<PAGE> 1
[MAS FUNDS LOGO]
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
ADVISORY MORTGAGE PORTFOLIO
ANNUAL REPORT
1996
<PAGE> 2
We are pleased to present the Annual Report for the Advisory Foreign Fixed
Income and Advisory Mortgage Portfolios of MAS Funds as of September 30, 1996.
TABLE OF CONTENTS
MAS Overview and Statement of Net Assets
<TABLE>
<S> <C>
Advisory Foreign Fixed Income
Portfolio............................. 1
Advisory Mortgage Portfolio.............. 5
Statement of Operations..................... 15
Statement of Changes in Net Assets.......... 16
Financial Highlights........................ 17
Notes to Financial Statements............... 18
Report of Independent Accountants........... 24
</TABLE>
THIS ANNUAL REPORT CONTAINS CERTAIN INVESTMENT RETURN INFORMATION. IT SHOULD BE
NOTED THAT PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE
INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH EITHER MORE OR LESS THAN THEIR
ORIGINAL COST.
THIS REPORT HAS BEEN PREPARED FOR SHAREHOLDERS AND MAY BE DISTRIBUTED TO OTHERS
ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 3
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
-
Miller Anderson & Sherrerd uses the Advisory Foreign Fixed Income Portfolio as a
vehicle for opportunistic foreign bond investments in the portfolios of its
private advisory clients. By using the Portfolio instead of holding foreign
fixed-income securities directly, these clients may be able to benefit from some
or all of the following: (1) better diversification through ownership of a
smaller share of a larger number of holdings; (2) potentially enhanced
performance resulting from the ability to manage the foreign position on a
broader scale; (3) simplification of accounting as clients need only account for
mutual fund shares as opposed to individual securities, some of which are
subject to withholding taxes, fees, or other special treatment; (4) economies of
scale in custodial fees associated with holding foreign securities.
All securities in the Portfolio have a credit quality of A or better.
Derivatives may be used to represent country investments or otherwise pursue
portfolio strategy. The Portfolio is actively managed by Miller Anderson &
Sherrerd's global fixed-income team, which makes strategic decisions about
non-U.S. bond exposures for client portfolios.
The Portfolio seeks to buy those foreign securities that will outperform U.S.
securities with the same duration. Interest-rate risk is not explicitly managed
in the Portfolio. Overall interest-rate risk is instead managed at the level of
the client's entire portfolio, of which the Advisory Foreign Fixed Income
Portfolio is only a part. If long-maturity foreign securities are more
attractive than long-maturity U.S. securities, the portfolio will tend to have a
long maturity. Conversely, the portfolio will tend to have a short maturity if
the best foreign values, relative to U.S. alternatives, are concentrated in the
front end of the yield curve.
Investments in the Portfolio reflect careful comparisons of relative interest
rates, yield curve slopes, and currency values. When a country offers higher
real interest rates than those available in other countries, historically it has
been attractive to invest in these countries. In making this investment,
however, MAS separates the currency decision from the country decision and the
Portfolio will hedge exposures to those foreign currencies that are judged to be
overvalued and likely to depreciate.
During the past year, the Portfolio benefited from its investments in Canadian
and European bonds as interest-rate movements for these countries were more
favorable than for bonds in the United States. In addition, the decision to
hedge the exposures to European currencies protected the Portfolio from the
depreciation of these currencies versus the U.S. dollar over the course of the
year.
1
<PAGE> 4
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
Because the Portfolio is managed as a component of a diversified portfolio,
investment results from the Portfolio should not be analyzed on a stand-alone
basis. Results are presented in this report to comply with Securities and
Exchange Commission requirements for shareholder reporting. -
The Portfolio is only available to private advisory clients of Miller Anderson &
Sherrerd.
INVESTMENT RESULTS
GROWTH OF A $1 MILLION INVESTMENT
SINCE INCEPTION
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Years Ending September 30) MAS ADVISORY FOREIGN(000) Salomon Broad(000)
<S> <C> <C>
10/7/94 $1000 $1000
12/31/94 1017 1007
3/31/95 1037 1058
6/30/95 1083 1123
9/30/95 1121 1144
12/31/95 1195 1194
3/31/96 1200 1173
6/30/96 1235 1179
9/30/96 1306 1201
</TABLE>
AVERAGE ANNUAL RETURNS
ENDED 9/30/96*
<TABLE>
<CAPTION>
MAS ADVISORY SALOMON BROAD
FOREIGN INDEX
<S> <C> <C>
----------------------------
ONE YEAR 16.47% 4.94%
SINCE
INCEPTION 14.42% 9.68%
</TABLE>
MAS FUNDS RETURNS ARE NET OF ALL
FEES. RETURNS REPRESENT PAST
PERFORMANCE AND ARE NOT
INDICATIVE OF FUTURE RESULTS.
THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH EITHER
MORE OR LESS THAN THEIR ORIGINAL
COST.
THE ADVISOR HAS VOLUNTARILY
AGREED TO WAIVE ITS ADVISORY
FEES AND REIMBURSE CERTAIN
EXPENSES TO THE EXTENT NECESSARY
TO KEEP TOTAL ANNUAL OPERATING
EXPENSES FOR THE ADVISORY
FOREIGN FIXED INCOME PORTFOLIO
FROM EXCEEDING 0.15% OF AVERAGE
DAILY NET ASSETS.
