STOCK FUNDS QUARTERLY REPORT
March 31, 1997
A FAMILY OF 100% NO-LOAD FUNDS
LARGE CAP GROWTH FUND
MID CAP GROWTH FUND
SMALL CAP GROWTH FUND
BALANCED FUND
INTERNATIONAL GROWTH FUND
DEVELOPING MARKETS GROWTH FUND
[Sit Logo]
SIT MUTUAL FUNDS
SIT MUTUAL FUNDS
STOCK FUNDS QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
----
Chairman's Letter................................................ 1
Performance Review............................................... 2
Fund Reviews
Large Cap Growth Fund....................................... 4
Mid Cap Growth Fund......................................... 6
Small Cap Growth Fund....................................... 8
Balanced Fund............................................... 10
International Growth Fund................................... 12
Developing Markets Growth 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 - March 31, 1997
[PHOTO]
Dear Fellow Shareholders:
Global equity markets provided mixed results during the first calendar
quarter ended March 31, 1997. The strength of the U.S. economy induced the
Federal Reserve to raise short-term interest rates in March, leaving investors
to debate over the course of future interest rate trends.
Economic Overview
The strength of the U.S. economy during the first quarter of 1997
ultimately resulted in a 25 basis point increase in the federal funds rate.
Having grown at a +3.8% annualized real GDP growth rate during the fourth
quarter, the economy has thus far in 1997 exhibited few signs of slowing.
Personal income and expenditures posted strong gains during February, on steady
gains in employment and gradually rising wages. Real personal consumption
expenditures, which account for nearly two-thirds of GDP, have advanced at a
+4.8% annual rate. Given this momentum, our expectations for first quarter
growth have risen to +3.5% or higher, although we are forecasting a gradual
slowing thereafter which should produce calendar 1997 real GDP growth of +3.2%.
We also believe that inventory expansion could augment first quarter growth, but
that this will likely be offset by contracting net exports due to the stronger
U.S. dollar.
Even though the Fed has adopted a more restrictive monetary stance, the
currently low and relatively stable inflation level provides one of the
underpinnings for financial assets. Through March, consumer and producer
inflation has decelerated from year-end levels, with +2.8% and +1.6%
year-over-year increases in the CPI and PPI, respectively. Commodity inflation
also appears to be in a downward trend. While current inflation looks to be
contained, the strength of the economy, as evidenced by consumer spending and
employment trends, is being closely monitored by the Fed. We believe the Fed
will raise the fed funds rate by an additional 50 basis points in the ensuing
months should economic strength continue, but from the 7 to 7 1/2% level, the
stage could be set for long-term rates to decline during the second half of 1997
as the markets assess the lagged impact of higher short-term rates.
As expected, Congress did not meet the April 15th deadline for a budget
resolution and will likely complete negotiations early this summer.
Controversial issues to be debated include changing the calculations of the CPI
to reduce entitlement spending, tax cuts and a plan to balance the budget by
2002. Thus far in fiscal 1997, the deficit is $16 billion lower than last year's
level, and it remains one of the lowest in the industrialized world.
Equity Investment Strategy
We expect that domestic stocks could remain in a consolidation phase
near current levels until the Fed tightens further; however, the effect of
higher short-term interest rates has historically worked to growth stocks'
advantage as overall market earnings growth slows. At the end of the quarter,
the market, in general, and growth stocks, in particular, have become
increasingly attractive on the basis of price momentum and valuation. This is
especially true for quality, high-growth companies whose price/earnings ratios
have approached their long-term growth rates. The Sit domestic growth funds
continue to be positioned with substantially higher earnings growth than the S&P
500 Index, yet their valuations are not excessive when compared to the market's
price/earnings ratio. We look to make selective, high-growth additions to the
portfolio on an opportunistic basis where individual company fundamentals remain
strong. We also note that strength in the U.S. dollar has historically
correlated positively with small cap stock performance given their generally
limited exposure to foreign markets.
We believe some consolidation in international markets could result
from expectations of additional increases in U.S. short-term interest rates.
