, Inc. (a) 5,000 213
Case Corp. 2,400 52
Caterpillar, Inc. 72,000 3,312
Cordant Technologies, Inc. 11,700 439
Crane Co. 61,200 1,847
Cummins Engine Co., Inc. 5,700 202
Elsag Bailey Process Automation NV (a) 74,000 2,895
Emerson Electric Co. 900 54
Foster Wheeler Corp. 48,900 645
General Electric Co. 148,300 15,136
Gulfstream Aerospace Corp. (a) 20,000 1,065
Honeywell, Inc. 11,500 866
Ingersoll-Rand Co. 85,700 4,023
Johnson Controls, Inc. 29,500 1,741
Knoll, Inc. (a) 20,400 604
Lexmark International Group, Inc. Class A (a) 15,400 1,548
Litton Industries, Inc. (a) 25,100 1,638
Lockheed Martin Corp. 78,700 6,670
Miller (Herman), Inc. 1,500 40
Molex, Inc. 3,625 138
National Service Industries, Inc. 6,600 251
Northern Telecom, Ltd. 55,200 2,767
Northrop Grumman Corp. 18,400 1,346
Parker-Hannifin Corp. 8,950 293
9 Equity I Fund
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Philips Electronics NV - ADR 36,600 2,477
Pitney Bowes, Inc. 11,300 747
Pulte Corp. 5,600 156
Raytheon Co. Class A 1,237 64
Solectron Corp. (a) 2,800 260
Tecumseh Products Co. Class A 400 19
Tektronix, Inc. 12,000 361
Thermo Instrument Systems, Inc. (a) 4,200 63
Thomas & Betts Corp. 11,900 515
U.S. Filter Corp. (a) 117,200 2,681
Uniphase Corp. (a) 1,300 90
United Technologies Corp. 65,500 7,123
Xerox Corp. 119,200 14,065
-------
79,890
-------
TECHNOLOGY - 17.3%
3Com Corp. (a) 115,000 5,153
ADC Telecommunications, Inc. (a) 14,300 493
Adobe Systems, Inc. 5,800 271
Advanced Micro Devices, Inc. (a) 2,800 81
Altera Corp. (a) 29,100 1,768
America Online, Inc. 29,300 4,688
Apple Computer, Inc. (a) 124,300 5,089
Arrow Electronics, Inc. (a) 31,800 849
Ascend Communications, Inc. (a) 40,200 2,643
Autodesk, Inc. 5,700 243
Avnet, Inc. 5,400 327
BMC Software, Inc. (a) 30,500 1,359
Cisco Systems, Inc. (a) 278,600 25,858
COMPAQ Computer Corp. 434,700 18,230
Computer Associates International, Inc. 90,000 3,836
Computer Sciences Corp. 400 26
Compuware Corp. (a) 34,100 2,662
Cooper Industries, Inc. 19,400 925
Dell Computer Corp. (a) 266,800 19,526
Electronic Data Systems Corp. 85,226 4,283
EMC Corp. (a) 118,100 10,039
Galileo International, Inc. 3,800 165
General Instrument Corp. (a) 17,500 594
General Motors Corp. Class H (a) 16,000 635
Hewlett-Packard Co. 65,000 4,440
IMS Health, Inc. 59,600 4,496
Informix Corp. (a) 27,500 271
Integrated Device Technology (a) 5,100 31
Intel Corp. 218,800 25,928
International Business Machines Corp. 116,500 21,523
Intuit, Inc. (a) 2,400 174
Learning Co., Inc. (The) (a) 66,100 1,714
Loral Space & Communications, Ltd. (a) 13,800 246
LSI Logic Corp. (a) 1,700 27
Lucent Technologies, Inc. 102,300 11,253
Microchip Technology, Inc. (a) 3,900 144
Micron Technology, Inc. (a) 15,700 794
Microsoft Corp. (a) 188,200 26,077
Motorola, Inc. 8,400 513
National Semiconductor Corp. (a) 10,700 144
NCR Corp. (a) 4,400 184
Netscape Communications Corp. (a) 29,000 1,747
Network Associates, Inc. (a) 1,100 73
Novell, Inc. (a) 65,800 1,193
Oracle Systems Corp. (a) 204,700 8,827
Parametric Technology Corp. (a) 12,600 205
Qwest Communications International, Inc. (a) 35,000 1,748
SCI Systems, Inc. (a) 5,700 329
Sterling Software, Inc. (a) 15,800 428
Sun Microsystems, Inc. (a) 76,700 6,563
Synopsys, Inc. (a) 9,500 514
Tech Data Corp. (a) 7,200 289
Texas Instruments, Inc. 82,000 7,015
Textron, Inc. 6,500 494
Unisys Corp. (a) 28,400 978
Vishay Intertechnology, Inc. (a) 17,345 252
Vitesse Semiconductor Corp. (a) 2,500 114
Xilinx, Inc. (a) 500 33
Yahoo!, Inc. (a) 3,200 758
-------
239,262
-------
UTILITIES - 9.6%
Airtouch Communications, Inc. (a) 190,400 13,733
Allegheny Energy, Inc. 13,300 459
Alltel Corp. 20,000 1,196
Ameren Corp. 16,500 704
American Electric Power Co., Inc. 8,700 409
American Water Works, Inc. 14,100 476
Ameritech Corp. 9,200 583
AT&T Corp. 155,913 11,732
Baltimore Gas & Electric Co. 60,000 1,853
Bell Atlantic Corp. 98,800 5,236
BellSouth Corp. 17,000 848
Carolina Power & Light Co. 300 14
Central & Southwest Corp. 45,200 1,240
Century Telephone Enterprises, Inc. 25,950 1,752
Cincinnati Bell, Inc. 15,700 594
Citizens Utilities Co. Class B (a) 7,623 62
Columbia Energy Group 9,100 526
Comcast Corp. Class A 4,000 230
Comcast Corp. Special Class A 39,900 2,342
Equity I Fund 10
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Consolidated Edison, Inc. 54,300 2,871
Consolidated Natural Gas Co. 100 5
DQE, Inc. 600 26
DTE Energy Co. 74,600 3,198
Energy East Corp. 15,600 881
FirstEnergy Corp. 22,400 729
Florida Progress Corp. 7,400 332
FPL Group, Inc. 31,400 1,935
Frontier Corp. 5,800 197
GPU, Inc. 5,000 221
GTE Corp. 97,789 6,356
Houston Industries, Inc. 18,100 581
Kansas City Power & Light Co. 37,500 1,111
KeySpan Energy (a) 15,180 471
MCI WorldCom, Inc. (a) 285,324 20,472
MCN Corp. 25,900 494
Montana Power Co. 21,500 1,216
National Fuel & Gas Co. 2,000 90
New England Electric System 7,700 371
Nokia Corp. - ADR 149,600 18,017
OGE Energy Corp. 1,100 32
PacifiCorp 123,000 2,591
Paging Network, Inc. (a) 103,200 477
Peco Energy Co. 45,600 1,898
PG&E Corp. 166,200 5,235
Pinnacle West Capital Corp. 24,000 1,017
Public Service Enterprise Group, Inc. 9,700 388
Questar Corp. 26,000 504
SBC Communications, Inc. 150,000 8,045
Sprint Corp. 37,100 3,121
Tele-Communications, Inc. Class A (a) 30,000 1,656
U.S. West, Inc. 1,500 97
Unicom Corp. 58,000 2,237
United States Cellular Corp. (a) 1,600 61
UtiliCorp United, Inc. 2,800 104
Williams Cos. (The) 53,400 1,666
Wisconsin Energy Corp. 10,900 344
---------
133,036
---------
TOTAL COMMON STOCKS
(cost $949,782) 1,314,261
---------
PREFERRED STOCKS - 0.2%
Elsag Bailey Financing Trust (conv.)(a) 18,200 1,103
News Corp., Ltd. - ADR 7,100 175
Sealed Air Corp. Series A New (conv.)(a) 28,200 1,463
---------
TOTAL PREFERRED STOCKS
(cost $2,081) 2,741
---------
PRINCIPAL
AMOUNT
(000)
$
---------
SHORT-TERM INVESTMENTS - 3.9%
Frank Russell Investment Company Money
Market Fund, due on demand (b) 48,812 48,812
United States Treasury Notes
6.250% due 03/31/99 (c) 4,550 4,568
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $53,383) 53,380
---------
TOTAL INVESTMENTS - 99.2%
(identified cost $1,005,246)(d) 1,370,382
OTHER ASSETS AND LIABILITIES,
NET - 0.8% 11,322
---------
NET ASSETS - 100.0% 1,381,704
=========
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral 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
The accompanying notes are an integral part of the financial statements.
11 Equity I Fund
<PAGE>
EQUITY I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
Futures Contracts
(Notes 2 and 3)
S&P 500 Index
expiration date 03/99 180 $ 1,758
-----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 1,758
===========
(S) At December 31, 1998, United States Treasury Notes valued at $4,568 were
held as collateral in connection with futures contracts purchased by the
Fund.
The accompanying notes are an integral part of the financial statements.
Equity I Fund 12
<PAGE>
EQUITY I FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at market (identified cost $1,005,246)(Note 2) ...... $1,370,382
Cash ............................................................. 4,503
Foreign currency holdings (identified cost $99) ................. 97
Receivables:
Dividends and interest .......................................... 1,744
Investments sold ................................................ 8,223
Fund shares sold ................................................ 3,700
Daily variation margin on futures contracts (Notes 2 and 3) .... 153
Short-term investments held as collateral for securities
loaned, at market (Note 3) ...................................... 17,957
----------
Total Assets .................................................. 1,406,759
LIABILITIES
Payables:
Investments purchased ........................... $ 3,981
Fund shares redeemed ............................ 2,170
Accrued fees to affiliates (Note 4) ............. 780
Other accrued expenses .......................... 167
Payable upon return of securities loaned, at
market (Note 3) .................................. 17,957
-------
Total Liabilities ............................................ 25,055
----------
NET ASSETS ...................................................... $1,381,704
==========
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss) ........................... $ 36,846
Unrealized appreciation (depreciation) on:
Investments .................................................... 365,136
Futures contracts .............................................. 1,758
Foreign currency-related transactions .......................... (3)
Shares of beneficial interest ................................... 393
Additional paid-in capital ...................................... 977,574
----------
NET ASSETS ...................................................... $1,381,704
==========
NET ASSET VALUE, offering and redemption price per share:
($1,381,704,452 divided by 39,281,008 shares of $.01 par value
shares of beneficial interest outstanding) .................. $ 35.17
==========
13 Equity I Fund
<PAGE>
EQUITY I FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Dividends ...................................................... $ 16,325
Dividends from Money Market Fund (Note 5) ..................... 2,783
Interest ....................................................... 231
--------
Total Investment Income ...................................... 19,339
EXPENSES (Notes 2 and 4):
Advisory fees .................................... $ 7,570
Administrative fees .............................. 57
Custodian fees ................................... 595
Transfer agent fees .............................. 436
Professional fees ................................ 66
Registration fees ................................ 102
Trustees' fees ................................... 3
Miscellaneous .................................... 80
--------
Total Expenses ................................................... 8,909
--------
Net investment income ............................................... 10,430
--------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ..................................... 114,834
Futures contracts ............................... 7,511
Foreign currency-related transactions ........... 12 122,357
--------
Net change in unrealized appreciation or
depreciation of:
Investments ..................................... 154,099
Futures contracts ............................... 1,329
Foreign currency-related transactions ........... (3) 155,425
-------- --------
Net gain (loss) on investments ..................................... 277,782
--------
Net increase (decrease) in net assets resulting from operations .... $288,212
========
The accompanying notes are an integral part of the financial statements.
Equity I Fund 14
<PAGE>
EQUITY I FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
YEARS ENDED DECEMBER 31,
1998 1997
----------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ........................... $ 10,430 $ 10,379
Net realized gain (loss) ....................... 122,357 250,266
Net change in unrealized appreciation or
depreciation .................................... 155,425 31,174
---------- ----------
Net increase (decrease) in net assets
resulting from operations ..................... 288,212 291,819
---------- ----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ........................... (10,430) (10,379)
In excess of net investment income .............. (64) (26)
Net realized gain on investments ................ (92,776) (260,727)
---------- ----------
Total Distributions to Shareholders ........... (103,270) (271,132)
---------- ----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ..................... 60,389 153,733
---------- ----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ...... 245,331 174,420
NET ASSETS
Beginning of period ............................. 1,136,373 961,953
---------- ----------
End of period ................................... $1,381,704 $1,136,373
========== ==========
The accompanying notes are an integral part of the financial statements.
15 Equity I Fund
<PAGE>
EQUITY I FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........... $ 30.51 $ 30.34 $ 28.00 $ 23.32 $ 24.91
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) .................... .27 .34 .42 .52 .62
Net realized and unrealized gain (loss) on
investments .................................. 7.10 8.89 5.96 7.71 (.41)
---------- ---------- ---------- ---------- ----------
Total Income From Investment Operations ..... 7.37 9.23 6.38 8.23 .21
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS:
Net investment income ......................... (.27) (.34) (.42) (.52) (.62)
Net realized gain on investments .............. (2.44) (8.72) (3.62) (3.03) (.94)
In excess of net realized gain on
investments .................................. -- -- -- -- (.24)
---------- ---------- ---------- ---------- ----------
Total Distributions ......................... (2.71) (9.06) (4.04) (3.55) (1.80)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ................. $ 35.17 $ 30.51 $ 30.34 $ 28.00 $ 23.32
========== ========== ========== ========== ==========
TOTAL RETURN (%)(a) ........................... 25.10 32.02 23.58 35.94 .79
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ..... 1,381,704 1,136,373 961,953 751,497 547,242
Ratios to average net assets (%)(a):
Operating expenses .......................... .70 .70 .71 .59 .12
Net investment income ....................... .82 .96 1.38 1.91 2.52
Portfolio turnover rate (%) ................... 100.68 8.89 99.51 92.04 75.02
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
The accompanying notes are an integral part of the financial statements.
Equity I Fund 16
<PAGE>
EQUITY II FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To maximize total return primarily through capital appreciation and
by assuming a higher level of volatility than 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 seven small capitalization stock fund managers with three
separate and distinct investment styles.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Equity II++ Russell 2500(TM)** Lipper(R)Small Co. Growth++++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,462 $11,943 $12,235
1990 $10,622 $10,166 $10,990
1991 $15,127 $14,914 $16,602
1992 $17,140 $17,328 $18,645
1993 $20,002 $20,193 $21,751
1994 $19,482 $19,980 $21,528
1995 $25,067 $26,314 $28,166
1996 $29,705 $31,322 $33,733
1997 $38,218 $38,951 $40,728
1998 $38,488 $39,101 $40,469
- ----------------------------------------------------------------------------------------------------------------------
Total $236,313 $240,212 $254,847
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
EQUITY II FUND RUSSELL 2500(TM) INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,070 0.70% 1 Year $ 10,038 0.38%
5 Years $ 19,242 13.98%(S) 5 Years $ 19,363 14.13%(S)
10 Years $ 38,488 14.43%(S) 10 Years $ 39,101 14.61%(S)
<CAPTION>
LIPPER(R) SMALL CO. GROWTH FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
-----------------------------------------------
<C> <C> <C>
1 Year $9,936 (0.64)%
5 Years $18,605 13.22%(S)
10 Years $40,469 15.00%(S)
</TABLE>
17 Equity II Fund
<PAGE>
EQUITY II FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Equity II Fund reflected a total
return of 0.7% as compared to the Russell 2500(TM) Index, which gained only
0.4%. The Fund's performance was even better relative to other small cap funds
tracked by Lipper(R) Analytical Services, which lost 0.6% for the year. Good
security selection was the primary factor in achieving positive returns, with
the Fund's growth managers producing the best results.
PORTFOLIO HIGHLIGHTS
Small capitalization stocks lagged large cap issues throughout 1998. The
market's defense against weakening trends in the global economy was to focus on
stocks believed to have better financial strength and growth. The Russell
2000(R) Index lost 2.5% for the year, while the largest stocks in the Russell
1000(R) Index gained more than 40%--an unprecedented spread. Despite the
relative outperformance of growth-oriented funds in the fourth quarter, the
Equity II Fund produced good index-relative results for the year, finishing
slightly ahead of the Russell 2500(TM) Index and well ahead of the average small
cap fund tracked by Lipper. The managers' security selection accounted for the
better performance. Results were particularly good in the Consumer Discretionary
sector, led by retail holdings.
Investment style also had a strong influence on performance in the small cap
market. While small growth stocks were up slightly for the year, small value
stocks finished in negative territory. The Russell 2000(R) Growth Index rose
1.2% during the year, while the Russell 2000(R) Value Index fell 6.5%. The
Equity II Fund's growth-oriented managers produced even better gains than their
benchmark, both up more than 5%. The Value managers struggled through a
difficult environment, with valuation sensitivity contributing to both negative
style and cap effects. The dominance of larger cap stocks was particularly harsh
to the Fund's micro-cap oriented manager, Wellington Management Company LLP.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Mercury Interactive Corp. 0.6%
Lincare Holdings, Inc. 0.6
MedImmune, Inc. 0.6
City National Corp. 0.6
USG Corp. 0.6
Abercrombie & Fitch Co. Class A 0.5
AnnTaylor Stores Corp. 0.5
American Greetings Corp. Class A 0.5
Ross Stores, Inc. 0.4
Avnet, Inc. 0.4
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 21.7x
Portfolio Price/Book Ratio 2.56x
Market Capitalization - $-Weighted Average 1.63 Bil
Number of Holdings 894
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
Westpeak Investment Advisors, L.P. Small Cap-Market-Oriented
* Assumes initial investment on January 1, 1989.
** Russell 2500(TM) Index is composed of the bottom 500 stocks 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 $1.4 billion.
The Russell 2500(TM) Index return reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
+ 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 Advisor upon request.
++ Lipper(R) Small Co. Growth Funds Benchmark 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.
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 18
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
COMMON STOCKS - 90.4%
AUTO AND TRANSPORTATION - 4.8%
AAR Corp. 60,500 1,444
ABC Rail Products Corp. (a) 7,000 85
AirNet Systems, Inc. (a) 6,000 86
Alaska Air Group, Inc. (a) 25,400 1,124
Alexander & Baldwin, Inc. 5,000 114
America West Holding Corp. Class B (a) 39,300 668
Arvin Industries, Inc. 2,600 108
ASA Holdings, Inc. 30,000 911
Avis Rent A Car, Inc. (a) 54,300 1,313
Avondale Industries, Inc. (a) 4,600 133
Bandag, Inc. 6,300 252
Budget Group, Inc. Class A (a) 9,500 151
C.H. Robinson Worldwide, Inc. 6,800 176
Carey International, Inc. New (a) 7,500 129
Coach USA, Inc. (a) 20,000 694
Coachmen Industries, Inc. 71,700 1,882
Comair Holdings, Inc. 43,650 1,465
Consolidated Freightways Corp. (a) 19,900 316
Continental Airlines, Inc. Class B (a) 34,200 1,146
Control Devices, Inc. 8,666 139
Cooper Tire & Rubber Co. 8,400 172
Dollar Thrifty Automotive Group, Inc. (a) 20,100 259
Excel Industries, Inc. 7,000 123
Fleetwood Enterprises, Inc. 27,400 952
Forward Air Corp. (a) 5,000 92
FRP Properties, Inc. (a) 4,000 104
Hawker Pacific Aerospace (a) 35,000 114
Hertz Corp. Class A 4,100 187
Hunt (JB) Transportation Services, Inc. 2,623 60
Keystone Automotive Industries, Inc. (a) 6,000 126
Kirby Corp. (a) 2,400 48
Landair Corp. (a) 15,000 111
Landstar Systems, Inc. (a) 27,000 1,100
M.S. Carriers, Inc. (a) 2,900 94
Mark VII, Inc. (a) 8,000 135
Midas, Inc. 5,100 159
Midwest Express Holdings, Inc. (a) 29,700 781
Monaco Coach Corp. (a) 2,800 74
Monro Muffler Brake, Inc. (a) 15,000 107
Myers Industries, Inc. 3,100 89
National R.V. Holdings, Inc. (a) 37,700 971
Navistar International Corp. (a) 36,200 1,032
Offshore Logistics, Inc. (a) 63,500 740
Polaris Industries, Inc. 22,100 866
Roadway Express, Inc. 3,000 43
Skywest, Inc. 58,950 1,924
Smith (A. O.) Corp. 2,500 61
Tower Automotive, Inc. (a) 32,200 803
Transport Corp. of America (a) 10,000 115
Trinity Industries, Inc. 37,400 1,440
USA Truck, Inc. (a) 11,000 128
Varlen Corp. 11,250 259
Werner Enterprises, Inc. 5,300 93
Wynn's International, Inc. 3,750 83
------
25,781
------
CONSUMER DISCRETIONARY - 17.9%
Abacus Direct Corp. (a) 41,300 1,887
Abercrombie & Fitch Co. Class A (a) 41,450 2,933
ACT Networks, Inc. (a) 44,050 531
Action Performance Companies, Inc. (a) 21,700 765
AMERCO (a) 3,500 98
American Greetings Corp. Class A 62,700 2,575
American Management Systems, Inc. (a) 4,500 180
Ames Department Stores, Inc. (a) 11,200 301
AnnTaylor Stores Corp. (a) 72,050 2,841
ARC International Corp. (a) 16,500 26
Ascent Entertainment Group, Inc. (a) 14,000 102
Aztar Corp. (a) 15,600 79
Barnes & Noble, Inc. (a) 30,000 1,275
Berlitz International, Inc. (a) 2,400 70
Best Buy Co. (a) 17,400 1,068
BHC Communications, Inc. Class A 1,700 207
Big Flower Holdings, Inc. (a) 2,300 51
BJ's Wholesale Club, Inc. (a) 19,000 880
Blair Corp. 4,500 100
Bowne & Co., Inc. 4,600 82
Brinker International, Inc. (a) 10,500 303
Brown Group, Inc. 6,100 107
Brunswick Corp. 7,800 193
Buckle, Inc. (The)(a) 35,700 857
Buffets, Inc. (a) 64,900 771
Cameron Ashley, Inc. (a) 10,000 131
Capstar Broadcasting Corp. Class A (a) 65,000 1,487
Carmike Cinemas, Inc. (a) 4,000 81
Carter-Wallace, Inc. 5,100 100
Cavanaughs Hospitality Corp. (a) 10,000 108
CEC Entertainment, Inc. (a) 67,200 1,865
Central Garden & Pet Co. (a) 3,400 48
Central Newspapers, Inc. Class A 21,000 1,500
Children's Comprehensive Services, Inc. (a) 12,000 161
Chris Craft Industries, Inc. (a) 12,000 578
19 Equity II Fund
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Circus Circus Enterprises, Inc. (a) 17,000 194
Claire's Stores, Inc. 56,800 1,164
Cole National Corp. Class A (a) 8,000 137
Computer Horizons Corp. (a) 71,350 1,891
Consolidated Graphics, Inc. (a) 13,500 912
Cornell Corrections, Inc. (a) 5,000 95
Cox Radio, Inc. Class A (a) 1,300 55
CPI Corp. 3,300 87
Cutter & Buck, Inc. (a) 37,900 1,412
Dan River, Inc. Class A (a) 11,000 129
Darden Restaurants, Inc. 14,600 263
Department 56, Inc. (a) 36,100 1,356
DeVry, Inc. (a) 66,300 2,030
EduTrek International, Inc. Class A (a) 13,000 76
Elder-Beerman Stores Corp. New (a) 28,850 332
Electronics Boutique Holdings Corp. (a) 7,000 143
Ethan Allen Interiors, Inc. 2,000 82
Extended Stay America, Inc. (a) 29,500 310
First Consulting Group, Inc. 25,000 509
Fossil, Inc. (a) 75,325 2,147
Franklin Covey Co. 5,200 87
Furniture Brands International, Inc. (a) 38,100 1,038
Grey Advertising 4,720 1,685
GTECH Holdings Corp. (a) 8,700 223
Handleman Co. (a) 97,300 1,368
Hearst-Argyle Television, Inc. (a) 32,500 1,073
Hollinger International, Inc. Class A 45,000 627
IHOP Corp. New (a) 3,200 127
Insurance Auto Auctions, Inc. (a) 8,000 94
Interim Services, Inc. (a) 62,300 1,456
Iron Mountain, Inc. (a) 4,000 142
ITT Educational Services, Inc. (a) 45,000 1,530
Jacor Communications, Inc. (a) 30,000 1,931
Kellwood Co. 3,500 88
Knight-Ridder, Inc. 24,800 1,268
La-Z-Boy Chair Co. 6,400 114
Lamar Advertising Co. Class A (a) 30,000 1,118
Landry's Seafood Restaurants, Inc. (a) 12,000 87
Learning Tree International, Inc. (a) 12,000 109
Lee Enterprises, Inc. 39,500 1,244
Linens 'n Things, Inc. (a) 6,600 262
Lithia Motors, Inc., Class A (a) 9,100 148
Maxim Group, Inc. (a) 6,000 144
Mazel Stores, Inc. (a) 10,000 129
McClatchy Newspapers, Inc. Class A 46,800 1,656
McGraw-Hill, Inc. 11,000 1,121
Media General, Inc. Class A 1,100 58
MeriStar Hospitality Corp. REIT 67,300 1,249
Metzler Group, Inc. (a) 20,000 973
Michaels Stores, Inc. (a) 3,500 63
Micro Warehouse, Inc. (a) 21,950 741
Mine Safety Appliances Co. 4,100 271
Modis Professional Services, Inc. (a) 57,400 832
Movado Group, Inc. 2,400 63
Musicland Stores Corp. (a) 8,900 133
O'Charleys, Inc. (a) 12,000 168
OfficeMax, Inc. (a) 72,800 892
Ogden Corp. 13,100 328
On Assignment, Inc. (a) 43,000 1,454
Oshkosh B' Gosh, Inc. Class A 6,000 121
Papa Johns International, Inc. (a) 31,900 1,404
Penton Media, Inc. 52,761 1,068
Personnel Group of America, Inc. (a) 8,700 152
Petco Animal Supplies, Inc. (a) 20,000 201
Plantronics, Inc. (a) 1,700 146
Polo Ralph Lauren Corp. Class A New (a) 35,500 681
Premark International, Inc. 23,100 800
Quicksilver, Inc. (a) 30,350 911
Rainforest Cafe, Inc. (a) 19,000 114
RCM Technologies, Inc. (a) 8,000 211
RDO Equipment Co. Class A (a) 12,000 90
Recoton Corp. (a) 2,600 47
Regis Corp. 20,000 799
Rent-Way, Inc. (a) 36,060 877
Reynolds & Reynolds Co. Class A 43,500 998
Richey Electronics, Inc. (a) 12,000 124
Robert Half International, Inc. (a) 13,050 583
Rocky Shoes & Boots, Inc. (a) 15,000 88
Ross Stores, Inc. 60,600 2,382
Ruby Tuesday, Inc. 2,900 62
Rural/Metro Corp. (a) 11,500 125
Ryan's Family Steak Houses, Inc. (a) 104,200 1,289
Saga Communications Class A (a) 7,812 160
Scholastic Corp. (a) 800 43
Schultz Sav-o Stores, Inc. 60,750 995
SCP Pool Corp. (a) 12,000 177
Scripps (E.W.) Co. Class A 25,000 1,244
Shaw Industries, Inc. 2,900 70
Shopko Stores, Inc. (a) 13,200 439
Sport Supply Group, Inc. (a) 16,000 148
Springs Industries, Inc. 7,500 311
StaffMark, Inc. (a) 32,400 725
Stage Stores, Inc. (a) 11,000 103
Ticketmaster Online-CitySearch, Inc.
Class B (a) 8,000 456
Tiffany & Co. 20,500 1,062
TJX Cos., Inc. 32,900 954
TMP Worldwide, Inc. (a) 19,850 844
Tommy Hilfiger Corp. (a) 17,700 1,062
Equity II Fund 20
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
TRM Copy Centers Corp. (a) 10,000 75
Unifirst Corp. 3,100 71
Unisource Worldwide, Inc. 20,000 145
United Stationers, Inc. (a) 39,600 1,059
United Television, Inc. 11,000 1,231
Urban Outfitters, Inc. (a) 6,300 109
Value City Department Stores, Inc. (a) 60,600 845
Viad Corp. 4,000 122
Wackenhut Corrections Corp. (a) 34,200 979
Warnaco Group, Inc. Class A 35,700 901
Washington Post Co. Class B 3,700 2,137
West Marine, Inc. (a) 15,500 151
Wiley (John) & Son Inc. Class A 2,000 97
Wilsons The Leather Experts, Inc. (a) 11,000 118
World Color Press, Inc. (a) 18,800 572
Youth Services International, Inc. (a) 14,000 53
Zale Corp. (a) 26,300 848
------
95,338
------
CONSUMER STAPLES - 2.4%
Aurora Foods, Inc. (a) 31,000 614
Block Drug Co., Inc. Class A 18,971 820
Canandaigua Brands Co., Inc.
Class A (a) 5,100 294
Coca-Cola Bottling Co. Consolidated 16,000 928
Coors (Adolph) Co. Class B 3,100 175
Corn Products International, Inc. 15,200 462
Dole Food, Inc. 6,900 207
Earthgrains Co. 67,600 2,090
Golden State Vintners, Inc. Class B (a) 45,000 473
Hormel (George A.) & Co. - Hormel Foods Corp. 2,100 69
IBP, Inc. 50,500 1,471
International Multifoods Corp. 900 23
McCormick & Co., Inc. 6,600 223
Nature's Sunshine Products, Inc. 7,000 105
Performance Food Group Co. (a) 2,100 59
Pilgrim's Pride Corp. 3,200 64
Ralcorp Holdings, Inc. (a) 6,000 110
Schweitzer-Mauduit International, Inc. 7,000 108
Smithfield Foods, Inc. (a) 1,900 64
Standard Commercial Corp. 13,500 116
SuperValu, Inc. 41,300 1,155
Tootsie Roll Industries, Inc. 39,100 1,530
U.S. Foodservice (a) 18,700 916
Universal Corp. 9,100 320
Universal Foods Corp. 18,600 510
Vlasic Foods International, Inc. (a) 3,300 79
------
12,985
------
FINANCIAL SERVICES - 17.0%
Advanta Corp. Class A 4,900 64
Advest Group, Inc. (The) 1,200 22
Affiliated Computer Services, Inc. Class A (a) 5,000 225
Affiliated Managers Group, Inc. (a) 4,300 128
Alleghany Corp. (a) 700 132
American Bank Note Holographics, Inc. (a) 35,000 613
American Bankers Insurance Group, Inc. 2,600 126
American Financial Group, Inc. 8,200 360
AmeriCredit Corp. (a) 5,400 75
Amplicon, Inc. 9,600 144
AMRESCO, Inc. (a) 8,400 74
Amwest Insurance Group, Inc. 10,000 143
Andover Bancorp, Inc. 1,600 54
Area Bancshares Corp. 2,900 75
Astoria Financial Corp. 30,000 1,373
BancorpSouth, Inc. 2,300 42
Bank Plus Corp. (a) 13,000 56
Bank United Corp. Class A 1,200 47
BankAtlantic Bancorp, Inc. 48,000 342
BankAtlantic Bancorp, Inc. Class A 61,540 396
Bank North Group, Inc. 9,500 355
Bear Stearns Cos., Inc. 28,870 1,078
BISYS Group, Inc. (a) 30,000 1,544
Brookline Bancorp., Inc. 3,200 37
Burnham Pacific Properties, Inc. 9,900 119
Carolina First Corp. 3,000 76
CCA Prison Realty Trust 19,400 398
Centris Group, Inc. 112,000 1,092
Centura Banks, Inc. 2,200 164
Charter One Financial, Inc. 36,750 1,018
Chartwell Re Corp. 1,300 31
Chicago Title Corp. 7,000 329
Chittenden Corp. 100 3
Citizens Banking Corp. 1,500 50
City National Corp. 76,900 3,200
Clark/Bardes Holdings, Inc. (a) 15,500 256
CNB Bancshares, Inc. 4,400 205
Colonial BancGroup, Inc. 77,300 928
Commerce Bancorp, Inc. 6,000 315
Commerce Bancshares, Inc. 15,157 640
Commerce Group, Inc. 2,600 92
Commercial Federal Corp. 11,000 255
Commonwealth Bancorp, Inc. 3,400 53
Community Bank System, Inc. 31,100 912
Compass Bancshares, Inc. 2,500 95
Conning Corp. New 3,000 62
CORT Business Services Corp. (a) 27,500 667
21 Equity II Fund
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
CORUS Bankshares, Inc. 1,300 42
Cullen Frost Bankers, Inc. 11,200 615
Data Transmission Network Corp. (a) 6,000 172
Delphi Financial Group, Inc. (a) 2,022 106
Delta Financial Corp. (a) 8,700 52
Dime Bancorp, Inc. 54,300 1,435
Dime Community Bancorp, Inc. 3,500 72
Donaldson, Lufkin & Jenrette, Inc. 42,000 1,722
Donegal Group, Inc. 71,288 1,105
Doral Financial Corp. 57,700 1,276
Downey Financial Corp. 44,995 1,145
DST Systems, Inc. (a) 32,200 1,836
Duke Realty Investments, Inc. 42,000 977
E.W. Blanch Holdings, Inc. 1,600 76
Eaton Vance Corp. 1,000 21
Enhance Financial Services Group, Inc. 9,500 285
EVEREN Capital Corp. 2,500 57
Everest Reinsurance Holdings, Inc. 10,000 389
Executive Risk, Inc. 30,000 1,648
EXEL Limited Class A 17,500 1,313
FBL Financial Group, Inc. Class A 6,500 158
Fidelity National Financial 66,176 2,018
Financial Federal Corp. (a) 1,600 40
Financial Security Assurance Holdings, Ltd 10,500 570
First American Financial Corp. 61,350 1,971
First Bancorp. 26,500 800
First Republic Bank (a) 11,200 281
First Washington Bancorp, Inc. 2,530 60
FirstFed Financial Corp. (a) 51,500 921
FirstMerit Corp. 1,800 48
Flagstar Bancorp, Inc. 5,100 133
Flushing Financial Corp. 9,300 147
Freedom Securities Corp. 10,300 156
Fremont General Corp. 49,400 1,223
Fund American Cos., Inc. 1,600 224
Golden State Bancorp, Inc. (a) 72,200 1,200
Greenpoint Financial Corp. 14,500 509
Hamilton Bancorp, Inc. (a) 2,300 60
HCC Insurance Holdings, Inc. 9,600 169
HealthCare Financial Partners, Inc. (a) 35,000 1,373
Heller Financial, Inc. Class A 19,100 561
Hibernia Corp. 6,000 104
Hoenig Group, Inc. (a) 12,000 84
Horace Mann Educators Corp. 35,000 998
HSB Group, Inc. 9,300 382
Imperial Credit Industries, Inc. (a) 6,016 50
IndyMac Mortgage Holdings, Inc. REIT 48,900 517
Intercontinental Life Corp. (a) 5,400 104
Interpool, Inc. 3,600 60
Investors Financial Services Corp. 11,200 664
IPC Holdings, Ltd. 36,700 835
Jack Henry & Associates, Inc. 25,000 1,244
JSB Financial, Inc. 2,500 136
LandAmerica Financial Group, Inc. 28,900 1,612
Legg Mason, Inc. 40,000 1,262
Liberty Financial Cos., Inc. 3,500 95
Life USA Holdings, Inc. 8,000 102
LINC Capital, Inc. (a) 10,000 79
Litchfield Financial Corp. 6,000 114
M & T Bank Corp. 500 259
MAF Bancorp, Inc. 2,400 63
Markel Corp. (a) 6,500 1,177
Metris Companies, Inc. 24,500 1,222
Midland Co. 3,000 72
Mutual Risk Management, Ltd. 19,150 749
NAC Reinsurance Corp. 5,900 277
National City Bancorporation (a) 4,900 125
National Data Corp. 20,000 974
National Western Life Insurance Co. Class A (a) 2,900 339
Nationwide Financial Services, Inc. Class A 20,000 1,034
Ocean Financial Corp. 4,600 76
Ohio Casualty Corp. 6,100 251
Old National Bancorp 1,000 56
One Valley Bancorp of West Virginia, Inc. 3,500 115
Pacific Gulf Properties, Inc. 5,000 100
Paychex, Inc. 35,000 1,800
Penn Treaty American Corp. (a) 4,400 119
Pennsylvania Real Estate Investment Trust 5,000 97
Peoples Heritage Financial Group 61,724 1,234
Pinnacle Banc Group, Inc. 1,800 50
PMI Group, Inc. (The) 7,900 390
Price (T. Rowe) & Associates, Inc. 35,000 1,186
Profit Recovery Group International, Inc. (The)(a) 20,000 750
Protective Life Corp. 38,350 1,527
Provident Bankshares Corp. 10,798 269
PXRE Corp. 36,786 922
Queens County Bancorp 8,997 267
Raymond James Financial, Inc. 40,900 864
Reliance Bancorp, Inc. 6,400 178
Reliance Group Holdings, Inc. 39,100 503
RenaissanceRe Holdings, Ltd. 33,300 1,220
Republic Bancorp, Inc. 5,362 73
Resource Bancshares Mortgage Group 64,000 1,040
Richmond County Financial Corp. 6,900 111
Equity II Fund 22
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Riggs National Corp. 17,200 349
RLI Corp. 4,750 158
Rollins Truck Leasing Corp. 17,700 261
Roslyn Bancorp, Inc. 28,600 610
Ryder System, Inc. 13,200 343
Scottish Annuity & Life Holdings, Ltd. (a) 8,500 117
Seacoast Financial Services Corp. (a) 11,000 112
SEI Corp. 1,000 99
Selective Insurance Group, Inc. 51,500 1,043
Silicon Valley Bancshares (a) 10,100 172
Smith (Charles E.) Residential Realty, Inc. 36,600 1,176
Sovereign Bancorp, Inc. 107,727 1,522
Sovran Self Storage, Inc. 31,800 799
Staten Island Bancorp, Inc. 14,000 279
Stewart Information Services Corp. 28,200 1,635
SunGard Data Systems (a) 45,000 1,785
Transatlantic Holdings, Inc. 16,800 1,268
U.S. Trust Corp. 1,900 144
UniCapital Corp. New (a) 18,800 139
Union Planters Corp. 24,302 1,101
United Bankshares, Inc. 4,000 106
United Companies Financial Corp. 29,000 98
United Fire & Casualty Co. 25,575 854
Washington Federal, Inc. 17,232 461
Webster Financial Corp. 53,400 1,465
Westamerica Bancorporation 38,000 1,396
Western Bancorp 2,000 58
-------
90,912
-------
HEALTH CARE - 8.7%
Agouron Pharmaceuticals, Inc. (a) 6,500 381
Alkermes, Inc. (a) 20,000 440
Alpharma, Inc. Class A 30,900 1,091
American Dental
Partners, Inc. New (a) 55,600 643
American Retirement Corp. (a) 1,700 27
AmeriSource Health Corp. Class A (a) 4,100 267
AmSurg Corp. Class A (a) 16,600 116
Anesta Corp. (a) 30,450 807
ARV Assisted Living, Inc. (a) 25,000 153
Assisted Living Concepts, Inc. (a) 8,000 105
Balanced Care Corp. (a) 16,700 134
Ballard Medical Products 12,400 301
Bausch & Lomb, Inc. 6,300 378
Bergen Brunswig Corp. Class A 20,600 718
Beverly Enterprises, Inc. (a) 45,600 308
Bindley Western Industries, Inc. 23,700 1,167
Biosite Diagnostics, Inc. (a) 20,000 238
Cooper Companies, Inc. (a) 31,800 658
CorVel Corp. (a) 3,200 113
Curative Health Services Inc. (a) 20,000 650
Empi, Inc. (a) 4,400 109
Express Scripts, Inc. Class A (a) 17,900 1,184
First Health Group Corp. (a) 50,000 825
Hanger Orthopedic Group, Inc. (a) 27,900 628
HCR Manor Care, Inc. (a) 26,500 778
Health Management Associates Class A (a) 50,000 1,081
Healthcare Services Group, Inc. (a) 12,200 113
Hooper Holmes, Inc. 4,400 128
Human Genome Sciences, Inc. (a) 15,500 548
IDEXX Laboratories, Inc. (a) 55,600 1,487
Immucor Corp. (a) 15,000 129
Immunex Corp. (a) 2,700 338
Incyte Pharmaceuticals, Inc. (a) 15,000 559
Integrated Health Services, Inc. (a) 89,000 1,257
Jones Pharma, Inc. 30,000 1,093
Lincare Holdings, Inc. (a) 79,600 3,224
Lunar Corp. (a) 9,000 87
Maxxim Medical, Inc. (a) 2,000 60
MedImmune, Inc. (a) 32,400 3,220
Monarch Dental Corp. New (a) 8,500 34
Natural Alternatives International, Inc. (a) 8,000 86
OEC Medical Systems, Inc. (a) 36,600 1,151
Osteotech, Inc. (a) 20,550 958
Owens & Minor, Inc., Holding Co. 10,100 159
PacifiCare Health Systems, Inc. Class B (a) 26,700 2,121
Pediatric Services of America, Inc. (a) 15,000 49
Pediatrix Medical Group (a) 18,000 1,079
Penwest Pharmaceuticals Co. (a) 12,000 77
Pharmaceutical Product Development, Inc. (a) 34,300 1,031
PMR Corp. (a) 9,600 73
ProMedCo Management Co. (a) 21,200 127
Protocol Systems, Inc. (a) 12,000 83
Province Healthcare Co. New (a) 26,800 945
Quest Diagnostics, Inc. (a) 9,100 162
Quintiles Transnational Corp. (a) 27,300 1,455
Renal Care Group, Inc. (a) 15,425 447
Res-Care, Inc. (a) 2,000 49
ResMed, Inc. (a) 22,400 1,014
Respironics, Inc. (a) 6,000 120
Roberts Pharmaceutical Corp. (a) 17,000 370
Safeskin Corp. (a) 2,500 60
Sepracor, Inc. (a) 9,250 815
Sola International, Inc. (a) 33,000 569
STAAR Surgical Co. (a) 13,000 101
Steris Corp. (a) 47,300 1,345
23 Equity II Fund
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Sunrise Assisted Living, Inc. (a) 25,000 1,288
Total Renal Care Holdings, Inc. (a) 10,000 296
Trigon Healthcare, Inc. (a) 45,950 1,715
Twinlab Corp. (a) 67,600 883
U.S. Vision, Inc. New (a) 12,000 90
United Payors & United Providers, Inc. (a) 4,600 132
Universal Health Services, Inc. Class B (a) 4,900 254
UroCor, Inc. (a) 18,000 110
Urologix, Inc. (a) 14,000 58
Vencor, Inc. (a) 62,100 279
Veterinary Centers of America, Inc. (a) 6,000 119
VISX, Inc. (a) 14,800 1,293
Weider Nutrition International, Inc. Class A 18,000 115
------
46,655
------
INTEGRATED OILS - 0.3%
Cross Timbers Oil Co. 77,525 581
Giant Industries, Inc. 38,900 365
Tesoro Petroleum Corp. (a) 18,100 219
TransMontaigne, Inc. (a) 21,000 318
------
1,483
------
MATERIALS AND PROCESSING - 8.8%
ACX Technologies, Inc. (a) 3,400 45
Advanced Energy Industries, Inc. (a) 6,000 153
Agrium, Inc. 76,500 665
AK Steel Holding Corp. 23,100 543
Albany International Corp. Class A 6,426 122
Albemarle Corp. 2,100 50
American Buildings Co. (a) 5,000 115
Applied Extrusion Technologies, Inc. (a) 18,000 144
AptarGroup, Inc. 52,900 1,484
ASARCO, Inc. 26,400 398
Ball Corp. 26,000 1,190
Banta Corp. 32,500 890
Boise Cascade Corp. 41,700 1,292
Bowater, Inc. 33,100 1,372
Building Materials Holding Corp. (a) 12,000 143
Burlington Industries, Inc. (a) 23,800 262
BWay Corp. (a) 7,000 105
Cambrex Corp. 4,300 103
Carbide/Graphite Group, Inc. (The)(a) 8,000 118
Carpenter Technology Corp. 7,300 248
Centex Construction Products, Inc. 34,200 1,388
Centex Corp. 26,800 1,207
Channell Commercial Corp. (a) 8,000 67
Chemed Corp. 4,400 147
Chesapeake Corp. 14,800 546
Citation Corp. (a) 9,400 118
Cleveland-Cliffs, Inc. 17,600 710
Comfort Systems USA, Inc. (a) 12,450 223
Commercial Metals Co. 11,400 316
Cyprus Amax Minerals Co. 45,800 458
Dayton Superior Corp. Class A (a) 4,400 85
Easco, Inc. 11,000 84
Elcor Chemical Corp. 30,700 992
Engle Homes, Inc. 8,300 127
Ennis Business Forms, Inc. 78,000 775
Ethyl Corp. 21,200 123
Fuller (H.B.) Co. 2,200 101
Geon Co. 5,800 133
Giant Cement Holding, Inc. (a) 4,000 99
Granite Construction, Inc. 12,000 403
Great Lakes Chemical Corp. 25,500 1,020
Harsco Corp. 11,800 359
Homestake Mining Co. 81,200 746
Hughes Supply, Inc. 5,500 161
IMCO Recycling, Inc. 9,000 139
Interface, Inc. 9,000 83
Kaydon Corp. 16,800 673
Lafarge Corp. 2,100 85
Lesco, Inc. 9,600 124
Lone Star Industries, Inc. 47,200 1,738
Louisiana Pacific Corp. 67,500 1,236
Martin Marietta Materials, Inc. 1,400 87
MAXXAM, Inc. (a) 1,100 63
McWhorter Technologies, Inc. (a) 3,000 69
Mead Corp. 35,500 1,041
Millennium Chemicals, Inc. 51,300 1,020
Minerals Technologies, Inc. 34,900 1,428
Mississippi Chemical Corp. 11,300 158
Mohawk Industries, Inc. (a) 3,500 147
Morrison Knudsen Corp. (a) 8,900 87
NCH Corp. 2,000 119
NCI Building Systems, Inc. (a) 39,300 1,104
New England Business Service, Inc. 1,600 63
NN Ball & Roller, Inc. 18,000 108
Nortek, Inc. (a) 5,200 144
Northland Cranberries, Inc. Class A 7,000 63
Pan Pacific Retail Properties, Inc. 7,000 140
Penford Corp. 4,000 64
Phelps Dodge Corp. 20,400 1,037
Plum Creek Timber Co. L.P. 29,000 756
Potlatch Corp. 9,800 361
Primex Technologies, Inc. 2,200 94
Equity II Fund 24
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Quaker Fabric Corp. (a) 12,000 76
Quanex Corp. 4,700 106
Rayonier, Inc. 7,000 322
Redwood Trust, Inc. 4,900 69
Reliance Steel & Aluminum Co. 3,900 108
Rock of Ages Corp. Class A (a) 8,000 110
RPM, Inc. (Ohio) 22,700 363
Schulman (A.), Inc. 41,300 929
Security Capital Group, Inc. Class B (a) 12,900 175
SIFCO Industries 57,000 709
Simpson Manufacturing Co., Inc. (a) 1,900 71
Southdown, Inc. 20,000 1,184
Spartech Corp. 3,400 75
SPS Technologies, Inc. (a) 2,100 119
St. Joe Co. (The) 42,500 996
Stepan Co. 2,000 53
Synalloy Corp. 12,000 107
Temple-Inland, Inc. 20,600 1,222
Texas Industries, Inc. 38,000 1,023
Thomas Industries, Inc. 700 14
Universal Stainless & Alloy Products, Inc. (a) 9,000 66
USG Corp. 58,000 2,953
USX-U.S. Steel Group 43,700 1,005
Valley National Gases, Inc. (a) 12,000 68
W.R. Grace & Co. (a) 21,400 336
Waters Corp. (a) 4,500 393
Webb (Del E.) Corp. 34,800 959
Wellman, Inc. 11,000 112
Wellsford Real Properties, Inc. (a) 10,000 103
Westvaco Corp. 29,700 796
WHX Corp. (a) 6,400 64
Wolverine Tube, Inc. (a) 4,000 84
Worthington Industries, Inc. 26,600 333
------
47,164
------
MISCELLANEOUS - 1.3%
Agribrands International, Inc. (a) 6,500 195
Building One Services Corp. (a) 16,200 334
ChoicePoint, Inc. (a) 14,000 903
Griffon Corp. (a) 82,300 874
Labor Ready, Inc. New (a) 56,700 1,116
LNR Property Corp. 53,000 1,057
MAXIMUS, Inc. (a) 40,700 1,506
Pameco Corp. (a) 7,000 81
Quest Education Corp. (a) 12,000 119
URS Corp. (a) 37,300 872
------
7,057
------
OTHER ENERGY - 2.8%
Atwood Oceanics, Inc. (a) 24,200 411
Barrett Resources Corp. (a) 10,700 257
Bayard Drilling Technologies, Inc. (a) 25,000 125
BEC Energy 5,400 222
BJ Services Co. (a) 70,000 1,094
Calenergy, Inc. (a) 5,900 205
Chesapeake Energy Corp. 17,200 15
Coho Energy, Inc. (a) 17,181 48
Cooper Cameron Corp. (a) 66,850 1,638
Costilla Energy, Inc. (a) 10,000 39
Devon Energy Corp. 15,400 473
Eastern Enterprises, Inc. 13,400 586
Evergreen Resources, Inc. (a) 4,700 83
Global Industries, Inc. (a) 85,950 526
Hanover Compressor Co. (a) 30,800 791
Horizon Offshore, Inc. (a) 15,000 83
HS Resources, Inc. (a) 4,800 36
Mallon Resources Corp. (a) 20,000 136
Mitcham Industries, Inc. (a) 18,000 83
Northwestern Corp. 6,600 174
Nuevo Energy Co. (a) 9,300 107
Octel Corp. (a) 17,500 243
OMNI Energy Services Corp. New (a) 15,400 65
ONEOK, Inc. 14,200 513
Pool Energy Services Co. (a) 68,300 734
Rowan Cos., Inc. (a) 113,100 1,131
Santa Fe International Corp. 41,300 604
Seacor Holdings, Inc. (a) 21,700 1,074
Seitel, Inc. (a) 9,800 122
Supreme Industries, Inc. Class A (a) 12,981 125
Tidewater, Inc. 4,000 93
Titan Exploration, Inc. (a) 18,000 119
Transocean Offshore, Inc. 24,000 644
Ultramar Diamond Shamrock Corp. 38,300 929
Unit Corp. (a) 18,000 75
Valero Energy Corp. 36,700 780
Vintage Petroleum, Inc. 70,950 612
Willbros Group, Inc. (a) 6,000 33
Wiser Oil Co. 79,700 159
-------
15,187
-------
PRODUCER DURABLES - 6.3%
Advanced Lighting
Technologies, Inc. (a) 15,000 146
AFC Cable Systems, Inc. (a) 7,200 241
Ag-Chem Equipment Co., Inc. (a) 10,000 108
American Power Conversion Corp. (a) 27,800 1,345
Applied Power, Inc., Class A 4,250 160
Astec Industries, Inc. (a) 8,300 459
Bell Industries (a) 57,129 650
25 Equity II Fund
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Briggs & Stratton Corp. 3,300 165
C&D Technologies, Inc. 12,100 333
Cascade Corp. 8,000 127
CFM Technologies, Inc. (a) 12,400 102
Champion Enterprises, Inc. (a) 34,200 936
Cohu, Inc. 33,400 735
Columbus McKinnon Corp. 39,000 687
Commercial Intertech Corp. 4,100 53
Cordant Technologies, Inc. 6,000 225
Crane Co. 4,550 137
Cummins Engine Co., Inc. 27,200 966
Curtiss-Wright Corp. 2,100 80
D.R. Horton, Inc. 49,300 1,134
Detroit Diesel Corp. (a) 9,000 186
EG&G, Inc. 25,000 695
FARO Technologies, Inc. (a) 25,000 100
Farr Co. (a) 13,500 132
FLIR Systems, Inc. (a) 9,000 209
General Cable Corp. 5,800 119
Gleason Corp. 3,500 63
Gradall Industries, Inc. (a) 10,000 144
Gulfstream Aerospace Corp. (a) 17,300 921
Harnischfeger Industries, Inc. 31,600 322
Helix Technology Corp. 11,200 144
Holophane Corp. (a) 4,000 103
Itron, Inc. (a) 7,500 53
JLG Industries, Inc. 49,100 767
Kaman Corp. Class A 5,900 94
Kaufman & Broad Home Corp. 28,500 819
Kellstrom Industries, Inc. (a) 3,700 106
Kennametal, Inc. 29,500 627
KLA Instruments Corp. (a) 27,000 1,171
Lennar Corp. 66,100 1,669
Litton Industries, Inc. (a) 21,600 1,409
M.D.C. Holdings, Inc. 17,600 376
Middleby Corp. (The)(a) 22,000 80
Moog Inc. (a) 2,100 82
MTS Systems Corp. 17,600 233
Newmark Homes Corp. (a) 15,000 105
NVR, Inc. (a) 21,800 1,040
Oak Industries, Inc. (a) 5,400 189
OYO Geospace Corp. (a) 8,000 66
Perceptron, Inc. (a) 3,000 19
Pittway Corp. Class A 41,122 1,360
Powell Industries, Inc. (a) 12,000 120
Power-One, Inc. (a) 14,000 98
PRI Automation, Inc. (a) 3,000 77
Pulte Corp. 62,100 1,727
Ryland Group, Inc. 46,500 1,343
Spectra-Physics Lasers, Inc. (a) 2,500 22
Starrett (L.S.) Co. Class A 25,200 865
STM Wireless, Inc. Class A (a) 10,900 52
Superior TeleCom, Inc. 2,800 132
TB Wood's Corporation 8,000 97
Tecumseh Products Co. Class A 3,700 171
Teradyne, Inc. (a) 32,500 1,377
Terex Corp. (a) 40,200 1,148
Toll Brothers, Inc. (a) 38,500 869
TransTechnology Corp. 4,300 89
TriStar Aerospace Co. (a) 21,200 148
U.S. Home Corp. (a) 7,900 263
Uniphase Corp. (a) 31,550 2,188
Worldtex, Inc. (a) 15,000 54
York International Corp. 8,200 335
------
33,367
------
TECHNOLOGY - 14.1%
ADAC Laboratories (a) 5,900 118
Advanced Micro Devices, Inc. (a) 26,500 767
Allen Telecom, Inc. (a) 20,000 134
Alliant Techsystems, Inc. (a) 2,600 214
American Xtal Technology, Inc. (a) 11,200 102
Apple Computer, Inc. (a) 12,100 495
Ardent Software, Inc. (a) 29,750 675
Arrow Electronics, Inc. (a) 8,600 230
Aspect Development, Inc. (a) 32,400 1,446
AstroPower, Inc. (a) 13,000 122
Avant! Corp. (a) 10,800 171
Avnet, Inc. 36,800 2,226
BEA Systems, Inc. (a) 55,000 670
Bell & Howell Co. (a) 7,300 276
BindView Development Corp. (a) 48,950 1,334
Broadcom Corp. Class A (a) 3,550 427
BTG, Inc. (a) 10,000 58
Business Objects SA - ADR (a) 51,600 1,677
Cable Design Technologies Corp. (a) 64,400 1,191
CACI International, Inc. Class A (a) 7,000 118
Cambridge Technology Partners, Inc. (a) 30,000 662
Celeritek, Inc. (a) 20,200 61
CFI ProServices, Inc. (a) 8,800 98
CHS Electronics, Inc. (a) 71,400 1,209
Citrix Systems, Inc. (a) 12,000 1,164
CNET, Inc. (a) 29,900 1,592
Computer Management Sciences, Inc. (a) 5,200 88
Compuware Corp. (a) 22,850 1,784
Comverse Technology, Inc. (a) 22,100 1,568
Concord Communications, Inc. (a) 22,900 1,305
Cotelligent Group, Inc. (a) 8,000 171
CSG Systems International, Inc. (a) 800 63
Digi International, Inc. (a) 17,600 193
Equity II Fund 26
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Digital Link Corp. (a) 25,000 131
Electronics For Imaging, Inc. (a) 38,500 1,538
Esterline Corp. (a) 3,100 67
Exar Corp. (a) 8,000 127
Excel Switching Corp. New (a) 13,200 502
Excel Technology, Inc. (a) 15,000 153
Excite, Inc. (a) 19,150 804
Exodus Communications, Inc. (a) 10,000 643
Genesys Telecommunications Laboratories, Inc. (a) 20,100 452
GeoTel Communications Corp. (a) 20,400 755
Gerber Scientific, Inc. 9,500 226
Harmon Industries, Inc. 10,400 240
HNC Software, Inc. (a) 25,300 1,021
IDX Systems Corp. (a) 23,900 1,052
Imation Corp. (a) 13,200 231
Infoseek Corp. (a) 25,000 1,231
Integrated Circuit Systems, Inc. (a) 9,000 159
Integrated Electrical Services, Inc. (a) 3,000 67
Integrated Silicon Solution, Inc. (a) 117,500 367
InterVoice, Inc. (a) 23,300 804
ITI Technologies, Inc. (a) 5,700 177
Keane, Inc. (a) 14,050 561
LCC International, Inc. Class A (a) 17,000 64
Linear Technology Corp. 12,050 1,078
LSI Logic Corp. (a) 58,000 935
Macromedia, Inc. (a) 57,100 1,916
Manhattan Associates, Inc. (a) 15,000 409
MAPICS, Inc. (a) 18,400 304
Marshall Industries (a) 4,000 98
Mechanical Dynamics, Inc. (a) 20,000 161
Mercury Interactive Corp. (a) 52,850 3,336
Micron Electronics, Inc. (a) 8,600 148
MICROS Systems, Inc. (a) 7,900 254
Microsemi Corp. (a) 15,000 165
MicroStrategy, Inc. (a) 15,000 467
MIPS Technologies, Inc. (a) 7,100 227
National Computer Systems, Inc. 12,700 467
NeoMagic Corp. (a) 45,500 1,004
Network Appliance, Inc. (a) 32,000 1,432
Newbridge Networks Corp. (a) 42,000 1,276
Open Text Corp. (a) 23,550 571
Optek Technology, Inc. (a) 7,000 128
OrCad, Inc. (a) 18,000 153
OSI Systems, Inc. New (a) 13,000 106
P-COM, Inc. (a) 30,000 119
Par Technology Corp. (a) 15,000 90
Pericom Semiconductor Corp. New (a) 14,000 151
Pioneer-Standard Electronics, Inc. 3,400 32
PMC - Sierra, Inc. (a) 10,000 630
Polycom, Inc. (a) 34,100 761
Progress Software Corp. (a) 4,200 142
Proxim, Inc. (a) 15,400 411
PSINET, Inc. (a) 50,000 1,044
QLogic Corp. (a) 1,200 156
QuadraMed Corp. (a) 36,700 752
Rational Software Corp. (a) 53,850 1,420
REMEC, Inc. (a) 7,000 126
RF Micro Devices, Inc. (a) 17,200 790
Sanmina Corp. (a) 2,600 162
ScanSource, Inc. (a) 6,000 128
SDL, Inc. (a) 4,700 184
SeaChange International, Inc. (a) 18,000 108
Seagate Technology (a) 47,550 1,437
Semtech Corp. (a) 25,400 902
Silicon Graphics, Inc. (a) 27,600 355
Sterling Software, Inc. (a) 58,900 1,593
Stoneridge, Inc. (a) 11,000 250
Symbol Technologies, Inc. 10,400 665
Synopsys, Inc. (a) 20,000 1,083
Tech-Sym Corp. (a) 33,500 745
Tekelec, Inc. (a) 53,700 889
Telxon Corp. 700 10
THQ, Inc. (a) 32,400 903
Transaction Systems Architects, Inc.
Class A (a) 30,000 1,503
TSI International Software, Ltd. (a) 23,000 1,110
USWeb Corp. (a) 29,150 765
Verilink Corp. (a) 20,500 76
VeriSign, Inc. (a) 10,000 591
Veritas Software Corp. (a) 17,000 1,017
Verity, Inc. (a) 24,450 646
VideoServer, Inc. (a) 13,200 244
Vitesse Semiconductor Corp. (a) 24,650 1,122
Whittman-Hart, Inc. (a) 21,700 601
Wind River Systems, Inc. (a) 21,600 1,013
Xircom, Inc. (a) 57,650 1,960
Xylan Corp. (a) 3,500 63
------
75,165
------
UTILITIES - 6.0%
AGL Resources, Inc. 12,500 288
American Tower Corp. Class A (a) 6,200 183
American Water Works, Inc. 10,300 348
Aquarion Co. 3,600 148
Atmos Energy Corp. 5,800 187
Aware, Inc. (a) 21,450 583
Bay State Gas Co. 3,400 135
Calpine Corp. (a) 6,400 162
Cellullar Communications of Puerto Rico (a) 59,000 1,077
27 Equity II Fund
<PAGE>
EQUITY II FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Central Hudson Gas & Electric Corp. 5,500 246
Citizens Utilities Co. Class B (a) 145,196 1,180
Cleco Corp. 4,600 158
CMP Group, Inc. 46,500 878
Conectiv, Inc. 27,600 676
Connecticut Energy Corp. 1,700 52
CoreComm, Ltd. (a) 21,500 339
Dycom Industries, Inc. (a) 6,700 383
E'town Corp. 1,600 76
Eastern Utilities Associates 12,500 353
Empire District Electric Co. 2,400 59
Energen Corp. 6,200 121
Energy East Corp. 12,400 701
General Communication, Inc. Class A (a) 16,000 64
Gilat Satellite Networks, Ltd. (a) 18,900 1,042
Global TeleSystems Group, Inc. (a) 17,500 973
Hawaiian Electric Industries, Inc. 27,300 1,099
Illinova Corp. 38,700 968
Indiana Energy, Inc. 4,266 105
Interstate Energy Corp. 19,300 622
IXC Communications, Inc. (a) 22,600 756
Jones Intercable, Inc. Class A (a) 47,700 1,699
K N Energy, Inc. 20,000 728
Laclede Gas Co. 2,000 54
MDU Resources Group, Inc. 9,450 249
Metrocall, Inc. (a) 24,000 108
Minnesota Power & Light Co. 10,900 480
Montana Power Co. 2,900 164
Nevada Power Co. 15,900 413
New Jersey Resources Corp. 2,600 103
Niagara Mohawk Power Corp. (a) 76,200 1,229
NICOR, Inc. 13,200 558
NIPSCO Industries, Inc. 10,300 314
Northeast Utilities (a) 38,700 619
Northwest Natural Gas Co. 3,700 95
NUI Corp. 3,100 83
OGE Energy Corp. 6,900 200
Peoples Energy Corp. 9,800 391
Piedmont Natural Gas Co., Inc. 7,005 253
Potomac Electric Power Co. 13,800 363
Primus Telecommunications Group, Inc. (a) 10,000 163
Public Service Co. of New Mexico 25,500 521
Questar Corp. 1,000 19
Rochester Gas & Electric Corp. 16,600 519
SCANA Corp. 27,300 880
Sierra Pacific Resources 9,000 342
SIG Corp., Inc. 2,500 89
South Jersey Industries, Inc. 3,700 97
Southwest Gas Corp. 33,500 900
St. Joseph Light & Power Co. 7,000 126
Telegroup, Inc. (a) 60,000 77
TNP Enterprises, Inc. 34,200 1,296
UGI Corp. 1,000 24
United Illuminating Co. 10,600 546
United States Cellular Corp. (a) 38,500 1,462
UtiliCorp United, Inc. 33,000 1,211
Washington Gas & Light Co. 10,000 271
Western Resources, Inc. 30,500 1,014
WICOR, Inc. 7,600 166
Wisconsin Energy Corp. 6,600 207
Yankee Energy Systems, Inc. 2,000 58
-------
32,053
-------
TOTAL COMMON STOCKS
(cost $410,580) 483,147
-------
PREFERRED STOCKS - 0.0%
Callon Petroleum Co. Series A (conv.) 1,800 50
Golden Books Financial
Trust (conv.)(a) 5,000 7
-------
TOTAL PREFERRED STOCKS
(cost $243) 57
-------
PRINCIPAL
AMOUNT
(000)
$
-----------
LONG-TERM INVESTMENTS - 0.2%
American Residential Services, Inc.
(conv.)
7.250% due 04/15/04 200 79
Getty Images, Inc. (conv.)
4.750% due 06/01/03 700 580
Res-Care, Inc.
6.000% due 12/01/04 100 138
Titan Corp. (conv.)
8.250% due 11/01/03 45 70
-------
TOTAL LONG-TERM INVESTMENTS
(cost $1,015) 867
-------
Equity II Fund 28
<PAGE>
Equity II Fund
Statement of Net Assets, continued
December 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
SHORT-TERM INVESTMENTS - 9.6%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 48,276 48,276
United States Treasury Notes (c)
6.250% due 03/31/99 2,700 2,711
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $50,987) 50,987
--------
TOTAL INVESTMENTS - 100.2%
(identified cost $462,825)(d) 535,058
OTHER ASSETS AND LIABILITIES,
NET - (0.2%) (1,239)
--------
NET ASSETS - 100.0% 533,819
========
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures
contracts purchased by the Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
FUTURES CONTRACTS
(Notes 2 and 3)
S&P 400 Midcap Index
expiration date 03/99 112 $ 2,268
S&P 500 Index
expiration date 03/99 87 770
----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 3,038
==========
(S) At December 31, 1998, United States Treasury Notes valued at $2,711 were
held as collateral in connection with futures contracts purchased by the
Fund.
The accompanying notes are an integral part of the financial statements.
29 Equity II Fund
<PAGE>
EQUITY II FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at market (identified cost $462,825)(Note 2) .......... $ 535,058
Receivables:
Dividends and interest ............................................ 499
Investments sold .................................................. 2,970
Fund shares sold .................................................. 2,539
Daily variation margin on futures contracts (Notes 2 and 3)........ 679
Short-term investments held as collateral for securities
loaned, at market (Note 3) ........................................ 31,890
----------
Total Assets .................................................... 573,635
LIABILITIES
Payables:
Investments purchased ........................... $ 5,811
Fund shares redeemed ............................ 1,677
Accrued fees to affiliates (Note 4) ............ 357
Other accrued expenses .......................... 81
Payable upon return of securities loaned, at
market (Note 3) ................................. 31,890
----------
Total Liabilities ............................................. 39,816
---------
NET ASSETS ....................................................... $ 533,819
=========
NET ASSETS CONSIST OF:
Undistributed net investment income .............................. $ 178
Accumulated distributions in excess of net realized gain ......... (1,054)
Unrealized appreciation (depreciation) on:
Investments ..................................................... 72,233
Futures contracts ............................................... 3,038
Shares of beneficial interest .................................... 173
Additional paid-in capital ....................................... 459,251
---------
NET ASSETS ....................................................... $ 533,819
=========
NET ASSET VALUE, offering and redemption price per share:
($533,818,977 divided by 17,255,677 shares of $.01 par value
shares of beneficial interest outstanding) ................... $ 30.94
=========
The accompanying notes are an integral part of the financial statements.
Equity II Fund 30
<PAGE>
EQUITY II FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Dividends ....................................................... $ 4,248
Dividends from Money Market Fund (Note 5) ....................... 1,682
Interest ........................................................ 142
-----------
Total Investment Income ........................................ 6,072
EXPENSES (Notes 2 and 4):
Advisory fees ................................... $ 3,771
Administrative fees ............................. 21
Custodian fees .................................. 365
Transfer agent fees ............................. 315
Professional fees ............................... 32
Registration fees ............................... 67
Trustees' fees .................................. 4
Miscellaneous ................................... 44
----------
Total Expenses ................................................. 4,619
-----------
Net investment income ............................................. 1,453
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ..................................... 27,308
Futures contracts ............................... 1,756 29,064
---------- ----------
Net change in unrealized appreciation or
depreciation of:
Investments ..................................... (28,245)
Futures contracts ............................... 2,834 (25,411)
---------- ----------
Net gain (loss) on investments .................................... 3,653
----------
Net increase (decrease) in net assets
resulting from operations ........................................ $ 5,106
==========
The accompanying notes are an integral part of the financial statements.
31 Equity II Fund
<PAGE>
EQUITY II FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
YEARS ENDED DECEMBER 31,
1998 1997
--------- ---------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................... $ 1,453 $ 1,520
Net realized gain (loss) ........................... 29,064 61,756
Net change in unrealized appreciation or
depreciation ........................................ (25,411) 48,513
--------- ---------
Net increase (decrease) in net assets
resulting from operations ......................... 5,106 111,789
--------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................... (1,505) (1,485)
Net realized gain on investments .................... (31,338) (65,718)
In excess of net realized gain on investments ....... (1,054) --
--------- ---------
Total Distributions to Shareholders ............... (33,897) (67,203)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ........................ 80,451 71,618
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .......... 51,660 116,204
NET ASSETS
Beginning of period ................................. 482,159 365,955
--------- ---------
End of period (including undistributed net
investment income of $178 and $230,
respectively) .................................... $ 533,819 $ 482,159
========= =========
The accompanying notes are an integral part of the financial statements.
Equity II Fund 32
<PAGE>
EQUITY II FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..... $ 32.96 $ 30.05 $ 28.88 $ 25.00 $ 26.58
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) ............... .09 .11 .16 .27 .36
Net realized and unrealized gain
(loss) on investments ................... .04 8.11 4.96 6.80 (.86)
-------- -------- -------- -------- --------
Total Income From Investment
Operations ............................ .13 8.22 5.12 7.07 (.50)
-------- -------- -------- -------- --------
DISTRIBUTIONS:
Net investment income ................... (.10) (.11) (.16) (.29) (.31)
Net realized gain on
investments ............................. (1.98) (5.20) (3.79) (2.90) (.21)
In excess of net realized gain on
investments ............................. (.07) -- -- -- (.56)
-------- -------- -------- -------- --------
Total Distributions ................... (2.15) (5.31) (3.95) (3.19) (1.08)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ........... $ 30.94 $ 32.96 $ 30.05 $ 28.88 $ 25.00
======== ======== ======== ======== ========
TOTAL RETURN (%)(a) ...................... .70 28.66 18.51 28.67 (2.60)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted). 533,819 482,159 365,955 279,566 202,977
Ratios to average net assets (%)(a):
Operating expenses .................... .91 .92 .95 .83 .23
Net investment income ................. .29 .35 .52 .97 1.46
Portfolio turnover rate (%) ............. 128.87 103.00 120.78 89.31 58.04
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
33 Equity II Fund
<PAGE>
EQUITY III FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (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 III++ Russell 1000(R)Value** Lipper(R) Equity Income++++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,807 $12,519 $12,050
1990 $12,074 $11,507 $11,295
1991 $15,438 $14,338 $14,269
1992 $17,337 $16,318 $15,608
1993 $19,929 $19,276 $17,757
1994 $20,160 $18,892 $17,308
1995 $27,410 $26,138 $22,459
1996 $33,140 $31,794 $26,630
1997 $44,117 $42,979 $33,962
1998 $49,204 $49,697 $37,725
- -----------------------------------------------------------------------------------------
Total $261,616 $253,458 $219,063
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
EQUITY III FUND RUSSELL 1000(R) VALUE INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ---------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 Year $11,153 11.53% 1 Year $11,563 15.63%
5 Years $24,690 19.81%(S) 5 Years $25,782 20.86%(S)
10 Years $49,204 17.27%(S) 10 Years $49,697 17.39%(S)
<CAPTION>
LIPPER(R) EQUITY INCOME FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
-------------- ----------- -----------
<S> <C> <C>
1 Year $11,108 11.08%
5 Years $21,246 16.27%(S)
10 Years $37,725 14.20%(S)
</TABLE>
35 Equity III Fund
<PAGE>
EQUITY III FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Equity III Fund reflected a total
return of 11.5% as compared to the Russell 1000(R) Value Index, which rose
15.6%. The Fund's underperformance relative to the Index was due primarily to
negative cap effect and to poor results from holdings in the energy sectors.
However, the Fund outperformed the average return of funds in the Lipper(R)
Equity Income Funds Benchmark, which gained only 11% for the year.
PORTFOLIO HIGHLIGHTS
The market's strong performance in 1998 was heavily biased towards growth
stocks. As a result, value-oriented stocks finished the year significantly
behind their growth counterparts, with the Russell 1000 Value Index up 15.6%
versus the 38.7% return of the Russell 1000(R) Growth Index. The strong
performance of technology stocks as well as weakness in the energy sectors
proved to be the biggest factors in the margin of underperformance for value
shares. Investor behavior that continued to pay little heed to valuation was
also a trend in favor of growth shares, particularly those with larger
capitalizations.
These factors posed significant challenges to managers in the Equity III Fund,
given valuation disciplines that favored midcap shares. Valuation sensitivity
had the undesirable effect of limiting the Fund's exposure to higher-priced
sectors. However, portfolio disciplines helped moderate the impact by
maintaining exposure to some higher-priced sectors such as Technology. Cap
effect was also a negative contributor to Fund performance, as large cap stocks
generally carried higher valuations after leading the market over the last few
years.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
International Business Machines Corp. 4.1%
AT&T Corp. 2.8
GTE Corp. 2.5
Exxon Corp. 2.1
SBC Communications, Inc. 1.9
Fleet Financial Group, Inc. 1.8
Ford Motor Co. 1.6
Washington Mutual, Inc. 1.5
Bank One Corp. 1.4
BankAmerica Corp. 1.2
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 19.2x
Portfolio Price/Book Ratio 2.8x
Market Capitalization - $-Weighted Average 40.35 Bil
Number of Holdings 196
MONEY MANAGERS STYLES
Equinox Capital Management, Inc. Value
Trinity Investment Management Corp. Value
Westpeak Investment Advisors, L.P. Large Cap-Value
* Assumes initial investment on January 1, 1989.
** 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.
The Russell 1000 Value Index return reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
++ 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 Advisor upon request.
++++ Lipper(R) Equity Income Funds Benchmark 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.
