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.
<PAGE>
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
[CHART]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STABILITY: INCOME: GROWTH & INCOME: GROWTH:
Safety of principal Increased income Long-term capital Long-term capital
and current income appreciation and income appreciation
MONEY MARKET BOND LARGE CAP GROWTH DEVELOPING MARKETS GROWTH
MINNESOTA TAX-FREE INCOME BALANCED SMALL CAP GROWTH
TAX-FREE INCOME INTERNATIONAL GROWTH
U.S. GOVERNMENT SECURITIES MID CAP GROWTH
</TABLE>
<PAGE>
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - SEPTEMBER 30, 1997
[PHOTO]
Dear Fellow Shareholders:
Domestic stocks and bonds delivered strong results during the third quarter
ended September 30, 1997. In October, however, stock markets worldwide are
correcting the large gains of the first nine months, primarily because
investment valuations have outpaced the fundamentals. The currency crisis in
Asia has been one of the catalysts for the change in investor psychology, but we
remain positive for the market for the U.S. and leading international economies
and financial markets as the fundamental underpinnings for financial assets
remains favorable.
Economic Overview
The domestic economy continues to impress with moderate-to-strong growth
together with surprisingly subdued inflation. The first two quarters of 1997
achieved real GDP growth of +4.9 percent and +3.3 percent, respectively, and the
third quarter's growth rate should approximate the average of the first two, or
about +4.0 percent. With respect to inflation, the GDP price deflator measured
just +1.8 percent for the second quarter. We believe this number should stay low
when reported for the third quarter given already released results of other
inflation measures. For example, the August CPI change was a low +2.2 percent.
Today's inflation levels are nearing those of the early 1960s, a very good time
for financial markets. The ability of the economy to sustain strong growth
without any evidence of serious current inflation is the subject of much debate.
Given currently low levels of inflation, and the economic and financial problems
in Asia, we believe the Federal Reserve will maintain the current monetary
policy well into 1998.
For the fiscal year ended September 30th, the Federal budget deficit
totaled $23 billion, the smallest deficit since 1974. A short five years ago,
the deficit measured $290 billion. The remarkable improvement is due to a very
simple phenomenon: in each of those five years, federal revenues outstripped
outlays on a percentage basis by a ratio of more than two to one. The terrific
improvement in the budget deficit is a positive in many ways, including driving
lower interest rates as fewer new government securities are issued. This
favorable fiscal outlook and the strengths of the American economy lead us to
conclude that a favorable financial environment continues over the intermediate
term, although periodic cyclical corrections could occur. Internationally,
fiscal policy is mixed. Economic growth is strengthening in Europe and Greater
China, but growth has stalled in Japan as a higher value-added tax has dampened
consumer spending. Southeast Asian economies are now going through a
readjustment process with higher interest rates and slower growth likely over
the near term. Currently, the financial markets are concerned over whether the
currency crisis and likely slowdown in Southeast Asia will lead to policy
changes which will ultimately offset the economic health of the U.S. and leading
European nations.
Equity Strategy Summary
The strength in stock prices during the third quarter and for the
year-to-date period have been due to very positive fundamentals: economic
growth, profits have been stronger than expected, and inflation and interest
rates have been lower. Our outlook for the U.S. and international markets
remains generally positive. The corrections underway are bringing stock prices
back to more reasonable levels, and given the strong underpinnings in the U.S.,
Europe, and selective Asian markets, we believe the correction in these markets
will be contained around recent levels. Consequently, we will see higher stock
prices once the current uncertainties are resolved. Within the U.S. market, we
expect returns will parallel earnings growth for the overall market over the
intermediate term as valuation levels probably will remain around the recent
levels of 18-20 times earnings. This is sustainable on the basis of inflation in
the area of 2 1/2 percent and interest rates at the 6-6 1/2 percent level.
Growth companies, both large and small, are more attractively priced relative to
the overall market and their historical valuation levels, and our portfolios are
very atrractively valued and are well positioned for the opportunities ahead.
