<PAGE> 1
FIXED INCOME FUND
SEMI-ANNUAL INVESTMENT ADVISER'S REPORT
DECEMBER 31, 1994
The first half of the Fund's fiscal year ended with the economy continuing on
its improving trend. Continued strong economic growth in the second half of
1994 and the anticipation of future inflation caused the Federal Reserve to
raise the Fed Funds rate by a total of 125 basis points during the period.
Volatility in the foreign exchange markets caused foreign investors to limit
investments in dollar denominated securities.
The yield on the 30 year Treasury started the second half of 1994 at 7.61% and
increased 27 basis points to end 1994 at 7.88%. Yield on the 10 year Treasury
increased from 7.32% to 7.83%, a 51 basis point increase. During the period,
the yield curve from 3 month bills to the 30 year bond shifted from 332 basis
points in early July to 220 basis points at the end of December, a flattening
of 112 basis points. Corporates underperformed Treasuries due to rising
concerns about credit and event risk. The banking and brokerage industries
came under the most pressure due to the unexpected rapid rise in rates
experienced during 1994.
The Fixed Income Fund reduced its holding in corporates and eliminated its
holdings of mortgage securities to increase liquidity. During this
restructuring the Portfolio's duration was shortened which helped performance.
The Portfolio's total return for the last six months was 0.88% compared to the
Lipper Intermediate Investment Grade average return of 0.57% and the Lehman
Intermediate Government Corporate Index of 0.71%.
PNC Institutional Management Corporation
January 31, 1995
<PAGE> 2
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------- -----
<S> <C> <C> <C>
UNITED STATES TREASURY AND AGENCY
OBLIGATIONS - 80.2%
FEDERAL FARM CREDIT BANK - 7.1%
5.85%. . . . . . . . . . . . . . . . . . . . . . . . . . 04/29/96 $ 1,000 $ 979,340
------------
FEDERAL HOME LOAN BANK
NOTES - 28.6%
5.45%. . . . . . . . . . . . . . . . . . . . . . . . . . 01/25/95 1,000 999,550
5.70%. . . . . . . . . . . . . . . . . . . . . . . . . . 05/26/95 1,000 995,940
5.82%. . . . . . . . . . . . . . . . . . . . . . . . . . 05/17/96 1,000 991,250
7.04%. . . . . . . . . . . . . . . . . . . . . . . . . . 05/24/99 1,000 959,930
------------
3,946,670
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES - 9.0%
5.92%. . . . . . . . . . . . . . . . . . . . . . . . . . 01/04/95 300 299,951
7.30%. . . . . . . . . . . . . . . . . . . . . . . . . . 07/10/02 1,000 941,670
------------
1,241,621
------------
U.S. TREASURY BONDS - 7.3%
8.125% . . . . . . . . . . . . . . . . . . . . . . . . . 08/15/19 1,000 1,014,290
------------
U.S. TREASURY NOTES - 28.2%
7.625% . . . . . . . . . . . . . . . . . . . . . . . . . 12/31/94 900 900,000
5.875% . . . . . . . . . . . . . . . . . . . . . . . . . 05/15/95 1,000 998,040
7.875% . . . . . . . . . . . . . . . . . . . . . . . . . 02/15/00 1,000 1,003,000
7.875% . . . . . . . . . . . . . . . . . . . . . . . . . 11/15/04 1,000 1,003,580
------------
3,904,620
------------
TOTAL UNITED STATES TREASURY
AND AGENCY OBLIGATIONS
(Cost $11,302,134) 11,086,541
------------
CORPORATE BONDS - 11.0%
BANKS - 7.3%
North Carolina National Bank (A3,A)
8.50%. . . . . . . . . . . . . . . . . . . . . . . . . . 11/01/96 1,000 1,005,000
------------
PETROLEUM REFINING - 3.7%
Texaco Capital Co. (A1,A+)
9.00%. . . . . . . . . . . . . . . . . . . . . . . . . . 12/15/99 500 516,250
------------
TOTAL CORPORATE BONDS
(Cost $1,525,941) 1,521,250
------------
</TABLE>
See Notes to Financial Statements.
