STOCK FUNDS QUARTERLY REPORT
SEPTEMBER 30, 1998
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
REGIONAL GROWTH FUND
SCIENCE AND TECHNOLOGY GROWTH FUND
[LOGO] SIT(SM) MUTUAL FUNDS
-----------------------------
THE INVESTMENT IS MUTUAL.(SM)
<PAGE>
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
Regional Growth Fund............................................ 16
Science and Technology Growth Fund.............................. 18
A Look at the Sit Mutual Funds........................................ 20
This document must be preceded or accompanied by a Prospectus.
<PAGE>
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - SEPTEMBER 30, 1998
[PHOTO]
Dear Fellow Shareholders:
After three and one half years of stellar performance, domestic equity markets
reached a short-term peak in July and have been volatile thereafter. Events have
moved very rapidly in the space of a few weeks with equity markets worldwide
retreating in the third quarter.
Economic Overview
Based on data presently known about the third quarter, we believe the economy
has slowed considerably from the torrid +5.5% growth in 1998's first quarter and
also may be slower than the second quarter's +1.8% rate. Recently observed
pressures on net exports and corporate profits are driving this result. The
weakness in profits will ultimately result in reduced business capital spending.
In terms of components of GDP, consumer spending is by far the largest portion,
accounting for 68.4% of total real GDP. It seems likely that consumer spending
will slow from a +6.1% annualized rate in the first half of the year because of
moderating job growth, a low savings rate and a deceleration in the rate of wage
increases. Government spending should continue to increase at a modest rate.
Inflation-adjusted federal government spending peaked in 1991 and has declined
since then in each year. State and local spending, however, has continued to
rise steadily. September 30th was noteworthy as it marked the end of the federal
government's fiscal year, the first to have a budget surplus in thirty years.
Given the likelihood of slower economic growth, inflation will remain low.
Corporations are unable to raise prices and commodity prices are docile.
Selected industries have been hard hit by imports. Nucor Corp., the country's
largest steel minimill operator recently cut galvanized steel prices to the
lowest levels in six years. A strong dollar has made imports cheaper, but
recently this dynamic has reversed. Slowing economic growth and the likelihood
of interest rate reductions on the part of the Federal Reserve have been
responsible. The dollar's behavior over the near term will be heavily influenced
by developments in Japan and the European Monetary Union.
In summary, we believe the U.S. economy is at an important juncture. The
consumer sector is currently healthy but is likely to moderate going forward.
Business capital spending and net exports are additional vulnerabilities. We
think the Federal Reserve recognizes these risks and has begun to take action in
response. The Fed cut the federal funds rate by twenty-five basis points on
September 29th . This is apt to be the first of several cuts. We remain of the
view that the U.S is unlikely to experience a full-blown recession, but growth
is slowing, which effects interest rates and corporate earnings growth.
Equity Strategy Summary:
Large capitalization market indices declined at double digit rates during the
third quarter while small capitalization measures were off even more. Markets
generally peaked around the third week of July with declines since that point
ranging from the high teens to in excess of thirty percent, depending on the
Index.
A daunting number of adverse background developments have arisen over the past
quarter including (1) more signs of U.S corporate profit pressure even among the
"bluest of the blue chips" including Coca-Cola and Gillette, (2) the slowness of
Japan addressing its banking and economic problems, (3) significant national
leadership issues in major countries including America and Germany, where
Chancellor Kohl's 16-year term of office ended, (4) evidence that equity mutual
fund investors have been making net withdrawals for the first time in eight
years and (5) unexpected hedge fund losses, which in one instance necessitated a
Federal Reserve-instigated private bailout to contain systemic risk. Reflecting
these formidable cross-currents, stock market volatility has increased as eleven
of 21 trading days in September saw moves of greater than 100 points in the Dow
Jones Industrial Average. The extreme narrowness of the domestic stock market
suggests continued volatility. For example, the NASDAQ Composite's year-to-date
return through quarter end was +7.9%. The top ten stocks in the Index
contributed +15.0%; implying hundreds of other companies experienced negative
returns.
With respect to global stock market comparisons during the third quarter, most
international markets were in negative territory, with Latin America being
hardest hit. In U.S. dollar terms, Brazil declined by -35.9% and Germany by
- -18.3%.
The sell-offs have created interesting valuation opportunities, especially given
low interest rates. Also, negative investor sentiment normally is a good
contrary indicator of market direction. Thus, while the third quarter of 1998
was difficult, we remain impressed by the chance to achieve attractive returns
in both domestic and international equities.
With best wishes,
/S/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
1
<PAGE>
SIT MUTUAL FUNDS
QUARTER ENDED SEPTEMBER 30, 1998 PERFORMANCE REVIEW - STOCK FUNDS
STOCK FUNDS REVIEW
Solid positive returns generated early in July were quickly forfeited, as
domestic markets experienced their most challenging period in eight years and
negative returns predominated during the remainder of 1998's third quarter.
Internationally, previously strong regions like Europe reversed course, while
struggling areas like Asia continued to decline.
While the direction of large cap stocks changed during the third quarter, one
dynamic that did not change was large cap stocks outperforming mid and small cap
issues. The large cap Russell 1000 Index bested the small cap Russell 2000 Index
by nearly ten percentage points during the quarter, with returns of -10.3% and
- -20.0%, respectively. Over the past year, the difference measures over
twenty-five percentage points at +7.3% and -19.0%, respectively. Outperformance
of large cap stocks has largely been driven by stocks with the biggest market
capitalizations, such as General Electric and Microsoft. The twenty largest
companies in the S&P 500 Index contributed +4.8 percentage points of that
Index's +6.0% return on a year-to-date basis. Similarly, the +6.0%
capitalization-weighted result compares with a -3.9% S&P 500 Index return on an
equal weighted basis.