International markets, particularly Europe and Latin America, have
performed well year to date. These markets are undergoing corrections, and
valuations are now becoming more attractive. Our strategy will continue to focus
on those countries and markets with strong economic and financial underpinnings
and favorable fiscal and monetary policy. We continue to favor European markets,
selective Latin American and Asian markets, including Hong Kong and Taiwan.
As always, we appreciate having you invest with us.
With best wishes,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
<PAGE>
SIT MUTUAL FUNDS
SEPTEMBER 30, 1997 PERFORMANCE REVIEW - STOCK FUNDS
STOCK FUNDS REVIEW
Strong first half 1997 financial asset returns continued into the third
quarter, with the large cap S&P 500 rising 7.5 percent, the mid cap S&P MidCap
400 Index advancing 16.1 percent and the small cap Russell 2000 Index gaining
14.9 percent. These comfortable returns masked growing volatility on a monthly
basis, and this has been the case thus far in the month of October.
Of note in the quarter's results was a reversal from the past several
quarters with small caps outperforming large caps, an event we noted could occur
in our last quarterly report to you. Some of the valuation divergence between
large and small cap companies has closed, but superior earnings growth going
forward and reasonable valuations compared with historical norms should continue
to help performance in the mid and small cap segments. Interestingly, value
stocks outperformed growth stocks in the large cap classification, but growth
beat value in small stock categories. Over the past twelve months, though, value
leads growth across all cap sizes. We believe this changes for the same reasons
small caps appear attractive vis-a-vis large caps; superior earnings growth and
attractive valuations. The three domestic Sit growth funds all possess 5-year
projected earnings growth rates between two and three times that of the broad
market, yet price/earnings ratios for the funds are within 15 percent of market
multiples. We believe this high-earnings-growth, reasonable-valuation
combination bodes well for investors.
Results internationally were not as robust as those achieved domestically
with a negative return for the Morgan Stanley EAFE Index of -0.7 percent and the
MSCI Emerging Markets Free Index lower still at -9.4 percent. Asian currency
turmoil was the main culprit with respect to the latter result. Returns were
widely varied depending on geography. The MSCI Europe Index advanced +8.3
percent paced by a local market return of +19.3 percent in Italy, while the MSCI
Pacific Index declined -12.4 percent.
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
YTD
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
--------------------------------------------------------------------------------------- -----
<S> <C> <C> <C> <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% 31.66% 23.05% 28.27%
- ------------------------------------------------------------------------------------------------------------------------------------
SIT MID CAP GROWTH 43.65 10.33 5.50 9.77 35.15 -2.04 65.50 -2.14 8.55 -0.47 33.64 21.87 21.09
- ------------------------------------------------------------------------------------------------------------------------------------
SIT SMALL CAP GROWTH -- -- -- -- -- -- -- -- -- 11.57(1) 52.16 14.97 19.15
- ------------------------------------------------------------------------------------------------------------------------------------
SIT BALANCED -- -- -- -- -- -- -- -- -- -0.33 25.43 15.80 18.96
- ------------------------------------------------------------------------------------------------------------------------------------
SIT INTERNATIONAL GROWTH -- -- -- -- -- -- 4.10(1) 2.69 48.37 -2.99 9.36 10.31 15.26
- ------------------------------------------------------------------------------------------------------------------------------------