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 36
<PAGE>
EQUITY III FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
COMMON STOCKS - 94.7%
AUTO AND TRANSPORTATION - 5.8%
AMR Corp. (a) 13,900 825
Burlington Northern Santa Fe Corp. 5,900 199
CSX Corp. 2,800 116
Dana Corp. 11,700 478
Delta Air Lines, Inc. 28,500 1,482
Ford Motor Co. 57,900 3,398
General Motors Corp. 31,700 2,269
Mascotech, Inc. 13,800 236
Navistar International Corp. (a) 21,400 610
Trinity Industries, Inc. 19,100 735
UAL Corp. (a) 8,900 531
USAirways Group, Inc. (a) 23,800 1,239
------
12,118
------
CONSUMER DISCRETIONARY - 7.5%
Alberto Culver Co. Class B 4,700 125
Cracker Barrel Old Country Store, Inc. 14,700 342
Deluxe Corp. 20,500 750
Eastman Kodak Co. 28,593 2,059
Federated Department Stores, Inc. (a) 20,300 884
Fort James Corp. 9,700 388
Fortune Brands, Inc. 15,800 500
Harcourt General, Inc. 100 5
Hasbro, Inc. 16,600 600
JC Penney & Co., Inc. 12,800 600
King World Productions, Inc. (a) 24,400 718
Kmart Corp. (a) 37,200 570
Knight-Ridder, Inc. 9,700 496
Limited, Inc. (The) 12,600 367
MediaOne Group, Inc. (a) 7,200 338
OfficeMax, Inc. (a) 26,600 326
Ogden Corp. 25,500 639
Saks, Inc. (a) 20,200 638
Sears Roebuck & Co. 22,000 935
Service Corp. International 9,100 346
Time Warner, Inc. 13,000 807
Tribune Co. 12,200 805
Tupperware Corp. 17,200 283
Viacom, Inc. Class B (a) 9,300 688
Wendy's International, Inc. 13,400 292
Whirlpool Corp. 24,100 1,335
------
15,836
------
CONSUMER STAPLES - 4.4%
Anheuser-Busch Cos., Inc. 23,200 1,523
ConAgra, Inc. 29,200 920
Dole Food Co., Inc. 22,800 684
Heinz (H.J.) Co. 14,100 798
Hormel Foods Corp. 7,800 255
Interstate Bakeries Corp. 15,000 397
PepsiCo, Inc. 18,600 761
Philip Morris Cos., Inc. 41,300 2,210
Pilgrim's Pride Corp. 10,600 211
SuperValu, Inc. 33,200 930
UST Corp. 15,800 551
------
9,240
------
FINANCIAL SERVICES - 26.7%
Aetna, Inc. 15,000 1,179
Allstate Corp. 28,862 1,115
Ambac Financial Group, Inc. 11,800 710
American General Corp. 19,400 1,513
Associates First Capital Corp. Class A 15,048 638
Bank One Corp. 57,400 2,931
BankAmerica Corp. 42,413 2,550
Chase Manhattan Corp. 35,776 2,435
CIGNA Corp. 17,800 1,376
Comerica, Inc. 19,000 1,296
Commerce Bancorp, Inc. 12,700 667
Conseco, Inc. 23,400 715
Countrywide Credit Industries, Inc. 25,800 1,295
Dime Bancorp, Inc. 52,400 1,385
Dow Jones & Co., Inc. 14,100 679
Federal National Mortgage Association 20,500 1,517
First American Financial Corp. 5,600 180
First Data Corp. 15,600 494
First Union Corp. 34,000 2,068
Fleet Financial Group, Inc. 85,100 3,803
Fremont General Corp. 24,000 594
Hartford Financial Services Group, Inc. (The) 32,400 1,778
Horace Mann Educators Corp. 16,500 470
Household International Corp. 13,400 531
KeyCorp 26,500 848
Lehman Brothers Holdings, Inc. 1,500 66
Lincoln National Corp. 1,300 106
MBIA, Inc. 30,300 1,987
Morgan Stanley Dean Witter & Co. 33,000 2,343
National Bancorp of Alaska, Inc. 8,200 277
National City Corp. 33,400 2,422
Old Republic International Corp. 46,200 1,040
Park National Corp. 900 93
PMI Group, Inc. (The) 13,700 676
PNC Bank Corp. 29,400 1,591
Reliance Group Holdings, Inc. 61,300 789
Ryder System, Inc. 27,000 702
SouthTrust Corp. 5,400 199
Sovereign Bancorp, Inc. 62,200 879
37 Equity III Fund
<PAGE>
EQUITY III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Spieker Properties, Inc. 25,100 869
SunTrust Banks, Inc. 10,000 765
Torchmark Corp. 35,500 1,254
Transamerica Financial Corp. 5,300 612
Trustmark Corp. 13,000 291
U.S. Bancorp 42,700 1,516
United Bankshares, Inc. 13,400 356
Wachovia Corp. 3,900 341
Washington Mutual, Inc. 83,438 3,186
Wells Fargo Co. (a) 31,000 1,238
------
56,365
------
HEALTH CARE - 2.7%
Allergan, Inc. 11,400 738
Baxter International, Inc. 16,700 1,074
Bristol-Myers Squibb Co. 8,600 1,151
Columbia/HCA Healthcare Corp. 60,100 1,487
Integrated Health Services, Inc. (a) 51,700 730
PacifiCare Health Systems, Inc. Class B (a) 6,400 508
------
5,688
------
INTEGRATED OILS - 7.4%
Amerada Hess Corp. 21,800 1,085
Amoco Corp. 5,300 313
Ashland, Inc. 22,100 1,069
Atlantic Richfield Co. 11,800 770
Chevron Corp. 8,600 713
Coastal Corp. 17,600 615
Enron Corp. 14,500 827
Exxon Corp. 60,600 4,431
Kerr-McGee Corp. 20,600 788
Mobil Corp. 19,200 1,673
Phillips Petroleum Co. 2,700 115
Texaco, Inc. 25,700 1,359
USX-Marathon Group 59,900 1,804
------
15,562
------
MATERIALS AND PROCESSING - 4.7%
Aluminum Co. of America 2,300 171
Eastman Chemical Co. 22,000 985
Fluor Corp. 17,600 749
FMC Corp. (a) 13,800 773
Freeport-McMoRan Copper & Gold, Inc. Class B 55,700 581
International Paper Co. 21,000 941
Lafarge Corp. 16,800 680
NL Industries, Inc. 75,100 1,065
Olin Corp. 16,500 467
Praxair, Inc. 6,900 243
Reynolds Metals Co. 18,100 954
Rohm & Haas Co. 3,900 117
Sonoco Products Co. 12,700 376
Timken Co. 17,700 334
USG Corp. 7,900 402
USX-U.S. Steel Group 23,600 543
Westvaco Corp. 15,600 419
------
9,800
------
MISCELLANEOUS - 0.2%
Rouse Co. (The) 18,000 495
------
OTHER ENERGY - 2.7%
Calenergy, Inc. (a) 18,700 649
Conoco, Inc. Class A (a) 44,100 921
Sempra Energy 7,000 178
Sunoco, Inc. (a) 32,900 1,186
Tidewater, Inc. 8,800 204
Tosco Corp. 51,700 1,338
Transocean Offshore, Inc. 16,600 445
Ultramar Diamond Shamrock Corp. 17,300 420
USEC, Inc. 19,700 273
------
5,614
------
PRODUCER DURABLES - 6.1%
Aeroquip-Vickers, Inc. 5,900 177
Caterpillar, Inc. 4,500 207
Cordant Technologies, Inc. 9,900 371
D.R. Horton, Inc. 4,200 97
Deere & Co. 3,900 129
EG&G, Inc. 55,700 1,549
Foster Wheeler Corp. 20,500 270
Honeywell, Inc. 4,500 339
Ingersoll-Rand Co. 20,300 953
JLG Industries, Inc. 7,000 109
Johnson Controls, Inc. 21,400 1,263
Lexmark International Group, Inc. Class A (a) 7,800 784
Lockheed Martin Corp. 13,200 1,119
NACCO Industries, Inc. Class A 6,100 561
Northrop Grumman Corp. 11,200 819
Philips Electronics NV 7,400 501
Sundstrand Corp. 22,300 1,157
Thomas & Betts Corp. 16,400 710
Xerox Corp. 14,900 1,758
------
12,873
------
TECHNOLOGY - 6.0%
Advanced Micro Devices, Inc. (a) 8,000 232
COMPAQ Computer Corp. 17,600 738
Electronic Data Systems Corp. 31,167 1,566
Equity III Fund 38
<PAGE>
EQUITY III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
------- --------
International Business Machines Corp. 46,300 8,554
Unisys Corp. (a) 42,500 1,463
--------
12,553
--------
UTILITIES - 20.5%
AT&T Corp. 79,200 5,960
Baltimore Gas & Electric Co. 42,200 1,303
BCE, Inc. 28,200 1,070
Bell Atlantic Corp. 30,968 1,641
BellSouth Corp. 50,200 2,504
Century Telephone Enterprises, Inc. 16,700 1,127
Columbia Energy Group 5,200 300
Consolidated Edison, Inc. 16,700 883
DTE Energy Co. 58,300 2,500
Entergy Corp. 42,500 1,323
FPL Group, Inc. 9,800 604
GTE Corp. 82,073 5,335
Kansas City Power & Light Co. 17,700 524
LG&E Energy Corp. 39,300 1,113
MCI WorldCom, Inc. (a) 31,100 2,231
MCN Corp. 10,200 194
Minnesota Power & Light Co. 14,300 629
Niagara Mohawk Power Corp. (a) 47,100 759
PacifiCorp 45,000 948
Peco Energy Co. 16,600 691
PG&E Corp. 56,540 1,781
QUALCOMM, Inc. (a) 5,000 258
Questar Corp. 100 2
SBC Communications, Inc. 74,600 4,000
Sprint Corp. 15,200 1,279
U.S. West, Inc. 24,600 1,590
Unicom Corp. 45,800 1,766
Western Resources, Inc. 26,500 882
--------
43,197
--------
TOTAL COMMON STOCKS
(cost $168,957) 199,341
--------
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- --------
SHORT-TERM INVESTMENTS - 5.5%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 9,501 9,501
United States Treasury Notes
6.250% due 03/31/99(c) 2,000 2,008
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $11,509) 11,509
--------
TOTAL INVESTMENTS - 100.2%
(identified cost $180,466)(d) 210,850
OTHER ASSETS AND LIABILITIES,
NET - (0.2%) (359)
--------
NET ASSETS - 100.0% 210,491
========
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral 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.
39 Equity III Fund
<PAGE>
EQUITY III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
Futures Contracts
(Notes 2 and 3)
S&P Barra Value Index
expiration date 03/99 32 $ 219
S&P 500 Index
expiration date 03/99 20 329
-----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 548
===========
(S) At December 31, 1998, United States Treasury Notes valued at $2,008 were
held as collateral in connection with futures contracts purchased by the
Fund.
The accompanying notes are an integral part of the financial statements.
Equity III Fund 40
<PAGE>
EQUITY III FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at market (identified cost $180,466)(Note 2) .......... $210,850
Receivables:
Dividends and interest ............................................ 489
Fund shares sold .................................................. 136
Daily variation margin on futures contracts (Notes 2 and 3) ...... 29
--------
Total Assets .................................................... 211,504
LIABILITIES
Payables:
Fund shares redeemed ................................. $ 859
Accrued fees to affiliates (Note 4) ................. 114
Other accrued expenses ............................... 40
----------
Total Liabilities ............................................... 1,013
--------
NET ASSETS ......................................................... $210,491
========
NET ASSETS CONSIST OF:
Undistributed net investment income ................................ $ 72
Accumulated net realized gain (loss) .............................. 4,719
Unrealized appreciation (depreciation) on:
Investments ....................................................... 30,384
Futures contracts ................................................. 548
Shares of beneficial interest ...................................... 72
Additional paid-in capital ......................................... 174,696
--------
NET ASSETS ......................................................... $210,491
========
NET ASSET VALUE, offering and redemption price per share:
($210,490,918 divided by 7,227,652 shares of $.01 par value
shares of beneficial interest outstanding) ..................... $ 29.12
========
The accompanying notes are an integral part of the financial statements.
41 Equity III Fund
<PAGE>
EQUITY III FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Dividends .......................................................... $ 4,899
Dividends from Money Market Fund (Note 5) ......................... 377
Interest ........................................................... 68
-------
Total Investment Income .......................................... 5,344
EXPENSES (Notes 2 and 4):
Advisory fees .......................................... $ 1,395
Administrative fees .................................... 9
Custodian fees ......................................... 142
Transfer agent fees .................................... 103
Professional fees ...................................... 24
Registration fees ...................................... 24
Trustees' fees ......................................... 4
Miscellaneous .......................................... 30
----------
Total Expenses ................................................... 1,731
-------
Net investment income ............................................... 3,613
-------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ............................................ 28,705
Futures contracts ...................................... (227) 28,478
----------
Net change in unrealized appreciation or
depreciation of:
Investments ............................................ (10,308)
Futures contracts ...................................... 492 (9,816)
---------- -------
Net gain (loss) on investments ...................................... 18,662
-------
Net increase (decrease) in net assets
resulting from operations ......................................... $22,275
=======
The accompanying notes are an integral part of the financial statements.
Equity III Fund 42
<PAGE>
EQUITY III FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands YEARS ENDED DECEMBER 31,
1998 1997
---------- ---------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................... $ 3,613 $ 4,089
Net realized gain (loss) ........................... 28,478 52,299
Net change in unrealized appreciation or
depreciation ........................................ (9,816) 8,826
--------- ---------
Net increase (decrease) in net assets
resulting from operations ......................... 22,275 65,214
--------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................... (3,541) (4,089)
In excess of net investment income .................. -- (43)
Net realized gain on investments .................... (25,167) (58,222)
--------- ---------
Total Distributions to Shareholders ............... (28,708) (62,354)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ........................ (25,188) 17,474
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .......... (31,621) 20,334
NET ASSETS
Beginning of period ................................. 242,112 221,778
--------- ---------
End of period (including undistributed net
investment income of $72 at December 31, 1998) ...... $ 210,491 $ 242,112
========= =========
The accompanying notes are an integral part of the financial statements.
43 Equity III Fund
<PAGE>
EQUITY III FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ........................................ $29.80 $29.68 $29.11 $24.18 $27.05
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) ................... .47 .60 .70 .82 .93
Net realized and unrealized
gain (loss) on investments ................... 2.75 8.69 5.10 7.73 (.85)
------ ------ ------ ------ ------
Total Income From Investment
Operations ................................. 3.22 9.29 5.80 8.55 .08
------ ------ ------ ------ ------
DISTRIBUTIONS:
Net investment income ........................ (.47) (.60) (.71) (.83) (.91)
In excess of net investment income ........... -- (.01) -- -- --
Net realized gain on investments ............. (3.43) (8.56) (4.52) (2.79) (1.94)
In excess of net realized gain
on investments ............................... -- -- -- -- (.10)
------ ------ ------ ------ ------
Total Distributions ........................ (3.90) (9.17) (5.23) (3.62) (2.95)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ................ $29.12 $29.80 $29.68 $29.11 $24.18
====== ====== ====== ====== ======
TOTAL RETURN (%)(a) .......................... 11.53 33.13 20.90 35.96 1.16
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) .... 210,491 242,112 221,778 222,541 177,807
Ratios to average net assets (%)(a):
Operating expenses ......................... .74 .78 .79 .65 .17
Net investment income ...................... 1.54 1.77 2.23 2.90 3.39
Portfolio turnover rate (%) ................. 135.53 128.86 100.78 103.40 85.92
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Equity III Fund 44
<PAGE>
EQUITY Q FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (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 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 the Russell 1000(R) Index. The Fund employed the investment management
services of three managers using three distinctive quantitative approaches to
investment.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Equity Q++ Russell 1000(R)** Lipper(R)Growth & Income++++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,710 $13,042 $12,243
1990 $12,099 $12,499 $11,694
1991 $15,987 $16,627 $15,063
1992 $17,580 $18,130 $16,310
1993 $20,006 $19,970 $18,140
1994 $20,204 $20,046 $17,953
1995 $27,865 $27,617 $23,448
1996 $34,459 $33,817 $28,311
1997 $45,853 $44,927 $35,979
1998 $57,763 $57,067 $41,494
- --------------------------------------------------------------------------------------------------------------------
Total $274,526 $273,742 $230,635
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
EQUITY Q FUND RUSSELL 1000(R) INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $12,598 25.98% 1 Year $12,702 27.02%
5 Years $28,872 23.62%(S) 5 Years $28,576 23.37%(S)
10 Years $57,763 19.17%(S) 10 Years $57,067 19.03%(S)
<CAPTION>
LIPPER(R) GROWTH & INCOME FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
--------------------------------------------
<S> <C> <C>
1 Year $11,533 15.33%
5 Years $22,875 18.00%(S)
10 Years $41,494 15.29%(S)
</TABLE>
45 Equity Q Fund
<PAGE>
EQUITY Q FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Equity Q Fund reflected a total
return of 26%, as compared to the Russell 1000(R) Index, which rose 27%. The
Fund was unable to keep pace with the index due to the negative impact of the
underlying managers' valuation sensitivity. However, it still finished the year
well ahead of the average of funds in the Lipper(R) Growth & Income Funds
Benchmark, which gained only 15.3% for the year.
PORTFOLIO HIGHLIGHTS
For the fourth consecutive year, the stock market favored large capitalization
stocks over midcap and small cap alternatives. This made it very difficult for
most growth and income funds to keep pace with the market indexes, which were
increasingly dominated by large cap issues. The Equity Q Fund's economic sector
and cap size-neutral strategy helped maintain its exposure to many of these
stocks, particularly higher-priced issues within the Technology sector, which
led the market's gain.
The Fund's managers were very effective in their security selection decisions
during the year, although their valuation disciplines generally limited exposure
to many of the largest cap issues. The resulting underweighting of these
stocks, and the cumulative effect of being modestly underweighted in the growth
sectors in favor of more attractively-priced cyclical stocks, were critical
factors in the Fund's performance relative to the Russell 1000(R) Index.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Intel Corp. 2.6%
AT&T Corp. 2.5
BankAmerica Corp. 2.2
Merck & Co., Inc. 2.0
MCI WorldCom, Inc. 2.0
Bristol-Myers Squibb Co. 1.8
Microsoft Corp. 1.7
Cisco Systems, Inc. 1.7
American International Group, Inc. 1.7
Citigroup, Inc. 1.6
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 27.6x
Portfolio Price/Book Ratio 4.31x
Market Capitalization - $-Weighted Average 69.67 Bil
Number of Holdings 493
MONEY MANAGERS STYLES
Barclays Global Investors, N.A Market-Oriented
Franklin Portfolio Associates, LLC Market-Oriented
J.P. Morgan Investment Management, Inc. Market-Oriented
* Assumes initial investment on January 1, 1989.
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $158.3 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select. The Russell 1000 Index return reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates.
++ 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 Advisor upon request.
++++ Lipper(R) Growth & Income Funds Benchmark 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.
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 46
<PAGE>
EQUITY Q FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
COMMON STOCKS - 97.8%
AUTO AND TRANSPORTATION - 3.2%
AMR Corp. (a) 90,200 5,356
Burlington Northern, Inc. 9,700 327
CNF Transportation, Inc. 4,600 173
Consolidated Freightways Corp. (a) 1,200 19
Cooper Tire & Rubber Co. 12,600 258
CSX Corp. 20,400 847
Dana Corp. 66,600 2,722
Delta Air Lines, Inc. 8,500 442
Eaton Corp. 10,900 770
FDX Corp. (a) 5,500 490
Ford Motor Co. 128,100 7,518
General Motors Corp. 69,300 4,959
Genuine Parts Co. 9,100 304
Goodyear Tire & Rubber Co. 26,500 1,337
Hertz Corp. Class A 15,100 689
Kansas City Southern Industries, Inc. 101,800 5,007
Lear Corp. (a) 13,900 535
Meritor Automotive, Inc. 32,000 678
Modine Manufacturing Co. 3,000 108
Navistar International Corp. (a) 95,300 2,716
Norfolk Southern Corp. 16,400 520
PACCAR, Inc. 4,400 180
Trinity Industries, Inc. 14,800 570
Union Pacific Corp. 23,700 1,068
Wisconsin Central Transportation Corp. (a) 3,200 54
-------
37,647
-------
CONSUMER DISCRETIONARY - 12.8%
AC Nielsen Corp. (a) 26,600 751
America Online, Inc. 25,300 4,048
AnnTaylor Stores Corp. (a) 8,800 347
AutoZone Inc. (a) 26,100 860
BHC Communications, Inc. Class A 1,900 232
BJ's Wholesale Club, Inc. (a) 1,300 60
Black & Decker Corp. 6,300 353
Browning-Ferris Industries, Inc. 28,200 802
Brunswick Corp. 1,900 47
Buffets, Inc. (a) 7,000 83
Cendant Corp. (a) 242,500 4,623
Circuit City Stores, Inc. 17,000 849
Circus Circus Enterprises, Inc. (a) 14,300 164
Corporate Express, Inc. (a) 16,900 87
Costco Cos, Inc. (a) 19,200 1,386
Darden Restaurants, Inc. 33,200 598
Dayton Hudson Corp. 326,100 17,692
Deluxe Corp. 17,400 636
Department 56, Inc. (a) 8,800 331
Dillard's, Inc. Class A 18,600 528
Disney (Walt) Co. 291,600 8,748
Donnelley (R.R.) & Sons Co. 66,400 2,909
Eastman Kodak Co. 32,200 2,318
Enesco Group, Inc. 10,600 246
Extended Stay America, Inc. (a) 12,300 129
Federated Department Stores, Inc. (a) 36,800 1,603
Fortune Brands, Inc. 7,600 240
Fruit of the Loom, Inc. Class A (a) 133,100 1,838
Furniture Brands International, Inc. (a) 8,300 226
Gannett Co., Inc. 74,700 4,818
Gap, Inc. 18,700 1,052
General Nutrition Companies, Inc. (a) 22,600 366
Hasbro, Inc. 39,200 1,416
Hilton Hotels Corp. 36,200 692
Home Depot, Inc. (The) 253,300 15,500
Huffy Corp. 10,500 173
International Game Technology 26,700 649
JC Penney & Co., Inc. 21,800 1,022
Kmart Corp. (a) 295,200 4,520
Knight-Ridder, Inc. 15,300 782
La-Z-Boy Chair Co. 14,600 260
Leggett & Platt, Inc. 34,400 757
Mattel, Inc. 55,200 1,259
McDonald's Corp. 2,600 199
McGraw-Hill, Inc. 1,200 122
MediaOne Group, Inc. (a) 112,900 5,306
MGM Grand, Inc. (a) 7,900 214
Mirage Resorts, Inc. (a) 43,300 647
New York Times Co. Class A 25,400 881
Nine West Group, Inc. (a) 3,000 47
Oakley, Inc. (a) 3,000 28
Ogden Corp. 21,800 546
Payless ShoeSource, Inc. (a) 30,800 1,459
Premark International, Inc. 28,500 987
QUALCOMM, Inc. (a) 35,400 1,830
Reebok International, Ltd. (a) 9,500 141
Reynolds & Reynolds Co. Class A 11,100 255
Rubbermaid, Inc. 70,800 2,226
Sears Roebuck & Co. 68,200 2,899
Service Corp. International 58,600 2,230
Shaw Industries, Inc. 42,000 1,019
Snyder Communications, Inc. (a) 16,300 550
Spelling Entertainment Group, Inc. (a) 700 5
Sunglass Hut International, Inc. (a) 50,400 350
Tele-Communictions, Inc.
Liberty Media Group Series A (a) 13,400 617
Time Warner, Inc. 89,900 5,579
TJX Cos., Inc. 86,200 2,500
Toys "R" Us, Inc. (a) 65,200 1,100
Tribune Co. 24,700 1,630
47 Equity Q Fund
<PAGE>
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Tricon Global Restaurants, Inc. (a) 136,400 6,837
True North Communications, Inc. 3,000 81
Tupperware Corp. 23,000 378
Viacom, Inc. Class B (a) 29,200 2,161
Viad Corp. 85,400 2,594
Wal-Mart Stores, Inc. 155,300 12,647
Washington Post Co. Class B 600 347
Waste Management, Inc. 95,900 4,471
Whirlpool Corp. 38,600 2,137
-------
151,020
-------
CONSUMER STAPLES - 7.5%
Albertson's, Inc. 88,500 5,636
American Stores Co. 28,700 1,060
Block Drug Co., Inc. Class A 8,005 346
Campbell Soup Co. 36,300 1,997
Coca-Cola Co. (The) 68,900 4,608
Dole Food Co., Inc. 500 15
Fleming Cos., Inc. 19,200 199
General Mills, Inc. 11,900 925
Hannaford Brothers Co. 7,100 376
Hershey Foods Corp. 3,000 187
IBP, Inc. 223,800 6,518
Interstate Bakeries Corp. 12,900 341
Kroger Co. (a) 35,000 2,118
PepsiCo, Inc. 177,400 7,262
Philip Morris Cos., Inc. 213,500 11,422
Procter & Gamble Co. 128,000 11,689
Quaker Oats Co. 72,100 4,290
Ralston-Purina Group 32,100 1,039
Safeway, Inc. (a) 188,150 11,466
Sara Lee Corp. 21,800 614
Seagram Co., Ltd. 82,400 3,131
SuperValu, Inc. 26,900 753
Tyson Foods, Inc. Class A 3,400 72
Unilever NV 130,400 10,815
Universal Corp. 36,000 1,265
-------
88,144
-------
FINANCIAL SERVICES - 16.5%
Allstate Corp. 143,628 5,548
Ambac Financial Group, Inc. 17,300 1,041
American Express Co. 31,600 3,231
American General Corp. 20,800 1,622
American International Group, Inc. 202,825 19,598
American National Insurance Co. 5,000 413
AmSouth Bancorp 42,450 1,937
AON Corp. 7,800 432
Associated Banc-Corp 4,500 154
Associates First Capital Corp. Class A 67,468 2,859
Astoria Financial Corp. 5,800 265
Bank One Corp. 57,641 2,943
BankAmerica Corp. 424,504 25,524
BankBoston Corp. 2,600 101
Bankers Trust New York Corp. 10,500 897
Bear Stearns Cos., Inc. 32,268 1,206
Block (H&R) Co., Inc. 14,000 630
Capital One Financial Corp. 6,400 736
CarrAmerica Realty Corp. 15,600 374
Centura Banks, Inc. 700 52
Charter One Financial, Inc. 10,400 288
Chase Manhattan Corp. 22,700 1,545
Chubb Corp. (The) 13,900 902
CIGNA Corp. 23,400 1,809
CIT Group, Inc. (The) 5,500 175
Citigroup, Inc. 386,150 19,115
City National Corp. 19,100 795
Colonial BancGroup, Inc. 4,400 53
Comerica, Inc. 36,700 2,502
Compass Bancshares, Inc. 5,000 189
Conseco, Inc. 67,800 2,072
Credit Acceptance Corp. (a) 2,000 15
Crestar Financial Corp. 6,700 482
Dime Bancorp, Inc. 8,000 212
DST Systems, Inc. (a) 6,600 377
Dun & Bradstreet Corp. 7,100 224
Equifax, Inc. 32,500 1,111
Equitable Companies, Inc. 13,100 758
Everest Reinsurance Holdings, Inc. 1,400 55
Federal Home Loan Mortgage Corp. 142,300 9,169
Federal National Mortgage Association 93,100 6,889
Financial Security Assurance Holdings, Ltd 600 33
FINOVA Group, Inc. 4,600 248
First American Corp. 6,700 297
First Data Corp. 43,200 1,369
First Security Corp. 47,700 1,112
First Union Corp. 105,800 6,434
FirstMerit Corp. 1,700 45
Fleet Financial Group, Inc. 9,738 435
Fremont General Corp. 9,000 223
GATX Corp. 16,400 621
Golden West Financial Corp. 16,000 1,467
Greenpoint Financial Corp. 6,800 239
Hibernia Corp. 58,400 1,015
Household International Corp. 17,400 689
Huntington Bancshares, Inc. 1,300 39
KeyCorp 33,100 1,059
Lehman Brothers Holdings, Inc. 31,600 1,392
Liberty Property Trust 39,600 975
Equity Q Fund 48
<PAGE>
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Lincoln National Corp. 23,000 1,882
M & T Bank Corp. 100 52
Marsh & McLennan Cos., Inc. 154,000 8,999
Marshall & Ilsley Corp. 7,100 410
MBIA, Inc. 18,600 1,219
Mercantile Bancorp, Inc. 10,700 494
Mercury General Corp. 7,200 315
Metris Companies, Inc. 4,966 248
Morgan (J.P.) & Co., Inc. 9,200 967
Morgan Stanley Dean Witter & Co. 137,140 9,737
National City Corp. 38,100 2,762
National Commerce Bancorp 6,300 117
North Fork Bancorporation, Inc. 20,600 493
Ocwen Financial Corp. (a) 4,200 52
Ohio Casualty Corp. 1,100 45
Old Republic International Corp. 3,600 81
Pacific Century Financial Corp. 7,200 176
Peoples Heritage Financial Group 6,300 126
PMI Group, Inc. (The) 20,300 1,002
PNC Bank Corp. 40,650 2,200
Popular, Inc. 26,500 894
Provident Financial Group, Inc. 3,000 112
Providian Financial Corp. 28,650 2,149
Public Storage, Inc. 6,200 168
Republic of New York Corp. 7,700 351
Ryder System, Inc. 6,300 164
SAFECO Corp. 14,100 605
SouthTrust Corp. 70,350 2,594
Sovereign Bancorp, Inc. 12,100 171
Spieker Properties, Inc. 2,000 69
St. Paul Cos., Inc. 30,800 1,070
Summit Bancorp 4,600 201
SunTrust Banks, Inc. 87,100 6,663
TCF Financial Corp. 6,300 152
Torchmark Corp. 8,000 283
Transamerica Financial Corp. 3,200 370
Travelers Property Casualty Corp. Class A 68,500 2,124
U.S. Bancorp 19,000 675
Union Planters Corp. 9,200 417
UNUM Corp. 17,200 1,004
Waddell & Reed Financial, Inc.
Class A 1,000 24
Class B (a) 4,400 102
Washington Federal, Inc. 4,500 120
Washington Mutual, Inc. 91,216 3,483
Wells Fargo Co. (a) 81,900 3,271
-------
194,605
-------
HEALTH CARE - 12.1%
Abbott Laboratories 69,600 3,410
Aetna, Inc. 6,000 472
Allergan, Inc. 47,900 3,102
ALZA Corp. (a) 42,400 2,215
American Home Products Corp. 223,700 12,598
Amgen, Inc. (a) 16,100 1,682
Bausch & Lomb, Inc. 10,900 654
Bergen Brunswig Corp. Class A 41,400 1,444
Beverly Enterprises, Inc. New (a) 11,700 79
Biogen, Inc. (a) 4,600 381
Bristol-Myers Squibb Co. 159,480 21,341
Cardinal Health, Inc. 65,350 4,958
Chiron Corp. (a) 12,900 337
Columbia/HCA Healthcare Corp. 47,100 1,166
Forest Labs, Inc. (a) 62,500 3,324
Genzyme Corp. (a) 58,200 2,892
HBO & Co. 118,400 3,397
HCR Manor Care, Inc. (a) 13,900 408
HEALTHSOUTH Corp. (a) 101,600 1,568
Humana, Inc. (a) 61,600 1,097
Immune Response Corp. (a) 1,200 13
Immunex Corp. (a) 16,500 2,067
Integrated Health Services, Inc. (a) 18,900 267
IVAX Corp. (a) 40,200 500
Johnson & Johnson 137,900 11,567
Lilly (Eli) & Co. 2,300 204
Mallinckrodt, Inc. 114,400 3,525
McKesson Corp. 46,800 3,700
MedImmune, Inc. (a) 12,500 1,242
Merck & Co., Inc. 161,707 23,883
Mylan Laboratories, Inc. 156,000 4,914
Omnicare, Inc. 23,000 799
PacifiCare Health Systems, Inc. Class B (a) 47,600 3,781
Pfizer, Inc. 1,300 163
Pharmacia & Upjohn, Inc. 18,600 1,053
Schering-Plough Corp. 160,400 8,862
Tenet Healthcare Corp. (a) 46,400 1,218
United Healthcare Corp. 61,200 2,635
Warner-Lambert Co. 28,900 2,173
Watson Pharmaceuticals, Inc. (a) 800 50
Wellpoint Health Networks, Inc. Class A (a) 37,100 3,228
-------
142,369
-------
INTEGRATED OILS - 4.6%
Ashland, Inc. 31,200 1,509
Atlantic Richfield Co. 20,800 1,357
Coastal Corp. 87,800 3,068
Enron Corp. 105,400 6,014
Exxon Corp. 225,300 16,475
Lyondell Petrochemical Co. 7,000 126
49 Equity Q Fund
<PAGE>
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Mobil Corp. 129,300 11,265
Pennzoil-Quaker State Co. (a) 17,100 253
Phillips Petroleum Co. 21,400 912
Royal Dutch Petroleum Co. 203,300 9,734
Tenneco, Inc. 80,300 2,735
Tesoro Petroleum Corp. (a) 27,200 330
Unocal Corp. 22,500 657
-------
54,435
-------
MATERIALS AND PROCESSING - 5.6%
Albemarle Corp. 1,200 29
Alcan Aluminum, Ltd. 33,200 898
Allegheny Teldyne, Inc. 25,700 525
Aluminum Co. of America 7,000 522
Boise Cascade Corp. 3,000 93
Bowater, Inc. 5,800 240
Consolidated Papers, Inc. 10,800 297
Crompton & Knowles Corp. 7,100 147
Cytec Industries, Inc. (a) 2,800 60
Dow Chemical Co. 123,000 11,184
du Pont (E.I.) de Nemours & Co. 16,900 897
Engelhard Corp. 108,600 2,118
Fluor Corp. 56,700 2,413
FMC Corp. (a) 1,800 101
Fort James Corp. 30,900 1,236
Georgia Gulf Corp. 2,200 35
Georgia-Pacific Group 12,100 709
Goodrich (B.F.) Co. 8,600 309
Harsco Corp. 17,700 539
Homestake Mining Co. 35,000 322
Illinois Tool Works, Inc. 5,300 307
IMC Global, Inc. 8,400 180
Johns Manville Corp. 42,800 704
Kimberly-Clark Corp. 158,100 8,615
Lafarge Corp. 16,800 680
Louisiana Pacific Corp. 13,200 242
Masco Corp. 11,600 334
Monsanto Co. 157,100 7,461
Owens-Corning Fiberglas Corp. 12,700 450
Pentair, Inc. 11,700 466
Pioneer Hi-Bred International, Inc. 6,100 165
Praxair, Inc. 20,400 719
Reynolds Metals Co. 11,600 611
Rohm & Haas Co. 52,600 1,585
Schulman (A.), Inc. 2,000 45
Sealed Air Corp. New (a) 40,000 2,043
Sherwin-Williams Co. 17,100 502
Sigma Aldrich Corp. 15,300 448
Smurfit-Stone Container Corp. (a) 40,194 633
Solutia, Inc. 41,300 924
Temple-Inland, Inc. 9,400 558
Tyco International, Ltd. 102,700 7,746
UCAR International, Inc. (a) 3,600 64
Unifi, Inc. 10,000 196
Union Camp Corp. 7,400 500
Union Carbide Corp. 11,400 485
USEC, Inc. 9,300 129
USG Corp. 85,900 4,375
Waters Corp. (a) 12,500 1,091
Worthington Industries, Inc. 72,700 909
-------
65,841
-------
MISCELLANEOUS - 0.2%
Avalonbay Communities, Inc. 2,500 86
Crestline Capital Corp. (a) 12,270 179
Host Marriott Corp. (a) 122,700 1,695
TeleTech Holdings, Inc. (a) 6,500 65
-------
2,025
-------
OTHER ENERGY - 0.5%
Apache Corp. 29,100 737
BEC Energy 8,100 334
Diamond Offshore Drilling, Inc. 6,900 163
El Paso Energy Corp. 24,300 846
Enron Oil & Gas Co. 7,600 131
ENSCO International, Inc. 21,300 228
Global Marine, Inc. (a) 17,000 156
Input/Output, Inc. (a) 2,800 20
ONEOK, Inc. 7,900 285
PennzEnergy Co. (a) 17,100 279
R&B Falcon Corp. (a) 19,200 146
Sempra Energy 26,600 675
Smith International, Inc. (a) 200 5
Sunoco, Inc. (a) 4,200 151
Tidewater, Inc. 5,600 130
Tosco Corp. 53,100 1,375
Transocean Offshore, Inc. 14,500 389
Valero Energy Corp. 7,800 166
-------
6,216
-------
PRODUCER DURABLES - 6.8%
Allied Waste Industries, Inc. (a) 5,600 132
AlliedSignal, Inc. 89,300 3,957
Boeing Co. 29,800 972
Boston Scientific Corp. (a) 28,000 751
Briggs & Stratton Corp. 9,400 469
Caterpillar, Inc. 145,800 6,707
Coltec Industries, Inc. (a) 12,900 252
Cordant Technologies, Inc. 800 30
Deere & Co. 31,000 1,027
EG&G, Inc. 22,700 631
Equity Q Fund 50
<PAGE>
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Emerson Electric Co. 7,500 454
Foster Wheeler Corp. 5,400 71
General Electric Co. 175,600 17,921
Grainger (W.W.), Inc. 26,300 1,095
Gulfstream Aerospace Corp. (a) 19,500 1,038
Honeywell, Inc. 19,300 1,454
Ingersoll-Rand Co. 129,100 6,060
ITT Industries, Inc. 19,100 759
Johnson Controls, Inc. 30,900 1,823
Lexmark International Group, Inc. Class A (a) 81,400 8,181
Lockheed Martin Corp. 15,800 1,339
Milacron, Inc. 4,200 81
Miller (Herman), Inc. 9,300 249
Northern Telecom, Ltd. 74,800 3,749
Northrop Grumman Corp. 1,200 88
Parker-Hannifin Corp. 24,700 809
Perkin-Elmer Corp. 6,000 585
Pitney Bowes, Inc. 93,300 6,164
Raytheon Co. Class A 13,200 682
Republic Industries, Inc. (a) 41,000 605
Rockwell International Corp. 4,900 238
Sensormatic Electronics Corp. (a) 15,400 107
Solectron Corp. (a) 9,100 846
Sundstrand Corp. 9,800 508
Tektronix, Inc. 12,200 367
Thermo Electron Corp. (a) 18,000 305
Thermo Instrument Systems, Inc. (a) 79,400 1,196
Thomas & Betts Corp. 17,800 771
United Technologies Corp. 66,100 7,188
-------
79,661
-------
TECHNOLOGY - 15.6%
3Com Corp. (a) 4,700 211
Adobe Systems, Inc. 14,800 692
Anixter International, Inc. (a) 30,000 609
Apple Computer, Inc. (a) 231,000 9,457
Autodesk, Inc. 18,100 772
Cirrus Logic, Inc. (a) 23,100 225
Cisco Systems, Inc. (a) 212,200 19,695
COMPAQ Computer Corp. 136,937 5,743
CompUSA, Inc. (a) 15,400 201
Computer Associates
International, Inc. 102,900 4,386
Computer Sciences Corp. 18,800 1,211
Comverse Technology, Inc. (a) 46,500 3,299
Cooper Industries, Inc. 15,900 758
Dell Computer Corp. (a) 76,700 5,613
Electronic Data Systems Corp. 93,900 4,718
EMC Corp. (a) 118,100 10,039
General Dynamics Corp. 27,800 1,630
General Instrument Corp. (a) 38,200 1,296
General Motors Corp. Class H (a) 2,200 87
Glenayre Technologies, Inc. (a) 14,900 65
Harris Corp. 13,300 487
Informix Corp. (a) 20,300 200
Ingram Micro, Inc. Class A (a) 23,700 827
Intel Corp. 256,200 30,359
International Business Machines Corp. 68,400 12,637
Lucent Technologies, Inc. 140,900 15,499
Micron Technology, Inc. (a) 11,000 556
Microsoft Corp. (a) 142,700 19,772
Motorola, Inc. 53,200 3,249
National Semiconductor Corp. (a) 7,100 96
NCR Corp. (a) 23,900 998
Novell, Inc. (a) 128,600 2,331
Oracle Systems Corp. (a) 60,400 2,605
PeopleSoft, Inc. (a) 100 2
Rational Software Corp. New (a) 9,500 251
Read-Rite Corp. (a) 900 13
Seagate Technology (a) 13,100 396
Sterling Software, Inc. (a) 28,800 779
Sun Microsystems, Inc. (a) 76,500 6,546
Sybase, Inc. (a) 25,300 187
Symbol Technologies, Inc. 17,800 1,138
Tellabs, Inc. (a) 35,700 2,448
Texas Instruments, Inc. 91,900 7,863
Unisys Corp. (a) 77,300 2,662
Xilinx, Inc. (a) 4,600 299
-------
182,907
-------
UTILITIES - 12.4%
Airtouch Communications, Inc. (a) 53,600 3,866
Allegheny Energy, Inc. 16,500 569
Ameren Corp. 26,600 1,135
Ameritech Corp. 72,500 4,595
AT&T Corp. 385,100 28,978
Baltimore Gas & Electric Co. 16,200 500
Bell Atlantic Corp. 210,204 11,141
BellSouth Corp. 72,700 3,626
Carolina Power & Light Co. 32,900 1,548
Central & Southwest Corp. 83,700 2,297
Cincinnati Bell, Inc. 55,500 2,099
CMS Energy Corp. 11,300 547
Columbia Energy Group 12,300 710
Comcast Corp. Special Class A 55,100 3,234
Consolidated Natural Gas Co. 10,400 562
DTE Energy Co. 32,700 1,402
Edison International 38,400 1,070
Energy East Corp. 12,900 729
Entergy Corp. 26,800 834
51 Equity Q Fund
<PAGE>
EQUITY Q FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Florida Progress Corp. 25,200 1,129
FPL Group, Inc. 55,600 3,426
Frontier Corp. 7,900 269
GTE Corp. 157,400 10,231
Houston Industries, Inc. 80,400 2,583
Illinova Corp. 7,800 195
K N Energy, Inc. 4,400 160
Kansas City Power & Light Co. 2,500 74
KeySpan Energy (a) 45,700 1,417
LG&E Energy Corp. 84,800 2,401
MCI WorldCom, Inc. (a) 331,009 23,750
New England Electric System 7,200 347
NICOR, Inc. 1,400 59
Northeast Utilities (a) 7,000 112
Northern States Power Co. 16,500 458
OGE Energy Corp. 43,400 1,259
PG&E Corp. 204,300 6,435
Pinnacle West Capital Corp. 11,800 500
PP&L Resources, Inc. 18,600 518
Public Service Enterprise Group, Inc. 46,500 1,860
SBC Communications, Inc. 163,828 8,785
Southern Co. 113,300 3,293
Southwest Gas Corp. 3,500 94
Sprint Corp. 8,400 707
TECO Energy, Inc. 6,700 189
Tele-Communications TCI Ventures Group
Series A (a) 81,800 1,927
Tele-Communications, Inc. Class A (a) 19,900 1,101
Texas Utilities Co. 38,300 1,788
U.S. West, Inc. 5,300 343
UtiliCorp United, Inc. 5,900 216
Western Resources, Inc. 6,700 223
Wisconsin Energy Corp. 12,400 390
---------
145,681
---------
TOTAL COMMON STOCKS
(cost $806,044) 1,150,551
---------
PRINCIPAL
AMOUNT
(000)
$
-----------
SHORT-TERM INVESTMENTS - 2.0%
Frank Russell Investment Company Money
Market Fund, due on demand (b) 18,045 18,045
United States Treasury Notes
6.250% due 03/31/99 (c) 5,200 5,220
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $23,265) 23,265
---------
TOTAL INVESTMENTS - 99.8%
(identified cost $829,309)(d) 1,173,816
---------
OTHER ASSETS AND LIABILITIES,
NET - 0.2% 2,084
---------
NET ASSETS - 100.0% 1,175,900
=========
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
------------ --------------
FUTURES CONTRACTS
(Notes 2 and 3)
S&P 400 Midcap Index
expiration date 03/99 13 $ 258
S&P 500 Index
expiration date 03/99 71 572
---------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 830
=========
(S) At December 31, 1998, United States Treasury Notes valued at $5,220 were
held as collateral in connection with futures contracts purchased by the
Fund.
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral 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.
Equity Q Fund 52
<PAGE>
EQUITY Q FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at market (identified cost $829,309)(Note 2) ......... $1,173,816
Receivables:
Dividends and interest .......................................... 1,609
Investments sold ................................................ 5,178
Fund shares sold ................................................ 3,117
Daily variation margin on futures contracts (Notes 2 and 3) ..... 132
Short-term investments held as collateral for securities loaned,
at market (Note 3) .............................................. 29,922
----------
Total Assets .................................................. 1,213,774
LIABILITIES
Payables:
Investments purchased ........................... $ 5,371
Fund shares redeemed ............................ 1,895
Accrued fees to affiliates (Note 4) ............. 621
Other accrued expenses .......................... 65
Payable upon return of securities loaned, at
market (Note 3) ................................. 29,922
----------
Total Liabilities ............................................. 37,874
----------
NET ASSETS ....................................................... $1,175,900
==========
NET ASSETS CONSIST OF:
Undistributed net investment income .............................. $ 40
Accumulated net realized gain (loss) ............................. 55,016
Unrealized appreciation (depreciation) on:
Investments ..................................................... 344,507
Futures contracts ............................................... 830
Shares of beneficial interest .................................... 292
Additional paid-in capital ....................................... 775,215
----------
NET ASSETS ....................................................... $1,175,900
==========
NET ASSET VALUE, offering and redemption price per share:
($1,175,900,003 divided by 29,235,049 shares of $.01 par value
shares of beneficial interest outstanding) .................... $ 40.22
==========
The accompanying notes are an integral part of the financial statements.
53 Equity Q Fund
<PAGE>
EQUITY Q FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Dividends .......................................................... $15,913
Dividends from Money Market Fund (Note 5) ......................... 883
Interest ........................................................... 123
-------
Total Investment Income .......................................... 16,919
EXPENSES (Notes 2 and 4):
Advisory fees .................................... $ 6,514
Administrative fees .............................. 49
Custodian fees ................................... 476
Transfer agent fees .............................. 362
Professional fees ................................ 51
Registration fees ................................ 54
Trustees' fees ................................... 3
Miscellaneous .................................... 70
----------
Total Expenses .................................................. 7,579
-----
Net investment income .............................................. 9,340
-----
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments .......................................... 147,100
Futures contracts .................................... 6,811 153,911
--------
Net change in unrealized appreciation or
depreciation of:
Investments .......................................... 87,425
Futures contracts .................................... 434 87,859
-------- --------
Net gain (loss) on investments ..................................... 241,770
--------
Net increase (decrease) in net assets
resulting from operations ......................................... $251,110
========
The accompanying notes are an integral part of the financial statements.
Equity Q Fund 54
<PAGE>
EQUITY Q FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
YEARS ENDED DECEMBER 31,
1998 1997
----------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................ $ 9,340 $ 11,846
Net realized gain (loss) ........................ 153,911 180,923
Net change in unrealized appreciation or
depreciation ..................................... 87,859 93,779
----------- -----------
Net increase (decrease) in net assets
resulting from operations ...................... 251,110 286,548
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................ (9,349) (11,797)
Net realized gain on investments ................. (117,001) (185,330)
----------- -----------
Total Distributions to Shareholders ............ (126,350) (197,127)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ..................... 63,380 80,058
----------- -----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ....... 188,140 169,479
NET ASSETS
Beginning of period .............................. 987,760 818,281
----------- -----------
End of period (including undistributed net
investment income of $40 and $49, respectively).. $ 1,175,900 $ 987,760
=========== ===========
The accompanying notes are an integral part of the financial statements.
55 Equity Q Fund
<PAGE>
EQUITY Q FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ......................... $ 35.90 $ 32.94 $ 30.40 $ 24.43 $ 26.03
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) ................. .32 .44 .58 .59 .69
Net realized and unrealized gain (loss) on
investments ............................... 8.53 10.01 6.33 8.52 (.41)
---------- ---------- ---------- ---------- ----------
Total Income From Investment Operations .. 8.85 10.45 6.91 9.11 .28
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS:
Net investment income ...................... (.32) (.44) (.58) (.61) (.69)
In excess of net investment income ......... -- -- (.01) -- --
Net realized gain on investments ........... (4.21) (7.05) (3.78) (2.53) (.97)
In excess of net realized gain on
investments ................................ -- -- -- -- (.22)
---------- ---------- ---------- ---------- ----------
Total Distributions ...................... (4.53) (7.49) (4.37) (3.14) (1.88)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD .............. $ 40.22 $ 35.90 $ 32.94 $ 30.40 $ 24.43
========== ========== ========== ========== ==========
TOTAL RETURN (%)(a) ........................ 25.98 33.07 23.67 37.91 .99
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ... 1,175,900 987,760 818,281 620,259 430,661
Ratios to average net assets (%)(a):
Operating expenses ....................... .69 .68 .71 .58 .11
Net investment income .................... .85 1.17 1.80 2.07 2.74
Portfolio turnover rate (%) ............... 74.56 94.89 74.59 74.00 45.87
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Equity Q Fund 56
<PAGE>
INTERNATIONAL FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide favorable total return and additional diversification for
U.S. investors.
INVESTS IN: Primarily the equity securities of non-U.S. 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>
Dates International++ MSCI EAFE ** Lipper(R)International++++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,406 $11,080 $12,250
1990 $10,429 $8,510 $10,787
1991 $11,834 $9,573 $12,128
1992 $11,111 $8,439 $11,626
1993 $15,063 $11,219 $16,228
1994 $15,874 $12,124 $16,064
1995 $17,573 $13,524 $17,546
1996 $18,976 $14,384 $19,574
1997 $19,085 $14,680 $20,578
1998 $21,666 $17,665 $23,235
- -----------------------------------------------------------------------------------------------------------
Total $164,017 $131,198 $170,016
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL FUND MSCI EAFE INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- -------------- -------------- ------------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1 Year $ 11,352 13.52% 1 Year $ 12,033 20.33%
5 Years $ 14,384 7.54%(S) 5 Years $ 15,746 9.51%(S)
10 Years $ 21,666 8.04%(S) 10 Years $ 17,665 5.86%(S)
<CAPTION>
SALOMON SMITH BARNEY BROAD MARKET INDEX (BMI)
EX-US+ LIPPER(R) INTERNATIONAL FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- -------------- -------------- ------------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1 Year $ 11,724 17.24% 1 Year $ 11,291 12.91%
5 Years $ 15,787 9.56%(S) 5 Years $ 14,318 7.44%(S)
10 Years $ 23,235 8.80%(S)
</TABLE>
57 International Fund
<PAGE>
INTERNATIONAL FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the International Fund had a total return
of 13.5% as compared to the Salomon Smith Barney Broad Market Index ex-US, which
gained 17.2%. The Fund's shortfall to the benchmark was primarily due to its
underweighting in large capitalization stocks during a year in which large caps
outperformed globally.
PORTFOLIO HIGHLIGHTS
Dominant trends in the non-US developed markets were similar to those evident in
the US market. Investors showed a strong preference for larger cap issues as a
defensive investment amid fears of deteriorating global economic fundamentals.
Growth-oriented investments also fared better for this reason. On the surface,
international market performance looked quite similar to 1997, with continental
European markets the strongest performers. The European Monetary Union continued
to foster optimism in the stock market. The United Kingdom performed well, but
lagged the majority of its European Union neighbors. Asian markets posted strong
fourth quarter gains due to strong currency appreciation, but were generally
poor performers for most of the year.
Underweightings in large cap issues and growth stocks resulted in the
International Fund trailing the benchmark. While the Fund's two large cap,
growth-oriented managers performed well, the other managers struggled for much
of the year. Country allocations were generally favorable, with continental
European markets overweighted in the Fund. However, the underweighting in large
cap, growth issues in Europe reflected the managers' reluctance to buy stocks
with often extreme valuations, given perceived risks. Performance also reflected
tactical bets toward more cyclical companies early in the year, and an
underweighting in Japanese bank shares, which rallied late in the year as talk
of banking reform improved investors' sentiment towards the sector. Despite
these setbacks, the Fund finished the year ahead of the average international
fund tracked by Lipper, which gained only 12.9%.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Novartis AG (Regd) (Switzerland) 1.1%
Suez Lyonnaise Des Eaux (France) 1.1
Diageo PLC (United Kingdom) 1.0
Vivendi (France) 1.0
Glaxo Wellcome PLC (United Kingdom) 1.0
Vodafone Group PLC (United Kingdom) 1.0
British Petroleum Co. PLC (United Kingdom) 0.9
Siemens AG (Germany) 0.9
Telecom Italia SPA (Italy) 0.9
Railtrack Group PLC (United Kingdom) 0.8
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 22.17x
Portfolio Price/Book Ratio 2.22x
Market Capitalization - $-Weighted Average 23.6 Bil
Number of Holdings 733
MONEY MANAGERS STYLES
J.P. Morgan Investment Management, Inc. Market-Oriented
Marathon Asset Management, Ltd. Value
Mastholm Asset Management, LLC 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
* Assumes initial investment on January 1, 1989.
** 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 exchange 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 Advisor upon request.
++++ Lipper(R) International Funds Benchmark 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 Smith Barney 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 Index. However, 10 years of historical
performance information is not available because it 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 Fund 58
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
COMMON STOCKS - 92.4%
ARGENTINA - 0.1%
Banco Frances del Rio la Plata - ADR 3,653 76
Telefonica de Argentina Class B - ADR 6,220 174
YPF Sociedad Anonima Class D - ADR 13,018 364
---------
614
---------
AUSTRALIA - 2.4%
Amcor, Ltd. 159,000 679
AMP, Ltd. (a) 42,440 538
Australia & New Zealand Bank Group,
Ltd. 1,105,303 7,234
Australian Gas & Light Co. 23,226 167
Boral, Ltd. 585,577 832
Brambles Industries, Ltd. 21,608 526
Broken Hill Proprietary Co. 90,520 667
Caltex Australia 100,000 245
Colonial, Ltd 65,067 223
Commonwealth Bank of Australia 18,297 260
CSR, Ltd. 301,600 737
Eastern Aluminum 236,000 201
Eltin, Ltd. 272,754 197
Fairfax (John) 11,000 23
Foster's Brewing Group, Ltd. 97,800 265
Goodman Fielder Wattie 326,300 330
Lend Lease Corp. 54,778 738
National Australia Bank, Ltd. 55,208 832
News Corp. 315,808 2,086
Pacific Dunlop, Ltd. 516,095 835
Pasminco, Ltd. 65,000 49
Pioneer International, Ltd. 157,372 333
PMP Communications, Ltd. 196,000 360
Publishing Broadcasting, Ltd. 34,030 149
Santos, Ltd. 327,000 878
Tabcorp. Holdings, Ltd. 25,000 153
Telstra Corp., Ltd. NPV (a) 159,415 745
Western Mining Corp., Ltd. 97,600 294
Westfield Trust (Units) 437,375 965
Westfield Trust (Units) New (a) 19,682 42
Westpac Banking Corp. 273,484 1,830
Westralian Sands, Ltd. NPV 117,408 281
Woolworth's, Ltd. 218,750 746
---------
24,440
---------
AUSTRIA - 0.2%
Bank Austria AG 20,241 1,029
Voest-Alpine Stahl AG 13,000 337
Wienerberger Baustoff 1,600 319
---------
1,685
---------
BELGIUM - 0.7%
Credit Communal Holding Dexia NPV 932 155
Delhaize-Le Lion NPV 8,100 712
Fortis AG 1,652 595
KBC Bancassurance Holding NPV 13,940 1,097
Tractebel Investments International NPV 22,716 4,383
UCB Capital NPV 29 178
---------
7,120
---------
BRAZIL - 0.1%
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar
(Regd.) - GDR 6,240 97
Telecomunicacoes Brasileiras
SA - ADR (a) 12,460 911
Uniao de Bancos Brasileiros
SA - GDR 4,166 60
-------
1,068
-------
CANADA - 3.0%
Abitibi-Consolidated, Inc. 76,000 706
Air Canada, Inc. (a) 120,000 483
Alcan Aluminum, Ltd. 5,200 141
Barrick Gold Corp. 28,100 548
Barrick Gold Corp. NPV 8,600 168
BCE, Inc. 48,800 1,847
Bombardier, Inc. Class B 196,200 2,824
Canadian Airlines Corp. (a) 59,000 73
Canadian Hunter Exploration, Ltd. (a) 19,900 130
Canadian Imperial Bank of Commerce 16,105 400
Canadian Natural Resources, Ltd. (a) 38,800 584
Canadian Pacific, Ltd. 45,100 848
CGI Group, Inc. Class A (a) 28,000 554
CGI Group, Inc. Class A
Sub Voting (a) 96,500 1,878
Dofasco, Inc. NPV 32,701 419
EdperBrascan Corp. Class A 22,000 307
Geac Computer Corp., Ltd. (a) 17,800 463
Hudson's Bay Co. 50,000 633
Imasco, Ltd. 80,892 1,731
Imperial Oil, Ltd. 76,270 1,225
Inco, Ltd. 68,931 728
Moore Corp., Ltd. 107,800 1,181
National Bank of Canada 78,700 1,277
59 International Fund
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Newcourt Credit Group, Inc. 15,300 536
Nexfor, Inc. (a) 34,705 137
Noranda, Inc. New (a) 79,600 794
Northern Telecom, Ltd. 2,800 140
Nova Scotia Power, Inc. 20,200 241
Potash Corp. of Saskatchewan, Inc. 18,300 1,179
QLT PhotoTherapeutics, Inc. (a) 23,000 533
Rigel Energy Corp. (a) 67,000 438
Rogers Communications, Inc.
Class B (a) 80,000 714
Royal Bank of Canada 38,430 1,925
Stelco, Inc. Class A 65,000 340
Suncor, Inc. NPV 5,717 172
Talisman Energy, Inc. (a) 5,500 97
The Seagram Co., Ltd. 56,700 2,161
Thomson Corp. (The) 50,000 1,174
Torstar Corp. Class B 36,800 435
Westcoast Energy, Inc. 24,446 489
-------
30,653
-------
CHILE - 0.0%
Chilectra SA - ADR 3,330 74
-------
DENMARK - 0.7%
Bang & Olufsen Holding Series B 11,000 671
Coloplast AS Class B (Regd) 5,850 699
Danisco 17,200 932
Den Danske Bank 1,440 193
Great Nordic Store Nord A/S 24,900 880
Jyske Bank AS (Regd.) 9,241 896
Tele Danmark AS Series B 1,000 135
Tele Danmark Class B - ADR 42,600 2,891
Unidanmark Class A (Regd) 1,260 115
-------
7,412
-------
FINLAND - 1.3%
Enso OY Series A 71,000 635
Huhtamaki OY Series I Free 3,000 114
KCI Konecranes International PLC 15,600 704
Kesko Oyj 87,600 1,306
Merita, Ltd. Series A 96,700 611
Metsa-Serla Oyj Series B 90,000 732
Nokia Oyj Series A 17,906 2,177
Outokumpu Oyj Class A 47,500 436
OY Tamro AB 41,300 178
Pohjola Series B 11,300 616
Rauma Group (The) 11,500 167
Rautaruukki OY 64,000 413
Sampo Insurance Co., Ltd. Series A 28,400 1,078
Stora Enso Oyj Class A (a) 120,000 1,314
UPM-Kymmene Oyj 43,000 1,197
Valmet Corp. Series A 76,700 1,023
-------
12,701
-------
FRANCE - 10.4%
Accor SA 15,533 3,362
Alcatel Alsthom 22,353 2,735
Alstom - ADR New (a) 38,530 896
Assurances Generales de France 11,000 657
AXA - UAP 14,834 2,149
Banque Nationale Paris 39,229 3,229
Bongrain SA 2,510 1,122
Bouygues 13,300 2,740
Carrefour SA 3,011 2,272
Castorama Dubois 2,800 639
Chargeurs International SA 4,200 232
Cie de St. Gobain 9,162 1,293
Clarins 11,592 830
Credit Commercial de France 4,320 401
Dexia France 16,387 2,524
Dexia France 1,180 182
Dexia France New (a) 1,775 273
Elf Aquitaine - ADR 35,800 2,027
Elf Aquitaine SA 19,640 2,269
Eridania Beghin-Say SA 1,843 319
Galeries Lafayette 3,800 4,078
Groupe Danone 10,331 2,956
GTM - Entrepose 13,055 1,354
Guyenne et Gascogne 3,046 1,365
L'Air Liquide 10,825 1,985
L'Oreal (Societe) 358 259
Lafarge SA (BR) 9,956 946
Lagardere Groupe (Regd) 17,100 726
Lapeyre (BR) 1,820 130
Legrand 829 220
Legris Industries SA 4,600 225
LVMH Moet-Hennessy 13,053 2,582
M6 Metropole Television 3,300 564
Michelin (Cie Gen) Class B (Regd) 43,018 1,720
Omnicom SA (a) 9,400 1,039
Paribas (a) 15,385 1,337
Pathe SA 516 144
Pechiney International Class A 54,053 1,764
Peugeot SA 3,015 466
Pinault-Printemps-Redoute SA (a) 5,475 1,046
Primagaz CIE 125 12
Renault 35,038 1,573
Rhodia SA (a) 48,307 734
Sanofi SA 19,251 3,168
Schneider SA 68,514 4,154
Scor SA 28,200 1,864
International Fund 60
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Sefimeg (Regd) 2,100 148
SGS Thomson Microelectronics (a) 15,187 1,195
Sidel SA 10,300 873
Simco (Regd) 3,900 354
Societe Generale 21,939 3,551
Sodexho 3,880 867
Suez Lyonnaise Des Eaux 55,220 11,338
Sylea 2,800 155
Thomson-CSF 56,118 2,409
Total Co. SA Class B 23,020 2,330
TV Francaise (TFI) 7,593 1,351
Union des Assurances Federales 4,313 572
Usinor Sacilor 186,153 2,066
Valeo 23,505 1,851
Vallourec (Usin) 460 18
Vivendi 37,880 9,825
-------
105,465
-------
GERMANY - 7.3%
Adidas AG 8,000 869
Allianz AG (Regd) 6,260 2,295
BASF AG 30,474 1,163
Bayer AG 68,531 2,860
Bayer Motoren Werk 472 366
Bayerische Motoren Werke AG (a) 94 70
Bayerische Vereinsbank AG 30,429 2,383
Berliner Kraft-und Licht (Bewag) -
Aktiengesellschaft Class A 50,100 1,353
Bilfinger & Berger BAU AG 10,700 273
Buderus AG 1,277 465
Commerzbank AG 40,400 1,277
Continental AG 62,551 1,726
DaimlerChrysler AG (a) 28,011 2,765
Deutsche Bank AG 39,319 2,313
Deutsche Lufthansa AG 74,590 1,647
Deutsche Pfandbrief & Hypothekenbank AG 8,000 701
Deutsche Telekom AG 28,683 943
Dresdner Bank AG 31,490 1,323
Fresenius Medical Care AG - ADR 55,360 1,301
GEA AG (a) 42,520 1,283
Gehe AG 13,610 939
Gerresheimer Glas AG 11,350 165
Hannover Rueckversicherungs AG 7,400 788
Hoechst AG 53,490 2,218
Holzmann (Philipp) (a) 2,990 471
Hornback Baumarkt AG 1,949 70
IKB Deutsche Industriebank AG 2,250 46
Karstadt AG 2,200 1,148
KM Europa Metal AG (a) 10,000 576
Mannesmann AG (a) 55,499 6,360
Mannheimer Aktiengesellschaft 500 315
Merck KGAA 55,800 2,511
Muenchener
Rueckversicherungs-Gesellschaft AG (a) 3,834 1,866
Phoenix AG 11,000 209
Preussag AG 6,180 2,792
Rhoen - Klinikum AG 1,762 175
RWE AG 32,700 1,790
SAP AG 3,510 1,516
Schering AG 9,800 1,230
SGL Carbon AG 4,614 277
Siemens AG 142,116 9,167
SKW Trostberg AG 24,600 627
Tarkett AG 22,184 270
Veba AG 122,446 7,325
Viag AG 965 567
Volkswagen AG 28,960 2,312
Wella Aktiengesellschaft 1,630 1,145
-------
74,251
-------
HONG KONG - 1.9%
Cathay Pacific Airways 441,000 438
Cheung Kong Holdings, Ltd. 322,000 2,317
China Telecom (Hong Kong) Ltd. (a) 54,000 93
CLP Holdings, Ltd. 219,900 1,096
First Pacific Co. 505,434 241
Great Eagle Holdings 626,849 769
Guangshen Railway Co., Ltd. 2,058,000 239
Hang Lung Development Co. 250,000 268
Hang Seng Bank 120,000 1,073
Henderson Investment, Ltd. 1,368,000 803
Henderson Land
Development Co., Ltd. 44,000 228
Hong Kong & China Gas
1999 Warrants (a) 22,591 1
Hong Kong & China Gas Co., Ltd. 512,006 651
Hong Kong Electric Holding, Ltd. 694,000 2,105
Hong Kong Telecommunications, Ltd. 89,200 156
HSBC Holdings (UK Regd) PLC 23,362 582
Hutchison Whampoa, Ltd. 313,000 2,212
Hysan Development 472,572 705
Jardine Strategic Holdings, Ltd. (a) 571,437 829
National Mutual Asia 681,000 510
New World Development Co., Ltd. 276,000 695
Orient Overseas International, Ltd. 188,000 49
QPL International Holdings, Ltd. 640,000 49
Sun Hung Kai Properties, Ltd. 188,200 1,372
Tai Cheung Holdings 73,000 18
Television Broadcast 497,000 1,283
Vitasoy International Holdings, Ltd. 500,000 182
61 International Fund
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- ---------
VTech Holdings, Ltd. 113,000 492
---------
19,456
---------
IRELAND - 0.3%
CBT Group Public, Ltd. - ADR (a) 8,879 132
Greencore Group PLC 124,400 574
Independent Newspapers PLC 192,000 771
Irish Life PLC 120,000 1,132
Jefferson Smurfit Group PLC 239,100 430
Waterford Wedgwood (Units) 585,000 496
---------
3,535
---------
ISRAEL - 0.2%
ForSoft, Ltd. (a) 28,700 296
Gilat Satellite Networks, Ltd. (a) 22,350 1,232
---------
1,528
---------
ITALY - 5.6%
Assicurazioni Generali SPA 35,260 1,471
Banca Commerciale Italiana 307,000 2,117
Banca Nazionale del Lavoro (a) 801,489 2,397
Banca Pop di Bergamo CV 3,500 85
Banca Pop di Milano 316,643 2,873
Banco di Roma (a) 2,361,855 4,000
ENI SPA - ADR 34,000 2,304
Ente Nazionale Idrocarburi
SPA (Regd) 697,873 4,558
Fiat SPA di Risp 264,358 528
Fila Holdings SPA - ADR 12,400 96
Gucci Group NV 3,080 150
Industrie Natuzzi SPA - ADR 26,372 656
Istituto Bancario San Paolo di
Torino - ADR (a) 21,945 785
Istituto Mobiliare Italiano SPA (a) 322,783 5,700
Istituto Nazionale Delle Assicurazioni 151,000 399
Italgas (Soc. Ital.) 24,591 133
Luxottica Group SPA - ADR 57,000 684
Magneti Marelli SPA 73,500 127
Mediaset SPA 447,452 3,626
Mediolanum SPA (a) 186,905 1,386
Mondadori (Arnoldo) Editore SPA 142,200 1,879
Montefibre di Risp 90,000 72
Rinascente (LA) 8,500 87
Telecom Italia Mobile SPA 129,246 954
Telecom Italia SPA 1,218,537 7,664
Telecom Italia SPA di Risp 998,533 8,515
Unicredito Italiano 618,477 3,663
---------
56,909
---------
JAPAN - 18.1%
Acom Co., Ltd. 18,000 1,156
Advantest 1,830 116
Alps Electric Co. 10,000 184
Amada Co., Ltd. 49,000 237
Aoki International 27,000 120
Aoyama Trading Co. 52,300 1,462
Apic Yamada Corp. 25,200 103
Asahi Bank, Ltd. 232,000 850
Bank of Kyoto, Ltd. 138,000 696
Bank of Yokohama 240,000 575
Bridgestone Tire Corp. 51,000 1,157
Canon Chemicals, Inc. 14,300 145
Canon, Inc. 222,000 4,742
Chubu Electric Power Co., Inc. 33,000 666
Chugai Pharmaceutical Co., Ltd. 110,000 1,100
Citizen Watch Co., Ltd. 14,000 84
Credit Saison Co. 85,000 2,094
CSK Corp., Ltd. 85,000 1,955
Dai Ichi Kangyo Bank 198,000 1,054
Dai Ichi Pharmaceutical Co. 114,000 1,925
Dai-Tokyo Fire & Marine 418,000 1,479
Daito Trust Construction 59,990 520
Daiwa House Industries Co. 25,000 266
Daiwa Kosho Lease Co., Ltd. 104,000 427
Daiwa Securities 100,000 341
DDI Corp. 313 1,163
Deodeo Corp. 18,000 173
East Japan Railway Co. 192 1,072
Ebara Corp. 52,000 448
Eisai Co. 66,100 1,286
Ezaki Glico Co. 76,000 435
Fanuc Co. 21,400 733
Fuji Electric Co. 107,000 235
Fuji Machine Manufacturing Co. 46,000 1,453
Fuji Oil Co. 78,000 479
Fujitsu Support and Service, Inc. 10,000 721
Fujitsu, Ltd. 211,000 2,809
Furukawa Electric Co. 200,000 681
General Sekiyu KK 32,000 116
Heiwa Corp. 36,000 402
Hitachi Koki Co. 84,000 279
Hitachi, Ltd. 591,000 3,659
Hokkaido Electric Power Co., Inc. 24,400 410
Honda Motor Co., Ltd. 108,000 3,544
Hoya Corp. 32,000 1,557
Intec, Inc. 52,000 472
Ishihara Sangyo (a) 140,000 229
Ishikawajima-Harima Heavy Industries 281,000 497
Ito-Yokado Co., Ltd. 106,000 7,407
62 International Fund
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Itochu Corp. 200,000 386
Japan Tobacco, Inc. 241 2,409
Jeol 50,000 241
Kandenko Co., Ltd. 56,000 378
Kao Corp. 198,000 4,466
Kawasaki Steel Corp. 416,000 622
Kinki Coca-Cola Bottling 32,000 424
Kirin Beverage Corp. 18,000 355
Kirin Brewery Co. 54,000 688
Kissei Pharmaceutical Co. 35,000 618
Koa Fire & Marine 97,000 301
Kojima Co., Ltd. 19,100 362
Kokuyo Co., Ltd. 13,000 175
Komatsu Forklift Co., Ltd. 27,000 142
Komori Corp. 11,000 232
Kuraray Co., Ltd. 29,000 320
Kurimoto Iron Works 97,000 325
Kyocera Corp. 21,700 1,146
Kyushu Electric Power 13,100 249
Laox 12,000 88
Mabuchi Motor Co., Ltd. 27,500 2,104
Makita Corp. 124,000 1,381
Marubeni Corp. 822,000 1,411
Marui Co., Ltd. 30,000 577
Maruichi Steel Tube 51,000 658
Matsumotokiyoshi 33,000 1,276
Matsushita Electric
Industrial Co., Ltd. 303,000 5,358
Mikuni Coca-Cola Bottling 5,000 107
Minebea Co., Ltd. 254,000 2,907
Mitsubishi Chemical 441,000 928
Mitsubishi Corp. 120,000 690
Mitsubishi Electric Corp. (a) 215,000 675
Mitsubishi Estate Co., Ltd. 134,000 1,201
Mitsubishi Heavy Industries 502,000 1,954
Mitsui Fudosan Co., Ltd. 182,000 1,376
Mitsui Marine & Fire
Insurance Co., Ltd. 37,000 195
Mitsui O.S.K. Lines 156,000 251
Mitsui Trust & Banking Co., Ltd. 375,000 428
Murata Manufacturing Co., Ltd. 71,000 2,946
Namco 40,000 803
NEC Corp. 80,000 736
Nichido Fire & Marine 400 2
Nichiei Co., Ltd. 34,700 2,762
Nikko Securities Co., Ltd. 268,000 747
Nintendo Co., Ltd. 7,000 678
Nippon Denso Co. 133,000 2,459
Nippon Fire & Marine 113,000 416
Nippon Oil Co. 178,000 620
Nippon System Development 22,000 681
Nippon Telegraph & Telephone Corp. 817 6,302
Nippon Yusen 344,000 1,086
Nishimatsu Construction 332,000 1,938
Nisshin Flour Milling Co., Ltd. 38,000 317
Nomura Securities Co., Ltd. 167,000 1,455
Noritake Co. 106,000 548
NTT Mobile Communication Network, Inc. (a) 192 7,897
Oki Electric Industries 54,000 159
Olympus Optical Co. 184,000 2,114
Osaka Gas Co. 178,000 612
Pioneer Electronics Corp. 151,000 2,531
Ricoh Co., Ltd. 94,000 866
Rinnai Corp. 78,000 1,363
Rohm Co. 36,000 3,277
Roland Corp. 24,000 594
Ryohin Keikaku Co., Ltd. 5,500 732
Sakura Bank, Ltd. 745,000 1,707
Sangetsu Co. 6,000 90
Sankyo Co., Ltd. 31,000 677
Sankyo Co., Ltd. GUNMA 53,000 886
Sankyo Seiko Co. 100,000 272
Sanwa Bank 179,000 1,379
Sekisui Chemical Co., Ltd. 303,000 2,037
Sekisui House, Ltd. 73,000 772
Seven-Eleven Japan NPV 3,300 266
Sharp Corp. 52,000 469
Shin-Etsu Chemical Co. 23,400 563
Shiseido Co., Ltd. 89,000 1,143
Shohkoh Fund & Co., Ltd. 1,870 602
Showa Shell Sekiyu 50,000 281
Skylark Co. 54,300 807
Sony Corp. 81,500 5,933
Sony Music Entertainment, Inc. 23,000 1,058
Stanley Electric 116,000 386
Sumitomo Bank 72,000 739
Sumitomo Corp. 50,000 243
Sumitomo Electric Industries 65,000 731
Sumitomo Forestry 76,000 545
Sumitomo Realty & Development 52,000 169
Sumitomo Rubber Industries 22,000 105
Sumitomo Trust & Banking 324,000 860
Suzuki Motor Corp. 57,000 676
Tadano 45,000 130
Takashimaya Co. 52,000 437
Takeda Chemical Industries 40,000 1,539
Takefuji Corp. 20,300 1,481
TDK Corp. 10,000 914
Toc Co. 50,000 453
Toda Corp. 42,000 203
Toho Bank 100,000 414
International Fund 63
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- ------
Tohoku Electric Power 19,700 349
Tokio Marine & Fire Insurance Co. 14,000 167
Tokyo Broadcasting 56,000 626
Tokyo Electric Power 93,700 2,312
Tokyo Electronics 5,900 224
Tokyo Gas Co. 822,000 2,160
Tokyo Steel Manufacturing 25,000 125
Toppan Printing 88,000 1,074
Torii Pharmaceutical Co., Ltd. 22,800 617
Toshiba Corp. 461,000 2,744
Tostem Corp. 42,000 832
Toyo Seikan Kaisha, Ltd. 26,000 441
Toyota Motor Corp. 103,000 2,797
UNY Co., Ltd. 13,000 237
West Japan Railway Co. 346 1,530
Yamaha Motor Co. 56,000 361
Yamanouchi Pharmaceutical 64,000 2,061
Yamato Kogyo Co. 42,000 243
Yodogawa Steel Works, Ltd. 71,000 267
-------
183,893
-------
LUXEMBOURG - 0.0%
Societe Europeene des Satellites (a) 693 106
-------
MALAYSIA - 0.2% (e)
Berjaya Leisure Berhad 60,000 20
Carlsberg Brewery Malaysia Berhad 170,000 341
Commerce Asset Holdings 180,000 97
Golden Hope Plantation 50,000 38
Kumpulan Guthrie 392,000 177
Malayan Banking Berhad 233,000 330
Malaysian Airline System 50,000 19
Oriental Holdings Berhad 30,000 32
Perlis Plantations 216,000 155
Resorts World Berhad 543,000 439
Technical Resource Industries Berhad 396,000 145
-------
1,793
-------
MEXICO - 0.1%
Cemex SA de CV - ADR 19,000 83
Cemex SA de CV Class B NPV (a) 24,709 62
Cemex SA de CV NPV (a) 741 2
Fomento Economico Mexicano
SA de CV 45,110 123
Gruma SA (a) 10,526 105
Gruma SA Series B NPV (a) 45,900 116
Grupo Industrial Maseca
Series B NPV 131,263 106
Grupo Television SA de CV -
GDR (a) 5,409 133
Telefonos de Mexico SA
Series L - ADR (a) 11,479 558
-------
1,288
-------
NETHERLANDS - 5.8%
ABN Amro Holdings NV 109,323 2,299
AKZO Nobel NV 2,596 118
AKZO Nobel NV - ADR 34,600 1,544
ASM Lithography Holding NV (a) 12,840 392
Benckiser NV Class B 18,000 1,178
Buhrmann NV (a) 58,613 1,048
CSM NV CVA 8,507 491
Elsevier NV 55,568 778
European Vinyls Corp.