Value stocks outperformed growth stocks in the small cap classification, but
growth beat value among large stocks. Slowing economic growth, and hence
corporate earnings growth, tends to favor growth versus value in large caps. But
the higher risk nature of small cap growth stocks has seen the category
underperform value stocks.
For the quarter internationally, the MSCI EAFE Index declined -14.2%. Returns
from the Pacific region and Europe were similar at -13.7% and -14.4%
respectively. But, returns were notably poorer in emerging markets as the MSCI
Emerging Markets Free Index returned -22.9% for the quarter, bringing that
Index's 1-year return to -49.2%.
1986 1987 1988
---- ---- ----
SIT LARGE CAP GROWTH 21.83% 5.32% 5.33%
SIT MID CAP GROWTH 10.33 5.50 9.77
SIT SMALL CAP GROWTH -- -- --
SIT BALANCED -- -- --
SIT INTERNATIONAL GROWTH -- -- --
SIT DEVELOPING MARKETS GROWTH -- -- --
SIT REGIONAL GROWTH -- -- --
SIT SCIENCE & TECHNOLOGY GROWTH -- -- --
S&P 500 Index 18.64 5.28 16.55
S&P Midcap 400 Index 16.21 -2.04 20.87
Russell 2000 Index(2) -- -- --
EAFE Index(3) -- -- --
MSCI Emerging Markets Free Index(4) -- -- --
PSE Tech 100 Index -- -- --
NASDAQ
SYMBOL INCEPTION
------ ---------
SIT LARGE CAP GROWTH SNIGX 09/02/82
SIT MID CAP GROWTH NBNGX 09/02/82
SIT SMALL CAP GROWTH SSMGX 07/01/94
SIT BALANCED SIBAX 12/31/93
SIT INTERNATIONAL GROWTH SNGRX 11/01/91
SIT DEVELOPING MARKETS GROWTH SDMGX 07/01/94
SIT REGIONAL GROWTH n/a 12/31/97
SIT SCIENCE & TECHNOLOGY GROWTH n/a 12/31/97
S&P 500 Index(5)
S&P Midcap 400 Index(5)
Russell 2000 Index(2)
EAFE Index(3)
MCSI Emerging Markets Free Index(4)
PSE Tech 100 Index
(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.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
----------------------------
YTD
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
32.02% -2.37% 32.72% 4.94% 3.15% 2.83% 31.66% 23.05% 31.70% 6.54%
35.15 -2.04 65.50 -2.14 8.55 -0.47 33.64 21.87 17.70 -9.19
-- -- -- -- -- 11.57(1) 52.16 14.97 7.63 -11.76
-- -- -- -- -- -0.33 25.43 15.80 21.73 6.41
-- -- 4.10(1) 2.69 48.37 -2.99 9.36 10.31 4.81 -0.85
-- -- -- -- -- -2.02(1) -4.29 17.27 -5.20 -32.75
-- -- -- -- -- -- -- -- -- -3.60
-- -- -- -- -- -- -- -- -- 10.30
31.61 -3.05 30.46 7.64 10.07 1.32 37.58 22.96 33.36 6.00
35.55 -5.12 50.11 11.92 13.95 -3.60 30.94 19.19 32.29 -7.08
-- -- -- -- -- 4.61(2) 28.45 16.49 22.36 -16.21
-- -- 0.26(1) -12.17 32.56 7.78 11.21 6.05 1.78 -0.55
-- -- -- -- -- 2.80(2) -6.94 3.92 -13.40 -38.21
-- -- -- -- -- -- -- -- -- 10.06
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE
TOTAL RETURN PERIODS ENDED SEPTEMBER 30, 1998
QUARTER SIX MONTHS SINCE
ENDED 9/30/98 ENDED 9/30/98 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
- ------------- ------------- ------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
-13.54% -7.74% 9.39% 20.37% 18.69% 15.88% 15.82%
-19.10 -20.07 -11.74 9.07 11.99 14.72 17.37
-17.05 -18.14 -20.30 4.37 -- -- 15.62
-7.32 -3.03 8.89 15.52 -- -- 14.15
-14.37 -14.05 -9.84 4.47 7.59 -- 9.96
-23.09 -37.63 -45.26 -9.52 -- -- -8.01
-14.39 -13.39 -- -- -- -- --
-6.29 -1.16 -- -- -- -- --
-9.95 -6.97 9.04 22.60 19.91 17.28 17.90
-14.47 -16.30 -6.31 14.12 13.68 16.68 17.51
-20.15 -23.87 -19.01 6.86 -- -- 11.77
-14.21 -13.30 -8.34 3.75 5.35 -- 6.05
-22.89 -41.55 -49.23 -18.24 -- -- -13.79
-7.56 -7.57 -- -- -- -- --
</TABLE>
(4) FIGURES ASSUME AN INCEPTION DATE OF 6/30/94.
(5) FIGURES ASSUME AN INCEPTION DATE OF 9/2/82.
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS.