SIT DEVELOPING MARKETS GROWTH -- -- -- -- -- -- -- -- -- -2.02(1) -4.29 17.27 16.47
- ------------------------------------------------------------------------------------------------------------------------------------
S&P 500 INDEX 31.60 18.64 5.28 16.55 31.61 -3.05 30.46 7.64 10.07 1.32 37.58 22.96 29.63
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 30.94 19.19 31.19
RUSSELL 2000 INDEX (2) -- -- -- -- -- -- -- -- -- 4.61 28.45 16.49 26.60
EAFE INDEX (3) -- -- -- -- -- -- 0.26 -12.17 32.56 7.78 11.21 6.05 10.42
MSCI EMERGING MARKETS FREE INDEX (4) -- -- -- -- -- -- -- -- -- 2.80 -6.94 3.92 5.40
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE
PERIODS ENDED SEPTEMBER 30, 1997
TOTAL RETURN ------------------------------------------
NASDAQ QUARTER SIX MONTHS SINCE
SYMBOL INCEPTION ENDED 9/30/97 ENDED 9/30/97 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 6.96% 29.34% 33.38% 27.95% 18.30% 13.16% 16.26%
SIT MID CAP GROWTH NBNGX 09/02/82 11.99 34.68 23.29 25.60 19.17 14.61 19.61
SIT SMALL CAP GROWTH SSMGX 07/01/94 16.25 39.16 16.06 29.02 ---- ---- 29.63
SIT BALANCED SIBAX 12/31/93 5.50 19.86 24.05 20.21 ---- ---- 15.60
SIT INTERNATIONAL GROWTH SNGRX 11/01/91 2.10 15.75 20.46 10.19 15.45 ---- 13.71
SIT DEVELOPING MARKETS GROWTH SDMGX 07/01/94 -2.38 9.65 15.62 5.14 ---- ---- 7.91
S&P 500 INDEX (5) 7.50 26.27 40.44 29.91 20.77 14.75 18.51
S&P MIDCAP 400 INDEX (5) 16.08 33.14 39.14 25.88 20.24 16.47 19.29
RUSSELL 2000 INDEX (2) 14.88 33.50 33.18 22.97 -- -- 23.41
EAFE INDEX (3) -0.70 12.18 12.18 8.83 12.33 -- 8.70
MCSI EMERGING MARKETS FREE INDEX (4) -9.40 -2.44 4.46 -4.55 -- -- 1.44
</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.
<PAGE>
SIT LARGE CAP GROWTH FUND
SEPTEMBER 30, 1997
[PHOTO]
PETER L. MITCHELSON, CFA
SENIOR PORTFOLIO MANAGER
RONALD D. SIT, CFA
PORTFOLIO MANAGER
Dear Fellow Shareholders:
Performance of the Sit Large Cap Growth Fund was strong during the third
quarter of calendar 1997 with a total return of +6.96%. Year to date, the Fund's
return of +28.27% ranked in the 31st percentile of 628 Growth and Income Funds
tracked by Lipper Analytical Services. For 3 years the Fund's +27.9% annual
return ranked in the 22nd percentile out of 369 funds; for 5 years its +18.30%
return was in the 58th percentile of 225 funds; and for 10 years its +13.2%
return ranked in the 49th percentile of 129 funds.
U.S. stock market indexes surged to further new highs during the third
quarter on a continuation of moderate economic growth, better-than-expected
inflation, satisfactory profit gains and stable monetary policy. Smaller cap
indexes outperformed their larger cap counterparts due to a shift in relative
earnings growth in favor of smaller cap stocks. The equity investments in the
Sit Large Cap Growth Fund continue to possess strong relative earnings growth.
As of the end of September, the average 1997 earnings gain projected for the
companies held in the Fund is +26.9% and for 1998 it is +20.8%, which is
significantly greater than the expected earnings increase of the broad stock
market.
As of September 30th, the Fund was 95% invested in equities, an increase of
two percentage points compared to the end of the previous quarter. Significant
weighting increases included technology, where we added Sun Microsystems, Texas
Instruments and Ciena Corp., and financial services, where we acquired positions
in Equitable Companies and St. Paul Companies. Reductions occurred in health
care and consumer non-durables, where we trimmed holdings in several names. In
addition, during the quarter, portfolio positions in Loewen Group, Stewart
Enterprises and MCI Communications were eliminated. Technology, health care and
financial services remain the three most heavily weighted sectors.
Assets in the Large Cap Growth Fund totaled $78.7 million at the end of
September, up from $55.9 million a year ago. We appreciate greatly shareholders'
continued interest and participation in the Fund.