International NV 7,200 57
Fortis Amev NV 10,762 891
Heineken Holding NV Class A 15,624 748
Hollandsche Beton Groep NV 66,598 822
Hunter Douglas NV 41,887 1,387
ING Groep NV 59,403 3,620
Koninklijke Ahold NV 122,586 4,528
Koninklijke Boskalis Westminster NV 23,905 386
Koninklijke KPN NV 145,684 7,289
Koninklijke KPN NV- ADR 37,523 1,886
Koninklijke Nedlloyd NV 45,000 611
Koninklijke Numico NV 22,686 1,081
Laurus NV (a) 33,861 854
Pakhoed Kon NV CVA 12,000 303
Philips Electronics NV 58,284 3,909
Philips Electronics NV - ADR 21,200 1,435
Royal Dutch Petroleum Co. 62,176 3,094
Stork NV 35,315 806
TNT Post Group NV 35,099 1,130
TNT Post Group NV - ADR 22,391 728
Unilever NV 31,970 2,731
Vedior 14,200 280
Vendex NV (a) 48,373 1,174
Verenigde Nederlandse
Uitgeversbedrijven Verenigd Bezit 91,726 3,457
Wereldhave NV 8,338 474
Wolters Kluwer CVA 32,030 6,851
-------
58,380
-------
NEW ZEALAND - 0.3%
Air New Zealand Class B 69,400 109
Fletcher Challenge Paper 975,909 652
Telecom Corp. of New Zealand, Ltd. 701,377 1,532
Telecom Corp. of New Zealand, Ltd. NPV 213,565 927
International Fund 64
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
Wrightson, Ltd. 300,000 66
-------
3,286
-------
NORWAY - 0.5%
Bergesen DY AS Series A 4,130 49
Christiania Bank OG Kreditkasse 45,000 156
Fred. Olsen Energy ASA (a) 44,750 277
Norsk Hydro AS 19,216 650
Norske Skogindustrier AS Class A 4,000 117
Nycomed Amersham PLC 98,300 686
Orkla ASA Class A (a) 40,396 603
Orkla ASA Class B (a) 29,732 389
Rieber & Son ASA Series B 44,000 324
Saga Petroleum AS Series A 20,070 184
Schibsted AS 51,600 652
Storebrand ASA Series A (a) 87,500 663
-------
4,750
-------
PORTUGAL - 0.5%
Bco Pinto & Sotto Mayor SA 99,360 1,885
Jeronimo Martins SGPS 10,580 579
Portugal Telecom SA 55,508 2,546
-------
5,010
-------
SINGAPORE - 0.6%
City Developments 113,000 489
Creative Technology, Ltd. (a) 13,000 195
Development Bank of Singapore, Ltd.
(Alien Market) 198,200 1,789
Jurong Shipyard 100,000 436
Mandarin Oriental
International, Ltd. (a) 559,369 352
Overseas Union Enterprises 206,000 409
Singapore Land 46,000 102
Singapore Press Holdings, Ltd. (a) 167,040 1,822
Straits Steamship Land, Ltd. 110,000 119
-------
5,713
-------
SPAIN - 3.9%
Acciona SA (a) 19,500 1,631
Acerinox SA 32,500 756
Banco Bilbao Vizcaya SA 88,890 1,392
Banco Popular Espanol SA 31,500 2,372
Banco Santander SA (Regd) 25,916 514
Centros Commerciales Pryca 38,800 1,201
Corp. Fin. Reunida (a) 32,000 465
Corporacion Bancaria de Espana SA 24,200 1,246
Corporacion Bancaria de Espana
SA (Regd) 280,638 7,257
Dragados y Construcciones SA 6,600 243
Endesa SA 97,986 2,592
Fomento de Construcciones y Contratas
SA 10,700 794
Gas Natural SDG SA 3,102 337
Gas Y Electricidad SA Series 2 19,741 1,959
Hidroelectrica del Cantabrico SA 8,390 464
Iberdrola SA 78,083 1,459
Prosegur CIA de Seguridad
SA (Regd.) 55,000 640
Repsol SA 32,853 1,750
Repsol SA - ADR 52,800 2,884
Tabacalera SA Class A (Regd.) 169,425 4,268
Telefonica SA 91,909 4,081
Telefonica SA 1999 Rights (a) 91,909 81
Union Electrica Fenosa SA 13,000 225
Viscofan Envoltura 17,325 560
-------
39,171
-------
SWEDEN - 2.4%
ABB AB Series A 73,810 786
ABB AB Series B 67,000 709
Astra AB Series A 18,801 383
Astra AB Series B 50,046 1,016
Atlas Copco AB Series B 11,030 239
Autoliv, Inc. 100,830 3,611
BT Industries AB 22,000 320
Electrolux AB Series B (a) 207,420 3,561
Esselte AB Series B 3,570 58
Gambro AB Series B (a) 53,500 579
Granges AB 5,155 74
Hennes and Mauritz AB Series B 11,270 918
Hoganas AB B Shares 27,450 448
Munksjo AB 50,800 350
NetCom Systems AB Series B (a) 28,800 1,170
Nordbanken Holding AB 92,678 593
Om Gruppen AB (a) 52,600 660
Pharmacia & Upjohn, Inc. 23,300 1,319
Sandvik AB Series A 3,360 58
Sandvik AB Series B 9,820 169
Scandic Hotels AB 28,210 1,035
Scania AB Series A 31,200 572
Svenska Celluosa Series B 19,000 414
Svenska Handelsbank Series A 44,000 1,852
Telefonaktiebolaget Ericsson (LM)
Series B 91,240 2,168
Tornet Fastighets AB 52,000 759
Volvo AB Series B 42,000 963
-------
24,784
-------
65 International Fund
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
SWITZERLAND - 5.0%
ABB AG 336 394
Adecco SA 1,379 629
Baloise Holding, Ltd. 1,325 1,374
Barry Callebaut AG (Regd) 3,415 776
Bobst AG (BR) 300 371
Credit Suisse Group (Regd) 2,795 437
Forbo Holding AG (Regd) 3,380 1,476
Holderbank Financiere Glarus AG (BR) 400 473
Lindt & Spruengli AG 160 419
Lindt & Spruengli AG (Regd) 10 262
Nestle SA (Regd) 3,826 8,328
Novartis AG (Regd.) 5,811 11,421
Phoenix Mecano (BR) 400 240
Publicitas Holdings SA - (Regd.) 2,000 611
Roche Holdings Genusscheine
AG NPV 264 3,221
Sarna Kunststoff Holdings AG (Regd) 250 359
Schweiz Ruckversicher (Regd) 460 1,199
Schweizerische Lebensversicherungs-und
Rentenanstalt 1,729 1,284
SGS Holding (BR) 750 734
Sulzer AG (Regd) 2,400 1,461
Swisscom AG (Regd) (a) 5,500 2,302
Swisslog Holding AG 8,858 839
The Swatch Group AG 8,900 1,334
UBS AG (a) 25,236 7,753
Zurich Allied AG (a) 3,880 2,874
-------
50,571
-------
UNITED KINGDOM - 20.8%
Abbey National PLC 33,000 702
Airtours PLC 171,000 1,094
Allied Zurich AG (a) 132,232 1,987
Anglian Water PLC (a) 122,916 1,707
Arriva PLC 237,166 1,482
ASDA-MFI Group PLC 889,879 2,388
Barclays Bank PLC 118,200 2,563
Bass PLC 46,214 669
Berisford PLC 306,000 915
BG PLC 36,441 234
Billiton PLC (a) 311,300 621
BOC Group PLC 106,466 1,527
British Aerospace PLC 602,465 5,135
British Airways PLC 140,580 967
British Airways PLC - ADR 8,270 561
British American Tobacco PLC 154,932 1,364
British Petroleum Co. PLC 630,947 9,392
British Sky Broadcasting Group PLC 302,258 2,290
British Steel PLC 343,600 521
British Telecom PLC 185,007 2,800
BTR PLC 857,375 1,759
Bunzl PLC 395,500 1,544
Burmah Castrol PLC 25,000 357
Cable & Wireless Communications PLC (a) 156,100 1,424
Cable & Wireless PLC 241,560 2,954
Cadbury Schweppes PLC 101,228 1,732
Caradon PLC 87,423 150
Centrica PLC (a) 35,500 73
Coats Viyella PLC 290,000 130
Commercial Union Assurance Co. PLC 306,229 4,828
Compass Group PLC 122,200 1,395
Courtaulds Textile Co. PLC 130,000 350
Devro International PLC 210,000 604
Diageo PLC 938,591 10,409
E D & F Man Group PLC 140,000 814
Elan Corp. PLC - ADR (a) 11,000 765
Electrocomponents PLC 27,000 178
EMI Group PLC 132,000 884
Energis PLC (a) 37,100 826
Fairview Holdings PLC (a) 79,719 118
First Leisure Corp. PLC 211,000 715
Flextech PLC (a) 80,000 811
Gallaher Group PLC 92,900 622
GKN PLC 10,000 133
Glaxo Wellcome PLC 284,549 9,795
Glynwed International PLC 176,200 489
Granada Group PLC 253,000 4,435
Great University Stores PLC 90,000 949
Guardian Royal Exchange PLC 353,333 1,978
Halifax PLC 62,000 877
Hanson PLC 190,375 1,515
Hays 34,000 299
Heywood Williams Group PLC 21,666 77
Hillsdown Holdings PLC (a) 184,938 230
HSBC Holdings PLC 16,800 463
Hyder PLC 135,333 1,709
Imperial Chemical Industries PLC 85,000 736
Independent Newspapers PLC 149,535 634
Kingfisher PLC 270,314 2,928
Ladbroke Group, Ltd. PLC 252,500 1,015
Laing (John) PLC Class A NV 18,800 78
Laird Group PLC 240,830 652
LASMO PLC 325,000 540
Lloyds TSB Group PLC 311,708 4,438
London Clubs International 200,000 545
LucasVarity PLC 1,549,347 5,174
Medeva PLC 293,000 521
MEPC PLC 27,086 180
International Fund 66
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
MFI Furniture Group PLC 388,641 226
Mirror Group News PLC 805,000 2,009
Misys PLC (a) 197,800 1,453
Morgan Crucible PLC 249,188 1,143
National Power PLC 76,945 663
National Westminster Bank PLC 139,000 2,690
Newsquest PLC 200,000 812
Northern Rock PLC 62,600 583
Nycomed Amersham PLC 49,217 339
Pearson PLC 36,000 716
PIC International Group PLC (a) 300,000 379
Pilkington Brothers PLC 243,000 242
Powell Duffryn PLC 68,000 523
PowerGen PLC (a) 227,128 3,000
Premier Consolidated Oil PLC 613,971 163
Premier Farnell PLC 69,000 183
Provident Financial PLC 92,228 1,353
Prudential Corp. PLC 117,000 1,785
Racal Electronics PLC 387,800 2,242
Railtrack Group PLC 323,720 8,444
Rank Group PLC 26,750 102
Reed International 548,080 4,353
Rentokil Initial PLC 43,000 325
Rio Tinto Corp. PLC (Regd) 299,953 3,488
Rolls-Royce PLC 37,370 155
Royal & Sun Alliance Insurance Group
PLC 584,784 4,761
Royal Bank of Scotland Group PLC 85,500 1,398
Safeway PLC 450,939 2,263
Sainsbury (J.) PLC 107,432 869
Shell Transportation & Trading PLC
(Regd) 786,000 4,832
Siebe PLC 68,000 267
Smith & Nephew PLC 750,000 2,280
Smith (David S.) Holdings PLC 43,000 76
SmithKline Beecham PLC 312,380 4,329
Somerfield PLC 753,211 5,031
South West Water PLC 95,738 1,851
Stagecoach Holdings PLC (a) 760,800 3,046
Stakis PLC 665,442 1,095
Standard Chartered Bank Group PLC 168,000 1,948
Storehouse PLC 497,533 1,124
Tarmac, Ltd. PLC 1,057,747 1,977
Tate & Lyle, Ltd. PLC 48,000 258
Taylor Woodrow PLC 238,743 591
Terranova Foods PLC (a) 79,719 146
Tesco Store Holdings PLC 169,389 492
Thames Water PLC (a) 30,250 583
Tomkins PLC 802,090 3,811
Trinity PLC 40,000 266
Unilever PLC 125,640 1,413
United Newspaper, Ltd. PLC 52,200 454
United Utilities PLC 17,000 236
Vickers PLC 132,133 393
Vodafone Group PLC 586,681 9,533
WPP Group PLC 447,900 2,717
Zeneca Group PLC 70,600 3,076
---------
211,238
---------
TOTAL COMMON STOCKS
(cost $812,104) 936,894
---------
PREFERRED STOCKS - 1.0%
AUSTRALIA - 0.1%
News Corp., Ltd. 85,021 517
Sydney Harbour Casino Holdings, Ltd. (a) 955,470 845
---------
1,362
---------
BRAZIL - 0.0%
Banco Itau SA NPV 169,000 82
Petroleo Brasileiro SA NPV 1,849,080 210
---------
292
---------
FINLAND - 0.3%
Nokia Corp. - ADR 22,400 2,698
---------
GERMANY - 0.4%
Bayerische Motoren Werke AG (a) 180 77
Draegerwerk AG 750 12
Dyckerhoff AG 250 69
Fielmann AG 2,133 102
Fresenius AG 5,010 1,055
Hornbach Holding AG 1,320 78
Hugo Boss 200 384
M.A.N. AG 250 51
ProSieben Media AG NV 11,555 534
Rheinmetall AG 26,500 498
SAP AG 767 366
Volkswagen AG 8,400 419
---------
3,645
---------
ITALY - 0.0%
Fiat SPA 171,397 330
---------
67 International Fund
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- -------
JAPAN - 0.2%
Sanwa International Financial Bermuda
Trust (conv.) 216,000,000 1,481
---------
TOTAL PREFERRED STOCKS
(cost $9,333) 9,808
---------
PRINCIPAL
AMOUNT
(000)
$
-----------
LONG-TERM INVESTMENTS - 0.1%
JAPAN - 0.1%
Sumitomo Wiring Systems
0.900% due 09/30/08 JPY25,000 179
Yamanouchi Pharmaceutical (conv.)
1.250% due 03/31/14 JPY90,000 1,460
---------
TOTAL LONG-TERM INVESTMENTS
(cost $1,183) 1,639
---------
SHORT-TERM INVESTMENTS - 5.0%
UNITED STATES - 5.0%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 42,423 42,423
United States Treasury Notes
6.250% due 03/31/99 (c) 8,000 8,031
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $50,454) 50,454
---------
TOTAL INVESTMENTS - 98.5%
(identified cost $873,074)(d) 998,795
OTHER ASSETS AND LIABILITIES,
NET - 1.5% 14,884
---------
NET ASSETS - 100.0% 1,013,679
=========
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures contracts purchased by the
Fund.
(d) See note 2 for federal income tax information.
(e) The securities have been determined to be illiquid because they are
restricted or because there is an exceptionally low trading volume in their
primary trading market at December 31, 1998.
Abbreviations:
ADR - American Depositary Receipt
BR - Bearer
GDR - Global Depositary Receipt
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited company
Foreign Currency Abbreviations:
AUD - Australian dollar
DEM - German mark
FIM - Finnish markka
FRF - French franc
GBP - British pound
JPY - Japanese yen
NZD - New Zealand dollar
USD - U.S. dollar
The accompanying notes are an integral part of the financial statements.
International Fund 68
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
--------- --------------
FUTURES CONTRACTS
(Notes 2 and 3)
CAC-40 Index (France)
expiration date 03/99 330 $ 623
DAX index (Germany)
expiration date 03/99 41 1,036
FTSE-100 Index (UK)
expiration date 03/99 144 661
TOPIX index (Japan)
expiration date 03/99 131 (525)
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts purchased (S) $ 1,795
==============
(S) At December 31, 1998, United States Treasury Notes valued at $8,031 were
held as collateral in connection with futures contracts purchased by the
Fund.
MARKET
% OF VALUE
INDUSTRY DIVERSIFICATION NET (000)
(Unaudited) ASSETS $
------------------------ -------- -------
Auto & Transportation 6.1% 62,102
Consumer Discretionary 18.9 191,289
Consumer Staples 6.6 66,661
Financial Services 17.9 181,720
Health Care 6.6 67,147
Integrated Oils 2.3 23,856
Material & Processing 10.7 108,576
Miscellaneous 1.0 9,886
Other Energy 2.4 24,082
Producer Durables 7.4 74,633
Technology 3.3 33,824
Utilities 10.2 102,926
Short-Term Investments 5.0 50,454
Long-Term Investments 0.1 1,639
--------- ---------
Total Investments 98.5 998,795
Other Assets and Liabilities, Net 1.5 14,884
--------- ---------
NET ASSETS 100.0% 1,013,679
========= =========
MARKET
% OF VALUE
GEOGRAPHIC DIVERSIFICATION NET (000)
(Unaudited) ASSETS $
- ----------------------------- -------- --------
Europe 45.3% 458,522
Japan 18.4 187,013
United Kingdom 20.8 211,238
Pacific Basin 5.5 56,051
Latin America 0.3 3,336
United States (Short-Term
Investments) 5.0 50,454
Other 3.2 32,181
--------- ---------
Total Investments 98.5 998,795
Other Assets and Liabilities, Net 1.5 14,884
--------- ---------
NET ASSETS 100.0% 1,013,679
========= =========
69 International Fund
<PAGE>
INTERNATIONAL FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
FOREIGN CURRENCY EXCHANGE SPOT CONTRACTS
(Note 2)
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
DELIVER FOR SETTLEMENT (DEPRECIATION)
(000) (000) DATE (000)
- ------------ ----------- ---------- ----------------
USD -- FIM 1 01/04/99 $ --
USD 46 GBP 28 01/05/99 --
AUD 157 USD 96 01/05/99 --
FRF 641 USD 114 01/29/99 (1)
----------------
$ (1)
================
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
(Note 2)
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
DELIVER FOR SETTLEMENT (DEPRECIATION)
(000) (000) DATE (000)
- ------------- ------------- ------------ ----------------
USD 23,338 DEM 38,750 03/19/99 $ 3
USD 14,783 GBP 8,850 03/19/99 (114)
USD 10,952 JPY 1,250,000 03/19/99 221
JPY 1,512,000 USD 12,667 02/26/99 (809)
JPY 1,038,188 USD 7,500 08/05/99 (1,949)
NZD 3,320 USD 1,766 03/04/99 18
----------------
$ (2,630)
================
International Fund 70
<PAGE>
INTERNATIONAL FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at market (identified cost $873,074)(Note 2) ........ $ 998,795
Foreign currency holdings (identified cost $10,782) ............. 10,826
Forward foreign currency exchange contracts (cost $71,006)
(Note 2) ........................................................ 71,117
Foreign currency exchange spot contracts (cost $256)(Note 2) .... 256
Receivables:
Dividends and interest .......................................... 1,017
Investments sold ................................................ 3,653
Fund shares sold ................................................ 4,124
Foreign taxes recoverable ....................................... 999
Short-term investments held as collateral for securities
loaned, at market (Note 3) ..................................... 28,449
------------
Total Assets .................................................. 1,119,236
LIABILITIES
Payables:
Investments purchased ........................... $ 1,017
Fund shares redeemed ............................ 1,122
Accrued fees to affiliates (Note 4) ............ 703
Other accrued expenses .......................... 256
Daily variation margin on futures contracts
(Notes 2 and 3) ................................ 6
Forward foreign currency exchange contracts (cost
$71,006)(Note 2) ................................ 73,747
Foreign currency exchange spot contracts (cost
$256)(Note 2) ................................... 257
Payable upon return of securities loaned, at
market (Note 3) ................................. 28,449
----------
Total Liabilities ............................................. 105,557
-----------
NET ASSETS ....................................................... $ 1,013,679
===========
NET ASSETS CONSIST OF:
Accumulated distributions in excess of net investment income ..... $ (4,172)
Accumulated net realized gain (loss) ............................ 8,449
Unrealized appreciation (depreciation) on:
Investments ..................................................... 125,721
Futures contracts ............................................... 1,795
Foreign currency-related transactions ........................... (2,525)
Shares of beneficial interest .................................... 267
Additional paid-in capital ....................................... 884,144
-----------
NET ASSETS ....................................................... $ 1,013,679
===========
NET ASSET VALUE, offering and redemption price per share:
($1,013,679,204 divided by 26,655,882 shares of $.01 par value
shares of beneficial interest outstanding) ................... $ 38.03
===========
The accompanying notes are an integral part of the financial statements.
71 International Fund
<PAGE>
INTERNATIONAL FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Dividends ......................................................... $ 24,109
Dividends from Money Market Fund (Note 5) ........................ 2,254
Interest .......................................................... 585
Less foreign taxes withheld ....................................... (2,529)
--------
Total Investment Income ......................................... 24,419
EXPENSES (Notes 2 and 4):
Advisory fees ........................................ $ 7,667
Administrative fees .................................. 42
Custodian fees ....................................... 1,819
Transfer agent fees .................................. 385
Professional fees .................................... 77
Registration fees .................................... 50
Trustees' fees ....................................... 4
Miscellaneous ........................................ 68
----------
Total Expenses ................................................. 10,112
--------
Net investment income ............................................. 14,307
--------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ......................................... 40,137
Futures contracts ................................... (1,710)
Foreign currency-related transactions ............... 578 39,005
----------
Net change in unrealized appreciation or
depreciation of:
Investments ......................................... 72,914
Futures contracts ................................... 2,816
Foreign currency-related transactions ............... (2,331) 73,399
---------- --------
Net gain (loss) on investments .................................... 112,404
--------
Net increase (decrease) in net assets
resulting from operations ....................................... $126,711
========
The accompanying notes are an integral part of the financial statements.
International Fund 72
<PAGE>
INTERNATIONAL FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands YEARS ENDED DECEMBER 31,
1998 1997
----------- -----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ........................... $ 14,307 $ 11,499
Net realized gain (loss)......................... 39,005 41,977
Net change in unrealized appreciation or
depreciation .................................... 73,399 (46,787)
----------- -----------
Net increase (decrease) in net assets
resulting from operations ..................... 126,711 6,689
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ........................... (8,064) (9,488)
In excess of net investment income .............. (7,643) (4,696)
Net realized gain on investments ................ (16,426) (50,573)
In excess of net realized gain on investments ... -- (12,206)
----------- -----------
Total Distributions to Shareholders ........... (32,133) (76,963)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6)...................... (53,634) 98,629
----------- -----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ...... 40,944 28,355
NET ASSETS
Beginning of period ............................. 972,735 944,380
----------- -----------
End of period (including accumulated
distributions in excess of net
investment income of $4,172 and $6,243,
respectively).................................. $ 1,013,679 $ 972,735
=========== ===========
The accompanying notes are an integral part of the financial statements.
73 International Fund
<PAGE>
INTERNATIONAL FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 34.60 $ 37.39 $ 36.26 $ 34.28 $ 37.34
--------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) ................. .52 .46 .44 .48 .61
Net realized and unrealized gain
(loss) on investments ...................... 4.10 (.28) 2.41 3.16 .65
--------- ------- ------- ------- -------
Total Income From Investment Operations .. 4.62 .18 2.85 3.64 1.26
--------- ------- ------- ------- -------
DISTRIBUTIONS:
Net investment income ...................... (.30) (.37) (.35) (.64) (.36)
In excess of net investment income ......... (.29) (.18) -- (.08) --
Net realized gain on investments ........... (.60) (1.95) (1.37) (.94) (3.73)
In excess of net realized gain on
investments ................................ -- (.47) -- -- (.23)
--------- ------- ------- ------- -------
Total Distributions ...................... (1.19) (2.97) (1.72) (1.66) (4.32)
--------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD .............. $ 38.03 $ 34.60 $ 37.39 $ 36.26 $ 34.28
========= ======= ======= ======= =======
TOTAL RETURN (%)(a) ........................ 13.52 .58 7.98 10.71 5.38
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ... 1,013,679 972,735 944,380 796,777 674,180
Ratios to average net assets (%)(a):
Operating expenses, net .................. .98 1.00 1.04 .88 .32
Operating expenses, gross ................ .98 1.00 1.05 .89 .34
Net investment income .................... 1.38 1.14 1.20 1.41 1.63
Portfolio turnover rate (%) ............... 64.47 79.45 42.69 36.78 71.09
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
International Fund 74
<PAGE>
FIXED INCOME I FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.
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 Fixed I++ LB Aggregate ** Lipper(R)Intermediate++++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $11,335 $11,453 $11,135
1990 $12,311 $12,480 $11,923
1991 $14,282 $14,477 $13,734
1992 $15,319 $15,548 $14,659
1993 $16,920 $17,064 $16,053
1994 $16,418 $16,566 $15,517
1995 $19,377 $19,627 $18,090
1996 $20,104 $20,340 $18,665
1997 $21,999 $22,303 $20,240
1998 $23,841 $24,241 $21,745
- --------------------------------------------------------------------------------------------------------------
Total $181,906 $184,099 $171,761
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME I FUND LEHMAN BROTHERS AGGREGATE BOND INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ----------- --------------- ---------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,837 8.37% 1 Year $ 10,869 8.69%
5 Years $ 14,090 7.10%(S) 5 Years $ 14,206 7.27%(S)
10 Years $ 23,841 9.08%(S) 10 Years $ 24,241 9.26%(S)
<CAPTION>
LIPPER(R) INTERMEDIATE INVESTMENT GRADE DEBT FUNDS
BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
----------------- -------------- -------------------
<S> <C> <C>
1 Year $ 10,744 7.44%
5 Years $ 13,546 6.26%(S)
10 Years $ 21,745 8.08%(S)
</TABLE>
75 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Fixed Income I Fund reflected a total
return of 8.4% as compared to the Lehman Brothers Aggregate Bond Index, which
gained 8.7%. The Index outperformed primarily due to the Fund's emphasis on
yield sectors, which lagged treasuries in virtually all categories. However,
performance was favorable versus the Lipper(R) Intermediate Investment Grade
Debt Funds Benchmark, which finished the year with a return of 7.4%.
PORTFOLIO HIGHLIGHTS:
Bonds produced returns slightly above long-term expectations in 1998. Falling
yields and a flight to quality resulted in the outperformance of US treasuries
relative to other sectors of the US bond market during the year. Spread
sectors, including corporate bonds and mortgage- and asset-backed securities
lagged due to severe credit spread widening during the third quarter. After
trending toward historic lows over the past few years, credit spreads widened to
their largest level in two decades, driven by increasing fears of a global
recession. The Federal Reserve Board intervened during the third and fourth
quarters, applying three separate interest rate cuts, which added a degree of
liquidity to the market. Although this helped restore investor confidence, the
subsequent narrowing of spreads failed to fully offset third quarter widening.
Given their emphasis on spread sectors to add value, the unexpected sudden and
dramatic widening of credit spreads eroded the performance of most bond funds.
The Fixed Income I Fund, which was overweighted in lower quality corporates and
mortgage-backed securities, also found this to be true. However, the impact to
the Fund's performance was minimal, due to effective security selection and
yield curve strategies, as well as being longer in duration versus the Index for
much of the year.
TOP TEN ISSUERS
(as a percent of Total Investments) December 31, 1998
Federal National Mortgage Association 16.0%
United States Treasury 15.6
Government National Mortgage Association 8.9
Federal Home Loan Mortgage Corp. 6.9
Merrill Lynch & Co. 1.9
Green Tree 1.5
Tennessee Valley Authority 1.1
Ford Motor Credit Co. 0.8
General Motors Acceptance Corp. 0.8
World Omni Automobile Lease Securitization Trust 0.8
PORTFOLIO CHARACTERISTICS
December 31, 1998
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 9.7 Years
Weighted Average Duration 4.6 Years
Current Yield (SEC 30-day standardized) 5.5%
Number of Issues 925
Number of Issuers 607
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
* Assumes initial investment on January 1, 1989.
** 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 Advisor upon request.
++++ Lipper(R) Intermediate (5-10 Yr.) Investment Grade Debt Funds Benchmark
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.
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 76
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
LONG-TERM INVESTMENTS - 96.8%
ASSET-BACKED SECURITIES - 10.6%
Advanta Home Equity Loan Trust
Series 1991-1 Class A
9.000% due 02/25/06 37 37
AFC Home Equity Loan Trust
Series 1996-2 Class 1 A3
7.590% due 09/25/27 1,441 1,442
Arcadia Automobile Receivables Trust
Series 1998-A Class A4
6.000% due 11/17/03 395 397
Series 1998-B Class A3
5.950% due 11/15/02 765 774
Series 1998-D Class A3
5.800% due 08/15/06 790 793
Associates Manufactured Housing
Pass-Thru Certificates
Series 1997-2 Class A3
6.250% due 03/15/28 2,000 2,010
BankAmerica Manufactured
Housing Contract
Series 1997-1 Class A4
6.195% due 06/10/10 (c) 1,000 1,020
Case Equipment Loan Trust
Series 1998-A Class A4
5.830% due 02/15/05 2,400 2,427
Chase Credit Card Master Trust
Series 1997-3 Class A
6.777% due 05/15/07 1,200 1,260
Chase Funding Mortgage Loan
Series 1998-2 Class IIA2
5.875% due 03/25/17 2,500 2,500
Circuit City Credit Card Master Trust
Series 1994-2 Class A
8.000% due 11/15/03 2,340 2,396
Citibank Credit Card Master Trust I
Series 1997-3 Class A
6.840% due 02/10/04 (c) 1,100 1,125
Series 1998-6 Class A
5.850% due 04/10/03 4,385 4,429
Contimortgage Home Equity Loan Trust
Mortgage Pass-Thru Certificate
Series 1994-4 Class A6
8.270% due 12/15/24 325 337
Series 1996-4 Class A9
6.880% due 01/15/28 1,500 1,523
Series 1997-2 Class A6
7.120% due 03/15/16 825 844
Discover Card Master Trust I
Series 1998-7 Class A
5.600% due 05/15/06 1,325 1,327
Fleetwood Credit Corporation Grantor Trust
Series 1997-B Class A
6.400% due 05/15/13 (c) 3,392 3,452
Green Tree Financial Corp.
Series 1996-9 Class A5
7.200% due 01/15/28 1,000 1,027
Series 1997-1 Class M1
7.220% due 03/15/28 (c) 1,300 1,323
Series 1998-6 Class A5
6.060% due 04/01/18 2,205 2,213
Green Tree Home Improvement Loan Trust
Series 1997-A Class HEA5
7.210% due 03/15/28 1,735 1,775
Series 1997-E Class HEA6
6.620% due 01/15/29 1,620 1,653
Series 1998-D Class HIA2
5.940% due 06/15/29 755 757
Series 1998-E Class HIA1
5.907% due 08/15/07 765 766
Green Tree Lease Finance
Series 1998-1 Class A4
5.740% due 01/20/04 610 614
Green Tree Recreational, Equipment &
Consumer Loan Trust
Series 1997-3 Class A1
6.550% due 07/15/28 2,587 2,626
Series 1998-A Class A1C
6.180% due 06/15/19 529 539
Series 1998-C Class A4
6.170% due 02/15/11 2,150 2,188
IMC Home Equity Loan Trust
Series 1997-5 Class M1
7.080% due 11/20/28 (c) 1,500 1,550
J.C. Penney Master Credit Card Trust
Series E Class A
5.500% due 06/15/07 975 969
Metris Master Trust
Series 1996-1 Class A
6.450% due 02/20/02 2,413 2,421
Series 1997-1 Class A
6.870% due 10/20/05 3,350 3,493
Newcourt Equipment Trust Securities
Series 1998-1 Class A4
5.393% due 05/20/04 4,000 3,990
77 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
Oakwood Mortgage Investors, Inc.
Series 1997-D Class A3
6.500% due 02/15/28 1,110 1,126
Series 1998-A Class A2
6.100% due 05/15/28 1,070 1,071
Onyx Acceptance Grantor Trust
Series 1997-1 Class A
6.550% due 09/15/03 (c) 1,070 1,084
Series 1998-1 Class A
5.950% due 07/15/04 2,217 2,225
Series 1998-A Class A3
5.850% due 08/15/02 2,280 2,292
Series 1998-C Class A2
5.550% due 09/15/01 330 330
Series 1998-C Class A3
5.650% due 04/15/02 1,735 1,738
Pacificamerica Home Equity Loan
Series 1998-2 Class AF
6.590% due 06/26/28 (c) 1,774 1,831
Preferred Credit Corp.
Series 1997-1 Class A6
7.590% due 07/25/26 1,050 1,106
Premier Auto Trust
Series 1997-2 Class A5
6.320% due 03/06/02 1,600 1,632
Series 1998-3 Class A4
5.960% due 10/08/02 1,050 1,064
Series 1998-5 Class A4
5.190% due 04/08/03 1,760 1,759
Providian Master Trust
Series 1997-4 Class A
6.250% due 06/15/07 2,330 2,379
Saxon Asset Securities Trust Co.
Series 1997-1 Class AF2
7.085% due 07/25/20 2,186 2,192
Series 1998-4 Class AF3
6.265% due 07/25/23 1,490 1,498
Series 1998-4 Class AF6
6.400% due 01/25/30 1,800 1,814
Sears Credit Account Master Trust
Series 1998-1 Class A
5.800% due 08/15/05 125 125
Team Fleet Financing Corp.
Series 1997-1 Class A
7.350% due 05/15/03 1,975 2,031
The Money Store Home Equity Loan Trust
Series 1998-A Class AF5
6.370% due 12/15/23 1,420 1,434
UCFC Home Equity Loan
Series 1996-B1 Class A4
7.525% due 12/15/17 860 878
Union Acceptance Corp.
Series 1998-B Class A4
5.900% due 02/09/04 1,670 1,692
USAA Auto Loan Grantor Trust
Series 1998-1 Class A
5.800% due 01/15/05 2,357 2,383
Wal-Mart Stores, Inc.
Series 1994-B3
8.800% due 12/30/14 360 456
WFS Financial Owner Trust
Series 1998-A Class A4
5.950% due 05/20/03 2,350 2,383
World Financial Network
Credit Card Master Trust
Series 1996-A Class A
6.700% due 02/15/04 (c) 2,895 2,984
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A2
6.200% due 11/15/02 767 769
Series 1996-B Class A3
6.250% due 11/15/02 2,475 2,492
Series 1997-A Class A2
6.750% due 06/25/03 (c) 1,991 2,044
Series 1997-A Class B
6.088% due 06/25/03 (c) 847 862
Series 1997-B Class A3
6.180% due 11/25/03 1,829 1,840
-------
103,511
-------
BANKERS ACCEPTANCE NOTES - 0.1%
Mellon Bank, NA
7.625% due 09/15/07 510 577
-------
CORPORATE BONDS AND NOTES - 20.0%
Air Products & Chemicals, Inc.
8.750% due 04/15/21 300 383
Allegiance Corp.
7.300% due 10/15/06 900 953
7.000% due 10/15/26 100 106
America West Airlines, Series A
6.850% due 07/02/09 573 594
American Express Co.
8.500% due 08/15/01 45 48
American Health Properties, Inc.
7.050% due 01/15/02 650 676
Fixed Income I Fund 78
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
American Stores Co.
8.000% due 06/01/26 875 1,030
Analog Devices, Inc.
6.625% due 03/01/00 225 228
Appalachian Power Co.
6.800% due 03/01/06 1,250 1,335
Archer Daniels Co.
8.375% due 04/15/17 900 1,124
Aristar, Inc.
6.300% due 07/15/00 1,040 1,048
7.750% due 06/15/01 600 626
Associates Corp. of North America
Series H (MTN)
6.500% due 10/15/02 400 413
7.090% due 04/11/03 400 424
5.750% due 11/01/03 3,000 3,027
AT&T Capital Corp.
5.438% due 04/01/99 (c) 1,000 1,000
AT&T Corp.
8.625% due 12/01/31 440 494
Atlantic Richfield Co.
9.125% due 08/01/31 700 958
Avco Financial Services, Inc.
5.750% due 01/23/01 (MTN) 2,270 2,279
6.000% due 08/15/02 400 405
Baltimore Gas & Electric Co.
6.500% due 02/15/03 550 572
Banc One Corp.
7.250% due 08/01/02 790 832
Banco De Latinoamerica
6.500% due 04/02/01 1,400 1,426
Bank of New York, Inc.
7.875% due 11/15/02 500 541
Bank One Corp.
8.100% due 03/01/02 415 445
Bank One, Columbus, Ohio
7.375% due 12/01/02 195 208
BankAmerica Corp.
6.850% due 03/01/03 425 445
Barnett Bank, Inc.
6.900% due 09/01/05 665 711
Baxter International Inc.
6.630% due 02/15/28 1,150 1,155
Bear Stearns Co., Inc. (MTN) (c)
5.737% due 02/16/01 1,800 1,798
Bell Telephone Co. of Pennsylvania
8.350% due 12/15/30 645 840
BellSouth Telecommunications
7.000% due 12/01/95 295 324
Beneficial Corp.
8.400% due 05/15/08 757 876
Campbell Soup Co.
8.875% due 05/01/21 500 665
Cardinal Health, Inc.
6.250% due 07/15/08 600 615
Carolina Power & Light Co.
6.875% due 08/15/23 250 263
Case Corp.
7.250% due 08/01/05 395 408
7.250% due 01/15/16 400 403
Caterpillar Financial Services (MTN)
9.500% due 02/06/07 80 98
Caterpillar, Inc.
8.000% due 02/15/23 750 887
Central Fidelity Banks, Inc.
8.150% due 11/15/02 280 306
Central Power & Light Co.
Series FF
6.875% due 02/01/03 550 579
Champion International Corp.
6.400% due 02/15/26 570 585
Chesapeake & Potomac Telephone Co.
8.375% due 10/01/29 405 526
Chevron Corp.
Profit Sharing Savings Plan Trust Fund
8.110% due 12/01/04 354 384
Choice Hotels International, Inc.
7.125% due 05/01/08 1,250 1,293
Chrysler Financial Corp. (MTN)
6.080% due 03/12/01 1,550 1,577
Cincinnati Bell Telephone Co.
6.300% due 12/01/28 650 657
Cincinnati Gas & Electric Co.
7.200% due 10/01/23 250 257
CIT Group, Inc.
6.150% due 12/15/02 (MTN) 300 305
5.625% due 10/15/03 2,100 2,099
Citicorp
5.350% due 05/24/01 (MTN)(c) 2,000 1,994
5.375% due 05/24/01 (MTN)(c) 3,000 3,000
9.500% due 02/01/02 195 216
7.125% due 06/01/03 485 513
Citigroup, Inc.
6.875% due 02/15/98 920 918
City National Bank
6.375% due 01/15/08 575 592
Coca Cola Enterprises, Inc.
7.000% due 10/01/26 665 728
79 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
Colonial Realty LP (MTN)
6.980% due 09/26/05 500 481
Comerica Bank
6.000% due 10/01/08 275 279
Commercial Credit Group, Inc.
6.000% due 06/15/00 500 504
5.750% due 07/15/00 255 256
7.875% due 07/15/04 500 553
6.500% due 06/01/05 300 313
8.700% due 06/15/10 795 968
Commonwealth Edison Co.
Series 85
7.375% due 09/15/02 1,120 1,182
Conagra, Inc. (MTN)
8.100% due 05/20/02 300 323
Consolidated Rail Corp.
Pass-thru Certificate Structured Note
Series 1995 Class A
6.760% due 05/25/15 551 568
Constitution Capital Trust I
9.150% due 04/15/27 700 906
CoreStates Capital Corp.
5.875% due 10/15/03 750 758
Cox Communications, Inc.
6.500% due 11/15/02 600 620
6.690% due 09/20/04 (MTN) 500 525
Crown Cork & Seal Finance PLC
7.000% due 12/15/06 850 855
CSX Corp.
7.900% due 05/01/17 500 563
DaimlerChrysler AG
7.450% due 03/01/27 990 1,136
Dillards, Inc.
6.430% due 08/01/04 1,175 1,177
Dole Food Co., Inc.
6.750% due 07/15/00 280 280
Duke Energy Corp.
6.875% due 08/01/23 600 602
Duke Power Co.
7.000% due 07/01/33 1,030 1,073
Excel Realty Trust, Inc.
6.875% due 10/15/04 925 967
Federal Express Corp.
7.600% due 07/01/97 400 401
Federated Department Stores, Inc.
6.125% due 09/01/01 1,100 1,112
Fifth Third Bank
6.750% due 07/15/05 900 945
Finova Capital Corp.
5.875% due 10/15/01 600 600
7.125% due 05/01/02 1,100 1,140
First Bank Systems, Inc.
8.000% due 07/02/04 1,050 1,166
First Chicago Corp. (MTN)
5.502% due 11/14/01(c) 3,000 2,967
First Interstate Bancorp (MTN)
9.375% due 01/23/02 225 249
First Tennessee Bank
Series BKNT
5.750% due 12/01/08 1,325 1,310
First Union Institutional
Capital Trust I
8.040% due 12/01/26 100 110
First Union National Bank
5.800% due 12/01/08 800 798
First Union National Bank, Newark (MTN)
7.125% due 10/15/06 555 608
Fleet Financial Group, Inc.
6.875% due 03/01/03 350 365
8.125% due 07/01/04 675 754
Florida Residential Property & Casualty
Insurance Co.
Series 1997-A
7.250% due 07/01/02 1,100 1,138
Florida Windstorm
6.500% due 08/25/02 1,125 1,162
Ford Motor Credit Co.
8.375% due 01/15/00 425 438
7.750% due 11/15/02 5,000 5,385
6.125% due 04/28/03 2,380 2,431
6.750% due 05/15/05 425 450
Fort James Corp.
6.625% due 09/15/04 1,225 1,248
Fortune Brands, Inc.
7.875% due 01/15/23 400 459
General Electric Capital Corp.
8.300% due 09/20/09 470 576
6.660% due 05/01/18 (c) 1,025 1,045
General Motors Acceptance Corp.
5.480% due 12/16/02 (MTN) 3,075 3,070
6.750% due 03/15/03 5,000 5,218
Goldman Sachs Group
5.528% due 01/15/01 (c) 1,500 1,497
Grand Metropolitan Investment Corp.
7.450% due 04/15/35 425 492
GTE California, Inc.
6.750% due 05/15/27 600 637
Fixed Income I Fund 80
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
Heller Financial, Inc.
6.440% due 10/06/02 1,100 1,121
Hertz Corp.
7.625% due 08/01/02 450 476
9.000% due 11/01/09 390 472
Homeside, Inc.
11.250% due 05/15/03 1,175 1,352
Household Finance Corp. (MTN)
6.125% due 07/15/02 2,100 2,094
IMC Global, Inc.
6.500% due 08/01/03 1,000 976
International Business Machines Corp.
7.125% due 12/01/96 1,200 1,345
International Lease Finance Corp.
6.375% due 08/01/01 300 306
6.375% due 02/15/02 1,200 1,225
8.375% due 12/15/04 900 1,016
International Paper Co.
9.400% due 06/01/02 600 662
IRT Property Co.
7.250% due 08/15/07 1,325 1,292
ITT Financial Corp.
7.400% due 11/15/25 1,165 1,153
Jackson National Life Insurance Co.
8.150% due 03/15/27 1,150 1,321
JPM Capital Trust I
7.540% due 01/15/27 285 299
Kansas Gas & Electric Co.
6.500% due 08/01/05 200 204
Kern River Funding Corp., Series B
6.720% due 09/30/01 1,025 1,060
Key Bank Corp.
8.000% due 07/01/04 200 223
7.500% due 06/15/06 875 967
6.500% due 04/15/08 650 685
Liberty Mutual Insurance Co.
7.697% due 10/15/97 1,850 1,913
Lincoln National Corp.
7.250% due 05/15/05 450 480
7.000% due 03/15/18 600 630
Loral Corp.
7.000% due 09/15/23 900 941
Lowes Companies, Inc.
6.875% due 02/15/28 1,020 1,071
Martin Marietta Corp.
7.000% due 03/15/11 325 325
Mattel, Inc.
6.000% due 07/15/03 1,100 1,111
Mellon Capital II
Series B
7.995% due 01/15/27 370 411
Merck & Co., Inc.
5.950% due 12/01/28 725 724
Merrill Lynch & Co.
6.000% due 02/12/03 550 558
Mirage Resorts, Inc.
6.625% due 02/01/05 1,070 1,039
Nabisco, Inc.
6.375% due 02/01/35 1,000 968
Natexis Ambs Co., LLC, Series A
8.440% due 12/29/49 325 307
New England Telephone & Telegraph Co.
7.875% due 11/15/29 430 530
News America Holdings, Inc.
8.875% due 04/26/23 575 697
7.750% due 01/20/24 600 647
Norfolk Southern Corp.
7.350% due 05/15/07 1,000 1,106
Northwestern Bell Telephone Co.
7.750% due 05/01/30 455 524
Norwest Corp., Series H (MTN)
6.750% due 06/15/07 150 160
Norwest Financial, Inc.
6.375% due 11/15/01 750 769
6.250% due 11/01/02 425 436
6.375% due 11/15/03 650 674
NYNEX Corp.
9.550% due 05/01/10 542 670
Occidental Petroleum Corp.
8.500% due 11/09/01 (MTN) 295 314
10.125% due 11/15/01 255 279
Panamsat Corp.
6.125% due 01/15/05 700 688
Pennsylvania Power & Light Co.
6.875% due 03/01/04 1,200 1,263
Philip Morris Cos., Inc.
6.150% due 03/15/00 2,900 2,924
7.000% due 07/15/05 1,700 1,808
6.950% due 06/01/06 380 405
7.200% due 02/01/07 2,000 2,172
7.650% due 07/01/08 395 447
Pitney Bowes Credit Corp.
8.550% due 09/15/09 780 963
PNC Funding Corp.
6.875% due 07/15/07 1,100 1,175
Praxair, Inc.
6.850% due 06/15/05 880 899
81 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
Provident Cos., Inc.
6.375% due 07/15/05 1,200 1,238
Ralston Purina Co.
7.875% due 06/15/25 845 956
Raytheon Co.
6.300% due 03/15/05 1,020 1,045
Realty Income Corp.
7.750% due 05/06/07 1,500 1,421
Reliastar Financial Corp.
6.500% due 11/15/08 650 658
Republic of New York Corp.
9.750% due 12/01/00 130 140
8.250% due 11/01/01 240 257
7.875% due 12/12/01 300 319
Rite Aid Corp.
6.700% due 12/15/01 1,100 1,128
Ryder System, Inc., Series P
6.600% due 11/15/05 650 653
Safeco Capital Trust I
8.072% due 07/15/37 300 334
Safeco Corp. (MTN)
7.020% due 09/18/02 1,050 1,106
Safeway, Inc.
6.050% due 11/15/03 500 503
Salomon Smith Barney Holdings, Inc.
6.250% due 06/15/05 1,500 1,514
Sears Roebuck Acceptance Corp.
7.030% due 06/04/03 (MTN) 800 842
6.750% due 01/15/28 950 958
Series II (MTN)
6.690% due 04/30/01 975 1,001
Service Corp. International
6.750% due 06/01/01 400 409
7.375% due 04/15/04 800 849
Shopping Center Associates
6.750% due 01/15/04 750 741
Socgen Real Estate Co., LLC
Series A
7.640% due 12/29/49 (g) 540 506
Southern California Edison Co.
6.375% due 01/15/06 1,200 1,256
Spieker Properties (MTN)
8.000% due 07/19/05 800 826
Sprint Capital Corp.
6.125% due 11/15/08 1,100 1,124
Star Banc Corp.
5.875% due 11/01/03 350 352
Summit Properties Partnership, L.P.
7.200% due 08/15/07 550 525
Suntrust Banks, Inc.
7.375% due 07/01/02 575 610
6.250% due 06/01/08 160 166
TCI, Inc.
9.800% due 02/01/12 425 568
Temple Inland, Inc.
7.250% due 09/15/04 575 618
Texaco Capital, Inc.
9.750% due 03/15/20 625 872
8.875% due 09/01/21 440 567
TIG Capital Trust I
8.597% due 01/15/27 1,225 1,383
Time Warner, Inc.
7.975% due 08/15/04 450 499
8.110% due 08/15/06 900 1,026
8.180% due 08/15/07 900 1,043
6.875% due 06/15/18 1,050 1,100
Union Carbide Chemicals & Plastics
7.875% due 04/01/23 835 861
Union Oil Co. (MTN)
9.400% due 02/15/11 390 502
Union Pacific Corp.
7.600% due 05/01/05 350 376
Union Pacific Railroad Trust
Pass-thru Certificate
Series 1996-A2
7.060% due 05/15/03 450 481
Union Planters Bank
6.500% due 03/15/18 700 717
United Technologies Corp.
8.750% due 03/01/21 445 581
US Bank National Association Minnesota
5.647% due 12/19/01 (c) 3,000 3,025
5.625% due 11/30/05 1,000 997
USX Marathon Group
8.500% due 03/01/23 930 1,026
Virginia Electric & Power Co.
8.750% due 04/01/21 335 363
Wachovia Corp.
6.800% due 06/01/05 280 296
5.625% due 12/15/08 1,350 1,341
Walt Disney Co., Series E (MTN)
5.125% due 12/15/03 325 322
Wells Fargo & Co.
6.875% due 04/01/06 500 531
7.125% due 08/15/06 1,225 1,330
Whirlpool Corp.
9.500% due 06/15/00 400 420
Fixed Income I Fund 82
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
Willamette Industries, Inc.
7.850% due 07/01/26 750 813
Wisconsin Central Transportation Corp.
6.625% due 04/15/08 1,190 1,207
World Financial Properties Tower
Series 1996 WBF-B
6.910% due 09/01/13 1,291 1,311
Worldcom, Inc.
6.400% due 08/15/05 600 623
6.950% due 08/15/28 1,300 1,395
-------
195,760
-------
EURODOLLAR BONDS - 1.9%
Australian Gas Light Co.
6.400% due 04/15/08 2,000 2,033
Bear Stearns Companies, Inc. (MTN)
5.601% due 03/18/05 (c) 2,000 1,930
Hutchison Whampoa Finance, Ltd.
7.450% due 08/01/17 900 779
Merita Bank, Ltd.
7.150% due 12/29/49 (g) 250 242
7.500% due 12/29/49 (g) 675 659
Merrill Lynch & Co. (MTN)
5.226% due 10/01/03 (c) 5,250 5,192
Nationsbank Corp. (MTN)
5.371% due 06/17/02 (c) 3,000 2,978
Ontario, Province of
7.375% due 01/27/03 450 485
5.500% due 10/01/08 1,325 1,330
SCL Term Aereo Santiago SA
6.950% due 07/01/12 3,000 2,998
Skandinaviska Enskilda Banken
8.125% due 09/06/49 (g) 375 413
-------
19,039
-------
MORTGAGE-BACKED SECURITIES - 38.6%
ACLC Franchise Loan Receivables
1997 Pass-thru Class A1
7.120% due 03/15/12 909 945
BKB Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 531 529
Capita Equipment Receivables Trust
Series 1996-1 Class A4
6.280% due 06/15/00 1,030 1,036
Chase Commercial Mortgage Securities Corp.
Series 1997-1 Class E
7.370% due 12/19/07 (c) 1,000 959
Commercial Mortgage Acceptance Corp.
Series 1997-ML1 Class A1
6.500% due 11/15/04 (c) 1,327 1,365
Credit Suisse First Boston
Mortgage Securities Corp.
Series 1998-C2 Class A1
5.960% due 12/15/07 4,150 4,196
Delta Funding Home Equity Loan Trust
Series 1997-3 Class M1F
7.080% due 10/25/28 1,200 1,150
DLJ Commercial Mortgage Corp.
Series 1998-CF2 Class A1A
5.880% due 11/12/31 2,670 2,687
Federal Home Loan Mortgage Corp. (b)
6.500% 15 Year TBA Gold 210 213
6.000% 30 Year TBA Gold 8,100 8,001
6.500% 30 Year TBA Gold 6,500 6,547
Federal Home Loan Mortgage Corp.
Participation Certificate
6.500% due 2003 355 357
7.000% due 2003 13 13
7.500% due 2007 190 196
7.000% due 2008 371 378
6.500% due 2009 341 347
7.500% due 2009 1,443 1,486
8.000% due 2009 123 127
6.000% due 2010 227 229
7.000% due 2010 1,861 1,902
8.000% due 2010 482 497
6.000% due 2011 2,354 2,367
6.500% due 2011 2,427 2,466
7.000% due 2011 213 218
7.500% due 2011 49 50
6.000% due 2012 177 178
6.500% due 2012 38 38
7.500% due 2012 992 1,019
6.000% due 2013 1,164 1,168
6.500% due 2013 5,698 5,782
12.000% due 2014 174 196
6.500% due 2016 418 425
9.000% due 2016 1,079 1,149
12.500% due 2016 122 139
9.000% due 2017 29 30
9.000% due 2018 1,659 1,769
9.000% due 2020 1,056 1,130
6.500% due 2024 4,382 4,416
7.500% due 2024 139 143
8.000% due 2025 8,429 8,802
8.500% due 2025 779 816
9.000% due 2025 707 749
83 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
7.500% due 2026 75 77
9.000% due 2026 16 17
7.000% due 2027 897 914
8.500% due 2027 2,319 2,427
6.000% due 2028 1,212 1,198
6.500% due 2028 790 796
7.000% due 2028 739 753
7.500% due 2028 (h) 4,282 4,397
8.000% due 2028 427 442
8.500% due 2028 (h) 562 588
Federal Home Loan Mortgage Corp.
Series K Class 5
7.760% due 05/01/12 1,237 1,338
Federal Housing Authority
Project 68
7.430% due 06/27/21 1,318 1,360
Federal National Mortgage Association Pools
7.000% due 1999 449 448
7.500% due 1999 4,764 4,893
7.000% due 2000 427 428
8.000% due 2002 579 587
7.000% due 2003 394 398
7.500% due 2003 699 708
8.000% due 2003 270 273
6.500% due 2004 207 209
8.000% due 2004 56 57
8.000% due 2005 31 31
7.200% due 2007 983 1,076
6.000% due 2008 (h) 5,040 5,320
6.500% due 2008 1,041 1,056
6.500% due 2009 7,712 7,827
6.500% due 2010 307 312
10.500% due 2010 4 4
6.500% due 2011 649 658
8.000% due 2011 169 174
6.500% due 2012 824 836
7.000% due 2012 35 36
7.500% due 2012 452 464
6.000% due 2013 87 87
6.500% due 2013 1,397 1,417
7.000% due 2013 416 425
7.500% due 2017 28 28
8.000% due 2017 38 39
9.000% due 2017 403 429
6.500% due 2024 4,064 4,094
7.500% due 2024 2,007 2,062
8.000% due 2024 3,268 3,387
8.500% due 2024 544 570
8.000% due 2025 1,921 1,990
8.500% due 2025 1,323 1,386
8.500% due 2026 2,455 2,571
7.000% due 2027 1,353 1,380
7.500% due 2027 6,502 6,679
8.000% due 2027 2,016 2,087
9.000% due 2027 24 25
6.000% due 2028 5,396 5,326
6.500% due 2028 7,054 7,100
7.000% due 2028 359 367
7.500% due 2028 9,482 9,741
Federal National Mortgage Association (b)
6.000% 15 Year TBA 4,535 4,546
5.500% 30 Year TBA 5,000 4,820
6.000% 30 Year TBA 6,290 6,207
6.500% 30 Year TBA 16,445 16,553
7.000% 30 Year TBA 30,055 30,656
Federal National Mortgage Association
REMIC
Series 1992-158 Class ZZ
7.750% due 08/25/22 486 511
Series 1997-55 Class ZA
7.000% due 04/18/27 5,424 5,506
Federal National Mortgage Association Aces
Series 1997-M5 Class B
6.650% due 08/25/07 1,720 1,791
6.250% due 01/25/08 1,250 1,290
Federal National Mortgage Association
Principal Only Strip
Zero Coupon due 03/01/20 131 110
First Union Lehman Brothers Commercial Trust
Series 1997-C1 Class C
7.440% due 04/18/07 950 1,008
Government National Mortgage Association
8.500% due 2005 45 47
6.500% due 2008 88 89
6.500% due 2009 677 689
6.500% due 2010 159 162
7.000% due 2011 157 161
9.000% due 2016 1,465 1,573
9.500% due 2016 146 157
8.000% due 2017 70 73
9.000% due 2017 2,209 2,372
9.000% due 2020 11 12
10.500% due 2020 689 756
10.500% due 2021 86 94
8.500% due 2022 51 54
6.500% due 2023 809 818
7.000% due 2023 3,053 3,125
7.000% due 2023 (c) 2,218 2,250
7.500% due 2023 3,543 3,656
7.000% due 2024 (c) 2,223 2,252
7.000% due 2024 (h) 7,753 7,935
7.500% due 2024 2,781 2,869
Fixed Income I Fund 84
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
8.000% due 2024 1,255 1,305
7.500% due 2025 759 782
8.000% due 2025 1,048 1,090
6.500% due 2026 3,622 3,659
7.000% due 2026 995 1,018
7.500% due 2026 590 608
8.000% due 2026 6,429 6,682
6.500% due 2027 126 128
7.000% due 2027 3,645 3,729
7.500% due 2027 2,651 2,733
8.000% due 2027 6,184 6,428
6.000% due 2028 4,928 4,865
6.500% due 2028 3,751 3,788
7.000% due 2028 8,577 8,775
7.500% due 2028 495 511
8.500% due 2028 693 734
Government National Mortgage Association (b)
6.500% 15 Year TBA 2,600 2,649
6.000% 30 Year TBA 2,400 2,379
6.500% 30 Year TBA 7,970 8,050
7.000% 30 Year TBA 4,990 5,105
Greenwich Capital Acceptance, Inc.
Mortgage Pass-thru Certificate
Series 1993 Class LB-1
7.256% due 04/25/23 (c) 448 455
GS Mortgage Securities Corp. II
Series 1997-GL Class Class A2A
6.940% due 07/13/30 396 406
Series 1998-C1 Class A1
6.060% due 10/18/30 2,964 3,003
Series 1998-GLII Class A1
6.312% due 04/13/31 (c) 1,044 1,069
Guaranteed Export Trust
Series 1996-A
6.550% due 06/15/04 715 736
Housing Securities, Inc.
Series 1994-2 Class A1
6.500% due 07/25/09 923 930
LB Commercial Conduit Mortgage Trust
Series 1998-C4 Class A1A
5.870% due 08/15/06 (c) 1 1
Lehman Brothers Mortgage Trust, Inc.
Series 1991-2 Class A-1
8.000% due 03/20/99 13 13
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class D
7.863% due 06/15/21 (c) 565 587
Series 1996-C1 Class A1
7.150% due 04/25/28 2,702 2,780
Series 1996-C2 Class A1
6.690% due 11/21/28 541 554
Series 1996-C2 Class A2
6.820% due 11/21/28 3,200 3,354
Series 1997-C1 Class A1
6.950% due 06/18/29 (c) 5,684 5,907
Series 1998-C3 Class A1
5.650% due 12/15/30 1,500 1,507
Morgan Stanley Capital I
Series 1998-HF1 Class A2
6.520% due 01/15/08 1,500 1,565
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class A2B
7.900% due 02/15/06 950 1,048
Norwest Asset Securities Corp.
Series 1997-9 Class A5
7.000% due 06/25/12 1,082 1,107
Series 1998-18 Class A4
6.250% due 08/25/28 1,825 1,782
Norwest Integrated Structured Assets, Inc.
Series 1998-1 Class 2A4
7.000% due 06/25/28 1,890 1,934
Prudential Home Mortgage Securities Co.
Series 1992-38 Class A8
6.950% due 11/25/22 1,640 1,622
Series 1993-52 Class A1
8.002% due 11/25/23 (c) 979 993
Residential Accredited Loans, Inc.
Series 1996-QS1 Class A4
6.900% due 01/25/26 3,000 3,009
Series 1997-QS1 Class A11
7.500% due 02/25/27 2,300 2,354
Residential Funding Mortgage Securities I
Series 1997-S4 Class A5
7.000% due 03/25/12 1,300 1,328
Series 1997-S10 Class A-5
7.000% due 07/25/12 945 965
Residential Funding Mortgage Securities I
REMIC
Series 1997-S17 Class A5
7.000% due 11/25/27 5,000 5,086
Resolution Trust Corp.
Series 1994-C1 Class C
8.000% due 06/25/26 1,200 1,253
Series 1994-C2 Class D
8.000% due 04/25/25 274 282
85 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
Series 1995 - C1 Class D
6.900% due 02/25/27 900 895
Salomon Brothers Mortgage Securities VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16 Class A
8.254% due 11/25/24 (c) 846 851
Sears Mortgage Securities Corp.
Series 1992 Class A
7.587% due 10/25/22 (c) 1,349 1,376
Structured Asset Mortgage Investments, Inc.
REMIC
Series 1998-9 Class 1A3
6.250% due 11/25/28 5,000 4,882
United States Department of Veteran Affairs
REMIC
Series 1992-1 Class 2-E
7.750% due 03/15/16 775 788
-------
379,084
-------
MUNICIPAL BONDS - 0.3%
Austin, Texas Revenue Bond
5.250% due 05/15/20 525 548
Central Puget Sound, Washington
Regional Transit Authority Sales Tax
and Motor Revenue
5.250% due 02/01/21 1,350 1,407
Georgia, State of, General Obligation,
Series D
5.250% due 10/01/15 700 747
-------
2,702
-------
UNITED STATES GOVERNMENT AGENCIES - 5.9%
Federal Farm Credit Bank (MTN)
5.960% due 06/16/08 1,950 2,016
Federal Home Loan Bank
6.450% due 03/13/02 (h) 2,625 2,665
5.915% due 08/25/08 3,580 3,722
Federal Home Loan Mortgage Corp.
5.750% due 07/15/03 (h) 650 667
5.125% due 10/15/08 4,745 4,703
Federal National Mortgage Association
5.790% due 10/12/99 (MTN) 3,000 3,020
6.100% due 10/06/00 (MTN) 1,910 1,925
6.250% due 11/20/02 (MTN) 1,955 1,991
6.010% due 07/17/03 (MTN) 2,000 2,022
7.780% due 09/29/06 (MTN) 255 260
6.940% due 03/19/07 (MTN) 1,550 1,618
6.900% due 08/21/07 (MTN) 3,650 3,819
6.160% due 08/07/28 190 199
6.080% due 09/01/28 (MTN) 2,475 2,591
6.210% due 08/06/38 3,445 3,613
Government Backed Trust Certificates
Series 1-C
9.250% due 11/15/01 3,421 3,644
Series 2E
9.400% due 05/15/02 1,448 1,532
Series T-3
9.625% due 05/15/02 (c) 1,470 1,555
Resolution Funding Corp.
8.875% due 07/15/20 2,275 3,197
8.625% due 01/15/21 880 1,213
8.625% due 01/15/30 240 346
Tennessee Valley Authority
Series A
6.375% due 06/15/05 3,260 3,466
Series C
6.000% due 03/15/13 3,150 3,297
Series E
6.250% due 12/15/17 640 677
6.750% due 11/01/25 3,320 3,749
-------
57,507
-------
UNITED STATES GOVERNMENT TREASURIES - 16.9%
United States Treasury Bond
Principal Strip
Zero Coupon due 05/15/20 14,400 4,403
United States Treasury Bonds
10.750% due 08/15/05 7,825 10,437
8.750% due 11/15/08 2,985 3,480
10.375% due 11/15/09 2,130 2,720
11.750% due 02/15/10 1,580 2,147
10.000% due 05/15/10 2,365 3,019
12.750% due 11/15/10 14,490 21,047
13.875% due 05/15/11 3,365 5,207
14.000% due 11/15/11 1,590 2,519
10.375% due 11/15/12 3,300 4,553
12.000% due 08/15/13 2,400 3,664
13.250% due 05/15/14 2,670 4,420
12.500% due 08/15/14 415 667
11.750% due 11/15/14 50 78
7.500% due 11/15/16 5,385 6,689
8.875% due 08/15/17 9,740 13,720
8.125% due 08/15/19 (h) 2,245 2,998
8.000% due 11/15/21 20,735 27,723
7.625% due 11/15/22 2,665 3,455
6.875% due 08/15/25 450 545
6.500% due 11/15/26 3,585 4,169
United States Treasury Notes
6.000% due 08/15/00 2,260 2,307
Fixed Income I Fund 86
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
6.250% due 08/31/00 1,655 1,697
5.750% due 11/15/00 4,380 4,464
5.625% due 11/30/00 15,075 15,342
5.250% due 01/31/01 75 76
6.250% due 10/31/01 395 412
5.875% due 11/30/01 125 128
6.250% due 02/28/02 2,670 2,791
7.500% due 02/15/05 8,200 9,389
6.625% due 05/15/07 700 787
-------
165,053
-------
YANKEE BONDS - 2.5%
Abbey National PLC
6.700% due 06/29/49 (g) 2,325 2,279
Abitibi-Consolidated, Inc.
7.500% due 04/01/28 2,125 1,930
African Development Bank
9.750% due 12/15/03 425 503
6.750% due 10/01/04 400 423
6.875% due 10/15/15 775 821
8.800% due 09/01/19 535 685
Alberta, Province of
9.250% due 04/01/00 265 277
Asian Development Bank
8.000% due 04/30/01 295 313
8.500% due 05/02/01 295 317
6.250% due 10/24/05 400 419
Canadian National Railway Co.
6.800% due 07/15/18 555 570
Canadian Occidental Petroleum, Ltd.
7.400% due 05/01/28 1,050 980
Carter Holt Harvey, Ltd.
8.875% due 12/01/04 350 383
Diageo Capital PLC
6.125% due 08/15/05 550 568
Hydro Quebec
Series GH
8.250% due 04/15/26 605 748
International American Development Bank
6.950% due 08/01/26 425 474
Manitoba, Province of
5.500% due 10/01/08 400 404
Series CD
9.250% due 04/01/20 335 467
National Westminster Bank PLC
7.750% due 04/29/49 (g) 2,225 2,348
New Brunswick, Province of
7.125% due 10/01/02 500 533
9.750% due 05/15/20 320 462
Newfoundland, Province of
10.000% due 12/01/20 150 212
Noranda Forest, Inc.
6.875% due 11/15/05 350 338
Nova Scotia, Province of
9.125% due 05/01/21 685 926
Quebec, Province of
7.125% due 02/09/24 1,145 1,250
Royal Caribbean Cruises, Ltd.
7.250% due 03/15/18 1,100 1,057
Saskatchewan, Province of
6.625% due 07/15/03 100 105
8.000% due 07/15/04 1,290 1,448
Societe Generale
7.850% due 04/29/49 (g) 1,275 1,300
Tyco International Group SA
6.375% due 06/15/05 800 817
Wharf International Finance, Ltd.
7.625% due 03/13/07 1,050 882
-------
24,239
-------
TOTAL LONG-TERM INVESTMENTS
(cost $926,279) 947,472
-------
NOTIONAL
AMOUNT
(000)
$
--------
OPTIONS PURCHASED- 0.1%
United States Treasury 10 Year Notes (e)*
Feb. 104.39 Call 2,800 20
United States Treasury 30 Year Bonds (e)*
Jan. 97.25 Call 20,000 780
Jan. 110.43 Call 1,400 33
Mar. 110.25 Call 4,200 35
April 110 Call 2,700 24
May 113.44 Call 1,400 41
-------
TOTAL OPTIONS PURCHASED
(cost $1,078) 933
------
NUMBER
OF
SHARES
--------
PREFERRED STOCKS - 0.5%
Banco Bilbao Vizcaya International - ADR 10,000 276
Credit Lyonnais Capital S.C.A - ADR 100,000 2,400
Equity Office Properties Trust
Series B 27,800 1,129
TIG Holdings, Inc. 7,500 765
-------
TOTAL PREFERRED STOCKS
(cost $5,152) 4,570
-------
87 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
SHORT-TERM INVESTMENTS - 11.2%
Federal Home Loan Mortgage Corp.
Discount Note
5.080% due 01/14/99 (a)(f)(h) 1,325 1,323
Frank Russell Investment Company
Money Market Fund
due on demand (a) 108,739 108,739
----------
TOTAL SHORT-TERM INVESTMENTS
(cost $110,062) 110,062
----------
TOTAL INVESTMENTS - 108.6%
(identified cost $1,042,571)(d) 1,063,037
----------
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS WRITTEN - (8.6%) (84,546)
----------
NET ASSETS - 100.0% 978,491
==========
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2.
(c) Adjustable or floating rate security.
(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 in connection with options written by the Fund.
* $100,000 notional amount represents 1 contract.
Abbreviations
ADR - American Depositary Receipt
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
NOTIONAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- -------
OPTIONS WRITTEN
(Notes 2 and 3)
United States Treasury 30 Year Bonds*
Jan 110.43 Call 1,400 33
Mar 111.14 Call 2,500 26
Apr 114.33 Call 4,200 9
Apr 114.08 Call 2,700 6
Jan 102.30 Put 1,400 --
Apr 106.65 Put 4,200 91
Apr 106.41 Put 2,700 55
------
Total Liability for Options Written
(premiums received $260)(S) 220
======
(S) At December 31, 1998, United States Government Obligations valued at
$12,188 were held as collateral in connection with options written by the
Fund.
The accompanying notes are an integral part of the financial statements.
Fixed Income I Fund 88
<PAGE>
FIXED INCOME I FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at market (identified cost $1,042,571)(Note 2) ....... $1,063,037
Cash ............................................................. 1,760
Receivables:
Dividends and interest .......................................... 10,083
Investments sold (regular settlement) .......................... 13,426
Investments sold (delayed settlement)(Note 2) ................... 10,082
Fund shares sold ................................................ 3,712
Short-term investments held as collateral for securities
loaned, at market (Note 3) ...................................... 117,925
----------
Total Assets .................................................. 1,220,025
LIABILITIES
Payables:
Investments purchased (regular settlement) ........ $ 15,910
Investments purchased (delayed settlement)(Note 2).. 105,685
Fund shares redeemed ............................... 1,373
Accrued fees to affiliates (Note 4) ................ 282
Other accrued expenses ............................. 139
Options written, at market value (premiums
received $260)(Notes 2 and 3) ....................... 220
Payable upon return of securities loaned, at
market (Note 3) ..................................... 117,925
----------
Total Liabilities ............................................... 241,534
----------
NET ASSETS ......................................................... $ 978,491
==========
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss) .............................. $ 2,784
Unrealized appreciation (depreciation) on:
Investments ....................................................... 20,466
Options written ................................................... 40
Shares of beneficial interest ...................................... 450
Additional paid-in capital ......................................... 954,751
----------
NET ASSETS ......................................................... $ 978,491
==========
NET ASSET VALUE, offering and redemption price per share:
($978,490,629 divided by 44,971,619 shares of $.01 par value
shares of beneficial interest outstanding) ...................... $ 21.76
==========
The accompanying notes are an integral part of the financial statements.
