Cornerstone Funds
Monthly Report
March 2000
Dear Limited Partner:
The Net Asset Value per Unit for each of the three Cornerstone Funds as of
March 31, 2000 was as follows:
Fund N.A.V. % Change for the Month
Fund II $3,938.32 -2.73%
Fund III $3,001.00 0.82%
Fund IV $4,668.19 0.55%
In general, the performance differences between the three Cornerstone Funds
can be attributed to the portfolio weightings and trading approaches unique
to each fund. For example, the primary reason for the different results of
Cornerstone II and Cornerstone III, the two broadly diversified funds in
the Series, is due to their respective participation in the currency and
global stock index futures sectors. Cornerstone II's approach to those
sectors resulted in losses, while Cornerstone III's approach generated
profits. Additionally, Cornerstone II had greater exposure to the soft
commodities markets than Cornerstone III, which moved in a trendless manner
in March. As a result, Cornerstone II's losses in this complex were more
severe than those in Cornerstone III.
During March, global interest rate futures prices, which had moved in a
choppy sideways pattern during January and February, increased during the
second half of the month as fears of drastic interest rate hikes by the
world's central banks subsided and investors found solace from stock market
volatility in fixed income vehicles. Consequently, profits were recorded
by Cornerstone II and Cornerstone III from long positions in U.S. and
European interest rate futures (Cornerstone IV, being a currency-only fund,
can only have exposure to the currency markets). These gains were
partially offset by losses incurred by Cornerstone II and Cornerstone III
from trading Japanese government bond futures as prices moved lower early
in the month, followed by a rebound in late March.
The price volatility previously seen in the interest rate futures markets
took to the global equity markets as prices fluctuated on concerns
regarding recent valuation disparities between "old economy" and "new
economy" stocks. While Cornerstone III recorded gains primarily from
trading the S&P 500 Index futures, Cornerstone II incurred losses in this
sector primarily from long Hang Seng Index futures positions.
In the commodities markets, a portion of previously recorded profits was
given back in the energy markets from long futures positions in crude oil
and its refined products as oil prices reversed lower after several months
of trending upward to nine-year highs. This reversal lower was prompted by
expectations that ministers from OPEC would agree at their meeting in
Vienna on March 27 to increase oil production. In soft commodities,
trendless price movement within the sugar and cocoa futures markets
resulted in additional losses for Cornerstone II. These losses were
mitigated by profits recorded from long positions in corn and soybean meal
futures as prices in these markets climbed higher. Cornerstone III
recorded losses from short corn futures positions.
In the currency markets, gains were recorded by Cornerstone III and
Cornerstone IV from short positions in the euro as the value of the
European common currency finished the month lower versus the U.S. dollar
and Japanese yen, undermined by expectations that interest rates would be
held steady by the European Central Bank. Cornerstone IV also recorded
profits from short South African rand positions as the value of the rand
plummeted to an 18-month low versus the U.S. dollar. Additional gains were
recorded by Cornerstone IV from long Mexican peso positions as its value
strengthened relative to the U.S. dollar. These gains were offset by
losses recorded by each of the Cornerstone Funds from short Japanese yen
positions as the value of the yen reversed higher versus the U.S. dollar
and major European currencies on reports of yen repatriation by
institutions ahead of the Japanese fiscal year-end on March 31.
Termination of Exchange Privilege
As noted in prior monthly reports, the exchange privilege among the
Cornerstone Funds (a "Series Exchange") is terminated effective with
the April 30, 2000 monthly closing. The decision to terminate the
Series Exchange privilege was made in view of the limited use of that
procedure and by a desire to reduce certain administrative expenses
paid by the Cornerstone Funds in order to maintain an effective
registration statement, as well as the availability of alternative
investment vehicles, such as the Morgan Stanley Dean Witter Spectrum
Series and the Morgan Stanley Dean Witter Charter Series. Limited
partners retain the ability to execute an exchange from a Cornerstone
Fund into either the Morgan Stanley Dean Witter Spectrum Series or the
Morgan Stanley Dean Witter Charter Series (a "Non-Series Exchange"),
subject to certain restrictions set forth in the applicable
prospectus. The Non-Series Exchange privilege is provided to limited
partners at no additional cost. Limited partners of the Cornerstone
Funds are reminded that, subject to certain restrictions, they have
the right to redeem their Units on a monthly basis, and that limited
partners of the Cornerstone Funds may vote to take certain actions
with respect to the operation of the
<PAGE>
Cornerstone Funds, as more fully set forth in Section 17 of the
Limited Partnership Agreement on page A-16 of the Prospectus.