Given the potential currency risk in those countries whose currencies are
closely aligned to the U.S. dollar and those in Asia whose financial sectors
have come under stress, we have modestly reduced our weight in Asia. We remain
positive on Asia's long-term prospects, however, and look for significant
economic growth and investment to drive sustainable earnings growth in the +10
to +12% range. We have increased our exposure to European multinationals with
strong regional and global franchises as well as to Latin America, which has
been the beneficiary of strong capital inflows and improving economic
fundamentals.
We sincerely appreciate your interest and investment in the Sit Mutual
Funds, and we look forward to assisting you in achieving your long-term
investment goals.
With best wishes,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
SIT MUTUAL FUNDS
March 31, 1997 Performance Review - Stock Funds
STOCK FUNDS REVIEW
Domestic stocks began 1997 in strong fashion but retreated in March on
news of higher short-term interest rates to finish the first quarter with modest
gains. The market grew skittish on additional signs of economic acceleration and
in anticipation of potential future Federal Reserve actions, which once again
generally led investors to the relative stability of larger company stocks. The
DJIA provided investors with a +2.1% total return, while the S&P 500 Index
finished the quarter +2.8%. Similar to last quarter, performance was again
narrowly concentrated among the largest companies in the representative indices.
Medium and smaller-sized companies fared comparatively worse, with the S&P
Midcap 400 Index declining -1.5% and the Russell 2000 Index falling -5.2%.
Most of the first quarter's economic indicators were suggestive of
strong growth, which spurred a rise in interest rates and a contraction in
equity valuations. Hardest hit were the high growth areas of technology, health
care and business services. Holdings in the consumer staples and financial
services area performed reasonably well. Despite the economic strength of the
past two quarters, we continue to look for moderate growth in the second half of
1997, which should aid prospects for domestic, above-average growth issues.
International equity results varied widely but were down slightly
during the quarter as seen in the -1.6% performance in the MSCI EAFE Index in
U.S. dollar terms. The Asia Pacific markets reacted negatively to U.S. dollar
strength, higher U.S. short-term interest rates and financial sector weakness.
Taiwan was the exception, however, rising +15.2% on strength in the electronics
sector. The MSCI Pacific Index fell -9.9%, but this return was heavily
influenced by Japan's -11.8% contraction. European markets contributed
positively as seen in the MSCI Europe's +4.9% return, while Latin American
markets surged +21.0% according to the MSCI Emerging Markets Latin America Index
on positive capital inflows and generally improving economic fundamentals.
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SIT LARGE CAP GROWTH 23.48% 21.83% 5.32% 5.33% 32.02% -2.37% 32.72% 4.94% 3.15% 2.83%
SIT MID CAP GROWTH 43.65 10.33 5.50 9.77 35.15 -2.04 65.50 -2.14 8.55 -0.47
SIT SMALL CAP GROWTH ---- ---- ---- ---- ---- ---- ---- ---- ---- 11.57(1)
SIT BALANCED ---- ---- ---- ---- ---- ---- ---- ---- ---- -0.33
SIT INTERNATIONAL GROWTH ---- ---- ---- ---- ---- ---- 4.10(1) 2.69 48.37 -2.99
SIT DEVELOPING MARKETS GROWTH ---- ---- ---- ---- ---- ---- ---- ---- ---- -2.02(1)