89 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Interest ......................................................... $ 52,480
Dividends from Money Market Fund (Note 5) ........................ 5,501
Dividends ........................................................ 401
----------
Total Investment Income ........................................ 58,382
EXPENSES (Notes 2 and 4):
Advisory fees ...................................... $ 2,590
Administrative fees ................................ 41
Custodian fees ..................................... 423
Transfer agent fees ................................ 272
Professional fees .................................. 53
Registration fees .................................. 81
Trustees' fees ..................................... 4
Miscellaneous ...................................... 40
----------
Total Expenses ................................................. 3,504
----------
Net investment income ............................................. 54,878
----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ....................................... 18,166
Options written ................................... 1,797
Foreign currency-related transactions ............. (3) 19,960
----------
Net change in unrealized appreciation or
depreciation of:
Investments ....................................... (1,022)
Options written ................................... (29)
Foreign currency-related transactions ............. (7) (1,058)
---------- ----------
Net gain (loss) on investments .................................... 18,902
----------
Net increase (decrease) in net assets
resulting from operations ....................................... $ 73,780
==========
The accompanying notes are an integral part of the financial statements.
Fixed Income I Fund 90
<PAGE>
FIXED INCOME I FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands YEARS ENDED DECEMBER 31,
1998 1997
--------- ---------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................. $ 54,878 $ 47,275
Net realized gain (loss) ......................... 19,960 5,135
Net change in unrealized appreciation or
depreciation ...................................... (1,058) 14,104
--------- ---------
Net increase (decrease) in net assets
resulting from operations ....................... 73,780 66,514
--------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................. (55,645) (47,931)
Net realized gain on investments .................. (9,092) --
--------- ---------
Total Distributions to Shareholders ............. (64,737) (47,931)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ...................... 171,196 116,770
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ........ 180,239 135,353
NET ASSETS
Beginning of period ............................... 798,252 662,899
--------- ---------
End of period (including undistributed net
investment income of $1,141 at December 31,
1997) .......................................... $ 978,491 $ 798,252
========= =========
The accompanying notes are an integral part of the financial statements.
91 Fixed Income I Fund
<PAGE>
FIXED INCOME I FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ........................................ $ 21.51 $ 20.99 $ 21.59 $ 19.59 $ 21.74
-------------- -------------- -------------- -------------- --------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) ................... 1.32 1.37 1.38 1.42 1.46
Net realized and unrealized gain (loss)
on investments .............................. .45 .54 (.62) 2.02 (2.06)
-------------- -------------- -------------- -------------- --------------
Total Income From Investment Operations .... 1.77 1.91 .76 3.44 (.60)
-------------- -------------- -------------- -------------- --------------
DISTRIBUTIONS:
Net investment income ........................ (1.31) (1.39) (1.36) (1.44) (1.44)
Net realized gain on investments ............. (.21) -- -- -- --
In excess of net realized gain on
investments ................................. -- -- -- -- (.11)
-------------- -------------- -------------- -------------- --------------
Total Distributions ........................ (1.52) (1.39) (1.36) (1.44) (1.55)
-------------- -------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD ................ $ 21.76 $ 21.51 $ 20.99 $ 21.59 $ 19.59
============== ============== ============== ============== ==============
TOTAL RETURN (%)(a) .......................... 8.37 9.42 3.75 18.03 (2.97)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) .... 978,491 798,252 662,899 638,317 496,038
Ratios to average net assets (%)(a):
Operating expenses ......................... .39 .42 .42 .35 .10
Net investment income ...................... 6.03 6.54 6.57 6.82 7.06
Portfolio turnover rate (%) ................. 226.70 165.81 147.31 138.05 173.97
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Fixed Income I Fund 92
<PAGE>
FIXED INCOME III FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: 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.
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, each employing a distinct approach to the Broad Market-Sector Rotation
style.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Fixed III++ LB Aggregate ** Lipper(R)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
1998 $15,350 $15,297 $14,833
- --------------------------------------------------------------------------------------------------------------
Total $86,945 $85,815 $85,247
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME III FUND LEHMAN BROTHERS AGGREGATE BOND INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,680 6.80% 1 Year $ 10,869 8.69%
5 Years $ 13,927 6.85%(S) 5 Years $ 14,206 7.27%(S)
Inception* $ 15,350 7.51%(S) Inception* $ 15,297 7.45%(S)
<CAPTION>
LIPPER(R) INTERMEDIATE INVESTMENT GRADE DEBT FUNDS
BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
--------------------------------------------------------
<S> <C> <C>
1 Year $ 10,744 7.44%
5 Years $ 13,546 6.26%(S)
Inception* $ 14,833 6.79%(S)
</TABLE>
93 Fixed Income III Fund
<PAGE>
FIXED INCOME III FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Fixed Income III Fund reflected a
total return of 6.8%, as compared to the Lehman Brothers Aggregate Bond Index
which rose 8.7%. The Fund's performance was negatively impacted by the weak
returns of non-investment grade and emerging markets debt holdings during the
year.
PORTFOLIO HIGHLIGHTS
The year proved unusual in the "across the board" outperformance of treasuries
versus other sectors of the bond market, particularly extended sectors. Emerging
markets debt proved to be the worst performers during the year, with worries
over economic problems, as well as a significant decline in investment during
the third quarter as investors fled riskier investments. Severe credit spread
widening during the third quarter also eroded the performance of corporate,
mortgage- and asset-backed securities. This included high yield US corporate
bonds as yield spreads changed from historically narrow levels to their widest
levels in 20 years before reversing moderately in the fourth quarter.
These trends boded poorly for the Fixed Income III Fund, which employs
strategies focused on spread sectors, including emerging markets debt and high
yield US corporates. The Fund lagged the index by a significant margin for the
year, primarily reflecting the weakness of its emerging markets debt and
corporate holdings. Duration strategies added value during the year, however,
longer duration holdings during the fourth quarter proved disadvantageous given
rising yields. It was exacerbated by a bulleted yield curve strategy as yields
on intermediate maturity bonds rose by more than either shorter or longer
maturities.
TOP TEN ISSUERS
(as a percent of Total Investments) December 31, 1998
Government National Mortgage Association 15.7%
Federal National Mortgage Association 13.9
Federal Home Loan Mortgage Corp. 6.5
United States Treasury 5.7
Green Tree Trust 1.7
Ford Motor Credit Co. 1.7
Time Warner, Inc. 1.1
AT&T Capital Corp. 1.0
Citicorp 1.0
First Plus Home Loan Trust 0.9
PORTFOLIO CHARACTERISTICS
December 31, 1998
Weighted Average Quality Diversification AA3
Weighted Average Years-to-Maturity 10.2 Years
Weighted Average Duration 4.9 Years
Current Yield (SEC 30-day standardized) 6.3%
Number of Issues 455
Number of Issuers 344
MONEY MANAGERS STYLES
BEA Associates, Inc. Broad Market-Sector
Rotation
Pacific Investment Management Co. Broad Market-Sector
Rotation
Standish, Ayer & Wood, Inc. Broad Market-Sector
Rotation
* 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 Advisor upon request.
++ Lipper(R) Intermediate (5-10 Yr.) Investment Grade Debt Funds Benchmark 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 fund
which invests at least 65% of assets in U.S. Treasury Bills, Notes and
Bonds with average maturities of five to ten years.
(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.
Fixed Income III Fund 94
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
LONG-TERM INVESTMENTS - 103.9%
ASSET-BACKED SECURITIES - 5.9%
American Express Credit Account
Master Trust
Series 1997-1 Class A
6.400% due 04/15/05 850 875
Cityscape Home Equity Loan Trust
Pass-thru Certificate
Series 1996-2 Class A2
7.200% due 04/25/11 468 478
Contimortgage Home Equity Loan Trust
Series 1996-4 Class A8
7.220% due 01/15/28 315 321
Series 1998-1 Class A5
6.430% due 04/15/16 740 749
Delta Funding Home Equity Loan Trust
Series 1998-4 Class A4F
6.190% due 02/15/31 1,250 1,227
Discover Card Master Trust I
Series 1998-7 Class A
5.600% due 05/16/06 1,625 1,627
First Plus Home Loan Trust Step Up Bond
Series 1998-5 Class A3
6.060% due 09/10/11 (b) 5,000 5,011
Fleetwood Credit Corp. Grantor Trust
Series 1994-B Class A
6.750% due 03/15/10 264 266
Fund America Investors Corp. II
Pass-thru Certificate
Series 1993-F Class A1
5.400% due 09/25/09 50 50
Green Tree Financial Corp.
Series 1995-5 Class A3
6.250% due 10/15/25 245 245
Series 1995-6 Class A3
6.650% due 11/15/25 278 279
Series 1998-2 Class M1
6.940% due 12/01/27 1,650 1,641
Series 1998-4 Class A3
5.980% due 08/01/08 800 802
Series 1998-5 Class B1
7.180% due 02/01/08 800 751
Series 1998-6 Class M1
6.630% due 05/01/28 (b) 1,700 1,655
Series 1998-8 Class B1
7.690% due 09/01/30 1,875 1,802
Green Tree Home Equity Loan Trust
Series 1998-C Class A2
6.030% due 07/15/29 1,650 1,654
Green Tree Recreational, Equipment &
Consumer Trust
Series 1998-B Class A3
6.050% due 10/15/10 750 760
Greenwich Capital Acceptance, Inc.
Series 1994 Class A-1
8.749% due 11/25/24 (b) 77 77
IMC Home Equity Loan Trust
Series 1998-3 Class A3
6.160% due 05/20/14 430 429
MBNA Master Credit Card Trust
Series 1994-B, Class A
4.964% due 01/15/02 (b) 2,000 1,998
New Century Home Equity Loan Trust
Series 1997-NC6 Class A4
6.730% due 07/25/22 260 254
Southern Pacific Secured Assets Corp.
Series 1998-1 Class A2
6.270% due 02/25/18 850 855
Student Loan Marketing Association
Series 1997-3 Class A1
5.352% due 04/25/06 (b) 2,455 2,425
UCFC Home Equity Loan Trust
Series 1996-B1 Class A7
8.200% due 09/15/27 270 289
Vanderbilt Mortgage Finance
Series 1998-C Class 1A6
6.750% due 10/07/28 1,000 937
------
27,457
------
CORPORATE BONDS AND NOTES - 32.8%
A.H. Belo Corp.
6.875% due 06/01/02 850 871
Ackerly Group, Inc.
9.000% due 01/15/09 300 305
Adelphia Communications Corp.
9.250% due 10/01/02 175 185
8.375% due 02/01/08 100 103
American Airlines, Inc.
Series 90-P
10.600% due 03/04/09 1,013 1,288
Series 91-A Class A-1
9.710% due 01/02/07 315 362
American General Institutional Capital
Series B
8.125% due 03/15/46 970 1,120
American Standard Co.
7.375% due 04/15/05 1,550 1,568
95 Fixed Income III Fund
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
AMR Corp.
9.950% due 03/07/01 (MTN) 1,000 1,078
Amresco, Inc.
Series 98-A
9.875% due 03/15/05 575 403
Aramark Corp.
6.750% due 08/01/04 1,365 1,382
Archibald Candy Corp.
10.250% due 07/01/04 200 203
AT&T Capital Corp.
5.438% due 04/01/99 (b) 2,000 1,999
6.920% due 04/29/99 (MTN) 105 106
6.470% due 12/03/99 (MTN) 400 401
6.480% due 12/03/99 (MTN) 1,050 1,062
6.410% due 08/13/99 (MTN) 290 291
Banesto Delaware, Inc.
8.250% due 07/28/02 1,000 1,068
Bank United Corp.
8.875% due 05/01/07 1,050 1,091
Bankamerica Corp.
5.240% due 03/05/01 (MTN)(b) 5,000 4,988
Banque Paribas New York
6.950% due 07/22/13 910 890
Bay View Capital Corp.
9.125% due 08/15/07 470 451
Beaver Valley Funding Corp.
9.000% due 06/01/17 1,295 1,479
BellSouth Capital Funding Corp.
6.040% due 11/15/26 1,680 1,737
Beneficial Corp.
5.286% due 04/02/02 (MTN)(b) 2,000 1,988
Building Materials Corp.
8.000% due 10/15/07 1,325 1,305
California Energy Co., Inc. Step Up Bond
10.250% due 01/15/04 (b) 1,500 1,578
Cencall Communications Corp.
Step Up Bond
Zero Coupon due 01/15/04 (b) 140 137
Chancellor Media Corp.
8.000% due 11/01/08 90 92
Chase Manhattan Corp.
6.000% due 11/01/05 190 192
6.750% due 09/15/06 (MTN) 230 243
6.375% due 04/01/08 620 640
Circus Circus Enterprise, Inc.
9.250% due 12/01/05 40 41
Citicorp
5.490% due 08/13/02 (MTN)(b) 2,000 1,988
6.375% due 11/15/08 (MTN) 640 662
Classic Cable, Inc.
9.875% due 08/01/08 85 89
Clear Channel Communications
6.875% due 06/15/18 400 389
Cleveland Electric Illumination Co.
7.430% due 11/01/09 230 237
Colonial Realty LP
7.500% due 07/15/01 825 830
Columbia/HCA Healthcare Corp.
8.020% due 08/05/02 (MTN) 2,000 2,035
8.360% due 04/15/24 600 627
Conmed Corp.
9.000% due 03/15/08 300 291
Connecticut Light & Power Co.
7.750% due 06/01/02 175 182
7.875% due 10/01/24 855 887
Conseco Finance Trust III
8.796% due 04/01/27 675 648
Conseco Financing Trust II
8.700% due 11/15/26 800 731
Contifinancial Corp.
8.375% due 08/15/03 1,050 767
Continental Airlines, Inc.
9.500% due 12/15/01 1,295 1,357
Crescent Real Estate Equities
6.625% due 09/15/02 850 791
7.125% due 09/15/07 925 840
Crown Central Petroleum Corp.
10.875% due 02/01/05 85 82
CS Wireless Systems, Inc.
Step Up Bond Series B
Zero Coupon due 03/01/06 (b) 340 68
CSC Holdings, Inc.
7.875% due 12/15/07 790 819
7.250% due 07/15/08 180 182
7.625% due 07/15/18 1,000 993
CSX Corp.
6.250% due 10/15/08 825 837
6.800% due 12/01/28 (MTN) 825 805
Delco Remy International, Inc.
10.625% due 08/01/06 120 128
Dime Bancorp Trust I
Series A
9.330% due 05/06/27 300 324
Dresser Industries, Inc.
7.600% due 08/15/96 780 920
EOP Operating, Ltd.
6.376% due 02/15/02 1,425 1,412
Fixed Income III Fund 96
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
ERAC USA Finance Co.
6.350% due 01/15/01 (MTN) 800 802
ERP Operating, LP
8.500% due 05/15/99 425 428
Extendicare Health Services, Inc.
9.350% due 12/15/07 300 288
Felcor Suites, LP
7.625% due 10/01/07 500 462
First Republic Bancorp
7.750% due 09/15/12 700 689
First Security Corp.
5.875% due 11/01/03 3,500 3,503
First Union National Bank
6.500% due 12/01/28 825 808
Fleet Credit Card LLC
6.450% due 10/30/00 825 839
Forcenergy, Inc.
Series B
8.500% due 02/15/07 80 58
Ford Motor Co.
6.625% due 10/01/28 1,060 1,089
Ford Motor Credit Co.
5.471% due 03/05/01 (MTN)(b) 5,000 4,998
Fox/Liberty Networks LLC
8.875% due 08/15/07 765 780
Step Up Bond
Zero Coupon due 08/15/07 (b) 480 326
Fugi JGB Investment LLC
9.870% due 12/31/49 (e) 3,090 2,256
Global Crossing Holdings, Ltd.
9.625% due 05/15/08 750 780
Goldman Sachs Group
5.480% due 02/22/02 (MTN)(b) 5,000 4,970
Granite Broadcasting Corp.
8.875% due 05/15/08 80 76
Grove Holdings, LLC
11.625% due 05/01/09 (b) 250 115
Grove Worldwide LLC
9.250% due 05/01/08 150 138
GS Escrow Corp.
7.000% due 08/01/03 1,725 1,690
7.125% due 08/01/05 1,175 1,170
GTE Corp.
6.840% due 04/15/18 600 640
6.940% due 04/15/28 820 891
Haven Capital Trust I
10.460% due 02/01/27 350 425
Hayes Lemmerz International, Inc.
11.000% due 07/15/06 40 44
8.250% due 12/15/08 240 240
Health Care REIT, Inc.
7.625% due 03/15/08 725 746
Hilton Hotels
7.950% due 04/15/07 290 304
HMH Properties, Inc.
Series C
8.450% due 12/01/08 140 140
IMC Global, Inc.
7.400% due 11/01/02 800 813
7.625% due 11/01/05 800 819
Imperial Capital Trust I
Series B
9.980% due 12/31/26 250 274
Imperial Credit Industries, Inc.,
Series B
9.875% due 01/15/07 550 424
Integrated Health Services
5.750% due 01/01/01 250 217
Intermedia Communications, Inc.
Series B
8.500% due 01/15/08 120 114
Interpool Capital Trust
Series B
9.875% due 02/15/27 500 524
ITC Deltacom, Inc.
11.000% due 06/01/07 125 137
Jackson Products, Inc.
9.500% due 04/15/05 90 90
James Cable Partners, LP
10.750% due 08/15/04 180 187
K Mart Corp.
7.820% due 01/02/02 (MTN) 700 707
7.840% due 01/02/02 (MTN) 800 809
7.770% due 07/02/02 (MTN) 700 707
7.470% due 07/31/02 (MTN) 400 401
9.780% due 01/05/20 800 875
Kaufman and Broad Home Corp.
7.750% due 10/15/04 925 925
Lehman Brothers Holdings, Inc.
5.801% due 01/19/00 (MTN)(b) 3,000 2,987
7.625% due 06/01/06 450 474
Level 3 Communications, Inc.
9.125% due 05/01/08 245 243
Long Island Savings Bank
7.000% due 06/13/02 500 508
97 Fixed Income III Fund
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
MCI Communications Corp.
6.125% due 04/15/02 605 614
Mcleodusa, Inc.
8.375% due 03/15/08 750 750
Merck & Co., Inc.
Series B
5.760% due 05/03/37 (MTN) 2,410 2,502
Merita Bank, Ltd.
7.150% due 12/29/49 (e) 1,200 1,161
Merrill Lynch & Co., Inc.
7.863% due 10/15/08 (b) 2,000 2,070
Metromedia Fiber Network
10.000% due 11/15/08 95 97
MMI Capital Trust I
Series B
7.625% due 12/15/27 1,300 1,275
Natexis Ambs Co. LLC
Series A
8.440% due 12/29/49 (e) 400 378
National Westminster Bank
9.375% due 11/15/03 260 301
News America, Inc.
7.300% due 04/30/28 425 436
7.625% due 11/30/28 1,200 1,280
Nextel Communications, Inc.
Step Up Bond (b)
Zero Coupon due 08/15/04 1,520 1,474
Zero Coupon due 09/15/07 2,080 1,336
Zero Coupon due 02/15/08 305 183
Nextlink Communications, Inc.
9.625% due 10/01/07 125 121
10.750% due 11/15/08 1,175 1,196
Step Up Bond
Zero Coupon due 04/15/08 (b) 575 331
Niagara Mohawk Power Corp.
8.750% due 04/01/22 430 469
Series B
7.000% due 10/01/00 3,000 3,038
Norfolk Southern Corp.
7.050% due 05/01/37 795 860
North Atlantic Energy Corp.
Series A
9.050% due 06/01/02 864 898
Northwest Airlines Inc.
7.625% due 03/15/05 2,080 1,955
Ocwen Federal Bank
12.000% due 06/15/05 325 308
Ocwen Financial Corp.
11.875% due 10/01/03 650 583
Optel, Inc.
11.500% due 07/01/08 350 341
Paging Network, Inc.
8.875% due 02/01/06 50 46
10.125% due 08/01/07 230 221
10.000% due 10/15/08 460 437
Pantry, Inc.
10.250% due 10/15/07 60 62
Pathmark Stores
9.625% due 05/01/03 90 87
Paxson Communications Corp.
11.625% due 10/01/02 450 457
Phillips Van-Heusen Corp.
9.500% due 05/01/08 80 80
Premier Parks, Inc. Step Up Bond
Zero Coupon due 04/01/08 (b) 350 237
Prime Succession Acquisition Co.
10.750% due 08/15/04 400 392
Providian Capital I
Series A
9.525% due 02/01/27 500 511
Prudential Insurance Co. of America
6.875% due 04/15/03 700 724
6.375% due 07/23/06 135 138
Psinet, Inc.
11.500% due 11/01/08 125 131
Public Service Co. New Mexico
7.100% due 08/01/05 500 504
PX Escrow Corp. Step Up Bond
Zero Coupon due 02/01/06 (b) 1,225 674
Qwest Communications International
7.250% due 11/01/08 170 174
Regal Cinemas, Inc.
9.500% due 06/01/08 165 170
Revlon Worldwide
Series B
Zero Coupon due 03/15/01 2,275 1,308
Rose Hills Corp.
9.500% due 11/15/04 475 461
Salomon Smith Barney Holdings
7.980% due 03/01/00 325 334
Seagate Technology, Inc.
7.450% due 03/01/37 715 693
Simon Debartolo Group LP
6.625% due 06/15/03 425 420
6.750% due 07/15/04 875 864
Fixed Income III Fund 98
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ----------
Sinclair Broadcast Group, Inc.
8.750% due 12/15/07 400 403
Socgen Real Estate Co. LLC
Series A
7.640% due 12/29/49 (e) 325 299
Societe Generale
7.850% due 04/29/49 (e) 300 306
Spieker Properties, LP
6.950% due 12/15/02 500 506
Summit Properties Partnership
7.200% due 08/15/07 575 548
Tele-Communications Inc.
4.795% due 09/11/00 (MTN)(b) 2,000 1,981
6.340% due 02/01/02 495 507
9.650% due 03/31/27 535 661
Tenet Healthcare Corp.
8.000% due 01/15/05 1,275 1,317
6.000% due 12/01/05 1,250 1,059
7.625% due 06/01/08 100 102
8.125% due 12/01/08 200 205
Time Warner, Inc.
7.975% due 08/15/04 375 416
8.110% due 08/15/06 750 855
8.180% due 08/15/07 750 869
9.125% due 01/15/13 580 734
8.050% due 01/15/16 800 932
6.850% due 01/15/26 1,700 1,755
6.625% due 05/15/29 650 661
Tokai Preferred Capital Co. LLC
9.980% due 12/29/49 (b) 1,500 1,275
Toledo Edison Co.
8.700% due 09/01/02 500 525
Toll Brothers Corp.
7.750% due 09/15/07 1,200 1,188
Trenwick Capital Trust I
8.820% due 02/01/37 575 629
Tricon Global Restaurants, Inc.
7.450% due 05/15/05 775 798
TU Electrical Capital V
8.175% due 01/30/37 710 775
Union Planters Bank
6.500% due 03/15/18 400 410
United Companies Financial Corp.
8.375% due 07/01/05 575 299
United Technologies Corp.
8.875% due 11/15/19 170 220
US Air, Inc.
9.625% due 02/01/01 850 882
USF&G Corp.
8.375% due 06/15/01 250 264
Valero Energy
6.750% due 12/15/02 695 701
Walt Disney Co.
Series E
5.125% due 12/15/03 (MTN) 825 820
Webster Capital Trust I
9.360% due 01/29/27 225 250
Wellsford Residential Property Trust
9.375% due 02/01/02 475 508
Wheeling-Pittsburgh Corp.
9.250% due 11/15/07 120 112
Wireless One, Inc. Step-Up Bond
Zero Coupon due 08/01/06 (b) 200 28
Worldcom, Inc.
8.875% due 01/15/06 750 820
6.950% due 08/15/28 1,205 1,293
-------
151,493
-------
EURODOLLAR BONDS - 9.5%
Amvescap PLC
6.600% due 05/15/05 675 703
Argentina, Republic of
9.164% due 04/10/05 (b) 3,245 2,921
Series 10
5.313% due 04/01/00 (b) 244 229
Series L
6.188% due 03/31/05 (b) 1,476 1,254
Arisco Productos Alimenticios
10.750% due 05/22/05 100 92
Auxiliaire Credit Foncier
5.281% due 09/25/02 (b) 915 868
Brazil, Republic of
6.125% due 04/15/24 (b) 1,080 626
Cemex SA
8.500% due 08/31/00 (MTN) 1,000 994
Citicorp
5.300% due 06/27/02 (MTN)(b) 3,000 2,975
Credit Lyonnais
5.813% due 07/10/00 (b) 4,000 3,945
6.563% due 09/19/49 (e) 1,040 832
Ford Motor Credit Co. (b)
5.468% due 01/17/02 1,500 1,485
5.525% due 02/13/03 2,000 1,982
ForeningsSparbanken AB
7.500% due 11/29/49 (e) 430 438
99 Fixed Income III Fund
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ----------
Globo Communicacoes e Participacoes SA
10.625% due 12/05/08 680 437
Household Bank Nevada NA
5.376% due 10/22/03 (MTN)(b) 4,000 3,926
Hutchison Whampoa Finance, Ltd.
7.450% due 08/01/17 525 455
Korea, Republic of
8.188% due 04/08/00 3,000 2,790
Morgan Stanley Dean Witter
5.429% due 03/11/03 (MTN)(b) 2,000 1,991
Nacional Financiera SNC
8.000% due 06/19/00 420 416
Okobank (e)
6.794% due 10/29/49 50 50
5.739% due 09/29/49 (MTN) 700 665
Panama, Republic of
8.875% due 09/30/27 1,325 1,239
Poland, Republic of, Step-up Bond
5.000% due 10/27/14 (b) 3,705 3,450
Santander Finnish Issuances
6.213% due 09/30/49 (e) 500 453
SCL Term Aereo Santiago SA
6.950% due 07/01/12 2,000 1,999
Sibneft
9.407% due 08/15/00 (b) 540 461
Skandinaviska Enskilda Banken (e)
6.625% due 03/29/49 (MTN) 790 784
7.500% due 03/29/49 615 634
8.125% due 09/06/49 475 522
6.500% due 12/29/49 1,890 1,843
Tata Electric Co.
8.500% due 08/19/17 600 455
Telefonica De Argentina SA
9.125% due 05/07/08 650 598
Tyco International Group SA
6.125% due 11/01/08 1,175 1,177
Venezuela, Republic of
Series DL
5.938% due 12/18/07 (b) 643 402
------
44,091
------
MORTGAGE-BACKED SECURITIES - 45.1%
Bear Stearns Mortgage Securities Inc.
Series 1998-2 Class B
6.750% due 04/30/30 (b) 1,568 1,591
Chase Commercial Mortgage Securities Corp
Series 1997-2 Class D
6.600% due 12/19/07 1,325 1,263
Collateralized Mortgage Securities Corp.
Series J, Class J-5 CMO
7.985% due 05/01/17 1,088 1,087
Federal Home Loan Mortgage Corp.
6.500% 30 Year TBA (d) 10,070 10,142
6.000% 30 Year TBA Gold (d) 3,200 3,161
8.250% 30 Year TBA Gold (d) 775 806
Series 1037 Class Z
9.000% due 02/15/21 1,062 1,119
Federal Home Loan Mortgage Corp.
Participation Certificate
7.000% due 2009 376 384
8.500% due 2017 855 905
8.500% due 2025 520 544
7.500% due 2026 1 1
8.500% due 2027 2,707 2,833
6.500% due 2028 353 356
7.500% due 2028 5,929 6,088
8.500% due 2028 697 729
Federal National Mortgage Association
6.000% due 2003 226 228
10.000% due 2005 185 193
7.716% due 2024 (b) 138 137
7.718% due 2026 (b) 3,614 3,686
6.000% 15 Year TBA (d) 5,930 5,945
6.500% 15 Year TBA (d) 3,100 3,144
6.000% 30 Year TBA (d) 25,140 24,810
6.500% 30 Year TBA (d) 8,850 8,908
7.000% 30 Year TBA (d) 13,600 13,872
8.000% 30 Year TBA (d) 13,225 13,696
Federal National Mortgage Association
Series 1997-16 Class M
Zero Coupon due 2/25/23 850 712
Federal National Mortgage Association
(REMIC)
Series 1992-10, Class ZD
8.000% due 11/25/21 1,736 1,851
GMAC Commercial Mortgage Securities
Inc
Series 1997-C1 Class A2
6.850% due 09/15/06 (b) 200 211
Fixed Income III Fund 100
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ---------
Government National Mortgage
Association
9.000% due 2017 2,711 2,912
7.000% due 2023 (b) 1,559 1,581
7.000% due 2023 752 769
7.000% due 2024 (b) 5,648 5,727
7.500% due 2024 354 365
7.000% due 2025 161 164
7.500% due 2025 1,422 1,466
8.000% due 2025 769 800
7.000% due 2026 1,542 1,578
7.000% due 2026 (b) 2,293 2,322
7.500% due 2026 1,669 1,721
8.000% due 2026 7,386 7,677
6.500% due 2027 (b) 4,042 4,094
6.875% due 2027 (b) 2,970 3,008
7.000% due 2027 1,712 1,752
7.500% due 2027 1,326 1,367
8.000% due 2027 8,449 8,782
7.000% due 2028 2,408 2,463
6.000% 30 Year TBA (d) 1,450 1,437
6.500% 30 Year TBA (d) 35,920 36,279
8.000% 30 Year TBA (d) 2,450 2,546
Kidder Peabody Acceptance Corp.
Series 1994-C1 Class B
6.850% due 02/01/06 1,050 1,075
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class D
8.048% due 06/15/21 (b) 1,618 1,683
Morgan Stanley Capital I
Series 1998-HF1 Class A2
6.520% due 01/15/08 1,625 1,695
Nomura Asset Securities Corp.
Series 1999-2
6.500% due 01/01/29 2,000 1,992
Paine Webber Mortgage Acceptance Corp. IV
Series 1995-M1 Class A
6.700% due 01/15/07 720 745
Residential Funding Mortgage Securities
II
Series 1997-HS5, Class M1
7.010% due 05/25/27 1,368 1,392
Resolution Trust Corp.
Series 1994 - C2 Class G
8.000% due 04/25/25 266 272
Series 1994-1 Class M-2
7.750% due 09/25/29 387 393
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1995-1 Class 2-C
7.500% due 10/25/28 (b) 319 319
Salomon Brothers Mortgage Securities VII, Inc.
Mortgage Pass-thru Certificate
Series 1994-16 Class A
8.254% due 11/25/24 (b) 338 340
Series 1997 Class A2
7.174% due 03/25/25 790 831
Structured Asset Securities Corp.
Mortgage Pass-thru Certificate
Series 1996-CFL Class A1C
5.944% due 02/25/28 128 130
Series 1996-CFL Class C
6.525% due 02/25/28 300 307
-------
208,386
-------
MUNICIPAL BONDS - 1.0%
Florida, State of, Board of Education
Capital Outlay Series B
4.750% due 06/01/23 615 601
Massachusetts Bay Transportation Authority
4.750% due 03/01/21 380 366
Massachusetts State Water Reserve
Authority
4.750% due 08/01/27 240 229
Municipal Electric Authority of Georgia
5.000% due 01/01/26 500 493
Nevada, State of
4.750% due 05/15/26 890 847
New York City, New York Municipal Water
Finance Authority Water and Sewer
System Revenue
4.750% due 06/15/25 500 478
New York, Metropolitan Transportation
Authority
4.750% due 04/01/28 330 315
North Texas, Thruway Authority Dallas
North Thruway System Revenue
4.750% due 01/01/29 700 665
Ohio, State of, Turnpike Common
Turnpike Revenue Series B
4.750% due 02/15/28 280 267
Triborough Bridge & Tunnel Authority of
New York Series A
4.750% due 01/01/24 280 267
-------
4,528
-------
101 Fixed Income III Fund
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ---------
UNITED STATES GOVERNMENT
AGENCIES - 0.7%
Federal Home Loan Mortgage Corp.
5.750% due 07/15/03 800 821
Federal National Mortgage Association
6.000% due 05/15/08 165 174
6.000% due 05/15/08 (f) 1,385 1,462
Tennessee Valley Authority
5.880% due 04/01/36 760 806
-------
3,263
-------
UNITED STATES GOVERNMENT
TREASURIES - 6.8%
United States Treasury Bond
Principal Strip
8.750% due 05/15/20 7,200 2,201
United States Treasury Bonds
8.875% due 02/15/19 2,000 2,848
6.625% due 02/15/27 (f) 4,275 5,057
7.250% due 05/15/16 1,000 1,211
9.125% due 05/15/18 3,000 4,340
8.875% due 08/15/17 2,000 2,817
8.125% due 08/15/19 240 321
6.875% due 08/15/25 810 982
United States Treasury Notes
6.000% due 06/30/99 1,525 1,535
5.875% due 11/15/99 200 202
5.625% due 12/31/99 275 278
5.625% due 11/30/00 400 407
5.375% due 02/15/01 680 690
6.375% due 03/31/01 650 674
6.625% due 04/30/02 100 106
6.250% due 06/30/02 3,805 3,994
3.625% due 07/15/02 440 437
3.625% due 07/15/02 (f) 1,160 1,151
6.250% due 02/15/07 1,920 2,106
-------
31,357
-------
YANKEE BONDS - 2.1%
Amvescap PLC
6.600% due 05/15/05 200 200
Argentina, Republic of
14.250% due 11/30/02 (b) 625 606
Brazil, Republic of,
Series EI-L
6.125% due 04/15/06 (b) 960 620
Colombia, Republic of
12.243% due 08/13/05 (b) 1,210 1,107
Colt Telecom Group PLC Step Up Bond
Zero Coupon due 12/15/06 (b) 500 418
Crown Packaging Enterprise, Ltd. Step Up Bond
Zero Coupon due 08/01/06 (b) 300 15
Diamond Cable Communication PLC Step Up Bond
Zero Coupon due 02/15/07 (b) 420 298
Edperbrascan Corp.
7.125% due 12/16/03 775 805
Grupo Televisa SA Step Up Bond
Zero Coupon due 05/15/08 (b) 475 353
Petro-Canada
7.000% due 11/15/28 800 789
Petroleum Geo-Services
7.125% due 03/30/28 260 243
Royal Caribbean Cruises Ltd.
7.500% due 10/15/27 1,325 1,276
St. George Bank, Ltd.
7.150% due 10/01/05 775 805
TFM SA de CV Step Up Bond
Zero Coupon due 06/15/09 (b) 1,410 736
TV Azteca SA de CV
10.125% due 02/15/04 900 766
YPF Sociedad Anonima
7.250% due 03/15/03 65 61
8.000% due 02/15/04 480 456
-------
9,554
-------
TOTAL LONG-TERM INVESTMENTS
(cost $479,785) 480,129
-------
NOTIONAL
AMOUNT
(000)
($)
------------
OPTIONS PURCHASED - 0.1%
Japan Government Bond (h)**
July 99.38 Put JPY1,227,600 289
United States Treasury Bonds (h)*
January 110.43 Call 1,700 40
February 103.40 Call 5,100 178
February 111.03 Call 3,100 70
April 110.25 Call 5,100 42
April 110.00 Call 3,400 30
-------
TOTAL OPTIONS PURCHASED
(cost $571) 649
-------
Fixed Income III Fund 102
<PAGE>
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- ---------
PREFERRED STOCKS - 1.5%
American RE Capital 18,100 468
Australia & New Zealand Banking Group, Ltd. 7,200 201
California Federal Preferred Capital
Corp. Series A 94,050 2,381
Centaur Funding Corp. 1,000 600
Citigroup, Inc. 9,050 480
Credit Lyonnais Capital S.C.A. - ADR 3,500 76
El Paso Electric Co. Series A
Payment in Kind Preferred Stock 4,865 522
Equity Office Properties Trust
Series B 15,000 609
NB Capital Corp. 24,000 625
Pinto Totta International Finance, Ltd. 1,175 1,070
--------
TOTAL PREFERRED STOCKS
(cost $7,244) 7,032
--------
WARRANTS - 0.0%
EOP Operating, Ltd.
1999 Warrants (h) 1,200 10
Capital Pacific Holdings, Inc.
2002 Warrants (h) 2,212 2
--------
TOTAL WARRANTS 12
(cost $10) --------
PRINCIPAL
AMOUNT
(000)
$
----------
SHORT-TERM INVESTMENTS - 17.3%
AT&T Capital Corp.
5.627% due 01/15/99 (MTN)(a)(b) 2,000 2,000
Federal Home Loan Mortgage Corp. Discount Notes
5.450% due 01/15/99 (a)(f) 4,000 3,992
5.450% due 01/28/99 (a) 5,000 4,981
Frank Russell Investment Company
Money Market Fund, due on demand (a) 68,081 68,081
United States Treasury Bills (f)(g)
3.740% due 01/07/99 (a) 160 160
4.410% due 03/04/99 480 477
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $79,690) 79,691
--------
TOTAL INVESTMENTS - 122.8%
(identified cost $567,300)(c) 567,513
OTHER ASSETS AND LIABILITIES,
NET, INCLUDING OPTIONS WRITTEN - (22.8%) (105,323)
--------
NET ASSETS - 100.0% 462,190
========
(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 in connection with futures contracts purchased (sold) and
options written by the Fund.
(g) Rate noted is yield-to-maturity.
(h) Nonincome-producing security.
* Each contract represents $100,000 notional value.
** Represents 1 OTC contract.
Abbreviations:
ADR - American Depository Receipt
CMO - Collateralized Mortgage Obligation
MTN - Medium Term Note
PLC - Public Limited Company
REIT - Real Estate Investment Trust
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
Foreign Currency Abbreviations:
JPY - Japanese Yen
USD - U.S. dollar
The accompanying notes are an integral part of the financial statements.
103 Fixed Income III Fund
<PAGE>
The accompanying notes are an integral part of the financial statements.
FIXED INCOME III FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS* (000)
------------ ----------------
FUTURES CONTRACTS
(Notes 2 and 3)
LONG POSITIONS
Eurodollar Financial
expiration date 12/99 15 $ (8)
expiration date 03/00 15 (4)
expiration date 06/00 15 (2)
expiration date 09/00 18 6
expiration date 12/00 3 5
expiration date 03/01 3 5
expiration date 06/01 3 4
expiration date 09/01 10 14
United States Treasury 5 Year Note
expiration date 03/99 147 (8)
United States Treasury 10 Year Note
expiration date 03/99 252 (358)
United States Treasury 30 Year Bond
expiration date 03/99 73 (72)
SHORT POSITIONS
United States Treasury 5 Year Note
expiration date 03/99 11 2
United States Treasury 10 Year Note
expiration date 03/99 226 (78)
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts (S) $ (494)
==============
(S) At December 31, 1998, United States Government Securities valued at $12,299
were held as collateral in connection with futures contracts purchased
(sold) and options written by the Fund.
* Each contract represents $100,000 notional value.
NOTIONAL MARKET
AMOUNT VALUE
(000) (000)
$ $
---------- -------
OPTIONS WRITTEN
(Notes 2 and 3)
United States Treasury Bonds*
January 102.30 Put 1,700 --
February 99.26 Put 5,100 --
March 111.14 Call 2,700 28
April 114.08 Call 3,400 8
April 114.33 Call 5,100 11
-------
Total Liability for Options Written
(premiums received $205)(S) 47
=======
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
(Note 2)
UNREALIZED
CONTRACTS TO IN EXCHANGE APPRECIATION
DELIVER FOR SETTLEMENT (DEPRECIATION)
(000) (000) DATE (000)
- ------------ ----------- ---------- -----------------
JPY 27,501 USD 239 03/18/99 $ (6)
================
The accompanying notes are an integral part of the financial statements.
Fixed Income III Fund 104
<PAGE>
FIXED INCOME III FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
<S> <C> <C>
ASSETS
Investments at market (identified cost $567,300)(Note 2) .......... $ 567,513
Forward foreign currency exchange contracts (cost $239)(Note 2) .... 238
Receivables:
Dividends and interest ............................................ 5,080
Investments sold (regular settlement) ............................ 19,356
Investments sold (delayed settlement)(Note 2) .................... 60,923
Fund shares sold .................................................. 1,393
Short-term investments held as collateral for securities
loaned, at market (Note 3) ........................................ 16,054
-----------------
Total Assets .................................................... 670,557
LIABILITIES
Payables:
Due to Custodian ..................................... $ 6,948
Investments purchased (regular settlement) .......... 4,544
Investments purchased (delayed settlement)(Note 2).... 179,659
Fund shares redeemed ................................. 545
Accrued fees to affiliates (Note 4) ................. 237
Other accrued expenses ............................... 73
Daily variation margin on futures contracts
(Notes 2 and 3) ..................................... 14
Forward foreign currency exchange contracts (cost
$239)(Note 2) ........................................ 246
Options written, at market value (premiums
received $205)(Notes 2 and 3) ........................ 47
Payable upon return of securities loaned, at
market (Note 3) ...................................... 16,054
------------
Total Liabilities ............................................... 208,367
-----------------
NET ASSETS ......................................................... $ 462,190
=================
NET ASSETS CONSIST OF:
Accumulated distributions in excess of net investment income ....... $ (145)
Accumulated distributions in excess of net realized gain ........... (1,129)
Unrealized appreciation (depreciation) on:
Investments ....................................................... 213
Futures contracts ................................................. (494)
Options written ................................................... 158
Foreign currency-related transactions ............................. (6)
Shares of beneficial interest ...................................... 452
Additional paid-in capital ......................................... 463,141
-----------------
NET ASSETS ......................................................... $ 462,190
=================
NET ASSET VALUE, offering and redemption price per share:
($462,190,324 divided by 45,211,976 shares of $.01 par value
shares of beneficial interest outstanding) ..................... $ 10.22
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
105 Fixed Income III Fund
<PAGE>
FIXED INCOME III FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
<S> <C> <C>
INVESTMENT INCOME:
Interest ......................................................... $ 24,979
Dividends from Money Market Fund (Note 5) ....................... 3,680
Dividends ........................................................ 592
-------------
Total Investment Income ........................................ 29,251
EXPENSES (Notes 2 and 4):
Advisory fees .................................. $ 2,361
Administrative fees ............................ 20
Custodian fees ................................. 258
Transfer agent fees ............................ 213
Professional fees .............................. 32
Registration fees .............................. 53
Trustees' fees ................................. 4
Miscellaneous .................................. 31
-------------
Total Expenses .................................................. 2,972
-------------
Net investment income ............................................... 26,279
-------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments .......................................... 5,026
Futures contracts .................................... 4,347
Options written ...................................... 249
Foreign currency-related transactions ................ 114 9,736
-------------
Net change in unrealized appreciation or
depreciation of:
Investments .......................................... (6,093)
Futures contracts .................................... (610)
Options written ...................................... 84
Foreign currency-related transactions ................ (123) (6,742)
------------- -------------
Net gain (loss) on investments ...................................... 2,994
-------------
Net increase (decrease) in net assets resulting
from operations .................................................... $ 29,273
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income III Fund 106
<PAGE>
FIXED INCOME III FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
YEARS ENDED DECEMBER 31,
1998 1997
----------- -----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................... $ 26,279 $ 20,665
Net realized gain (loss) ........................... 9,736 6,722
Net change in unrealized appreciation or
depreciation ........................................ (6,742) 4,087
----------- -----------
Net increase (decrease) in net assets
resulting from operations ......................... 29,273 31,474
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................... (26,251) (20,551)
In excess of net investment income .................. (390) (798)
Net realized gain on investments .................... (10,618) (1,962)
In excess of net realized gain on investments ....... (1,252) --
----------- -----------
Total Distributions to Shareholders ............... (38,511) (23,311)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ........................ 88,995 82,193
----------- -----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .......... 79,757 90,356
NET ASSETS
Beginning of period ................................. 382,433 292,077
----------- -----------
End of period (including accumulated
distributions in excess of
net investment income of $145 and $28,
respectively) .................................... $ 462,190 $ 382,433
=========== ===========
The accompanying notes are an integral part of the financial statements.
107 Fixed Income III Fund
<PAGE>
FIXED INCOME III FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ...................... $ 10.42 $ 10.17 $ 10.34 $ 9.37 $ 10.44
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (b) .............. .62 .63 .64 .67 .66
Net realized and unrealized gain
(loss) on investments ................... .08 .32 (.16) .97 (1.07)
-------- -------- -------- -------- --------
Total Income From Investment
Operations ............................ .70 .95 .48 1.64 (.41)
-------- -------- -------- -------- --------
DISTRIBUTIONS:
Net investment income ................... (.61) (.62) (.64) (.67) (.66)
In excess of net
investment income ....................... (.01) (.02) (.01) -- --
Net realized gain on
investments ............................. (.25) (.06) -- -- --
In excess of net realized gain on
investments ............................. (.03) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ................... (.90) (.70) (.65) (.67) (.66)
-------- -------- -------- -------- --------
NET ASSET VALUE, END
OF PERIOD ................................ $ 10.22 $ 10.42 $ 10.17 $ 10.34 $ 9.37
======== ======== ======== ======== ========
TOTAL RETURN (%) ......................... 6.80 9.64 4.88 17.99 (3.89)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of
period ($000 omitted) ................... 462,190 382,433 292,077 252,465 166,620
Ratios to average net assets (%)(a):
Operating expenses .................... .67 .70 .73 .61 .20
Net investment income ................. 5.91 6.13 6.32 6.83 7.02
Portfolio turnover rate (%) ............ 342.49 274.84 144.26 141.37 134.11
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Fixed Income III Fund 108
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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.
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 as approved by the
Board of Trustees on April 27, 1998.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All premiums and discounts, including original
issue discounts, for the Funds 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.
At December 31, 1998, 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:
12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 Totals
-------- -------- -------- -------- -------- --------
Fixed Income III $ -- $ -- $ -- $ -- $ -- $ --
109 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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, 1998 are as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Equity I $ 976,814,803 $ 428,461,319 $ (34,893,816) $ 393,567,503
Equity II 463,507,740 97,771,333 (26,221,477) 71,549,856
Equity III 179,350,183 38,835,676 (7,336,272) 31,499,404
Equity Q 791,185,861 406,797,886 (24,167,525) 382,630,361
International 872,283,880 199,944,840 (73,433,837) 126,511,003
Fixed Income I 1,040,329,916 26,192,246 (3,485,598) 22,706,648
Fixed Income III 568,406,976 10,501,974 (11,396,402) (894,428)
</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, 1998:
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) PAID-IN CAPITAL
---------------- -------------- -----------------
Equity I $ 64,305 $ (64,305) $--
Equity II (169) 169 --
International 3,470,541 (3,470,541) --
Fixed Income I (373,846) 373,846 --
Fixed Income III 245,049 123,185 (368,234)
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.
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.
Notes to Financial Statements 110
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
(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 and Fixed Income III 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, 1998, 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.
111 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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.
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1998, 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>
Equity I $1,224,837,610 $1,269,549,747 International $ 620,524,114 $ 693,586,732
Equity II 646,556,723 615,061,895 Fixed Income I 339,403,003 205,533,319
Equity III 303,926,687 358,339,957 Fixed Income III 301,079,692 204,521,758
Equity Q 803,666,498 969,277,807
</TABLE>
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were as
follows:
PURCHASES SALES
--------------- ----------------
Fixed Income I $1,853,752,249 $1,814,649,421
Fixed Income III 1,348,648,312 1,292,359,798
Notes to Financial Statements 112
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
OPTIONS WRITTEN AND FUTURES CONTRACTS: Fund transactions in written options and
futures contracts for the year ended December 31, 1998 were as follows:
EQUITY I FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- ----------------
Outstanding December 31, 1997 176 $ 39,023,305
Opened 1,312 347,746,256
Closed (1,308) (332,479,683)
---------- ----------------
Outstanding December 31, 1998 180 $ 54,289,878
========== ================
EQUITY II FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- ----------------
Outstanding December 31, 1997 146 $ 26,114,344
Opened 992 220,431,273
Closed (939) (200,555,902)
---------- ----------------
Outstanding December 31, 1998 199 $ 45,989,715
========== ================
EQUITY III FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- ----------------
Outstanding December 31, 1997 39 $ 7,190,350
Opened 515 121,758,961
Closed (502) (118,801,607)
---------- ----------------
Outstanding December 31, 1998 52 $ 10,147,704
========== ================
EQUITY Q FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- ----------------
Outstanding December 31, 1997 109 $ 24,972,119
Opened 680 177,069,554
Closed (705) (178,217,873)
---------- ----------------
Outstanding December 31, 1998 84 $ 23,823,800
========== ================
(1) The aggregate face value of contracts is computed on the date each contract
was opened.
113 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
INTERNATIONAL FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
----------- ---------------
Outstanding December 31, 1997 361 $ 46,978,235
Opened 4,006 346,781,926
Closed (3,721) (344,886,862)
----------- ---------------
Outstanding December 31, 1998 646 $ 48,873,299
=========== ===============
FIXED INCOME I WRITTEN OPTIONS
NUMBER OF PREMIUMS
CONTRACTS (2) RECEIVED
------------- -------------
Outstanding December 31, 1997 209 $ 135,513
Opened 42 555,920
Closed (20) (188,887)
Expired (40) (242,546)
------------- -------------
Outstanding December 31, 1998 191 $ 260,000
============= =============
FIXED INCOME III WRITTEN OPTIONS
NUMBER OF PREMIUMS
CONTRACTS (2) RECEIVED
------------- -------------
Outstanding December 31, 1997 226 $ 146,732
Opened 53 436,528
Closed (13) (137,221)
Expired (86) (240,850)
------------- -------------
Outstanding December 31, 1998 180 $ 205,189
============= =============
<TABLE>
<CAPTION>
FUTURES CONTRACTS FUTURES CONTRACTS
FIXED INCOME III SOLD SHORT PURCHASED
AGGREGATE AGGREGATE
NUMBER OF FACE VALUE OF NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1) CONTRACTS CONTRACTS (1)
----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1997 -- $ -- 429 $ 50,469,783
Opened (549) (64,344,152) 2,973 362,544,033
Closed 312 36,243,850 (2,848) (337,130,765)
----------- -------------- ----------- ---------------
Outstanding December 31, 1998 (237) $ (28,100,302) 554 $ 75,883,051
=========== ============== =========== ===============
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
(2) Each contract represents $100,000 notional value.
SECURITIES LENDING: Effective April 27, 1998, the Investment Company resumed
its securities lending program. The program allows each Fund to loan securities
with a value up to 33 1/3% of its total assets to certain brokers. The Fund
receives cash (U.S. currency), U.S. Government or U.S. Government agency
obligations as collateral against the loaned securities. To the extent that a
loan is secured by cash collateral, such collateral shall be invested by Morgan
Stanley Trust Company ("MSTC") in short-term instruments, money market mutual
funds, and such other short-term investments, provided the investments meet
certain quality and diversification requirements. Under the securities-lending
arrangement, the collateral received is recorded on the Fund's statement of
assets and liabilities along with the related obligation to return the
collateral. In those situations where the Company has relinquished control of
securities transferred, it derecognizes the securities and records a receivable
from the counterparty.
Income generated from the investment of cash collateral, less negotiated rebate
fees paid to participating brokers and transaction costs, is divided between
the Fund and MSTC and is included as interest income for the Fund. To the
extent that a loan is secured
Notes to Financial Statements 114
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
by non-cash collateral, brokers pay the Fund negotiated lenders' fees, which
are divided between the Fund and MSTC and are included as interest income for
the Fund. All collateral received will be in an amount at least equal to 100%
(for fixed income securities), 102% (for loans of U.S. equity securities) or
105% (for non-U.S. equity securities) of the market value of the loaned
securities at the inception of each loan. This collateral must be maintained at
not less than the above respective percentages of the market value of the
loaned securities during the period of the loan. Should the borrower of the
securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Consequently, loans are made
only to borrowers which are deemed to be of good financial standing. As of
December 31, 1998, the value of outstanding securities on loan and the value of
collateral amounted to as follows:
<TABLE>
<CAPTION>
VALUE OF VALUE OF VALUE OF VALUE OF
SECURITIES ON LOAN COLLATERAL SECURITIES ON LOAN COLLATERAL
------------------ ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Equity I $ 17,693,021 $ 17,956,583 International $ 29,331,646 $ 28,448,832
Equity II 31,753,266 31,889,853 Fixed Income I 112,035,074 117,925,000
Equity Q 29,689,688 29,921,738 Fixed Income III 15,258,232 16,053,850
</TABLE>
4. RELATED PARTIES
ADVISOR: Frank Russell Investment Management Company ("FRIMCo" or "Advisor")
operates and administers all of the Funds which comprise the Investment
Company, and advises 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, a wholly owned
subsidiary of the Northwestern Mutual Life Insurance Company. Frank Russell
Company 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, 1998, the advisory fee paid to FRIMCo, for
the Funds listed below, in accordance with the Investment Company's Advisory
Agreement with that firm, amounted to $31,868,785 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. Effective
December 1, 1998, the advisory fee annual rates were reduced by the
Administrator fee of .05%; the new rates are:
ANNUAL RATE ANNUAL RATE
------------- -------------
Equity I 0.55% International 0.70%
Equity II 0.70 Fixed Income I 0.25
Equity III 0.55 Fixed Income III 0.50
Equity Q 0.55
FRIMCo calculates its advisory fee based on average daily net assets for each
Fund less any advisory fee incurred on assets invested in the Money Market
Fund (see Note 5) thereby eliminating any duplication of fees.
ADMINISTRATOR: Effective December 1, 1998, the Investment Company & Board of
Trustees approved a plan to pay a .05% fee of the average daily net assets of
the Fund, to FRIMCo, in accordance with the Investment Company's Advisory
Agreement with that firm. The fee paid to FRIMCo for the Funds listed above
amounted to $238,776 before waivers.
ANALYTIC SERVICES: Fees for analytic services provided to the Funds are paid
or accrued to Russell/Mellon Analytical Services, an affiliate of the
Investment Company. Russell/Mellon Analytical Services provides its TruVP
System to the Funds, pursuant to a written Service Agreement. The TruVP
System provides analytics used by the investment department.
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, 1998 were $2,085,298.
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.
115 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1998 WERE AS FOLLOWS:
<TABLE>
<CAPTION>
ADVISORY ADMINISTRATION ANALYTIC TRANSFER
FEES FEES SERVICE FEES AGENT FEES TOTALS
------------ -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Equity I $ 620,110 $ 56,745 $ 8,932 $ 94,578 $ 780,365
Equity II 295,742 21,303 3,522 35,933 356,500
Equity III 95,138 8,729 1,698 8,062 113,627
Equity Q 535,051 48,743 1,665 35,145 620,604
International 589,109 42,321 10,447 60,940 702,817
Fixed Income I 197,571 41,246 88 42,830 281,735
Fixed Income III 191,447 19,689 -- 26,345 237,481
------------ -------------- -------------- ------------ ------------
$ 2,524,168 $ 238,776 $ 26,352 $ 303,833 $ 3,093,129
============ ============== ============== ============ ============
</TABLE>
BROKERAGE COMMISSIONS: The Funds may effect portfolio transactions through
Frank Russell Securities, Inc., an affiliate of the Advisor, 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,
1998 were as follows:
Equity I $ 325,697 Equity Q $ 19,198
Equity II 26,102 International 319,838
Equity III 110,191
Additionally, the Funds paid brokerage commissions to non-affiliated brokers
who provided brokerage and research services to the Advisor.
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 $24,875 for the year ended December 31,
1998, and were allocated to each Fund on a pro rata basis, including 21
affiliated Funds not presented 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, 1998,
$343,877,000 of the Money Market Fund's net assets represents investments by
these Funds and $431,989,000 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
---------------------------------------------------------------
1998 1997 1998 1997
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
EQUITY I
Proceeds from shares sold 11,649,184 9,571,549 $ 382,854,757 $ 318,926,605
Proceeds from reinvestment of distributions 2,804,239 8,403,086 91,197,788 251,274,449
Payments for shares redeemed (12,417,244) (12,432,666) (413,663,483) (416,468,295)
------------ -------------- ------------- -------------
Total net increase (decrease) 2,036,179 5,541,969 $ 60,389,062 $ 153,732,759
============ ============== ============= =============
EQUITY II
Proceeds from shares sold 6,590,024 4,308,084 $ 209,065,456 $ 138,867,923
Proceeds from reinvestment of distributions 1,013,507 1,960,489 30,141,042 61,436,762
Payments for shares redeemed (4,974,795) (3,821,842) (158,755,431) (128,686,967)
------------ -------------- ------------- -------------
Total net increase (decrease) 2,628,736 2,446,731 $ 80,451,067 $ 71,617,718
============ ============== ============= =============
</TABLE>
Notes to Financial Statements 116
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
<TABLE>
<CAPTION>
SHARES DOLLARS
---------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
EQUITY III
Proceeds from shares sold 1,912,599 1,592,374 $ 57,633,142 $ 53,105,282
Proceeds from reinvestment of distributions 832,353 1,960,469 23,877,077 57,577,559
Payments for shares redeemed (3,641,754) (2,899,571) (106,697,244) (93,209,130)
----------- ----------- ------------- -------------
Total net increase (decrease) (896,802) 653,272 $ (25,187,025) $ 17,473,711
=========== =========== ============= =============
EQUITY Q
Proceeds from shares sold 7,788,647 8,963,096 $ 298,738,895 $ 322,888,554
Proceeds from reinvestment of distributions 2,920,742 5,185,592 109,535,351 181,290,822
Payments for shares redeemed (8,992,387) (11,469,089) (344,894,333) (424,121,094)
----------- ----------- ------------- -------------
Total net increase (decrease) 1,717,002 2,679,599 $ 63,379,913 $ 80,058,282
=========== =========== ============= =============
INTERNATIONAL
Proceeds from shares sold 8,855,148 10,420,072 $ 330,797,414 $ 390,495,912
Proceeds from reinvestment of distributions 756,486 1,995,915 27,769,744 68,774,542
Payments for shares redeemed (11,065,451) (9,560,991) (412,201,782) (360,640,598)
----------- ----------- ------------- -------------
Total net increase (decrease) (1,453,817) 2,854,996 $ (53,634,624) $ 98,629,856
=========== =========== ============= =============
FIXED INCOME I
Proceeds from shares sold 18,203,608 13,731,606 $ 398,149,172 $ 290,844,536
Proceeds from reinvestment of distributions 2,497,093 1,875,831 54,549,439 39,542,171
Payments for shares redeemed (12,833,370) (10,089,965) (281,502,033) (213,616,474)
----------- ----------- ------------- -------------
Total net increase (decrease) 7,867,331 5,517,472 $ 171,196,578 $ 116,770,233
=========== =========== ============= =============
FIXED INCOME III
Proceeds from shares sold 20,310,407 16,294,869 $ 212,962,809 $ 168,283,128
Proceeds from reinvestment of distributions 3,397,977 2,096,517 35,268,436 21,580,122
Payments for shares redeemed (15,209,804) (10,407,484) (159,235,867) (107,669,883)
----------- ----------- ------------- -------------
Total net increase (decrease) 8,498,580 7,983,902 $ 88,995,378 $ 82,193,367
=========== =========== ============= =============
</TABLE>
7. BENEFICIAL INTEREST
As of December 31, 1998, the following Funds have one or more shareholders
with shares of beneficial interest of greater than 10% of the total
outstanding shares of each respective Fund or Class: Equity I 17.0%, Equity
III 12.4%, Equity Q 19.4%, Fixed Income I 10.3% and 11.6%, Fixed Income III
21.0%, and International 18.7%.
117 Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Frank Russell Investment Company:
In our opinion, the accompanying statements of assets and liabilities, including
the statements of net assets, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position 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, and Fixed Income III (the "Funds")) at
December 31, 1998, and the results of their operations, the changes in their net
assets and the financial highlights for the periods indicated therein, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments owned at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
February 15, 1999
Report of Independent Accountants 118
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
INSTITUTIONAL FUNDS
TAX INFORMATION
December 31, 1998 (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, 1998:
TOTAL LONG-TERM
CAPITAL GAINS
---------------
Equity I $ 62,310,742
Equity II 30,796,611
Equity III 19,259,439
Equity Q 93,595,688
International 13,146,301
Fixed Income I 7,520,517
Fixed Income III 5,091,186
119 Tax Information
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
INSTITUTIONAL FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS
December 31, 1998
There was a Special Meeting in Lieu of Annual Meeting of Shareholders of the
Frank Russell Investment Company (the "Investment Company") held at 909 A
Street, Tacoma, Washington on November 19, 1998.
THE FOLLOWING MATTERS WERE VOTED UPON AT THE MEETING
THE RESULTS OF EACH VOTE ACCOMPANY THE DESCRIPTION OF EACH MATTER
- -----------------------------------------------------------------
1. This item number was reserved for a matter affecting another FRIC Fund of
the Investment Company.
2. To elect the members of the Board of Trustees of the Investment Company.
VOTE:
-----
FOR WITHHELD
------------------- ----------------
Lynn L. Anderson 1,142,054,288.045 2,131,664.459
Paul E. Anderson 1,139,319,894.878 2,166,057.626
Paul Anton, PhD. 1,141,736,993.856 2,448,958.648
William E. Baxter 1,141,722,018.319 2,463,934.185
Lee C. Gingrich 1,142,034,296.045 2,161,656.459
Eleanor W. Palmer 1,141,728,049.319 2,457,903.185
3. To ratify the selection of PricewaterhouseCoopers LLP as the Investment
Company's independent accountants.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
----------------- ------------- ----------------
1,141,762,608.691 732,463.728 1,690,880.085
4. To approve a proposed advisory agreement with Frank Russell Investment
Management Company ("FRIMCo"), the current investment manager of the
Investment Company, restructuring the manner in which services are provided
to the Funds, providing for compensation to FRIMCo for managing certain
additional assets of the Funds.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
------------------ ------------ --------------
Equity I Fund 36,341,070.869 4,902.000 159,605.570
Equity II Fund 14,331,170.684 0.000 776.149
Equity III Fund 6,238,494.343 0.000 0.000
Equity Q Fund 27,904,535.584 4,666.000 8,868.175
International Fund 24,985,311.003 0.000 2,779.822
Fixed Income I Fund 41,762,498.137 5,890.000 101,521.907
Fixed Income III Fund 42,820,803.200 948.000 24,267.791
Matter Submitted to a Vote of Shareholders 120
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
INSTITUTIONAL FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
5. To approve a proposed advisory agreement with FRIMCo, to take effect upon the
closing of the acquisition of Frank Russell Company by The Northwestern
Mutual Life Insurance Company.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
---------------- ------------- ------------------
Equity I Fund 36,344,677.022 8,244.847 162,656.570
Equity II Fund 14,327,947.425 3,223.259 776.149
Equity III Fund 6,237,273.133 1,221.210 0.000
Equity Q Fund 27,901,650.194 7,960.390 8,459.175
International Fund 24,983,629.457 1,681.546 2,779.822
Fixed Income I Fund 41,758,766.067 6,758.070 104,385.907
Fixed Income III Fund 42,816,279.312 4,523.888 25,215.791
6. To approve a change to the Funds' fundamental investment restrictions
limiting borrowing activities, authorizing a higher borrowing level for the
purpose of meeting shareholder redemption requests.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
----------------- -------------- --------------
Equity I Fund 34,881,776.022 140,644.847 157,898.570
Equity II Fund 14,293,260.425 37,910.259 776.149
Equity III Fund 5,962,755.133 1,221.210 0.000
Equity Q Fund 26,904,399.194 10,401.390 7,822.175
International Fund 24,145,092.457 50,419.546 5,539.822
Fixed Income I Fund 40,313,361.067 218,514.070 96,263.907
Fixed Income III Fund 41,577,127.312 6,992.888 32,957.791
7. To approve the elimination of certain fundamental investment restrictions
applicable to the Funds.
VOTE:
-----
a) elimination of restriction on investing in interests of oil and gas:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- -------------- ----------------
Equity I Fund 28,659,641.732 317,389.816 6,203,287.891
Equity II Fund 11,709,383.902 109,215.568 2,513,347.363
Equity III Fund 5,849,383.118 10,276.575 104,316.650
Equity Q Fund 21,756,160.751 155,537.447 5,010,924.561
International Fund 19,353,168.975 358,227.148 4,489,655.702
Fixed Income I Fund 33,986,085.658 440,208.000 6,201,845.386
Fixed Income III Fund 32,278,488.157 681,427.996 8,657,161.838
121 Matter Submitted to a Vote of Shareholders
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
INSTITUTIONAL FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
b) elimination of restriction on investing in issuers in operation for less
than three years:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- -------------- --------------
Equity I Fund 34,676,883.206 325,875.663 177,560.570
Equity II Fund 14,215,457.857 111,711.827 4,777.149
Equity III Fund 5,949,290.558 14,685.785 0.000
Equity Q Fund 26,736,814.747 173,047.837 12,760.175
International Fund 24,021,772.580 172,777.423 6,501.822
Fixed Income I Fund 40,068,845.067 457,594.070 101,699.907
Fixed Income III Fund 40,928,916.316 662,089.884 26,071.791
c) elimination of restriction on investing in issuers beneficially owned by
affiliated persons:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ---------------- --------------
Equity I Fund 34,164,970.089 838,589.780 176,759.570
Equity II Fund 13,874,361.014 452,808.670 4,777.149
Equity III Fund 5,305,584.907 658,391.436 0.000
Equity Q Fund 26,306,337.719 604,271.865 12,013.175
International Fund 23,422,860.346 768,928.657 9,262.822
Fixed Income I Fund 39,737,392.810 782,965.327 107,780.907
Fixed Income III Fund 40,479,193.788 1,111,812.412 26,071.791
d) elimination of restriction on investing in warrants not listed on the NYSE
or ASE:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
---------------- -------------- --------------
Equity I Fund 34,835,398.765 166,798.104 178,122.570
Equity II Fund 14,261,944.425 62,975.259 7,027.149
Equity III Fund 5,952,478.558 11,497.785 0.000
Equity Q Fund 26,764,379.184 145,470.400 12,773.175
Fixed Income III Fund 40,984,085.312 608,724.888 24,267.791
8. This item number was reserved for a matter affecting another FRIC Fund of
the Investment Company.
To act upon any other business as may legally have come before the Special
Meeting or any adjournment thereof.
VOTE:
-----
GRANT WITHHELD
------------------ -------------------
Equity I Fund 34,173,260.972 2,332,317.467
Equity II Fund 13,255,977.883 1,075,968.950
Equity III Fund 5,974,898.802 263,595.541
Equity Q Fund 26,694,511.802 1,223,557.957
International Fund 23,557,625.355 1,430,465.470
Fixed Income I Fund 39,088,935.951 2,780,974.093
Fixed Income III Fund 39,373,967.069 3,472,051.922
Matter Submitted to a Vote of Shareholders 122
<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
Mark E. Swanson, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
MANAGER, TRANSFER AND DIVIDEND PAYING 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
PricewaterhouseCoopers LLP
1001 4th Avenue Plaza
Suite 4200
Seattle, WA 98154
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
MONEY MANAGERS
EQUITY I
Alliance Capital Management L.P., Minneapolis, MN
Barclays Global Investors, N.A., San Francisco, CA
Equinox Capital Management, Inc., New York, NY
INVESCO Capital Management, Inc., Atlanta, GA
Lincoln Capital Management Company, Chicago, IL
Morgan Stanley Asset Management, Inc., New York, NY
Peachtree Asset Management, Atlanta, GA
Sanford C. Bernstein & Co., Inc., New York, NY
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
Westpeak Investment Advisors, L.P., Boulder, Co
EQUITY III
Equinox Capital Management, Inc., New York, NY
Trinity Investment Management Corporation, Boston, MA
Westpeak Investment Advisors, L.P., Boulder, Co
EQUITY Q
Barclays Global Investors, N.A., 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, LLC, 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 III
BEA Associates, Inc., 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.
123 Manager, Money Managers and Service Providers
<PAGE>
[RUSSELL LOGO]
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402-5120
253-627-7001
800-972-0700
Fax: 253-591-3495
A-5147(299) 36-08-020
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
- ---------------
SPECIALTY FUNDS
- ---------------
1998 Annual Report
CLASS C, CLASS E, & CLASS S
REAL ESTATE SECURITIES FUND
EMERGING MARKETS FUND
SPECIAL GROWTH FUND
SHORT TERM BOND FUND
(FORMERLY KNOWN AS FIXED INCOME II FUND)
TAX EXEMPT BOND FUND
(FORMERLY KNOWN AS LIMITED VOLATILITY TAX FREE FUND)
EQUITY T FUND - CLASS S ONLY
MONEY MARKET FUND - CLASS S ONLY
US GOVERNMENT MONEY MARKET FUND - CLASS S ONLY
TAX FREE MONEY MARKET FUND - CLASS S ONLY
DECEMBER 31, 1998
[RUSSELL LOGO]
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
Frank Russell Investment Company
is a "series mutual fund" with 28
different investment portfolios.
These financial statements report
on nine 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, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Our Clients.............................................. 2
Real Estate Securities Fund........................................ 3
Emerging Markets Fund.............................................. 13
Special Growth Fund................................................ 29
Fixed Income II Fund............................................... 47
Limited Volatility Tax Free Fund................................... 59
Equity T Fund...................................................... 73
Money Market Fund.................................................. 83
U.S. Government Money Market Fund.................................. 91
Tax Free Money Market Fund......................................... 97
Notes to Financial Statements...................................... 110
Report of Independent Accountants.................................. 120
Tax Information.................................................... 121
Matters Submitted to a Vote of Shareholders........................ 122
Manager, Money Managers and Service Providers...................... 126
</TABLE>
FRANK RUSSELL INVESTMENT COMPANY - SPECIALTY FUNDS
Copyright (C) Frank Russell Company 1999. 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
We are pleased to present the Frank Russell Investment Company 1998 Annual
Report. This report covers information on nine of the Funds and represents our
seventeenth year in operation.
We remain committed to providing our clients with superior investment solutions
through the benefits of multi-manager, multi-style diversification used in
structuring our Funds. The commitment proved worthwhile in 1998, 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 (FRIMCo) continuously evaluates the
Funds we offer our clients. Each of these Funds is carefully monitored by
Russell investment professionals to ensure that the most appropriate investment
advisors and strategies are utilized within each Fund. The advisors are
monitored by FRIMCo, using the expertise and advice of the Investment Policy and
Research group of Frank Russell Company.
Since the close of 1997, we have implemented changes in our Funds' structure
which we believe will benefit current and potential investors. The former Class
C shares of the Russell Funds have been renamed Russell Fund Class E shares, and
their fee structure now aligns with the Russell LifePoints(R) Funds' Class E
shares. Additionally, the Russell LifePoints(R) Funds' Class D shares were
opened for investment in March 1998.
FRIMCo's decision to retain Boston Financial Data Services(BFDS) to assist in
the transfer agent process in June 1998 has enhanced the level of services
provided to our clients.
We are also pleased to announce the recent acquisition of Frank Russell Company
by The Northwestern Mutual Life Insurance Company, the U.S. leader in both
individual life insurance sold annually and total life insurance in force. We
believe this is a very positive development for both Russell and the Funds,
given the financial strength and image of Northwestern.
Thank you for your continued confidence and investment with Frank Russell
Investment Company. We look forward to 1999 and continuing to earn your support.
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 Investment Company Frank Russell Investment Company
<PAGE>
Real Estate Securities Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
Objective: To generate a high level of total return 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.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
Real Estate NAREIT Lipper(R)
Dates Securities - Class S Equity 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
1998 $25,419 $24,317 $22,437
- -------------------------------------------------------------------------------
Total $184,797 $179,125 $167,226
===============================================================================
</TABLE>
YEARLY PERIODS ENDED DECEMBER 31
<TABLE>
<CAPTION>
Real Estate Securities Fund - Class S NAREIT Equity REIT Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 8,406 (15.94)% 1 Year $ 8,249 (17.51)%
5 Years $16,271 10.22%(S) 5 Years $15,959 9.80%(S)
Inception* $25,419 10.40%(S) Inception* $24,317 9.90%(S)
</TABLE>
<TABLE>
<CAPTION>
Real Estate Securities Fund - Class E ++++ Lipper(R) Real Estate Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 8,375 (16.25)% 1 Year $8,470 (15.30)%
5 Years $16,079 9.96%(S) 5 Years $15,048 8.52%(S)
Inception* $25,120 10.27%(S) Inception* $22,437 9.13%(S)
</TABLE>
3 Real Estate Securities Fund
<PAGE>
Real Estate Securities Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
Performance Review
For the year end December 31, 1998, the Real Estate Securities Fund Class S and
Class E shares lost 15.9% and 16.3%, respectively, as compared to the NAREIT
Equity REIT Index which fell 17.5%. The Fund exceeded the Index primarily
through effective security selection.
Portfolio Highlights
1998 proved a disastrous year for Real Estate Investment Trusts (REITs), as a
series of threats caused investor sentiment to turn decidedly negative. The
year began with the threat of tax reform, as less favorable tax provisions were
proposed in the federal budget. Although only the least onerous was approved,
the market continued to reflect a negative bias as fears of excessive building
and acquisition came to the fore. This too passed, but was supplanted by fears
in the third quarter that an economic slowdown would impair the ability of REITs
to grow earnings. Finally, falling commodity prices evoked concern that
deflationary pressures would diminish the earnings power of REITs by depressing
lease rates.
The Real Estate Securities Fund fared reasonably well during the year given
existing market trends. The value orientation of AEW proved very effective in
focusing investments away from the securities most affected by the
above-mentioned threats. Cohen & Steers also fared reasonably well, performing
in line with the Index.
<TABLE>
<CAPTION>
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1998
<S> <C>
Vornado Realty Trust 5.6%
Mack-Cali Realty Corp. 4.7
Apartment Investment & Management Co. Class 4.3
Starwood Lodging Trust 4.1
Highwoods Properties, Inc. 3.9
Arden Realty Group, Inc. 3.6
Avalonbay Communities, Inc. 3.3
Crescent Real Estate Equities, Inc. 3.3
Kimco Realty Corp. 3.2
Simon Property Group, Inc. 3.2
<CAPTION>
Portfolio Characteristics December 31, 1998
<S> <C>
Current P/E Ratio 19.1x
Portfolio Price/Book Ratio 1.54x
Market Capitalization - $-Weighted Average 2.07 Bil
Number of Holdings 77
</TABLE>
Money Managers
AEW Capital Management, L.P.