2
<PAGE> 3
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets (Concluded)
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------- -----
<S> <C> <C> <C>
VARIABLE RATE OBLIGATIONS - 7.3%
BROKERAGE SERVICES - 7.3%
Morgan Stanley Group, Inc.(A1,A+)
7.36%+
(Cost $1,000,000) . . . . . . . . . . . . . . . . . . . . . 03/09/95 $ 1,000 $ 1,000,000
------------
TOTAL INVESTMENT IN SECURITIES - 98.5%
(Cost $13,828,075*) 13,607,791
OTHER ASSETS IN EXCESS OF LIABILITIES - 1.5% . . . . . . . . . . . 213,603
------------
NET ASSETS (100.0 %) (Equivalent to $9.37
per share based on 1,424,033 Fixed Income
shares and 50,634 Fixed Income Dollar
shares of beneficial interest outstanding) . . . . . . . . . . $ 13,821,394
============
NET ASSET VALUE,
offering and redemption price per Fixed
Income and Fixed Income Dollar share
($13,821,394 / 1,474,667) . . . . . . . . . . . . . . . . . . $ 9.37
============
</TABLE>
- ----------------------------
* Aggregate cost for federal income tax purposes. The
aggregate gross unrealized appreciation (depreciation)
for all securities is as follows: Excess of value over tax
cost $7,170, excess of tax cost over value ($227,454).
+ Floating Rate Note - The rate shown is the rate as of
December 31, 1994, and the maturity shown is the next
interest readjustment date.
Average Weighted Maturity of the Portfolio - 3.9 years.
The Moody's Investors Service, Inc. and Standard and
Poor's Ratings Group, Division of McGraw Hill ratings
indicated are the most recent ratings available at
December 31, 1994.
See Notes to Financial Statements.
3
<PAGE> 4
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Operations
Six Months Ended December 31, 1994
(Unaudited)
<TABLE>
<S> <C>
Investment income:
Interest................................................................ $ 710,274
-----------
Expenses:
Investment advisory fees................................................ 22,855
Administrative fees..................................................... 22,855
Trustees' fees and officer's salary..................................... 27,729
Legal fees.............................................................. 16,672
Audit fees.............................................................. 7,484
Registration fees....................................................... 9,242
Custodian fees.......................................................... 3,573
Insurance .............................................................. 1,614
Printing ............................................................... 1,861
Service Organization fees............................................... 599
Transfer agent fees..................................................... 1,484
Miscellaneous........................................................... 975
-----------
116,943
Less fees waived and expenses reimbursed................................ (70,637)
-----------
Total expenses....................................................... 46,306
-----------
Net investment income................................................ 663,968
-----------
Realized and unrealized gain (loss) from investment activities:
Net realized loss from securities transactions.......................... (704,021)
Change in unrealized appreciation of investments........................ 349,614
-----------
Net loss on investments.............................................. (354,407)
-----------
Net increase in net assets resulting from operations.......................... $ 309,561
===========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 5
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended Year
December 31, 1994 Ended
(Unaudited) June 30, 1994
----------------- -------------
<S> <C> <C>
Decrease in net assets:
Operations:
Net investment income...................................................... $ 663,968 $ 2,028,531
Net realized gain (loss) from securities transactions...................... (704,021) 62,893
Change in unrealized appreciation (depreciation) on investments............ 349,614 (2,540,325)
------------------ -------------
Net increase (decrease) in net assets resulting from operations.......... 309,561 (448,901)