S&P 500 INDEX 31.60 18.64 5.28 16.55 31.61 -3.05 30.46 7.64 10.07 1.32
S&P MIDCAP 400 INDEX 35.59 16.21 -2.04 20.87 35.55 -5.12 50.11 11.92 13.95 -3.60
RUSSELL 2000 INDEX (2) -- -- -- -- -- -- -- -- -- 4.61
EAFE INDEX (3) -- -- -- -- -- -- 0.26 -12.17 32.56 7.78
MSCI EMERGING MARKETS FREE INDEX (4) -- -- -- -- -- -- -- -- -- 2.80
</TABLE>
(continued wide table from above)
YTD
1995 1996 1997
31.66% 23.05% -0.83%
33.64 21.87 -10.09
52.16 14.97 -14.38
25.43 15.80 -0.75
9.36 10.31 -0.43
-4.29 17.27 6.22
37.58 22.96 2.67
30.94 19.19 -1.46
28.45 16.49 -5.17
11.21 6.05 -1.57
-6.94 3.92 8.04
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE
PERIODS ENDED MARCH 31, 1997
TOTAL RETURN
NASDAQ QUARTER SIX MONTHS SINCE
SYMBOL INCEPTION ENDED 3/31/97 ENDED 3/31/97 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SIT LARGE CAP GROWTH SNIGX 09/02/82 -0.83% 3.12% 16.94% 19.91% 13.30% 11.17% 14.82%
SIT MID CAP GROWTH NBNGX 09/02/82 -10.09 -8.46 2.68 15.32 10.56 11.73 17.92
SIT SMALL CAP GROWTH SSMGX 07/01/94 -14.38 -16.60 -4.96 ---- ---- ---- 20.53
SIT BALANCED SIBAX 12/31/93 -0.75 3.50 12.56 14.07 ---- ---- 11.80
SIT INTERNATIONAL GROWTH SNGRX 11/01/91 -0.43 4.07 6.17 7.60 12.08 ---- 12.01
SIT DEVELOPING MARKETS GROWTH SDMGX 07/01/94 6.22 5.45 14.16 ---- ---- ---- 5.81
S&P 500 INDEX (5) 2.67 11.23 19.81 22.30 16.42 13.38 17.31
S&P MIDCAP 400 INDEX (5) -1.46 4.51 10.65 15.51 13.70 13.59 17.69
RUSSELL 2000 INDEX (2) -5.17 -0.24 5.11 -- -- -- 15.44
EAFE INDEX (3) -1.57 0.00 1.45 6.53 10.57 -- 7.24
MCSI EMERGING MARKETS FREE INDEX (4) 8.04 7.07 6.15 -- -- -- 2.62
</TABLE>
(1) Period from Fund inception through calendar year-end.
(2) Figures assume an inception date of 7/1/94.
(3) Figures assume an inception date of 10/31/91.
(4) Figures assume an inception date of 6/30/94.
(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 LARGE CAP GROWTH FUND REVIEW
March 31, 1997
[PHOTO]
PETER L. MITCHELSON, CFA
SENIOR PORTFOLIO MANAGER
RONALD D. SIT, CFA
PORTFOLIO MANAGER
Performance of the Sit Large Cap Growth Fund was slightly negative in
the first quarter of calendar 1997, lagging the return of the Lipper Growth Fund
Index. Over the past 12 months, the Fund's total return of +16.94% compared
favorably with the +12.03% return of the Lipper Index.
Domestic stock market returns have been more modest thus far in 1997
after two robust years. From record highs reached in early March, major stock
market indexes retreated roughly -7% by month end amidst fears of multiple
Federal Reserve policy tightenings in response to recent economic strength that
has pushed the economy into a zone that could result in future inflationary
pressures. First quarter real GDP growth could be +3.5% or higher, spurred by a
healthy consumer sector that is well employed. Coming on the heels of the +3.8%
real GDP growth rate in the fourth quarter of 1996, the first quarter strength
has concerned the Federal Reserve that tightness in employment has the potential
to cause wage pressures in the future even though most other pricing indicators
are relatively dormant at the present time. While the Fed's actions are creating
uncertainty in the near term, we believe the intent of keeping inflation under
control is very positive for financial assets in the longer term. The Fund
appears well positioned to benefit ultimately since the average 1997 earnings
gain projected for the companies held in the Fund is +25.3%, which is
considerably higher than the broad market's expected increase.
