STOCK FUNDS QUARTERLY REPORT
SEPTEMBER 30, 1996
A FAMILY OF 100% NO-LOAD FUNDS
DEVELOPING MARKETS GROWTH FUND
SMALL CAP GROWTH FUND
INTERNATIONAL GROWTH FUND
GROWTH FUND
GROWTH & INOMCE FUND
BALANCED FUND
[LOGO]
SIT MUTUAL FUNDS
SIT MUTUAL FUNDS
STOCK FUNDS QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
Chairman's Letter............................................ 1
Performance Review........................................... 2
Fund Reviews
Developing Markets Growth Fund......................... 4
Small Cap Growth Fund.................................. 6
International Growth Fund.............................. 8
Growth Fund............................................ 10
Growth & Income Fund................................... 12
Balanced Fund.......................................... 14
A Look at the Sit Mutual Funds............................... 16
This document must be preceded or accompanied by a Prospectus.
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - SEPTEMBER 30, 1996
[PHOTO]
Eugene C. Sit
Dear Fellow Shareholders:
Domestic financial assets provided positive results during the third
quarter ended September 30, 1996. Contributing factors were generally healthy
corporate earnings reports and positive cash flows to equity mutual funds.
ECONOMIC OVERVIEW
The domestic economy expanded strongly during the second quarter at a +4.7%
annualized rate of real GDP growth. Consumer spending was healthy during this
time, and growth was bolstered by an uptick in government spending, particularly
at the state and local levels. Our research suggests that domestic growth will
return to more moderate levels during the remainder of 1996. Consumer spending,
a large component of domestic growth, slowed during the months of July and
August, which is possibly the result of tighter credit conditions. Recent retail
sales figures also imply that consumer spending may, in fact, have slowed. Also,
the deterioration of the trade deficit during the summer months is likely to
exert a drag on third quarter growth, particularly given the dollar's steady
rise. Finally, the unexpected surge in government spending is likely not
sustainable given trends toward increased fiscal responsibility. Economic
deceleration during the second half of 1996 should result in an approximate
+2 3/4% rate of real GDP growth for the year.
Inflation continues to remain generally contained at moderate levels.
Moderate second half growth should aid in keeping inflationary pressures from
mounting. Recent figures show the Consumer Price Index rising at a +3.0% annual
rate, while the Producer Price Index has shown a +2.9% year-over-year increase.
Energy prices have recently risen on concerns over political stability in the
Middle East; however, a resolution should bring oil prices back to their
previous range. Labor costs, which are presently rising at an annual rate of
+3.5%, are also a key inflationary component, since they represent nearly
two-thirds of consumer inflation. Productivity gains have thus far been
sufficient to offset these increases, but we are closely monitoring this
situation since it would have an impact on growth stock valuation.
Contrary to expectations, the Federal Reserve did not increase short-term
interest rates in September. Although recent data releases have suggested
economic moderation, a late surge in the economy or increased wage pressures
could prompt the Fed to raise short-term rates at their next FOMC meeting after
the election.
With the elections drawing near, investors are increasingly assessing the
possibility of fiscal policy change. Government policy is likely to remain
moderately restrictive so long as the Republicans maintain control of the
Congress. The 1996 fiscal deficit should approximate $115 billion, a nearly $50
billion improvement over fiscal 1995; however, the impact of mandatory
entitlement spending will become increasingly important and will widen the
deficit in the years ahead.
STRATEGY SUMMARY
The investment environment for growth stocks remains attractive given
moderate corporate profit increases and generally contained inflation.
Historically, the price-earnings ratios of high quality growth companies have
expanded during periods of sustained low inflation. Accordingly, our domestic
growth funds are focused on investment areas and themes with the potential for
producing sustained and above-average earnings growth relative to other equity
investment alternatives. These characteristics are often found in technology and
health care companies where the spread of information transmission and
processing technology combined with the development of innovative devices and
drugs provide opportunities for long-term growth.
The Sit international stock funds continue to emphasize areas with strong
regional economic growth, such as in the Pacific Rim and Latin America, as well
as opportunistic areas in the more mature European and Japanese markets. The Sit
International Growth Fund remains underweighted in Japan where low interest
rates have weakened the yen but should allow for a sustained economic recovery.
Both funds have overweighted positions in the other Asian markets where economic
growth is strong but where restrictive monetary policy has impacted equity
valuations. Latin American investments are also attractive given accelerating
economic growth combined with relatively low equity valuations.
We sincerely appreciate the interest and support of our shareholders, and
we will continue to strive to meet the expectations and long-term investment
objectives of our investors.
With best wishes,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
SIT MUTUAL FUNDS
SEPTEMBER 30, 1996 PERFORMANCE REVIEW - STOCK FUNDS
STOCK FUNDS REVIEW
Domestic stocks stumbled in July amid shifting economic expectations and
generally higher interest rates but recovered to post positive returns for the
third quarter ended September 30, 1996. Following July's correction, which most
negatively impacted small-sized growth companies, investors clearly favored the
liquidity of blue-chip issues, pushing the DJIA up +4.6% and raising the S&P 500
Index by +3.1%. Medium-sized companies performed positively as well, as seen in
the +2.9% advance in the S&P Midcap 400 Index; the Russell 2000 Index, a measure
of small cap equity performance, had a +0.4% return.