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 9/30/97: $43.20 Per Share
6/30/97: $40.39 Per Share
Total Net Assets: $78.73 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
Technology 21.2
Financial 18.5
Health Care 17.2
Consumer Non-Durables 8.1
Retail 6.0
Capital Goods 5.9
Bussiness Equipment & Services 5.8
Energy 5.4
Consumer Services 3.7
Raw Materials 1.2
Consumer Durables 0.9
Multi-Industry 0.7
Cash Equivalents 5.4
<PAGE>
<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
---- ------------ ----- ---- ------------ -----
<C> <C> <C> <C> <C> <C> <C>
3 Months 6.96% 7.51% 7.50% 6.96% 7.51% 7.50%
(unannualized)
1 Year 33.38 36.29 40.44 33.38 36.29 40.44
5 Years 18.30 19.66 20.77 131.73 145.31 156.91
10 Years 13.16 14.66 14.75 244.30 292.60 295.95
Inception 16.26 17.76 18.51 871.01 1079.10 1196.55
(9/2/82)
</TABLE>
* As of 9/30/97
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]
SIT LARGE CAP GROWTH FUND
S&P 500 INDEX
The sum of $10,000 invested at inception (9/2/82) and held until 9/30/97 would
have grown to $97,101 in the Fund, or $129,657 in the S&P 500 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* General Electric Corp.
* Mercury General Corp.
* Intel Corp.
* Warner Lambert Corp.
* Pfizer, Inc.
* Schlumberger, Ltd.
* Microsoft Corp.
* Norwest Corp.
* Coca Cola Co.
* Gillette Co. (The)
Total number of holdings: 70
<PAGE>
SIT MID CAP GROWTH FUND REVIEW
SEPTEMBER 30, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ERIK S. ANDERSON, CFA
PORTFOLIO MANAGER
Dear Fellow Shareholders:
The Sit Mid Cap Growth Fund provided an absolute return of 12.0% for its
investors during the quarter ended September 30, 1997. The Russell MidCap Growth
Index returned +14.0% and the S&P MidCap 400 Index returned +16.1%. The Fund's
return is attributable to very strong performance in July at +9.0%, followed by
a difficult August measuring -2.0% and finishing with a strong return in
September of +4.9%.
An area of considerable strength for the Fund was in the Financial sector,
which became the Fund's most heavily weighted sector during the quarter. On
average, financial sector holdings returned in excess of +20% versus +16% for
the peer group for the quarter. An overweight position of 23% of fund assets in
the sector vis-a-vis 8% for the Russell MidCap Growth Index also enhanced
returns. Four of the Fund's five largest holdings are in this sector, including
auto insurer Mercury General, banking firm TCF Financial, mortgage insurer MGIC
Investment, and financial services leader T. Rowe Price. While a strong bond
market certainly helped returns for the financial sector this quarter, we
believe the significant growth prospects enjoyed by these stocks will drive
positive returns in a less benign bond environment as well. Another area of
value-added performance was underweighting the lagging consumer non-durables
sector. In our last quarterly report we noted the purchase of ASM Lithography
during the second quarter and its subsequent 50% gain by June 30, 1997. The
stock continued to do very well, rising an additional 69% during the third
quarter. Returns for the fund lagged in the Business Equipment and Services and
the Consumer Services sectors. Cash in the portfolio remains low at 2.8%.
We remain disciplined within our investment mandate seeking out companies
with superior long-term earnings growth potential that can be purchased at
reasonable valuations. Companies held in the Fund have projected average
earnings growth of 32% for 1997 and 28% in 1998 versus 10% and 7%, respectively,
for the S&P 500. Despite this much faster growth, the Fund's valuation of 23.5
times estimated 1998 earnings is only modestly above the 20.8 times multiple of
the market overall. The earnings growth versus valuation ratio of the Fund
remains attractive.