Cohen & Steers Capital Management
* 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 REITs 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(R) 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 E - For the period, November 4, 1996
(commencement of sales) to May 15, 1998, shareholder service and Rule 12b-1
distribution fees were charged. From May 16, 1998 through December 31,
1998, only shareholder service 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 E to provide historical perspective.
(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.
Real Estate Securities Fund 4
<PAGE>
Real Estate Securities Fund
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
-------- --------
<S> <C> <C>
Common Stocks (b) - 95.5%
Apartments - 16.7%
Apartment Investment
& Management Co. Class A 660,515 24,563
Archstone Communities Trust 778,174 15,758
Avalonbay Communities, Inc. 552,422 18,920
Camden Property Trust 209,279 5,441
Colonial Properties Trust 20,000 532
Equity Residential Properties Trust 144,738 5,853
Essex Property Trust, Inc. 222,000 6,605
Post Properties, Inc. 195,246 7,505
Smith (Charles E.) Residential
Realty, Inc. 245,100 7,874
Summit Properties, Inc. 186,300 3,214
--------
96,265
--------
Health Care - 2.6%
American Retirement Corp. (a) 376,000 5,898
Healthcare Realty Trust, Inc. 204,700 4,567
Nationwide Health Properties, Inc. 200,000 4,313
--------
14,778
--------
Hotels/Leisure - 7.6%
Crestline Capital Corp. (a) 28,560 418
FelCor Suite Hotels, Inc. 118,500 2,733
Golf Trust of America, Inc. 40,300 1,119
Hospitality Properties Trust 124,700 3,008
Host Marriott Corp. New (a) 285,600 3,891
Marriot International, Inc. Class A 296,700 8,604
RFS Hotel Investors, Inc. 52,400 642
Starwood Lodging Trust 1,028,000 23,323
--------
43,738
--------
Leasing - 0.2%
Entertainment Properties Trust 75,900 1,290
--------
Office/Industrial - 38.5%
AMB Property Corp. 98,800 2,174
Arden Realty Group, Inc. 872,900 20,240
Bedford Property Investors, Inc. 66,100 1,115
Boston Properties, Inc. 100,700 3,071
Brandywine Realty Trust 22,000 393
Cabot Industrial Trust 91,400 1,868
Cadillac Fairview Corp. (a) 66,000 1,233
CarrAmerica Realty Corp. 155,450 3,731
CenterPoint Properties Corp. 66,100 2,235
Cousins Properties, Inc. 238,300 7,685
Crescent Operating, Inc. (a) 47,900 228
Crescent Real Estate Equities, Inc. 806,600 18,552
Duke Realty Investments, Inc. 112,500 2,616
Equity Office Properties Trust 638,248 15,318
First Industrial Realty Trust, Inc. 461,600 12,377
Highwoods Properties, Inc. 857,000 22,068
Kilroy Realty Corp. 121,500 2,794
Liberty Property Trust 240,700 5,927
Mack-Cali Realty Corp. 871,600 26,911
Meridan Industrial Trust, Inc. 113,700 2,672
Pacific Gulf Properties, Inc. 85,500 1,715
Prentiss Properties Trust 82,500 1,841
ProLogis Trust 682,918 14,171
Reckson Associates Realty Corp. 531,200 11,786
Reckson Services Industries, Inc. (a) 211,296 858
SL Green Realty Corp. 333,600 7,214
Spieker Properties, Inc. 505,100 17,489
Tower Realty Trust, Inc. 25,600 515
TriNet Corporate Realty Trust, Inc. 322,000 8,614
Trizec Hahn Corp. 143,900 2,950
Weeks Corp. 55,750 1,571
--------
221,932
--------
Outlet Centers - 0.9%
Prime Retail, Inc. 197,000 1,933
Tanger Factory Outlet Centers, Inc. 160,900 3,409
--------
5,342
--------
Regional Malls - 11.9%
CBL & Associates Properties, Inc. 51,700 1,335
General Growth Properties, Inc. 457,600 17,332
J.P. Realty, Inc. 252,900 4,963
Macerich Co. (The) 478,500 12,262
Mills Corp. 21,300 423
Rouse Co. (The) 376,500 10,354
Simon Property Group, Inc. 636,450 18,139
Taubman Centers, Inc. 227,800 3,132
Urban Shopping Centers, Inc. 28,500 933
--------
68,873
--------
Self Storage - 2.9%
Public Storage, Inc. 513,200 13,889
Shurgard Storage Centers, Inc. 100,700 2,599
Storage Trust Realty 24,600 575
--------
17,063
--------
Shopping Centers - 14.2%
Bradley Real Estate, Inc. 179,200 3,673
Developers Diversified Realty Corp. 741,400 13,160
Glimcher Realty Trust 170,000 2,667
Kimco Realty Corp. 460,400 18,272
Kranzco Realty Trust 75,400 1,126
</TABLE>
5 Real Estate Securities Fund
<PAGE>
Real Estate Securities Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
-------- --------
<S> <C> <C>
Pan Pacific Retail Properties, Inc. 403,700 8,049
Philips International Realty Corp. 110,500 1,699
Regency Realty Corp. 48,900 1,088
Vornado Operating, Inc. (a) 45,405 366
Vornado Realty Trust 940,500 31,742
--------
81,842
--------
Total Common Stocks
(cost $562,890) 551,123
--------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(000)
$
---------
<S> <C> <C>
Short-Term Investment - 3.0%
Frank Russell Investment Company
Money Market Fund,
due on demand (c) 17,608 17,608
--------
Total Short-Term Investment
(cost $17,608) 17,608
--------
Total Investments - 98.5%
(identified cost $580,498)(d) 568,731
Other Assets and Liabilities,
Net - 1.5% 8,438
--------
Net Assets - 100.0% 577,169
========
</TABLE>
(a) Nonincome-producing security.
(b) All commons stocks held are Real Estate Investment Trusts with the
exception of the following:
American Retirement Corp.
Cadillac Fairview Corp.
Crescent Operating, Inc.
Marriot International, Inc. Class A
Reckson Services Industries, Inc.
Rouse Co. (The)
Trizec Hahn Corp.
Vornado Operating Co.
(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.
Real Estate Securities Fund 6
<PAGE>
Real Estate Securities Fund
Statement of Assets and Liabilities
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at market (identified cost $580,498)(Note 2) ................................................ $ 568,731
Receivables:
Dividends ............................................................................................... 4,229
Investments sold ........................................................................................ 3,814
Fund shares sold ........................................................................................ 4,225
Short-term investments held as collateral for securities loaned, at market (Note 3) ...................... 7,029
---------
Total Assets .......................................................................................... 588,028
Liabilities
Payables:
Investments purchased .................................................................... $ 982
Fund shares redeemed ..................................................................... 2,219
Accrued fees to affiliates (Note 4) ..................................................... 542
Other accrued expenses ................................................................... 87
Payable upon return of securities loaned, at market (Note 3) .............................. 7,029
---------
Total Liabilities ..................................................................................... 10,859
---------
Net Assets ............................................................................................... $ 577,169
=========
Net Assets consist of:
Undistributed net investment income ...................................................................... $ 3,312
Accumulated distributions in excess of net realized gain ................................................. (2,480)
Unrealized appreciation (depreciation) on investments .................................................... (11,767)
Shares of beneficial interest ............................................................................ 236
Additional paid-in capital ............................................................................... 587,868
---------
Net Assets ............................................................................................... $ 577,169
=========
Net Asset Value, offering and redemption price per share:
Class S ($576,325,510 divided by 23,583,885 shares of $.01 par
value shares of beneficial interest outstanding) ....................................................... $ 24.44
=========
Class E ($843,467 divided by 34,761 shares of $.01 par value
shares of beneficial interest outstanding) ........................................................... $ 24.27
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7 Real Estate Securities Fund
<PAGE>
Real Estate Securities Fund
Statement of Operations
Amounts in thousands Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Dividends .............................................................................................. $ 34,768
Dividends from Money Market Fund (Note 5) ............................................................. 1,917
---------
Total Investment Income .............................................................................. 36,685
Expenses (Notes 1, 2 and 4):
Advisory fees .............................................................................. $ 5,159
Administrative fees ........................................................................ 24
Custodian fees ............................................................................. 196
Distribution fees - Class E ................................................................ 1
Transfer agent fees ........................................................................ 864
Professional fees .......................................................................... 33
Registration fees - Class S ................................................................ 92
Shareholder servicing fees - Class E ....................................................... 1
Trustees' fees ............................................................................. 4
Miscellaneous .............................................................................. 58
---------
Total Expenses ....................................................................................... 6,432
---------
Net investment income ................................................................................... 30,253
---------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments ............................................................... (1,281)
Net change in unrealized appreciation or depreciation of investments .................................... (137,901)
---------
Net gain (loss) on investments .......................................................................... (139,182)
---------
Net increase (decrease) in net assets resulting from operations ......................................... $(108,929)
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Real Estate Securities Fund 8
<PAGE>
Real Estate Securities Fund
Statement of Changes in Net Assets
Amounts in thousands
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
--------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ....................................................................... $ 30,253 $ 23,853
Net realized gain (loss) ................................................................... (1,281) 44,736
Net change in unrealized appreciation or depreciation ....................................... (137,901) 27,721
--------- ---------
Net increase (decrease) in net assets resulting from operations ........................... (108,929) 96,310
--------- ---------
From Distributions to Shareholders:
Net investment income
Class S ................................................................................... (26,915) (24,656)
Class E ................................................................................... (26) (9)
In excess of net investment income
Class S ................................................................................... -- (9)
Net realized gain on investments
Class S ................................................................................... (7,019) (40,156)
Class E ................................................................................... (5) (25)
In excess of net realized gain on investments
Class S ................................................................................... (2,469) --
Class E ................................................................................... (2) --
--------- ---------
Total Distributions to Shareholders ..................................................... (36,436) (64,855)
--------- ---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ................. 106,663 138,695
--------- ---------
Total Net Increase (Decrease) in Net Assets .................................................. (38,702) 170,150
Net Assets
Beginning of period ......................................................................... 615,871 445,721
--------- ---------
End of period (including undistributed net investment income
of $3,312 and accumulated distributions in excess of
net investment income of $9, respectively) ................................................ $ 577,169 $ 615,871
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
9 Real Estate Securities Fund
<PAGE>
Real Estate Securities Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................. $ 30.86 $ 29.19 $ 23.51 $ 22.53 $ 22.76
--------- --------- --------- --------- ---------
Income From Investment Operations:
Net investment income (a) ........................... 1.34 1.36 1.39 1.32 1.25
Net realized and unrealized gain (loss) on investments (6.13) 3.93 6.89 1.03 .40
--------- --------- --------- --------- ---------
Total Income From Investment Operations ............ (4.79) 5.29 8.28 2.35 1.65
--------- --------- --------- --------- ---------
Distributions:
Net investment income ................................ (1.17) (1.41) (1.34) (1.35) (1.23)
Net realized gain on investments ..................... (.34) (2.21) (1.26) -- (.45)
In excess of net realized gain on investments ........ (.12) -- -- -- (.20)
Tax return of capital ................................ -- -- -- (.02) --
--------- --------- --------- --------- ---------
Total Distributions ................................ (1.63) (3.62) (2.60) (1.37) (1.88)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period ........................ $ 24.44 $ 30.86 $ 29.19 $ 23.51 $ 22.53
========= ========= ========= ========= =========
Total Return (%) ...................................... (15.94) 18.99 36.81 10.87 7.24
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ............. 576,326 615,483 445,619 290,990 209,208
Ratios to average net assets (%):
Operating expenses ................................. 1.05 1.02 1.04 1.04 1.05
Net investment income .............................. 4.93 4.57 5.64 6.10 5.65
Portfolio turnover rate (%) ......................... 42.58 49.40 51.75 23.49 45.84
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Real Estate Securities Fund 10
<PAGE>
Real Estate Securities Fund
Financial Highlights - Class E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996*
------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .................. $ 31.02 $ 29.18 $ 26.67
------- ------- -------
Income From Investment Operations:
Net investment income (c) ........................... 1.26 1.14 .24
Net realized and unrealized gain (loss) on investments (6.12) 3.95 3.85
------- ------- -------
Total Income From Investment Operations ............ (4.86) 5.09 4.09
------- ------- -------
Distributions:
Net investment income ................................ (1.43) (1.04) (.32)
Net realized gain on investments ..................... (.34) (2.21) (1.26)
In excess of net realized gain on investments ........ (.12) -- --
------- ------- -------
Total Distributions ................................ (1.89) (3.25) (1.58)
------- ------- -------
Net Asset Value, End of Period ........................ $ 24.27 $ 31.02 $ 29.18
======= ======= =======
Total Return (%)(a) .................................. (16.25) 18.20 15.75
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ............. 843 388 101
Ratios to average net assets (%)(b):
Operating expenses ................................. 1.47 1.71 1.77
Net investment income .............................. 4.90 3.94 5.31
Portfolio turnover rate (%)(b) ....................... 42.58 49.40 51.75
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31,
1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
11 Real Estate Securities Fund
<PAGE>
Emerging Markets Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
OBJECTIVE: To provide maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from developed market international portfolios, by investing
principally in equity securities.
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.
GROWTH OF A $10,000 INVESTMENT
<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 $18,040
1994 $13,356 $16,793 $15,876
1995 $12,260 $15,956 $14,538
1996 $13,763 $17,288 $15,903
1997 $13,289 $15,672 $13,558
1998 $9,625 $12,733 $10,572
------------------------------------------------------
Total $86,476 $106,070 $98,487
</TABLE>
YEARLY PERIODS ENDED DECEMBER 31
<TABLE>
<CAPTION>
Emerging Markets Fund - Class S IFC Investable Composite Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ----------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $7,243 (27.57)% 1 Year $7,798 (22.02)%
5 Years $6,786 (7.46)%(S) 5 Years $5,861 (10.14)%(S)
Inception $9,625 (0.64)%(S) Inception $10,572 0.95 %(S)
<CAPTION>
Emerging Markets Fund - Class E (S)(S) Extended Barings Emerging Markets Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ----------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $7,239 (27.61)% 1 Year $ 8,124 (18.76)%
5 Years $6,783 (7.47)%(S) 5 Years $ 7,223 (6.30)%(S)
Inception $9,620 (0.65)%(S) Inception $12,733 4.17%(S)
</TABLE>
13 Emerging Markets Fund
<PAGE>
Emerging Markets Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Emerging Markets Fund Class S and
Class E shares both reflected a loss of 27.6%, as compared to the Barings
Extended Emerging Markets Index (BEMI), which fell 18.8%. The Fund
underperformed the Extended BEMI primarily due to the Fund's country allocation
decisions.
PORTFOLIO HIGHLIGHTS
A series of crises added to the concerns over the economic problems of Asia's
emerging markets. Russia's default on its foreign debt obligations early in the
third quarter confirmed fears of spreading currency weakness. The resulting
negative sentiment was focused on Latin American markets, with Brazil perceived
as the next currency at risk. As a result, Latin American markets ended the year
down 34%. Asian markets produced the best results regionally with a 1.6% gain,
while European markets ended the year down more than 16%. While far from
resolving their economic problems, Asian economies appeared to investors to have
suffered the worst effects, leaving them positioned for a recovery.
The Emerging Markets Fund struggled with trends in the asset class. Fund
performance reflected the managers' lack of success in gauging sentiment swings.
Instead, the Fund focused on fundamentals, leading to underweightings in Asian
markets which the managers continued to view with caution, given unresolved
economic problems. They were overweight Latin American markets, believing that
the better valuations and better financial condition of the region's companies
would, with the added benefit of a strong U.S. economy, avert similar problems
afflicting Asia and Russia.
<TABLE>
<CAPTION>
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1998
<S> <C>
Sonae Investimentos SA (Portugal) 2.3%
Telefonos de Mexico SA Series L - ADR (Mexico) 2.2
YPF Sociedad Anonima Class D - ADR (Argentina) 2.0
Genesis India Investment Co. (India) 1.5
Philippine Long Distance Telephone Co. - ADR (Philippines) 1.4
Enersis SA - ADR (Chile) 1.2
Brisa - Auto Estradas de Portugal SA (Portugal) 1.2
Sasol NPV (South Africa) 1.2
Mol Magyar Olaj-es Gazipari Rt. - GDR (Hungary) 1.1
Migros (Turkey) 1.0
<CAPTION>
PORTFOLIO CHARACTERISTICS
December 31, 1998
<S> <C>
Current P/E Ratio 8.95x
Portfolio Price/Book Ratio 1.04x
Market Capitalization - $-Weighted Average 3.4 Bil
Number of Holdings 415
</TABLE>
MONEY MANAGERS
Genesis Asset Managers Limited
J.P. Morgan Investment Management, Inc.
Montgomery Asset Management, L.P.
* 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
Advisor 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.
(S)(S) Emerging Markets Fund - Class E Shares - for the period September 22,
1998 (commencement of sales) to December 31, 1998, shareholder
servicing and 12b-1 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 E to provide historical
perspective.
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.
Emerging Markets Fund 14
<PAGE>
Emerging Markets Fund
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
----------- ----------
<S> <C> <C>
COMMON STOCKS - 87.1%
ARGENTINA - 5.7%
Banco de Galicia y Buenos Aires
Class B - ADR 45,090 783
Central Puerto SA Class B 120,000 280
Corcemar SA Class B 110,595 625
Cresud SA 225,300 271
Inversiones Y Representaciones 152,448 418
Naviera Perez Companc Class B 341,431 1,446
Nobleza Piccardo 73,900 251
Perez Companc SA Class B - ADR 79,170 670
Quilmes Industrial (Regd) 71,000 639
Telecom Argentina Class B 170,122 962
Telefonica de Argentina Class B 340,000 970
Telefonica de Argentina
Class B - ADR 95,500 2,668
Transportadora de Gas del Sur SA
Class B 535,284 1,061
YPF Sociedad Anonima
Class D - ADR 207,790 5,805
----------
16,849
----------
AUSTRALIA - 0.6%
Lihir Gold, Ltd. (a) 782,200 877
Orogen Minerals, Ltd. 800,000 824
----------
1,701
----------
BANGLADESH - 0.0%
Beximco Infusions 7,500 43
----------
BRAZIL - 3.3%
Centrais Eletricas Brasileiras SA
Class B - ADR 61,900 594
Centrais Eletricas de Santa Catarina
SA - GDR 700 31
Centrais Eletricas de Santa Catarina
SA - GDR (144A) 5,400 241
Companhia Energetica de Minas
Gerais SA - ADR 19,947 380
Copene Petroquimica do Nordeste SA
- ADR 68,500 391
Eletrobras (centrais) NPV 24,510,000 422
Forca E Luz (Cia Paul) NPV 15,747,000 1,134
Light - Servicos de Eletricidade SA
NPV 4,850,000 590
Makro Atacadista - GDR (a) 60,000 447
Makro Atacadista SA - GDR 60,800 453
Petroleo Brasileiro Petrobras SA -
ADR 48,000 544
Souza Cruz NPV 111,620 721
Telecomunicacoes Brasileiras - ADR 18,963 2
Telecomunicacoes Brasileiras SA (a) 54,260,000 2,425
Telecomunicacoes Brasileiras SA -
ADR 15,208 1,105
Telecomunicacoes de Sao Paulo
NPV (a) 19,113 2
Votorantim Celulose e Papel SA - ADR 39,500 213
White Martins SA NPV 220,938 106
----------
9,801
----------
CHILE - 5.3%
Administradora de Fondos de
Pensiones Provida SA - ADR 34,370 462
Antofagasta Holdings PLC 308,636 923
Banco Santander Chile
Series A - ADR 54,800 801
Banco Santiago - ADR 20,000 298
Compania de Telecomunicaciones de
Chile SA - ADR 109,993 2,275
Distribucion y Servicio D&S SA -
ADR 133,000 1,513
Embotelladora Andina SA - ADR
Series A 71,600 1,038
Embotelladora Andina SA - ADR
Series B 58,000 754
Enersis SA - ADR 140,855 3,636
Gener SA - ADR 57,697 923
Laboratorio Chile SA - ADR 30,000 431
Madeco SA - ADR 17,142 144
Maderas y Sinteticos SA - ADR (a) 103,000 657
Quinenco SA 90,100 721
Sociedad Quimica Y Minera de Chile
SA - ADR 26,230 884
----------
15,460
----------
CHINA - 1.3%
Anhui Conch Cement Co., Ltd. 1,264,000 140
Beijing North Star Co., Ltd. Class H 4,085,300 654
China Telecom (Hong Kong), Ltd. (a) 37,000 64
China Telecom (Hong Kong), Ltd. -
ADR (a) 24,000 834
Huaneng Power International, Inc.
Series N - ADR (a) 87,000 1,262
Yanzhou Coal Mining Co., Ltd. -
ADR 107,800 815
Yanzhou Coal Mining Co., Ltd.
Series H 696,000 117
----------
3,886
----------
</TABLE>
15 Emerging Markets Fund
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
----------- ----------
<S> <C> <C>
COLOMBIA - 0.1%
Cementos Diamante SA -GDR 180
31,200 ----------
CROATIA - 0.2%
Pliva d.d. 23,200 379
Pliva d.d. - GDR 9,400 154
----------
533
----------
CZECH REPUBLIC - 1.8%
Central European Media Enterprises,
Ltd. Class A (a) 84,400 549
Ceske Radiokomunikace - GDR (a) 26,200 845
Czechoslovakian Value Fund
(Units)(a) 87,000 611
SPT Telecom AS (a) 73,700 1,125
Tabak AS 3,500 978
Vseobecny Investment Fund 139,775 307
Vynosovy Investment Fund 72,500 505
Zivnostenska Banka 7,100 347
----------
5,267
----------
ECUADOR - 0.2%
La Cement National - GDR (a) 3,700 407
La Cemento Nacional - GDR (a) 700 77
----------
484
----------
EGYPT - 2.2%
Al-Ahram Beverage Co. SAE (a) 8,700 498
Al-Ahram Beverage Co. SAE -
GDR (a) 48,000 1,385
Al Ahram Beverage Co. SAE - GDR
(144A)(a) 65,900 1,878
Ameriyah Cement Co. 17,800 266
Egyptian Mobile Phone Network (a) 141,666 862
Paints & Chemical Industry Co. -
GDR (144A)(a) 10,000 64
Paints & Chemical Industry Co. -
GDR (a) 84,000 538
Suez Cement Co. (Regd) - GDR (a) 31,900 450
Torah Portland Cement Co. 24,985 425
----------
6,366
----------
FRANCE - 0.0%
Elf Gabon SA (a) 1,100 116
----------
GHANA - 0.6%
Ashanti Goldfields, Ltd. - ADR 178,219 1,671
----------
GREECE - 3.8%
Athens Medical Center SA (Regd) 56,550 1,110
Commercial Bank of Greece (Regd) 7,000 689
Credit Bank (Regd) 15,011 1,567
Hellenic Bottling 22,000 680
Hellenic Telecommunication
Organization SA 85,887 2,286
Hellenic Telecommunication
Organization SA - ADR (a) 5,600 74
Heracles General Cement Co. 29,100 790
National Bank of Greece (Regd) 9,927 2,235
Silver & Baryte Ores Mining 696 25
STET Hellas Telecommunications SA
- ADR (a) 33,500 1,055
Titan Cement Co. 7,130 548
----------
11,059
----------
HONG KONG - 1.8%
Chen Hsong Holding 1,900,000 255
Goldlion Holdings, Ltd. 894,000 68
Guangdong Investment, Ltd. 112,000 22
Jiangsu Expressway Co., Ltd.
Class H 4,590,000 1,001
New World Infrastructure, Ltd. (a) 1,407,700 2,062
Shanghai Industrial Holdings, Ltd. 250,000 505
Tingyi (Cayman Island) Holding Co. 7,999,000 723
Yue Yuen Industrial Holdings 312,800 593
----------
5,229
----------
HUNGARY - 3.9%
BorsodChem - GDR 42,000 1,082
BorsodChem Rt. 50,200 1,305
Egis Gyogyszergyar 22,500 512
Gedeon Richter, Ltd. - GDR 20,368 862
Magyar Olaj Es Gas 77,900 2,135
Magyar Tavkozlesi Rt. (Regd) 95,176 544
Mol Magyar Olaj-es Gazipari Rt. -
GDR 115,500 3,176
Mol Magyar Olay-Es Gazipari - GDR 16,200 446
OTP Bank Rt. 23,700 1,187
Zalakeramia Reszvenytarsasag - GDR 55,400 139
Zalakeramia Rt. 14,300 173
----------
11,561
----------
INDIA - 3.6%
Bajaj Auto, Ltd. - GDR 6,700 104
BSES, Ltd. (a) 27,700 346
BSES, Ltd. - GDR (a) 15,000 188
Genesis India Investment Co. (a) 558,030 4,269
Hindalco Industries, Ltd. - GDR 29,000 332
</TABLE>
Emerging Markets Fund 16
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
----------- ----------
<S> <C> <C>
India Cements, Ltd. - GDR 114,200 63
ITC, Ltd. - GDR (a) 33,100 728
Larsen & Toubro, Ltd. -
GDR 42,400 322
Mahanagar Telephone Nigam, Ltd. - GDR 25,000 300
Perusahaan Persero Telekom - ADR 86,600 563
Raymond Woolen Mills, Ltd. -
GDR (a) 5,100 19
Reliance Industries, Ltd. (a) 134,300 752
State Bank of India - GDR 30,000 246
State Bank of India - GDR (144A) 8,000 66
Tata Engineering & Locomotive Co. -
GDR (a) 104,400 400
Videsh Sanchar Nigam, Ltd. 148,700 1,784
----------
10,482
----------
INDONESIA - 0.5%
Gulf Indonesia Resources, Ltd. (a) 55,100 358
PT Ramayana Lestari Sentosa 1,000,000 241
PT Unilever Indonesia 19,000 71
Semen Gresik 698,000 724
----------
1,394
----------
ISRAEL - 0.8%
Bank Leumi Le-Israel 482,000 681
ECI Telecom, Ltd. 19,300 679
Elbit Medical Imaging, Ltd. (a) 200 2
Elbit Systems, Ltd. 200 2
Elbit, Ltd. 200 1
Formula Systems (1985), Ltd -
ADR (a) 16,200 407
Makhteshim-Agan Industries, Ltd. (a) 106,432 230
Supersol, Ltd. 86,000 213
----------
2,215
----------
JORDAN - 0.3%
Arab Bank Group 2,780 836
----------
LEBANON - 0.2%
Solidere - GDR 70,000 714
----------
LUXEMBOURG - 0.5%
Millicom International Cellular SA (a) 43,000 1,457
----------
MALAYSIA - 0.6% (d)
Berjaya Sports 116,000 101
Golden Hope Plantation 463,000 350
Lion Corp. Berhad 6,400 1
London & Pacific Insurance Co.
Berhad 2,600 2
Malaysian Assurance Alliance Berhad 247,137 178
Malaysian Pacific 475,000 455
Malaysian Tobacco 243,000 82
Nestle Berhad 55,000 154
Nylex Berhad 37,000 11
O.Y.L. Industries Berhad 119,000 208
Shell Refining (Malaysia) 147,000 108
YTL Power International Berhad 313,000 172
----------
1,822
----------
MEXICO - 7.7%
Alfa SA de CV Class A NPV 71,200 200
Carso Global Telecom Series A1 NPV 97,000 327
Cemex SA de CV Class B NPV 151,400 380
Cemex SA de CV NPV 557,731 1,202
Compania Cervecerias Unidas SA -
ADR 22,700 437
Corporacion Interamericana de
Entretenimiento SA
Series B NPV (a) 157,300 429
Corporacion Interamericana de
Entretenimiento SA
Series L NPV (a) 20,973 44
Desc SA de CV Series C - ADR 85,700 1,644
Empaques Ponderosa (a) 460,000 240
Empresas ICA Sociedad - ADR 120,228 541
Empresas la ModernaSA de CV -
ADR (a) 21,700 515
Fomento Economico Mexicano SA de
CV Series B - ADR 72,600 1,933
Grupo Carso Series A NPV 64,500 219
Grupo Casa Autrey SA de CV - ADR 46,166 315
Grupo Financiero Banamex Accival
Series B NPV (a) 455,000 596
Grupo Financiero Bancomer Series B
NPV 4,046,100 866
Grupo Gigante SA Series B NPV (a) 970,000 308
Grupo Herdez SA Class B NPV 462,000 131
Grupo Iusacell SA de CV - ADR
Series L (a) 27,600 197
Grupo Mexico SA Series B NPV 47,000 123
Grupo Modelo SA Series C 186,800 396
Grupo Radio Centro SA de CV - ADR 40,700 219
Grupo Television SA de CV -
GDR (a) 23,100 570
Kimberly-Clark, Mexico
Class A NPV 330,000 1,053
Panamerican Beverages, Inc. Class A 68,000 1,483
</TABLE>
17 Emerging Markets Fund
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
----------- ----------
<S> <C> <C>
Seguros Comercial America
Series B NPV (a) 87,000 294
Sigma Alimentos, SA Series B 162,043 281
Telefonos de Mexico SA
Series L - ADR 131,177 6,387
Transportacion Maritima
Mexicana SA de CV (a) 80,000 365
TV Azteca SA de CV - ADR 159,700 1,068
----------
22,763
----------
MOROCCO - 0.2%
Banque Marocaine Du Commerce
Exterieur - GDR 1,706 127
ONA SA 2,700 314
Wafabank 2,085 261
----------
702
----------
NETHERLANDS - 0.2%
Ceteco Holding NV CVA 42,042 705
----------
PAKISTAN - 0.3%
Adamjee Insurance 8,202 6
Fauji Fertilizer 228,300 210
Hub Power Co. - GDR 26,300 145
Pakistan State Oil 230,694 362
Pakistan Telecom Corp. Series A 277,700 105
----------
828
----------
PANAMA - 0.2%
Banco Latinoamericano de
Exportaciones SA Class E 40,000 665
----------
PAPUA NEW GUINEA - 0.3%
Oil Search, Ltd. (Australia Regd) 800,000 809
----------
PERU - 1.4%
Cementos Norte Pacasmayo
SA Series T 285,841 281
Compania de Minas Buenaventura
Series B - ADR 56,000 728
Credicorp, Ltd. 27,300 246
Enrique Ferreyros 311,610 281
Ferreyros SA - ADR 12,916 236
Telefonica Del Peru SA
Class B - ADR 176,338 2,237
----------
4,009
----------
PHILIPPINES - 2.8%
Ayala Corp. 1,958,000 692
Ayala Land, Inc. 184,026 52
Bank of the Philippine Islands 150,000 318
Benpres Holdings Corp. (a) 1,700,000 275
First Philippine Holdings Class B 820,560 443
Jollibee Foods 2003 Warrants (a) 645,000 298
Manila Electric Co. Class B 403,200 1,296
Philippine Commercial International
Bank 198,800 828
Philippine Long Distance Telephone
Co. - ADR 161,225 4,182
----------
8,384
----------
POLAND - 1.8%
Bank Handlowy W Warszawie
SA - GDR 76,000 969
Bank Slaski SA 9,270 480
Elektrim SA 101,497 1,099
Prokom Software SA - GDR 48,000 895
Telekomunikacja Polska SA
Series A - GDR (a) 185,500 937
Wielkopolski Bank Kredytowy SA (a) 83,100 523
Zywiec (a) 2,634 315
----------
5,218
----------
PORTUGAL - 7.2%
Banco Espirito Santo e Comercial de
Lisboa SA (Regd) 34,489 1,071
BPI-SGPS SA (Regd) 27,000 917
Brisa - Auto Estradas de Portugal SA 60,500 3,563
Cimpor Cimentos de Portugal 56,500 1,804
Companhia de Seguros Tranquilidade 43,200 1,379
Electricidade de Portugal SA 89,300 1,967
Filmes Lusomundo (a) 15,000 188
Mundial Confianca (a) 51,000 1,623
Portugal Telecom SA - ADR 45,000 2,008
Sonae Investimentos SA 138,400 6,731
----------
21,251
----------
RUSSIA - 0.4%
Irkutskenergo - ADR 32,000 65
Surgutneftegaz - ADR 166,400 571
Ukraine Enterprise Corp. (a) 31,000 3
Unified Energy Systems - ADR 15,600 48
Unified Energy Systems - GDR 14,300 44
Vimpel-Communications - ADR (a) 39,700 513
----------
1,244
----------
</TABLE>
Emerging Markets Fund 18
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
----------- ----------
<S> <C> <C>
SLOVAKIA - 0.0%
Slovakofarma AS 2,200 96
----------
SOUTH AFRICA - 10.5%
Amalgamated Banks of South Africa 189,500 899
Anglo America Corp. SA 40,400 1,137
Anglo American Investment Trust, Ltd. 70,000 814
AngloGold, Ltd. (a) 59,400 2,311
B.O.E. Corp., Ltd. 1,309,455 745
Barlow, Ltd. 648,737 2,489
C.G. Smith Ltd. 454,000 1,029
Consolidated African Mines, Ltd. (a) 5,375,000 730
De Beers Centenary AG 85,800 1,092
De Beers Consolidated Mines, Ltd. - ADR 5,000 63
Highveld Steel & Vanadium Corp., Ltd. 442,634 1,116
Impala Platinum Holdings, Ltd. 118,800 1,614
Iscor 6,642,148 1,184
Liberty Holdings Ltd. 40,900 1,430
Liberty Life Association of Africa 144,065 1,981
Lonrho Africa PLC 437,204 407
Lonrho PLC 231,676 1,262
Molope Foods, Ltd. (a) 481,700 425
Molpe Foods, Ltd. Series N (a) 448,300 350
Nasionale Pers Beperk Class N 187,000 705
PepsiCo International, Inc. (a) 2,000 174
Rembrandt Group, Ltd. 216,200 1,285
Sasol NPV 931,494 3,519
South African Breweries 127,939 2,155
Standard Bank Investment Corp., Ltd. 319,229 976
Tiger Oats, Ltd. 11,800 116
Wooltru Ltd. 138,640 174
Wooltru Ltd. Class N 571,572 699
----------
30,881
----------
SOUTH KOREA - 6.5%
Hanjin Heavy Industries 91,000 696
Hanwha Chemical Corp. (a) 286,491 1,369
Housing & Commercial Bank Korea -
GDR 62,700 740
Korea Electric Power Corp. 43,039 1,066
Medison Co. 118,240 1,376
Pohang Iron & Steel Co., Ltd. 32,238 1,970
Pohang Iron & Steel Co., Ltd. - ADR 12,700 212
Pusan City Gas Co., Ltd. 49,200 1,350
S1 Corp. 4,100 767
Samsung Display Devices Co. 35,176 1,734
Samsung Electronics Co. - GDR (a) 10,042 387
Samsung Electronics, Ltd. 21,709 1,456
Samsung Electronics, Ltd. - GDS (a) 52,319 782
Sindo Ricoh Co. 25,260 905
SK Telecommunications Co., Ltd. 3,126 2,273
Ssangyong Oil Refining Co., Ltd. 67,620 1,293
Tae Young Corp. 16,000 379
Youngone Corp. 18,580 499
----------
19,254
----------
SRI LANKA - 0.2%
Aitken Spence & Co., Ltd. 11,600 18
Ceylon Theatre (a) 13,660 40
Development Finance Corp. of Ceylon 97,221 210
Hayleys, Ltd. 21,280 46
John Keells Holdings, Ltd. 43,535 142
National Development Bank, Ltd. 9,800 18
----------
474
----------
SWITZERLAND - 0.6%
Holderbank Financiere 1,392 1,648
Glarus AG (BR) ----------
TAIWAN - 3.7%
Asia Cement Corp. - GDR 78,718 708
China Steel Corp. - GDR 62,383 760
Evergreen Marine Corp. - GDR 72,601 643
Hocheng Group Corp. - GDR 126,565 335
President Enterprises - GDS (a) 72,959 649
ROC Taiwan Fund 76,500 473
Siliconware Precision Industries Co. -
GDR (a) 66,864 685
Standard Foods Taiwan Ltd. (a) 3,000 29
Standard Foods Taiwan Ltd. (Regd) -
GDR (a) 56,400 536
Synnex Technology International
Corp. (a) 56,453 994
Synnex Technology International
Corp. (Regd) - GDR (a) 36,200 637
Taiwan Semiconductor
Manufacturing Co., Ltd (a) 114,200 1,620
Yageo Corp. (a) 229,172 1,483
Yageo Corp. - GDR (a) 74,390 481
Yang Ming Marine Transport -
GDR (a) 116,840 788
----------
10,821
----------
THAILAND - 1.4%
Advanced Information Services
(Alien Market)(a) 11,917 71
Ban Pu Coal (Alien Market)(a) 175,800 358
</TABLE>
19 Emerging Markets Fund
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
----------- ----------
<S> <C> <C>
BEC World PLC (Alien Market) 70,700 389
Cogeneration PLC (Alien Market)(a) 203,200 157
Grammy Entertainment PLC
(Alien Market) 42,000 199
Industrial Finance Corp. of Thailand
(Alien Market) 910,000 376
PTT Exploration & Production PLC
(Alien Market)(a) 121,100 853
Siam Cement Co. (Alien Market)(a) 61,400 1,392
Thai Farmers Bank (Alien Market)(a) 230,000 405
----------
4,200
----------
TURKEY - 2.4%
Dogan Sirketler Grubu Holding AS 17,497,000 122
EGE Biracilik Ve Malt Sanayii 5,400,000 419
Ford Otomotiv Sanayi AS 1,026,000 205
Haci Omer Sabanci Holding AS 19,955,000 307
Hurriyet Gazetecilik ve
Matbaacilik AS 17,500,000 266
Kazkommertsbank Co. - GDR (a) 4,800 44
Migros 2,796,500 2,792
Sarkuysan Elektrolitik Bakir 8,490,000 343
Tupras (a) 5,800,000 257
Turkiye Is Bankasi 4,955,500 129
Yapi ve Kredi Bankasi AS 198,404,272 2,296
----------
7,180
----------
UNITED KINGDOM - 0.7%
Genesis Smaller Companies (a) 147,886 1,698
Star Cruises PLC (a) 161,000 348
----------
2,046
----------
VENEZUELA - 1.2%
Companhia Anonima Nacional
Telefonos de Venezuela - ADR 113,546 2,023
Electricidad de Caracas (Regd) 158,664 68
Mavesa SA - ADR 278,750 1,045
Siderurgica Venezolana Sivensa -
GDR 5,984 22
Siderurgica Venezolana Sivensa -
ADR 65,833 298
----------
3,456
----------
ZIMBABWE - 0.1%
Delta Corp. 967,350 209
Reunion Mining PLC (a) 250,000 208
----------
417
----------
TOTAL COMMON STOCKS
(cost $304,078) 256,177
----------
PREFERRED STOCKS - 8.1%
ARGENTINA - 0.3%
Quilmes Industrial Quinsa Societe -
ADR (a) 103,500 964
----------
BRAZIL - 7.3%
Banco do Estado de Sao Paulo NPV 55,449,000 2,295
Banco Itau SA NPV 3,411,418 1,666
Brasmotor SA NPV 9,140,000 908
Centrais Electricas de Santa Catrina
SA - ADR Series B 3,600 161
CEMIG SA 75,618,148 1,439
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar NPV 36,000,000 581
Companhia Energetica de Minas
Gerais - ADR 31,356 597
Companhia Energetica de Sao Paulo
NPV 10,225,000 220
Companhia Paranaense de Energia -
Copel 57,640,000 415
Companhia Paranaense de Energia
Copel Class B - ADR 15,800 113
Companhia Paulista de Forca e Luz 28,606 2
Companhia Paulista de Forca e Luz
NPV 41,484 3
Companhia Vale Do Rio Doce
Series A NPV 49,400 634
Coteminas (Cia Tec) NPV 6,075,105 654
Duratex SA (BR) 3,364,000 92
Embratel Participacoes SA (a) 21,868,000 299
Embratel Participacoes SA - ADR (a) 38,784 541
Iochpe Maxion SA - ADR (a) 221,300 46
Itausa Investimentos Itau SA 1,390,000 771
Kepler Weber SA NPV 3,200 5
Marcopolo SA NPV 521,000 474
Odebrecht SA NPV 11,793,000 29
Perdigao SA NPV 225,200,000 276
Petro Ipiranga (cia) NPV 73,261,000 406
Petrobras Distribuidora NPV 34,472,500 300
Petroleo Brasileiro SA NPV 15,300,000 1,735
Renner Participacoes SA (a) 6,000,000 4
Tele Celular Sul Participacoes SA (a) 21,868,000 37
Tele Celular Sul Participacoes SA -
ADR (a) 24,794 432
Tele Centro Oeste Celular
Participacoes SA (a) 21,868,000 23
Tele Centro Sul Participacoes SA (a) 21,868,000 190
</TABLE>
Emerging Markets Fund 20
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
----------- ----------
<S> <C> <C>
Tele Leste Celular
Participacoes SA (a) 21,868,000 13
Tele Nordeste Celular
Participacoes SA (a) 21,868,000 20
Tele Norte Celular
Participacoes SA (a) 21,868,000 10
Tele Norte Leste Participacoes SA (a) 21,868,000 273
Tele Norte Leste Participacoes SA -
ADR (a) 53,713 668
Tele Sudeste Celular
Participacoes SA (a) 21,868,000 92
Telecomunicacoes Brasileiras NPV 21,868,000 3
Telecomunicacoes de Minas Gerais
Class B NPV 9,325,489 272
Telecomunicacoes de Sao Paulo SA NPV 17,012,351 2,319
Telemig Celular Participacoes SA (a) 21,868,000 24
Telemig Celular SA Class C NPV (a) 15,625,489 306
Telerj Celular SA Class B NPV (a) 9,800,940 231
Telesp Celular Participacoes SA (a) 21,868,000 161
Telesp Celular SA Class B NPV (a) 28,162,841 1,237
Usiminas Uni Sd Mg NPV 161,000 355
Votorantim Celulose E Papel SA - ADR 20,700,000 222
----------
21,554
----------
COLOMBIA - 0.0%
Gran Cadena de Almacenes
Class B - ADR 38,320 125
----------
PORTUGAL - 0.4%
Filmes Lusomundo-SGPS SA
95,000 1,102
----------
RUSSIA - 0.1%
Lukoil Holding Oil Co. - ADR
73,200 246
----------
TOTAL PREFERRED STOCKS
(cost $36,822) 23,991
----------
<CAPTION>
Market
Principal Value
Amount (000)
(000) $
----------- ----------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.3%
BRAZIL - 0.0%
Casa Anglo Series 2 (a)
1.000% due 11/01/99 (conv.) 3 70
----------
INDONESIA - 0.0%
Modernland Realty (a)
6.000% due 01/04/03 (conv.) IDR 30 5
----------
TAIWAN - 0.3%
Far Eastern Department Stores (a)
3.000% due 07/06/01 (conv.)
981 888
----------
TOTAL LONG-TERM INVESTMENTS
(cost $1,233) 963
----------
SHORT-TERM INVESTMENTS - 3.3%
UNITED STATES - 3.3%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 9,784 9,784
----------
TOTAL SHORT-TERM INVESTMENTS
(cost $9,784) 9,784
----------
TOTAL INVESTMENTS - 98.8%
(identified cost $351,917)(c) 290,915
OTHER ASSETS AND LIABILITIES,
NET - 1.2% 3,473
----------
NET ASSETS - 100.0% 294,388
==========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) See Note 2 for federal income tax information.
(d) The securities have been determined to be illiquid because they are
restricted or because there is an exceptionally low trading volume in their
primary trading market at December 31, 1998.
Abbreviations
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
GDS - Global Depositary Share
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
144A - Represents private placement security for qualified buyers according to
rule 144A of the Securities Act of 1933.
The accompanying notes are an integral part of the financial statements.
21 Emerging Markets Fund
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
% of Value
Industry Diversification Net (000)
(Unaudited) Assets $
- ------------------------------- --------- --------
<S> <C> <C>
Auto & Transportation 2.8% 8,097
Consumer Discretionary 10.3 30,388
Consumer Staples 8.9 26,080
Financial Services 15.8 46,524
Health Care 1.6 4,826
Integrated Oils 5.0 14,858
Material & Processing 15.4 45,301
Miscellaneous 2.7 7,971
Other Energy 4.6 13,405
Producer Durables 3.6 10,496
Technology 3.3 9,887
Utilities 21.2 62,335
Short-Term Investments 3.3 9,784
Long-Term Investments 0.3 963
--------- --------
Total Investments 98.8 290,915
Other Assets and Liabilities, Net 1.2 3,473
--------- --------
Net Assets 100.0% 294,338
========= ========
Market
% of Value
Geographic Diversification Net (000)
(Unaudited) Assets $
- ------------------------------- --------- --------
Latin America 32.7% 96,380
Europe 20.2 59,384
Pacific Basin 19.8 58,393
Africa 13.6 40,037
United Kingdom 0.7 2,046
United States (Short-Term
Investments) 3.3 9,784
Middle East 7.8 22,772
Other 0.7 2,119
-------- --------
Total Investments 98.8 290,915
Other Assets and Liabilities, Net 1.2 3,473
-------- --------
Net Assets 100.0% 294,388
======== ========
</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> <C> <C>
USD 40 BRL 48 01/04/99 $ --
USD 24 BRL 29 01/05/99 --
BRL 149 USD 123 01/04/99 (1)
MAD 440 USD 47 01/04/99 --
PHP 1,924 USD 49 01/04/99 (1)
--------
$ (2)
========
</TABLE>
Foreign Currency Abbreviations:
BRL - Brazilian real
IDR - Indonesian rupiah
MAD - Moroccan dirham
PHP - Philippine peso
USD - U.S. dollar
The accompanying notes are an integral part of the financial statements.
Emerging Markets Fund 22
<PAGE>
Emerging Markets Fund
Statement of Assets and Liabilities
Amounts in thousands (except per-share amounts)
<TABLE>
<CAPTION>
December 31, 1998
<S> <C> <C>
Assets
Investments at market (identified cost $351,917)(Note 2) ........................................... $ 290,915
Foreign currency holdings (identified cost $3,125) ................................................. 3,117
Foreign currency exchange spot contracts (cost $282)(Note 2) ....................................... 282
Receivables:
Dividends and interest ............................................................................ 989
Investments sold .................................................................................. 1,153
Fund shares sold .................................................................................. 1,880
Short-term investments held as collateral for securities loaned, at market (Note 3) ................ 12,427
---------
Total Assets .................................................................................... 310,763
Liabilities
Payables:
Investments purchased ................................................................ $ 1,262
Fund shares redeemed ................................................................. 1,857
Accrued fees to affiliates (Note 4) .................................................. 408
Other accrued expenses ............................................................... 137
Foreign currency exchange spot contracts (cost $282)(Note 2) .......................... 284
Payable upon return of securities loaned, at market (Note 3) .......................... 12,427
---------
Total Liabilities ............................................................................... 16,375
---------
Net Assets ......................................................................................... $ 294,388
=========
Net Assets consist of:
Undistributed net investment income ................................................................ $ 495
Accumulated net realized gain (loss) ............................................................... (70,928)
Unrealized appreciation (depreciation) on:
Investments ....................................................................................... (61,002)
Foreign currency-related transactions ............................................................. (4)
Shares of beneficial interest ...................................................................... 347
Additional paid-in capital ......................................................................... 425,480
---------
Net Assets ......................................................................................... $ 294,388
=========
Net Asset Value, offering and redemption price per share:
Class S ($294,349,464 divided by 34,709,189 shares of $.01 par value
shares of beneficial interest outstanding) ...................................................... $ 8.48
=========
Class E ($38,660 divided by 4,558 shares of $.01 par value
shares of beneficial interest outstanding) ...................................................... $ 8.48
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23 Emerging Markets Fund
<PAGE>
Emerging Markets Fund
Statement of Operations
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
<S> <C> <C>
Investment Income:
Dividends ................................................................................ $ 9,296
Dividends from Money Market Fund (Note 5) ................................................ 1,119
Interest ................................................................................. 60
Less foreign taxes withheld .............................................................. (544)
---------
Total Investment Income ................................................................ 9,931
Expenses (Notes 2 and 4):
Advisory fees ................................................................. $ 4,007
Administrative fees ........................................................... 13
Custodian fees ................................................................ 886
Transfer agent fees ........................................................... 793
Professional fees ............................................................. 46
Registration fees - Class S ................................................... 77
Trustees' fees ................................................................ 4
Miscellaneous ................................................................. 55
---------
Total Expenses ......................................................................... 5,881
---------
Net investment income ..................................................................... 4,050
---------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments ................................................................... (56,228)
Foreign currency-related transactions ......................................... (1,345) (57,573)
---------
Net change in unrealized appreciation or depreciation of:
Investments ................................................................... (57,108)
Foreign currency-related transactions ......................................... 42 (57,066)
--------- ---------
Net gain (loss) on investments ............................................................ (114,639)
---------
Net increase (decrease) in net assets resulting from operations ........................... $(110,589)
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Emerging Markets Fund 24
<PAGE>
EMERGING MARKETS FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
--------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ................................................................. $ 4,050 $ 3,030
Net realized gain (loss) .............................................................. (57,573) (4,838)
Net change in unrealized appreciation or depreciation ................................. (57,066) (18,122)
--------- ---------
Net increase (decrease) in net assets resulting from operations ..................... (110,589) (19,930)
--------- ---------
From Distributions to Shareholders:
Net investment income
Class S ............................................................................. (2,472) (1,176)
In excess of net investment income
Class S ............................................................................. -- (2,439)
--------- ---------
Total Distributions to Shareholders ............................................... (2,472) (3,615)
--------- ---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ........... 74,397 85,107
--------- ---------
Total Net Increase (Decrease) in Net Assets ............................................ (38,664) 61,562
Net Assets
Beginning of period ................................................................... 333,052 271,490
--------- ---------
End of period (including undistributed net investment income of
$495 and accumulated distributions in excess of
net investment income of $862, respectively) ........................................ $ 294,388 $ 333,052
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
25 merging Markets Fund
<PAGE>
Emerging Markets Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 11.79 $ 12.35 $ 11.16 $ 12.25 $ 13.90
----------- ----------- ----------- ----------- -----------
Income From Investment Operations:
Net investment income (b) ............................. .12 .14 .10 .11 .15
Net realized and unrealized gain (loss) on investments . (3.35) (.56) 1.26 (1.12) (1.24)
----------- ----------- ----------- ----------- -----------
Total Income From Investment Operations .............. (3.23) (.42) 1.36 (1.01) (1.09)
----------- ----------- ----------- ----------- -----------
Distributions:
Net investment income .................................. (.08) (.05) (.08) (.03) (.10)
In excess of net investment income ..................... -- (.09) (.09) (.02) (.10)
Net realized gain on investments ....................... -- -- -- -- (.31)
In excess of net realized gain on investments .......... -- -- -- (.03) (.05)
----------- ----------- ----------- ----------- -----------
Total Distributions .................................. (.08) (.14) (.17) (.08) (.56)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period .......................... $ 8.48 $ 11.79 $ 12.35 $ 11.16 $ 12.25
=========== =========== =========== =========== ===========
Total Return (%)(a) .................................... (27.57) (3.45) 12.26 (8.21) (5.83)
Ratios/supplemental Data:
Net Assets, end of period ($000 omitted) ............... 294,349 333,052 271,490 172,673 127,271
Ratios to average net assets (%)(a):
Operating expenses, net .............................. 1.75 1.64 1.71 1.75 .80
Operating expenses, gross ............................ 1.75 1.64 1.72 1.80 .83
Net investment income ................................ 1.20 .87 .77 .88 1.10
Portfolio turnover rate (%) ............................ 59.35 50.60 34.62 71.16 57.47
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Emerging Markets Fund 26
<PAGE>
Emerging Markets Fund
Financial Highlights - Class E
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1998*
------
<S> <C>
Net Asset Value, Beginning of Period .............................. $ 7.37
------
Income From Investment Operations:
Net investment income (loss) (c) ................................. (.02)
Net realized and unrealized gain (loss) on investments ........... 1.13
------
Total Income From Investment Operations ........................ 1.11
------
Net Asset Value, End of Period .................................... $ 8.48
======
Total Return (%)(a) ............................................... 15.06
Ratios/supplemental Data:
Net Assets, end of period ($000 omitted) ......................... 39
Ratios to average net assets (%)(b):
Operating expenses ............................................. --
Net investment income .......................................... --
Portfolio turnover rate (%) ...................................... 59.35
</TABLE>
* For the period September 22, 1998 (commencement of operations) to December
31, 1998.
(a) Periods less than one year are not annualized.
(b) The ratios are not meaningful due to the Fund's short period of operation.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
27 Emerging Markets Fund
<PAGE>
Special Growth Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
OBJECTIVE: To maximize total return primarily through capital appreciation and
by assuming a higher level of volatility than 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 seven small capitalization stock fund managers with three
separate and distinct investment styles.
<TABLE>
<CAPTION>
Growth of a $10,000 Investment
Yearly
Periods Special Lipper(R)
Ended Growth- Russell Small Co.
December 31 Class S 2500(TM)** Growth++
- ----------- ------- ---------- --------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $12,393 $11,393 $12,235
1990 $10,623 $10,166 $10,990
1991 $15,203 $14,914 $16,602
1992 $17,106 $17,328 $18,645
1993 $19,755 $20,193 $21,751
1994 $19,022 $19,980 $21,528
1995 $24,448 $26,314 $26,165
1996 $29,009 $31,322 $33,733
1997 $37,356 $38,951 $40,728
1998 $37,510 $39,101 $40,469
- -------------------------------------------------------------
Total $232,425 $240,212 $254,846
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Yearly periods ended December 31
Special Growth Fund - Class S Russell 2500(Tm) Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ----------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $10,042 0.42% 1 Year $10,038 0.38%
5 Years $18,988 13.68%(S) 5 Years $19,363 14.13%(S)
10 Years $37,510 14.13%(S) 10 Years $39,101 14.61%(S)
<CAPTION>
Special Growth Fund - Class E ++++ Lipper(r) Small Co. Growth Funds Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ----------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $10,004 0.04% 1 Year $9,936 (0.64)%
5 Years $18,771 13.42%(S) 5 Years $18,605 13.22%(S)
10 Years $37,083 14.00%(S) 10 Years $40,469 15.00%(S)
</TABLE>
29 Special Growth Fund
<PAGE>
Special Growth Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Special Growth Fund Class S and Class
E shares reflected total returns of 0.4% and 0.04%, respectively, as compared to
the Russell 2500(TM) Index, which gained 0.4%. The Fund outperformed the average
small cap fund universe as tracked by Lipper(R) Analytical Services, which lost
0.6% for the year. Good security selection was the primary factor in achieving
positive returns, with the Fund's growth managers producing the best results.
PORTFOLIO HIGHLIGHTS
Small capitalization stocks lagged large cap issues throughout 1998. The
market's defense against weakening trends in the global economy was to focus on
stocks believed to have better financial strength and growth. The Russell
2000(R) Index lost 2.5% for the year, while the largest stocks in the Russell
1000(R) Index gained more than 40%--an unprecedented spread. Despite the
relative outperformance of growth-oriented funds in the fourth quarter, the
Special Growth Fund produced good index-relative results for the year, finishing
slightly ahead of the Russell 2500(TM) Index, and well ahead of the average
small cap fund tracked by Lipper. The managers' security selection accounted for
the better performance. Results were particularly good in the Consumer
Discretionary sector, led by retail holdings.
Investment style also had a strong influence on performance in the small cap
market. While small growth stocks were up slightly for the year, small value
stocks finished in negative territory. The Russell 2000(R) Growth Index rose
1.2% during the year, while the Russell 2000(R) Value Index fell 6.5%. The
Fund's growth-oriented managers produced even better gains than their benchmark,
both up more than 5%. The Value managers struggled through a difficult
environment, with valuation sensitivity contributing to both negative style and
cap effects. The dominance of larger cap stocks was particularly harsh to the
Fund's micro-cap oriented manager, Wellington Management Company LLP.
<TABLE>
<CAPTION>
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
<S> <C>
Mercury Interactive Corp. 0.7%
MedImmune, Inc. 0.7
USG Corp. 0.6
Lincare Holdings, Inc. 0.6
Abercrombie & Fitch Co. Class A 0.6
City National Corp. 0.6
AnnTaylor Stores Corp. 0.5
Ross Stores, Inc. 0.5
Avnet, Inc. 0.5
American Greetings Corp. Class A 0.5
<CAPTION>
PORTFOLIO CHARACTERISTICS
December 31, 1998
<S> <C>
Current P/E Ratio 21.8x
Portfolio Price/Book Ratio 2.6x
Market Capitalization - $-Weighted Average 1.64 Bil
Number of Holdings 868
</TABLE>
<TABLE>
<CAPTION>
MONEY MANAGERS STYLES
<S> <C>
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
Westpeak Investment Advisors, L.P. Small Cap-Market-Oriented
</TABLE>
* The Special Growth Fund - Class S assumes initial investment on January 1,
1989.
** 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 $1.4 billion.
The Russell 2500(TM) Index return reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
++ Lipper(R) Small Co. Growth Funds Benchmark 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 E - For the period, November 4, 1996
(commencement of sales) to May 15, 1998, shareholder service and Rule 12b-1
distribution fees were charged. From May 16, 1998 through December 31,
1998, only shareholder service 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 E to provide historical perspective.
(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.
Special Growth Fund 30
<PAGE>
Special Growth Fund
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
MARKET
NUMBER VALUE
OF (000)
SHARES $
------- --------
<S> <C> <C>
COMMON STOCKS - 93.9%
AUTO AND TRANSPORTATION - 5.2%
AAR Corp. 75,500 1,803
ABC Rail Products Corp. (a) 10,000 122
AirNet Systems, Inc. (a) 9,000 129
Alaska Air Group, Inc. (a) 8,600 381
Alexander & Baldwin, Inc. 6,200 142
America West Holding Corp.
Class B (a) 39,600 673
Arvin Industries, Inc. 1,500 63
ASA Holdings, Inc. 45,000 1,367
Avis Rent A Car, Inc. (a) 65,000 1,572
Avondale Industries, Inc. (a) 6,600 191
Bandag, Inc. 8,000 320
Budget Group, Inc. Class A (a) 12,600 200
C.H. Robinson Worldwide, Inc. 8,400 217
Carey International, Inc. New (a) 8,900 154
CNF Transportation, Inc. 1,500 56
Coach USA, Inc. (a) 44,300 1,537
Coachmen Industries, Inc. 94,000 2,468
Comair Holdings, Inc. 51,250 1,720
Consolidated Freightways Corp. (a) 10,100 160
Continental Airlines, Inc. Class B (a) 37,100 1,243
Control Devices, Inc. 10,332 165
Cooper Tire & Rubber Co. 7,700 157
Dollar Thrifty Automotive
Group, Inc. (a) 20,100 259
Excel Industries, Inc. 8,000 140
Fleetwood Enterprises, Inc. 28,300 983
Forward Air Corp. (a) 7,000 129
FRP Properties, Inc. (a) 5,000 130
Hawker Pacific Aerospace (a) 40,000 130
Hertz Corp. Class A 1,400 64
Hunt (JB) Transportation
Services, Inc. 3,994 92
Keystone Automotive
Industries, Inc. (a) 6,000 126
Kirby Corp. (a) 300 6
Landair Corp. (a) 20,000 148
Landstar Systems, Inc. (a) 35,600 1,451
Mark VII, Inc. (a) 8,000 135
Midas, Inc. 4,400 137
Midwest Express Holdings, Inc. (a) 37,600 989
Monaco Coach Corp. (a) 7,800 207
Monro Muffler Brake, Inc. (a) 20,000 143
MotivePower Industries, Inc. (a) 1,300 42
Myers Industries, Inc. 3,800 109
National R.V. Holdings, Inc. (a) 47,700 1,228
Navistar International Corp. (a) 34,100 972
Offshore Logistics, Inc. (a) 107,000 1,257
Polaris Industries, Inc. 29,100 1,140
Roadway Express, Inc. 1,900 27
Skywest, Inc. 73,400 2,394
Tower Automotive, Inc. (a) 40,400 1,007
Transport Corp. of America (a) 12,000 138
Trinity Industries, Inc. 49,900 1,920
USA Truck, Inc. (a) 14,000 163
Varlen Corp. 9,000 207
Werner Enterprises, Inc. 6,000 106
Winnebago Industries, Inc. 9,000 136
Wynn's International, Inc. 10,000 221
-------
31,176
-------
CONSUMER DISCRETIONARY - 18.4%
Abacus Direct Corp. (a) 44,800 2,047
Abercrombie & Fitch Co. Class A (a) 47,850 3,385
ACT Networks, Inc. (a) 45,350 547
Action Performance
Companies, Inc. (a) 30,800 1,086
AMERCO (a) 2,400 67
American Greetings Corp. Class A 68,300 2,805
Ames Department Stores, Inc. (a) 7,700 207
AnnTaylor Stores Corp. (a) 83,500 3,293
ARC International Corp. (a) 20,600 32
Ascent Entertainment Group, Inc. (a) 18,000 131
Aztar Corp. (a) 18,400 93
Barnes & Noble, Inc. (a) 45,000 1,913
Best Buy Co. (a) 22,900 1,405
BHC Communications, Inc. Class A 1,200 146
Big Flower Holdings, Inc. (a) 45,300 999
BJ's Wholesale Club, Inc. (a) 23,600 1,093
Blair Corp. 5,100 113
Bob Evans Farms, Inc. 2,800 73
Bowne & Co., Inc. 3,800 68
Brinker International, Inc. (a) 6,400 185
Brown Group, Inc. 7,700 135
Brunswick Corp. 8,100 200
Buckle, Inc. (The) (a) 50,750 1,218
Buffets, Inc. (a) 76,400 907
Cameron Ashley, Inc. (a) 15,000 196
Capstar Broadcasting Corp.
Class A (a) 100,000 2,288
Carmike Cinemas, Inc. (a) 5,000 102
Carter-Wallace, Inc. 3,800 75
Cavanaughs Hospitality Corp. (a) 18,000 194
CEC Entertainment, Inc. (a) 78,550 2,180
Central Newspapers, Inc. Class A 21,000 1,500
Children's Comprehensive
Services, Inc. (a) 15,000 201
Chris Craft Industries, Inc. (a) 12,100 583
Circus Circus Enterprises, Inc. (a) 73,700 843
Claire's Stores, Inc. 73,400 1,505
</TABLE>
31 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Cole National Corp. Class A (a) 10,000 171
Computer Horizons Corp. (a) 82,600 2,189
Consolidated Graphics, Inc. (a) 16,500 1,115
Cornell Corrections, Inc. (a) 7,000 133
Cox Radio, Inc. Class A (a) 1,500 63
Cutter & Buck, Inc. (a) 44,300 1,650
Dan River, Inc. Class A (a) 13,000 153
Darden Restaurants, Inc. 11,000 198
Department 56, Inc. (a) 46,200 1,735
DeVry, Inc. (a) 83,100 2,545
EduTrek International, Inc.
Class A (a) 20,000 118
Elder-Beerman Stores Corp. New (a) 33,550 386
Electronic Arts (a) 900 50
Electronics Boutique
Holdings Corp. (a) 8,000 163
Ethan Allen Interiors, Inc. 1,800 74
Extended Stay America, Inc. (a) 41,300 434
First Consulting Group, Inc. 20,000 408
Fossil, Inc. (a) 89,850 2,561
Franklin Covey Co. 6,200 104
Furniture Brands International, Inc. (a) 35,600 970
Grey Advertising, Inc. 4,900 1,749
GTECH Holdings Corp. (a) 4,600 118
Handleman Co. (a) 122,600 1,724
Hearst-Argyle Television, Inc. (a) 41,000 1,353
Hollinger International, Inc. Class A 53,100 740
IHOP Corp. New (a) 3,800 151
Insurance Auto Auctions, Inc. (a) 10,000 118
Interim Services, Inc. (a) 57,100 1,335
Iron Mountain, Inc. (a) 5,500 195
ITT Educational Services, Inc. (a) 50,000 1,700
Jacor Communications, Inc. (a) 35,000 2,253
Kellwood Co. 5,900 148
Kelly Services, Inc. Class A 200 6
Knight-Ridder, Inc. 30,400 1,554
La-Z-Boy Chair Co. 3,200 57
Lamar Advertising Co. Class A (a) 41,600 1,550
Landry's Seafood Restaurants, Inc. (a) 16,000 117
Learning Tree International, Inc. (a) 15,700 142
Lee Enterprises, Inc. 50,000 1,575
Linens 'n Things, Inc. (a) 1,600 63
Lithia Motors, Inc., Class A (a) 10,000 163
Maxim Group, Inc. (a) 9,000 216
Mazel Stores, Inc. (a) 12,000 155
McClatchy Newspapers, Inc. Class A 51,475 1,821
McGraw-Hill, Inc. 12,500 1,273
MeriStar Hospitality Corp. REIT 78,500 1,457
Metzler Group, Inc. (a) 25,000 1,216
Michaels Stores, Inc. (a) 8,000 145
Micro Warehouse, Inc. (a) 25,400 857
Modis Professional Services, Inc. (a) 72,100 1,045
Musicland Stores Corp. (a) 15,700 235
NTL, Inc. (a) 700 39
O'Charleys, Inc. (a) 15,000 210
OfficeMax, Inc. (a) 83,000 1,017
Ogden Corp. 11,600 291
On Assignment, Inc. (a) 50,000 1,691
Oshkosh B' Gosh, Inc. Class A 5,000 101
Oxford Industries, Inc. 600 17
Papa Johns International, Inc. (a) 37,000 1,628
Penton Media, Inc. 70,017 1,418
Personnel Group of America, Inc. (a) 2,700 47
Petco Animal Supplies, Inc. (a) 22,000 221
Pillowtex Corp. 2,300 62
Plantronics, Inc. (a) 3,500 301
Premark International, Inc. 22,900 793
Quicksilver, Inc. (a) 34,700 1,041
Rainforest Cafe, Inc. (a) 24,500 147
RCM Technologies, Inc. (a) 10,000 264
RDO Equipment Co. Class A (a) 15,000 113
Recoton Corp. (a) 2,200 39
Regis Corp. 30,000 1,198
Rent-Way, Inc. (a) 41,900 1,019
Reynolds & Reynolds Co. Class A 56,400 1,294
Richey Electronics, Inc. (a) 20,000 206
Robert Half International, Inc. (a) 16,300 728
Rocky Shoes & Boots, Inc. (a) 20,000 118
Ross Stores, Inc. 77,300 3,039
Ruby Tuesday, Inc. 2,600 55
Rural/Metro Corp. (a) 16,000 174
Ryan's Family Steak Houses, Inc. (a) 116,800 1,445
Saga Communications Class A (a) 8,300 170
Scholastic Corp. (a) 4,900 260
Schultz Sav-o Stores, Inc. 74,500 1,220
SCP Pool Corp. (a) 12,750 188
Scripps (E.W.) Co. Class A 30,400 1,512
Shaw Industries, Inc. 2,400 58
Shopko Stores, Inc. (a) 11,800 392
Snyder Communications, Inc. (a) 2,500 84
Sport Supply Group, Inc. (a) 20,000 185
Springs Industries, Inc. 9,500 394
StaffMark, Inc. (a) 38,000 850
Stage Stores, Inc. (a) 14,000 131
Tiffany & Co. 30,000 1,556
TJX Cos., Inc. 42,300 1,227
TMP Worldwide, Inc. (a) 23,000 978
TRM Copy Centers Corp. (a) 12,000 90
Unifirst Corp. 2,600 59
Unisource Worldwide, Inc. 26,800 194
United Stationers, Inc. (a) 47,600 1,273
United Television, Inc. 10,450 1,170
</TABLE>
Special Growth Fund 32
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Urban Outfitters, Inc. (a) 8,500 148
Value City Department Stores, Inc. (a) 86,100 1,200
Viad Corp. 4,800 146
Wackenhut Corrections Corp. (a) 45,000 1,288
Warnaco Group, Inc. Class A 26,200 662
Washington Post Co. Class B 4,200 2,426
West Marine, Inc. (a) 20,000 195
Wiley (John) & Son Inc. Class A 2,100 101
Wilsons The Leather Experts, Inc. (a) 15,000 161
World Color Press, Inc. (a) 18,600 566
Youth Services International, Inc. (a) 18,000 68
Zale Corp. (a) 32,900 1,060
-------
110,994
-------
CONSUMER STAPLES - 2.4%
Aurora Foods, Inc. (a) 27,100 537
Block Drug Co., Inc. Class A 25,576 1,106
Canandaigua Brands Co., Inc.
Class A (a) 9,600 553
Church and Dwight Co., Inc. 4,900 176
Coca-Cola Bottling Co. Consolidated 20,000 1,160
Coors (Adolph) Co. Class B 3,300 186
Corn Products International, Inc. 19,200 583
Dole Food Co., Inc. 6,200 186
Earthgrains Co. 72,700 2,249
Fleming Cos., Inc. 4,300 45
Golden State Vintners, Inc. Class B (a) 15,000 158
Hormel (George A.) & Co. - Hormel Foods
Corp 2,100 69
IBP, Inc. 67,200 1,957
Nature's Sunshine Products, Inc. 10,000 150
Performance Food Group Co. (a) 3,600 100
Pilgrim's Pride Corp. 3,500 70
Ralcorp Holdings, Inc. (a) 6,900 126
Schweitzer-Mauduit
International, Inc. 9,000 139
Seaboard Corp. 100 42
Smithfield Foods, Inc. (a) 1,500 51
Smucker (J.M.) Co. 2,700 67
Standard Commercial Corp. 18,000 154
SuperValu, Inc. 50,500 1,413
Tootsie Roll Industries, Inc. 32,500 1,272
U.S. Foodservice (a) 23,400 1,147
Universal Corp. 2,000 70
Universal Foods Corp. 20,600 565
-------
14,331
-------
FINANCIAL SERVICES - 17.8%
1st Source Corp. 200 7
Advanta Corp. Class A 5,000 66
Affiliated Computer Services, Inc.
Class A (a) 3,600 162
Alleghany Corp. (a) 900 169
American Bank Note
Holographics, Inc. (a) 40,000 700
American Financial Group, Inc. 10,500 461
AmeriCredit Corp. (a) 7,400 102
AmerUs Life Holdings, Inc. 5,600 125
Amplicon, Inc. 11,800 177
AMRESCO, Inc. (a) 10,300 90
Amwest Insurance Group, Inc. 10,000 143
Andover Bancorp, Inc. 2,000 68
Area Bancshares Corp. 3,100 81
Astoria Financial Corp. 42,100 1,926
BancorpSouth, Inc. 1,800 33
Bank Plus Corp. (a) 15,600 67
BankAtlantic Bancorp, Inc. Class A 130,295 839
Bank North Group, Inc. 2,800 105
Bear Stearns Cos., Inc. 32,825 1,227
Berkley (W.R.) Corp. 35,050 1,174
BISYS Group, Inc. (a) 30,000 1,545
Brookline Bancorp., Inc. 5,000 57
Burnham Pacific Properties, Inc. 10,000 121
Carolina First Corp. 5,800 146
CCA Prison Realty Trust 23,800 488
Centris Group, Inc. 138,800 1,353
Centura Banks, Inc. 1,600 119
Charter One Financial, Inc. 42,000 1,163
Chartwell Re Corp. 2,700 64
Chicago Title Corp. 10,100 474
Chittenden Corp. 800 26
Citizens Banking Corp. 1,900 64
City National Corp. 80,550 3,353
Clark/Bardes Holdings, Inc. (a) 19,200 317
CNB Bancshares, Inc. 5,400 252
Colonial BancGroup, Inc. 96,000 1,152
Commerce Bancorp, Inc. 6,700 352
Commerce Bancshares, Inc. 19,128 808
Commerce Group, Inc. 3,000 106
Commercial Federal Corp. 18,900 438
Commonwealth Bancorp, Inc. 4,200 65
Community Bank System, Inc. 900 26
Compass Bancshares, Inc. 50 2
Conning Corp. New 9,600 197
CORT Business Services Corp. (a) 32,000 776
Cullen Frost Bankers, Inc. 9,400 516
Data Transmission Network Corp. (a) 5,000 143
Delphi Financial Group, Inc. (a) 8,058 423
Delta Financial Corp. (a) 15,000 89
Dime Bancorp, Inc. 65,800 1,740
Dime Community Bancorp, Inc. 4,300 88
</TABLE>
33 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Donaldson, Lufkin & Jenrette, Inc. 48,000 1,968
Doral Financial Corp. 78,500 1,737
Downey Financial Corp. 50,655 1,289
DST Systems, Inc. (a) 37,800 2,157
Duke Realty Investments, Inc. 4,700 109
Eaton Vance Corp. 1,200 25
Enhance Financial
Services Group, Inc. 12,100 363
EVEREN Capital Corp. 2,100 48
Everest Reinsurance Holdings, Inc. 23,500 915
Executive Risk, Inc. 30,000 1,648
EXEL Limited Class A 21,000 1,575
FBL Financial Group, Inc. Class A 7,200 175
Fidelity National Financial 84,304 2,571
Financial Federal Corp. (a) 2,100 52
Financial Security
Assurance Holdings, Ltd. 12,400 673
First American Financial Corp. 74,500 2,393
First Bancorp 11,300 341
First Republic Bank (a) 15,900 398
First Washington Bancorp, Inc. 2,310 55
FirstFed Financial Corp. (a) 63,300 1,131
Flagstar Bancorp, Inc. 2,900 76
Flushing Financial Corp. 9,450 149
Freedom Securities Corp. 17,500 265
Fremont General Corp. 55,150 1,365
Fund American Cos., Inc. 1,900 266
Gables Residential Trust 52,000 1,206
Golden State Bancorp, Inc. (a) 112,700 1,874
Greenpoint Financial Corp. 21,900 769
Hamilton Bancorp, Inc. (a) 2,000 52
HCC Insurance Holdings, Inc. 12,000 212
HealthCare Financial Partners, Inc. (a) 35,000 1,374
Heller Financial, Inc. Class A 14,000 411
Hibernia Corp. 64,200 1,115
Hoenig Group, Inc. (a) 20,000 140
Horace Mann Educators Corp. 40,000 1,140
HSB Group, Inc. 11,700 480
Imperial Credit Industries, Inc. (a) 10,162 84
Independence Community Bank Corp. 1,400 22
IndyMac Mortgage Holdings, Inc. REIT 15,400 163
Intercontinental Life Corp. (a) 6,400 123
Investors Financial Services Corp. 4,300 255
IPC Holdings, Ltd. 43,500 990
Jack Henry & Assocociates, Inc. 33,800 1,682
JSB Financial, Inc. 2,500 136
Kansas City Life Insurance Co. 400 33
LandAmerica Financial Group, Inc. 35,400 1,976
Legg Mason, Inc. 60,000 1,894
Liberty Financial Cos., Inc. 5,400 146
Life USA Holdings, Inc. 7,000 89
LINC Capital, Inc. (a) 14,000 110
Litchfield Financial Corp. 7,350 140
M & T Bank Corp. 600 311
MAF Bancorp, Inc. 50,900 1,342
Markel Corp. (a) 8,000 1,448
Metris Companies, Inc. 28,250 1,409
Mutual Risk Management, Ltd. 24,100 943
NAC Reinsurance Corp. 7,200 338
National City Bancorporation (a) 5,500 140
National Data Corp. 25,000 1,217
National Western Life Insurance Co.