Transfer of Clearing Broker and Foreign Currency Dealer Functions
The General Partner has determined, commencing in May 2000, to transfer the
Cornerstone Funds' futures and options clearing from Carr Futures Inc. to
Morgan Stanley & Co. Incorporated, an affiliate of the General Partner,
while trades on the London Metal Exchange will be cleared by Morgan Stanley
& Co. International Limited, also an affiliate of the General Partner. In
addition, Morgan Stanley, rather than Carr Futures, will act as the
counterparty on all of the Cornerstone Funds' foreign currency forward
trades. Dean Witter Reynolds Inc. will continue to act as the non-clearing
commodity broker for the Cornerstone Funds. The fees and charges of the
Morgan Stanley entities for acting as the clearing brokers will be at rates
similar to those charged by Carr Futures, as described in "Description of
Charges to Each Partnership - 1. Commodity Broker" on page 39 of the
Prospectus dated August 28, 1996 (the "Prospectus"), as updated and
supplemented on page S-18 of the Supplement to the Prospectus dated May 14,
1999 (the "Supplement"). The aggregate transaction fees and costs and
brokerage commissions will continue to be capped at 13/20 of 1% per month
of each Cornerstone Fund's Net Assets at month-end allocated to each
Trading Manager. In addition, these fees and costs continue to be subject
to the 14% annual cap on aggregate brokerage commissions, transaction fees
and costs, and net excess interest and compensating balance benefits. It
is expected as well that the prices charged by Morgan Stanley will be
equivalent to, if not better than, those charged by Carr Futures on its
currency forward trades. Morgan Stanley will not charge the roundturn
transaction fee presently charged by Carr Futures for acting, essentially,
as an executing agent on each currency forward contact. Morgan Stanley
will act as a principal for its own account on the Cornerstone Funds'
currency forward contract trades and it will attempt to earn a profit on
each currency forward contract. However, under the current arrangement,
counterparties to Carr Futures, in its role as the Cornerstone Funds'
agent, earn a profit on the currency forward contracts for the Cornerstone
Funds.
Related Risk Factors
The following Risk Factors in the Prospectus and the Supplement should now
be read as applying to Morgan Stanley, rather than Carr Futures.
"-Special Risks Associated with Forward Trading," on page 10 of the
Prospectus, as updated on page S-35 of the Supplement.
"-The Partnerships Have Credit Risk to the Commodity Brokers," on page
S-36 of the Supplement.
Related Conflict of Interest
As was the case when Dean Witter acted as the Cornerstone Funds' clearing
commodity broker and counterparty on foreign currency forward trades (see
"Conflicts of Interest-Relationship of the General Partner to the Commodity
Broker" on pages 16-17 of the Prospectus), the General Partner will have a
disincentive to replace Morgan Stanley as the clearing commodity broker and
counterparty on foreign currency forward trades. This is because Morgan
Stanley is an affiliate of the General Partner and will receive fees from
the Cornerstone Funds for serving as clearing commodity broker and will
earn profits on the Cornerstone Funds' foreign currency forward trades as
the counterparty on those trades.
While the General Partner has an obvious conflict of interest in selecting
its affliliates as the clearing brokers and foreign currency forward dealer
for the Cornerstone Funds' trades, the General Partner believes that the
Cornerstone Funds will receive as good or better services, costs and prices
than under the current arrangements.