3
<PAGE>
SIT LARGE CAP GROWTH FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
SENIOR PORTFOLIO MANAGERS
PETER L. MITCHELSON, CFA
ROGER J. SIT
RONALD D. SIT, CFA
Performance of the Sit Large Cap Growth Fund reflected the stock market
decline during the third quarter of 1998. The Fund's quarterly total return of
- -13.54% ranked in the 67th percentile out of 828 Growth and Income Funds tracked
by Lipper Analytical Services, Inc. For the one-year, three-year and five-year
time periods, the Fund ranked in the 7th percentile out of 715 funds, 17th
percentile out of 449 funds and 8th percentile out of 289 funds, respectively.
Based on its performance through September 30, 1998, the Sit Large Cap Growth
Fund received a 4-star rating from Morningstar, Inc. for the 3- and 10-year
periods among 2,697 and 732 funds, respectively, and a 5-star rating for the
5-year period out of 1,603 funds in the domestic stock fund category.
After a strong first half, U.S. equity prices declined during the third
quarter reflecting concerns about the global financial system, unexpected hedge
fund losses, corporate profit growth and talk of impeachment of the U.S.
president. The S&P 500 Index fell -10%, but large cap growth stocks outpaced
value issues. Given expectations for modest corporate profit gains accompanying
slower economic growth, the Sit Large Cap Growth Fund is well-positioned with
strong absolute and relative earnings growth among its equity investments. At
the end of September, the average 1998 earnings gain projected for the companies
held in the Fund was +15.4%, 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. Sector weighting
changes were minor during the quarter. Weighting increases included electronic
technology and health technology, while reductions occurred in retail trade and
finance. New positions were added in Compaq Computer, Lockheed Martin, St. Paul
Companies, American Home Products, and Delta and Pine Land. The heaviest
weighted sectors remain the traditional growth groups of electronic technology,
health technology and technology services along with finance and retail trade.
Assets in the Large Cap Growth Fund totaled $108.2 million at the end of
September. We greatly appreciate shareholders' continued interest and
participation in the Fund.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Large Cap Growth Fund is to maximize long-term capital
appreciation. The Fund pursues this objective by investing primarily in common
stocks of growth companies with a capitalization of over $5 billion at the time
of purchase.
PORTFOLIO SUMMARY
Net Asset Value 9/30/98: $42.66 Per Share
6/30/98: $49.34 Per Share
Total Net Assets: $108.16 Million
Weighted Average Market Cap: $61,239 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Electronic Technology 17.7
Health Technology 14.6
Finance 10.6
Retail Trade 10.0
Technology Services 9.7
Utilities 5.6
Consumer Services 4.8
Consumer Non-Durables 4.7
Producer Manufacturing 4.3
Process Industries 3.9
Industrial Services 2.9
Energy Minerals 1.9
Health Services 1.8
Transportation 1.4
Consumer Durables 0.9
Non-Energy Minerals 0.3
Cash Equivalents 4.9
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
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months -13.54% -9.08% -9.95% -13.54% -9.08% -9.95%
(not annualized)
1 Year 9.39 11.11 9.04 9.39 11.11 9.04
5 Years 18.69 20.80 19.91 135.57 157.20 147.91
10 Years 15.88 18.07 17.28 336.68 426.70 392.48
Inception 15.82 17.34 17.90 962.23 1210.12 1313.82
(9/2/82)
</TABLE>
* As of 9/30/98
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.
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM
LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (9/2/82) and held until 9/30/98 would
have grown to $106,223 in the Fund, or $141,384 in the S&P 500 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Cisco Systems, Inc.
* Monsanto Co.
* Dayton Hudson Corp.
* General Electric Co.
* Microsoft Corp.
* Pfizer, Inc.
* AirTouch Communications, Inc.
* Merck & Co., Inc.
* Intel Corp.
* Home Depot, Inc.
Total number of holdings: 72
5
<PAGE>
SIT MID CAP GROWTH FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
[PHOTO] SENIOR PORTFOLIO MANAGERS
EUGENE C. SIT, CFA
ERIK S. ANDERSON, CFA
The third quarter of 1998 was a difficult period for mid capitalization
growth stocks and the Sit Mid Cap Growth Fund, in particular. The Fund returned
- -19.1%, which slightly lagged the -18.1% return of the average mid cap stock
fund according to Lipper Analytical Services, Inc. On a 5-year basis, the Fund
has returned +12.0% annualized versus +10.9% for the peer group as defined by
Lipper.
Despite disappointing recent stock performance and a global economic
slowdown, business fundamentals remain robust for stocks held in the Fund.
Earnings for 1999 are forecasted to grow +26.5%, well in excess of the +2.2%
growth expected of the market at large. Notwithstanding the twelve-fold
advantage in earnings growth expected of the Fund's stocks, valuations are
attractive. Holdings trade at an average price to earnings ratio of 23.4 times,
just modestly above the S&P 500 Index's ratio of 21.9 times. We believe the
portfolio's risk versus reward profile is favorable with a P/E multiple below
the earnings growth rate.
Unlike most past periods, stock selection detracted from third quarter
results. Electronic technology and finance sectors were challenging, while
health technology and technology services were areas of positive performance.
Six of the Fund's top ten holdings are in the latter two sectors. Biotechnology
firm Biogen advanced +34.3% during the quarter and +102.9% over the past year
and Legato Systems rose +31.7% and +189.4% over the two time periods,
respectively, to highlight two leading stocks in these sectors. Overweighting
the two sectors also enhanced returns, as both outperformed the Russell MidCap
Growth Index during the quarter.