As of March 31, the Fund was 92% invested in equities, a reduction of
five percentage points compared to the end of 1996. Industry weighting changes
were minor during the quarter. The four most heavily-weighted sectors represent
rapidly growing areas of the economy, namely, technology, health care, financial
and consumer non-durables. During the quarter, four new companies, Chase
Manhattan, Allstate, Eli Lilly and Warner Lambert were purchased, while
portfolio positions in Promus Hotel and Potash were eliminated.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Sit Large Cap Growth 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 3/31/97: $33.40 Per Share
12/31/96: $33.68 Per Share
Total Net Assets: $59.36 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
Technology 20.8
Health Care 17.0
Financial 13.8
Consumer Non-Durables 10.1
Capital Goods 6.4
Business Equip. & Services 6.1
Energy 5.4
Retail 4.9
Consumer Services 3.3
Utilities 1.7
Raw Materials 1.5
Consumer Durables 0.7
Multi-Industry 0.5
Other Assets & Liabilities 7.8
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* Cumulative Total Returns*
----------------------------- -------------------------
Large Cap Russell S&P Large Cap Russell S&P
Growth 1000 500 Growth 1000 500
Fund Growth Index Index Fund Growth Index Index
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months -0.83% 0.54% 2.67% -0.83% 0.54% 2.67%
(unannualized)
1 Year 16.94 17.48 19.81 16.94 17.48 19.81
5 Years 13.30 14.66 16.42 86.73 98.14 113.87
10 Years 11.17 13.03 13.38 188.32 240.38 250.95
Inception 14.82 16.45 17.31 650.73 822.29 926.85
(9/2/82)
</TABLE>
* As of 3/31/97
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 NOR THE RUSSELL 1000 GROWTH INDEX.
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
[LINE GRAPH]
The sum of $10,000 invested at inception (9/2/82) and held until 3/31/97 would
have grown to $75,073 in the Fund, or $102,687 in the S&P 500 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* General Electric Corp.
* Microsoft Corp.
* Intel Corp.
* Philip Morris Cos., Inc.
* Pfizer, Inc.
* Cisco Systems, Inc.
* Coca Cola Co.
* Johnson & Johnson
* Gillette Co. (The )
* Norwest Corporation
Total number of holdings: 66
SIT MID CAP GROWTH FUND REVIEW
March 31, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ERIK S. ANDERSON, CFA
PORTFOLIO MANAGER
Medium cap growth stocks, particularly those with above-average growth
prospects, experienced difficult market performance during the first quarter as
continued signs of economic strength and expectations for higher interest rates
took their toll. Looking ahead, we believe the Sit Mid Cap Growth Fund remains
an attractive investment vehicle given the growth attributes of its portfolio in
light of its current valuation.
The dynamic companies in the Fund's portfolio combine to provide
earnings growth potential exceeding +25% in both 1997 and 1998. Over the long
term, we expect the Fund to provide earnings growth of approximately +23%,
nearly three times the overall market as measured by the S&P 500 Index. We
remain committed to our growth-oriented investment approach, which leads us to
emphasize investment opportunities in technology, health care, and financial
services because of the favorable prospects for these sectors.
The Fund's valuation at quarter end was 22.2 times and 17.8 times
estimated 1997 and 1998 earnings, respectively, on a weighted average basis,
equating to an average 23% discount to its estimated near-term growth rates and
a 13% discount to its estimated long-term growth rate. Moreover, with a weighted
average market cap of $2.7 billion, and with 75% of its portfolio invested in
companies having greater than 16% estimated long-term earnings growth, the
Fund's concentration in true midcap, high-growth investments is higher than most
comparable growth-oriented midcap indices.
Performance during the quarter was impacted negatively by payment
processors, health care information systems companies, and software/networking
stocks; however, we are seeing improved performance in several other key areas,
specifically technology and health care. New additions during the quarter
included Pairgain Technology (telecommunications), Republic New York (banking)
and Vertex Pharmaceuticals (biotechnology). With 5% in cash reserves, the Fund
remained essentially fully invested at quarter end. Given the fundamentals of
the companies in the Fund's portfolio and the valuation, in general, of medium
cap growth stocks, we remain optimistic on the Fund's prospects for 1997.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Sit Mid Cap 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 3/31/97: $12.83 Per Share
12/31/96: $14.27 Per Share
Total Net Assets: $324.00 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
Technology 23.0
Financial 20.2
Health Care 16.1
Business Equip. & Services 11.2
Energy 10.3
Consumer Services 7.6
Retail 2.7
Capital Goods 2.2
Consumer Durables 1.7
Other Assets & Liabilities 5.0
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
Mid Cap Russell S&P Mid Cap Russell S&P
Growth Mid Cap Midcap Growth Mid Cap Midcap
Fund Growth Index 400 Index Fund Growth Index 400 Index
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months -10.09% -3.64% -1.46% -10.09% -3.64% -1.46%
(unannualized)
1 Year 2.68 6.34 10.65 2.68 6.34 10.65
5 Years 10.56 13.09 13.70 65.20 84.98 90.05
10 Years 11.73 11.90 13.59 203.22 207.76 257.46
Inception 17.92 n/a 17.69 1,007.03 n/a 975.47
(9/2/82)
</TABLE>
* As of 3/31/97
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 MID CAP GROWTH INDEX NOR THE S&P MIDCAP 400 INDEX.