<PAGE>
Rights of Limited Partners
Limited Partners are directed to the fourth paragraph of Section 9(e) of
the Limited Partnership Agreement on page A-11 of the Prospectus for a
description of the conditions applicable to a Cornerstone Fund entering
into an arrangement with an affiliate of the General Partner. Limited
Partners are also reminded that, subject to certain restrictions, they have
the right to redeem their Units on a monthly basis, and they may vote to
take certain actions with respect to a Cornerstone Fund's operations, as
described in Section 17(c) of the Limited Partnership Agreements on pages A-
16 of the Prospectus.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd
floor, New York, NY 10048 or your Morgan Stanley Dean Witter Financial
Advisor.
I hereby affirm, that to the best of my knowledge and belief, the
information contained in this report is accurate and complete. Past
performance is not a guarantee of future results.
Sincerely,
Robert E. Murray
Chairman
Demeter Management Corporation
General Partner
<PAGE>
Historical Fund Performance
Presented below is the percentage change in Net Asset Value per Unit from
the start of each calendar year each Fund has traded. Also provided is the
inception-to-date return and the annualized return since inception for each
Fund. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
CORNERSTONE FUND II
Year Return Year Return
1985 20.1% 1993 7.8%
1986 -17.5% 1994 -8.9%
1987 71.6% 1995 26.5%
1988 .1% 1996 11.5%
1989 -15.1% 1997 18.1%
1990 47.9% 1998 12.5%
1991 11.0% 1999 -5.4%
1992 -1.3% 2000 (3 months) -0.7%
Inception-to-Date Return: 303.9%
Annualized Return: 9.6%
CORNERSTONE FUND III
Year Return Year Return
1985 54.6% 1993 -4.8%
1986 -8.0% 1994 -10.0%
1987 32.5% 1995 27.5%
1988 19.4 % 1996 8.2%
1989 -11.4% 1997 10.2%
1990 18.7% 1998 9.1%
1991 12.0% 1999 -6.8%
1992 -11.1% 2000 (3 months) -1.5%
Inception-to-Date Return: 207.8%
Annualized Return: 7.7%
CORNERSTONE FUND IV
Year Return Year Return
1987(8 months) 10.6% 1994 -14.3%
1988 37.5% 1995 23.0%
1989 -14.1% 1996 13.0%
1990 57.8 % 1997 38.4%
1991 33.5% 1998 6.8%
1992 10.4% 1999 -1.1%
1993 -9.1% 2000 (3 months) -0.8%
Inception-to-Date Return: 376.7%
Annualized Return: 12.9%
<PAGE>
<TABLE>
Dean Witter Cornerstone Funds
Statements of Operations
For the Month Ended March 31, 2000
(Unaudited)
<CAPTION>
Cornerstone Fund II Cornerstone
Fund III _ Cornerstone Fund IV
Percent of Percent of
Percent of
March 1, 2000 March 1, 2000
March 1, 2000
Beginning Beginning
Beginning
Amount Net Asset Value Amount Net Asset
Value Amount Net Asset Value
$ % $ %
$ %
<S> <C> <C> <C> <C>
<C> <C>
REVENUES
Trading profit (loss):
Realized (231,079) (0.88) 1,638,429 5.19
8,883 0.01
Net change in unrealized (340,415) (1.29) (1,208,361)
(3.83) (196,619) (0.20)
Total Trading Results (571,494) (2.17) 430,068 1.36
(187,736) (0.19)
Interest Income (DWR) 100,036 0.38 122,950 0.39
373,391 0.38
Total Revenues (471,458) (1.79) 553,018 1.75
185,655 0.19
EXPENSES
Brokerage commissions (DWR) 144,559 0.55 174,231 0.55
378,442 0.38
Management fees 85,466 0.32 106,087 0.34
328,490 0.33
Transaction fees and costs 14,723 0.06 8,177 0.02
9,014 0.01
Administrative expenses 3,738 0.01 6,089
0.02 12,173 0.02
Total Expenses 248,486 0.94 294,584 0.93
728,119 0.74
NET INCOME (LOSS) (719,944) (2.73) 258,434 0.82
(542,464) (0.55)
Dean Witter Cornerstone Funds
Statements of Changes in Net Asset Value
For the Month Ended March 31, 2000
(Unaudited)
Cornerstone Fund II Cornerstone Fund
III Cornerstone Fund IV .