Large cap growth stocks provided an incremental +0.7% over large cap value
stocks as measured by the Russell 1000 Growth/Value Indices, primarily on
positive earnings revisions in technology and health care names. Small cap
growth stocks, however, underperformed small cap value stocks by -2.3%, as
measured by the Russell 2000 Growth/Value Indices. While both the technology and
health care sectors provided improved results in September, their year-to-date
sector rankings remain somewhat mixed across the equity capitalization spectrum.
Technology stocks led the way among large cap stocks, while both of these groups
generally trailed among small cap issues. Given our forecast for moderating
economic growth for the remainder of 1996 and into the coming year, we believe
the prospects for these growth-oriented groups remains favorable.
In international markets, three of the world's top five equity markets thus
far in 1996 in U.S. dollar terms have been emerging markets, most notably Brazil
and Mexico. The MSCI Europe Index performed in line with the U.S. at +3.8%
during the quarter, while the MSCI Pacific Index Ex-Japan performed positively
as well at +1.7%. Japan performed less favorably during this period, as the
Nikkei contracted -4.3% in local price terms on concerns that it's economic
recovery had faltered.
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
1985 1986 1987 1988 1989 1990
<S> <C> <C> <C> <C> <C> <C>
SIT DEVELOPING MARKETS GROWTH ---- ---- ---- ---- ---- ----
(NASDAQ Symbol: SDMGX)
SIT SMALL CAP GROWTH ---- ---- ---- ---- ---- ----
(NASDAQ Symbol: SSMGX)
SIT INTERNATIONAL GROWTH ---- ---- ---- ---- ---- ----
(NASDAQ Symbol: SNGRX)
SIT GROWTH 43.65% 10.33% 5.50% 9.77% 35.15% -2.04%
(NASDAQ Symbol: NBNGX)
SIT GROWTH & INCOME 23.48 21.83 5.32 5.33 32.02 -2.37
(NASDAQ Symbol: SNIGX)
SIT BALANCED ---- ---- ---- ---- ---- ----
MCSI EMERGING MARKETS FREE INDEX(2) ---- ---- ---- ---- ---- ----
RUSSELL 2000 INDEX(3) ---- ---- ---- ---- ---- ----
EAFE INDEX(4) ---- ---- ---- ---- ---- ----
NASDAQ OTC COMPOSITE INDEX 31.36 7.36 -5.26 15.41 19.26 -17.80
S&P 500 INDEX 31.60 18.64 5.28 16.55 31.61 -3.05
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
YTD.
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
SIT DEVELOPING MARKETS GROWTH ---- ---- ---- -2.02%(1) -4.29% 18.13%
(NASDAQ Symbol: SDMGX)
SIT SMALL CAP GROWTH ---- ---- ---- 11.57(1) 52.16 18.04
(NASDAQ Symbol: SSMGX)
SIT INTERNATIONAL GROWTH 4.10%(1) 2.69% 48.37% -2.99 9.36 5.55
(NASDAQ Symbol: SNGRX)
SIT GROWTH 65.50 -2.14 8.55 -0.47 33.64 19.70
(NASDAQ Symbol: NBNGX)
SIT GROWTH & INCOME 32.72 4.94 3.15 2.83 31.66 18.33
(NASDAQ Symbol: SNIGX)
SIT BALANCED ---- ---- ---- -0.33 25.43 11.05
MCSI EMERGING MARKETS FREE INDEX(2) ---- ---- ---- 2.80 -6.94 4.85
RUSSELL 2000 INDEX(3) ---- ---- ---- 4.61 28.45 10.73
EAFE INDEX(4) 0.26 -12.17 32.56 7.78 11.21 4.39
NASDAQ OTC COMPOSITE INDEX 56.84 15.45 14.75 -3.20 39.92 16.61
S&P 500 INDEX 30.46 7.64 10.07 1.32 37.58 13.50
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN TOTAL RETURN
QUARTER ENDED SIX MONTHS
INCEPTION 9/30/96 ENDED 9/30/96
<S> <C> <C> <C>
SIT DEVELOPING MARKETS GROWTH 07/01/94 0.55% 8.26%
SIT SMALL CAP GROWTH 07/01/94 2.54 13.96
SIT INTERNATIONAL GROWTH 11/01/91 -0.80 2.02
SIT GROWTH 09/02/82 6.48 12.17
SIT GROWTH & INCOME 09/02/82 6.14 13.39
SIT BALANCED 12/31/93 4.11 8.75
MCSI EMERGING MARKETS FREE INDEX (2) -4.08 -0.86
RUSSELL 2000 INDEX (3) 0.34 5.36
EAFE INDEX (4) -0.13 1.45
NASDAQ OTC COMPOSITE INDEX (5) 3.54 11.40
S&P 500 INDEX (5) 3.09 7.72
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR
THE PERIODS ENDED SEPTEMBER 30, 1996 SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C> <C>
SIT DEVELOPING MARKETS GROWTH 17.03% ---- ---- ---- 4.65%
SIT SMALL CAP GROWTH 22.92 ---- ---- ---- 36.16
SIT INTERNATIONAL GROWTH 4.99 9.91% ---- ---- 12.39
SIT GROWTH 19.24 17.42 14.61% 16.36% 19.36
SIT GROWTH & INCOME 19.53 17.31 14.35 13.28 15.13
SIT BALANCED 14.13 ---- ---- ---- 12.67
MCSI EMERGING MARKETS FREE INDEX (2) 3.05 ---- ---- ---- 0.13
RUSSELL 2000 INDEX (3) 13.13 ---- ---- ---- 19.30
EAFE INDEX (4) 8.61 8.06 ---- ---- 8.00
NASDAQ OTC COMPOSITE INDEX (5) 17.57 17.17 18.42 13.34 14.62
S&P 500 INDEX (5) 20.33 17.42 15.23 14.99 17.09
</TABLE>
(1) Period from Fund inception through calendar year-end.