Mid and small cap stocks are less exposed to the international economic
problems that in large part precipitated the stock market correction that began
in July, because direct foreign sales generally are a smaller part of company
totals. Four of the Fund's top 10 holdings are essentially all domestic, HBO &
Co., Mercury General, Staples, Inc. and Ceridian Corp. Additionally, valuations
have reached levels associated with mid and small cap sector troughs in the
past. We are optimistic about the future, indeed, and we expect to be investing
the portfolio's 6.4% cash allocation over the coming weeks.
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 9/30/98: $13.34 Per Share
6/30/98: $16.49 Per Share
Total Net Assets: $319.70 Million
Weighted Average Market Cap: $4,887 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Technology Services 26.5
Finance 13.3
Health Technology 12.9
Retail Trade 8.5
Health Services 7.4
Electric Technology 5.8
Consumer Services 4.4
Commercial Services 3.4
Industrial Services 2.5
Process Industries 2.4
Consumer Durables 2.3
Producer Manufacturing 2.2
Utilities 2.0
Cash Equivalents 6.4
6
<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 -19.10% -16.70% -14.47% -19.10% -16.70% -14.47%
(not annualized)
1 Year -11.74 -9.37 -6.31 -11.74 -9.37 -6.31
5 Years 11.99 12.66 13.68 76.16 81.53 89.87
10 Years 14.72 14.65 16.68 294.82 292.24 367.72
Inception 17.37 n/a 17.51 1216.02 n/a 1241.55
(9/2/82)
</TABLE>
* As of 9/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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. THE LIPPER AVERAGES AND INDICES ARE OBTAINED
FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL
FUNDS.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (9/2/82) and held until 3/31/98 would
have grown to $131,602 in the Fund, or $134,155 in the S&P MidCap 400 Index
assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Elan Corp., p.l.c., A.D.R.
* Biogen, Inc.
* HBO & Co.
* Legato Systems, Inc.
* BMC Software, Inc.
* Dendrite International, Inc.
* Mercury General Corp.
* Peoplesoft, Inc.
* Staples, Inc.
* Ceridian Corp.
Total number of holdings: 55
7
<PAGE>
SIT SMALL CAP GROWTH FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
[PHOTO] SENIOR PORTFOLIO MANAGER
EUGENE C. SIT, CFA
The Sit Small Cap Growth Fund's third quarter return of -17.1% was
disappointing in absolute terms, but compared very favorably with the -21.4%
return of the Lipper Small Cap Fund universe, the -20.2% return of the Russell
2000 Index and the -22.4% return of the Russell 2000 Growth Index. The Fund has
outperformed its peer group over all time periods. For example, its since
inception return of +15.6% annualized compares favorably with the +11.4% return
of the Lipper Small Cap Fund universe. We would also note that despite negative
returns recently experienced, small cap stocks have posted good results over
long time horizons and remain an appropriate asset class for the aggressive
portion of a well diversified portfolio.
The Fund's strong quarterly performance vis-a-vis its Russell 2000 Growth
Index benchmark was driven by stock selection, especially in the technology
services sector. Holdings in this sector advanced an average of +3.0% versus a
decline of -22.4% for the average stock in the benchmark. The top three
holdings, Legato Systems, Dendrite International and BISYS Group, advanced +32%,
+27% and +7%, respectively, showing advances can be garnered even in the most
difficult environments. Cash increased to 8.7% of portfolio assets from 3.3% at
the end of the second quarter in order to capitalize on low current valuations.
In contrast to the difficult stock market conditions for small cap companies,
business fundamentals for holdings in the portfolio are by and large progressing
according to plan. Small cap stocks underperformed large cap stocks during the
quarter, a common occurrence in a weak overall market environment. But, stalwart
large cap stocks began to fade late in the quarter perhaps indicative of a
"final shoe to drop" for this correction. In historic terms, small caps are
currently priced at very low levels relative to large caps. We continue to
adhere to our philosophy of seeking high quality, rapidly growing, financially
stable companies for investment. Sectors where such opportunity exists include
technology services, commercial services and health services. The Fund is
overweighted in these sectors. Forecasted earnings growth for the Fund's
holdings in 1999 measures +37.9% versus +2.2% for the S&P 500.
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 9/30/98: $16.88 Per Share
6/30/98: $20.35 Per Share
Total Net Assets: $44.26 Million
Weighted Average Market Cap: $757 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Technology Services 30.0
Commercial Services 10.8
Finance 10.0
Health Services 9.7
Electric Technology 6.3
Utilities 4.6
Consumer Services 4.5
Health Technology 4.1
Energy Minerals 2.7
Industrial Services 2.6
Consumer Non-Durables 2.2
Retail Trade 2.2
Transportation 1.2
Producer Manufacturing 0.4
Cash Equivalents 8.7
8
<PAGE>
<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 -17.05% -20.15% -22.36% -17.05% -20.15% -22.36%
(not annualized)
1 Year -20.30 -19.01 -24.83 -20.30 -19.01 -24.83
3 Year 4.37 6.86 1.45 13.70 22.03 4.41
Inception 15.62 11.77 9.36 85.37 60.49 46.31
(7/1/94)
</TABLE>
* As of 9/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM
LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (7/1/94) and held until 9/30/98 would
have grown to $18,537 in the Fund, or $16,049 in the Russell 2000 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Legato Systems, Inc.
* Dendrite International, Inc.
* BISYS Group, Inc.
* HA-LO Industries, Inc.
* Transaction Network Services, Inc.
* On Assignment, Inc.
* Uniphase Corp.
* Newfield Exploration Co.
* Cerner Corp.