Units Amount Per Unit Units Amount Per Unit Units
Amount Per Unit
$ $ $ $
$ $
<S> <C> <C> <C> <C> <C>
<C> <C> <C> <C>
Net Asset Value,
March 1, 2000 6,510.329 26,359,679 4,048.90 10,605.198 31,567,734
2,976.63 21,201.189 99,089,564 4,673.77
Net Income (Loss) - (719,944) (110.58) - 258,434
24.37 - (542,464) (25.58)
Redemptions (214.601) (845,167) 3,938.32 (200.464) (601,594)
3,001.00 (535.802) (2,490,504) 4,648.19
Net Asset Value,
March 31, 2000 6,295.728 24,794,568 3,938.32 10,404.734 31,224,574
3,001.00 20,665.387 96,056,596 4,648.19
Exchanges,
April 1, 2000 - - 3,938.32 (1.883) (5,651)
3,001.00 1.216 5,651 4,648.19
Net Asset Value,
April 1, 2000 6,295.728 24,794,568 3,938.32 10,402.851 31,218,923
3,001.00 20,666.603 96,062,247 4,648.19
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Dean Witter Cornerstone Funds
Notes to Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization - Dean Witter Cornerstone Fund II ("Cornerstone
II"), Dean Witter Cornerstone Fund III ("Cornerstone III"), and
Dean Witter Cornerstone Fund IV ("Cornerstone IV"),
(individually, a "Partnership", or collectively, the
"Partnerships") are limited partnerships organized to engage in
the speculative trading of futures, options and forward
contracts on foreign currencies and other commodity interests
(collectively, "futures interests").
The general partner for each Partnership is Demeter Management
Corporation ("Demeter"). The non-clearing commodity broker is
Dean Witter Reynolds Inc. ("DWR") and an unaffiliated clearing
commodity broker, Carr Futures Inc. ("Carr"), provides clearing
and execution services. Commencing May 2000, clearing and
execution services will be transferred from Carr to Morgan
Stanley & Co., Incorporated ("MS & Co.") and Morgan Stanley &
Co. International Limited ("MSIL"). Demeter, DWR, MS & Co. and
MSIL are wholly-owned subsidiaries of Morgan Stanley Dean
Witter & Co.
Demeter is required to maintain a 1% minimum interest in the
equity of each Partnership and income (losses) are shared by
Demeter and the Limited Partners based upon their proportional
ownership interests.
Use of Estimates - The financial statements are prepared in
accordance with generally accepted accounting principles, which
require management to make estimates and assumptions that
affect the reported amounts in the financial statements and
related disclosures. Management believes that the estimates
utilized in the preparation of the financial statements are
prudent and reasonable. Actual results could differ from those
estimates.
Revenue Recognition - Futures interests are open commitments
until settlement date. They are valued at market on a daily
basis and the resulting net change in unrealized gains and
losses is reflected in the change in unrealized profit (loss)
on open contracts from one period to the next in the statements
of operations. Monthly, DWR pays each Partnership interest
income based upon 80% of its average daily Net Assets at a rate
equal to the average yield on 13-week U.S. Treasury bills
issued. For purposes of such interest payments in Dean Witter
Cornerstone Fund IV, Net Assets do not include monies due the
Partnerships on futures interests, but not actually received.
Net Income (Loss) per Unit - Net income (loss) per unit of
limited partnership interest ("Unit(s)") is computed using the
weighted average number of Units outstanding during the period.
Brokerage Commissions and Related Transaction Fees and Costs -
Brokerage commissions for each Partnership are accrued at 80%
of DWR's published non-member rates on a half-turn basis.