Class A (a) 2,700 315
Ocean Financial Corp. 2,800 46
Ohio Casualty Corp. 8,300 341
Old National Bancorp 200 11
One Valley Bancorp
of West Virginia, Inc. 4,400 145
Pacific Gulf Properties, Inc. 7,000 140
Paychex, Inc. 40,500 2,083
Penn Treaty American Corp. (a) 5,400 145
Pennsylvania Real Estate
Investment Trust 7,000 136
Peoples Heritage Financial Group 92,780 1,856
PMI Group, Inc. (The) 8,200 405
Price (T. Rowe) & Associates, Inc. 50,000 1,694
Profit Recovery Group
International, Inc. (The) (a) 20,000 750
Protective Life Corp. 41,100 1,636
PXRE Corp. 41,959 1,052
Queens County Bancorp 8,997 267
Raymond James Financial, Inc. 53,900 1,139
Reliance Bancorp, Inc. 7,800 217
Reliance Group Holdings, Inc. 41,600 536
RenaissanceRe Holdings, Ltd. 37,000 1,355
Republic Bancorp, Inc. 7,083 97
Republic of New York Corp. 30,400 1,385
Resource Bancshares Mortgage Group 96,500 1,568
Richmond County Financial Corp. 8,900 143
Riggs National Corp. 16,300 331
RLI Corp. 4,250 141
Rollins Truck Leasing Corp. 21,650 319
Roslyn Bancorp, Inc. 25,800 550
Scottish Annuity & Life
Holdings, Ltd. (a) 11,000 151
Seacoast Financial Services Corp. (a) 14,000 143
SEI Corp. 900 89
Selective Insurance Group, Inc. 48,000 972
Silicon Valley Bancshares (a) 11,700 199
Sky Financial Group, Inc. 2,310 61
</TABLE>
Special Growth Fund 34
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Smith (Charles E.) Residential
Realty, Inc. 40,000 1,285
Sovereign Bancorp, Inc. 129,266 1,826
Sovran Self Storage, Inc. 37,400 940
Staten Island Bancorp, Inc. 17,600 351
Stewart Information Services Corp. 36,300 2,105
SunGard Data Systems (a) 60,000 2,380
Transatlantic Holdings, Inc. 26,000 1,965
Trenwick Group, Inc. 1,250 41
Trustmark Corp. 1,900 43
UniCapital Corp. New (a) 20,400 150
Union Planters Corp. 31,475 1,425
United Bankshares, Inc. 5,000 133
United Companies Financial Corp. 20,000 68
United Fire & Casualty Co. 27,450 916
Washington Federal, Inc. 18,709 500
Webster Financial Corp. 57,600 1,580
Westamerica Bancorporation 30,000 1,103
Western Bancorp 3,300 96
-------
107,018
-------
HEALTH CARE - 9.0%
Agouron Pharmaceuticals, Inc. (a) 7,650 449
Alpharma, Inc. Class A 33,550 1,185
American Retirement Corp. (a) 4,700 74
AmeriSource Health Corp. Class A (a) 3,500 228
AmSurg Corp. Class A (a) 22,000 154
Anesta Corp. (a) 35,100 930
ARV Assisted Living, Inc. (a) 30,000 184
Assisted Living Concepts, Inc. (a) 8,000 105
Balanced Care Corp. (a) 22,100 177
Ballard Medical Products 12,400 301
Bausch & Lomb, Inc. 4,900 294
Bergen Brunswig Corp. Class A 12,000 419
Beverly Enterprises, Inc. (a) 55,900 377
Bindley Western Industries, Inc. 27,633 1,361
Bio-Rad Laboratories, Inc. Class A (a) 1,900 40
Biosite Diagnostics, Inc. (a) 24,000 285
Cooper Companies, Inc. (a) 45,400 939
CorVel Corp. (a) 3,500 124
Curative Health Services Inc. (a) 30,000 975
Empi, Inc. (a) 5,200 129
Express Scripts, Inc. Class A (a) 21,000 1,389
First Health Group Corp. (a) 61,000 1,007
Hanger Orthopedic Group, Inc. (a) 35,000 788
HCR Manor Care, Inc. (a) 40,000 1,175
Health Management Associates
Class A (a) 60,000 1,298
Healthcare Services Group, Inc. (a) 15,200 141
Hooper Holmes, Inc. 2,900 84
Human Genome Sciences, Inc. (a) 27,000 955
IDEXX Laboratories, Inc. (a) 67,000 1,792
Immucor Corp. (a) 16,000 138
Immunex Corp. (a) 3,300 413
Incyte Pharmaceuticals, Inc. (a) 15,000 559
Integrated Health Services, Inc. (a) 101,000 1,427
Jones Pharma, Inc. 25,000 911
Lincare Holdings, Inc. (a) 88,800 3,596
Lunar Corp. (a) 11,000 106
Maxxim Medical, Inc. (a) 4,600 137
MedImmune, Inc. (a) 41,150 4,089
Monarch Dental Corp. New (a) 10,500 42
Natural Alternatives
International, Inc. (a) 10,000 108
OEC Medical Systems, Inc. (a) 45,300 1,424
Osteotech, Inc. (a) 23,900 1,114
Owens & Minor, Inc., Holding Co. 9,300 146
PacifiCare Health Systems, Inc.
Class B (a) 32,800 2,605
Pediatric Services of America, Inc. (a) 20,000 65
Pediatrix Medical Group (a) 24,000 1,439
Penwest Pharmaceuticals Co. (a) 18,000 115
Pharmaceutical Product
Development, Inc. (a) 40,000 1,203
PMR Corp. (a) 24,000 183
ProMedCo Management Co. (a) 27,100 163
Protocol Systems, Inc. (a) 20,000 138
Province Healthcare Co. New (a) 31,100 1,096
Quest Diagnostics, Inc. (a) 7,700 137
Quintiles Transnational Corp. (a) 35,100 1,871
Renal Care Group, Inc. (a) 18,050 523
ResMed, Inc. (a) 27,000 1,221
Respironics, Inc. (a) 6,000 120
Roberts Pharmaceutical Corp. (a) 20,800 452
Safeskin Corp. (a) 2,100 51
Sepracor, Inc. (a) 10,700 942
Sola International, Inc. (a) 60,000 1,035
STAAR Surgical Co. (a) 18,000 140
Steris Corp. (a) 58,200 1,654
Sunrise Assisted Living, Inc. (a) 30,000 1,545
Total Renal Care Holdings, Inc. (a) 13,107 387
Trigon Healthcare, Inc. (a) 42,200 1,574
Twinlab Corp. (a) 83,800 1,095
U.S. Vision, Inc. New (a) 17,000 128
United Payors & United
Providers, Inc. (a) 5,200 150
Universal Health Services, Inc.
Class B (a) 3,400 176
UroCor, Inc. (a) 20,000 123
Urologix, Inc. (a) 32,000 132
Vencor, Inc. (a) 65,600 295
</TABLE>
35 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Veterinary Centers
of America, Inc. (a) 2,600 52
VISX, Inc. (a) 17,800 1,555
Weider Nutrition International, Inc.
Class A 24,000 153
-------
54,087
-------
INTEGRATED OILS - 0.3%
Cross Timbers Oil Co. 89,500 670
Giant Industries, Inc. 48,600 456
Houston Exploration Co. (The) (a) 2,800 56
Tesoro Petroleum Corp. (a) 29,000 352
TransMontaigne, Inc. (a) 13,300 201
-------
1,735
-------
MATERIALS AND PROCESSING - 9.0%
ACX Technologies, Inc. (a) 4,300 57
Advanced Energy Industries, Inc. (a) 8,000 205
Agrium, Inc. 27,400 238
AK Steel Holding Corp. 26,300 618
Albany International Corp. Class A 8,058 153
American Buildings Co. (a) 7,000 161
Applied Extrusion
Technologies, Inc. (a) 22,000 176
AptarGroup, Inc. 68,600 1,925
ASARCO, Inc. 32,800 494
Ball Corp. 29,700 1,359
Banta Corp. 43,000 1,177
Boise Cascade Corp. 45,600 1,414
Bowater, Inc. 29,500 1,222
Building Materials Holding Corp. (a) 12,000 143
Burlington Industries, Inc. (a) 28,700 316
BWay Corp. (a) 7,500 113
Carbide/Graphite
Group, Inc. (The) (a) 11,000 162
Carpenter Technology Corp. 10,400 353
Centex Construction Products, Inc. 44,500 1,808
Centex Corp. 36,500 1,645
Channell Commercial Corp. (a) 18,000 151
Chemed Corp. 2,400 80
Chesapeake Corp. 17,300 638
Citation Corp. (a) 12,000 150
Cleveland-Cliffs, Inc. 19,400 782
Comfort Systems USA, Inc. (a) 15,000 268
Commercial Metals Co. 3,500 97
Cyprus Amax Minerals Co. 57,400 574
Dayton Superior Corp. Class A (a) 8,000 154
Easco, Inc. 12,000 92
Elcor Chemical Corp. 29,500 953
Engle Homes, Inc. 10,200 156
Ethyl Corp. 26,600 155
Fuller (H.B.) Co. 3,300 152
Geon Co. 3,100 71
Giant Cement Holding, Inc. (a) 5,000 124
Granite Construction, Inc. 13,000 436
Great Lakes Chemical Corp. 22,400 896
Harsco Corp. 9,200 280
Homestake Mining Co. 103,500 951
Hughes Supply, Inc. 11,050 323
IMCO Recycling, Inc. 9,000 139
Kaydon Corp. 40,000 1,603
Lesco, Inc. 13,000 167
Lone Star Industries, Inc. 61,600 2,267
Louisiana Pacific Corp. 80,000 1,465
McWhorter Technologies, Inc. (a) 2,500 57
Mead Corp. 46,600 1,366
Millennium Chemicals, Inc. 47,200 938
Minerals Technologies, Inc. 45,500 1,863
Mississippi Chemical Corp. 9,800 137
Mohawk Industries, Inc. (a) 3,500 147
Morrison Knudsen Corp. (a) 10,800 105
NCH Corp. 700 42
NCI Building Systems, Inc. (a) 53,500 1,505
New England Business Service, Inc. 2,300 90
NN Ball & Roller, Inc. 25,000 150
Nortek, Inc. (a) 7,600 210
Northland Cranberries, Inc. Class A 12,000 108
Pan Pacific Retail Properties, Inc. 8,000 160
Penford Corp. 8,000 128
Phelps Dodge Corp. 24,700 1,256
Plum Creek Timber Co. L.P. 35,500 925
Potlatch Corp. 15,600 575
Quaker Fabric Corp. (a) 22,000 139
Quanex Corp. 5,700 129
Rayonier, Inc. 6,800 312
Redwood Trust, Inc. 6,300 88
Reliance Steel & Aluminum Co. 7,600 210
Rock of Ages Corp. Class A (a) 10,400 143
RPM, Inc. (Ohio) 28,400 454
Schulman (A.), Inc. 45,300 1,019
Scotts Co. (The) Class A (a) 5,600 215
SIFCO Industries 63,000 784
Simpson Manufacturing Co., Inc. (a) 2,400 90
Southdown, Inc. 21,500 1,273
Spartech Corp. 3,000 66
SPS Technologies, Inc. (a) 2,500 142
St. Joe Co. (The) 59,500 1,394
Stepan Co. 1,600 43
Synalloy Corp. 16,000 142
Temple-Inland, Inc. 25,400 1,507
Texas Industries, Inc. 33,750 909
</TABLE>
Special Growth Fund 36
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Thomas Industries, Inc. 1,900 37
Universal Stainless & Alloy
Products, Inc. (a) 10,000 74
USG Corp. 72,000 3,667
USX-U.S. Steel Group 55,100 1,267
Valley National Gases, Inc. (a) 25,000 141
W.R. Grace & Co. (a) 29,200 458
Waters Corp. (a) 2,800 244
Webb (Del E.) Corp. 41,700 1,149
Wellman, Inc. 14,000 143
Wellsford Real Properties, Inc. 18,400 190
Westvaco Corp. 37,300 1,000
WHX Corp. (a) 5,500 55
Wolverine Tube, Inc. (a) 5,000 105
Worthington Industries, Inc. 33,300 416
-------
54,630
-------
MISCELLANEOUS - 1.3%
Agribrands International, Inc. (a) 6,600 198
ChoicePoint, Inc. (a) 13,200 851
Griffon Corp. (a) 101,800 1,082
Labor Ready, Inc. New (a) 73,400 1,445
LNR Property Corp. 65,500 1,306
MAXIMUS, Inc. (a) 41,000 1,516
Pameco Corp. (a) 8,000 93
Quest Education Corp. (a) 18,000 178
URS Corp. (a) 49,800 1,164
-------
7,833
-------
OTHER ENERGY - 2.8%
Atwood Oceanics, Inc. (a) 24,000 408
Barrett Resources Corp. (a) 10,500 252
Bayard Drilling Technologies, Inc. (a) 30,000 150
BEC Energy 7,000 288
BJ Services Co. (a) 80,000 1,250
Chesapeake Energy Corp. 21,500 19
Coho Energy, Inc. (a) 35,480 100
Cooper Cameron Corp. (a) 69,050 1,692
Costilla Energy, Inc. (a) 12,000 47
Devon Energy Corp. 11,000 338
Eastern Enterprises, Inc. 12,500 547
Evergreen Resources, Inc. (a) 5,300 93
Global Industries, Inc. (a) 100,150 613
Hanover Compressor Co. (a) 35,200 904
Horizon Offshore, Inc. (a) 20,000 110
HS Resources, Inc. (a) 7,900 60
Mallon Resources Corp. (a) 20,000 136
Mitcham Industries, Inc. (a) 20,000 92
Northwestern Corp. 8,300 219
Nuevo Energy Co. (a) 11,100 128
Octel Corp. (a) 22,200 308
OMNI Energy Services Corp. New (a) 13,600 58
ONEOK, Inc. 17,600 636
Pool Energy Services Co. (a) 96,000 1,032
Rowan Cos., Inc. (a) 128,150 1,281
Santa Fe International Corp. 47,600 696
Seacor Holdings, Inc. (a) 22,700 1,122
Seitel, Inc. (a) 15,700 195
Supreme Industries, Inc. Class A (a) 15,788 152
Titan Exploration, Inc. (a) 22,000 146
Transocean Offshore, Inc. 30,000 804
Ultramar Diamond Shamrock Corp. 46,000 1,115
Unit Corp. (a) 25,000 105
Valero Energy Corp. 41,200 876
Vintage Petroleum, Inc. 85,550 738
Willbros Group, Inc. (a) 12,000 67
Wiser Oil Co. 4,900 10
-------
16,787
-------
PRODUCER DURABLES - 6.5%
Advanced Lighting
Technologies, Inc. (a) 15,000 146
Aeroquip-Vickers, Inc. 7,600 228
AFC Cable Systems, Inc. (a) 7,175 240
Ag-Chem Equipment Co., Inc. (a) 12,000 129
American Power Conversion Corp. (a) 32,500 1,572
Applied Power, Inc., Class A 5,000 189
Astec Industries, Inc. (a) 8,300 459
Bell Industries (a) 51,536 586
C&D Technologies, Inc. 10,400 286
Cascade Corp. 10,000 158
CFM Technologies, Inc. (a) 15,600 129
Champion Enterprises, Inc. (a) 48,500 1,328
Cohu, Inc. 47,100 1,036
Columbus McKinnon Corp. 47,000 828
Cordant Technologies, Inc. 1,300 49
Crane Co. 4,600 139
Cummins Engine Co., Inc. 33,300 1,182
Curtiss-Wright Corp. 2,000 76
D.R. Horton, Inc. 53,900 1,240
Detroit Diesel Corp. (a) 3,000 62
EG&G, Inc. 25,000 695
FARO Technologies, Inc. (a) 30,000 120
Farr Co. (a) 15,750 154
FLIR Systems, Inc. (a) 8,000 186
General Cable Corp. 5,200 107
Gleason Corp. 3,100 56
Gradall Industries, Inc. (a) 13,000 187
Gulfstream Aerospace Corp. (a) 20,500 1,092
Harnischfeger Industries, Inc. 47,100 480
Helix Technology Corp. 15,600 201
</TABLE>
37 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Holophane Corp. (a) 5,000 128
Itron, Inc. (a) 11,500 81
JLG Industries, Inc. 57,800 903
Kaman Corp. Class A 4,700 75
Kaufman & Broad Home Corp. 36,700 1,055
Kellstrom Industries, Inc. (a) 4,000 115
Kennametal, Inc. 33,200 706
KLA Instruments Corp. (a) 34,000 1,475
Lennar Corp. 87,500 2,209
Litton Industries, Inc. (a) 21,500 1,403
M.D.C. Holdings, Inc. 18,500 395
Middleby Corp. (The) (a) 28,000 102
Mine Safety Appliances Co. 3,600 238
Moog Inc. (a) 2,000 78
MTS Systems Corp. 8,400 111
Newmark Homes Corp. (a) 20,000 140
NVR, Inc. (a) 33,400 1,592
Oak Industries, Inc. (a) 9,200 322
OYO Geospace Corp. (a) 7,700 64
Perceptron, Inc. (a) 5,600 36
Pittway Corp. Class A 45,234 1,495
Powell Industries, Inc. (a) 16,000 160
Power-One, Inc. (a) 18,000 126
PRI Automation, Inc. (a) 5,000 128
Pulte Corp. 43,500 1,210
Ryland Group, Inc. 65,100 1,880
Smith (A.O.) Corp. 5,800 142
Spectra-Physics Lasers, Inc. (a) 3,100 27
Starrett (L.S.) Co. Class A 30,100 1,033
STM Wireless, Inc. Class A (a) 18,200 86
Superior TeleCom, Inc. 4,300 203
TB Wood's Corporation 10,000 121
Tecumseh Products Co. Class A 6,200 287
Teradyne, Inc. (a) 41,082 1,740
Terex Corp. (a) 53,000 1,514
Toll Brothers, Inc. (a) 48,000 1,083
TransTechnology Corp. 5,600 116
TriStar Aerospace Co. (a) 26,100 183
U.S. Home Corp. (a) 13,200 439
Uniphase Corp. (a) 37,550 2,604
Worldtex, Inc. (a) 20,000 73
York International Corp. 2,600 106
-------
39,324
-------
TECHNOLOGY - 15.0%
ADAC Laboratories (a) 4,800 96
Advanced Micro Devices, Inc. (a) 49,900 1,444
Allen Telecom, Inc. (a) 20,000 134
Alliant Techsystems, Inc. (a) 3,200 264
American Management
Systems, Inc. (a) 2,600 104
American Xtal Technology, Inc. (a) 16,200 147
Apple Computer, Inc. (a) 15,100 618
Ardent Software, Inc. (a) 34,600 785
Arrow Electronics, Inc. (a) 7,700 205
Aspect Development, Inc. (a) 34,000 1,517
AstroPower, Inc. (a) 17,000 159
Avant! Corp. (a) 5,400 86
Avnet, Inc. 46,900 2,837
BEA Systems, Inc. (a) 70,000 853
Bell & Howell Co. (a) 5,100 193
BindView Development Corp. (a) 57,150 1,557
Boole & Babbage, Inc. (a) 1,200 35
Broadcom Corp. Class A (a) 4,150 500
BTG, Inc. (a) 22,000 127
Business Objects SA - ADR (a) 60,000 1,950
Cable Design Technologies Corp. (a) 77,000 1,425
CACI International, Inc. Class A (a) 6,000 101
Cambridge Technology
Partners, Inc. (a) 30,000 662
Celeritek, Inc. (a) 30,000 90
CFI ProServices, Inc. (a) 10,500 117
CHS Electronics, Inc. (a) 60,700 1,028
Citrix Systems, Inc. (a) 15,000 1,455
CNET, Inc. (a) 36,400 1,938
Compuware Corp. (a) 26,500 2,069
Comverse Technology, Inc. (a) 25,500 1,809
Concord Communications, Inc. (a) 26,700 1,522
Cotelligent Group, Inc. (a) 8,000 171
CSG Systems International, Inc. (a) 800 63
Digi International, Inc. (a) 16,300 178
Digital Link Corp. (a) 35,000 184
Electronics For Imaging, Inc. (a) 44,800 1,789
Esterline Corp. (a) 3,700 80
Exar Corp. (a) 12,000 191
Excel Switching Corp. New (a) 15,300 581
Excel Technology, Inc. (a) 20,000 204
Excite, Inc. (a) 22,600 949
Genesys Telecommunications Laboratories,
Inc. (a) 23,400 527
GeoTel Communications Corp. (a) 24,300 899
Gerber Scientific, Inc. 7,700 183
Harmon Industries, Inc. 7,900 182
HNC Software, Inc. (a) 32,200 1,300
IDX Systems Corp. (a) 29,900 1,316
Imation Corp. (a) 16,600 291
Infoseek Corp. (a) 35,000 1,724
Integrated Circuit Systems, Inc. (a) 12,000 212
Integrated Electrical Services, Inc. (a) 4,400 98
Integrated Silicon Solution, Inc. (a) 144,700 452
InterVoice, Inc. (a) 30,700 1,059
ITI Technologies, Inc. (a) 5,400 167
</TABLE>
Special Growth Fund 38
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Keane, Inc. (a) 17,550 701
LCC International, Inc. Class A (a) 21,000 79
Linear Technology Corp. 13,900 1,244
LSI Logic Corp. (a) 69,800 1,126
Macromedia, Inc. (a) 66,400 2,229
Manhattan Associates, Inc. (a) 42,000 1,145
MAPICS, Inc. (a) 15,900 262
Mechanical Dynamics, Inc. (a) 25,000 202
Mercury Interactive Corp. (a) 68,700 4,336
Micron Electronics, Inc. (a) 7,900 136
MICROS Systems, Inc. (a) 5,200 167
Microsemi Corp. (a) 20,000 220
MicroStrategy, Inc. (a) 13,000 405
MIPS Technologies, Inc. (a) 7,200 230
National Computer Systems, Inc. 18,600 684
National Semiconductor Corp. (a) 13,000 176
NeoMagic Corp. (a) 63,200 1,394
Network Appliance, Inc. (a) 47,200 2,111
Newbridge Networks Corp. (a) 48,800 1,482
Open Text Corp. (a) 27,250 661
Optek Technology, Inc. (a) 9,000 164
OrCad, Inc. (a) 24,000 204
OSI Systems, Inc. New (a) 17,000 138
P-COM, Inc. (a) 40,000 159
Par Technology Corp. (a) 25,000 150
Pericom Semiconductor Corp.
New (a) 25,000 269
PMC - Sierra, Inc. (a) 15,000 945
Polycom, Inc. (a) 39,600 884
Proxim, Inc. (a) 17,900 478
PSINET, Inc. (a) 70,000 1,461
QLogic Corp. (a) 2,800 364
QuadraMed Corp. (a) 52,100 1,068
Rational Software Corp. (a) 66,150 1,744
REMEC, Inc. (a) 10,000 180
RF Micro Devices, Inc. (a) 20,600 946
ScanSource, Inc. (a) 8,000 171
SDL, Inc. (a) 5,600 220
SeaChange International, Inc. (a) 22,000 132
Seagate Technology (a) 59,950 1,813
Semtech Corp. (a) 29,700 1,054
Silicon Graphics, Inc. (a) 77,500 998
Sterling Software, Inc. (a) 68,000 1,840
Stoneridge, Inc. (a) 6,300 143
Symbol Technologies, Inc. 9,600 614
Synopsys, Inc. (a) 26,100 1,413
Tech-Sym Corp. (a) 41,300 919
Tekelec, Inc. (a) 70,800 1,173
Telxon Corp. 500 7
THQ, Inc. (a) 42,600 1,187
Transaction Systems Architects, Inc.
Class A (a) 40,000 2,005
TSI International Software, Ltd. (a) 20,000 965
USWeb Corp. (a) 33,950 891
Verilink Corp. (a) 26,300 97
Veritas Software Corp. (a) 20,000 1,195
Verity, Inc. (a) 28,350 750
VideoServer, Inc. (a) 15,300 283
Vitesse Semiconductor Corp. (a) 28,600 1,301
Whittman-Hart, Inc. (a) 25,300 700
Wind River Systems, Inc. (a) 25,100 1,177
Xircom, Inc. (a) 68,350 2,323
Xylan Corp. (a) 3,800 69
-------
90,211
-------
UTILITIES - 6.2%
AGL Resources, Inc. 16,200 374
American Water Works, Inc. 15,500 523
Aquarion Co. 5,200 213
Atmos Energy Corp. 5,000 161
Aware, Inc. (a) 24,850 676
Bay State Gas Co. 4,500 179
Calpine Corp. (a) 7,400 187
Cellullar Communications
of Puerto Rico (a) 66,966 1,222
Central Hudson Gas & Electric Corp. 5,100 228
Citizens Utilities Co. Class B (a) 188,118 1,528
Cleco Corp. 5,600 192
CMP Group, Inc. 61,200 1,155
Conectiv, Inc. 26,800 657
Connecticut Energy Corp. 1,400 43
Dycom Industries, Inc. (a) 7,800 446
E'town Corp. 1,000 47
Eastern Utilities Associates 13,200 373
Empire District Electric Co. 3,000 74
Energen Corp. 7,100 138
Energy East Corp. 13,000 735
General Communication, Inc.
Class A (a) 22,000 88
Gilat Satellite Networks, Ltd. (a) 21,950 1,210
Global TeleSystems Group, Inc. (a) 22,500 1,252
Hawaiian Electric Industries, Inc. 35,100 1,413
Illinova Corp. 48,800 1,220
Indiana Energy, Inc. 5,333 131
Interstate Energy Corp. 23,000 742
IXC Communications, Inc. (a) 32,000 1,070
Jones Intercable, Inc. Class A (a) 50,000 1,781
K N Energy, Inc. 24,600 895
Laclede Gas Co. 900 24
MDU Resources Group, Inc. 11,400 300
Metrocall, Inc. (a) 36,000 162
</TABLE>
39 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Market
Number Value
of (000)
Shares $
------- --------
<S> <C> <C>
Minnesota Power & Light Co. 14,800 651
Montana Power Co. 2,800 158
Nevada Power Co. 20,000 520
New England Electric System 900 43
New Jersey Resources Corp. 2,300 91
Niagara Mohawk Power Corp. (a) 91,000 1,467
NICOR, Inc. 19,400 820
NIPSCO Industries, Inc. 8,200 250
Northeast Utilities (a) 48,400 774
Northwest Natural Gas Co. 2,100 54
NUI Corp. 3,900 105
OGE Energy Corp. 19,900 577
Peoples Energy Corp. 11,200 447
Piedmont Natural Gas Co., Inc. 9,400 340
Potomac Electric Power Co. 17,500 460
Primus Telecommunications
Group, Inc. (a) 15,000 245
Public Service Co. of New Mexico 27,200 556
Questar Corp. 8,800 171
Rochester Gas & Electric Corp. 19,500 610
SCANA Corp. 34,100 1,100
Sierra Pacific Resources 11,300 429
SIG Corp., Inc. 2,800 100
Southwest Gas Corp. 31,900 857
St. Joseph Light & Power Co. 9,200 165
Telegroup, Inc. (a) 75,000 96
TNP Enterprises, Inc. 39,600 1,502
United Illuminating Co. 11,600 597
United States Cellular Corp. (a) 43,800 1,664
UtiliCorp United, Inc. 31,200 1,145
Western Resources, Inc. 33,300 1,107
WICOR, Inc. 9,200 201
Wisconsin Energy Corp. 12,100 380
Yankee Energy Systems, Inc. 2,400 71
-------
37,192
-------
TOTAL COMMON STOCKS
(cost $482,417) 565,318
--------
PREFERRED STOCKS - 0.0%
Callon Petroleum Co. Series A (conv.) 3,600 99
Golden Books Financial Trust
(conv.)(a) 6,000 9
-------
TOTAL PREFERRED STOCKS
(cost $349) 108
-------
<CAPTION>
Principal Market
Amount Value
(000) (000)
$ $
------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 0.2%
American Residential Services, Inc.
(conv.)
7.250% due 04/15/04 250 99
Getty Images, Inc. (conv.)
4.750% due 06/01/03 800 663
Res-Care, Inc.
6.000% due 12/01/04 100 138
Titan Corp. (conv.)
8.250% due 11/01/03
45 70
-------
TOTAL LONG-TERM INVESTMENTS
(cost $1,146) 970
-------
SHORT-TERM INVESTMENTS - 6.0%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 34,102 34,102
United States Treasury Notes (c)
6.250% due 03/31/99
2,350 2,359
-------
TOTAL SHORT-TERM INVESTMENTS
(cost $36,461) 36,461
-------
TOTAL INVESTMENTS - 100.1%
(identified cost $520,373)(d) 602,857
OTHER ASSETS AND LIABILITIES,
NET - (0.1%) (857)
-------
NET ASSETS - 100.0% 602,000
=======
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures contracts purchased by the
Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depository Receipt
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 40
<PAGE>
Special Growth Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts* (000)
---------- -------------
Futures Contracts
(Notes 2 and 3)
<S> <C> <C>
S&P 400 Midcap Index
Expiration date 03/99 73 $ 1,517
S&P 500 Midcap Index
Expiration date 03/99 69 386
---------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased(S) $ 1,903
=========
</TABLE>
(S) At December 31, 1998, United States Treasury Notes valued at $2,359 were
held as collateral in connection with futures contracts purchased by the
Fund.
* Each contract represents $100,000 notional value.
The accompanying notes are an integral part of the financial statements.
41 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Assets and Liabilities
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost $520,373)(Note 2) ..................................................... $ 602,857
Receivables:
Dividends and interest ...................................................................................... 490
Investments sold ............................................................................................ 3,460
Fund shares sold ............................................................................................ 2,337
Daily variation margin on futures contracts (Notes 2 and 3) ................................................. 453
Short-term investments held as collateral for securities loaned, at market (Note 3) .......................... 38,853
---------
Total Assets .............................................................................................. 648,450
LIABILITIES
Payables:
Investments purchased ............................................................................. $ 3,725
Fund shares redeemed .............................................................................. 3,228
Accrued fees to affiliates (Note 4) ............................................................... 564
Other accrued expenses ............................................................................ 80
Payable upon return of securities loaned, at market (Note 3) ....................................... 38,853
---------
Total Liabilities ......................................................................................... 46,450
---------
NET ASSETS ................................................................................................... $ 602,000
=========
NET ASSETS CONSIST OF:
Accumulated distributions in excess of net realized gain ..................................................... $ (2,548)
Unrealized appreciation (depreciation) on:
Investments ................................................................................................. 82,484
Futures contracts ........................................................................................... 1,903
Shares of beneficial interest ................................................................................ 139
Additional paid-in capital ................................................................................... 520,022
---------
NET ASSETS ................................................................................................... $ 602,000
=========
NET ASSET VALUE, offering and redemption price per share:
Class S ($595,861,631 divided by 13,750,086 shares of $.01 par value
shares of beneficial interest outstanding) ................................................................ $ 43.34
=========
Class E ($6,138,866 divided by 143,066 shares of $.01 par value
shares of beneficial interest outstanding) ................................................................ $ 42.91
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 42
<PAGE>
Special Growth Fund
Statement of Operations
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
<S> <C> <C>
INVESTMENT INCOME:
Dividends .................................................................................................. $ 5,255
Dividends from Money Market Fund (Note 5) ................................................................. 1,941
Interest ................................................................................................... 169
--------
Total Investment Income .................................................................................. 7,365
EXPENSES (Notes 1, 2 and 4):
Advisory fees ......................................................................... $ 5,877
Administrative fees ................................................................... 25
Custodian fees ........................................................................ 396
Distribution fees - Class E ........................................................... 6
Transfer agent fees ................................................................... 692
Professional fees ..................................................................... 35
Registration fees - Class S ........................................................... 79
Registration fees - Class E ........................................................... 1
Shareholder servicing fees - Class E .................................................. 10
Trustees' fees ........................................................................ 4
Miscellaneous ......................................................................... 51
--------
Total Expenses ........................................................................................... 7,176
--------
Net investment income ....................................................................................... 189
--------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ........................................................................... 23,005
Futures contracts ..................................................................... 2,689 25,694
--------
Net change in unrealized appreciation or depreciation of:
Investments ........................................................................... (30,049)
Futures contracts ..................................................................... 1,360 (28,689)
--------
Net gain (loss) on investments .............................................................................. (2,995)
--------
Net increase (decrease) in net assets resulting from operations ............................................. $ (2,806)
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
43 Special Growth Fund
<PAGE>
Special Growth Fund
Statement of Changes in Net Assets
Amounts in thousands
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ....................................................................... $ 189 $ 869
Net realized gain (loss) ................................................................... 25,694 66,347
Net change in unrealized appreciation or depreciation ....................................... (28,689) 53,907
--------- ---------
Net increase (decrease) in net assets resulting from operations ........................... (2,806) 121,123
--------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
Class S ................................................................................... (447) (842)
In excess of net investment income
Class S ................................................................................... (89) --
Net realized gain on investments
Class S ................................................................................... (29,455) (68,942)
Class E ................................................................................... (257) (356)
In excess of net realized gain on investments
Class S ................................................................................... (2,783) --
Class E ................................................................................... (24) --
--------- ---------
Total Distributions to Shareholders ..................................................... (33,055) (70,140)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ................. 62,073 130,847
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .................................................. 26,212 181,830
NET ASSETS
Beginning of period ......................................................................... 575,788 393,958
--------- ---------
End of period (including undistributed net investment income of
$258 at December 31, 1997) ............................................................... $ 602,000 $ 575,788
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Special Growth Fund 44
<PAGE>
Special Growth Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................... $ 45.72 $ 40.79 $ 39.17 $ 33.47 $ 35.82
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) ............................. .01 .08 .12 .18 .16
Net realized and unrealized gain (loss) on investments . .08 11.18 6.87 9.25 (.71)
--------- --------- --------- --------- ---------
Total Income From Investment Operations .............. .09 11.26 6.99 9.43 (.55)
--------- --------- --------- --------- ---------
DISTRIBUTIONS:
Net investment income .................................. (.03) (.08) (.12) (.21) (.10)
In excess of net investment income ..................... (.01) -- -- -- --
Net realized gain on investments ....................... (2.22) (6.25) (5.25) (3.52) (.85)
In excess of net realized gain on investments .......... (.21) -- -- -- (.85)
--------- --------- --------- --------- ---------
Total Distributions .................................. (2.47) (6.33) (5.37) (3.73) (1.80)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD .......................... $ 43.34 $ 45.72 $ 40.79 $ 39.17 $ 33.47
========= ========= ========= ========= =========
TOTAL RETURN (%) ........................................ .42 28.77 18.65 28.52 (3.71)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ............... 595,862 572,635 393,048 313,678 229,077
Ratios to average net assets (%):
Operating expenses ................................... 1.15 1.15 1.19 1.22 1.20
Net investment income ................................ .03 .18 .28 .49 .50
Portfolio turnover rate (%) ........................... 129.19 97.19 118.13 87.56 55.40
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
45 Special Growth Fund
<PAGE>
Special Growth Fund
Financial Highlights - Class E
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996*
--------- --------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $ 45.42 $ 40.75 $ 43.48
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (c) .............................. (.17) (.13) (.02)
Net realized and unrealized gain (loss) on investments .. .09 11.05 1.63
--------- --------- ---------
Total Income From Investment Operations ............... (.08) 10.92 1.61
--------- --------- ---------
DISTRIBUTIONS:
Net realized gain on investments ........................ (2.22) (6.25) (4.34)
In excess of net realized gain on investments ........... (.21) -- --
--------- --------- ---------
Total Distributions ................................... (2.43) (6.25) (4.34)
--------- --------- ---------
NET ASSET VALUE, END OF PERIOD ........................... $ 42.91 $ 45.42 $ 40.75
========= ========= =========
TOTAL RETURN (%)(a) ..................................... .04 27.90 4.04
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ............... 6,139 3,153 910
Ratios to average net assets (%)(b):
Operating expenses .................................... 1.58 1.83 1.89
Net investment income (loss) ......................... (.39) (.51) (.38)
Portfolio turnover rate (%)(b) ......................... 129.19 97.19 118.13
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31,
1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Special Growth Fund 46
<PAGE>
Fixed Income II Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
OBJECTIVE: The preservation of capital and the generation of current income
consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.
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
<TABLE>
<CAPTION>
Dates Fixed II++ ML 1-2.99 ** Lipper(R)Short 1-5 Yr++++
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $11,099 $11,087 $11,012
1990 $12,177 $12,165 $11,902
1991 $13,676 $13,586 $13,317
1992 $14,050 $14,442 $14,076
1993 $15,031 $15,223 $14,942
1994 $15,154 $15,310 $14,888
1995 $16,662 $16,994 $16,488
1996 $17,454 $17,840 $17,222
1997 $18,506 $19,027 $18,275
1998 $19,632 $20,359 $19,320
- ---------------------------------------------------------------------------
Total $163,441 $166,033 $161,442
===========================================================================
</TABLE>
Yearly periods ended December 31
<TABLE>
<CAPTION>
Fixed Income II Fund
Periods Ended Growth of Total
12/31/98 $10,000 Return
- ------------- ---------- -------------
<S> <C> <C>
1 Year $10,609 6.09%
5 Years $13,061 5.49%(s)
10 Years $19,632 6.98%(s)
<CAPTION>
Merrill Lynch 1-2.99 Years Treasury Index
Periods Ended Growth of Total
12/31/98 $10,000 Return
- ------------- --------- -------------
<S> <C> <C>
1 Year $10,700 7.00%
5 Years $13,373 5.99%(s)
10 Years $20,359 7.37%(s)
<CAPTION>
Lipper(r) Short Investment Grade Debt Funds
Benchmark
Periods Ended Growth of Total
12/31/98 $10,000 Return
- ------------- ---------- -------------
<S> <C> <C>
1 Year $10,572 5.72%
5 Years $12,930 5.27%(s)
10 Years $19,320 6.81%(s)
</TABLE>
47 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Fixed Income II Fund reflected a total
return of 6.1%, as compared to the Merrill Lynch 1-2.99 Years Treasury Index
which rose 7%. The Fund modestly underperformed the Index due to the poor
performance of spread sector holdings relative to comparable maturity
treasuries. The market's flight to quality during the third quarter had a
dominant impact on the bond market's performance for the year.
PORTFOLIO HIGHLIGHTS:
Data reflecting strength in many sectors of the US economy helped ease fears of
a recession. However, evidence of slowing pressured yields lower over the course
of 1998. The Federal Reserve Board's reluctance to stimulate economic growth
resulted in an inverted yield curve throughout much of the year with the
interest rate on overnight loans to banks, i.e., Fed Funds, being higher than
yields on short- and short-intermediate maturity treasuries. The market's
weakness during the third quarter led to significant credit spread widening as
investors demanded higher yields on non-treasury issues, perceiving greater
risks of default in an economic downturn. The Fed reacted by easing rates three
times late in the year to strengthen confidence and stimulate growth. This had
its desired effect by calming the financial markets in the fourth quarter.
These trends proved challenging for the Fixed Income II Fund. Because of its
substantial investment in credit spread sectors, increased widening had a
negative effect on the its returns, with most of the Fund's underperformance
occurring in October. Holdings of lower quality corporate issues suffered losses
in value relative to the Merrill Lynch 1-2.99 Yrs. Treasury Index. The
all-treasury composition of the Index made it a particularly challenging
benchmark given the market's flight to quality during the year. Above-index
duration also weakened results as yields rose in the fourth quarter. Despite
these factors, the Fund finished the year well ahead of the average short-term
investment grade bond fund tracked by Lipper, which managed to gain 5.7%.
<TABLE>
<CAPTION>
TOP TEN ISSUERS
(as a percent of Total Investments) December 31, 1998
<S> <C>
United States Treasury 21.8%
Sears Roebuck Acceptance Corp. 5.5
World Omni Automobile Lease 3.2
Chase Mortgage Finance Corp. 2.7
Federal National Mortgage Association 2.7
Barnett Auto Trust 2.7
General Electric Capital Corp. 2.6
Associates Corp. of North America 2.6
Premier Auto Trust 2.5
Nationsbank Credit Card Master Trust 2.2
<CAPTION>
Portfolio Characteristics
December 31, 1998
<S> <C>
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 4.5 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day standardized) 4.9%
Number of Issues 170
Number of Issuers 130
<CAPTION>
Money Managers Styles
<S> <C>
BlackRock Financial Management Mortgage/Asset-
Backed Specialist
Standish, Ayer & Wood, Inc. Corporate Specialist
STW Fixed Income Management, Ltd. Sector Rotation Core
</TABLE>
* Assumes initial investment on January 1, 1989.
** 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 Advisor upon request.
++++ Lipper(R) Short (1-5 Yr.) Investment Grade Debt Funds Benchmark 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.
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 48
<PAGE>
Fixed Income II Fund
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
$ $
--------- ------
<S> <C> <C>
LONG-TERM INVESTMENTS - 92.4%
ASSET-BACKED SECURITIES - 34.3%
ABFS Equipment Contract Trust
6.100% due 10/15/05 426 428
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 28 28
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 01/20/13 260 260
Amresco Residential Securities Mortgage
Loan Trust
Series 1997-1 Class B1F
7.915% due 03/25/27 (c) 550 568
Amresco Residential Securities Mortgage
Loan Trust Step Up Bond
Series 1998-2 Class B1A
6.774% due 06/25/28 (c) 1,000 998
Arcadia Automobile Receivables Trust
Series 1998-A Class A3
5.900% due 11/15/02 600 606
Series 1998-B Class A3
5.950% due 11/15/02 1,000 1,012
Series 1998-C Class A3
5.670% due 08/15/06 800 806
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03 2,207 2,232
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 6,900 6,946
Brazos Student Loan Finance Corp.
5.817% due 12/01/25 (c) 895 887
Centex Home Equity Loan Trust
Step Up Bond
5.774% due 07/25/28 (c) 460 453
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 4,500 4,574
Series 1997-5 Class A
6.194% due 08/15/05 365 375
Chemical Master Credit Card Trust I
Series 1996-1 Class A
5.550% due 09/15/03 4,000 4,012
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 553 555
Series 1997-1 Class A
6.500% due 10/15/03 887 897
Series 1997-2 Class A
6.350% due 01/15/04 506 511
Series 1997-3 Class A
6.200% due 03/20/04 414 418
Contimortgage Home Equity Loan Trust
Series 1997-5 Class A4
6.580% due 06/15/19 600 609
Contimortgage Home Equity Loan
Trust Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 143 143
Copel Capital Funding Corp.
Series 1997-A Class A3
6.270% due 04/20/05 781 785
Cox Enterprises, Inc.
6.250% due 08/26/99 1,400 1,408
Dayton Hudson Credit Card Master Trust
Series 1997-1 Class A
6.250% due 08/25/05 500 511
Delta Funding Home
Equity Loan Trust
Series 1998-1 Class A2A
5.429% due 05/25/30 (c) 339 334
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 27 27
First Chicago Master Trust II Credit
Card Certificates
Series 1994-L
7.150% due 04/15/01 4,500 4,546
First Plus Home Loan Trust
Step Up Bond
Series 1998-5 Class A4
6.250% due 04/14/14 (c) 600 602
Series 1998-5 Class A6
6.420% due 10/10/18 (c) 300 293
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 484 490
First USA Credit Card Master Trust
Series 1997-6 Class A
6.420% due 03/17/05 800 824
</TABLE>
49 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
$ $
--------- ------
<S> <C> <C>
FMAC Loan Receivables Trust
Series 1998-CA Class A1
5.990% due 11/15/04 462 461
Franchise Loan Trust
Series 1998-I Class A1
6.240% due 07/15/04 477 477
Green Tree Financial Corp.
Series 1997-3 Class A2
6.490% due 07/15/28 248 249
Series 1998-1 Class A3
5.950% due 04/01/13 750 753
Green Tree Home Improvement Loan Trust
Series 1997-A Class HIA3
7.050% due 08/15/23 600 608
Series 1998-D Class HIA2
5.940% due 06/15/29 800 800
Series 1998-D Class HIA4
6.200% due 06/15/29 650 654
Green Tree Recreational, Equipment &
Consumer Trust
Series 1997-C Class A1
6.490% due 02/15/18 511 512
IMC Home Equity Loan Trust
Series 1998-1 Class A3
6.410% due 04/20/18 700 700
Nationsbank Credit Card Master Trust
Series 1995-1 Class A
6.450% due 04/15/03 5,650 5,747
Newcourt Equipment Trust Securiites
Series 1998-1 Class A3
5.240% due 12/20/02 750 746
Series 1998-2 Class D
7.210% due 09/15/07 (c) 350 338
NPF VI Inc.
Series 1998-1A Class A
6.220% due 06/01/02 600 602
Olympic Automobile Receivables Trust
Series 1996-B Class A4
6.700% due 03/15/02 977 987
Series 1996-D Class CTFS
6.125% due 04/15/02 2,399 2,427
PBG Equipment Trust
Series 1A Class A
6.270% due 01/20/12 786 795
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 01/25/01 5,000 5,102
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01 5,000 5,032
Series 1998-4 Class A3
5.690% due 06/08/02 1,300 1,307
Rental Car Finance Corp.
Series 1997-1 Class A1
6.250% due 06/25/03 400 402
Ryder Vehicle Lease Trust
Series 1998-A Class A
6.100% due 09/15/08 (c) 444 447
Sears Credit Account Master Trust
Series 1995-2 Class A
8.100% due 06/15/04 4,300 4,410
Series 1995-3 Class A
7.000% due 10/15/04 900 919
Series 1995-5 Class A
6.050% due 01/15/08 600 608
Series 1998-1 Class A
5.800% due 08/15/05 1,500 1,503
SMS Student Loan Trust
Series 1997-A Class A
5.101% due 10/27/25 (c) 1,100 1,055
Standard Credit Card Master Trust
Series 1994-4 Class A
8.250% due 11/07/03 1,200 1,287
Standard Credit Card Master Trust I
Series 1995-3 Class A
7.850% due 02/07/02 600 617
The Money Store Auto Grantor Trust
Series 1997-4 Class A2
6.350% due 03/20/04 505 512
The Money Store Residential Trust
Series 1997-I Class A3
6.680% due 08/15/12 500 510
The Money Store Small Business
Administration Loan Trust
Series 1997-1 Class A
5.999% due 01/15/25 (c) 902 890
Series 1997-1 Class B
6.479% due 01/15/25 (c) 451 444
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 2,188 2,202
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 1,089 1,097
</TABLE>
Fixed Income II Fund 50
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
$ $
--------- -------
<S> <C> <C>
Series 1997-A Class A2
6.750% due 06/25/03 (c) 5,476 5,623
Series 1997-A Class A4
6.900% due 06/25/03 1,494 1,519
------
89,480
------
CORPORATE BONDS AND NOTES - 27.4%
Ahmanson (H.F.)
9.875% due 11/15/99 1,050 1,090
Aristar, Inc.
6.125% due 12/01/00 725 729
Associates Corp. of North America
6.375% due 08/15/00 5,500 5,583
5.750% due 11/01/03 1,000 1,009
AT&T Capital Corp.
7.500% due 11/15/00 (MTN) 475 481
Banco De Latinoamerica
6.500% due 04/02/01 1,200 1,223
Bankamerica Corp.
9.500% due 04/01/01 1,250 1,355
Banponce Corp.
Series 2 (MTN)
5.750% due 03/01/99 2,075 2,076
Bear Stearns Co., Inc.
7.625% due 09/15/99 1,125 1,140
Business Loan Center, Inc.
Series 1998-1A
6.750% due 04/02/05 600 600
Carramerica Realty Corp.
6.625% due 10/01/00 575 570
Chase Manhattan Corp.
10.125% due 11/01/00 1,259 1,359
5.375% due 12/05/09 (c) 200 188
Chrysler Financial Corp.
6.610% due 06/16/00 (MTN) 1,150 1,171
CIT Group Holdings, Inc.
6.125% due 12/15/00 (MTN) 5,000 5,066
Coca-Cola Put Asset Trust
6.000% due 03/15/01 1,000 1,015
Comdisco, Inc.
6.070% due 05/08/00 (MTN) 1,000 998
Conseco, Inc.
6.400% due 06/15/01 1,000 963
ERAC USA Finance Co.
6.375% due 05/15/03 1,075 1,087
ERP Operating, L.P.
8.500% due 05/15/99 1,050 1,058
Finova Capital Corp.
6.450% due 06/01/00 400 404
First Chicago Corp.
9.000% due 06/15/99 500 508
Fleet Financial Group, Inc.
6.875% due 03/01/03 700 729
Franchise Finance Corp.
7.000% due 11/30/00 1,000 998
General Electric Capital Corp.
6.120% due 08/15/00 (MTN) 5,500 5,586
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 965 969
Heller Financial, Inc.
5.311% due 03/01/99 (MTN) (c) 1,000 999
Hertz Corp.
6.500% due 04/01/00 450 455
Homeside Lending, Inc.
6.875% due 05/15/00 (MTN) 1,200 1,221
6.875% due 06/30/02 (MTN) 2,000 2,052
Household Finance Corp.
6.125% due 07/15/02 (MTN)(c) 1,125 1,122
IMC Global, Inc.
7.400% due 11/01/02 800 813
JC Penney & Co., Inc.
6.375% due 09/15/00 (MTN) 1,125 1,140
KeyCorp
8.400% due 04/01/99 1,000 1,007
Lehman Brothers Holdings, Inc.
6.000% due 02/26/01 (MTN) 1,250 1,248
6.750% due 09/24/01 (MTN) 300 304
MBNA Corp.
Series B
6.500% due 09/15/00 (MTN) 1,000 1,002
MCI Communications Corp.
6.125% due 04/15/02 1,500 1,524
Merrill Lynch & Co., Inc.
7.260% due 03/25/02 (MTN) 1,425 1,493
Midlantic Corp.
9.250% due 09/01/99 375 385
Norwest Financial, Inc.
6.375% due 09/15/02 500 514
Panamsat Corp.
6.000% due 01/15/03 600 594
Procter & Gamble
9.625% due 01/14/01 3,020 3,245
Sears Roebuck Acceptance Corp.
6.160% due 09/20/00 (MTN) 5,500 5,569
Series II
6.690% due 04/30/01 (MTN) 1,050 1,078
</TABLE>
51 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
$ $
--------- -------
<S> <C> <C>
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 1,250 1,270
Tele-Communications, Inc.
8.250% due 01/15/03 1,250 1,372
Traveler's Group, Inc.
4.454% due 04/05/99 (MTN) (c) 1,100 1,100
7.750% due 05/15/00 1,000 1,029
6.700% due 07/05/00 500 508
Walt Disney Co.
Series E
5.125% due 12/15/03 (MTN) 600 597
Waste Management, Inc.
6.700% due 05/01/01 240 245
6.125% due 07/15/01 300 300
Wellsford Residential Property Trust
5.570% due 11/24/99 (MTN)(c) 1,300 1,301
------
71,442
------
MORTGAGE-BACKED SECURITIES - 6.6%
Asset Securitization Corp.
Series 1997-D5 Class A1A
6.500% due 02/14/41 617 631
Bayview Financial Acquisition Trust
Series 1998-1 Class A1
7.010% due 05/25/29 699 703
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 576 577
BKB Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 238 237
Chase Mortgage Finance Corp.
Series 1998-S2 Class A1
6.500% due 07/25/28 700 705
DLJ Mortgage Acceptance Corp.
Series 1996-CF2 Class A1A
6.860% due 11/12/21 408 422
Federal Home Loan Mortgage Corp.
Participation Certificate
9.000% due 2005 118 121
6.250% due 2007 64 64
Federal National Mortgage Association
7.000% due 2004 565 573
6.500% due 2008 982 996
8.000% due 2009 691 717
8.500% due 2010 583 611
7.500% due 2014 1,095 1,136
8.500% due 2026 892 934
General Electric Capital Mortgage
Services, Inc.
Series 1998-12 Class 2A1
6.600% due 06/25/28 1,160 1,171
Government National Mortgage
Association
7.250% due 2006 1,003 1,029
8.250% due 2009 545 579
9.500% due 2017 399 429
Morgan Stanley Capital I
Series 1998-CF1 Class A1
6.330% due 10/15/07 515 528
Series 1998-HF2 Class A1
6.010% due 11/15/30 870 874
Mortage Capital Funding, Inc.
Series 1998-MC3 Class A1
6.001% due 11/18/31 (c) 500 500
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 349 351
Residential Accredited Loans, Inc.
Series 1997-QS7 Class A1
7.500% due 07/25/27 245 247
Residential Asset Securitization Trust
Series 1998-A2 Class A1
6.750% due 04/25/28 439 440
Series 1998-A12 Class A5
6.750% due 11/25/28 753 758
Resolution Trust Corp. Mortgage
Pass-thru Certificate
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 198 200
Union Planters Mortgage Finance Corp.
Series 1998-A Class A1
6.350% due 01/25/28 494 500
Wilshire Funding Corporation
Series 1997-WFC1 Class AI
7.250% due 08/25/27 574 576
Series 1998-WFC2 Class A3
7.000% due 12/28/37 552 551
------
17,160
------
MUNICIPAL BONDS - 0.6%
Missouri Higher Education Loan Authority
Series 97 Class P
5.260% due 07/25/08 (c) 694 698
</TABLE>
Fixed Income II Fund 52
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
$ $
--------- -------
<S> <C> <C>
Philadelphia, Pennsylvania, Authority
for Industrial Development
Series 1997 Class A
6.488% due 06/15/04 816 814
-------
1,512
-------
UNITED STATES GOVERNMENT
AGENCIES - 0.5%
Federal Farm Credit Bank
5.220% due 09/11/01 1,250 1,257
-------
UNITED STATES GOVERNMENT
TREASURIES - 21.6%
United States Treasury Bonds
8.750% due 11/15/08 925 1,078
United States Treasury Notes
5.625% due 12/31/99 600 606
6.875% due 03/31/00 125 128
4.500% due 09/30/00 4,420 4,410
6.250% due 10/31/01 375 391
6.625% due 04/30/02 28,675 30,347
3.625% due 07/15/02 13,700 13,597
5.750% due 10/31/02 700 725
5.750% due 11/30/02 4,710 4,883
-------
56,165
-------
YANKEE BONDS - 1.4%
Edperbrascan Corp.
7.375% due 10/01/02 1,000 1,039
Quebec, Province of
13.250% due 09/15/14 450 494
Tyco International Group SA
6.125% due 06/15/01 1,000 1,010
Westpac Banking, Ltd.
7.875% due 10/15/02 1,000 1,067
-------
3,610
-------
TOTAL LONG-TERM INVESTMENTS
(cost $239,961) 240,626
-------
SHORT-TERM INVESTMENTS - 6.7%
Eastman Chemical Co.
5.500% due 01/14/99 (a) 800 798
Federal National Mortgage Association
Discount Notes
5.060% due 02/16/99 (a) 2,000 1,987
Frank Russell Investment Company Money
Market Fund
due on demand (a) 13,940 13,940
Occidental Petroleum Corp.
5.460% due 01/04/99 (a) 750 750
-------
TOTAL SHORT-TERM INVESTMENTS
(cost $17,475) 17,475
-------
TOTAL INVESTMENTS - 99.1%
(identified cost $257,436)(b) 258,101
OTHER ASSETS AND LIABILITIES,
NET - 0.9% 2,438
-------
NET ASSETS - 100.0% 260,539
=======
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate security.
Abbreviations:
MTN - Medium Term Note
The accompanying notes are an integral part of the financial statements.
53 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
<S> <C> <C>
Investments at market (identified cost $257,436)(Note 2) ............................................................. $ 258,101
Cash .................................................................................................................. 165
Receivables:
Dividends and interest ............................................................................................... 2,605
Fund shares sold ..................................................................................................... 2,315
Short-term investments held as collateral for securities loaned, at market (Note 3) .................................. 25,253
---------
Total Assets ....................................................................................................... 288,439
LIABILITIES
Payables:
Investments purchased ...................................................................................... $ 2,273
Fund shares redeemed ....................................................................................... 199
Accrued fees to affiliates (Note 4) ....................................................................... 126
Other accrued expenses ..................................................................................... 49
Payable upon return of securities loaned, at market (Note 3) ................................................ 25,253
---------
Total Liabilities .................................................................................................. 27,900
---------
NET ASSETS ............................................................................................................ $ 260,539
=========
NET ASSETS CONSIST OF:
Undistributed net investment income ................................................................................... $ 621
Accumulated net realized (gain) loss .................................................................................. (6,555)
Unrealized appreciation (depreciation) on investments ................................................................. 665
Shares of beneficial interest ......................................................................................... 141
Additional paid-in capital ............................................................................................ 265,667
---------
NET ASSETS ............................................................................................................ $ 260,539
=========
NET ASSET VALUE, offering and redemption price per share:
($260,539,464 divided by 14,111,063 shares of $.01 par value
shares of beneficial interest outstanding) ........................................................................ $ 18.46
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 54
<PAGE>
Fixed Income II Fund
Statement of Operations
Amounts in thousands Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................... $14,205
Dividends form Money Market Fund (Note 5) ......................... 609
-------
Total Investment Income .......................................... 14,814
EXPENSES (Notes 2 and 4):
Advisory fees .............................................. $ 1,205
Administrative fees ........................................ 11
Custodian fees ............................................. 142
Transfer agent fees ........................................ 165
Professional fees .......................................... 38
Registration fees .......................................... 35
Trustees' fees ............................................. 4
Miscellaneous .............................................. 29
-------
Total Expenses ................................................... 1,629
-------
Net investment income ............................................... 13,185
-------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments ........................... 1,126
Net change in unrealized appreciation or depreciation of
investments ......................................................... 355
-------
Net gain (loss) on investments ...................................... 1,481
-------
Net increase (decrease) in net assets resulting from operations ..... $14,666
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
55 Fixed Income II Fund
<PAGE>
FIXED INCOME II FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands Years Ended December 31,
1998 1997
---------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ..................................................... $ 13,185 $ 13,527
Net realized gain (loss) ................................................. 1,126 (118)
Net change in unrealized appreciation or depreciation ..................... 355 487
--------- ---------
Net increase (decrease) in net assets resulting from operations ......... 14,666 13,896
--------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ..................................................... (13,149) (13,676)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund share transactions (Note 6) 29,552 6,267
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ................................ 31,069 6,487
NET ASSETS
Beginning of period ....................................................... 229,470 222,983
--------- ---------
End of period (including undistributed net investment income of
$621 and $609, respectively) ........................................... $ 260,539 $ 229,470
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 56
<PAGE>
Fixed Income II Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................. $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) ........................... .99 1.08 1.04 1.16 1.21
Net realized and unrealized gain (loss) on investments .11 -- (.19) .59 (1.07)
----------- ----------- ----------- ----------- -----------
Total Income From Investment Operations ............ 1.10 1.08 .85 1.75 .14
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS:
Net investment income ................................ (.99) (1.09) (1.04) (1.18) (1.15)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ........................ $ 18.46 $ 18.35 $ 18.36 $ 18.55 $ 17.98
=========== =========== =========== =========== ===========
TOTAL RETURN (%)(a) .................................. 6.09 6.02 4.76 9.95 .82
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (omitted $000) ............. 260,539 229,470 222,983 183,577 144,030
Ratios to average net assets (%)(a):
Operating expenses ................................. .66 .66 .70 .58 .19
Net investment income .............................. 5.37 5.70 5.70 6.41 6.52
Portfolio turnover rate (%) ......................... 129.85 213.14 264.40 269.31 233.75
</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) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
57 Fixed Income II Fund
<PAGE>
Limited Volatility Tax Free Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
Objective: To provide a high level of federal tax-exempt current income by
investing principally in a diversified portfolio of investment grade municipal
securities.
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.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
Limited Volatility Lipper(R) Short
Dates Tax Free SSB 3-Month T-Bill ** Muni Debt ++
- ----- -------- --------------------- ------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1989 $10,695 $10,864 $10,708
1990 $11,349 $11,723 $11,392
1991 $12,217 $12,397 $12,313
1992 $12,931 $12,844 $13,101
1993 $13,782 $13,239 $13,913
1994 $13,708 $13,797 $13,885
1995 $14,778 $14,588 $14,905
1996 $15,231 $15,355 $15,461
1997 $15,981 $16,160 $16,176
1998 $16,751 $16,976 $16,893
- ------------------------------------------------------------------------------
Total $147,423 $147,943 $148,747
</TABLE>
YEARLY PERIODS ENDED DECEMBER 31
<TABLE>
<CAPTION>
Limited Volatility Tax Free Fund SALOMON SMITH BARNEY 3-MONTH TREASURY BILL INDEX
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/98 $10,000 Return 12/31/98 $10,000 Return
- ----------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $10,482 4.82% 1 Year $10,505 5.05%
5 Years $12,155 3.98%(S) 5 Years $12,823 5.10%(S)
10 Years $16,751 5.30%(S) 10 Years $16,976 5.44%(S)
</TABLE>
<TABLE>
<CAPTION>
LIPPER(R) SHORT MUNICIPAL DEBT FUNDS BENCHMARK
Periods Ended Growth of Total
12/31/98 $10,000 Return
----------------------------------------------
<S> <C> <C>
1 Year $10,443 4.43%
5 Years $12,142 3.96%(S)
10 Years $16,893 5.38%(S)
</TABLE>
59 Limited Volatility Tax Free Fund
<PAGE>
Limited Volatility Tax Free Fund
Portfolio Management Discussion
December 31, 1998 (Unaudited)
Performance Review
For the year ended December 31, 1998, the Limited Volatility Tax Free Fund
reflected a total return of 4.8%, as compared to the Lipper(R) Short Municipal
Debt Funds Benchmark results of 4.4%. The Fund outperformed the benchmark
primarily due to its longer-than-index duration during the year, which boosted
returns as interest rates trended lower.
Portfolio Highlights
Fixed income markets were extremely volatile in 1998 as evidenced by the credit
spread widening during the third quarter. Spreads grew from historically narrow
levels to their widest levels in 20 years. Federal Reserve Board intervention
late in the year restored confidence to the market, though spreads failed to
revert to their prior levels. Rates fell as economic growth continued to show a
moderating trend with scant signs of inflationary pressures. Municipal bond
yields remained high relative to treasuries as significant new issuance during
the year muted the trend of declining yields evident in other sectors of the
bond market. However, the economic health of state and local governments
continued to support narrow credit spreads.
<TABLE>
<CAPTION>
Top Ten Issuing States
(as a percent of Total Investments) December 31, 1998
<S> <C>
New York 11.4%
Texas 11.0
Illinois 8.7
Washington 6.7
Utah 4.8
Michigan 4.7
California 4.7
Hawaii 3.6
Alaska 3.2
Florida 3.0
</TABLE>
<TABLE>
<CAPTION>
Portfolio Characteristics December 31, 1998
<S> <C>
Weighted Average Quality Diversification AAA
Weighted Average Years-to-Maturity 3.8 Years
Weighted Average Duration 3.3 Years
Current Yield (SEC 30-day standardized) 3.0%
Number of Issues 174
Number of Issuers 135
</TABLE>
Money Managers
MFS Institutional Advisors, Inc.
Standish, Ayer & Wood, Inc.
* Assumes initial investment on January 1, 1989.
** Salomon Smith Barney 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(R) Short Municipal Debt Funds Benchmark 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.
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.