* Aspen Technology, Inc.
Total number of holdings: 60
9
<PAGE>
SIT BALANCED FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
[PHOTO] SENIOR PORTFOLIO MANAGERS
PETER L. MITCHELSON, CFA
BRYCE A. DOTY, CFA
Performance of the Sit Balanced Fund reflected weaker stock market trends
during the third quarter of calendar 1998. The Fund's quarterly total return of
- -7.32% ranked in the 70th percentile out of 435 Balanced Funds tracked by Lipper
Analytical Services, Inc. For the year-to-date, one-year and three-year periods,
the Fund ranked in the 12th percentile out of 413 funds, 12th percentile out of
395 funds and 15th percentile out of 274 funds, respectively. In addition, based
on its overall performance through September 30, 1998, the Sit Balanced Fund
received a 4-star rating from Morningstar, Inc. among 2,697 funds for the 3-year
time period in the domestic hybrid fund category.
As of September 30, 1998, the asset allocation of the Fund was 54% in
equities (down from 58% at the end of June), 41% in fixed income securities
(38%) and 5% in cash reserve instruments (4%).
Within the equity portion of the portfolio, sector weightings changes were
minor during the quarter. Significant weighting increases included electronic
technology, where we added Compaq Computer and Computer Sciences, and health
technology, where we bought American Home Products. The biggest reduction was in
finance, where we sold Equitable Companies, pared positions in American
International Group and Franklin Resources, and the group was particularly weak.
Above-average earnings growth remains the hallmark of the equity holdings. As of
the end of September, the average 1998 earnings gain projected for the companies
held in the Fund was +15.0%, which is significantly higher than the expected
earnings increase of the broad stock market.
Within the fixed income portion of the portfolio, activity last quarter
primarily involved increasing the Fund's weighting in shorter-to-intermediate
average life securities. This was done in anticipation of reductions in
short-term interest rates by the Federal Reserve, which should result in price
appreciation for these securities. Looking forward, we expect economic growth to
moderate. We also expect demand for high-quality securities to remain strong.
Finally, we believe that the Federal Reserve and other central banks will
continue to lower short-term interest rates in order to help stabilize financial
markets. The Fund will continue to focus on high-quality securities that offer
attractive total return opportunities.
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 9/30/98: $15.39 Per Share
6/30/98: $16.68 Per Share
Total Net Assets: $6.86 Million
Quarterly Dividend: $0.076 Per Share
PORTFOLIO STRUCTURE
(% of total net assets)
[PIE CHART]
Cash Equivalent 5.4%
Bonds 40.5%
Stocks 54.1%
10
<PAGE>
<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 -7.32% 4.23% -9.95% -7.32% 4.23% -9.95%
(not annualized)
1 Year 8.89 11.51 9.04 8.89 11.51 9.04
3 Year 15.52 8.67 22.60 54.15 28.34 84.28
Inception 14.15 7.59 20.48 87.52 41.58 142.29
(12/31/93)
</TABLE>
* As of 9/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM
LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
MORNINGSTAR PROPRIETARY RATINGS REFLECT HISTORICAL RISK-ADJUSTED PERFORMANCE
THROUGH 9/30/98. THESE RATINGS ARE SUBJECT TO CHANGE MONTHLY AND ARE CALCULATED
FROM THE FUNDS' 3-, 5-, AND 10-YEAR AVERAGE ANNUAL RETURNS IN EXCESS OF 90-DAY
TREASURY BILL RETURNS WITH APPROPRIATE FEE ADJUSTMENTS AND A RISK FACTOR THAT
REFLECTS FUND PERFORMANCE BELOW 90-DAY TREASURY BILL RETURNS. TEN PERCENT OF THE
FUNDS IN AN INVESTMENT CATEGORY RECEIVE 5 STARS, 22.5% RECEIVE 4.
GROWTH OF $10,000
The sum of $10,000 invested at inception (12/31/93) and held until 9/30/98 would
have grown to $18,752 in the Fund, $14,158 in the Lehman Aggregate Bond Index,
or $24,229 in the S&P 500 Index assuming reinvestment of all dividends and
capital gains.
TOP HOLDINGS
STOCKS
* Cisco Systems, Inc.
* General Electric Co.
* Microsoft Corp.
* AirTouch Communications, Inc.
* Bristol-Myers Squibb Co.
BONDS
* U.S. Treasury Strip, 5.95%, 11/15/09
* GNMA, 9.50%, 12/15/17
* GNMA, 9.00%, 12/15/19
* Security Capital Industrial Trust, 8.65%, 5/15/16
* FHLMC, 9.00%, 7/1/16
Total number of holdings: 120
11
<PAGE>
SIT INTERNATIONAL GROWTH FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
[PHOTO] SENIOR PORTFOLIO MANAGERS
EUGENE C. SIT, CFA
ANDREW B. KIM, CFA
ROGER J. SIT
For the three months ended September, the Sit International Growth Fund
declined -14.4%. This compares with the MSCI EAFE Index benchmark's decline of
- -14.2%. A major reason for the Fund's negative return was the European
portfolio's steep fall, which accounted for 70.3% of the Fund's net assets.
During the September quarter, the major stock markets in Europe were severely
affected by the adverse impact on investor sentiment of the Russian default in
August and ongoing concerns over Latin America and Asia. Led by the banking
sector, the MSCI Europe index was down -14.4% in the September quarter,
following a +5.1% gain in the previous quarter.