(2) Figures assume an inception date of 6/30/94.
(3) Figures assume an inception date of 7/1/94.
(4) Figures assume an inception date of 10/31/91.
(5) Figures assume an inception date of 9/2/82.
PLEASE REMEMBER THAT PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS AND
IS ONLY ONE OF THE FACTORS TO CONSIDER IN CHOOSING A FUND. AS WITH ALL
INVESTMENTS, THE SHARE PRICE AND RETURN MAY VARY AND YOU MAY HAVE A GAIN OR LOSS
AT THE TIME OF SALE.
SIT DEVELOPING MARKETS GROWTH FUND REVIEW
SEPTEMBER 30, 1996
The Sit Developing Markets Growth Fund gained +0.55% during the quarter,
and outperformed the MSCI Emerging Markets Free Index which declined -4.1%.
After posting strong returns during the first two quarters of 1996, most
developing markets declined during the third quarter. The Fund's holdings in
Israel performed strongly, posting average gains of +26% for the quarter. As of
September 30, the Fund had 9% invested in Israel, compared to the Index
allocation of 2%.
The Fund continues to have a significant amount invested in the Asian
developing markets. Output expansion is slowing due to tighter monetary
conditions, as well as slower growth of exports caused by sluggish demand from
industrial countries. For 1997, however, growth is expected to accelerate
largely due to faster growth in China which, in turn, would stimulate
intra-regional Asian trade. Additionally, we expect the bottoming in the
electronics industry towards year-end will result in stronger corporate earnings
growth for Asian exports. Subsequent to quarter-end, we are taking advantage of
depressed valuations and a relatively high cash position to increase investment
in Korea and Thailand. Both markets are down over -25% from their peak levels
two years ago.
The outperformance of Latin American equity markets this year should
continue in 1997. The positive financial fundamentals for Latin America remain
intact based on the continuing recovery of GDP growth in the region which is
projected to increase to 4% in 1997 from 3.4% in 1996 and 0.9% in 1995.
Valuations on a regional weighted basis are attractive at an average P/E of
about 13 times estimated 1997 earnings. We expect the market performance of
Brazil to be especially strong powered by positive surprises in the
tariff-rebalancing process for public utilities.
We remain optimistic over the outlook for emerging markets as these "high
beta" markets tend to exaggerate the trends that develop in the major stock
exchanges. The biggest risk appears to be a sudden increase in global interest
rates, which would disrupt the flow of funds to global equity markets. We
continue to search for new growth opportunities that will provide the portfolio
with additional market diversification.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Sit Developing Markets Growth Fund is to maximize
long-term capital appreciation. The Fund pursues this objective by investing in
equity securities of companies located or otherwise operating in a developing
market.
Developing markets tend to be less economically developed regions of the
world. General characteristics also include a high demand for capital
investment, a high dependence on export markets for their major industries, a
need to develop basic economic infrastructures, rapid economic growth and lower
degrees of political stability. Investors should carefully consider the risks
associated with developing markets such as currency flucuations, high
volatility, illiquidity and the possibility of political instability.
PORTFOLIO SUMMARY
Net Asset Value 9/30/96: $11.01 Per Share
6/30/96: $10.95 Per Share
Total Net Assets: $ 9.58 Million
PORTFOLIO STRUCTURE - BY REGION
(% of total net assets)
Sit Developing MSCI Emerging
Markets Growth Fund Markets Free Index
Pacific Basin 46.7 51.3
Latin America 26.8 29.0
Africa/Middle East 10.1 13.1
Europe 5.7 6.6
Other Assets
& Liabilities 10.7 N/A
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Morgan Stanley Morgan Stanley
Developing International Lipper Developing International Lipper
Markets Emerging Markets Emerging Markets Emerging Markets Emerging
Growth Fund Free Index Markets Index Growth Fund Free Index Markets Index
<S> <C> <C> <C> <C> <C> <C>
3 Months 0.55% -4.08% -2.26% 0.55% -4.08% -2.26%
(unannualized)
1 Year 17.03 3.05 7.49 17.03 3.05 7.49
Inception 4.65 0.13 2.63 10.78 0.30 6.02
(7/1/94)
</TABLE>
* As of 9/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
MORGAN STANLEY CAPITAL EMERGING MARKETS FREE INDEX. THE LIPPER AVERAGES AND
INDICES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT
EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
The sum of $10,000 invested at inception (7/1/94) and held until 9/30/96 would
have grown to $11,078 in the Fund or $10,030 in the Morgan Stanley Capital Int'l
Emerging Markets Free Index assuming reinvestment of all dividends and capital
gains.