GROWTH OF $10,000
[LINE GRAPH]
The sum of $10,000 invested at inception (9/2/82) and held until 3/31/97 would
have grown to $110,703 in the Fund, or $107,547 in the S&P Midcap 400 Index
assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Mercury General Corp.
* Parametric Technology, Inc.
* TCF Financial Corp.
* MGIC Investment Corp.
* T Rowe Price & Associates
* Xilinx, Inc.
* Analog Devices, Inc.
* Oxford Health Plans, Inc.
* HBO & Co.
* Promus Hotel Corp.
Total number of holdings: 56
SIT SMALL CAP GROWTH FUND REVIEW
March 31, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
The first quarter of 1997 was a difficult one in market performance for
small capitalization growth stocks and for the Sit Small Cap Growth Fund, in
particular. The Fund was down -14.4% versus -10.1% for the Lipper Small Company
Growth Index for this period. This underperformance occurred while major market
indices reached new highs before their recent corrections. More importantly,
many growth companies in our portfolio continue to exhibit very strong revenue
and earnings growth. We currently estimate that the Fund's holdings should show
earnings growth exceeding +30% on a weighted average basis in 1997 and 1998 and
in excess of +25% on a longer term basis. These projected growth rates are more
than three times the expected earnings growth for the stocks comprising the S&P
500 Index. We believe that the portfolio's valuation at approximately 21 times
estimated earnings for 1997 offers attractive relative value to the S&P 500's
price/earnings ratio of approximately 18 times given the portfolio's superior
growth rates.
Small company growth stocks have lagged the major market indices since
mid 1996. This reflects continued strong earnings performance of larger company
stocks despite the fact that we are in the late stages of the current economic
expansion. Additionally, expectations of further increases in interest rates and
substantial inflows into index-related securities have led investors to stocks
of larger, more stable companies. As mentioned, the fundamentals of our holdings
in the technology, business and consumer services, and health care sectors, in
general, remain quite favorable; we continue to adhere to our policy of seeking
out the most attractive growth companies in these sectors. The Fund's holdings
are heavily concentrated in the previously mentioned high-growth sectors as well
as financial and energy services companies.
In terms of portfolio changes during the quarter, the most significant
adjustments included increases in the financial and consumer services and
technology sectors where there are combinations of attractive valuations and
earnings momentum. Health care holdings were pared slightly, and cash was
reduced toward a more fully invested level. We believe the strong fundamentals
and attractive valuations of the companies in the Fund's portfolio make the Sit
Small Cap Growth Fund an attractive long-term investment today.
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 3/31/97: $15.78 Per Share
12/31/96: $18.43 Per Share
Total Net Assets: $46.27 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
Technology 28.1
Financial 16.9
Health Care 16.6
Consumer Services 11.8
Energy 9.5
Business Equip. & Services 4.2
Capital Goods 3.9
Consumer Non-Durables 1.9
Retail 0.5
Other Assets & Liabilities 6.6
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
Small Cap Russell Russell Small Cap Russell Russell
Growth 2000 2000 Growth 2000 2000
Fund Index Growth Index Fund Index Growth Index
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months -14.38% -5.17% -10.49% -14.38% -5.17% -10.49%
(unannualized)
1 Year -4.96 5.11 -5.82 -4.96 5.11 -5.82
Inception 20.53 15.44 13.47 67.12 48.44 41.62
(7/1/94)
</TABLE>
* As of 3/31/97
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 NOR THE RUSSELL 2000 GROWTH INDEX.