The yen has recently strengthened to below the (Y)120 level as a result of
the favorable investor response to Japan's banking reform agreement and
expectations of a possible pickup in the Japanese liquidity situation. During
the September quarter, the MSCI Japan index declined -15.0% in anticipation of
further corporate earnings slump. However, our Japan portfolio (16.2% of net
assets) continued to stress the defensive thematic structure, such as selected
high technology, specialty finance and pharmaceuticals. Our portfolio reduced
the heavy weighting in export focused companies during the quarter.
After a big drop of -22.4% in the June quarter, the MSCI Pacific ex-Japan
index's decline slowed to -8.9% in the September quarter. The capital control
implementation in Malaysia and the Hong Kong Monetary Authority's intervention
helped to stabilize the stock markets. The yen's strength in October should also
benefit further the Asian currencies. Consistent with our preference for growth
companies with sustainable long-term competitive strengths, our investments in
the Pacific ex-Japan region (6.9%) continues to focus on well-managed
Australian, Hong Kong and Taiwan firms that have unique product and service
franchise.
In response to the global financial crisis, European countries are likely to
ease the monetary policies to ensure an economic recovery currently under way.
The European markets should benefit from a continuation of low interest rate,
foreign exchange stability and corporate earnings growth. Europe offers the
widest selection of genuinely world-class company stocks, many of which provide
the strongest earnings growth prospects. Specifically, holdings in the financial
service sector are being upgraded while continuing to emphasize
telecommunications, information technology and service stocks.
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 9/30/98: $16.39 Per Share
6/30/98: $19.14 Per Share
Total Net Assets: $80.65 Million
Weighted Average Market Cap: $22,951 Million
PORTFOLIO STRUCTURE - BY REGION
(% of total net assets)
[BAR CHART]
SIT INT'L MORGAN STANLEY
GROWTH FUND EAFE INDEX
Europe Other 42.8 30.1
France, Germany & UK 27.5 43.7
Japan 16.2 20.4
Pacific Basin 6.9 5.8
Other Assets and Liabilities 6.6 0.0
12
<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 -14.37% -14.21% -15.78% -14.37% -14.21% -15.78%
(not annualized)
1 Year -9.84 -8.34 -9.93 -9.84 -8.34 -9.93
3 Years 4.47 3.75 6.81 14.03 11.69 21.87
5 Years 7.59 5.35 7.71 44.20 29.77 44.96
Inception 9.96 6.05 8.76 92.90 50.17 78.82
(11/1/91)
</TABLE>
* As of 9/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (11/1/91) and held until 9/30/98 would
have grown to $19,290 in the Fund, or $15,017 in the Morgan Stanley EAFE Index
assuming reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Rentokil Group, p.l.c.
* Misys, p.l.c.
* Wolters Kluwer
* SAP Preferred
* Aegon N.V., A.D.R.
* Bank of Ireland
* Zurich Allied AG
* CMG, p.l.c.
* Colonial, Ltd.
* Tieto Corp.
Total number of holdings: 69
13
<PAGE>
SIT DEVELOPING MARKETS GROWTH FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
[PHOTO] SENIOR PORTFOLIO MANAGERS
EUGENE C. SIT, CFA
ANDREW B. KIM, CFA
The Sit Developing Market Growth Fund declined -23.1% in the September
quarter due mainly to the rapid spreading of the Asian contagion to Russia and
Latin America. This decline compares with the MSCI Emerging Markets Free (EMF)
Index benchmark's drop of -22.9% and the Lipper Emerging Markets index falling
- -23.7%. Year-to-date, the Fund is down -32.8% versus the EMF benchmark decline
of -38.2%. The most significant change during the quarter was a big increase in
the cash position to 37% from 10% at the end of June.
International investors' perceptions are that deflationary conditions will
persist in Asia, depressing trade growth. Despite Japan's easy monetary policy,
the banks are not injecting liquidity into its neighboring countries. However,
Korea and Thailand recorded positive market gains in dollar terms in the
September quarter. The capital control implementation in Malaysia and the Hong
Kong Monetary Authority's intervention also helped to stabilize the stock
markets. The yen's strength in October should also benefit further the Asian
stocks and currencies. Although uncertainty in the global markets continues,
equity valuations in Asia should increase driven by improvement in liquidity.
Consistent with our preference for growth companies with sustainable long-term
competitive strengths, our investments in the Pacific ex-Japan region (35.6%)
continue to focus on financially strong firms with dominant product and service
franchises.
Our Europe weighting was 13.8% at the end of September with our heaviest
weighting in Portugal (8.9%). We believe Portugal will continue to benefit from
their first round membership in EMU and their indirect investments in Latin
America. Our holdings include telecommunications, utilities and banks.
The Latin American weighting stood at 5.6% at the end of September, compared
with the Index's average of 37.4%. Latin America suffers from the credit squeeze
akin to that which occurred in Asia. Looking ahead, the trigger will be failure
by Brazil, the region's largest economy, to implement the tough fiscal policy
and stabilize the currency. Latin American companies, especially those dependent
on commodity exports from oil to copper, will be under continuing pressure due
to a global collapse in demand. The equity risk premium is likely to remain at
an unprecedented high level if the current Brazilian bailout package fails to
materialize.