------------------ -------------
Dividends to shareholders from:
Net investment income:
Fixed Income shares (650,589) (1,997,498)
Fixed Income Dollar shares (13,379) (31,047)
Distributions to shareholders from:
Net capital gain:
Fixed Income shares.................................................... 0 (129,153)
Fixed Income Dollar shares............................................. 0 (2,054)
In excess of net capital gain:
Fixed Income shares.................................................... 0 (145,828)
Fixed Income Dollar shares............................................. 0 (2,320)
------------------ -------------
Total dividends and distributions to shareholders...................... (663,968) (2,307,900)
------------------ -------------
Capital share transactions:
Sales of shares............................................................ 1,674,074 12,284,599
Shares issued in reinvestment of dividends................................. 232,844 976,863
Shares repurchased......................................................... (19,625,913) (18,027,816)
------------------ -------------
Net decrease in net assets derived
from capital share transactions...................................... (17,718,995) (4,766,354)
------------------ -------------
Total decrease in net assets............................................ (18,073,402) (7,523,155)
Net Assets:
Beginning of period........................................................... 31,894,796 39,417,951
------------------ -------------
End of period................................................................. $ 13,821,394 $ 31,894,796
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 6
FIXED INCOME FUND
Fixed Income Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended Year Ended Year Ended Year Ended Year Ended
1994 June 30, June 30, June 30, June 30, June 30,
(Unaudited) 1994 1993 1992 1991 1990
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period................... $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25 $ 9.47
------ ------- --------- ------- ------- -------
Income from investment operations:
Net investment income.................................. 0.28 0.61 0.66 0.71 0.76 0.77
Net gain(loss) on securities(realized and unrealized).. (0.20) (0.75) 0.53 0.56 0.07 (0.22)
------ ------- --------- ------- ------- -------
Total income (loss) from investment operations... 0.08 (0.14) 1.19 1.27 0.83 0.55
------ ------- --------- ------- ------- -------
Less distributions:
Dividends from net investment income................... (0.28) (0.62) (0.66) (0.71) (0.76) (0.77)
Distributions from capital gains....................... 0.00 (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of capital gains............... 0.00 (0.04) 0.00 0.00 0.00 0.00
------ ------- --------- ------- ------- -------
Total distributions.............................. (0.28) (0.70) (0.66) (0.71) (0.76) (0.77)
------ ------- --------- ------- ------- -------
Net asset value, end of period......................... $ 9.37 $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25
====== ======= ========= ======= ======= =======
Total return........................................... (3.52%)(a) (1.54%) 12.41% 14.07% 9.43% 6.09%
Ratios/supplemental data:
Net assets, end of period (in 000's)................... $13,347 $31,392 $ 38,963 $29,739 $13,896 $12,599
Ratio of expenses to average daily net assets.......... 0.40%(a)(b) 0.40%(b) 0.40%(b) 0.40%(b) 0.40%(b) 0.40%(b)
Ratio of net investment income to average daily
net assets.......................................... 5.82%(a) 6.04% 6.48% 7.34% 8.29% 8.27%
Portfolio turnover rate................................ 65%(a) 85% 103% 94% 52% 38%
</TABLE>
- ----------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees and
officer's salary and expense reimbursements, the ratios of expenses to
average daily net assets would have been 1.02%(annualized), .96%,.93%,
1.00%, 1.34% and 1.22% for the period ended December 31, 1994 and the years
ended June 30, 1994, 1993, 1992, 1991 and 1990, respectively.
See notes to financial statements.