GROWTH OF $10,000
[LINE GRAPH]
The sum of $10,000 invested at inception (7/1/94) and held until 3/31/97 would
have grown to $16,712 in the Fund or $14,844 in the Russell 2000 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Anadigics, Inc.
* Scopus Technology
* Technomatix Technologies, Ltd.
* Community First Bankshares, Inc.
* Provident Bankshares Corp.
* BDM International, Inc.
* Central European Media Enterprises, Ltd.
* Cardio Thoracic Systems, Inc.
* Aspen Technology, Inc.
* Uniphase Corp.
Total number of holdings: 57
SIT BALANCED FUND REVIEW
March 31, 1997
[PHOTO]
PETER L. MITCHELSON, CFA
SENIOR PORTFOLIO MANAGER
BRYCE A. DOTY, CFA
PORTFOLIO MANAGER
Performance of the Sit Balanced Fund was slightly negative in the first
quarter of calendar 1997, but over the past 12 months increased +12.6%. On a
three year basis, the Fund was ranked in the 29th percentile out of 177 balanced
funds tracked by Lipper Analytical Services.
As of March 31, the asset allocation of the Fund in equities was 56%,
down slightly from 59% at the end of December. Fixed income securities stayed
relatively constant at 35% of assets while cash reserve instruments increased to
9% of assets.
Recent economic strength has pushed the economy into a zone that could
result in inflationary pressures, prompting the Federal Reserve to raise
short-term interest rates in the near term. First quarter real GDP growth could
be +3.5% or higher, spurred by a healthy consumer sector that is well employed.
Largely as a result of the Fed's intentions to tighten monetary policy, common
stock performance has been more modest thus far in 1997 after two robust years.
Our longer term forecast continues to be for moderate economic growth and
contained inflation, two conditions generally favorable for financial asset
investing, in general, and for growth stocks, in particular.
Within the equity portion of the portfolio, industry weighting changes
were minor during the quarter. Reflecting the Fund's growth-oriented equity
investment style, the four most heavily weighted sectors are technology, health
care, financial and consumer non-durables.
Within the fixed income portion of the portfolio, we sold a portion of
the Fund's U.S. Treasury securities in favor of corporates. Included in the
corporates is one of the new securities linked to the rate of inflation.
Specifically, the size of the principal increases at the same rate as the
Consumer Price Index, protecting the bond's return from rising inflation. Over
the near term, the Federal Reserve may raise interest rates further to slow the
economy, but stable to declining interest rates are likely to result thereafter.
Accordingly, we are maintaining the duration of the fixed income holdings
slightly longer than related fixed income market indices. High quality
securities offering attractive total returns continue to be emphasized.
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 3/31/97: $13.23 Per Share
12/31/96: $13.33 Per Share
Total Net Assets: $4.45 Million
Quarterly Dividend: $0.09 Per Share
PORTFOLIO STRUCTURE
(% of total net assets)
[PIE GRAPH]
Stocks 56.0%
Bonds 44.0%
(Bonds & Cash)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
Lehman S&P Lehman S&P
Balanced Aggregate 500 Balanced Aggregate 500
Fund Bond Index Index Fund Bond Index Index
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months -0.75% -0.56% 2.67% -0.75% -0.56% 2.67%
(unannualized)
1 Year 12.56 4.91 19.81 12.56 4.91 19.81
3 Year 14.07 6.86 22.30 48.44 22.03 82.91
Inception 11.80 5.37 19.00 43.69 18.53 75.98
(12/31/93)
</TABLE>
* As of 3/31/97
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
LEHMAN AGGREGATE BOND INDEX NOR THE S&P 500 INDEX.
GROWTH OF $10,000
[LINE GRAPH]
The sum of $10,000 invested at inception (12/31/93) and held until 3/31/97 would
have grown to $14,367 in the Fund, $11,853 in the Lehman Aggregate Bond Index or
$17,598 in the S&P 500 Index assuming reinvestment of all dividends and capital
gains.
TOP HOLDINGS
STOCKS
* General Electric Co.
* Microsoft Corp.
* Philip Morris Cos. Inc.
* Intel Corp.