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 9/30/98: $6.96 Per Share
6/30/98: $9.05 Per Share
Total Net Assets: $9.45 Million
Weighted Average Market Cap: $6,108 Million
PORTFOLIO STRUCTURE - BY REGION
(% of total net assets)
[BAR CHART]
SIT DEVELOPING MSCI EMERGING
MARKETS GROWTH FUND MARKETS FREE INDEX
Asia 35.6 33.2
Europe 13.8 12.3
Africa/Middle East 6.3 17.1
Latin America 5.6 37.4
North America 1.8 0.0
Cash and Other Assets and Liabilities 36.9 0.0
14
<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 -23.09% -22.89% -23.72% -23.09% -22.89% -23.72%
(not annualized)
1 Year -45.26 -49.23 -49.18 -45.26 -49.23 -49.18
3 Year -9.52 -18.24 -14.91 -25.94 -45.35 -38.40
Inception -8.01 -13.79 -11.05 -29.89 -46.81 -39.24
(7/1/94)
</TABLE>
* As of 9/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (7/1/94) and held until 9/30/98 would
have grown to $7,011 in the Fund, or in the Morgan Stanley Capital Int'l
Emerging Markets Free Index $5,319 assuming reinvestment of all dividends and
capital gains.
10 LARGEST HOLDINGS
* Home Centers, A.D.R.
* Hon Hai Precision Industry
* Advanced Info Services
* Vtech Holdings Ltd.
* Portugal Telecom, A.D.R.
* Telefonica De Argentina
* Hong Kong & China Gas
* Datacraft Asia Ltd.
* Nice Systems Ltd., A.D.R.
* Espirito Santo, A.D.R.
Total number of holdings: 53
15
<PAGE>
SIT REGIONAL GROWTH FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
[PHOTO] SENIOR PORTFOLIO MANAGER
EUGENE C. SIT, CFA
The Sit Regional Growth Fund experienced a challenging third quarter with a
return of -14.4%, bringing the Fund's year-to-date return to -3.6%. While
discouraging in an absolute sense, both figures were better than those achieved
by the average diversified U.S. stock fund as calculated by Lipper Analytical
Services, Inc. The third quarter and year-to-date figures for the domestic
equity fund universes were -15.0% and -4.9% respectively.
The slightly unfavorable result during the quarter versus the Russell 3000
Index was largely driven by the Fund's underweighting in the utilities sector.
The Fund's 2.7% exposure compared with 11.0% for the Index. As markets declined
over the last ten weeks of the quarter, investors sought refuge in the 100%
domestically exposed, yield- bearing, defensive utilities category. Our
investment philosophy emphasizes long-term investment in growth stocks, not
short-term trading in value stocks. Ninety-one percent of the Fund's holdings
are forecast to grow earnings faster than 12% over the next five years versus
69% of stocks in the Russell index. We believe strongly that consistency in
investment style is critical for long-term success. A more defensive position in
a weak market was accomplished by raising cash to 16.4% of assets from 1.9% at
the end of the second quarter. Also, holding mid and small capitalization stocks
in the portfolio disadvantaged returns. Large cap stocks continued to excel, as
they have for most of the past three years. The weighted average capitalization
of stocks in the Fund was $12.0 billion versus $54.4 billion for the Russell
3000 Index. Valuation and earnings growth considerations could reverse this
positioning.
A slowing economy has forced meaningful cuts in estimates of market earnings
growth. As of 6/30/98, earnings for the S&P 500 were forecasted to grow +6.8% in
1999. That figure is now +2.2%. But, estimated growth for stocks in the Fund
remained steady at +20.2% over the same period. The Fund's valuation at quarter
end was 20.6 times estimated 1999 earnings. By comparison, the S&P 500 carries a
price- to-earnings multiple of 21.9 times for 1999. Much faster earnings growth
at a lower P/E multiple is an attractive combination.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Fund is to maximize long-term capital appreciation. The
Fund pursues this objective by investing primarily in common stocks of companies
with their headquarters in Minnesota, Iowa, Missouri, North Dakota, South
Dakota, Nebraska, Kansas, Wisconsin, Illinois, Michigan, Indiana, and Ohio.
During normal market conditions, at least 80% of the Fund's total assets will be
invested in such securities. The Fund emphasizes securities of companies that
the Adviser believes have potential for long-term capital growth.
PORTFOLIO SUMMARY
Net Asset Value 9/30/98: $9.64 Per Share
6/30/98: $11.26 Per Share
Total Net Assets: $4.79 Million
Weighted Average Market Cap: $12,001 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Finance 19.1
Retail Trade 12.4
Health Technology 10.8
Technology Services 8.7
Commercial Services 3.9
Process Industries 3.6
Transportation 3.6
Consumer Durables 3.5
Industrial Services 3.4
Health Services 3.1
Producer Manufacturing 3.0
Electronic Technology 2.8
Utilities 2.7
Consumer Non-Durables 1.5
Consumer Services 1.5
Cash Equivalents 16.4
16
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
-------------------------------- -------------------------------
Regional Russell S&P Regional Russell S&P
Growth 3000 500 Growth 3000 500
Fund Index Index Fund Index Index
-------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months -14.39% -11.19% -9.95% -14.39% -11.19% -9.95%
(not annualized)
Inception n/a n/a n/a -3.60 2.23 6.00
(12/31/97)
</TABLE>
* As of 9/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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 3000 GROWTH INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM
LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (12/31/97) and held until 9/30/98 would
have grown to $9,640 in the Fund, or $10,600 in the S&P 500 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Walgreen Co.
* Ceridian Corp.
* Best Buy, Inc.
* Eli Lilly & Co.
* Cardinal Health, Inc.
* Medtronic, Inc.
* Norwest Corp.
* Dayton Hudson Corp.