10 LARGEST HOLDINGS
Tadiran Telecom, A.D.R.
Datacraft Asia Ltd.
Nice Systems Ltd., A.D.R.
Teva Pharmaceutical, A.D.R.
Banco Latinoamericano
Hutchison Whampoa
First Pacific Co.
Panamerican Beverage, Inc.
DCB Holdings Corp.
Andina, A.D.R.
Total number of holdings: 62
SIT SMALL CAP GROWTH FUND REVIEW
SEPTEMBER 30, 1996
[PHOTO] Eugene C. Sit, CFA
Senior Portfolio Manager
The Sit Small Cap Growth Fund achieved a +2.5% total return during the
third quarter ended September 30, 1996. During this period, the Fund
outperformed its benchmark indices, as shown in the accompanying table, as well
the Russell 2000 Growth Index, a measure of smaller cap growth stock
performance, which decreased by -0.9%. The Fund's +18.0% year-to-date return
surpassed its benchmarks' returns as well, including the +15.5% increase in the
Lipper Small Company Growth Index.
Small cap stocks experienced a correction in July and for the entire third
quarter produced modest results. At the same time, the earnings of these
companies have continued to advance, as has the broader stock market, suggesting
that smaller companies have increased in relative attractiveness. Furthermore,
smaller-sized companies are expected to grow earnings at a faster rate than
larger companies through 1997 as measured by the average expected earnings
growth rates of the Russell 2000 and S&P 500. The recent strength in the dollar
also generally bodes well for small cap performance, since smaller companies
usually have less earnings exposure to overseas markets. Continued inflows to
equity mutual funds also suggest that demand for small caps is likely to remain
favorable.
Stock selection was a key factor in the Fund's outperformance relative to
the Russell 2000 Index during the third quarter. The outsourcing of commercial
services was a successful theme as seen in the performance of companies such as
BDM International, Commodore Holdings and HA-LO Industries. Small cap radio and
television broadcasters continued to perform well among consumer services names,
while opportunistic increases in certain biotechnology and health care
information systems stocks boosted performance in the health care sector.
We estimate that the companies in the Fund's portfolio will exhibit
earnings growth on a weighted average basis of +38% in 1996 and +45% in 1997,
which is substantially above estimates for broad market and small cap index
earnings growth. The Fund's price-earnings ratio is 21.7 times 1997 earnings.
Historically, companies are attractively valued when they sell at price-earnings
ratios significantly less than their long-term growth rates, which is the case
currently.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Sit Small Cap Growth Fund is to maximize long-term
capital appreciation. The Fund pursues this objective by investing primarily in
the common stocks of small companies that have a capitalization of under $500
million at the time of purchase.
In addition, the Fund may purchase securities convertible into common
stocks, preferred stocks and warrants. The Fund may invest in securities not
listed on a national securities exchange but generally such securities will have
an established over-the-counter market.
PORTFOLIO SUMMARY
Net Asset Value 9/30/96: $19.76 Per Share
6/30/96: $19.27 Per Share
Total Net Assets: $58.47 Million
PORTFOLIO STRUCTURE
(% of total net assets)
Health Care 24.8
Technology 23.5
Financial 10.9
Consumer Services 9.6
Business Equiment
& Services 7.7
Energy 6.1
Capital Goods 2.7
Retail 2.3
Transportation 1.6
Consumer Non-Durables 0.3
Other Assets
& Liabilities 10.5
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Lipper Lipper
Small Cap Russell 2000 Small Co. Small Cap Russell 2000 Small Co.
Growth Fund Index Growth Index Growth Fund Index Growth Index
<S> <C> <C> <C> <C> <C> <C>
3 Months 2.54% 0.34% 1.27% 2.54% 0.34% 1.27%
(unannualized)
1 Year 22.92 13.13 17.12 22.92 13.13 17.12
Inception 36.16 19.30 25.20 100.40 48.79 65.98
(7/1/94)
</TABLE>
* As of 9/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
RUSSELL 2000 INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER
ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
The sum of $10,000 invested at inception (7/1/94) and held until 9/30/96 would
have grown to $20,040 in the fund or $14,879 in the Russell 2000 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
GMIS, Inc.
Anadigics, Inc.
BDM International, Inc.
Regeneron Pharmaceuticals, Inc.
Scopus Technology
American Radio Systems Corp.
HA-LO Industries, Inc.
Sierra Health Services, Inc.
Technomatix Technologies, Ltd.
HCIA, Inc.
Total number of holdings: 63
SIT INTERNATIONAL GROWTH FUND REVIEW
SEPTEMBER 30, 1996
[PHOTO] EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ANDREW B. KIM, CFA
SENIOR PORTFOLIO MANAGER
The Sit International Growth Fund's investment return for the quarter ended
September 30, 1996 was -0.80%, compared to the MSCI EAFE Index return of -0.13%.
The Fund is structurally underweight in the United Kingdom, which is the second
largest country weighting in the Index, due to the Fund's growth stock
orientation. Accordingly, the U.K.'s market advance of +8.5% during the quarter
was the primary reason for the Fund's underperformance.