Related transaction fees and costs are accrued on a half-turn
basis. Brokerage commissions and transaction fees combined for
each Partnership are capped at 13/20 of 1% per month (a 7.8%
maximum annual rate) of the adjusted Net Assets allocated to
each trading program employed by the Partnerships' trading
managers.
Operating Expenses - Each Partnership has entered into an
exchange agreement pursuant to which certain common
administrative expenses (i.e., legal, auditing, accounting,
filing fees and other related expenses) are shared by each of
the Partnerships based upon the number of outstanding Units of
each Partnership during the month in which such expenses are
incurred. In addition, the
<PAGE>
Dean Witter Cornerstone Funds
Notes to Financial Statements
(Continued)
Partnerships incur monthly management fees and may incur
incentive fees. Demeter bears all other operating expenses.
Income Taxes - No provision for income taxes has been made in
the accompanying financial statements, as partners are
individually responsible for reporting income or loss based
upon their respective share of each Partnership's revenues and
expenses for income tax purposes.
Distributions - Distributions, other than redemptions of Units,
are made on a pro-rata basis at the sole discretion of Demeter.
No distributions have been made to date.
Redemptions - Limited Partners may redeem some or all of their
Units at 100% of the Net Asset Value per Unit as of the last
day of any month upon fifteen days advance notice by redemption
form to Demeter.
Exchanges - Limited Partners may transfer their investment
among the Partnerships (subject to certain restrictions
outlined in the Limited Partnership Agreements) without paying
additional charges.
The current exchange privilege among the Cornerstone funds (a
"Series Exchange") will be terminated effective with the April
30, 2000 monthly closing. Limited partners will retain the
ability to execute an exchange from a Cornerstone fund into
other funds outside the Cornerstone Series (a "Non-Series
Exchange") subject to certain restrictions set forth in the
applicable limited partnership agreements.
Dissolution of the Partnership - Each partnership will
terminate on September 30, 2025 regardless of its financial
condition at such time, upon a decline in Net Assets to less
than $250,000, a decline in the Net Asset Value per Unit to
less than $250, or under certain other circumstances defined in
each Limited Partnership Agreement.
2. Related Party Transactions
Each Partnership pays brokerage commissions to DWR as described
in Note 1. Each Partnership's cash is on deposit with DWR and
Carr in futures interests trading accounts to meet margin
requirements as needed. DWR pays interest on these funds as
described in Note 1.
3. Trading Managers
Demeter, on behalf of each Partnership, retains certain
commodity trading managers to make all trading decisions for
the Partnerships. The trading managers for each Partnership
are as follows:
Dean Witter Cornerstone Fund II
John W. Henry & Company, Inc.
Northfield Trading L.P.
Dean Witter Cornerstone Fund III
Welton Investment Corporation
Sunrise Capital Management, Inc.
Dean Witter Cornerstone Fund IV
John W. Henry & Company, Inc.
Sunrise Capital Management, Inc.
<PAGE>
Dean Witter Cornerstone Funds
Notes to Financial Statements
(Concluded)
Compensation to the trading managers by the Partnerships
consists of management fee and an incentive fee as follows:
Management Fee - Each Partnership's management fee is accrued
at the rate of 1/3 of 1% per month (a 4% annual rate) of Net
Assets under management by each trading manager at each month
end.
Incentive Fee - Each Partnership pays an annual incentive fee
equal to 15% of the new appreciation in Net Assets, as defined
in the Limited Partnership Agreements, as of the end of each
annual incentive period ending December 31, except for Dean
Witter Cornerstone Fund IV, which pays incentive fees at the
end of each annual incentive period ending May 31. New
appreciation represents the amount by which Net Assets are
increased by profits from futures, forward and options trading
that exceed losses after brokerage commissions, management
fees, transaction fees and costs and common administrative
expenses are deducted. Such incentive fee is accrued in each
month in which new appreciation occurs. In those months in
which new appreciation is negative, previous accruals, if any,
during the incentive period will be reduced. In those
instances in which a Limited Partner redeems an investment, the
incentive fee (if earned through a redemption date) is to be
paid on those redemptions to the trading manager in the month
of such redemption.