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 9/30/97: $17.28 Per Share
6/30/97: $15.43 Per Share
Total Net Assets: $412.88 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
Financial 22.9
Technology 22.6
Health Care 16.9
Business Equipment & Services 10.9
Consumer Services 6.7
Energy 6.3
Capital Goods 3.3
Retail 2.4
Consumer Durables 2.1
Transportation 1.8
Consumer Non-Durables 1.3
Cash Equivalents 2.8
<PAGE>
<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 11.99% 13.99% 16.08% 11.99% 13.99% 16.08%
(unannualized)
1 Year 23.29 29.64 39.14 23.29 29.64 39.14
5 Years 19.17 19.22 20.24 140.35 140.81 151.37
10 Years 14.61 13.99 16.47 291.05 270.47 359.42
Inception 19.61 n/a 19.29 1,391.00 n/a 1,331.85
(9/2/82)
</TABLE>
* As of 9/30/97
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]
SIT MID CAP GROWTH FUND
SIT MIDCAP 400 INDEX
The sum of $10,000 invested at inception (9/2/82) and held until 9/30/97 would
have grown to $149,100 in the Fund, or $143,185 in the S&P Midcap 400 Index
assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Mercury General Corp.
* TCF Financial Corp.
* HBO & Co.
* MGIC Investment Corp.
* T Rowe Price & Associates
* Peoplesoft, Inc.
* Analog Devices, Inc.
* Parametric Technology, Inc.
* Xilinx, Inc.
* ASM Lithography Holdings, Inc.
Total number of holdings: 53
<PAGE>
SIT SMALL CAP GROWTH FUND REVIEW
SEPTEMBER 30, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
Dear Fellow Shareholders:
The small capitalization growth stock rally that commenced early in the
second quarter of 1997 continued through the third quarter of 1997. The Sit
Small Cap Growth Fund returned +16.3% compared to a +14.9% return for the
Russell 2000 Index and +16.9% return for the Russell 2000 Growth Index. The
robust return for the Fund during the quarter masked significant volatility
within the quarter. The Fund's returns for July, August and September measured
+7.8%, +0.0% and +8.0% respectively. Some prognosticators suggest that
increasing volatility signals a market top. We do not share this view as small
cap stocks possess impressive earnings growth potential and valuations which are
not out of line with historical norms.
The Fund's overweighting in the technology and energy sectors benefited
investors during the quarter. Technology stocks did better than the broad small
cap universe and stocks held by the Fund did better still, with an average
return during the quarter topping +32%. Specific stocks that drove the robust
returns included: Anadigics +59%, Legato Systems +92% and Tower Semiconductor
+66%. Value-added stock selection also occurred in the financial sector with the
Fund's holdings returning +24% versus +16% for financial stocks in the Russell
2000 Index. Conversely, health care stock selection lagged during the quarter.
In September, small cap health care stocks in general had an excellent month,
perhaps starting a trend that would benefit the Fund's overweighting in this key
growth sector.
Within the small capitalization stock universe, growth stocks outperformed
value stocks over the past quarter but have lagged by a very large -19.2% margin
over the past twelve months as measured by the Russell 2000 Growth Index as
compared with the Russell 2000 Value Index. We believe this gap closes as a
slowing economy makes earnings growth more difficult to come by, thus favoring
growth stocks that can deliver consistent and outsized earnings gains. Companies
in the Fund have an estimated average earnings growth expectation of 31% for
1997 and 39% for 1998. This compares with 10% and 7% growth for the large cap
S&P 500 Index for the same two periods. Yet, stocks in the Fund trade at a price
to earnings multiple of 22.3 times 1998 earnings, a small premium over the S&P
500's 20.8 times multiple.
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 9/30/97: $21.96 Per Share
6/30/97: $18.89 Per Share
Total Net Assets: $71.18 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
Technology 29.9
Financial 19.9
Health Care 12.5
Energy 10.1
Consumer Services 6.8
Capital Goods 5.7
Business Equipment & Services 5.6
Consumer Non-Durables 0.9
Cash Equivalents 8.6
<PAGE>
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
---- ----- ------------ ---- ----- ------------
3 Months 16.25% 14.88% 16.91% 16.25% 14.88% 16.91%
(unannualized)
1 Year 16.06 33.18 23.35 16.06 33.18 23.35
3 Year 29.02 22.97 21.20 114.75 85.93 78.05
Inception 29.63 23.41 22.71 132.58 98.17 94.65
(7/1/94)
* As of 9/30/97
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]
SIT SMALL CAP GROWTH FUND
RUSSELL 2000 INDEX
The sum of $10,000 invested at inception (7/1/94) and held until 9/30/97 would
have grown to $23,258 in the Fund or $19,816 in the Russell 2000 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Anadigics, Inc.