The outlook for European markets remains favorable due to a marked
relaxation in short-term domestic interest rates. European investors appear
confident that Britain will not increase its base lending rate before the
general election. However, in view of European markets' overall high valuations,
we consider the risk of a setback has increased for those companies that are not
capable of producing solid earnings gains in 1997. During the quarter we
increased the Fund's European allocation, and we do not envision further changes
over the near-term.
In Japan, lower interest rates are leading to increased investment in U.S.
bonds, thereby weakening the yen. A weaker yen should eventually contribute to a
reduction in high inventory levels. In 1997, technological innovations and
deregulation should allow the high-tech and telecommunication sectors to grow
rapidly.
We continue to overweight the Asian (ex-Japan) markets which have been
consolidating. Asia's problem does not appear to be one of declining
competitiveness, but rather the tight monetary policy adopted by central banks
to avoid overheating of their economies, in addition to lower Chinese imports.
Global over-capacity in commodity cyclical industries (electronic components,
petrochemicals, and steel) is likely to continue to pressure prices of these
products in the near-term. However, pessimistic local investor sentiment in many
of these markets is creating attractive valuations. Since we believe the
slowdown of exporters is cyclical in nature, we are maintaining our relatively
high allocation to these markets.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Sit International Growth Fund is to achieve long-term
growth of capital by investing in equity securities of issuers domiciled outside
the United States. The Fund's investment objective reflects the belief that
long-term investment planning should include the investment opportunities that
exist outside the U.S.
The Fund selects its investments based on the characteristics of the
particular markets and economies of the countries in which it invests. Emphasis
is placed on identifying securities of companies believed to be undervalued in
the marketplace in relation to factors such as the company's revenues, earnings,
assets and long-term competitive position which over time will enhance the
equity value of the company.
PORTFOLIO SUMMARY
Net Asset Value 9/30/96: $16.16 Per Share
6/30/96: $16.29 Per Share
Total Net Assets: $85.12 Million
PORTFOLIO STRUCTURE - BY REGION
(% of total net assets)
SIT INT'L Morgan Stanley
GROWTH FUND EAFE Index
Japan 24.4 37.5
Pacific Basin 23.7 10.6
Other Europe 21.4 21.0
France, Germany & UK 20.4 30.9
Latin America 4.6 0.0
Africa/Middle East 1.0 0.0
Other Assets & Liabilities 4.5 N/A
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Morgan Stanley Morgan Stanley
International Capital Int'l Lipper International Capital Int'l Lipper
Growth Fund EAFE Index Int'l Index Growth Fund EAFE Index Int'l Index
<C> <C> <C> <C> <C> <C> <C>
3 Months -0.80% -0.13% 0.09% -0.80% -0.13% 0.09%
(unannualized)
1 Year 4.99 8.61 10.75 4.99 8.61 10.75
3 Years 9.91 8.06 9.62 32.77 26.20 31.73
Inception 12.39 8.00 10.37 77.61 46.04 62.50
(11/1/91)
</TABLE>
* As of 9/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE (EUROPE, AUSTRALIA, FAR EAST) INDEX.
THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES,
INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
The sum of $10,000 invested at inception (11/1/91) and held until 9/30/96 would
have grown to $17,761 in the Fund or $14,604 in the Morgan Stanley EAFE Index
assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
Carrefour
Gehe A.G.
Wolters Kluwer
Hutchison Whampoa
Canon, Inc., A.D.R.
Reuters Holdings, p.l.c., A.D.S.
First Pacific Co.
Societe Generale de Surveillance
Aegon N.V., A.D.R.
Nutricia
Total number of holdings: 70
SIT GROWTH FUND REVIEW
[PHOTO] EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ERIK S. ANDERSON, CFA
PORTFOLIO MANAGER
The Sit Growth Fund performed strongly during the third calendar quarter of
1996, providing investors with a +6.5% total return. The Fund's recent
performance compares favorably to that of the NASDAQ Composite Index, which
gained +3.5% during this period, as well as to measures of medium-sized company
performance such as the S&P Midcap 400 Index, which posted a +2.9% increase. The
Fund's year-to-date performance of +19.7% also exceeds that of each of its
benchmark indices.
Stock selection played a key role in the Fund's third quarter performance
relative to the S&P Midcap 400 Index. Business outsourcing companies such as
FiServ, Danka Business Systems and Paychex performed strongly as did funeral
home operator, Loewen Group, the latter due primarily to an attempted takeover.
Health care stocks also contributed significantly including biotechnology issues
such as Biogen and Cephalon as well as health services companies, Oxford and
Healthsouth. Aside from individual company selection, the Fund's overweight in
technology issues and underweight in the utility sector also aided performance.
Among sector changes, technology holdings were reduced slightly during the
quarter on profit-taking in selected software names, as well as reductions made
in semiconductor-related issues. Equal increases in health care and financial
services holdings generally offset this reduction. The Fund is currently
positioned to participate in several high-growth investment themes including the
development of value-added software solutions, the spread of health care
information technology, as well as the outsourcing of business services like
payroll and temporary employment services. The Fund's weighted average market
capitalization as of September 30, 1996 was $3.0 billion, and it was close to
fully invested with cash reserves of 4%.