* Cincinnati Bell, Inc.
* Stryker Corp.
Total number of holdings: 39
17
<PAGE>
SIT SCIENCE AND TECHNOLOGY GROWTH FUND REVIEW
QUARTER ENDED SEPTEMBER 30, 1998
[PHOTO] SENIOR PORTFOLIO MANAGER
EUGENE C. SIT, CFA
In our second quarter performance review letter, we stated we would be
surprised if second half 1998 returns were to be of equal magnitude to the
+17.7% achieved by the Sit Science & Technology Growth Fund during the first
half of the year. This proved to be correct so far, as the Fund retreated by
- -6.3% during the third quarter. Still, the third quarter result compared
favorably with the -7.6% return of the PSE Technology 100 Index and especially
favorable versus the -11.1% return of the average Science & Technology Fund
according to Lipper Analytical Services, Inc. On a year-to-date basis, the
Fund's +10.3% return is slightly ahead of the PSE Technology 100 Index's +10.1%
return and materially ahead of the +7.8% return of the peer Lipper group of
funds.
While negative, third quarter returns for science & technology investors beat
those of the broad market indices. Within the S&P 500 Index, technology
services, health technology and electronic technology were the three top ranked
sectors in a seventeen-sector breakdown. Health services delivered a return
below that of the market and is the lowest weighted category in the Fund.
Interestingly, returns for the major indices have been fueled by a handful of
very large capitalization stocks. In fact, on a year-to-date basis, the NASDAQ
Composite has advanced +7.9%. Microsoft, Intel, Cisco Systems and Dell Computer,
accounted for +12.6% of the return. In other words, the rest of the NASDAQ Index
declined by -4.7%.
We are closely monitoring GDP growth rates for the world's major economies.
Business capital spending has been growing at above trend line rates over the
past three years, and technology spending has accounted for a rising percentage
of the category. A decline in economic growth and business profitability could
have an affect on technology spending. We are similarly monitoring the effect of
the Year 2000 issue on companies whose stocks are in the Fund.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Fund is to maximize long-term capital appreciation.
The Fund pursues this objective by investing primarily in common stocks of
companies which Sit Investment Associates, Inc. expects to benefit from the
development, improvement, advancement and use of science and technology. During
normal market conditions, at least 80% of the Fund's total assets will be
invested in such securities. The Fund emphasizes securities of companies that
the adviser believes have potential for long-term capital growth.
PORTFOLIO SUMMARY
Net Asset Value 9/30/98: $11.03 Per Share
6/30/98: $11.77 Per Share
Total Net Assets: $5.32 Million
Weighted Average Market Cap: $51,007 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Health Technology 29.7
Technology Services 27.5
Electronic Technology 25.7
Health Services 4.8
Cash Equivalents 12.3
18
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
---------------------------- ----------------------------
Pacific Stock Pacific Stock
Science and Exchange Science and Exchange
Technology Technology Technology Technology
Growth Fund 100 Index Growth Fund 100 Index
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
3 Months -6.29% -7.56% -6.29% -7.56%
(not annualized)
Inception n/a n/a 10.30 10.06
(12/31/97)
</TABLE>
* As of 9/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. MANAGEMENT
FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN THE FUND'S PERFORMANCE;
HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE PACIFIC STOCK EXCHANGE
TECHNOLOGY 100 INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER
ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (12/31/97) and held until 9/30/98 would
have grown to $11,030 in the Fund, or $11,006 in the PSE Tech 100 Index assuming
reinvestment of all dividends and capital gains.
10 LARGEST HOLDINGS
* Merck & Co., Inc.
* Dell Computer Corp.
* Cisco Systems, Inc.
* BMC Software, Inc.
* Medtronic, Inc.
* Microsoft Corp.
* Biogen, Inc.
* EMC Corp. Mass
* Schering Plough Corp.
* Elan Corp., p.l.c., A.D.R.
Total number of holdings: 44
19
<PAGE>
A LOOK AT THE SIT MUTUAL FUNDS
Sit Mutual Funds are managed by Sit Investment Associates, Inc. Sit
Investment Associates 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 Associates currently manages approximately $6
billion for some of America's largest corporations, foundations and endowments.
Sit Mutual Funds is comprised of thirteen 100% NO-LOAD funds. 100% NO-LOAD
means that Sit Mutual 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 for purchases and redemptions
* Free check-writing privileges on bond funds
* Retirement accounts including IRAs, Keoghs and 401(k) Plans
SIT FAMILY OF FUNDS
[GRAPH]
STABILITY: INCOME: GROWTH: HIGH GROWTH:
Safety of principal Increased income Long-term capital Long-term capital
and current income appreciation and appreciation
income
MONEY MARKET U.S. GOVERNMENT BALANCED MID CAP GROWTH
SECURITIES LARGE CAP GROWTH INTERNATIONAL GROWTH
TAX-FREE INCOME REGIONAL GROWTH SMALL CAP GROWTH
MINNESOTA TAX-FREE SCIENCE AND
INCOME TECHNOLOGY GROWTH
BOND DEVELOPING MARKETS
GROWTH
<PAGE>
QUARTERLY REPORT
STOCK FUNDS
SEPTEMBER 30, 1998
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 5166
WESTBORO, MA 01581-5166
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. MEMBER OF
4600 NORWEST CENTER ================
MINNEAPOLIS, MN 55402 100% NO LOAD
612-334-5888 (METRO AREA) MUTUAL FUND
800-332-5580 COUNCIL
================