* Tecnomatix Technologies, Ltd.
* Integrated Process Equipment Corp.
* Provident Bankshares Corp.
* Imperial Credit Industries, Inc.
* Community First Bankshares, Inc.
* PRI Automation Inc.
* Legato Systems Inc.
* RCSB Financial Inc.
* Swift Energy Co.
Total number of holdings: 62
<PAGE>
SIT BALANCED FUND REVIEW
SEPTEMBER 30, 1997
[PHOTO]
PETER L. MITCHELSON, CFA
SENIOR PORTFOLIO MANAGER
BRYCE A. DOTY, CFA
PORTFOLIO MANAGER
Dear Fellow Shareholders:
The Fund's total return increased +5.50% for the quarter ending September
30, 1997. For the first nine months of 1997, the Fund's total return was
+18.96%, which placed in the top third of Lipper Analytical Services' rankings
of 351 balanced funds. For the past one-, two- and three-year periods, the Fund
ranked in the 49th, 38th and 22nd percentiles, respectively, out of 333, 274 and
209 funds ranked.
As of September 30, 1997, the asset allocation of the Fund was 54% in
equities (down from 59% at the end of the prior quarter), 39% in fixed income
securities, and 7% in cash reserve instruments.
The U.S. stock market achieved new highs during the third quarter due to a
continuation of moderate economic growth, better-than-expected inflation,
satisfactory profit gains and stable monetary policy. Fixed income markets also
benefited from these same trends and interest rates were in a declining phase
during the three-month period. We are monitoring the inflation outlook carefully
since continued economic growth coupled with tightening labor market conditions
could lead to price pressures at some point in the future, and result in Federal
Reserve Board tightening.
A key characteristic of the equity holdings in the Balanced Fund is
above-average earnings growth. As of the end of September, the average 1997
earnings gain projected for the companies held in the Fund was +25.6% and for
the next five years was +19.59%, which is significantly greater than that for
the broad stock market. The Fund's strong earnings growth rates are obtained by
emphasizing higher growth sectors of the economy such as health care and
technology and by underweighting slower-growing sectors such as utilities.
Fixed income investment activity during the quarter involved shortening the
effective duration of the holdings slightly by selling longer maturity
Treasuries and purchasing shorter maturity Treasuries. If bond yields continue
to fall in the near term, we anticipate shortening the Fund's effective duration
further.
The Sit Balanced Fund provides investors both long-term growth and current
income as well as the freedom of leaving the asset allocation in the hands of
full-time investment professionals. We appreciate greatly shareholders'
investment in the Fund.
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 9/30/97: $15.66 Per Share
6/30/97: $14.93 Per Share
Total Net Assets: $5.47 Million
Quarterly Dividend: $0.09 Per Share
PORTFOLIO STRUCTURE
(% of total net assets)
[PIE GRAPH]
STOCKS 54.0%
BONDS 46.0%
(Bonds & Cash)
<PAGE>
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
---- ---------- ----- ---- ---------- -----
3 Months 5.50% 3.32% 7.50% 5.50% 3.32% 7.50%
(unannualized)
1 Year 24.05 9.71 40.44 24.05 9.71 40.44
3 Year 20.21 9.49 29.91 73.71 31.27 119.26
Inception 15.60 6.57 23.72 72.22 26.96 122.20
(12/31/93)
* As of 9/30/97
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]
SIT BALANCED FUND
LEHMAN AGGREGATE BOND INDEX
S&P 500 Index
The sum of $10,000 invested at inception (12/31/93) and held until 9/30/97 would
have grown to $17,222 in the Fund, $12,696 in the Lehman Aggregate Bond Index or
$22,220 in the S&P 500 Index assuming reinvestment of all dividends and capital
gains.
TOP HOLDINGS
STOCKS:
* General Electric Co.
* Intel Corp.
* Mercury General Corp.
* Pfizer, Inc.