6
<PAGE> 7
FIXED INCOME FUND
Fixed Income Dollar Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Six Months
Ended June 28,(d)
December 31, Year Ended Year Ended Year Ended through Year Ended
1994 June 30, June 30, June 30, June 30, June 30,
(Unaudited) 1994 1993 1992 1991 1990(c)
------------ ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................... $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.30 $ 9.47
------- ------- ------ ------ ------ ------
Income from investment operations:
Net investment income................................... 0.27 0.58 0.64 0.69 0.01 0.74
Net gain(loss) on securities(realized and unrealized)... (0.20) (0.75) 0.53 0.56 0.02 (0.22)
------- ------- ------ ------ ------ ------
Total income from investment operations........... 0.07 (0.17) 1.17 1.25 0.03 0.52
------- ------- ------ ------ ------ ------
Less distributions:
Dividends from net investment income.................... (0.27) (0.59) (0.64) (0.69) (0.01) (0.74)
Distributions from capital gains........................ 0.00 (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of capital gains................ 0.00 (0.04) 0.00 0.00 0.00 0.00
------- ------- ------ ------ ------ ------
Total distributions............................... (0.27) (0.67) (0.64) (0.69) (0.01) (0.74)
------- ------- ------ ------ ------ ------
Net asset value, end of period.......................... $ 9.37 $ 9.57 $10.41 $ 9.88 $ 9.32 $ 9.25
======= ======= ====== ====== ====== ======
Total return............................................ (3.77%)(a) (1.79%) 12.13% 13.75% 0.28% 5.75%
Ratios/supplemental data:
Net assets, end of period (in 000's).................... $ 474 $ 503 $ 455 $ 417 $ 214 $ 0
Ratio of expenses to average daily net assets........... 0.65%(a)(b) 0.65%(b) 0.65%(b) 0.65%(b) 0.65%(a)(b) 0.65%(b)
Ratio of net investment income to average daily
net assets........................................... 5.57%(a) 5.79% 6.25% 6.98% 7.69%(a) 8.11%
Portfolio turnover rate................................. 65%(a) 85% 103% 94% 52%(a) 38%
</TABLE>
- ----------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees
and officer's salary and expense reimbursements, the ratios of expenses to
average daily net assets would have been 1.27%(annualized), 1.21%,
1.18%, 1.25%, 1.59%(annualized), and 1.48% for the period ended December
31,1994 and the years ended June 30, 1994, 1993 and 1992 , the period ended
June 30, 1991 and the year ended June 30,1990, respectively.
(c) No shares were outstanding June 30,1990.
(d) Reissuance of shares.
See notes to financial statements.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
A. Portfolios for Diversified Investment (the Company) was incorporated
in Maryland on January 18, 1984 and was reorganized as a Massachusetts business
trust on October 31, 1985. The Company is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Company consists of one portfolio, Fixed Income Fund
("Income Fund").
The Company's Declaration of Trust authorizes the Board of Trustees to
issue an unlimited number of shares of beneficial interest in the Company and
to classify or reclassify any unissued shares into one or more classes of
shares. The Declaration of Trust further authorizes the trustees to classify
or reclassify any class of shares into one or more subclasses.
Income Fund has two classes of shares, one class being referred to as
Dollar shares. Dollar shares and the other class of shares are identical in
all respects, except that Dollar shares are sold to insitutions (Service
Organizations) which provide support services to their customers who
beneficially own such shares, in consideration of Income Fund's payment of
0.25% (on an annualized basis) of the average daily net asset value of the
Dollar shares held by the institutions for the benefit of their customers. The
Service Organization fee is applicable only to the Dollar shares.
B. Significant accounting policies relating to the Company are as
follows:
Security Valuation--Portfolio securities which are listed on an
exchange are valued at the last quoted sales price on that exchange, or, if
there has been no such reported sale on that day, at the mean between the
closing bid and asked price. If a security is traded on more than one
exchange, the security is valued at the last quoted sales price on the exchange
where the security is primarily traded. Unlisted securities for which market
quotations are not readily available are valued at the most recent quoted bid
price. Short-term investments having a maturity of sixty days or less are
valued on the basis of amortized cost.
Securities Transactions and Investment Income--Securities transactions
are accounted for on the trade date. The cost of investments sold is
determined by the use of the specific identification method for both financial
reporting and income tax purposes. Interest income is recorded on an accrual
basis.
Dividends and Distributions to Shareholders--Substantially all of the
net investment income of Income Fund will be distributed as dividends monthly
to shareholders. Net realized capital gains, if any, will be distributed at
least annually for purposes of relieving Income Fund of federal income and
excise taxes. Distributions necessary to relieve Income Fund of federal excise
taxes are based upon a twelve month period ended October 31 of each year and,
because of subsequently realized capital losses in the fiscal year, may exceed
the net realized capital gains.
Federal Taxes--No provision is made for federal taxes as it is the
Company's intention to have Income Fund continue to qualify as a regulated
investment company and to make the requisite distributions to its shareholders
which will be sufficient to relieve the portfolio from all or substantially all
federal income and excise taxes.