Consistent with our earnings growth-oriented investment philosophy, the
Fund continues to focus on industries offering the potential for above-average
earnings growth, primarily in the areas of technology and health care. We
estimate that the companies in the Fund's portfolio will grow earnings by a
weighted average +33% in 1996 and +32% in 1997, rates considerably higher than
those expected for other midcap or broad market indices. Given the strong growth
prospects for the companies in the Fund's portfolio, we believe the Fund's
investments are attractively positioned in an environment of moderate economic
growth.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Sit Growth Fund is to maximize long-term capital
appreciation. The Fund pursues this objective by investing primarily in the
common stocks of small and medium-size emerging growth companies before they
become well recognized.
The Fund may invest in larger companies which offer improved growth
possibilities because of rejuvenated management, changes in product or some
other development that might stimulate earnings growth.
PORTFOLIO SUMMARY
Net Asset Value 9/30/96: $ 16.59 Per Share
6/30/96: $ 15.58 Per Share
Total Net Assets: $ 380.82 Million
PORTFOLIO STRUCTURE
(% of total net assets)
Technology 26.3
Health Care 18.9
Business Equipment
& Services 14.6
Financial 14.4
Energy 6.3
Consumer Services 4.9
Retail 3.3
Capital Goods 3.1
Consumer Durables 1.8
Utilities 1.5
Raw Materials 0.9
Other Assets
& Liabilities 4.0
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Growth NASDAQ OTC S&P Midcap Growth NASDAQ OTC S&P Midcap
Fund Composite Index 400 Index Fund Composite Index 400 Index
<S> <C> <C> <C> <C> <C> <C>
3 Months 6.48% 3.54% 2.91% 6.48% 3.54% 2.91%
(unannualized)
1 Year 19.24 17.57 13.99 19.24 17.57 13.99
5 Years 14.61 18.42 15.23 97.77 132.87 103.17
10 Years 16.36 13.34 15.52 355.18 249.88 323.16
Inception 19.36 14.62 18.00 1,109.35 583.52 929.07
(9/2/82)
</TABLE>
* As of 9/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
NASDAQ OTC COMPOSITE INDEX NOR THE S&P 500 INDEX.
GROWTH OF $10,000
The sum of $10,000 invested at inception (9/2/82) and held until 9/30/96 would
have grown to $120,935 in the Fund or $68,352 in the NASDAQ OTC
Composite Index assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
Parametric Technology, Inc.
Oxford Health Plans, Inc.
HBO & Co.
Peoplesoft, Inc.
TCF Financial Corp.
Ceridian Corp.
Healthsouth Rehabilitation Corp.
T. Rowe Price & Associates
MGIC Investment Corp.
Mercury General Corp.
Total number of holdings: 62
SIT GROWTH & INCOME FUND REVIEW
[PHOTO] PETER L. MITCHELSON, CFA
SENIOR PORTFOLIO MANAGER
RONALD D. SIT, CFA
PORTFOLIO MANAGER
Performance of the Sit Growth & Income Fund continued to be favorable
during the third calendar quarter of 1996. The Fund's total return of +6.1%
comfortably exceeded the +3.2% return of the Lipper Growth & Income Fund Index.
Over the past 12 months, the Fund's total return of +19.5% also exceeded the
return of the Lipper Index, which increased +17.1%.
Domestic common stock returns have been surprisingly strong in 1996,
exceeding expectations at the beginning of the year. After achieving very strong
growth in the second quarter, the economy has returned to a more moderate pace
of activity, thereby permitting the Federal Reserve to adopt to a more neutral
stance on monetary policy, while remaining ever vigilant on inflation. The
economic outlook immediately ahead should be one of continued moderate growth
and inflation which history has shown is normally favorable for financial asset
as well as growth stock investments. One caveat is the upcoming elections. If
the White House and both houses of Congress were won by the Democratic party,
concerns over increased taxes and spending might surface again.
As of September 30th, the Growth & Income Fund was 97% invested in
equities, an increase of three percentage points compared to the end of the
previous quarter. Industry weighting changes were very minor during the quarter,
and technology, health care and financial services sectors remain the three most
heavily weighted sectors. We regularly calculate the expected growth of earnings
per share of the companies held in the Growth & Income portfolio. As of the end
of September, the projected average 1996 earnings growth rate of the companies
held in the Fund was +24.8% and for 1997 it was +23.6%, both of which were
significantly greater than for the broader stock market, as represented by the
S&P 500 Index. Reflecting the Fund's policy of investing in companies with
strong earnings growth characteristics, shareholders are being asked at the
October 23rd Annual Meeting to approve a change in the Fund's name to the Sit
Large Cap Growth Fund. We believe the name change will enhance the Fund's
identity within the Sit Mutual Funds without changing its investment objective
or policies.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Sit Growth & Income Fund is to achieve long-term
capital appreciation and, secondarily, current income. The Fund pursues this
objective by investing primarily in common stocks of medium to large size growth
companies. As of June 30, 1996, the Fund was invested exclusively in such
securities.
PORTFOLIO SUMMARY
Net Asset Value 9/30/96: $34.74 Per Share
6/30/96: $32.75 Per Share
Total Net Assets: $55.94 Million
Quarterly Dividend: $ 0.01 Per Share
PORTFOLIO STRUCTURE
Technology 24.5
Health Care 15.9
Financial 11.4
Consumer Non-Durables 10.3
Business Equip.