* Schlumberger Ltd.
BONDS:
* GNMA, 9.00%, 9/15/19
* Security Capital Indl. Trust, 8.65%, 5/15/16
* GNMA, 9.00%, 4/15/18
* EquiVantage 1996-3 A3, 7.70%, 9/25/27
* Ford Motor Credit Corp., 9.14%, 12/30/14
Total number of holdings: 108
<PAGE>
SIT INTERNATIONAL GROWTH FUND REVIEW
SEPTEMBER 30, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ANDREW B. KIM, CFA
SENIOR PORTFOLIO MANAGER
Dear Fellow Shareholders:
The Fund achieved a positive return of +2.1% during the September quarter,
compared with a negative return of -0.7% recorded by the MSCI EAFE Index. The
major factor behind the quarter's performance results was Japan's decline of
- -17.3%, a sharp reversal from a +23.5% June quarter gain, reflecting deepening
investor pessimism over the weak domestic economic data. However, Europe added
another +8.3% gain in the September quarter, finishing the first nine months up
+23.7%. Latin American equity markets also extended their advances with a +4.1%
gain in the September quarter for a total of +44.4% year to date.
The most dramatic change in the international markets was the spreading
currency crisis sweeping Southeast Asian countries. Being forced to abandon the
U.S. dollar-peg, their currencies plunged by almost one-third. Diminished
liquidity caused equity valuations to collapse. As discussed in the last
quarterly report, the Fund's exposure to this region had been reduced
substantially prior to the currency and banking crisis. The contagion effect
also undermined the stock markets in Hong Kong, Singapore and Taiwan despite
their strong financial fundamentals. Japanese holdings (25% of assets) provided
steady returns even in this poor environment.
The Fund's European holdings have continued to benefit from the
expectations of the single European currency expected to be effective in 1999.
The U.K. market's surge in late September was also in response to indications of
an acceleration of the Labor Government's timetable to join EMU. The latest
short-term interest rate hikes to 3.3% by the core European central banks
underlined the commitment to their anti-inflation policy. The Fund's European
market strategy calls for a further increase to 52% by year end from about 46% a
year ago. Deregulation, privatization and corporate restructuring are creating
new investment opportunities in major European countries. Also, we are seeking
undervalued equities in southern and northern Europe.
The downward trend in the U.S. dollar exchange rate against European
currencies may accelerate given rising European interest rates. Our Fund is no
longer hedged against the D-mark.
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 9/30/97: $18.96 Per Share
6/30/97: $18.57 Per Share
Total Net Assets: $100.72 Million
PORTFOLIO STRUCTURE - BY REGION
(% of total net assets)
[BAR GRAPH]
SIT INT'L MORGAN STANLEY
GROWTH FUND EAFE INDEX
----------- ----------
Europe Other 25.4 25.1
France, Germany & UK 25.2 36.7
Japan 25.1 29.2
Pacific Basin 14.7 9.0
Latin America 6.5 0.0
Africa/Middle East 0.4 0.0
Cash Equivalents 2.7 0.0
<PAGE>
<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 2.10% -0.70% 1.89% 2.10% -0.70% 1.89%
(unannualized)
1 Year 20.46 12.18 22.17 20.46 12.18 22.17
3 Years 10.19 8.83 11.87 33.77 28.90 39.99
5 Years 15.45 12.33 14.81 105.12 78.88 99.50
Inception 13.71 8.70 12.28 113.94 63.83 98.53
(11/1/91)
</TABLE>
* As of 9/30/97
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]
SIT INTERNATIONAL GROWTH FUND
MORGAN STANLEY EAFE INDEX
The sum of $10,000 invested at inception (11/1/91) and held until 9/30/97 would
have grown to $21,394 in the Fund or $16,383 in the Morgan Stanley EAFE Index
assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Canon, Inc., A.D.R.
* Lloyds TSB Group
* L.M. Ericsson Telephone Co., A.D.R.
* Aegon N.V., A.D.R.
* Matsushita Kotobuki
* Zurich Insurance
* SmithKline Beecham, p.l.c., A.D.R.