Repurchase Agreements--Income Fund may engage in repurchase agreements
on obligations issued or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities and other securities in
which the Fund is authorized to invest. With respect to any repurchase
agreement
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
(Continued)
transaction engaged in by the Fund, Income Fund's investment adviser will
require the seller of the securities subject to the repurchase agreement to
maintain, on a daily basis, the value of such securities at not less than the
repurchase price (including accrued interest). The agreements are conditioned
upon the collateral being deposited under the Federal Reserve/Treasury
book-entry system or by another authorized securities depository.
C. PNC Institutional Management Corporation ("PIMC") (formerly Provident
Institutional Management Corporation) is adviser for Income Fund and maintains
the Company's financial accounts. PNC Bank, National Association ("PNC Bank"),
serves as sub-adviser and custodian for Income Fund. PIMC is a subsidiary of
PNC Bank. PFPC Inc. ("PFPC"), an indirect wholly owned subsidiary of PNC Bank
Corp., is the Company's transfer agent. PNC Bank is a wholly owned subsidiary
of PNC Bank Corp. Provident Distributors Inc. ("PDI") serves as the Company's
distributor. No compensation is payable by the Company to PDI for its
distribution services. The Company has entered into an Administration
agreement with PFPC and PDI for certain administrative services.
In return for their advisory and administration services, PIMC and the
administrators are each entitled to receive a fee from the Company, computed
daily and payable monthly, at the annual rate of .20%. In addition, PIMC and
the administrators each has agreed to reduce the advisory and administrative
fees otherwise payable to them and to reimburse the Company for certain of its
operating expenses to the extent necessary to ensure that the operating
expenses ratios (excluding fees paid to Service Organizations pursuant to
Servicing Agreements) do not exceed .40% of the average net assets of Income
Fund.
If expenses borne by Income Fund in any fiscal year exceed the
applicable expense limitation imposed by state securities regulation, PIMC and
the administrators have each agreed to reimburse Income Fund for one-half of
any excess expense up to the amount of fees payable to them by Income Fund
(except where such regulations require reimbursement regardless of the fees
payable to them).
During the period ended December 31, 1994 PIMC, PFPC and the Company's
trustees and officer voluntarily waived fees or salary as shown below:
<TABLE>
<S> <C>
Advisory and Administration
fees waived $ 45,711
Trustees' fees and
officer's salary waived 24,926
</TABLE>
Expenses of Income Fund include legal fees paid to Drinker Biddle &
Reath. A partner of that firm is Secretary of the Company.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
(Continued)
D. Purchases and sales of securities, other than short-term obligations
for the period ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Corporate Obligations $ 0 $ 7,197,799
Government Obligations 6,983,945 15,586,023
</TABLE>
E. At December 31, 1994 net assets consisted of:
<TABLE>
<S> <C>
Capital paid-in $ 14,893,856
Undistributed net
investment income 0
Accumulated net
realized loss on investments (852,178)
Net unrealized depreciation of
investments (220,284)
----------
$ 13,821,394
==========
</TABLE>
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
(Concluded)
F. Transactions in Fixed Income shares and Fixed Income Dollar shares are
summarized as follows:
<TABLE>
<CAPTION>
INCOME SHARES INCOME DOLLAR SHARES
---------------------------- ------------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1994 YEAR ENDED 1994 YEAR ENDED
(UNAUDITED) JUNE 30,1994 (UNAUDITED) JUNE 30, 1994
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Shares sold . . . . . . . . . 170,782 1,173,487 4,629 26,640
Shares issued in reinvestment 24,365 79,414 0 0
of dividends . . . . . . . .
Shares issued in reinvestment
of capital gains . . . . . . 0 15,817 0 0
Shares repurchased . . . . . (2,051,692) (1,731,327) (6,611) (17,714)
----------- ----------- ------- --------
Net increase
(decrease) in shares . . . . (1,856,545) (462,609) (1,982) 8,926
Shares outstanding:
Beginning of period . . . . 3,280,578 3,743,187 52,616 43,690
----------- ----------- ------- --------
End of period . . . . . . . 1,424,033 3,280,578 50,634 52,616
=========== =========== ======= ========
</TABLE>
11