Limited Volatility Tax Free Fund 60
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Date Value
(000) Rate of (000)
$ % Maturity $
------- ------- ------- -------
<S> <C> <C> <C> <C>
Municipal Bonds - 98.7%
Alabama - 0.7%
Huntsville, Alabama Health Care Authority Revenue, Series A (a) 335 4.500 06/01/01 341
Jefferson County, Alabama Sewer Revenue, Series A (a) 500 5.000 02/01/05 526
-------
867
-------
Alaska - 3.1%
Alaska State Housing Finance Corp. Revenue, Series A-1 (a) 650 4.550 12/01/02 662
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation (a) 500 0.000 06/30/99 492
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation (a) 1,385 0.000 06/30/00 1,313
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation (a) 450 0.000 06/30/02 392
North Slope Borough, Alaska, Zero Coupon, Series B, General Obligation (a) 375 0.000 06/30/99 369
North Slope Borough, Alaska, Zero Coupon, Series B, General Obligation (a) 900 0.000 01/01/01 834
-------
4,062
-------
Arizona - 1.2%
Arizona State Transportation Board, Special Obligations Revenue,
Series A (pre-refunded 07/01/01)(e) 1,425 6.450 07/01/06 1,542
-------
Arkansas - 0.2%
Arkansas State, Zero Coupon, Series B, General Obligation 300 0.000 06/01/03 251
-------
California - 4.6%
California Health Facilities Finance Authority Revenue (a) 1,000 5.000 11/15/04 1,055
California State Public Works Board Lease Revenue, Series C 675 5.000 10/01/02 706
California Statewide Communities Development Authority Participation
Certificate (a)(b) 300 4.800 08/15/27 300
California, State of, General Obligation (a) 850 6.100 11/01/01 911
Los Angeles County, California Transportation Participation Certificate,
Tax Revenue, Series B 760 5.900 07/01/00 788
Orange County, California Water District Participation Certificate (b) 1,100 4.000 08/15/15 1,100
Sacramento, California Municipal Utility District, Utility Revenue, Series Z (a) 1,000 6.000 07/01/01 1,061
-------
5,921
-------
Colorado - 1.2%
Colorado Housing Finance Authority Revenue, Series C-2 500 4.500 11/01/05 503
Denver, Colorado Health & Hospital Revenue, Series A 1,000 5.000 12/01/04 1,020
-------
1,523
-------
Connecticut - 2.4%
Bridgeport, Connecticut, Series A, General Obligation (a) 1,150 5.250 09/01/99 1,168
Connecticut State Special Tax Obligation Revenue, Series C (a) 750 6.250 10/01/04 843
Connecticut State Unemployment Compensation Revenue, Series A (a) 1,125 5.000 11/15/99 1,146
-------
3,157
-------
District of columbia - 1.6%
District of Columbia Revenue (a) 1,000 5.250 10/01/02 1,046
District of Columbia, Series A, General Obligation (a)(d) 500 5.500 04/01/01 519
Washington D.C. Convention Center Authority, Dedicated Tax Revenue (a) 500 4.750 10/01/05 515
-------
2,080
-------
Florida - 3.0%
Florida Gas Utility Revenue 800 5.000 12/01/03 844
Florida State Board of Education Lottery Revenue, Series B (a) 1,000 5.000 07/01/05 1,062
Hillsborough County, Florida, Zero Coupon, Utility Refunding
Revenue, Series A (a) 1,000 0.000 08/01/99 982
</TABLE>
61 Limited Volatility Tax Free Fund
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Date Value
(000) Rate of (000)
$ % Maturity $
------- ------- ------- -------
<S> <C> <C> <C> <C>
Orange County, Florida Board Participation Certificate, Series A (a) 575 4.700 08/01/01 591
Osceola County, Florida Capital Improvements Revenue (a) 375 5.000 09/01/05 399
-------
3,878
-------
Georgia - 2.9%
Atlanta, Georgia Airport Facilities Revenue (a) 500 5.500 01/01/01 519
Chatham County, Georgia Hospital Authority Revenue, Series A (a) 500 5.000 01/01/00 509
Fulco, Georgia Hospital Authority Revenue Anticipation Certificates (a) 500 5.000 11/15/02 521
Fulco, Georgia Hospital Authority Revenue Anticipation Certificates (a) 500 4.300 11/15/03 509
Georgia Municipal Electric Authority, General Resolution Revenue, Series A (a) 850 5.000 01/01/02 881
Savannah, Georgia Hospital Authority Revenue, Series A 800 4.200 07/01/05 803
-------
3,742
-------
Hawaii - 3.6%
Hawaii State Housing Financial & Development Corp., Single Family
Management Purchasing Revenue 1,000 4.450 07/01/03 1,012
Hawaii, State of, Series CP, General Obligation (a) 600 5.000 10/01/02 625
Hawaii, State of, Series CR, General Obligation (a) 1,000 5.500 04/01/04 1,072
Honolulu, Hawaii City & County, Series A, General Obligation (a) 650 5.000 11/01/02 678
Honolulu, Hawaii City & County, Series B, General Obligation 1,150 5.000 10/01/02 1,199
-------
4,586
-------
Illinois - 8.6%
Bolingbrook, Illinois Parks District, Zero Coupon, General Obligation (a) 1,230 0.000 01/01/05 957
Chicago, Illinois Sales Tax Revenue (a) 1,000 5.250 01/01/05 1,061
Chicago, Illinois, Series C, General Obligation (a) 1,500 6.250 10/31/01 1,602
Cook County, Illinois High School District No. 201, General Obligation 1,000 5.000 12/01/05 1,051
Illinois Development Finance Authority Revenue, Series A (a) 1,145 5.500 05/15/05 1,228
Illinois Health Facilities Authority Revenue 1,000 5.250 09/01/04 1,050
Illinois Health Facilities Authority Revenue (a) 500 5.000 08/01/03 522
Illinois Health Facilities Authority Revenue (a) 270 5.250 08/15/03 285
Illinois Health Facilities Authority Revenue (a) 500 5.000 08/15/04 523
Illinois Health Facilities Authority Revenue, Series A (a) 130 4.800 10/01/99 132
Illinois Health Facilities Authority Revenue, Series A (a) 345 5.000 10/01/00 353
Illinois Health Facilities Authority Revenue, Series A (a) 1,000 4.550 07/01/01 1,020
Illinois Housing Development Authority, Elderly Housing Development Revenue 265 4.350 01/01/04 266
Illinois Housing Development Authority, Elderly Housing Development Revenue 500 4.450 01/01/05 503
Illinois State, General Obligation (a) 500 5.375 05/01/01 520
-------
11,073
-------
Indiana - 2.0%
Indiana Bond Bank Revenue, Series A 1,000 4.100 02/01/05 1,003
Indiana Health Facilities Financing Authority, Hospital Revenue 500 4.500 02/15/05 503
Indiana Health Facilities Financing Authority, Hospital Revenue, Series A (a) 500 5.000 11/01/02 520
Monroe County Industrial Hospital Authority Revenue (a) 500 4.500 05/01/03 511
-------
2,537
-------
Kentucky - 2.0%
Carrollton & Henderson, Kentucky Public Energy Authority Gas Revenue, Series A 1,535 4.750 01/01/04 1,587
McCracken County, Kentucky Hospital Revenue, Series A (a) 1,000 5.700 11/01/00 1,039
-------
2,626
-------
Louisiana - 2.6%
De Soto Parish, Louisiana Pollution Control Revenue, Series A 650 5.050 12/01/02 676
Louisiana Public Facilities Authority Revenue, Health Care Revenue 500 5.500 10/15/99 509
</TABLE>
Limited Volatility Tax Free Fund 62
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Date Value
(000) Rate of (000)
$ % Maturity $
------- ------- -------- -------
<S> <C> <C> <C> <C>
Louisiana, State of, Series A, General Obligation (a) 500 6.000 08/01/00 520
Louisiana, State of, Series A, General Obligation (a) 800 5.500 04/15/05 863
Shreveport, Louisiana, Zero Coupon, General Obligation (a) 1,000 0.000 01/01/05 779
-------
3,347
-------
Maine - 0.8%
Maine Health & Higher Educational Facilities Authority Revenue, Series A 1,000 4.300 07/01/04 1,015
-------
Maryland - 1.2%
Maryland State & Local Facilities Loan, Series 3, General Obligation 500 5.000 10/15/02 524
Maryland State Stadium Authority Lease Revenue, Convention Center Expansion (a) 1,000 5.375 12/15/00 1,038
-------
1,562
-------
Massachusetts - 1.6%
Massachusetts State Health & Educational Facilities Authority Revenue,
Series B (b) 500 4.550 01/01/21 510
Massachusetts State Industrial Finance Agency, Resource Recovery Revenue,
Series A 500 4.850 12/01/05 506
Massachusetts State Water Resources Authority Revenue, Series A 1,000 4.500 08/01/03 1,028
-------
2,044
-------
Michigan - 4.7%
Clarkston, Michigan Community Schools, General Obligation (a) 1,000 6.000 05/01/04 1,097
Detroit, Michigan City School District, Series B, General Obligation (a) 1,000 5.000 05/01/05 1,052
Jackson County, Michigan Hospital Financial Authority Revenue (a) 300 4.375 06/01/02 305
Michigan Municipal Bond Authority Revenue, State and Local Appropriations,
Series B (a) 550 6.900 05/01/99 557
Michigan State Building Authority Revenue, Series I 375 5.400 10/01/03 403
Michigan State Hospital Finance Authority Revenue, Series A 500 5.000 07/01/02 518
Michigan State Hospital Finance Authority Revenue, Series A (a) 500 4.250 05/15/04 504
Michigan State Hospital Finance Authority Revenue, Series A 1,000 5.500 10/01/04 1,050
Michigan State Hospital Finance Authority Revenue, Series S 500 5.500 08/15/00 516
-------
6,002
-------
Nebraska - 0.8%
Douglas County, Nebraska Hospital Authority No. 001 Revenue (a) 1,000 4.350 09/01/01 1,017
-------
New Jersey - 2.8%
Camden County, New Jersey Improvement Authority Revenue (a) 350 4.250 11/15/04 354
New Jersey State, Series E, General Obligation 500 5.500 07/15/02 531
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 09/01/01 688
Ocean County, New Jersey Utilities Authority Waste Water Revenue 1,000 5.000 01/01/01 1,030
-------
3,621
-------
New Mexico - 0.7%
New Mexico Mortgage Finance Authority Revenue, Series A1 830 6.200 01/01/01 855
-------
New York - 11.3%
Long Island Power Authority, New York Electric System Revenue, Series 6 (b) 1,490 4.850 05/01/33 1,490
Metropolitan Transportation Authority, New York, Service Contract Commuter
Facilities, Series 7 1,000 5.300 07/01/05 1,067
</TABLE>
63 Limited Volatility Tax Free Fund
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Date Value
(000) Rate of (000)
$ % Maturity $
------- ------- -------- -------
<S> <C> <C> <C> <C>
Metropolitan Transportation Authority, New York, Transit Facilities Revenue,
Series R (d) 650 5.000 07/01/03 678
Municipal Assistance Corp., New York, New York Revenue, Series E 1,000 4.700 07/01/02 1,031
Municipal Assistance Corp., New York, New York Revenue, Series L 500 4.500 07/01/02 512
New York City, New York, Series H, General Obligation 750 5.250 08/01/03 791
New York State Dormitory Authority Revenue 450 5.000 04/01/03 468
New York State Dormitory Authority Revenue (a) 500 5.000 02/01/04 523
New York State Dormitory Authority Revenue, Series 1 500 5.000 07/01/03 521
New York State Dormitory Authority Revenue, Series A 375 6.000 02/15/03 405
New York State Dormitory Authority Revenue, Series A 375 6.000 08/15/04 412
New York State Dormitory Authority Revenue, Series A (a) 1,000 4.300 08/15/04 1,015
New York State Dormitory Authority Revenue, Series B 745 4.500 02/15/03 761
New York State Dormitory Authority Revenue, Series E 1,000 5.500 02/15/03 1,060
New York State Energy Research & Development Authority, Pollution Control
Revenue, Series C (b) 200 4.800 06/01/29 200
New York State Housing Finance Agency Service Contract Obligation Revenue,
Zero Coupon, Series C 1,000 0.000 09/15/03 820
New York State Urban Development Corp. Revenue, Series 7 125 5.500 01/01/01 129
New York State, General Obligation 765 4.500 10/15/01 783
New York, New York, Series D, General Obligation 250 6.000 02/01/99 251
New York, New York, Series E, General Obligation 500 5.300 08/01/03 528
New York, New York, Series F, General Obligation 500 5.300 08/01/03 528
United Nations Development Corp., New York Revenue, Series B 250 4.450 07/01/01 251
Wallkill, New York, General Obligation (a) 300 4.500 03/01/01 306
-------
14,530
-------
North Carolina - 1.2%
North Carolina Medical Care Community Hospital Revenue (a) 1,000 4.250 06/01/04 1,012
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue,
Series A (a) 500 5.000 01/01/01 514
-------
1,526
-------
Ohio - 2.9%
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 1,019
Lorain County, Ohio Hospital Revenue 500 4.750 09/01/00 511
Ohio State Building Authority Revenue, State Facilities, Administration Building
Fund, Series A 600 5.250 10/01/03 637
Ohio State Special Obligation Revenue, Series A 1,000 5.000 06/01/04 1,052
-------
3,787
-------
Oklahoma - 0.2%
Stillwater, Oklahoma Medical Center Authority Revenue, Series A 300 5.550 05/15/01 308
-------
Pennsylvania - 2.2%
Allegheny County, Pennsylvania Hospital Development Authority Revenue (a) 750 5.200 10/01/05 797
Erie, Pennsylvania Water Authority Water Revenue (a) 420 4.300 12/01/04 425
Harrisburg, Pennsylvania, Zero Coupon, Series D, General Obligation (a) 815 0.000 03/15/04 660
Philadelphia, Pennsylvania Hospitals & Higher Education Facilities Authority
Revenue, Series A 500 5.000 05/15/02 518
</TABLE>
Limited Volatility Tax Free Fund 64
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Date Value
(000) Rate of (000)
$ % Maturity $
------- ------- -------- -------
<S> <C> <C> <C> <C>
Philadelphia, Pennsylvania, Zero Coupon, Water & Sewer Revenue (a) 500 0.000 10/01/02 432
-------
2,832
-------
Puerto Rico - 0.8%
Puerto Rico Electrical Power Authority Power Revenue, Series DD 1,000 5.000 07/01/04 1,058
-------
Rhode Island - 0.8%
Rhode Island Housing & Mortgage Finance Authority, Housing
Revenue, Series A (a) 1,000 5.150 07/01/01 1,024
-------
South Carolina - 1.0%
Columbia, South Carolina, Zero Coupon, Waterworks & Sewer System Revenue 1,000 0.000 02/01/04 819
Spartanburg County, South Carolina Social Health Services, Inc. Hospital
Revenue (a) 500 4.400 04/15/01 508
-------
1,327
-------
South Dakota - 0.4%
South Dakota Housing Development Authority Revenue, Series D (b) 490 4.250 05/01/05 490
-------
Tennessee - 1.5%
Metropolitan Government, Nashville & Davidson County, Tennessee Health &
Educational Facilities Bond Revenue, Series A (a) 750 4.500 11/01/03 768
Metropolitan Government, Nashville & Davidson County, Tennessee Health &
Educational Facilities Bond Revenue, Series A (d) 615 5.250 05/01/01 638
White House Utility District, Tennessee, Robertson & Sumner Counties,
Zero Coupon, Waterworks Revenue (a) 650 0.000 01/01/05 508
-------
1,914
-------
Texas - 10.8%
Abilene, Texas Health Facilities Development Corp., Medical Center A, Health
Care Revenue (a) 500 5.100 09/01/99 507
Grapevine, Texas Industrial Development Corporation Revenue, Series A3 (b) 200 4.850 12/01/24 200
Harris County, Texas Health Facilities Development Corporation Hospital Revenue 500 5.000 06/01/04 523
Harris County, Texas Health Facilities Development Corporation Hospital Revenue,
Series A (b) 210 4.850 02/15/27 210
Harris County, Texas, Zero Coupon, General Obligation, Series A (a) 1,000 0.000 08/15/03 831
Houston, Texas, Series A, General Obligation 650 5.000 03/01/02 675
Houston, Texas, Series C, General Obligation 1,000 5.900 03/01/03 1,062
Irving, Texas Independent School District, Zero Coupon, General Obligation 650 0.000 02/15/03 551
Lone Star, Texas Airport Improvement Authority Revenue, Series A-3 (b) 200 4.850 12/01/14 200
Lone Star, Texas Airport Improvement Authority Revenue, Series B-2 (b) 400 4.850 12/01/14 400
Lone Star, Texas Airport Improvement Authority Revenue, Series B-4 (b) 1,300 4.850 12/01/14 1,300
San Antonio, Texas Electric & Gas Revenue 800 4.700 02/01/05 828
San Antonio, Texas Electric & Gas Revenue, Zero Coupon, Series B (a) 1,000 0.000 02/01/04 813
San Antonio, Texas, General Obligation (d) 1,000 5.000 08/01/00 1,025
Stephenville, Texas Independent School District, Zero Coupon, General Obligation 830 0.000 02/15/04 674
Tarrant County, Texas Health Facilities Development Corp. Systems Revenue,
Series A (a) 500 5.000 02/15/01 514
Texas State Public Finance Authority Building Revenue 1,000 5.000 02/01/05 1,050
University of Texas, University Revenues, Series A 605 5.000 08/15/03 635
University of Texas, University Revenues, Series D 1,000 4.750 08/15/04 1,043
</TABLE>
65 Limited Volatility Tax Free Fund
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Date Value
(000) Rate of (000)
$ % Maturity $
------- ------- -------- -------
<S> <C> <C> <C> <C>
Wichita Falls, Texas Independent School District, General Obligation 865 5.000 02/01/05 904
-------
13,945
-------
Utah - 4.8%
Intermountain Power Agency, Power Supply Revenue, Series B 500 7.200 07/01/99 510
Intermountain Power Agency, Power Supply Revenue, Series B (a)(d) 500 5.250 07/01/99 506
Intermountain Power Agency, Power Supply Revenue, Series C 1,000 4.700 07/01/02 1,026
Intermountain Power Agency, Power Supply Revenue, Series E (d) 500 5.250 07/01/01 519
Jordan, Utah School District, General Obligation 1,050 5.000 06/15/05 1,112
Utah State Board of Regents Revenue 300 5.000 08/01/02 311
Utah State Board of Regents Revenue (a) 700 5.500 08/01/05 754
Utah State Building Ownership Authority, Lease Revenue, Series A 500 5.500 05/15/00 514
Utah, State of, General Obligation, Semiannual Demand 850 5.000 07/01/02 888
-------
6,140
-------
Virginia - 0.8%
Arlington County, Virginia Industrial Development Authority, Resource
Recovery Revenue, Series A 1,000 5.250 01/01/04 1,055
-------
WASHINGTON - 6.6%
CDP King County III, Washington Lease Revenue (a) 1,000 4.600 06/01/03 1,030
Washington State Health Care Facilities Authority Revenue, Series A (a) 250 4.300 08/15/01 254
Washington State Public Power Supply System, Nuclear Project No. 1 Revenue,
Series B 500 5.000 07/01/00 511
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 1,542
Washington State Public Power Supply System, Nuclear Project No. 2 Revenue,
Series C 650 7.200 07/01/99 663
Washington State Public Power Supply System, Nuclear Project No. 3 Revenue,
Series A 1,000 5.000 07/01/04 1,045
Washington, State of, Series A, General Obligation 1,060 6.500 07/01/04 1,193
Washington, State of, Series C, General Obligation 1,000 5.500 07/01/99 1,013
Washington, State of, Series C, General Obligation 1,000 5.000 07/01/02 1,041
-------
8,578
-------
Wisconsin - 1.1%
Chippewa Falls, Wisconsin Area University School District, General Obligation 1,375 5.250 04/01/05 1,455
-------
Total Investments - 98.7%
(identified cost $124,726)(c) 127,277
Other Assets and Liabilities, Net - 1.3% 1,682
-------
Net Assets - 100.0% 128,959
=======
</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.
(e) Pre-refunded: These bonds are collateralized by U.S. Treasury securities,
which are held in escrow by a trustee and used to pay principal and
interest in the tax-exempt issue and to retire the bonds in full at the
earliest refunding date. The rate noted is for descriptive purposes;
effective yield may vary.
The accompanying notes are an integral part of the financial statements.
Limited Volatility Tax Free Fund 66
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets
December 31, 1998
Abbreviations:
AMBAC - AMBAC Indemnity Corporation
FGIC - Financial Guaranty Insurance Company
MBIA - Municipal Bond Investors Assurance
Quality Ratings as a % of Market Value (Unaudited)
<TABLE>
<S> <C>
AAA 68%
AA 18
A 7
BBB 7
-----
100%
=====
</TABLE>
Economic Sector Emphasis as a % of Market Value (Unaudited)
<TABLE>
<S> <C>
General Obligation 28%
Health Care Revenue 23
Utility Revenue 17
State and Community Lease 11
Housing Revenue 4
University Revenue 3
Refunded 2
Pollution Control Revenue 1
Other 11
-----
100%
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
67 Limited Volatility Tax Free Fund
<PAGE>
Limited Volatility Tax Free Fund
Statement of Assets and Liabilities
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments at market (identified cost $124,726)(Note 2) ............................................... $ 127,277
Receivables:
Interest ............................................................................................... 1,886
Fund shares sold ....................................................................................... 160
---------
Total Assets ......................................................................................... 129,323
Liabilities
Payables:
Fund shares redeemed ...................................................................... $ 243
Accrued fees to affiliates (Note 4) ...................................................... 45
Other accrued expenses .................................................................... 76
---------
Total Liabilities .................................................................................... 364
---------
Net Assets .............................................................................................. $ 128,959
=========
Net Assets consist of:
Accumulated net realized gain (loss) ................................................................... $ (996)
Unrealized appreciation (depreciation) on investments ................................................... 2,551
Shares of beneficial interest ........................................................................... 60
Additional paid-in capital .............................................................................. 127,344
---------
NET ASSETS .............................................................................................. $ 128,959
=========
Net Asset Value, offering and redemption price per share:
($128,959,205 divided by 6,028,369 shares of $.01 par value
shares of beneficial interest outstanding) .......................................................... $ 21.39
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Limited Volatility Tax Free Fund 68
<PAGE>
Limited Volatility Tax Free Fund
Statement of Operations
Amounts in thousands December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Interest ............................................................................................. $ 4,899
Expenses (Notes 2 and 4):
Advisory fees ............................................................................ $ 520
Administrative fees ...................................................................... 5
Custodian fees ........................................................................... 67
Transfer agent fees ...................................................................... 64
Professional fees ........................................................................ 36
Registration fees ........................................................................ 44
Trustees' fees ........................................................................... 3
Miscellaneous ............................................................................ 41
-------
Total Expenses ..................................................................................... 780
-------
Net investment income ................................................................................. 4,119
-------
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 .................................. 1,153
-------
Net gain (loss) on investments ........................................................................ 1,012
-------
Net increase (decrease) in net assets resulting from operations ....................................... $ 5,131
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
69 Limited Volatility Tax Free Fund
<PAGE>
Limited Volatility Tax Free Fund
Statement of Changes in Net Assets
Amounts in thousands
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
--------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ....................................................................... $ 4,119 $ 2,885
Net realized gain (loss) ................................................................... (141) 113
Net change in unrealized appreciation or depreciation ....................................... 1,153 530
--------- ---------
Net increase (decrease) in net assets resulting from operations ........................... 5,131 3,528
--------- ---------
From Distributions to Shareholders:
Net investment income ....................................................................... (4,095) (2,885)
In excess of net investment income .......................................................... (59) (24)
--------- ---------
Total Distributions to Shareholders ....................................................... (4,154) (2,909)
--------- ---------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ................. 44,906 16,113
--------- ---------
Total Net Increase (Decrease) in Net Assets .................................................. 45,883 16,732
Net Assets
Beginning of period ......................................................................... 83,076 66,344
--------- ---------
End of period (including accumulated distributions in excess of net investment
income of $24 at December 31, 1997) ...................................................... $ 128,959 $ 83,076
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Limited Volatility Tax Free Fund 70
<PAGE>
Limited Volatility Tax Free Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................... $ 21.19 $ 21.02 $ 21.24 $ 20.48 $ 21.45
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income (a) ............................. .81 .84 .85 .81 .86
Net realized and unrealized gain (loss) on investments .19 .18 (.21) .77 (.97)
-------- -------- -------- -------- --------
Total Income From Investment Operations ............. 1.00 1.02 .64 1.58 (.11)
-------- -------- -------- -------- --------
Distributions:
Net investment income ................................. (.79) (.84) (.86) (.82) (.86)
In excess of net investment income .................... (.01) (.01) -- -- --
-------- -------- -------- -------- --------
Total Distributions ................................. (.80) (.85) (.86) (.82) (.86)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ......................... $ 21.39 $ 21.19 $ 21.02 $ 21.24 $ 20.48
======== ======== ======== ======== ========
Total Return (%) ....................................... 4.82 4.92 3.07 7.81 (0.54)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) .............. 128,959 83,076 66,344 63,838 48,975
Ratios to average net assets (%):
Operating expenses .................................. .72 .71 .75 .74 .72
Net investment income ............................... 3.80 3.99 4.02 3.91 4.14
Portfolio turnover rate (%) ........................... 74.42 40.79 74.34 73.91 71.71
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
71 Limited Volatility Tax Free Fund
<PAGE>
EQUITY T FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide capital growth on an after tax basis by investing
principally in equity securities
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.
GROWTH OF A $10,000 INVESTMENT
Dates Equity T S&P 500(R) **
Inception* $10,000 $10,000
1996 $10,642 $10,551
1997 $14,019 $14,073
1998 $18,516 $18,120
----------------------------------------------
Total $53,177 $52,744
YEARLY PERIODS ENDED DECEMBER 31
EQUITY T FUND
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- -----------------------------------------
1 Year $13,208 32.08%
Inception $18,516 31.66%(S)
STANDARD & POORS(R) 500 COMPOSITE STOCK PRICE INDEX
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
- --------------------------------------------------------
1 Year $12,876 28.76%
Inception $18,120 30.76%(S)
* The Fund commenced operations on October 7, 1996. Index comparison began
November 1, 1996.
** The Standard & Poor's(R) 500 Composite Stock Price Index is composed of 500
common stocks which are chosen by Standard & 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.
73 Equity T Fund
<PAGE>
EQUITY T FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Equity T Fund reflected a total return
of 32.1% as compared to the S&P 500 Index gain of 28.8%. The Fund exceeded the
Index primarily due to its effective security selection. Taxable capital gains
were negligible for the year relative to other mutual funds.
PORTFOLIO HIGHLIGHTS
The stock market's performance continued to be dominated by large capitalization
stocks over midcap and small cap alternatives. The market's increase was driven
by growth-oriented investments, particularly Internet-related companies, which
included a broad group of technology stocks.
While the vast majority of growth and income funds lagged the S&P 500 Index for
the year, the Equity T Fund benefited from its structured portfolio
construction, which limited deviations from the Index, particularly relative to
capitalization and economic sectors. The Fund's holdings of Sun Microsystems,
Lucent Technologies, and Cisco Systems led overall strong stock performance.
The Fund's gain exceeded the average performance of funds in the Lipper(R)
Growth & Income Funds peer group by nearly 17 percentage points.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Microsoft Corp. 3.2%
Philip Morris Cos., Inc. 2.7
MCI WorldCom, Inc. 2.6
Intel Corp. 2.4
GTE Corp. 2.3
Bristol-Myers Squibb Co. 2.3
Cisco Systems, Inc. 2.3
International Business Machines Corp. 2.0
Lucent Technologies, Inc. 1.9
Citigroup, Inc. 1.8
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 29.2x
Portfolio Price/Book Ratio 4.24x
Market Capitalization - $-Weighted
Average 79.28 Bil
Number of Holdings 182
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.
Equity T Fund 74
<PAGE>
EQUITY T FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
<S> <C> <C>
COMMON STOCKS - 98.0%
AUTO AND TRANSPORTATION - 2.9%
CNF Transportation, Inc. 9,000 338
Consolidated Freightways Corp. (a) 250 4
CSX Corp. 26,500 1,100
DaimlerChrysler AG (a) 13,763 1,322
Dana Corp. 20,800 850
Eaton Corp. 18,200 1,287
Ford Motor Co. 16,900 992
General Motors Corp. 4,000 286
Goodyear Tire & Rubber Co. 10,800 545
Lear Corp. (a) 4,900 189
Union Pacific Corp. 45,600 2,054
------
8,967
------
CONSUMER DISCRETIONARY - 11.8%
AutoZone, Inc. (a) 30,200 995
Best Buy Co. (a) 5,400 331
Browning-Ferris Industries, Inc. 14,500 412
Cendant Corp. (a) 83,400 1,590
Circuit City Stores, Inc. 30,700 1,533
Dayton Hudson Corp. 23,800 1,291
Eastman Kodak Co. 25,200 1,814
Extended Stay America, Inc. (a) 1,700 18
Federated Department Stores, Inc. (a) 35,100 1,529
Fruit of the Loom, Inc. Class A (a) 38,100 526
Gap, Inc. 19,500 1,097
Hasbro, Inc. 13,900 502
Home Depot, Inc. (The) 29,000 1,774
International Game Technology 32,800 797
JC Penney & Co., Inc. 800 38
Kmart Corp. (a) 17,500 268
Leggett & Platt, Inc. 31,300 689
Lowe's Cos., Inc. 20,300 1,039
Mattel, Inc. 36,400 830
McDonald's Corp. 9,400 720
Mirage Resorts, Inc. (a) 149,900 2,239
Sears Roebuck & Co. 36,100 1,534
Service Corp. International 72,100 2,744
Starwood Hotels & Resorts
Worldwide, Inc. 734 17
Time Warner, Inc. 33,250 2,064
TJX Cos., Inc. 63,800 1,850
Wal-Mart Stores, Inc. 56,000 4,561
Waste Management, Inc. 59,144 2,759
Whirlpool Corp. 8,300 460
------
36,021
------
CONSUMER STAPLES - 10.3%
Albertson's, Inc. 11,200 713
American Stores Co. 22,700 838
Anheuser-Busch Cos., Inc. 2,700 177
Bestfoods 3,800 202
Campbell Soup Co. 19,000 1,045
Coca-Cola Co. (The) 58,000 3,879
Corn Products International, Inc. 250 8
Gillette Co. 1,400 68
Hannaford Brothers Co. 20,500 1,087
PepsiCo, Inc. 62,400 2,555
Philip Morris Cos., Inc. 154,200 8,250
Procter & Gamble Co. 35,900 3,279
Ralston-Purina Group 54,400 1,761
Safeway, Inc. (a) 4,300 262
Sara Lee Corp. 3,600 101
Seagram Co., Ltd. 88,800 3,374
Unilever NV 48,500 4,022
------
31,621
------
FINANCIAL SERVICES - 15.4%
AEGON NV 5,608 686
Allstate Corp. 46,500 1,796
Ambac Financial Group, Inc. 4,900 295
American Express Co. 5,800 593
American International Group, Inc. 20,400 1,971
Associated Banc-Corp. 11,000 375
Associates First Capital Corp. Class A 4,506 191
Astoria Financial Corp. 26,685 1,221
BankAmerica Corp. 73,551 4,422
BankBoston Corp. 100 4
Bankers Trust New York Corp. 37,100 3,170
Capital One Financial Corp. 300 35
Charter One Financial, Inc. 16,500 457
CIT Group, Inc. (The) 15,300 487
Citigroup, Inc. 113,217 5,604
Commercial Federal Corp. 7,500 174
Compass Bancshares, Inc. 23,200 879
Dime Bancorp, Inc. 35,700 944
Equifax, Inc. 19,300 660
Federal National Mortgage Association 37,400 2,768
First Union Corp. 24,318 1,479
Fremont General Corp. 800 20
Household International Corp. 34,653 1,373
KeyCorp 72,800 2,330
Marsh & McLennan Cos., Inc. 36,300 2,121
MBIA, Inc. 26,400 1,731
Morgan Stanley Dean Witter
Discover & Co. 28,840 2,048
Ocwen Financial Corp. (a) 10,400 128
</TABLE>
75 Equity T Fund
<PAGE>
EQUITY T FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
<S> <C> <C>
Provident Financial Group, Inc. 33,800 1,263
Ryder System, Inc. 1,500 39
SouthTrust Corp. 20,200 745
St. Paul Cos., Inc. 35,900 1,247
TCF Financial Corp. 48,100 1,163
UNUM Corp. 21,400 1,248
Washington Mutual, Inc. 85,453 3,263
------
46,930
------
HEALTH CARE - 10.5%
ALZA Corp. (a) 53,600 2,801
American Home Products Corp. 51,400 2,894
Amgen, Inc. (a) 4,000 418
Bausch & Lomb, Inc. 7,300 438
Bristol-Myers Squibb Co. 52,800 7,066
Columbia/HCA Healthcare Corp. 29,300 725
Crescendo Pharmaceuticals Corp.
Class A (a) 235 3
Forest Labs, Inc. (a) 29,800 1,585
Genzyme Corp. (a) 39,200 1,948
Genzyme Molecular Oncology (a) 4,235 13
HCR Manor Care, Inc. (a) 22,800 670
HEALTHSOUTH Corp. (a) 1,700 26
Humana, Inc. (a) 10,800 192
Johnson & Johnson 12,500 1,048
Lilly (Eli) & Co. 14,200 1,262
MedImmune, Inc. (a) 2,800 278
Merck & Co., Inc. 18,000 2,658
Pfizer, Inc. 20,600 2,584
Schering-Plough Corp. 20,200 1,116
Tenet Healthcare Corp. (a) 43,400 1,139
United Healthcare Corp. 11,000 474
Warner-Lambert Co. 34,800 2,617
------
31,955
------
INTEGRATED OILS - 6.3%
Amoco Corp. 25,300 1,493
Atlantic Richfield Co. 64,500 4,209
Enron Corp. 7,800 445
Exxon Corp. 36,800 2,691
Lyondell Petrochemical Co. 65,300 1,175
Mobil Corp. 56,100 4,887
Phillips Petroleum Co. 13,700 584
Royal Dutch Petroleum Co. 72,500 3,471
Tenneco, Inc. 8,800 300
------
19,255
------
MATERIALS AND PROCESSING - 6.4%
Allegheny Teldyne, Inc. 130,118 2,659
Dow Chemical Co. 32,500 2,955
Georgia-Pacific Group 21,100 1,236
Kimberly-Clark Corp. 16,200 883
Monsanto Co. 84,000 3,990
Rohm & Haas Co. 40,900 1,232
Sherwin-Williams Co. 4,200 123
Temple-Inland, Inc. 2,100 125
Tyco International, Ltd. 64,403 4,859
Unifi, Inc. 22,000 430
USEC, Inc. 70,500 978
------
19,470
------
OTHER ENERGY - 0.8%
El Paso Energy Corp. 14,900 519
R&B Falcon Corp. (a) 59,500 454
Schlumberger, Ltd. 2,800 129
Tosco Corp. 33,400 864
Valero Energy Corp. 22,400 476
------
2,442
------
PRODUCER DURABLES - 4.3%
AlliedSignal, Inc. 77,600 3,439
Boston Scientific Corp. (a) 37,000 992
Coltec Industries, Inc. (a) 29,400 573
Deere & Co. 4,700 156
General Electric Co. 50,200 5,124
Grainger (W.W.), Inc. 9,700 404
Johnson Controls, Inc. 30,000 1,770
Perkin-Elmer Corp. 7,200 701
------
13,159
------
TECHNOLOGY - 18.1%
America Online, Inc. 9,100 1,456
Cisco Systems, Inc. (a) 74,075 6,875
COMPAQ Computer Corp. 44,600 1,870
Cooper Industries, Inc. 30,500 1,454
Dell Computer Corp. (a) 15,200 1,112
EMC Corp. (a) 38,300 3,256
Harris Corp. 26,800 982
Intel Corp. 62,300 7,384
International Business Machines Corp. 33,800 6,245
Lucent Technologies, Inc. 53,400 5,874
Microsoft Corp. (a) 69,800 9,672
Motorola, Inc. 5,700 348
Oracle Systems Corp. (a) 32,500 1,402
Sun Microsystems, Inc. (a) 60,600 5,184
Texas Instruments, Inc. 24,200 2,070
------
55,184
------
</TABLE>
Equity T Fund 76
<PAGE>
EQUITY T FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
<S> <C> <C>
UTILITIES - 11.2%
Ameritech Corp. 15,400 976
AT&T Corp. 54,400 4,094
Bell Atlantic Corp. 12,464 661
Central & Southwest Corp. 30,900 848
Columbia Energy Group 18,350 1,060
Comcast Corp. Special Class A 4,700 276
Duke Energy Corp. 521 33
Entergy Corp. 6,400 199
GTE Corp. 109,800 7,136
K N Energy, Inc. 9,700 353
MCI WorldCom, Inc. (a) 110,890 7,956
New England Electric System 500 24
Northern States Power Co. 57,500 1,596
PP&L Resources, Inc. 83,000 2,314
SBC Communications, Inc. 38,300 2,054
Sprint Corp. 16,300 1,371
Sprint PCS (a) 8,150 188
Tele-Communications, Inc.
Class A (a) 24,586 1,360
Tele-Communications TCI
Ventures Group Series A (a) 22,628 533
Wisconsin Energy Corp. 42,500 1,336
-------
34,368
-------
TOTAL COMMON STOCKS
(cost $227,130) 299,372
-------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
$
-----------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 1.9%
Frank Russell Investment Company Money
Market Fund,
due on demand (b) 5,624 5,624
United States Treasury Notes
6.250% due 03/31/99 (c) 251 251
-------
TOTAL SHORT-TERM INVESTMENTS
(cost $5,875) 5,875
-------
TOTAL INVESTMENTS - 99.9%
(identified cost $233,005)(d) 305,247
OTHER ASSETS AND LIABILITIES,
NET - 0.1% 205
-------
NET ASSETS - 100.0% 305,452
=======
<CAPTION>
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS* (000)
------------- --------------
<S> <C> <C>
FUTURES CONTRACTS
(Notes 2 and 3)
S&P 500 Index
expiration date 03/99 12 $ 103
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased (S) $ 103
==============
</TABLE>
(S) At December 31, 1998, United States Treasury Notes valued at $251 were held
as collateral in connection with futures contracts purchased by the Fund.
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures contracts purchased by the
Fund.
(d) See Note 2 for federal income tax information.
* Each contract represents $100,000 notional value.
Abbreviations:
NV - Nonvoting
The accompanying notes are an integral part of the financial statements.
77 Equity T Fund
<PAGE>
EQUITY T FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost $233,005)(Note 2).......... $ 305,247
Receivables:
Dividends and interest........................................... 419
Fund shares sold................................................. 2,491
Daily variation margin on futures contracts (Notes 2 and 3)...... 10
Deferred organization expenses (Note 2)........................... 13
Short-term investments held as collateral for securities
loaned, at market (Note 3)........................................ 4,656
---------
Total Assets................................................... 312,836
LIABILITIES
Payables:
Investments purchased.................................. $ 2,283
Fund shares redeemed................................... 27
Accrued fees to affiliates (Note 4).................... 229
Other accrued expenses................................. 189
Payable upon return of securities loaned, at
market (Note 3)......................................... 4,656
---------
Total Liabilities.............................................. 7,384
---------
NET ASSETS........................................................ $ 305,452
=========
NET ASSETS CONSIST OF:
Accumulated distributions in excess of net investment income...... $ (110)
Accumulated net realized gain (loss).............................. (768)
Unrealized appreciation (depreciation) on:
Investments...................................................... 72,242
Futures contracts................................................ 103
Shares of beneficial interest..................................... 167
Additional paid-in capital........................................ 233,818
---------
NET ASSETS........................................................ $ 305,452
=========
NET ASSET VALUE, offering and redemption price per share:
($305,451,657 divided by 16,728,709 shares of $.01 par value
shares of beneficial interest outstanding)..................... $ 18.26
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity T Fund 78
<PAGE>
EQUITY T FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends....................................................... $ 2,875
Dividends from Money Market Fund (Note 5)....................... 261
Interest........................................................ 13
--------
Total Investment Income....................................... 3,149
EXPENSES (Notes 2 and 4):
Advisory fees......................................... $ 1,451
Administrative fees................................... 12
Custodian fees ....................................... 147
Transfer agent fees................................... 113
Professional fees..................................... 31
Registration fees..................................... 115
Trustees' fees........................................ 4
Amortization of deferred organization expenses........ 5
Miscellaneous......................................... 69
--------
Total Expenses................................................ 1,947
--------
Net investment income............................................ 1,202
--------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments........................................... (1,447)
Futures contracts..................................... 718 (729)
--------
Net change in unrealized appreciation or depreciation of:
Investments........................................... 57,981
Futures contracts..................................... 72 58,053
-------- --------
Net gain (loss) on investments................................... 57,324
--------
Net increase (decrease) in net assets resulting from operations.. $ 58,526
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
79 Equity T Fund
<PAGE>
EQUITY T FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income................................ $ 1,202 $ 516
Net realized gain (loss)............................. (729) 65
Net change in unrealized appreciation or
depreciation......................................... 58,053 13,594
Net increase (decrease) in net assets
resulting from operations.......................... 58,526 14,175
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................ (1,222) (496)
In excess of net investment income................... (112) --
In excess of net realized gain on investments........ (78) --
--------- ---------
Total Distributions to Shareholders................ (1,412) (496)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6).......................... 138,603 76,125
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS........... 195,717 89,804
NET ASSETS
Beginning of period.................................. 109,735 19,931
--------- ---------
End of period (including accumulated distributions
in excess of net investment income of $110 and
undistributed net investment income of $20,
respectively)...................................... $ 305,452 $ 109,735
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Equity T Fund 80
<PAGE>
EQUITY T FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996*
-------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 13.90 $ 10.61 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (d)............................ .10 .08 .03
Net realized and unrealized gain (loss) on
investments.......................................... 4.35 3.28 .61
-------- -------- --------
Total Income From Investment Operations............ 4.45 3.36 .64
-------- -------- --------
DISTRIBUTIONS:
Net investment income................................ (.07) (.07) (.03)
In excess of net investment income................... (.01) -- --
In excess of net realized gain on investments........ (.01) -- --
-------- -------- --------
Total Distributions................................ (.09) (.07) (.03)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD........................ $ 18.26 $ 13.90 $ 10.61
======== ======== ========
TOTAL RETURN (%)(a)(c)................................ 32.08 31.73 6.10
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted)............. 305,452 109,735 19,931
Ratios to average net assets (%)(b)(c):
Operating expenses, net............................ .99 1.00 1.00
Operating expenses, gross.......................... .99 1.08 2.83
Net investment income.............................. .61 .92 1.62
Portfolio turnover rate (%)(b)....................... 50.59 39.23 8.86
</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.
(d) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
81 Equity T Fund
<PAGE>
MONEY MARKET FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
CORPORATE BONDS AND
NOTES - 18.2%
Bank of Nova Scotia
(MTN) 11,500 6.375 04/14/99 11,515
BRAVO Trust Series
1997-I (a) 20,000 5.398 04/15/99 19,996
Grantor Trust Series
1996-2 (a) 8,220 5.675 12/23/06 8,219
Grantor Trust Series
1997-11 (a) 41,009 5.344 12/01/04 41,009
Grantor Trust Series
1998-TG7 (a) 24,675 5.625 07/01/04 24,675
Lehman Syndicated Loan
Funding Trust Series
1998-4 20,000 5.625 02/16/99 20,000
Morgan (J.P.) & Co.,
Inc. (MTN) 15,000 5.750 03/10/99 15,000
Morganite Industries
Series 1998-A (a) 50,000 5.630 07/01/18 50,000
Pacific Life Insurance
Co. 25,000 5.248 04/23/99 25,000
Providian Life +
Health (a) 25,000 5.697 06/15/99 25,000
SALTS III (Cayman)
Corp. Series 98-10 37,000 5.654 06/12/99 37,000
Westpac Banking Corp. 15,000 5.690 03/29/99 14,998
------------
TOTAL CORPORATE BONDS
AND NOTES (cost
$292,412) 292,412
------------
EURODOLLAR
CERTIFICATES OF
DEPOSIT - 1.9%
Deutsche Bank 15,000 6.360 01/07/99 15,000
Deutsche Bank 15,000 5.390 01/08/99 14,998
------------
TOTAL EURODOLLAR
CERTIFICATES OF
DEPOSIT (cost $29,998) 29,998
------------
YANKEE CERTIFICATES OF
DEPOSIT - 6.6%
Bayerische Landesbank 25,000 5.088 03/23/99 24,995
Deutsche Bank AG 30,000 5.700 03/30/99 29,994
Dresdner Bank AG 40,000 6.000 01/07/99 40,000
National Westminster 10,000 5.740 04/28/99 9,996
Bank PLC ------------
TOTAL YANKEE
CERTIFICATES OF
DEPOSIT (cost
$104,985) 104,985
------------
DOMESTIC COMMERCIAL
PAPER - 60.4%
Atlantis One Funding
Corp. 20,000 5.420 02/12/99 19,874
Atlantis One Funding
Corp. 20,000 5.400 03/25/99 19,751
Atlantis One Funding
Corp. 20,000 5.300 04/15/99 19,694
Bank of Nova Scotia 15,000 5.787 01/04/99 14,993
Bavaria TRR Corp. 25,000 5.280 01/11/99 24,963
Bavaria TRR Corp. 30,000 5.580 01/29/99 29,870
Bavaria TRR Corp. 25,000 5.030 02/04/99 24,892
Centric Capital Corp. 15,000 5.280 01/22/99 14,954
Centric Capital Corp. 15,000 5.100 03/25/99 14,824
Certain Funding Corp. 50,000 5.340 01/15/99 49,896
Certain Funding Corp. 6,235 5.350 02/10/99 6,198
Certain Funding Corp. 12,030 5.350 02/19/99 11,942
China Merchants, Inc. 20,000 5.100 02/19/99 19,861
China Merchants, Inc. 28,750 5.400 02/25/99 28,513
Chinatex Capitals,
Inc. 7,000 5.210 03/18/99 6,923
KZH-KMS Corp. 15,000 5.420 01/22/99 14,953
KZH-KMS Corp. 20,000 5.500 01/28/99 19,918
KZH-KMS Corp. 20,500 5.400 03/12/99 20,285
Moat Funding, L.L.C. 20,000 5.400 01/08/99 19,979
</TABLE>
83 Money Market Fund
<PAGE>
MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Moat Funding, L.L.C. 20,000 5.610 01/26/99 19,922
Park Avenue Rec. Corp. 28,836 5.450 02/10/99 28,661
Park Avenue Rec. Corp. 11,987 5.475 02/10/99 11,914
Park Avenue Rec. Corp. 27,946 5.480 02/12/99 27,767
Power Authority of New
York Series 4 35,000 5.230 01/25/99 34,878
Premium Funding Series
A 8,000 5.486 03/19/99 7,906
Special Purpose
Accounts Receivable
Co. 10,000 5.230 01/28/99 9,961
Special Purpose
Accounts Receivable
Co. 30,000 5.320 02/12/99 29,814
Special Purpose
Accounts Receivable
Co. 12,000 5.500 02/19/99 11,910
Special Purpose
Accounts Receivable
Co. 15,000 5.300 03/05/99 14,861
Stellar Funding Group 20,000 5.270 01/11/99 19,971
Stellar Funding Group 4,020 5.270 01/13/99 4,013
Stellar Funding Group 12,175 5.525 02/10/99 12,100
Stellar Funding Group 9,641 5.070 03/23/99 9,531
Stellar Funding Group 18,360 5.070 03/29/99 18,135
Stellar Funding Group 13,759 5.070 03/31/99 13,586
Thames Asset Global
Securitization 25,000 5.420 02/16/99 24,827
Thames Asset Global
Securitization 10,000 5.520 02/16/99 9,929
Thames Asset Global
Securitization 25,951 5.400 02/22/99 25,749
Three Rivers Funding 26,148 6.050 01/06/99 26,126
Three Rivers Funding 15,000 5.420 01/12/99 14,975
Three Rivers Funding 15,000 5.420 01/15/99 14,968
Three Rivers Funding 14,540 5.450 01/15/99 14,509
Variable Funding
Capital Corp. 25,000 5.280 01/13/99 24,956
Variable Funding
Capital Corp. 45,000 5.200 01/21/99 44,870
Westways Funding I
Ltd. 10,000 5.330 01/29/99 9,959
Westways Funding I
Ltd. 23,000 5.500 02/26/99 22,804
Westways Funding I
Ltd. 12,110 5.250 03/02/99 12,004
Westways Funding I
Ltd. 20,000 5.350 03/02/99 19,822
Westways Funding II
Ltd. 25,000 5.650 01/28/99 24,894
Westways Funding II
Ltd. 6,696 5.350 03/03/99 6,635
Westways Funding II
Ltd. 15,000 5.300 03/19/99 14,830
------------
TOTAL DOMESTIC
COMMERCIAL PAPER (cost
$969,070) 969,070
------------
EURODOLLAR TIME
DEPOSITS - 6.5%
Bank of America 25,000 8.000 01/04/99 25,000
Bank of Nova Scotia 34,000 6.375 01/04/99 34,000
Bank of Nova Scotia 12,000 5.500 01/15/99 12,000
Mellon Bank, N.A. 33,700 5.500 01/04/99 33,700
------------
TOTAL EURODOLLAR TIME
DEPOSITS (cost
$104,700) 104,700
------------
UNITED STATES
GOVERNMENT AGENCIES -
1.4%
Aid to Chile
Guaranteed Note
(LIBOR Floater)(a) 11,100 5.281 06/01/05 11,108
Aid to INH Portugal
Guaranteed Note
(LIBOR Floater)(a) 11,875 5.358 12/01/17 12,067
------------
TOTAL UNITED STATES
GOVERNMENT AGENCIES
(cost $23,175) 23,175
------------
TOTAL INVESTMENTS -
95.0% (amortized cost
$1,524,340) 1,524,340
------------
</TABLE>
Money Market Fund 84
<PAGE>
MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
(000)
$
--------
<S> <C>
REPURCHASE AGREEMENT - 6.6%
Agreement with Lehman Brothers, Inc. and Chase Bank (Tri-Party) of
$106,486
acquired December 31, 1998 at 4.850% to be repurchased at
$106,543 on January 4, 1999, collateralized by: $108,606 United
States Treasury Obligations and Government Agencies, valued at 106,486
$107,936 ------------
TOTAL REPURCHASE AGREEMENT (identified 106,486
cost $106,486) ------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT - 101.6%
(amortized cost $1,630,826)(b) 1,630,826
OTHER ASSETS AND LIABILITIES, NET - (1.6%) (25,800)
------------
NET ASSETS - 100.0% 1,605,026
------------
------------
</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.
Abbreviations:
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
The accompanying notes are an integral part of the financial statements.
85 Money Market Fund
<PAGE>
MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at amortized cost which approximates
market (Note 2) ............................................... $ 1,524,340
Repurchase agreements (identified cost $106,486)(Note 2) ........ 106,486
Interest receivable .............................................. 5,673
-----------
Total Assets .................................................. 1,636,499
LIABILITIES
Payables:
Dividends .......................................... $ 6,299
Investments purchased .............................. 24,892
Accrued fees to affiliates (Note 4) ............... 125
Other accrued expenses ............................. 157
-----------
Total Liabilities ............................................. 31,473
-----------
NET ASSETS ....................................................... $ 1,605,026
===========
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss) ............................ $ (3)
Shares of beneficial interest .................................... 16,050
Additional paid-in capital ....................................... 1,588,979
-----------
NET ASSETS ....................................................... $ 1,605,026
===========
NET ASSET VALUE, offering and redemption price per share:
($1,605,026,284 divided by 1,605,029,325 shares of $.01 par
value shares of beneficial interest outstanding) ............... $ 1.00
===========
The accompanying notes are an integral part of the financial statements.
Money Market Fund 86
<PAGE>
MONEY MARKET FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Interest ......................................................... $ 61,905
EXPENSES (Notes 2 and 4):
Advisory fees ........................................ $ 2,658
Administrative fees .................................. 60
Custodian fees ....................................... 207
Transfer agent fees .................................. 138
Professional fees .................................... 31
Registration fees .................................... 172
Trustees' fees ....................................... 4
Miscellaneous ........................................ 52
--------
Expenses before reductions ........................... 3,322
Expense reductions (Note 4) ......................... (1,631)
--------
Expenses, net .................................................. 1,691
--------
Net investment income ............................................. 60,214
REALIZED GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments ......................... (3)
--------
Net increase in net assets resulting from operations .............. $ 60,211
========
The accompanying notes are an integral part of the financial statements.
87 Money Market Fund
<PAGE>
MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
YEARS ENDED DECEMBER 31,
1998 1997
----------- -----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ........................... $ 60,214 $ 40,768
Net realized gain (loss) ....................... (3) --
----------- -----------
Net increase in net assets resulting from
operations .................................... 60,211 40,768
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ........................... (60,214) (40,768)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) .................... 678,746 429,351
----------- -----------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ...... 678,743 429,351
NET ASSETS
Beginning of period ............................. 926,283 496,932
----------- -----------
End of period ................................... $ 1,605,026 $ 926,283
----------- -----------
The accompanying notes are an integral part of the financial statements.
Money Market Fund 88
<PAGE>
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<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 (c) ....................... .0553 .0563 .0549 .0601 .0447
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS:
Net investment income ........................... (.0553) (.0563) (.0549) (.0601) (.0447)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- ---------- ---------- ---------- ----------
TOTAL RETURN (%)(a) ............................. 5.69 5.79 5.63 6.19 4.57
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ....... 1,605,026 926,283 496,932 533,643 502,302
Ratios to average net assets (%)(a):
Operating expenses, net (b) .................. .16 .08 .05 .06 .05
Operating expenses, gross (b) ................ .31 .30 .30 .26 .05
Net investment income ......................... 5.54 5.65 5.49 6.01 4.49
</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.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
89 Money Market Fund
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT
AGENCIES - 90.8%
Aid to Chile Guaranteed
Note (LIBOR Floater)(a) 5,215 5.281 06/01/05 5,219
Aid to Sri Lanka
Guaranteed Note (LIBOR
Floater)(a) 3,375 5.358 06/15/12 3,406
Federal Agricultural
Mortgage Corp Discount
Note. 5,085 5.050 01/04/99 5,083
Federal Home Loan Bank
Bonds 12,725 4.940 10/27/99 12,720
Federal Home Loan
Mortgage Corp. 10,000 5.550 04/29/99 9,995
Federal Home Loan
Mortgage Corp. Discount
Notes 10,000 5.110 01/13/99 9,983
Federal Home Loan
Mortgage Corp. Discount
Notes 10,000 4.910 02/11/99 9,944
Federal Home Loan
Mortgage Corp. Discount
Notes 10,000 5.080 02/19/99 9,931
Federal Home Loan
Mortgage Corp. Discount
Notes 10,000 4.900 02/25/99 9,925
Federal Home Loan
Mortgage Corp. Discount
Notes 10,000 4.870 03/05/99 9,915
Federal Home Loan
Mortgage Corp. Discount
Notes 5,350 5.010 03/09/99 5,300
Federal Home Loan
Mortgage Corp. Discount
Notes 8,000 4.950 03/26/99 7,908
Federal Home Loan
Mortgage Corp.
Participation
Certificates 1,186 6.000 03/15/99 1,186
Federal Home Loan
Mortgage Corp.
Participation
Certificates 612 5.500 05/01/99 612
Federal National Mortgage
Association (MTN) 5,000 5.530 03/11/99 4,999
Federal National Mortgage
Association (MTN)(a) 12,460 4.696 06/02/99 12,444
Federal National Mortgage
Association Discount
Notes 4,225 5.060 02/16/99 4,198
Federal National Mortgage
Association Discount
Notes 4,000 4.980 03/15/99 3,959
Federal National Mortgage
Association Discount
Notes 10,000 4.960 03/17/99 9,897
New Hampshire Higher
Education Loan Corp. (c) 11,314 4.950 01/08/99 11,303
Student Loan Marketing
Association (a) 1,000 4.848 01/13/99 1,000
Student Loan Marketing
Association (MTN)(a) 2,000 4.696 07/12/99 1,999
----------
TOTAL UNITED STATES GOVERNMENT AGENCIES 150,926
----------
TOTAL INVESTMENTS - 90.8% (amortized cost $150,926) 150,926
----------
REPURCHASE AGREEMENT - 9.3%
Agreement with Lehman Brothers, Inc. and Chase Bank (Tri-Party) of
$15,428 acquired December 31, 1998 at 5.25% to be repurchased at
$15,437 on January 4, 1999, collateralized by: $15,739 United
States Treasury Obligations and Government Agencies,
valued at $15,716. 15,428
----------
TOTAL REPURCHASE AGREEMENT (identified cost $15,428) 15,428
----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT - 100.1%
(cost $166,354)(b) 166,354
OTHER ASSETS AND LIABILITIES, NET - (0.1%) (130)
----------
NET ASSETS - 100.0% 166,224
==========
</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.
91 U.S. Government Money Market Fund
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at amortized cost which approximates market
(Note 2) ......................................................... $150,926
Repurchase agreements (identified cost $15,428)(Note 2) ............ 15,428
Receivables:
Interest ........................................................... 475
From Advisor ....................................................... 34
--------
Total Assets ..................................................... 166,863
LIABILITIES
Payables:
Dividends ........................................... $ 598
Accrued fees to affiliates (Note 4) ................ 29
Other accrued expenses .............................. 12
--------
Total Liabilities ................................................ 639
--------
NET ASSETS .......................................................... $166,224
========
NET ASSETS CONSIST OF:
Shares of beneficial interest ....................................... $ 1,662
Additional paid-in capital .......................................... 164,562
--------
NET ASSETS .......................................................... $166,224
========
NET ASSET VALUE, offering and redemption price per share:
($166,224,306 divided by 166,224,056 shares of $.01 par value
shares of beneficial interest outstanding) ...................... $ 1.00
========
The accompanying notes are an integral part of the financial statements.
U.S. Government Money Market Fund 92
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Interest .......................................................... $ 8,236
EXPENSES (Notes 2 and 4):
Advisory fees ....................................... $ 366
Administrative fees ................................. 7
Custodian fees ...................................... 64
Transfer agent fees ................................. 271
Professional fees ................................... 15
Registration fees ................................... 51
Trustees' fees ...................................... 4
Miscellaneous ....................................... 47
-------
Expenses before reductions .......................... 825
Expense reductions (Note 4) ........................ (345)
-------
Expenses, net ................................................... 480
-------
Net investment income .............................................. 7,756
-------
Net increase in net assets resulting from operations ............... $ 7,756
=======
The accompanying notes are an integral part of the financial statements.
93 U.S. Government Money Market Fund
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
YEARS ENDED DECEMBER 31,
1998 1997
--------- ---------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................... $ 7,756 $ 11,788
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................... (7,756) (11,788)
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ........................ (21,188) (52,313)
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .......... (21,188) (52,313)
NET ASSETS
Beginning of period ................................. 187,412 239,725
--------- ---------
End of period ....................................... $ 166,224 $ 187,412
========= =========
The accompanying notes are an integral part of the financial statements.
U.S. Government Money Market Fund 94
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<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(b) .............. .0520 .0545 .0526 .0580 .0380
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS:
Net investment income .................. (.0520) (.0545) (.0526) (.0580) (.0380)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD .......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========== ========== ========== ========== ==========
TOTAL RETURN (%) ........................ 5.34 5.59 5.40 5.98 3.87
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) 166,224 187,412 239,725 149,941 112,077
Ratios to average net assets(%):
Operating expenses, net (a) ......... .32 .20 .25 .32 .57
Operating expenses, gross (a) ....... .55 .41 .50 .51 .57
Net investment income ................ 5.20 5.44 5.27 5.82 3.91
</TABLE>
(a) See Note 4 for current period amounts.
(b) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
95 U.S. Government Money Market Fund
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 103.7%
ALABAMA - 3.8%
Alabama Housing Financing Authority
Multi-family Housing Residential
Development, Series B, weekly
demand 1,550 4.050(2) 12/01/14 1,550
Birmingham, Alabama Baptist Medical
Center Special Care Facilities
Financing Authority Revenue, Series
A, weekly demand 1,480 4.100(2) 09/01/20 1,480
Childersburg, Alabama Industrial
Development Board Pollution Control
Revenue 245 7.400 11/15/99 254
Mobile, Alabama Industrial
Development Board Pollution Control
Revenue, weekly demand 3,000 4.125(2) 06/01/04 3,000
Tuscaloosa, Alabama Industrial
Development Revenue 1,100 4.050 12/01/99 1,100
-----
7,384
-----
ARIZONA - 2.0%
Chandler, Arizona Industrial
Development Authority Revenue,
monthly demand 2,955 3.500(3) 12/15/09 2,955
Greystone Tax Exempt Certificate
Trust Revenue, Series 1998-1,
weekly demand (f) 210 4.130(2) 05/01/28 210
Maricopa County, Arizona Hospital
Revenue 95 7.375 01/01/99 95
Maricopa County, Arizona Industrial
Development Authority Revenue,
weekly demand 550 4.000(2) 10/01/04 550
-----
3,810
-----
COLORADO - 2.6%
Central Platte Valley Metropolitan
District, Denver County, Colorado
Special Obligation Revenue, Series
98 (a) 495 3.550 10/01/99 495
Colorado Housing Financing Authority
Multi-family Housing Revenue,
weekly demand 1,150 3.450(2) 06/01/05 1,150
Colorado Housing Financing Authority
Multi-family Housing Revenue,
weekly demand 600 3.850(2) 05/01/15 600
Colorado Housing Financing Authority
Multi-family Housing Revenue,
Series A, weekly demand 175 4.125(2) 11/01/09 175
Denver, Colorado City and County
Multi-family Housing Revenue, daily
demand 2,690 5.250(1) 12/01/09 2,690
-----
5,110
-----
DELAWARE - 0.3%
Delaware State Economic Development
Authority Multi-family Housing
Revenue, weekly demand 650 4.250(2) 12/01/15 650
DISTRICT OF COLUMBIA - 0.7%
District of Columbia General
Obligation, Series B-3, daily
demand 100 5.000(1) 06/01/03 100
District of Columbia Revenue, weekly
demand 1,300 4.150(2) 07/01/22 1,300
-----
1,400
-----
FLORIDA - 7.3%
Boca Raton, Florida Industrial
Development Authority Revenue,
Series 84A, weekly demand 425 4.375(2) 12/01/14 425
Broward County, Florida Housing
Finance Authority Multi-family
Housing Revenue, weekly demand 700 4.200(2) 02/01/09 700
Greystone Tax Exempt Certificate
Trust Revenue, Series 1998-1,
weekly demand (f) 319 4.130(2) 05/01/28 319
</TABLE>
97 Tax Free Money Market Fund
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
Lee County, Florida Industrial
Development Authority Revenue,
Series 85, weekly demand 3,575 3.625(2) 04/01/10 3,575
Orange County, Florida Educational
Facilities Authority Revenue,
Series 1998, weekly demand 1,600 4.000(2) 05/01/25 1,600
Orange County, Florida Industrial
Development Authority Revenue,
monthly demand 900 3.450(3) 01/01/11 900
Orange County, Florida Industrial
Development Authority Revenue,
semiannual demand 3,055 3.550(5) 10/01/15 3,055
Orange County, Florida Industrial
Development Authority Revenue,
Series A, weekly demand 1,000 4.000(2) 02/01/16 1,000
Orange County, Florida Industrial
Development Authority Revenue,
weekly demand 800 4.000(2) 11/01/12 800
Orange County, Florida Multi-family
Housing Finance Authority Revenue,
annual demand 1,800 3.550(6) 10/01/07 1,800
------
14,174
------
GEORGIA - 7.6%
Fulton County, Georgia Development
Authority Revenue, weekly demand 800 4.000(2) 02/01/16 800
Fulton County, Georgia Development
Authority Revenue, weekly demand 2,000 4.000(2) 12/01/16 2,000
Georgia State Hospital Financing
Authority Revenue, daily demand 1,100 5.000(1) 03/01/01 1,100
Greystone Tax Exempt Certificate
Trust Revenue, Series 1998-1,
weekly demand (f) 1,064 4.130(2) 05/01/28 1,064
Gwinnett County, Georgia Development
Authority Revenue, weekly demand 155 4.000(2) 03/01/17 155
La Grange, Georgia Water & Sewer
Revenue (pre-refunded 01/01/00)(b) 1,000 7.375 01/01/12 1,060
Marietta, Georgia Housing Authority
Multi-family Housing Revenue,
weekly demand 2,500 3.625(2) 01/01/08 2,500
Monroe County, Georgia Development
Authority Revenue, weekly demand 2,200 4.000(2) 08/01/18 2,200
Residential Apartments I Portfolio
CERT Trust 1996, Series A, weekly
demand (e) 720 4.050(2) 12/01/02 720
Savannah, Georgia Housing Authority
Multi-family Housing Revenue,
Series B, weekly demand 1,000 4.000(2) 06/15/26 1,000
Smyrna, Georgia Housing Authority
Multi-family Housing Revenue,
weekly demand 700 4.000(2) 06/01/25 700
Thomasville, Georgia Hospital
Authority Revenue Anticipation
Certificates, weekly demand 1,500 4.000(2) 11/01/17 1,500
------
14,799
------
ILLINOIS - 11.0%
De Kalb, Illinois Industrial
Development Revenue, Series C,
weekly demand 500 4.150(2) 02/01/01 500
East Peoria, Illinois Multi-family
Housing Revenue, weekly demand 1,810 4.250(2) 06/01/08 1,810
Illinois Development Finance
Authority Revenue, quarterly demand 700 3.500(4) 08/01/25 700
Illinois Development Finance
Authority Revenue, weekly demand 2,058 4.150(2) 09/01/26 2,058
Illinois Health Facilities Authority
Revenue, Series B, weekly demand 5,000 3.400(2) 08/15/22 5,000
Illinois State Certificate of
Participation, Series A (a) 540 4.900 07/01/99 545
Illinois State Toll Highway
Authority Highway Priority Revenue,
Series B, weekly demand (a) 4,000 3.850(2) 01/01/10 4,000
St. Clair County, Illinois
Industrial Development Board
Revenue, Series 94, weekly demand 1,000 4.200(2) 10/01/15 1,000
Schaumburg, Illinois General
Obligation, Series A, weekly demand 2,100 4.150(2) 12/01/20 2,100
Troy Grove, Illinois Revenue, weekly
demand 750 4.570(2) 05/01/10 750
</TABLE>
Tax Free Money Market Fund 98
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
Winnebago & Boone Counties, Illinois
School District Number 205 Tax
Anticipation Warrants 3,000 5.400 10/29/99 3,021
------
21,484
------
INDIANA - 3.4%
Central High School Building
Corporation, Indiana First Mortgage
(a) 930 4.250 02/01/99 930
Fort Wayne, Indiana Economic
Development Revenue, Series 83,
weekly demand 1,000 4.125(2) 12/01/03 1,000
Highland, Indiana School Town Tax
Anticipation Time Warrants 1,100 3.500 06/30/99 1,101
Mishawaka, Indiana Waterworks
Revenue Bond Anticipation Notes,
Series A 2,000 4.200 08/12/99 2,000
Penn Harris Madison, Indiana School
Corporation 850 3.350 12/31/99 850
Residential Apartments I Portfolio
CERT Trust 1996, Series A, weekly
demand (e) 740 4.050(2) 12/01/02 740
------
6,621
------
IOWA - 1.8%
Residential Apartments I Portfolio
CERT Trust 1996, Series A, weekly
demand (e) 540 4.050(2) 12/01/02 540
Storm Lake, Iowa Private College
Revenue, weekly demand 2,900 4.100(2) 12/01/03 2,900
------
3,440
------
KANSAS - 0.1%
Greystone Tax Exempt Certificate
Trust Revenue, Series 1998-1,
weekly demand (f) 157 4.130(2) 05/01/28 157
------
KENTUCKY - 1.6%
Elsmere, Kentucky Industrial
Building Revenue, semiannual demand 555 3.750(5) 02/01/06 555
Jefferson County, Kentucky School
District Financing Corporation
School Building Revenue, Series A 475 3.800 02/01/99 475
Kentucky Area Development Districts
Financing Lease Program Revenue,
Series E2, monthly demand 490 4.350(3) 12/01/31 490
Kentucky Development Finance
Authority Revenue 845 6.000 11/01/99 864
Louisville, Kentucky Industrial
Development Revenue, weekly demand 750 4.050(2) 09/01/01 750
------
3,134
------
LOUISIANA - 1.5%
New Orleans, Louisiana Industrial
Development Board Industrial
Development Revenue, weekly demand 2,100 4.050(2) 03/01/07 2,100
Orleans Parish, Louisiana School
Board General Obligation (a) 800 7.800 02/01/99 803
------
2,903
------
MARYLAND - 4.8%
Anne Arundel County, Maryland
Industrial Development Revenue,
Series C, weekly demand 2,260 4.150(2) 02/01/01 2,260
Maryland State Health & Higher
Educational Facilities Authority
Revenue,
Series B, weekly demand 4,650 4.150(2) 04/01/35 4,650
Maryland State Health & Higher
Educational Facilities Authority
Revenue,
Series D, weekly demand 1,700 4.150(2) 07/01/23 1,700
</TABLE>
99 Tax Free Money Market Fund
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
Montgomery County, Maryland
Industrial Development Revenue,
monthly demand 800 3.500(3) 04/01/14 800
------
9,410
------
MASSACHUSSETTS - 1.8%
Brockton, Massachusetts Bond
Anticipation Notes 2,000 4.000 05/18/99 2,001
New England Educational Loan
Marketing Corporation, Series E 1,500 5.000 07/01/99 1,512
------
3,513
------
MICHIGAN - 4.7%
Cedar Springs, Michigan Public
School District State Anticipation
Notes 1,700 4.500 08/23/99 1,705
Lansing, Michigan Economic
Development Corporation, semiannual
demand 2,000 3.350(5) 05/01/15 2,000
Livonia, Michigan Economic
Development Corporation, semiannual
demand 240 3.250(5) 11/15/04 240
McDonald Tax Exempt Mortgage Bond
Trust, thirteen month demand (d) 143 4.100(7) 01/15/09 143
Meridian, Michigan Economic
Development, monthly demand 455 3.500(3) 11/15/14 455
Michigan State Job Development
Authority Revenue, monthly demand 1,300 3.050(3) 11/01/14 1,300
Michigan State Job Development
Authority Revenue, weekly demand 400 4.000(2) 08/01/15 400
Northville, Michigan Economic
Development Corporation Limited
Obligation Revenue, Series P,
weekly demand 500 4.125(2) 05/01/14 500
Oakland County, Michigan Economic
Development Corporation Limited
Obligation Revenue, semiannual
demand 375 3.700(5) 08/01/15 375
Parchment, Michigan School District
State Anticipation Notes 1,000 4.250 08/26/99 1,002
Royal Oak, Michigan Hospital Finance
Authority Hospital Revenue, Series
J, daily demand 1,000 5.000(1) 01/01/03 1,000
------
9,120
------
MINNESOTA - 5.4%
Burnsville, Minnesota Industrial
Development Revenue, Series C,
weekly demand 350 4.150(2) 02/01/01 350
Capital Realty Investment Tax Exempt
Fund, Series 96-1, weekly demand 8,335 4.280(2) 12/01/04 8,335
Mendota Heights, Minnesota
Commercial Development, weekly
demand 1,550 4.200(2) 12/01/15 1,550
Minnesota State Housing Finance
Agency, Series A 190 4.400 01/01/99 190
------
10,425
------
MISSISSIPPI - 0.2%
DeSoto County, Mississippi
Industrial Development Revenue,
weekly demand 400 4.570(2) 12/01/08 400
------
MISSOURI - 4.9%
Clayton, Missouri Industrial
Development Authority Revenue,
weekly demand 1,000 4.280(2) 01/01/09 1,000
Jackson County, Missouri Industrial
Development Authority Recreational
Facilities Revenue, Series A, daily
demand 600 5.250(1) 01/11/16 600
Kansas City, Missouri Industrial
Development Authority Multi-family
Housing Revenue, weekly demand 3,900 4.300(2) 10/01/15 3,900
St. Charles County, Missouri
Industrial Development Authority
Revenue, weekly demand 2,300 4.100(2) 12/01/27 2,300
St. Louis, Missouri Industrial
Development Authority Revenue,
Series C, weekly demand 965 4.150(2) 02/01/01 965
St. Louis, Missouri Industrial
Development Authority Revenue,
Series C-1 700 4.400 08/30/99 700
------
9,465
------
</TABLE>
Tax Free Money Market Fund 100
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
NEBRASKA - 0.1%
Douglas County, Nebraska Data
Equipment Corporation Equipment
Revenue 275 3.750 11/01/99 275
------
NEW MEXICO - 0.3%
New Mexico Institute of Mining &
Technology Revenue 520 3.100 06/01/99 520
------
NEW YORK - 1.0%
New York State Job Development
Authority Revenue, Series E1 - E55 150 3.150 03/01/99 150
North Hempstead, New York Bond
Anticipation Notes 1,800 4.000 07/29/99 1,802
------
1,952
------
NORTH CAROLINA - 0.4%
Beaufort County, North Carolina
Industrial Facility & Pollution
Control Revenue, Series 85, weekly
demand 300 4.100(2) 12/01/00 300
Durham, North Carolina General
Obligation 265 4.800 02/01/99 265
Johnston County, North Carolina
General Obligation (a) 275 4.900 05/01/99 277
------
842
------
OHIO - 5.7%
Bellevue, Ohio Hospital Facilities
Revenue, semiannual demand 340 3.650(5) 03/01/17 340
Buckeye, Ohio Tax-Exempt Mortgage
Bond Trust, semiannual demand 300 4.050(5) 02/01/05 300
Cincinnati & Hamilton County, Ohio
Port Authority Revenue 390 3.300 09/01/99 390
Clermont County, Ohio Economic
Development Revenue, semiannual
demand 400 3.400(5) 12/01/09 400
Clermont County, Ohio Economic
Development Revenue, semiannual
demand 205 3.400(5) 05/01/12 205
Clermont County, Ohio Hospital
Facilities Revenue, Series A
(pre-refunded 09/01/99)(a)(b) 700 7.500 09/01/19 734
Columbus, Ohio Electric System
Revenue, monthly demand 1,300 3.300(3) 09/01/09 1,300
Cuyahoga County, Ohio Industrial
Development Revenue 160 3.250 06/01/99 160
East Muskingum, Ohio Water Authority
Water Revenue Bond Anticipation
Notes 2,500 4.320 06/24/99 2,504
Franklin County, Ohio Industrial
Development Revenue, semiannual
demand 650 3.650(5) 04/01/15 650
Franklin County, Ohio Industrial
Development Revenue, semiannual
demand 140 3.250(5) 11/01/15 140
Mahoning County, Ohio Industrial
Development Revenue, Series A,
weekly demand 5 4.050(2) 10/01/00 5
Mahoning County, Ohio Industrial
Development Revenue, Series B,
weekly demand 30 4.050(2) 10/01/00 30
McDonald Tax Exempt Mortgage Bond
Trust, thirteen month demand (d) 669 4.100(7) 01/15/09 669
Ohio State Higher Educational
Facilities Community College
Revenue, weekly demand 585 4.000(2) 09/01/20 585
Scioto County, Ohio Health Care
Facilities, semiannual demand 670 3.000(5) 12/01/15 670
Stark County, Ohio Health Care
Facilities, semiannual demand 1,595 3.650(5) 09/15/16 1,595
Trumbull County, Ohio Industrial
Development Revenue, Series A,
weekly demand 445 4.050(2) 04/01/04 445
------
11,122
------
OKLAHOMA - 2.7%
Muskogee, Oklahoma Industrial Trust
Revenue, weekly demand 1,990 4.150(2) 12/01/15 1,990
Oklahoma State Industrial Authority
Revenue, Series B 2,000 3.350 08/15/23 2,000
</TABLE>
101 Tax Free Money Market Fund
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
Tulsa County, Oklahoma Industrial
Authority Health Care Revenue,
semiannual demand 1,250 3.200(5) 12/15/08 1,250
-------
5,240
-------
OREGON - 1.0%
Hillsboro, Oregon Graduate Institute 1,850
Revenue, weekly demand 1,850 4.100(2) 08/01/11 -------
PENNSYLVANIA - 2.9%
Berks County, Pennsylvania
Industrial Development Authority,
weekly demand 1,250 4.125(2) 12/01/04 1,250
Commonwealth Tax-Exempt Mortgage
Bond Trust, semiannual demand 305 3.250(5) 11/01/05 305
Delaware County, Pennsylvania
Industrial Development Authority
Pollution Control Revenue, Series
95, daily demand 1,000 5.000(1) 10/01/19 1,000
Erie, Pennsylvania Higher Education
Building Authority College Revenue,
Series A (pre-refunded 6/01/99)(b) 1,000 8.500 06/01/15 1,038
Lebanon County, Pennsylvania Health
Facilities Authority Health Center
Revenue, weekly demand 200 4.100(2) 12/01/23 200
McDonald Tax Exempt Mortgage Bond
Trust, thirteen month demand (d) 143 4.100(7) 01/15/09 143
Montgomery County, Pennsylvania
Industrial Development Authority
Revenue, weekly demand 800 4.050(2) 04/01/04 800
Northampton County, Pennsylvania
Higher Education Authority Revenue
(pre-refunded 11/15/99)(a)(b) 860 7.100 11/15/09 905
------
5,641
------
RHODE ISLAND - 1.0%
Cranston, Rhode Island Bond
Anticipation Notes 2,000 4.500 06/28/99 2,007
------
SOUTH CAROLINA - 0.3%
South Carolina State Public Service
Authority Revenue, Series B (a) 205 5.000 01/01/99 205
Spartanburg, South Carolina
Sanitation Sewer District 300 5.000 03/01/99 300
------
505
------
SOUTH DAKOTA - 0.8%
Sioux Falls, South Dakota Industrial
Development Revenue, weekly demand 1,620 3.850(2) 06/01/06 1,620
------
TENNESSEE - 2.8%
Franklin County, Tennessee Health &
Educational Facilities Revenue,
monthly demand 1,610 3.650(3) 09/01/10 1,610
Greystone Tax Exempt Certificate
Trust Revenue, Series 1998-1,
weekly demand (f) 1,190 4.130(2) 05/01/28 1,190
Knox County, Tennessee Industrial
Development Revenue, monthly demand
(a) 2,700 3.550(3) 12/01/14 2,700
------
5,500
------
TEXAS - 2.3%
Abilene, Texas Independent School
District (pre-refunded 02/15/99)(b) 500 6.400 02/15/02 502
Harlingen, Texas Construction
Independent School District General
Obligation (pre-refunded
08/15/99)(b) 300 6.750 08/15/04 306
Harris County, Texas Health
Facilities Development Corporation
Revenue,
Series A, weekly demand 200 4.150(2) 11/01/25 200
Houston, Texas Hotel Occupancy
Revenue, Series A (a) 500 7.000 07/01/99 509
Hurst, Euless & Bedford, Texas
Independent School District General
Obligation, Series 1991
(pre-refunded 08/15/99)(b) 620 6.500 08/15/04 645
</TABLE>
Tax Free Money Market Fund 102
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
North Richland Hills, Texas
Waterworks & Sewer Certificates of
Participation 500 5.125 02/15/99 501
San Antonio, Texas Electric & Gas
Revenue, Series B,
(pre-refunded 02/01/99)(b) 1,000 5.000 02/01/16 1,016
Spring Branch, Texas Independent
School District General Obligation 705 6.250 02/15/99 708
------
4,387
------
UTAH - 2.3%
West Valley City, Utah Industrial
Development Revenue, daily demand 4,550 5.100(1) 11/01/11 4,550
------
VIRGINIA - 3.1%
Greystone Tax Exempt Certificate
Trust Revenue, Series 1998-1,
weekly demand (f) 560 4.130(2) 05/01/28 560
Harrisonburg, Virginia Redevelopment
& Housing Authority Multi-family
Housing Revenue, annual demand 1,000 3.750(6) 02/01/26 1,000
Harrisonburg, Virginia Redevelopment
& Housing Authority Multi-family
Housing Revenue, Series A, annual
demand 3,495 3.750(6) 02/01/26 3,495
Norfolk, Virginia Industrial
Development Authority Revenue,
weekly demand 1,075 4.125(2) 03/01/16 1,075
------
6,130
------
WASHINGTON - 3.1%
Chelan-Douglas, Washington Public
Transportation (a) 315 3.850 05/01/99 315
King County, Washington School
District Number 403 Renton General
Obligation 765 4.000 06/01/99 768
King County, Washington School
District Number 403 Renton General
Obligation 680 4.000 12/01/99 685
Washington State Housing Finance
Commission Nonprofit Housing
Revenue, daily demand 2,200 5.150(1) 01/21/01 2,200
Washington State Housing Finance
Commission Nonprofit Housing
Revenue, daily demand 200 4.800(1) 01/01/07 200
Washington State Housing Finance
Commission Nonprofit Housing
Revenue, weekly demand 725 3.900(2) 07/01/11 725
Washington State Public Power Supply
System Nuclear Project Number 1
Revenue, Series B (pre-refunded
01/01/00)(b) 1,000 7.250 07/01/03 1,059
-------
5,952
-------
WEST VIRGINIA - 1.1%
Marshall County, West Virginia
Pollution Control Revenue, weekly
demand 1,000 4.250(2) 03/01/26 1,000
West Virginia State Hospital Finance
Authority Hospital Revenue, weekly
demand 1,100 4.050(2) 10/01/10 1,100
------
2,100
------
WISCONSIN - 6.8%
Fall Creek, Wisconsin School
District Tax & Revenue Anticipation
Notes 890 3.810 09/30/99 890
Hartford, Wisconsin Joint School
District Number 1, Tax & Revenue
Anticipation Promissory Notes 1,000 3.530 10/29/99 1,001
Minocqua, Hazelhurst and Lake
Tomahawk, Wisconsin Joint School
District Number 1, Tax & Revenue
Anticipation Promisory Notes 850 3.820 08/31/99 850
Richfield, Wisconsin Joint School
District Number 1, Tax & Revenue
Anticipation Promissory Notes 400 3.680 10/29/99 400
Wisconsin School District Temporary
Borrowing Program Certificate of
Participation, Series B2 1,000 3.900 10/08/99 1,000
Wisconsin State Health & Educational
Facilities Authority Revenue, daily
demand 7,100 5.150(1) 11/01/17 7,100
</TABLE>
103 Tax Free Money Market Fund
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DATE VALUE
(000) RATE OF (000)
$ % MATURITY* $
--------- -------- --------- ------
<S> <C> <C> <C> <C>
Wittenberg-Birnamwood, Wisconsin
School District Tax & Revenue
Anticipation Promissory Note 2,000 3.920 09/30/99 2,001
------
13,242
------
WYOMING - 0.5%
Lincoln County, Wyoming School
District Number 002 Grant
Anticipation Warrants 1,000 4.000 06/30/99 1,000
------
TOTAL INVESTMENTS - 103.7%
(amortized cost $201,834)(c) 201,834
OTHER ASSETS AND LIABILITIES, NET - (7,171)
(3.7)% -------
NET ASSETS - 100.0% 194,663
=======
</TABLE>
(a) Bond is insured by AMBAC, FGIC, or MBIA.