* Hutchison Whampoa
* Rentokil Group, p.l.c.
* Wolters Kluwer
Total number of holdings: 81
<PAGE>
SIT DEVELOPING MARKETS GROWTH FUND REVIEW
SEPTEMBER 30, 1997
[PHOTO]
EUGENE C. SIT, CFA
SENIOR PORTFOLIO MANAGER
ANDREW B. KIM, CFA
SENIOR PORTFOLIO MANAGER
Dear Fellow Shareholders:
The Sit Developing Markets Growth Fund was down -2.4% for the quarter,
compared with the MSCI Emerging Market Free Index's decline of -9.4%. However,
for the first nine months, the Fund achieved a positive return of +16.5%,
comparing favorably with a +5.4% gain for the Index. The negative September
quarter reflected a major deterioration in the Asian markets, compounded by the
currency devaluation.
The Fund's holdings in Latin America reached 40%, exceeding the 37%
allocated to Asia. Europe, Israel and South Africa accounted for 15% with the
remaining 8% in cash. The Latin American index increased +4.1% in the quarter,
relatively unaffected by the contagion effect, in comparison to a steep -25.2%
decline of the Asia index, The Europe and Middle East index went up +10.3%. As
of September 30, 1997, the country with the largest weighting was Mexico
(12.5%), followed by Singapore (10.8%), Hong Kong/China (9.4%), and Brazil
(8.7%).
As discussed in the last quarterly report, positive investor expectation
contributed to the Latin American region's P/E multiple expansion. For 1998,
further appreciation should result from strong earnings growth, aided by
continuing inflows of foreign direct investment. The moderate correction in
equity valuations in Brazil and Mexico during August provides a number of
attractive investment opportunities, especially involving new privatization
issues.
The most drastic change in the emerging markets was the currency crisis
sweeping Southeast Asia. Being forced to discard the U.S. dollar-peg, their
foreign exchange values plunged by nearly one-third since July, exacerbated by
the governments' inept policy responses, causing diminished liquidity and big
declines in equity valuations. Our focus will remain on the Manufacturing sector
whose exports should benefit from their improving competitiveness.
Stock selection assumes even greater importance in our investment strategy,
including Europe and Israel. Our sector emphasis will continue to be on
telecommunications, other technology-related companies and proprietary consumer
products and service companies that have healthy balance sheets.
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 9/30/97: $12.73 Per Share
6/30/97: $13.04 Per Share
Total Net Assets: $16.55 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR GRAPH]
SIT MSCI
DEVELOPING MARKETS EMERGING MARKETS
GROWTH FUND FREE INDEX
----------- ----------
Latin America 40.1 39.6
Asia 37.2 36.6
Africa/Middle East 10.1 13.5
Europe 4.9 10.3
Cash Equivalents 7.7 N/A
<PAGE>
<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 -2.38% -9.40% -5.09% -2.38% -9.40% -5.09%
(unannualized)
1 Year 15.62 4.46 12.76 15.62 4.46 12.76
3 Year 5.14 -4.55 0.35 16.23 -13.03 1.07
Inception 7.91 1.44 5.64 28.09 4.77 19.55
(7/1/94)
</TABLE>
* As of 9/30/97
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
SIT DEVELOPING MARKETS GROWTH FUND
MSCI EMERGING MARKETS FREE INDEX
The sum of $10,000 invested at inception (7/1/94) and held until 9/30/97 would
have grown to $12,809 in the Fund or $10,477 in the Morgan Stanley Capital Int'l
Emerging Markets Free Index assuming reinvestment of all dividends and capital
gains.
10 LARGEST HOLDINGS
* Nice Systems, A.D.R.
* Datacraft Asia Ltd.
* Panamerican Beverage, Inc.
* Grupo Casa Autrey, A.D.R.
* Grupo Elektra S.A., G.D.R.
* Disco S.A., A.D.R.
* Telebras, A.D.R.
* Enersis, A.D.R.
* TV Azteca S.A., A.D.R.
* Laoratorio Chile, A.D.R.
Total number of holdings: 54
<PAGE>
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