* Pfizer, Inc.
BONDS
* Franchise Finance Corp., 7.875%, 11/30/05
* Ford Motor Credit Corp., 9.14%, 12/30/14
* EquiVantage 1996-3 A-3, 7.70%, 9/25/27
* GNMA 9.50%, 11/15/04
* ContiMortgage Home Equity Loan Trust 1996-1 A7, 7.00%, 9/25/27
Total number of holdings: 101
SIT INTERNATIONAL GROWTH FUND REVIEW
March 31, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ANDREW B. KIM, CFA
SENIOR PORTFOLIO MANAGER
The Sit International Growth Fund declined -0.4% during the quarter,
compared to the MSCI EAFE Index decline of -1.6%. The European markets continued
their upward trend, and non-index markets in Latin America and Taiwan also
provided positive results. However, these positive returns were offset by the
declines in virtually all of the Asian markets. Japan declined the most, down
- -11.8% in U.S. dollar terms.
We have continued to reduce the Fund's exposure to Japan, and we remain
significantly underweighted relative to the Index at about 63% of the
benchmark's weight. Since the recent consumption tax increase will slow
consumption growth in the near term, we continue to focus on those exporters
benefiting from the low interest rate and weak yen environment.
We expect reasonable upside for the non-Japan Asian markets for the
remainder of 1997, based on an export recovery, a pick-up in earnings growth,
and modest valuations. Most markets are trading below their five-year historic
highs.
We continue to maintain our positive bias towards Europe. The business
cycle, inflation and interest rate outlooks are all favorable. The sharp
appreciation of the deutschmark relative to the dollar has resulted in positive
earnings revisions for many of our multi-national holdings, which have
significant dollar based earnings.
The Latin American markets have shown relative stability in relation to
the increasing volatility of the U.S. market. We plan to slightly increase our
allocation to the region as lower current account deficits, more competitive
currencies, and greater fiscal discipline should continue to support the markets
of the region. Our portfolio continues to concentrate on those companies with
visible earnings streams, benefiting from rapid globalization and corporate
restructuring.
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 3/31/97: $16.38 Per Share
12/31/96: $16.45 Per Share
Total Net Assets: $84.55 Million
PORTFOLIO STRUCTURE - BY REGION
( % of total net assets)
[BAR GRAPH]
SIT INT'L Morgan Stanley
GROWTH FUND EAFE Index
Europe Other 25.3 23.8
France, Germany & UK 24.8 36.2
Pacific Basin 23.1 10.9
Japan 18.4 29.1
Latin America 4.8 0.0
Cash Equivalents 3.6 0.0
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
International Morgan Stanley Lipper International Morgan Stanley Lipper
Growth Capital Int'l Int'l Growth Capital Int'l Int'l
Fund EAFE Index Index Fund EAFE Index Index
---------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months -0.43% -1.57% 2.50% -0.43% -1.57% 2.50%
(unannualized)
1 Year 6.17 1.45 12.34 6.17 1.45 12.34
3 Years 7.60 6.53 8.99 24.56 20.89 29.48
5 Years 12.08 10.57 11.41 76.87 65.28 71.63
Inception 12.01 7.24 10.90 84.83 46.04 75.22
(11/1/91)
</TABLE>
* As of 3/31/97
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
[LINE GRAPH]
The sum of $10,000 invested at inception (11/1/91) and held until 3/31/97 would
have grown to $18,483 in the Fund or $14,604 in the Morgan Stanley EAFE Index
assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Hutchison Whampoa
* Canon, Inc., A.D.R.
* Matsushita Kotobuki
* Aegon N.V., A.D.R.
* Nutricia
* Zurich Insurance
* Veba A.G.
* Banyu Pharmaceuticals
* City Developments
* L.M. Ericsson Telephone Co., A.D.R.
Total number of holdings: 77
SIT DEVELOPING MARKETS GROWTH FUND REVIEW
March 31, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ANDREW B. KIM, CFA
SENIOR PORTFOLIO MANAGER
The Sit Developing Markets Growth Fund was up +6.2% for the quarter,
compared to the MSCI Emerging Markets Index return of +8.0%. South Africa, which
comprises 11.5% of the Index, benefited from a stronger currency and rallied
+11.4% during the quarter. The Fund historically has had minimal exposure to
South Africa, as we focus on economies with superior economic and corporate
earnings growth potential.