(b) Pre-refunded: These bonds are collateralized by U.S. Treasury securities,
which are held in escrow by a trustee and used to pay principal and interest
in the tax-exempt issue and to retire the bonds in full at the earliest
refunding date. The rate noted is for descriptive purposes; effective yield
may vary.
(c) The cost for federal income tax purposes is the same as shown above.
(d) Multi-State bond issue including Michigan, Ohio, and Pennsylvania.
(e) Multi-State bond issue including Georgia, Indiana, and Iowa.
(f) Multi-State bond issue including Arizona, Florida, Georgia, Kansas,
Tennessee, and Virginia.
* 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) Annual
(7) Thirteen-month
The accompanying notes are an integral part of the financial statements.
Tax Free Money Market Fund 104
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
DECEMBER 31, 1998
QUALITY RATINGS AS A % OF MARKET VALUE++ (Unaudited)
<TABLE>
<S> <C>
VMIG1 or SP-1 93%
P1 7
------------
100%
============
</TABLE>
ECONOMIC SECTOR EMPHASIS AS A % OF MARKET VALUE (Unaudited)
<TABLE>
<S> <C>
General Obligation 24%
Industrial Revenue Bonds 22
Education Revenue 21
Housing Revenue 19
Healthcare Revenue 9
Pollution Control Revenue 3
Utility Revenue 2
-----------
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."
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.
105 Tax Free Money Market Fund
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
ASSETS
Investments at amortized cost which approximates
market (Note 2) ............................................... $ 201,834
Receivables:
Interest ........................................................ 1,655
Investments sold ................................................ 4,995
---------
Total Assets .................................................. 208,484
LIABILITIES
Payables:
Dividends ........................................... $ 497
Investments purchased ............................... 13,139
Accrued fees to affiliates (Note 4) ................ 66
Other accrued expenses .............................. 119
---------
Total Liabilities ............................................. 13,821
---------
NET ASSETS ....................................................... $ 194,663
---------
NET ASSETS CONSIST OF:
Accumulated net realized gain (loss) ............................ $ (5)
Shares of beneficial interest .................................... 1,947
Additional paid-in capital ....................................... 192,721
---------
NET ASSETS ....................................................... $ 194,663
---------
NET ASSET VALUE, offering and redemption price per share:
($194,662,708 divided by 194,667,896 shares of $.01 par value
shares of beneficial interest outstanding) ................... $ 1.00
---------
The accompanying notes are an integral part of the financial statements.
Tax Free Money Market Fund 106
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF OPERATIONS
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
Interest .......................................................... $ 6,237
EXPENSES (Notes 2 and 4):
Advisory fees ....................................... $ 421
Administrative fees ................................. 9
Custodian fees ...................................... 74
Transfer agent fees ................................. 105
Professional fees ................................... 20
Registration fees ................................... 66
Trustees' fees ...................................... 4
Miscellaneous ....................................... 56
-------
Expenses before reductions .......................... 755
Expense reductions (Note 4) ........................ (172)
-------
Expenses, net ................................................... 583
-------
Net investment income .............................................. 5,654
REALIZED GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments .......................... (5)
-------
Net increase in net assets resulting from operations ............... $ 5,649
-------
The accompanying notes are an integral part of the financial statements.
107 Tax Free Money Market Fund
<PAGE>
TAX FREE MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
Amounts in thousands
YEARS ENDED DECEMBER 31,
1998 1997
--------- ---------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................... $ 5,654 $ 3,793
Net realized gain (loss) ........................... (5) --
--------- ---------
Net increase in net assets resulting from
operations ........................................ 5,649 3,793
--------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................... (5,654) (3,793)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund
share transactions (Note 6) ........................ 63,943 28,518
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .......... 63,938 28,518
NET ASSETS
Beginning of period ................................. 130,725 102,207
--------- ---------
End of period ....................................... $ 194,663 $ 130,725
--------- ---------
The accompanying notes are an integral part of the financial statements.
Tax Free Money Market Fund 108
<PAGE>
TAX FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<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(b) ..................... .0331 .0355 .0329 .0370 .0279
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS:
Net investment income ......................... (.0331) (.0355) (.0329) (.0370) (.0279)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (%) ............................... 3.36 3.61 3.35 3.76 2.83
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ...... 194,663 130,725 102,207 78,000 100,819
Ratios to average net assets(%):
Operating expenses, net (a) ................ .34 .28 .42 .48 .40
Operating expenses, gross (a) .............. .44 .38 .42 .48 .40
Net investment income ....................... 3.29 3.55 3.28 3.69 2.84
</TABLE>
(a) See Note 4 for current period amounts.
(b) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
109 Tax Free Money Market Fund
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 nine 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.
At its meeting on April 27, 1998, the Investment Company's Board of Trustees
approved a plan to rename the "Limited Volatility Tax Free Fund" the "Tax
Exempt Bond Fund." The change was approved by the shareholders at a meeting on
November 19, 1998 and becomes effective January 15, 1999. Also, in an effort to
meet the best interest of shareholders of the Volatility Constrained Bond Fund
(part of the series of the Investment Company not presented herein) and the
Fixed Income II Fund, the Investment Company's Board of Trustees approved a
plan of reorganization for the merger of the two Funds. The newly formed Fund
will be the Short-Term Bond Fund. The merger was approved by the shareholders
at a meeting on November 19, 1998. The effective date for the merger is
expected to be February 26, 1999.
Effective May 18, 1998, pursuant to approval of the Investment Company's Board
of Trustees, Class C shares were renamed Class E shares. As of July 8, 1996,
the Real Estate Securities, Emerging Markets Funds and Special Growth have
available Class S and Class E 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 E
shares are charged a shareholder servicing fee of 0.25% of average daily net
assets. Class S shares which are reported herein are charged no such fees.
Prior to May 18, 1998 Class E shares were charged a 12b-1 distribution fee and
a shareholder servicing fee of 0.40% and 0.25% of average net assets,
respectively.
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.
Notes to Financial Statements 110
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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, Tax Free Money
Market, U.S. Government Money Market, and Money Market Funds may lend portfolio
securities as approved by the Board of Trustees on April 27, 1998.
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 ("REIT's") 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 of
capital by the trusts are treated by the Fund, respectively, as realized
capital gains or an adjustment to 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: All premiums and discounts, including original
issue discounts, for the Funds 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, 1998 to December 31,
1998, the Real Estate Securities Fund, Emerging Markets Fund, Special Growth
Fund, Fixed II Fund, Money Market Fund, U.S. Government Money Market Fund and
Tax Free Money Market Fund incurred net realized capital losses of $2,518,944,
$14,723,700, $157,599, $5,555, $5,784, $545 and $884, respectively. As
permitted by tax regulations, these Funds intend to elect to defer these losses
and treat them as arising in the year ending December 31, 1999.
At December 31, 1998, 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>
12/31/99 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 TOTALS
--------- ---------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Securities $ -- $ -- $ -- $ -- $ -- $ 2,693,062 $ 2,693,062
Emerging Markets -- -- 2,887,175 348,806 -- 56,335,864 59,571,845
Equity T -- -- -- -- -- 655,772 655,772
Fixed II -- 3,290,212 698,949 1,746,912 574,853 -- 6,310,926
Limited Volatility Tax 383,404 345,504 110,634 15,075 -- 141,152 995,769
Free
Money Market -- -- 41,009 814 -- 3,245 45,068
U.S. Government Money -- 1,309 4,913 3,331 1,570 762 11,885
Market
Tax Free Money Market -- -- -- -- 1,583 4,102 5,685
</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, 1998 were as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Real Estate Securities $578,293,067 $ 32,715,756 $(42,277,755) (9,561,999)
Emerging Markets 349,508,556 27,102,958 (85,696,153) (58,593,195)
Special Growth 519,394,094 117,066,971 (33,604,005) 83,462,966
Equity T 233,088,633 76,321,558 (4,163,329) 72,158,229
Limited Volatility Tax Free 124,725,548 2,565,276 (13,887) 2,551,389
Fixed II 257,712,043 1,010,170 (621,406) 388,764
</TABLE>
111 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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.
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, 1998:
<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) PAID-IN CAPITAL
-------------- ------------ ---------------
<S> <C> <C> <C>
Real Estate Securities $ 8,998 $ (8,998) $ --
Emerging Markets (221,372) 221,372 --
Equity T 2,225 -- (2,225)
Limited Volatility Tax
Free 58,808 17,292 (76,100)
Fixed II (24,077) 24,077 --
Special Growth 89,115 258,367 (347,482)
</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 "Advisor"). 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 E shares will pay shareholder servicing fees
along with other expenses that may be attributable to that Class. Prior to May
18, 1998, Class E shares paid a 12b-1 distribution fee.
DEFERRED ORGANIZATION EXPENSES: Organization and initial registration costs of
the Equity T Fund 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.
Notes to Financial Statements 112
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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'
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, 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, 1998, 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 for the Emerging Markets Fund 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.
113 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1998, 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>
Real Estate Securities $345,992,091 $247,025,225 Fixed II $ 97,996,439 $89,451,042
Emerging Markets 265,960,924 184,852,774 Equity T 237,415,177 97,133,405
Special Growth 791,415,923 755,508,526 Limited Volatility Tax Free 123,290,578 78,122,598
</TABLE>
Fixed II purchases and sales of U.S. Government and Agency obligations
(excluding short-term investments, options, futures and repurchase agreements)
were $229,766,606 and $211,052,468.
Money Market purchases, sales and maturities of securities (excluding U.S.
Government and Agency obligations and repurchase agreements) were
$14,855,684,377, $203,864,021 and $14,073,847,921 respectively. Purchases,
sales and maturities of U.S. Government and Agency obligations (excluding
repurchase agreements) were $10,001,900, $6,873,402 and $10,000,000.
U.S. Government Money Market purchases, sales and maturities of U.S. Government
and Agency obligations (excluding repurchase agreements) were $519,927,556,
$27,060,027 and $514,510,706, respectively.
Tax Free Money Market purchases, sales and maturities of short-term tax-exempt
obligations were $541,387,951, $439,228,643 and $37,823,998, respectively.
FUTURES CONTRACTS: Fund transactions in written options and futures contracts
for the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
EQUITY T FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- -------------
<S> <C> <C>
Outstanding December 31, 1997 10 $ 2,416,750
Opened 128 34,317,075
Closed (126) (33,099,995)
---- ------------
Outstanding December 31, 1998 12 $ 3,633,830
==== ============
<CAPTION>
SPECIAL GROWTH FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
---------- -------------
<S> <C> <C>
Outstanding December 31, 1997 209 $ 36,950,817
Opened 1,082 241,619,878
Closed (1,149) (244,689,702)
------ -------------
Outstanding December 31, 1998 142 $ 33,880,993
====== =============
</TABLE>
(1) The aggregate face value of contracts is computed on the date each contract
was opened.
SECURITIES LENDING: Effective April 27, 1998, the Investment Company resumed
its securities lending program. The program allows each Fund to loan securities
with a value up to 33 1/3% of its total assets to certain brokers. The Fund
receives cash (U.S. currency), U.S. Government or U.S. Government agency
obligations as collateral against the loaned securities. To the extent that a
loan is secured by cash collateral, such collateral shall be invested by Morgan
Stanley Trust Company ("MSTC") in short-term instruments, money market mutual
funds, and such other short-term investments, provided the investments meet
certain quality and diversification requirements. Under the securities-lending
arrangement, the collateral received is recorded on the Fund's statement of
assets and liabilities along with the related obligation to return the
collateral. In those situations where the Company has relinquished control of
securities transferred, it derecognizes the securities and records a receivable
from the counterparty.
Notes to Financial Statements 114
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
Income generated from the investment of cash collateral, less negotiated rebate
fees paid to participating brokers and transaction costs, is divided between
the Fund and MSTC and is included as interest income for the Fund. To the
extent that a loan is secured by non-cash collateral, brokers pay the Fund
negotiated lenders' fees, which are divided between the Fund and MSTC and are
included as interest income for the Fund. All collateral received will be in an
amount at least equal to 100% (for fixed income securities), 102% (for loans of
U.S. equity securities) or 105% (for non-U.S. equity securities) of the market
value of the loaned securities at the inception of each loan. This collateral
must be maintained at not less than the above respective percentages of the
market value of the loaned securities during the period of the loan. Should the
borrower of the securities fail financially, there is a risk of delay in
recovery of the securities or loss of rights in the collateral. Consequently,
loans are made only to borrowers which are deemed to be of good financial
standing. As of December 31, 1998, the value of outstanding securities on loan
and the value of collateral amounted to as follows:
<TABLE>
<CAPTION>
VALUE OF VALUE OF
SECURITIES ON VALUE OF SECURITIES ON VALUE OF
LOAN COLLATERAL LOAN COLLATERAL
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Real Estate Securities $ 6,899,625 $ 7,029,000 Fixed II $25,091,201 $25,252,969
Emerging Markets 12,445,721 12,427,034 Equity T 4,526,969 4,656,000
Special Growth 38,737,659 38,853,247
</TABLE>
4. RELATED PARTIES
ADVISOR: FRIMCo operates and administers all of the Funds which comprise the
Investment Company, and advises the Money Market and U.S. Government Money
Market Funds. FRIMCo is a wholly owned subsidiary of Frank Russell Company, a
wholly owned subsidiary of The Northwestern Mutual Life Insurance Company.
Frank Russell Company 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, 1998, the advisory fee paid to FRIMCo, for the
Funds listed below, in accordance with the Investment Company's Advisory
Agreement with that firm, amounted to $21,664,788 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. Effective
December 1, 1998, the advisory fee annual rates were reduced by the
Administrator fee of .05%, the new rates are:
<TABLE>
<CAPTION>
ANNUAL RATE ANNUAL RATE
----------- -----------
<S> <C> <C> <C>
Real Estate Securities 0.80% Limited Volatility Tax Free 0.30%
Emerging Markets 1.15 Money Market 0.20
Special Growth 0.90 Tax Free Money Market 0.20
Fixed II 0.45 U.S. Government Money Market 0.20
Equity T 0.70
</TABLE>
The Advisor contract also provides that if any Fund's expenses (exclusive of
interest and taxes) exceed specified limits imposed by the Advisor on an annual
basis, such excess will be paid by FRIMCo.
The Advisor has voluntarily agreed to waive a portion of its 0.70% advisory 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. There were no waivers by the Advisor for
the year ended December 31, 1998.
The Advisor has voluntarily agreed to waive 0.10% of its 0.20% advisory fee for
the Tax Free Money Market Fund. The amount of such waiver for the year ended
December 31, 1998 was $171,845.
Prior to June 15, 1998, the Advisor voluntarily agreed to waive 0.13% of its
0.20% advisory fee for the U.S. Government Money Market Fund. Effective June
15, 1998, the Advisor has voluntarily agreed to waive its advisory fee, up to
the full amount of that fee, equal to the amount by which the Fund's total
operating expenses exceed 0.30% of the Fund's average daily net assets on an
annual basis. The amount of such waiver for the year ended December 31, 1998
was $310,748. In addition, FRIMCo reimbursed the U.S. Government Money Market
Fund $33,870 for expenses over the cap in 1998.
The Advisor has voluntarily agreed to waive 0.15% of its 0.20% management fee
for the Money Market Fund. The amount of such waiver for the year ended
December 31, 1998 was $1,631,406.
115 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
FRIMCo calculates its advisory fee based on average daily net assets for each
Fund less any advisory fee incurred on assets invested in the Money Market Fund
(see Note 5) thereby eliminating any duplication of fees.
ADMINISTRATOR: Effective December 1, 1998, the Investment Company's Board of
Trustee approved a plan to pay a 0.05% fee of the average daily net assets of
the fund to FRIMCo, in accordance with the Investment Company's Advisory
agreement with that firm. The fee paid to FRIMCo for the Funds listed above
amounted to $166,648 before waivers.
ANALYTIC SERVICES: Fees for analytic services provided to the Funds are paid or
accrued to Russell/Mellon Analytical Services, an affiliate of the Investment
Company. Russell/Mellon Analytical Services provides TruVP System to the Funds,
pursuant to a written Service Agreement. The TruVP System provides analytics
used by the investment department.
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,
1998 were $3,204,251.
DISTRIBUTOR AND SHAREHOLDER SERVICING: Prior to May 18, 1998, the Investment
Company had a Distribution Plan pursuant to Rule 12b-1 (the "Plan") under the
1940 Act. Under this Plan, the Investment Company was 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 were primarily intended to result in the sale of the
Class C shares subject to the Distribution Plan. Effective May 18, 1998, Class
C shares of the Real Estate Securities Fund and Special Growth Fund were
renamed Class E shares and the 12b-1 fee was eliminated.
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 E 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 prior to May 18, 1998 for distribution services relating to
Class E are included in the accompanying Statements of Operations. Currently,
the Distributor receives no compensation from the Investment Company for its
services relating to distributing the Class S and Class E shares.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which the Funds 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 E shares of the Funds. The amounts paid to the
Distributor for shareholder services relating to Class E are included in the
accompanying Statements of Operations.
The shareholder servicing payments of the Real Estate Securities Fund, Special
Growth Fund, and (as of September 22, 1998) Emerging Markets Fund shall not
exceed 0.25% of the average daily net assets of a Fund's Class E shares on an
annual basis.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1998 WERE AS FOLLOWS:
<TABLE>
<CAPTION>
SHAREHOLDER
SERVICING &
ADVISORY ADMINISTRATION ANALYTIC TRANSFER DISTRIBUTION
FEES FEES SERVICE FEES AGENT FEES FEES TOTALS
---------- -------------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Securities $ 389,519 $ 24,457 $ 5 $ 127,074 $ 454 $ 541,509
Emerging Markets 289,889 12,635 4,332 100,946 10 407,812
Special Growth 449,516 25,052 3,425 82,994 3,234 564,221
Fixed II 96,208 10,846 -- 19,293 -- 126,347
Equity T 170,347 12,119 1,680 44,630 -- 228,776
Limited Volatility Tax Free 32,130 5,355 -- 7,605 -- 45,090
U.S. Government
Money Market -- -- -- 28,918 -- 28,918
Tax Free Money Market 17,345 8,672 -- 39,586 -- 65,603
Money Market 60,928 60,928 -- 3,598 -- 125,454
---------- ---------- ---------- --------- -------- -----------
$1,505,882 $ 160,064 $ 9,442 $ 454,644 $ 3,698 $ 2,133,730
========== ========== ========== ========= ======== ===========
</TABLE>
Notes to Financial Statements 116
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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. The amount retained by
Frank Russell Securities, Inc. for the year ended December 31, 1998 was as
follows:
Special Growth $23,061
Additionally, the Fund paid brokerage commissions to non-affiliated brokers who
provided brokerage and research service 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 $32,491 for the year ended December 31,
1998, and were allocated to each Fund and Class, where appropriate, on a pro
rata basis, including 19 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, 1998, $81,058,000 of the Money
Market Fund's net assets represents investments by these Funds and $694,808,000
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
------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
REAL ESTATE SECURITIES
CLASS S
Proceeds from shares
sold 9,286,206 7,684,555 $254,637,476 $230,371,098
Proceeds from
reinvestment
of distributions 1,114,356 1,795,828 30,225,625 53,609,700
Payments for shares (6,759,461) (4,804,495) (178,741,546) (145,560,311)
redeemed ------------------------------------------------------------
Net increase 3,641,101 4,675,888 106,121,555 138,420,487
(decrease) ------------------------------------------------------------
CLASS E (a)
Proceeds from shares
sold 28,391 10,282 715,067 312,091
Proceeds from
reinvestment of
distributions 375 2 9,219 56
Payments for shares (6,530) (1,234) (183,042) (38,088)
redeemed ------------------------------------------------------------
Net increase 22,236 9,050 541,244 274,059
(decrease) ------------------------------------------------------------
Total increase 3,663,337 4,684,938 $106,662,799 $138,694,546
(decrease) ------------------------------------------------------------
------------------------------------------------------------
EMERGING MARKETS
CLASS S
Proceeds from shares
sold 22,508,124 14,335,518 $221,963,938 $190,158,016
Proceeds from
reinvestment
of distributions 188,272 247,790 2,070,086 3,101,136
Payments for shares (16,241,312) (8,321,103) (149,674,980) (108,152,054)
redeemed -------------------------------------------------------------
Net increase 6,455,084 6,262,205 74,359,044 85,107,098
(decrease) -------------------------------------------------------------
</TABLE>
(a) Effective May 18, 1998, Class C was renamed Class E.
117 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
<TABLE>
<CAPTION>
SHARES DOLLARS
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING MARKETS
CLASS E (a)(b)
Proceeds from shares
sold 4,558 -- $ 37,476 $ --
Proceeds from
reinvestment
of distributions -- -- -- --
Payments for shares
redeemed -- -- -- --
--------------------------------------------------------
Net increase
(decrease) 4,558 -- 37,476 --
--------------------------------------------------------
Total increase
(decrease) 6,459,642 6,262,205 $ 74,396,520 $ 85,107,098
--------------------------------------------------------
--------------------------------------------------------
SPECIAL GROWTH
CLASS S
Proceeds from shares
sold 6,148,876 4,899,155 $275,512,884 $218,414,199
Proceeds from
reinvestment
of distributions 617,896 1,184,723 25,944,325 51,369,028
Payments for shares
redeemed (5,540,547) (3,197,051) (242,340,372) (141,074,274)
--------------------------------------------------------
Net increase
(decrease) 1,226,225 2,886,827 59,116,837 128,708,953
--------------------------------------------------------
CLASS E (a)
Proceeds from shares
sold 98,025 52,918 4,007,961 2,414,652
Proceeds from
reinvestment
of distributions 5,154 2 203,264 99
Payments for shares
redeemed (29,520) (5,846) (1,255,494) (276,164)
--------------------------------------------------------
Net increase
(decrease) 73,659 47,074 2,955,731 2,138,587
--------------------------------------------------------
Total increase
(decrease) 1,299,884 2,933,901 $ 62,072,568 $130,847,540
--------------------------------------------------------
--------------------------------------------------------
FIXED INCOME II
Proceeds from shares
sold 6,088,176 7,036,585 $112,706,722 $129,655,206
Proceeds from
reinvestment
of distributions 604,269 641,394 11,141,452 11,742,346
Payments for shares
redeemed (5,088,094) (7,319,010) (94,296,121) (135,131,042)
--------------------------------------------------------
Total increase
(decrease) 1,604,351 358,969 $ 29,552,053 $ 6,266,510
--------------------------------------------------------
--------------------------------------------------------
EQUITY T
Proceeds from shares
sold 10,018,318 6,151,525 $157,138,235 $ 77,850,485
Proceeds from
reinvestment
of distributions 66,849 32,047 1,141,887 433,594
Payments for shares
redeemed (1,253,400) (165,627) (19,677,370) (2,158,852)
-------------------------------------------------------
Total increase
(decrease) 8,831,767 6,017,945 $138,602,752 $ 76,125,227
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(a) Effective May 18, 1998, Class C was renamed Class E.
(b) Share transactions for Class E for the year ended December 31, 1998 are for
the period September 22, 1998 (commencement of sale of shares) to December
31, 1998.
Notes to Financial Statements 118
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY SPECIALTY FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
<TABLE>
<CAPTION>
SHARES DOLLARS
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
LIMITED VOLATILITY TAX
FREE
Proceeds from shares
sold 3,941,290 2,531,242 $ 83,965,595 $ 53,259,367
Proceeds from
reinvestment
of distributions 140,598 103,927 2,994,079 2,187,639
Payments for shares
redeemed (1,973,744) (1,870,802) (42,054,115) (39,334,693)
--------------------------------------------------------
Total net increase
(decrease) 2,108,144 764,367 $44,905,559 $16,112,313
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ON A CONSTANT DOLLAR BASIS
-----------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
MONEY MARKET
Proceeds from shares sold 12,024,642,035 8,643,687,722
Proceeds from reinvestment of distributions 17,841,290 1,300,153
Payments for shares redeemed (11,363,736,675) (8,215,637,307)
--------------- --------------
Total net increase (decrease) 678,746,650 429,350,568
=============== ===============
U.S. GOVERNMENT MONEY MARKET
Proceeds from shares sold 431,194,201 667,733,205
Proceeds from reinvestment of distributions 6,806,551 9,531,602
Payments for shares redeemed (458,188,993) (729,577,537)
--------------- --------------
Total net increase (decrease) (21,188,241) (52,312,730)
=============== ===============
TAX FREE MONEY MARKET
Proceeds from shares sold 367,890,405 267,746,557
Proceeds from reinvestment of distributions 3,257,832 1,922,212
Payments for shares redeemed (307,204,928) (241,151,219)
--------------- --------------
Total net increase (decrease) 63,943,309 28,517,550
=============== ===============
</TABLE>
7. DIVIDENDS
On February 1, 1999, the Board of Trustees declared the following dividend
from net investment income payable on February 4, 1999, to shareholders of
record on February 2, 1999:
Limited volatility Tax Free (Tax Exempt Bond Fund) $ 0.0689
8. BENEFICIAL INTEREST
As of December 31, 1998, the following Funds have one or more shareholders
with shares of beneficial interest of greater than 10% of the total
outstanding shares of each respective Fund or Class: Emerging Markets - Class
S 12.1%, Emerging Markets - Class E 12.8%, 35.1% and 51.3%, Special Growth -
Class E 16.0% and 49.3%, Equity T 10.4% and 15.5%, Tax Free Money Market
28.0%, and Real Estate Securities - Class E 11.9% and 40.7%.
9. SUBSEQUENT EVENTS
On January 15, 1999, the Funds began offering Class C shares under a
Distribution Plan with a 12b-1 fee payment of up to 0.75% of the average daily
net assets of a Fund's Class C shares. Under the Plan, the Class C shares of
the Real Estate Securities Fund, Special Growth Fund and (as of September 22,
1998) Emerging Markets Fund do not pay for unreimbursed expenses of the
Distributor including amounts expended by the Distributor in excess of amounts
received by it from the Funds, 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 Funds under the Distribution Plan.
119 Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Frank Russell Investment Company:
In our opinion, the accompanying statements of assets and liabilities, including
the statements of net assets, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the series of Frank Russell
Investment Company (in this report comprised of Real Estate Securities, Emerging
Markets, Special Growth, Fixed Income II, Limited Volatility Tax Free, Equity T,
Money Market, U.S. Government Money Market, and Tax Free Money Market (the
"Funds")) at December 31, 1998, and the results of their operations, the changes
in their net assets and the financial highlights for the periods indicated
therein, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of investments owned at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
Report of Independent Accountants 120
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
SPECIALTY FUNDS
TAX INFORMATION
December 31, 1998 (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, 1998:
TOTAL LONG-TERM
CAPITAL GAINS
---------------
Real Estate Securities $ 7,899,291
Equity T 77,852
Special Growth 30,812,289
121 Tax Information
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
SPECIALTY FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS
December 31, 1998
There was a Special Meeting in Lieu of Annual Meeting of Shareholders of the
Frank Russell Investment Company (the "Investment Company") held at 909 A
Street, Tacoma, Washington on November 19, 1998.
THE FOLLOWING MATTERS WERE VOTED UPON AT THE MEETING
THE RESULTS OF EACH VOTE ACCOMPANY THE DESCRIPTION OF EACH MATTER
- -----------------------------------------------------------------
1. This item number was reserved for a matter affecting another FRIC Fund of the
Investment Company.
2. To elect the members of the Board of Trustees of the Investment Company.
VOTE:
-----
<TABLE>
<CAPTION>
FOR WITHHELD
------------------ ----------------
<S> <C> <C>
Lynn L. Anderson 1,142,054,288.045 2,131,664.459
Paul E. Anderson 1,139,319,894.878 2,166,057.626
Paul Anton, PhD. 1,141,736,993.856 2,448,958.648
William E. Baxter 1,141,722,018.319 2,463,934.185
Lee C. Gingrich 1,142,034,296.045 2,161,656.459
Eleanor W. Palmer 1,141,728,049.319 2,457,903.185
</TABLE>
3. To ratify the selection of PricewaterhouseCoopers LLP as the Investment
Company's independent accountants.
VOTE:
-----
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
----------------- ------------ ----------------
<S> <C> <C>
1,141,762,608.691 732,463.728 1,690,880.085
</TABLE>
4. To approve a proposed advisory agreement with Frank Russell Investment
Management Company ("FRIMCo"), the current investment manager of the Investment
Company, restructuring the manner in which services are provided to the Funds,
providing for compensation to FRIMCo for managing certain additional assets of
the Funds.
VOTE:
-----
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
---------------- ------------ --------------
<S> <C> <C> <C>
Special Growth Fund 12,193,268.091 83,654.600 86,815.541
Limited Volatility Tax Free
Fund 5,345,648.344 2,025.646 10,757.566
Real Estate Securities Fund 21,256,075.976 46,643.031 68,353.946
US Government Money Market
Fund 122,664,948.280 95,213.950 698,064.590
Tax Free Money Market Fund 162,670,968.100 4,102.220 2,777.000
Emerging Markets Fund 31,426,304.864 52,190.910 66,495.211
Fixed Income II Fund 13,216,778.082 0.000 12,762.000
Equity T Fund 12,245,362.296 16,516.000 43,028.217
Money Market Fund 401,437,047.080 1,076.520 3,783.090
</TABLE>
Matter Submitted to a Vote of Shareholders 122
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
SPECIALTY FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
5. To approve a proposed advisory agreement with FRIMCo, to take effect upon the
closing of the acquisition of Frank Russell Company by The Northwestern Mutual
Life Insurance Company.
VOTE:
-----
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ----------- --------------
<S> <C> <C> <C>
Special Growth Fund 12,182,915.871 108,316.712 72,505.649
Limited Volatility Tax Free
Fund 5,339,010.633 6,831.646 12,589.277
Real Estate Securities Fund 21,239,535.692 52,665.900 78,871.361
US Government Money Market
Fund 122,351,827.830 103,010.690 1,003,388.300
Tax Free Money Market Fund 162,673,745.100 4,102.220 0.000
Emerging Markets Fund 31,400,906.088 65,015.279 79,069.618
Fixed Income II Fund 13,216,778.082 0.000 17,762.000
Equity T Fund 12,224,637.296 21,960.000 58,309.217
Money Market Fund 401,437,047.080 1,076.520 3,783.090
</TABLE>
6. To approve a change to the Funds' fundamental investment restrictions
limiting borrowing activities, authorizing a higher borrowing level for the
purpose of meeting shareholder redemption requests.
VOTE:
-----
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ------------- --------------
<S> <C> <C> <C>
Special Growth Fund 10,438,948.278 157,981.755 66,300.199
Limited Volatility Tax Free
Fund 5,138,727.947 6,924.043 10,757.566
Real Estate Securities Fund 18,938,409.399 174,556.125 68,266.429
US Government Money Market
Fund 121,136,051.170 1,347,829.230 974,346.420
Tax Free Money Market Fund 162,672,122.290 5,725.030 0.000
Emerging Markets Fund 29,329,607.826 137,452.176 68,243.983
Fixed Income II Fund 12,867,920.082 0.000 11,859.000
Equity T Fund 11,997,619.064 92,607.232 43,907.217
Money Market Fund 401,437,047.080 1,076.520 3,783.090
</TABLE>
123 Matter Submitted to a Vote of Shareholders
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
SPECIALTY FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
7. To approve the elimination of certain fundamental investment restrictions
applicable to the Funds.
VOTE:
-----
a) elimination of restriction on investing in interests of oil and gas:
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
----------------- --------------- ----------------
<S> <C> <C> <C>
Special Growth Fund 9,413,689.706 527,315.308 722,225.218
Limited Volatility Tax Free Fund 2,481,810.997 25,112.220 2,649,486.339
Real Estate Securities Fund 13,823,345.599 777,134.969 4,580,751.385
US Government Money Market Fund 110,127,081.380 3,240,024.030 10,091,121.410
Tax Free Money Market Fund 103,737,566.870 29,206,477.480 29,733,802.970
Emerging Markets Fund 24,232,010.931 832,508.122 4,470,784.932
Fixed Income II Fund 8,710,690.565 11,062.000 4,158,026.517
Equity T Fund 8,555,298.057 148,349.090 3,430,486.366
Money Market Fund 220,581,098.470 3,103,849.870 177,756,958.350
</TABLE>
b) elimination of restriction on investing in issuers in operation for less
than three years:
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
----------------- ----------------- ---------------
<S> <C> <C> <C>
Special Growth Fund 10,043,322.885 548,450.804 71,456.543
Limited Volatility Tax Free
Fund 5,125,345.770 20,306.220 10,757.566
Real Estate Securities Fund 18,377,933.192 726,584.992 76,713.769
US Government Money Market
Fund 118,663,175.380 3,820,935.770 974,115.670
Tax Free Money Market Fund 130,379,048.840 32,296,021.480 2,777.000
Emerging Markets Fund 28,869,273.199 586,566.626 79,464.160
Fixed Income II Fund 12,857,683.082 10,237.000 11,859.000
Equity T Fund 11,947,978.206 135,439.090 50,716.217
Money Market Fund 398,334,273.730 3,103,849.870 3,783.090
</TABLE>
c) elimination of restriction on investing in issuers beneficially owned by
affiliated persons:
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
----------------- ---------------- ----------------
<S> <C> <C> <C>
Special Growth Fund 9,930,204.508 659,625.255 73,400.469
Limited Volatility Tax Free
Fund 5,060,482.388 85,169.602 10,757.566
Real Estate Securities Fund 18,043,755.248 1,055,679.305 81,797.400
US Government Money Market
Fund 112,254,170.250 10,230,435.870 973,620.700
Tax Free Money Market Fund 128,847,893.150 33,817,895.170 12,059.000
Emerging Markets Fund 28,094,401.911 1,358,954.412 81,947.662
Fixed Income II Fund 12,642,474.480 225,445.602 11,859.000
Equity T Fund 11,364,750.418 704,361.878 65,018.217
Money Market Fund 398,102,070.310 3,336,053.290 3,783.090
</TABLE>
124 Matter Submitted to a Vote of Shareholders
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
SPECIALTY FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS
December 31, 1998
d) elimination of restriction on investing in warrants not listed on the NYSE
or ASE:
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
-------------- ------------- ---------------
<S> <C> <C> <C>
Special Growth Fund 10,015,048.011 572,555.133 75,627.088
Emerging Markets Fund 28,878,614.588 572,357.237 84,332.160
Fixed Income II Fund 12,856,858.082 11,062.000 11,859.000
Equity T Fund 11,884,941.035 184,174.261 65,018.217
</TABLE>
8. To approve a change in the fundamental investment objective of the Limited
Volatility Tax Free Fund.
VOTE:
-----
<TABLE>
<CAPTION>
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
------------- ----------- ----------------
<S> <C> <C> <C>
Limited Volatility Tax Free
Fund 5,109,713.649 34,106.630 12,589.277
</TABLE>
To act upon any other business as may legally have come before the Special
Meeting or any adjournment thereof.
VOTE:
-----
<TABLE>
<CAPTION>
GRANT WITHHELD
---------------- ---------------
<S> <C> <C>
Special Growth Fund 11,390,924.565 972,813.667
Limited Volatility Tax Free Fund 5,145,873.444 212,558.112
Real Estate Securities Fund 20,256,936.359 1,114,136.594
US Government Money Market Fund 114,925,691.560 8,532,535.260
Tax Free Money Market Fund 155,190,462.540 7,487,384.780
Emerging Markets Fund 29,671,399.959 1,873,591.026
Fixed Income II Fund 11,454,049.306 1,775,490.776
Equity T Fund 11,646,409.902 658,496.611
Money Market Fund 384,850,410.990 16,591,495.700
</TABLE>
125 Matter Submitted to a Vote of Shareholders
<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
Mark E. Swanson, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
MANAGER, TRANSFER AND DIVIDEND PAYING 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
PricewaterhouseCoopers LLP
One Post Office Square
Boston, MA 02109
DISTRIBUTOR
Russell Fund Distributors, Inc.
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 Limited, 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
Standish, Ayer & Wood, Inc., Boston, MA
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, LLC, New York, NY
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
Westpeak Investment Advisors, L.P., Boulder, Co
FIXED INCOME II
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Ltd., Hamilton, Bermuda
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 126
<PAGE>
[RUSSELL LOGO]
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402-5120
253-627-7001
800-972-0700
Fax: 253-591-3495
A-5147(299) 36-08-018
<PAGE>
- --------------------------------------------------------------------------------
FRANK RUSSELL INVESTMENT COMPANY
1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
Volatility Constrained Bond Fund
December 31, 1998
[RUSSELL LOGO]
<PAGE>
FRANK RUSSELL INVESTMENT
COMPANY
Frank Russell Investment Company
is a "series mutual fund" with 28
different investment portfolios.
These financial statements report
on one Fund, which has a distinct
investment objective and strategy.
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
VOLATILITY CONSTRAINED BOND FUND
ANNUAL REPORT
DECEMBER 31, 1998
TABLE OF CONTENTS
Page
Volatility Constrained Bond Fund .............................. 1
Notes to Financial Statements ................................. 12
Report of Independent Accountants ............................. 17
Matters Submitted to a Vote of Shareholders ................... 18
Manager, Money Managers and Service Providers .................. 21
FRANK RUSSELL INVESTMENT COMPANY - VOLATILITY CONSTRAINED BOND FUND
Copyright (C) Frank Russell Company 1999. 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>
VOLATILITY CONSTRAINED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: The preservation of capital and the generation of current income
consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.
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.
[GRAPH APPEARS HERE]
Dates Volatility Constrained ML 1-2-99** Lipper(R) Short 1-5++
* $10,000 $10,000 $10,000
1989 $11,063 $11,087 $11,012
1990 $12,050 $12,165 $11,902
1991 $13,496 $13,586 $13,317
1992 $13,805 $14,442 $14,076
1993 $14,726 $15,223 $14,942
1994 $14,724 $15,310 $14,888
1995 $16,179 $16,994 $16,488
1996 $16,934 $17,840 $17,222
1997 $17,932 $19,027 $18,275
1998 $19,027 $20,359 $19,320
- --------------------------------------------------------------------------------
Total $159,936 $166,033 $161,442
================================================================================
<TABLE>
<CAPTION>
VOLATILITY CONSTRAINED BOND FUND MERRILL LYNCH 1-2.99 YEARS TREASURY INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,611 6.11% 1 Year $ 10,700 7.00%
5 Years $ 12,921 5.26%(S) 5 Years $ 13,373 5.99%(S)
10 Years $ 19,027 6.64%(S) 10 Years $ 20,359 7.37%(S)
<CAPTION>
LIPPER(R) SHORT INVESTMENT GRADE DEBT FUNDS
BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
-----------------------------------------------
<C> <C> <C>
1 Year $ 10,572 5.72%
5 Years $ 12,930 5.27%(S)
10 Years $ 19,320 6.81%(S)
</TABLE>
1 Volatility Constrained Bond Fund
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Volatility Constrained Bond Fund
reflected a total return of 6.1%, as compared to the Merrill Lynch 1-2.99 Years
Treasury Index which rose 7%. The Fund modestly underperformed the Index due to
the poor performance of spread sector holdings relative to comparable maturity
treasuries. The market's flight to quality during the third quarter had a
dominant impact on the bond market's performance for the year.
PORTFOLIO HIGHLIGHTS
Data reflecting strength in many sectors of the US economy helped ease fears of
a recession. However, evidence of slowing growth pressured yields lower over the
course of 1998. The Federal Reserve Board's reluctance to stimulate economic
growth resulted in an inverted yield curve throughout much of the year, with the
interest rate on overnight loans to banks, i.e. Fed Funds, being higher than
yields on short- and short-intermediate maturity treasuries. The market's
weakness during the third quarter led to significant credit spread widening as
investors demanded higher yields on non-treasury issues, perceiving greater
risks of default in an economic downturn. The Fed reacted by easing rates three
times late in the year in order to strengthen confidence and stimulate growth.
This had its desired effect by calming the financial markets in the fourth
quarter.
These trends proved challenging for the Volatility Constrained Bond Fund.
Because of its substantial investment in credit spread sectors, increased
widening had a negative effect on its returns, with most of the Fund's
underperformance occurring in October. Holdings of lower quality corporate
issues suffered losses in value relative to the Index. The all-treasury
composition of the Merrill Lynch 1-2.99 Years Treasury Index made it a
particularly challenging benchmark given the market's flight to quality during
the year. Above-index duration also weakened results as yields rose in the
fourth quarter. Despite these factors, the Fund finished the year well ahead of
the average short-term investment grade bond fund tracked by Lipper, which
managed to gain 5.7%.
TOP TEN ISSUERS
(as a percent of Total Investments) December 31, 1998
United States Treasury 21.9%
Chase Mortgage Finance Corp. 3.2
World Omni Automobile Lease 2.8
Barnett Auto Trust 2.8
General Electric Capital Corp. 2.4
Sears Roebuck Acceptance Corp. 2.4
Premier Auto Trust 2.2
Federal National Mortgage Association 2.1
Proctor & Gamble 2.1
Associates Corp. of North America 2.0
PORTFOLIO CHARACTERISTICS
December 31, 1998
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 4.6 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day standardized) 5.3%
Number of Issues 178
Number of Holdings 140
MONEY MANAGERS STYLES
BlackRock Financial Management Mortgage/Asset-
Backed Specialist
Standish, Ayer & Wood, Inc. Corporate Specialist
STW Fixed Income Management, Ltd. Sector Rotation Core
* Assumes initial investment on January 1, 1989.
** 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(R) Short (1-5 Yr.) Investment Grade Debt Funds Benchmark 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.
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 2
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ----------
LONG-TERM INVESTMENTS - 91.0%
ASSET-BACKED SECURITIES - 33.2%
ABFS Equipment Contract Trust
6.100% due 10/15/05 341 343
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 131 131
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 01/20/13 106 106
Amresco Residential Securities Mortgage
Loan Trust
Series 1997-1 Class B1F
7.915% due 03/25/27 (c) 400 413
Amresco Residential Securities Mortgage
Loan Trust Step Up Bond
Series 1998-2 Class B1A
6.774% due 06/25/28 (c) 1,000 998
Arcadia Automobile Receivables Trust
Series 1998-A Class A3
5.900% due 11/15/02 400 404
Series 1998-C Class A3
5.670% due 08/15/06 600 604
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03 1,668 1,687
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 5,700 5,738
Brazos Student Loan Finance Corp.
5.817% due 12/01/25 (c) 700 694
California Infrastructure PG&E
Series 1997-1 Class A3
6.150% due 06/25/02 1,600 1,623
Case Equipment Loan Trust
Series 1997-B Class C
6.410% due 09/15/04 168 169
Centex Home Equity Loan Trust
Step Up Bond
5.774% due 07/25/28 (c) 368 362
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 2,900 2,948
Series 1997-5 Class A
6.194% due 08/15/05 270 278
Chase Manhattan Auto Owner Trust
Series 1998-B Class A4
5.800% due 02/17/03 2,000 2,021
Chemical Master Credit Card Trust I
Series 1996-1 Class A
5.550% due 09/15/03 4,000 4,012
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 458 459
Series 1997-1 Class A
6.500% due 10/15/03 665 673
Series 1997-3 Class A
6.200% due 03/20/04 550 555
Contimortgage Home Equity Loan Trust
Series 1997-5 Class A4
6.580% due 06/15/19 500 508
Contimortgage Home Equity Loan
Trust Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 143 143
Copel Capital Funding Corp.
Series 1997-A Class A3
6.270% due 04/20/05 607 610
Cox Enterprises, Inc.
6.250% due 08/26/99 1,000 1,006
Dayton Hudson Credit Card Master Trust
Series 1997-1 Class A
6.250% due 08/25/05 300 306
Delta Funding Home Equity Loan Trust
Series 1998-1 Class A2A
5.429% due 05/25/30 (c) 271 268
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 35 35
First Chicago Master Trust II Credit
Card Certificates
Series 1994-L
7.150% due 04/15/01 3,200 3,233
First Plus Home Loan Trust
Step Up Bond
Series 1998-5 Class A4
6.250% due 04/14/14 (c) 400 401
Series 1998-5 Class A6
6.420% due 10/10/18 (c) 200 195
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 338 342
First USA Credit Card Master Trust
Series 1997-6 Class A
6.420% due 03/17/05 575 592
3 Volatility Constrained Bond Fund
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ----------
FMAC Loan Receivables Trust
Series 1998-CA Class A1
5.990% due 11/15/04 340 340
Franchise Loan Trust
Series 1998-I Class A1
6.240% due 07/15/04 286 286
Green Tree Financial Corp.
Series 1998-1 Class A3
5.950% due 04/01/13 500 502
Series 1998-2 Class A3
6.050% due 10/01/07 325 326
Green Tree Home Improvement Loan Trust
Series 1997-A Class HIA3
7.050% due 08/15/23 500 507
Series 1998-D Class HIA2
5.940% due 06/15/29 600 600
Series 1998-D Class HIA4
6.200% due 06/15/29 475 478
Green Tree Recreational, Equipment &
Consumer Trust
Series 1997-C Class A1
6.490% due 02/15/18 368 368
IMC Home Equity Loan Trust
Series 1998-1 Class A3
6.410% due 04/20/18 350 350
Nationsbank Credit Card Master Trust
Series 1995-1 Class A
6.450% due 04/15/03 2,500 2,543
Newcourt Equipment Trust Securities
Series 1998-1 Class A3
5.240% due 12/20/02 625 622
Series 1998-2 Class D
7.210% due 09/15/07 (c) 350 338
NPF VI, Inc.
Series 1998-1A Class A
6.220% due 06/01/02 400 401
Olympic Automobile Receivables Trust
Series 1996-B Class A4
6.700% due 03/15/02 977 987
Series 1996-D Class CTFS
6.125% due 04/15/02 1,826 1,847
PBG Equipment Trust
Series 1A Class A
6.270% due 01/20/12 481 486
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 01/25/01 3,500 3,571
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01 3,500 3,522
Series 1998-4 Class A3
5.690% due 06/08/02 1,000 1,006
Rental Car Finance Corp.
Series 1997-1 Class A1
6.250% due 06/25/03 420 423
Ryder Vehicle Lease Trust
Series 1998-A Class A
6.100% due 09/15/08 (c) 356 358
Sears Credit Account Master Trust
Series 1995-3 Class A
7.000% due 10/15/04 500 510
Series 1995-5 Class A
6.050% due 01/15/08 400 406
SMS Student Loan Trust
Series 1997-A Class A
5.101% due 10/27/25 (c) 800 767
Standard Credit Card Master Trust
Series 1994-4 Class A
8.250% due 11/07/03 850 911
Standard Credit Card Master Trust I
Series 1995-3 Class A
7.850% due 02/07/02 425 437
The Money Store Auto Grantor Trust
Series 1997-4 Class A2
6.350% due 03/20/04 421 427
The Money Store Residential Trust
Series 1997-I Class A3
6.680% due 08/15/12 400 408
The Money Store Small Business
Administration Loan Trust
Series 1997-1 Class A
5.999% due 01/15/25 (c) 451 445
Series 1997-1 Class B
6.479% due 01/15/25 (c) 451 444
Toyota Auto Lease Trust
Series 1997-A Class A1
6.200% due 04/26/04 3,600 3,611
UCFC Home Equity Loan Trust
Series 1993-B1 Class A-1
6.075% due 07/25/14 61 60
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 1,702 1,713
Volatility Constrained Bond Fund 4
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ----------
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 693 698
Series 1997-A Class A2
6.750% due 06/25/03 (c) 3,485 3,577
Series 1997-A Class A4
6.900% due 06/25/03 896 912
Series 1997-B Class A1
6.070% due 11/25/03 556 557
---------
67,601
---------
CORPORATE BONDS AND NOTES - 25.8%
Ahmanson (H.F.)
9.875% due 11/15/99 900 934
Aristar, Inc.
6.125% due 12/01/00 500 503
Associates Corp. of North America
6.375% due 08/15/00 4,000 4,060
AT&T Capital Corp.
7.500% due 11/15/00 (MTN) 400 405
Banco De Latinoamerica
6.500% due 04/02/01 1,000 1,019
Bankamerica Corp.
9.500% due 04/01/01 750 813
Banponce Corp.
Series 2 (MTN)
5.750% due 03/01/99 1,100 1,101
Bear Stearns Co., Inc.
7.625% due 09/15/99 725 735
Business Loan Center, Inc.
Series 1998-1A
6.750% due 04/02/05 500 500
Carramerica Realty Corp.
6.625% due 10/01/00 475 471
Caterpillar Financial Services
6.100% due 07/15/99 (MTN) 500 502
Chase Manhattan Corp.
10.125% due 11/01/00 750 810
5.375% due 12/05/09 (c) 800 753
Chrysler Financial Corp.
6.610% due 06/16/00 (MTN) 850 865
CIT Group Holdings, Inc.
6.125% due 12/15/00 (MTN) 3,100 3,143
Coca-Cola Put Asset Trust
6.000% due 03/15/01 950 964
Comdisco, Inc.
6.070% due 05/08/00 (MTN) 1,000 998
Conseco, Inc.
6.400% due 06/15/01 850 819
ERAC USA Finance Co.
6.375% due 05/15/03 825 834
ERP Operating, L.P.
8.500% due 05/15/99 225 227
Federal Home Loan Mortgage Corp.
6.770% due 09/15/02 (MTN) 300 318
Finova Capital Corp.
6.450% due 06/01/00 625 631
First Bank South Dakota
5.607% due 12/20/00 (c) 500 497
First Chicago Corp.
9.000% due 06/15/99 500 508
Fleet Credit Card, L.L.C.
6.450% due 10/30/00 250 254
Franchise Finance Corp.
7.000% due 11/30/00 575 574
General Electric Capital Corp.
6.120% due 08/15/00 (MTN) 4,000 4,064
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 947 951
Greyhound Financial Corp.
8.500% due 02/15/99 775 777
Heller Financial, Inc.
5.311% due 03/01/99 (MTN)(c) 600 599
Hertz Corp.
6.625% due 07/15/00 650 658
Homeside Lending, Inc.
6.875% due 05/15/00 (MTN) 825 839
Household Finance Corp.
6.125% due 07/15/02 (MTN)(c) 1,000 997
IMC Global, Inc.
7.400% due 11/01/02 750 762
JC Penney & Co., Inc.
6.375% due 09/15/00 (MTN) 675 684
Lehman Brothers Holdings, Inc.
6.000% due 02/26/01 (MTN) 1,250 1,248
6.750% due 09/24/01 (MTN) 250 253
MBNA Corp.
Series B
6.500% due 09/15/00 (MTN) 375 376
MCI Communications Corp.
6.125% due 04/15/02 1,250 1,270
Merrill Lynch & Co., Inc.
7.260% due 03/25/02 (MTN) 925 969
5 Volatility Constrained Bond Fund
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ----------
Midlantic Corp.
9.250% due 09/01/99 450 461
Norwest Financial, Inc.
6.375% due 09/15/02 500 514
Panamsat Corp.
6.000% due 01/15/03 500 495
Procter & Gamble
9.625% due 01/14/01 3,900 4,190
Salomon Smith Barney Holdings, Inc.
6.625% due 07/01/02 75 77
6.500% due 10/15/02 300 307
Sears Roebuck Acceptance Corp.
6.160% due 09/20/00 (MTN) 4,000 4,050
Series II
6.690% due 04/30/01 (MTN) 750 770
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 625 635
Tele-Communications, Inc.
8.250% due 01/15/03 750 823
Traveler's Group, Inc.
4.454% due 04/05/99 (MTN)(c) 1,000 1,000
Walt Disney Co.
Series E
5.125% due 12/15/03 (MTN) 500 497
Waste Management, Inc.
6.125% due 07/15/01 225 225
Wellsford Residential Property Trust
5.570% due 11/24/99 (MTN)(c) 850 850
---------
52,579
---------
MORTGAGE-BACKED SECURITIES - 7.5%
Asset Securitization Corp.
Series 1997-D5 Class A1A
6.500% due 02/14/41 450 460
Bayview Financial Acquisition Trust
Series 1998-1 Class A1
7.010% due 05/25/29 524 527
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 467 468
BKB Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 154 153
Chase Mortgage Finance Corp.
Series 1998-S2 Class A1
6.500% due 07/25/28 500 504
DLJ Mortgage Acceptance Corp.
Series 1996-CF2 Class A1A
6.860% due 11/12/21 326 338
Federal Home Loan Mortgage Corp.
Participation Certificate
7.500% due 2000 114 114
7.500% due 2002 52 52
9.000% due 2005 158 161
8.000% due 2018 550 570
Federal National Mortgage Association
7.000% due 2004 513 521
8.750% due 2004 37 38
6.500% due 2008 884 896
8.500% due 2010 525 550
7.500% due 2014 730 757
8.500% due 2025 909 952
General Electric Capital Mortgage
Services, Inc.
Series 1998-12 Class 2A1
6.600% due 06/25/28 840 847
Government National Mortgage
Association
7.250% due 2006 786 807
8.250% due 2009 364 386
9.500% due 2017 488 524
Morgan Stanley Capital I
Series 1998-CF1 Class A1
6.330% due 10/15/07 368 377
Series 1998-HF2 Class A1
6.010% due 11/15/30 721 724
Mortgage Capital Funding, Inc.
Series 1998-MC3 Class A1
6.001% due 11/18/31 (c) 500 500
Norwest Integrated Structured Assets, Inc.
Series 1998-1 Class 2A1
7.000% due 06/25/28 987 993
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 254 255
Residential Accredited Loans, Inc.
Series 1997-QS7 Class A1
7.500% due 07/25/27 178 180
Residential Asset Securitization Trust
Series 1997-A9 Class A1
7.250% due 11/26/27 6 6
Series 1998-A1 Class A1
7.000% due 03/25/28 426 428
Series 1998-A2 Class A1
6.750% due 04/25/28 384 385
Series 1998-A12 Class A5
6.750% due 11/25/28 453 456
Volatility Constrained Bond Fund 6
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- ----------
Resolution Trust Corp. Mortgage
Pass-thru Certificate
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 241 243
Union Planters Mortgage Finance Corp.
Series 1998-A Class A1
6.350% due 01/25/28 375 380
Wilshire Funding Corp.
Series 1997-WFC1 Class AI
7.250% due 08/25/27 417 419
Series 1998-WFC2 Class A3
7.000% due 12/28/37 414 413
---------
15,384
---------
MUNICIPAL BONDS - 0.6%
Missouri Higher Education Loan Authority
Series 97 Class P
5.260% due 07/25/08 (c) 540 543
Philadelphia, Pennsylvania, Authority
for Industrial Development
Series 1997 Class A
6.488% due 06/15/04 589 588
---------
1,131
---------
UNITED STATES GOVERNMENT
AGENCIES - 0.4%
Federal Farm Credit Bank
5.220% due 09/11/01 875 880
---------
UNITED STATES GOVERNMENT
TREASURIES - 21.8%
United States Treasury Bonds
8.750% due 11/15/08 675 787
United States Treasury Notes
5.625% due 12/31/99 350 353
4.500% due 09/30/00 4,045 4,036
6.500% due 08/31/01 795 831
6.250% due 10/31/01 875 912
6.625% due 04/30/02 21,725 22,991
3.625% due 07/15/02 10,500 10,421
5.750% due 10/31/02 500 518
5.750% due 11/30/02 3,420 3,546
---------
44,395
---------
YANKEE BONDS - 1.7%
Edperbrascan Corp.
7.375% due 10/01/02 1,000 1,039
Noranda Forest, Inc.
8.875% due 10/15/99 450 459
Quebec, Province of
13.250% due 09/15/14 450 494
Tyco International Group SA
6.125% due 06/15/01 500 505
Westpac Banking, Ltd.
7.875% due 10/15/02 1,006 1,074
---------
3,571
---------
TOTAL LONG-TERM INVESTMENTS
(cost $185,109) 185,541
---------
SHORT-TERM INVESTMENTS - 8.3%
Federal National Mortgage Association
Discount Notes
5.060% due 02/16/99 (a) 500 496
Frank Russell Investment Company
Money Market Fund,
due on demand (a) 15,091 15,091
Occidental Petroleum Corp.
5.460% due 01/04/99 (a) 750 750
Sigma Finance Corp.
5.520% due 02/11/99 (a) 600 596
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $16,933) 16,933
---------
TOTAL INVESTMENTS - 99.3%
(identified cost $202,042)(b) 202,474
OTHER ASSETS AND LIABILITIES,
NET - 0.7% 1,340
---------
NET ASSETS - 100% 203,814
=========
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate security.
Abbreviations:
MTN - Medium Term Note
The accompanying notes are an integral part of the financial statements.
7 Volatility Constrained Bond Fund
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments at market (identified cost $202,042)(Note 2) ............................................. $ 202,474
Cash ................................................................................................. 132
Dividends and interest receivable .................................................................... 2,192
Short-term investments held as collateral for securities loaned, at market (Note 3) .................. 19,667
---------
Total Assets ...................................................................................... 224,465
<CAPTION>
LIABILITIES
<S> <C> <C>
Payables:
Investments purchased ................................................................. $ 500
Fund shares redeemed .................................................................. 347
Accrued fees to affiliates (Note 4) ................................................... 92
Other accrued expenses ................................................................ 45
Payable upon return of securities loaned, at market (Note 3) ........................... 19,667
---------
Total Liabilities ................................................................................. 20,651
---------
NET ASSETS ........................................................................................... $ 203,814
=========
NET ASSETS CONSIST OF:
Undistributed net investment income .................................................................. $ 613
Accumulated net realized gain (loss) ................................................................. (9,382)
Unrealized appreciation (depreciation) on investments ................................................ 432
Shares of beneficial interest ........................................................................ 106
Additional paid-in capital ........................................................................... 212,045
---------
NET ASSETS ........................................................................................... $ 203,814
=========
NET ASSET VALUE, offering and redemption price per share:
($203,814,098 divided by 10,632,250 shares of $.01 par value
shares of beneficial interest outstanding) ........................................................ $ 19.17
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 8
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
<S> <C> <C>
INVESTMENT INCOME:
Interest .......................................................................... $10,899
Dividends from Money Market Fund (Note 5) ......................................... 538
-------
Total Investment Income ......................................................... 11,437
EXPENSES (Notes 2 and 4):
Management fees ........................................................ $ 934
Administrative fees .................................................... 8
Custodian fees ......................................................... 122
Transfer agent fees .................................................... 157
Professional fees ...................................................... 39
Registration fees ...................................................... 28
Trustees' fees ......................................................... 4
Miscellaneous .......................................................... 28
-------
Total Expenses .................................................................. 1,320
-------
Net investment income .............................................................. 10,117
-------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments .......................................... 659
Net change in unrealized appreciation or depreciation of investments ............... 476
-------
Net gain (loss) on investments ..................................................... 1,135
-------
Net increase (decrease) in net assets resulting from operations .................... $11,252
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
9 Volatility Constrained Bond Fund
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands Years Ended December 31,
1998 1997
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income .......................................................... $ 10,117 $ 9,182
Net realized gain (loss) ...................................................... 659 (141)
Net change in unrealized appreciation or depreciation .......................... 476 325
--------- ---------
Net increase (decrease) in net assets resulting from operations .............. 11,252 9,366
--------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income .......................................................... (10,165) (9,388)
--------- ---------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ... 29,751 9,801
--------- ---------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ..................................... 30,838 9,779
NET ASSETS
Beginning of period ............................................................ 172,976 163,197
--------- ---------
End of period (including undistributed net investment income
of $613 and $708, respectively) ............................................. $ 203,814 $ 172,976
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 10
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $ 19.06 $ 19.07 $ 19.21 $ 18.64 $ 19.78
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) .............................. 1.02 1.07 1.09 1.21 1.15
Net realized and unrealized gain (loss) on investments .. .11 .02 (.22) .58 (1.16)
---------- ---------- ---------- ---------- ----------
Total Income From Investment Operations ............... 1.13 1.09 .87 1.79 (.01)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS:
Net investment income ................................... (1.02) (1.10) (1.01) (1.22) (1.13)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ........................... $ 19.17 $ 19.06 $ 19.07 $ 19.21 $ 18.64
========== ========== ========== ========== ==========
TOTAL RETURN (%) ......................................... 6.11 5.90 4.66 9.89 (.02)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ............... 203,814 172,976 163,197 181,881 195,007
Ratios to average net assets (%):
Operating expenses .................................... .69 .78 .76 .71 .67
Net investment income ................................. 5.31 5.63 5.69 6.33 5.97
Portfolio turnover rate (%) ............................ 126.20 197.45 311.51 256.72 182.65
</TABLE>
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
11 Volatility Constrained Bond Fund
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 the Volatility Constrained
Bond Fund, referred to as the "Fund." 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.
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 (both part of
the series of the Investment Company not presented herein) approved a plan
of reorganization for the merger of the two Funds. The newly formed Fund
will be the Short-Term Bond Fund. The merger was approved by the
shareholders of the Fund at a meeting on November 19, 1998. The effective
date for the merger is expected to be February 26, 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund's 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 Fund in the preparation of these
financial statements.
SECURITY VALUATION: United States 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 fixed-income securities and options are valued on the
basis of the closing bid 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 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 Fund 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 Fund 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 the money
manager within the Fund. The Fund may lend portfolio securities as approved
by the Board of Trustees on April 27, 1998.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All premiums and discounts, including original
issue discounts, for the Fund are amortized/accreted for both tax and
financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, the Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to the Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is the 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 Fund.
Notes to Financial Statements 12
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
At December 31, 1998, the 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 for the Fund are as
follows:
12/31/02 12/31/03 12/31/04 12/31/05 TOTALS
------------ ------------ ------------ ------------ ------------
$ 4,813,748 $ 1,871,605 $ 2,135,100 $ 201,012 $ 9,021,465
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income tax
purposes for the Fund as of December 31, 1998 are as follows:
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
-------------- -------------- ---------------- ----------------
$ 202,379,272 $ 272,385 $ (177,624) $ 94,761
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Income dividends and capital gain
distributions, if any, are recorded on the ex-dividend date. The Fund declares
and pays dividends monthly. Capital gain distributions are generally declared
and paid annually. An additional distribution may be paid by the Fund 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 foreign-denominated investments, mortgage-backed securities, and
certain securities sold at a loss. Accordingly, the 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 Fund
for the year ended December 31, 1998:
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED
INCOME GAIN (LOSS)
---------------- --------------
$ (46,949) $ 46,949
EXPENSES: The Fund will pay its own expenses other than those expressly assumed
by Frank Russell Investment Management Company ("FRIMCo" or "Advisor"). Most
expenses can be directly attributed to the individual Fund. Expenses which
cannot be directly attributed are allocated among all Funds principally based
on their relative net assets.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian, receives
delivery of underlying securities as collateral. The 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 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.
13 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
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 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 Fund's Prospectus and Statement
of Additional Information, the Fund 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 Fund in meeting its investment strategies.
The Fund typically uses derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by the Fund through the use of options and futures to earn
"market-like" returns with its excess and liquidity reserve cash balances.
Hedging may be used by the Fund 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 the Fund. By purchasing
certain instruments, the Fund may more effectively achieve the desired
portfolio characteristics that assist it in meeting its 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 Fund may
enter into foreign currency exchange spot contracts and forward foreign
currency exchange contracts ("contracts"). The 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 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.
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1998, purchases and sales of
investment securities (excluding U.S. Government and Agency obligations,
short-term investments, and repurchase agreements) aggregated to
$73,726,417 and $59,577,721, respectively.
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, and repurchase agreements) aggregated to
$178,179,582 and $164,621,293, respectively.
Notes to Financial Statements 14
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
SECURITIES LENDING: Effective April 27, 1998, the Investment Company
resumed its securities lending program. The program allows the Fund to loan
securities with a value up to 33 1/3% of its total assets to certain
brokers. The Fund receives cash (U.S. currency), U.S. Government or U.S.
Government agency obligations as collateral against the loaned securities.
To the extent that a loan is secured by cash collateral, such collateral
shall be invested by Morgan Stanley Trust Company ("MSTC") in short-term
instruments, money market mutual funds, and such other short-term
investments, provided the investments meet certain quality and
diversification requirements. Under the securities-lending arrangement, the
collateral received is recorded on the Fund's statement of assets and
liabilities along with the related obligation to return the collateral. In
those situations where the Company has relinquished control of securities
transferred, it derecognizes the securities and records a receivable from
the counterparty.
Income generated from the investment of cash collateral, less negotiated
rebate fees paid to participating brokers and transaction costs, is divided
between the Fund and MSTC and is included as interest income for the Fund.
To the extent that a loan is secured by non-cash collateral, brokers pay
the Fund negotiated lenders' fees, which are divided between the Fund and
MSTC and are included as interest income for the Fund. All collateral
received will be in an amount at least equal to 100% (for fixed income
securities), 102% (for loans of U.S. equity securities) or 105% (for
non-U.S. equity securities) of the market value of the loaned securities at
the inception of each loan. This collateral must be maintained at not less
than the above respective percentages of the market value of the loaned
securities during the period of the loan. Should the borrower of the
securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Consequently, loans are
made only to borrowers which are deemed to be of good financial standing.
As of December 31, 1998, the value of outstanding securities on loan and
the value of collateral amounted to $19,141,532 and $19,667,031,
respectively.
4. RELATED PARTIES
ADVISOR: FRIMCo operates and administers all of the Funds which comprise
the Investment Company, and advises 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,
a wholly owned subsidiary of The Northwestern Mutual Life Insurance
Company. Frank Russell Company researches and recommends to FRIMCo, and to
the Investment Company, one or more investment management organizations to
advise the portfolio of each Fund.
For the year ended December 31, 1998, the advisory fee paid to FRIMCo, for
the Fund, in accordance with the Investment Company's Advisory Agreement
with that firm, amounted to $934,839 before waivers. Such fee is payable
monthly at the annual rate of 0.50% of its average daily net assets.
Effective December 1, 1998, the advisory fee annual rate was reduced by the
Administrator fee of 0.05%. The new rate is 0.45%.
The Advisor contract also provides that if the Fund's expenses (exclusive
of interest and taxes) exceed specified limits imposed by the Advisor on an
annual basis, such excess will be paid by FRIMCo.
FRIMCo calculates its advisory fee based on average daily net assets of the
Fund, less any advisory fee incurred on assets invested in the Money Market
Fund (see Note 5) thereby eliminating any duplication of fees.
ADMINISTRATOR: Effective December 1, 1998, the Investment Company's Board
of Trustees approved a plan to pay a .05% fee of the average daily net
assets of the Fund to FRIMCo, in accordance with the Investment Company's
Advisory Agreement with that firm. The fee paid to FRIMCo for the Fund
amounted to $8,396 before waivers.
ANALYTIC SERVICES: Fees for analytic services provided to the Fund are paid
or accrued to Russell/Mellon Analytical Services, an affiliate of the
Investment Company. Russell/Mellon Analytical Services provides TruVP
System to the Funds, pursuant to a written Service Agreement. The TruVP
System provides analytics used by the investment department.
TRANSFER AGENT: The Fund has a contract with FRIMCo to provide transfer
agent services to the Investment Company. Total fees for the year ended
December 31, 1998 were $156,597.
15 Notes to Financial Statements
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1998 WERE AS FOLLOWS:
Advisory fees $74,840
Administration fees 8,396
Transfer Agent fees 8,188
-------
$91,424
=======
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 $3,612 for the year ended December
31, 1998, and were allocated to each Fund, where appropriate, on a pro rata
basis, including 27 other affiliated Funds not presented herein.
5. MONEY MARKET FUND
The Fund is permitted to invest its cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Fund's objectives) in
the Frank Russell Investment Company Money Market Fund (a series of Frank
Russell Investment Company not presented herein). As of December 31, 1998,
$15,091,000 of the Money Market Fund's net assets represents investments by
the Fund and $760,775,000 represents the investments of other affiliated
Funds not presented herein.
6. FUND SHARE TRANSACTIONS
Share transactions for shares for the years ended December 31, were as
follows:
<TABLE>
<CAPTION>
SHARES DOLLARS
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
VOLATILITY CONSTRAINED BOND
CLASS S
Proceeds from shares sold 6,193,655 4,531,595 $118,440,273 $ 86,343,467
Proceeds from reinvestment of distributions 382,196 318,828 7,296,864 6,058,603
Payments for shares redeemed (5,018,016) (4,334,448) (95,986,490) (82,601,508)
---------- ---------- ------------ ------------
Total net increase (decrease) 1,557,835 515,975 $ 29,750,647 $ 9,800,562
========== ========== ============ ============
</TABLE>
7. DIVIDENDS
On February 1, 1999, the Board of Trustees declared a dividend of $0.0954
from net investment income, payable on February 4, 1999, to shareholders of
record on February 2, 1999.
Notes to Financial Statements 16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Frank Russell Investment Company:
In our opinion, the accompanying statements of assets and liabilities, including
the statement of net assets, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Frank Russell Investment
Company Volatility Constrained Bond Fund (the "Fund") at December 31, 1998, and
the results of its operations, the changes in its net assets and the financial
highlights for the periods indicated therein, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments owned at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
---------------------------
Boston, Massachusetts
February 15, 1999
17 Report of Independent Accountants
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS
December 31, 1998
There was a Special Meeting in Lieu of Annual Meeting of Shareholders of the
Frank Russell Investment Company (the "Investment Company") held at 909 A
Street, Tacoma, Washington on November 19, 1998 and November 23, 1998.
THE FOLLOWING MATTERS WERE VOTED UPON AT THE MEETING
The results of each vote accompany the description of each matter
- -----------------------------------------------------------------
1. To approve an Agreement and Plan of Reorganization of the Investment
Company, on behalf of the Volatility Constrained Bond Fund (the "Bond
Fund") and the Fixed Income II Fund (the "Fixed Income Fund"), each a
sub-trust of the Investment Company, that provides for the merger of the
Bond Fund into the Fixed Income Fund, the distribution of Class S Shares of
the Fixed Income Fund to the Shareholders of the Bond Fund, and the
dissolution of the Bond Fund.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
Volatility Constrained --------------- ----------- ----------------
Bond Fund 7,414,300.551 4,042.000 42,957.821
2. To elect the members of the Board of Trustees of the Investment Company.
VOTE:
-----
FOR WITHHELD
------------------- ---------------
Lynn L. Anderson 1,142,054,288.045 2,131,664.459
Paul E. Anderson 1,139,319,894.878 2,166,057.626
Paul Anton, PhD. 1,141,736,993.856 2,448,958.648
William E. Baxter 1,141,722,018.319 2,463,934.185
Lee C. Gingrich 1,142,034,296.045 2,161,656.459
Eleanor W. Palmer 1,141,728,049.319 2,457,903.185
3. To ratify the selection of PricewaterhouseCoopers LLP as the Investment
Company's independent accountants.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
------------------ ------------- ----------------
1,141,762,608.691 732,463.728 1,690,880.085
Matter Submitted to a Vote of Shareholders 18
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
4. To approve a proposed advisory agreement with Frank Russell Investment
Management Company ("FRIMCo"), the current investment manager of the
Investment Company, restructuring the manner in which services are provided
to the Funds, providing for compensation to FRIMCo for managing certain
additional assets of the Funds.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
Volatility Constrained ------------- ------------ ---------------
Bond Fund 8,422,494.534 25,173.774 32,826.994
5. To approve a proposed advisory agreement with FRIMCo, to take effect upon
the closing of the acquisition of Frank Russell Company by The Northwestern
Mutual Life Insurance Company.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
Volatility Constrained ------------- ------------ ---------------
Bond Fund 8,426,453.534 25,577.774 32,463.994
6. To approve a change to the Funds' fundamental investment restrictions
limiting borrowing activities, authorizing a higher borrowing level for the
purpose of meeting shareholder redemption requests.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
Volatility Constrained ------------- ------------ ---------------
Bond Fund 7,341,008.992 56,295.774 42,038.536
7. To approve the elimination of certain fundamental investment restrictions
applicable to the Funds.
VOTE:
-----
a) elimination of restriction on investing in interests of oil and gas:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
Volatility Constrained ------------- ------------ ---------------
Bond Fund 6,428,114.240 503,622.399 507,606.663
b) elimination of restriction on investing in issuers in operation for
less than three years:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
Volatility Constrained ------------- ------------ ---------------
Bond Fund 6,863,519.889 532,451.103 43,372.310
19 Matter Submitted to a Vote of Shareholders
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
c) elimination of restriction on investing in issuers beneficially owned by
affiliated persons:
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
------------- ------------ ---------------
Volatility Constrained Bond
Fund 6,817,254.379 574,724.387 47,364.536
To act upon any other business as may legally have come before the Special
Meeting or any adjournment thereof.
Item 1.: The meeting of the Volatility Constrained Bond Fund was adjourned to
November 23, 1998 with respect to Item 1.
VOTE:
-----
GRANT WITHHELD
-------------- -------------
Volatility Constrained Bond Fund 8,018,857.185 461,638.117
Matter Submitted to a Vote of Shareholders 20
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
<TABLE>
<S> <C>
TRUSTEES OFFICE OF SHAREHOLDER INQUIRIES
George F. Russell, Jr., Chairman 909 A Street
Lynn L. Anderson Tacoma, WA 98402
Paul E. Anderson (800) RUSSEL4
Paul Anton, PhD (800) 787-7354
William E. Baxter
Lee C. Gingrich LEGAL COUNSEL
Eleanor W. Palmer Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
OFFICERS Philadelphia, PA 19103-7098
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds INDEPENDENT ACCOUNTANTS
Mark E. Swanson, Treasurer and Chief Accounting Officer PricewaterhouseCoopers LLP
Randall P. Lert, Director of Investments One Post Office Square
Karl Ege, Secretary and General Counsel Boston, MA 02109
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT DISTRIBUTOR
Frank Russell Investment Management Company Russell Fund Distributors, Inc.
909 A Street 909 A Street
Tacoma, WA 98402 Tacoma, WA 98402
CONSULTANT MONEY MANAGERS
Frank Russell Company
909 A Street VOLATILITY CONSTRAINED BOND
Tacoma, WA 98402 BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
CUSTODIAN STW Fixed Income Management, Ltd., Hamilton, Bermuda
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
</TABLE>
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.
21 Manager, Money Managers and Service Providers