& Services 9.1
Retail 5.3
Consumer Services 4.7
Energy 4.7
Capital Goods 4.6
Raw Materials 2.8
Consumer Durables 1.7
Utilities 1.0
Multi-Industry 0.7
Other Assets & Liabilities 3.3
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Growth & Lipper Growth S&P Growth & Lipper Growth S&P
Income Fund & Income Index 500 Index Income Fund & Income Index 500 Index
<S> <C> <C> <C> <C> <C> <C>
3 Months 6.14% 3.23% 3.09% 6.14% 3.23% 3.09%
(unannualized)
1 Year 19.53 17.09 20.33 19.53 17.09 20.33
5 Years 14.35 14.25 15.23 95.55 94.67 103.14
10 Years 13.28 13.22 14.99 247.86 246.26 304.17
Inception 15.13 15.53 17.09 627.99 663.90 823.19
(9/2/82)
</TABLE>
* As of 9/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND
CAPITAL GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE
REALIZED WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A
REPRESENTATION OF FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE
EXPENSES ARE INCLUDED IN THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE
NOT INCORPORATED IN THE S&P 500 INDEX. THE LIPPER INDEX FIGURES ARE OBTAINED
FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL
FUNDS.
ON 6/6/93, THE FUND'S INVESTMENT OBJECTIVE CHANGED TO ALLOW FOR A PORTFOLIO
OF 100% STOCKS. PRIOR TO THAT TIME, THE PORTFOLIO WAS REQUIRED TO CONTAIN NO
MORE THAN 80% STOCKS.
GROWTH OF $10,000
The sum of $10,000 invested at inception (9/2/82) and held until 9/30/96 would
have grown to $72,799 in the Fund, $76,390 in the Lipper Growth & Income Fund
Index or $92,319 in the S&P 500 Index assuming reinvestment of all dividends and
capital gains.
10 LARGEST HOLDINGS
Cisco Systems, Inc.
Microsoft Corp.
Pfizer, Inc.
Amgen, Inc.
Philip Morris Cos., Inc.
First Data Corp.
Johnson & Johnson
Coca Cola Co.
Gillette Co. (The)
Intel Corp.
Total number of holdings: 70
SIT BALANCED FUND REVIEW
[PHOTO] PETER L. MITCHELSON, CFA
SENIOR PORTFOLIO MANAGER
BRYCE A. DOTY, CFA
PORTFOLIO MANAGER
Performance of the Sit Balanced Fund was favorable in the third calendar
quarter of 1996. The Fund's total return was +4.1%, compared to +2.7% for the
Lipper Balanced Fund Index. For the twelve months through September 30, 1996,
the Fund achieved a total return of +14.1%, which ranked 12th out of 70
similar-sized balanced funds in the Lipper survey, and exceeded the return of
the Lipper Balanced Index of +11.8%.
During the third quarter, the asset mix of the Balanced Fund remained
relatively unchanged and with an emphasis on equity securities. As seen in the
accompanying chart on portfolio structure, the Fund's 61% exposure to equities
is at the top end of the normal operating range. In the fixed income portion of
the portfolio, virtually all of investments were in bonds and mortgages and cash
reserve instruments were a relatively small three percent of total assets.
Within the equity portion of the Fund, industry weighting shifts were quite
minor during the quarter, the largest being a two percentage point increase in
health care. During the quarter, one new health care name was added, the Swedish
pharmaceutical firm Astra, and additions were made to SmithKline Beecham, and
Oxford Health, an eastern HMO experiencing strong growth. The technology sector
continues to be the most heavily weighted industry group, primarily because of
the rapid earnings growth rates of many of the stocks in the sector. Cisco
Systems, a leading computer network producer, is the Fund's largest equity
holding.
Interest rates ended the quarter nearly unchanged. The Fund's fixed income
holdings performed well relative to the Lehman Aggregate Bond Index primarily
due to the higher level of interest income that they earn. The most significant
sector shift with the Fund's fixed income holdings involved selling three CMO's
and purchasing less defensive securities in the corporate and government
sectors.
Interest rates have moved within a narrow range for the past six months. We
expect this to continue for the remainder of 1996 as we maintain the Fund's
fixed income duration near the Lehman Aggregate Bond Index duration of 4.8
years.
In today's fast-moving financial markets and economy, the Sit Balanced Fund
provides investors both long-term growth and current income as well as the
freedom of leaving the asset allocation decision in the hands of full-time
investment professionals. We appreciate shareholders' continued interest and
support.
INVESTMENT OBJECTIVE AND STRATEGY
The Sit Balanced Fund's dual objectives are to seek long-term growth of
capital consistent with the preservation of principal and to provide regular
income. It pursues its objectives by investing in a diversified portfolio of
stocks, bonds and short-term instruments. The Fund may emphasize either equity
securities, fixed-income securities, or short-term instruments or hold equal
amounts of each, dependent upon the Adviser's analysis of market, financial and
economic conditions.
The Fund's permissible investment allocation is: 40-60% in equity
securities, 40-60% in fixed-income securities, and up to 20% in short-term
fixed-income instruments. At all times at least 25% of the assets will be
invested in fixed-income senior securities.