We have steadily increased the Fund's allocation in Latin America from
26% at the beginning of the quarter to 35% at quarter end. We remain optimistic
on Brazil, where the state-owned companies are benefiting from a more favorable
tariff environment as the privatization program progresses. During the quarter,
we added two supermarket chains in Brazil and Argentina (CIA Brasil Distribuicao
Pfd. and Disco S.A., respectively); a pharmaceutical company in Chile
(Laboratorio Chile); as well as a recently privatized electric utility in Brazil
(Light ON Brasil). In Mexico, new portfolio additions include a diversified
conglomerate and a household goods retailer (Grupo Carso, S.A. and Grupo Elektra
S.A., respectively).
The Fund's Asian weighting has declined to 45% from 48% at the
beginning of the quarter due to interest rate concerns, slower export growth,
and an oversupply of commercial real estate. However, the severe export
downturn, which impaired growth in 1996, is bottoming. We expect regional
earnings growth to accelerate to 14% in 1997 from only 4% in 1996. Overheating
pressures in most countries are abating and easier monetary policies should
result in attractive investment prospects.
We continue to overweight Israel and Portugal. Many multinational
technology companies are located in Israel, and Portugal is benefiting from
increased investment spending as they strive to join EMU.
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 3/31/97: $11.61 Per Share
12/31/96: $10.93 Per Share
Total Net Assets: $13.36 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
SIT DEVELOPING MARKETS MSCI Emerging
GROWTH FUND Markets Free Index
Pacific Basin 44.5 47.1
Latin America 34.7 31.7
Africa/Middle East 6.2 13.7
Europe 5.4 7.5
Other Assets & Liabilities 9.2 N/A
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
Developing Morgan Stanley Lipper Developing Morgan Stanley Lipper
Markets International Emerging Markets International Emerging
Growth Emerging Markets Markets Growth Emerging Markets Markets
Fund Free Index Index Fund Free Index Index
------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months 6.22% 8.04% 8.58% 6.22% 8.04% 8.58%
(unannualized)
1 Year 14.16 6.15 12.01 14.16 6.15 12.01
Inception 5.81 2.62 5.55 16.82 7.39 16.02
(7/1/94)
</TABLE>
* As of 3/31/97
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 INTERNATIONAL 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
[LINE GRAPH]
The sum of $10,000 invested at inception (7/1/94) and held until 3/31/97 would
have grown to $11,682 in the Fund or $10,739 in the Morgan Stanley Capital Int'l
Emerging Markets Free Index assuming reinvestment of all dividends and capital
gains.
10 LARGEST HOLDINGS
* Datacraft Asia Ltd.
* Telebras, A.D.R.
* Panamerican Beverage, Inc.
* Yageo, G.D.R.
* Banco Latinoamericano
* President Enterprises, G.D.S.
* Nice Systems, A.D.R.
* Korea Electric Power
* First Pacific Co.
* Disco S.A., A.D.R.
Total number of holdings: 59
A LOOK AT THE SIT MUTUAL FUNDS
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 $5.2 billion for some
of America's largest corporations, foundations and endowments.
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
Principal Stability & Current Income
STABILITY: INCOME: GROWTH & INCOME: GROWTH:
Safety of principal Increased income Long-term capital Long-term capital
and current income appreciation and appreciation
income
Growth Potential
* MONEY MARKET * U.S. GOVERNMENT * BALANCED * MID CAP GROWTH
SECURITIES * LARGE CAP GROWTH * INTERNATIONAL
* TAX-FREE INCOME GROWTH
* MINNESOTA * SMALL CAP
TAX-FREE INCOME GROWTH
* BOND * DEVELOPING
MARKETS GROWTH
[SIT 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
Carla J. Rose Assistant Secretary
Debra A. Sit, CFA Assistant Treasurer
QUARTERLY REPORT STOCK FUNDS
March 31, 1997
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 LaSalle 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
====================