PORTFOLIO SUMMARY
Net Asset Value 9/30/96: $13.00 Per Share
6/30/96: $12.57 Per Share
Total Net Assets: $ 4.26 Million
Quarterly Dividend: $ 0.07 Per Share
PORTFOLIO STRUCTURE
(% of total net assets)
FIXED INCOME 39.3%
(Bonds & Cash)
STOCKS 60.7%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Balanced Lehman Aggregate S&P Balanced Lehman Aggregate S&P
Fund Bond Index 500 Index Fund Bond Index 500 Index
<S> <C> <C> <C> <C> <C> <C>
3 Months 4.11% 1.85% 3.09% 4.11% 1.85% 3.09%
(unannualized)
1 Year 14.13 4.90 20.33 14.13 4.90 20.33
Inception 12.67 5.45 18.15 38.83 15.72 58.21
(12/31/93)
</TABLE>
* As of 9/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
NASDAQ OTC COMPOSITE INDEX NOR THE S&P 500 INDEX.
GROWTH OF $10,000
The sum of $10,000 invested at inception (12/31/93) and held until 9/30/96 would
have grown to $13,883 in the Fund, $11,572 in the Lehman Aggregate Bond Index or
$15,821 in the S&P 500 Index assuming reinvestment of all dividends and capital
gains.
TOP HOLDINGS
STOCKS:
Cisco Systems, Inc.
Microsoft Corp.
Gillette Co. (The)
Philip Morris Cos., Inc.
Pfizer, Inc.
BONDS:
U.S. Treasury Note, 8.25%, 7/15/98
Franchise Finance Corp., 7.02%, 2/20/03
Ford Motor Credit Corp., 9.14%, 12/30/14
GNMA 9.50%, 11/15/04
EquiVantage 1996-3 A-3, 7.70%, 9/25/27
Total number of holdings: 96
A LOOK AT THE SIT MUTUAL FUNDS
The Sit Mutual Funds is managed by Sit Investment Associates, Inc.
Sit Investment was founded by Eugene C. Sit in July 1981 and is
dedicated to a single purpose, to be one of the premier investment
management firms in the United States. Sit Investment currently manages
more than $4.8 billion for some of America's largest corporations,
foundations and endowments.
The Sit Mutual Funds is comprised of eleven 100% NO-LOAD funds.
100% NO-LOAD means that the funds have no sales charges on purchases,
no deferred sales charges, no 12b-1 fees, no redemption fees and no
exchange fees. Every dollar you invest goes to work for you.
Some of the other features include:
* Free telephone exchange
* Dollar-cost averaging through automatic investment plan
* Electronic transfer of funds for purchases and redemptions
* Free check-writing privileges on bond funds
* Retirement accounts including IRAs, Keoghs and 401(k) Plans
SIT FAMILY OF FUNDS
STABILITY:
Safety of principal
and current income
MONEY MARKET
INCOME:
Increased income
U.S. GOVERNMENT SECURITIES
TAX-FREE INCOME
MINNESOTA TAX-FREE INCOME
BOND
GROWTH & INCOME:
Long-term capital
appreciation and income
BALANCED
GROWTH & INCOME
GROWTH:
Long-term capital
appreciation
GROWTH
INTERNATIONAL GROWTH
SMALL CAP GROWTH
DEVELOPING MARKETS GROWTH
[LOGO]
Directors:
Eugene C. Sit, CFA
Peter L. Mitchelson, CFA
William E. Frenzel
John E. Hulse
Sidney L. Jones
Donald W. Phillips
Director Emeritus:
Melvin C. Bahle
Officers:
Eugene C. Sit, CFA Chairman
Peter L. Mitchelson, CFA Vice Chairman
Mary K. Stern President
Erik S. Anderson, CFA Vice President - Investments
Ronald D. Sit, CFA Vice President - Investments
Paul E. Rasmussen Vice President & Treasurer
Michael P. Eckert Vice President
Michael J. Radmer Secretary
Parnell M. Kingsley Assistant Secretary
Carla J. Rose Assistant Secretary
Debra A. Sit, CFA Assistant Treasurer
QUARTERLY REPORT STOCK FUNDS
SEPTEMBER 30, 1996
INVESTMENT ADVISER
Sit Investment Associates, Inc.
4600 Norwest Center
Minneapolis, MN 55402
612-334-5888 (Metro Area)
800-332-5580
DISTRIBUTOR
SIA Securities Corp.
4600 Norwest Center
Minneapolis, MN 55402
612-334-5888 (Metro Area)
800-332-5580
CUSTODIAN
The Northern Trust Company
50 South LasSalle Street
Chicago, IL 60675
TRANSFER AGENT AND
DISBURSING AGENT
First Data Investor Services
P.O. Box 9763
Providence, RI 02940-9763
AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INVESTMENT SUB-ADVISER
(Developing Markets Growth Fund and
International Growth Fund)
Sit/Kim International Investment Associates, Inc.
4600 Norwest Center
Minneapolis, MN 55402
612-334-5888 (Metro Area)
800-332-5580
MEMBER OF 100%
NO-LOAD
MUTUAL FUND
COUNCIL