*THE ADVISORY FOREIGN FIXED
INCOME PORTFOLIO COMMENCED
OPERATIONS ON 10/7/94. ALL
RETURNS ARE COMPARED TO THE
SALOMON BROAD INVESTMENT GRADE
INDEX, AN UNMANAGED MARKET
INDEX.
2
<PAGE> 5
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (62.1%)
<TABLE>
<CAPTION>
- ------------------------------------------------------
++RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1996 & POOR'S) (000) (000)+
- ------------------------------------------------------
<S> <C> <C>
AUSTRIAN SCHILLING (3.1%)
Government of Austria
5.50%, 1/18/04 AAA ATS 80,000 $ 7,307
- ------------------------------------------------------
BRITISH POUND (7.7%)
+++ United Kingdom
Treasury Bond
10.00%, 9/8/03 AAA GBP 10,250 18,289
- ------------------------------------------------------
DANISH KRONE (18.8%)
Kingdom of Denmark
8.00%, 3/15/06 AAA DKK 243,000 44,453
- ------------------------------------------------------
EUROPEAN CURRENCY UNIT (2.9%)
Government of France O.A.T.
7.50%, 4/25/05 AAA ECU 5,100 6,844
- ------------------------------------------------------
FINNISH MARKKA (3.5%)
Government of Finland
9.50%, 3/15/04 AA- FIM 32,000 8,331
- ------------------------------------------------------
GERMAN MARK (15.1%)
Allgemeine Hypo Bank AG
6.00%, 9/16/02 AAA DEM 12,000 8,028
Government of Germany
7.50%, 9/9/04 AAA 26,250 18,870
LBK-Baden Wurttemburg
6.00%, 1/25/06 AAA 13,500 8,670
- ------------------------------------------------------
GROUP TOTAL 35,568
- ------------------------------------------------------
IRISH PUNT (4.0%)
Irish Government
6.25%, 10/18/04 AA IEP 6,000 9,326
- ------------------------------------------------------
SPANISH PESETA (2.9%)
Spanish Government
8.00%, 5/30/04 AA ESP 875,000 6,911
- ------------------------------------------------------
SWEDISH KRONA (4.1%)
Government of Sweden
10.25%, 5/5/03 AAA SEK 55,000 9,668
- ------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$146,424) 146,697
- ------------------------------------------------------
CASH EQUIVALENTS (31.8%)
- ------------------------------------------------------
U.S. TREASURY BILLS (19.9%)
Zero Coupon, 2/27/97 Tsy $ 48,000 46,983
- ------------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
- -----------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS (11.9%)
Chase Securities, Inc. 5.60%,
dated 9/30/96, due 10/1/96,
to be repurchased at
$9,339, collateralized by
various U.S. Government
Obligations due
10/3/96-7/17/98, valued at
$9,431 $9,338 $ 9,338
Goldman Sachs & Co. 5.65%,
dated 9/30/96, due 10/1/96,
to be repurchased at
$9,338, collateralized by
U.S. Treasury Bonds, 8.75%,
due 5/15/17, valued at
$9,555 9,337 9,337
Merrill Lynch & Co. 5.50%,
dated 9/30/96, due 10/1/96,
to be repurchased at $9,338
collateralized by U.S.
Treasury Bills, due
12/31/96, valued at $9,566 9,337 9,337
- -----------------------------------------------------
GROUP TOTAL 28,012
- -----------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $75,000) 74,995
- -----------------------------------------------------
TOTAL INVESTMENTS (93.9%) (Cost $221,424) 221,692
- -----------------------------------------------------
OTHER ASSETS AND LIABILITIES (6.1%)
Cash 2
Interest Receivable 4,364
Receivable for Investments Sold 14,570
Receivable for Daily Variation on Futures
Contracts 2,011
Unrealized Gain on Forward Foreign Currency
Contracts 2,514
Other Assets 7
Payable for Investments Purchased (8,986)
Payable for Administrative Fees (15)
Payable for Trustees' Deferred Compensation
Plan-Note E (5)
Other Liabilities (62)
--------
14,400
- -----------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------
Applicable to 20,131,056 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $236,092
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 11.73
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 6
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO
VALUE
(CONT'D) (000)+
- -----------------------------------------------------
<S> <C>
NET ASSETS CONSIST OF:
Paid In Capital $174,846
Undistributed Net Investment Income (Loss) 37,078
Undistributed Realized Net Gain (Loss) 21,228
Unrealized Appreciation (Depreciation) on:
Investment Securities 268
Foreign Currency Transactions 2,382
Futures 290
- ------------------------------------------------------
NET ASSETS $236,092
- ------------------------------------------------------
+ See Note A1 to Financial Statements.
++ Ratings are unaudited.
+++ A portion of these securities was pledged to
cover margin requirements for futures
contracts.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
4
<PAGE> 7
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO
-
Miller Anderson & Sherrerd uses the Advisory Mortgage Portfolio as a vehicle for
mortgage investing in the portfolios of its private advisory clients. By using
the Portfolio instead of holding mortgages directly, these clients may be able
to benefit from some or all of the following: (1) better diversification through
ownership of a smaller share of a larger number of holdings; (2) potentially
enhanced performance resulting from the ability to manage the mortgage position
on a broader scale; (3) simplification of accounting as clients need only
account for mutual fund shares as opposed to individual mortgage securities,
some of which have unusual payment characteristics; (4) economies of scale in
custodial fees associated with the frequent pay-downs of mortgage securities.
The Portfolio invests in a full range of mortgage securities, collateralized
mortgage obligations (CMOs), asset-backed securities, U.S. Government, and other
fixed-income securities. Derivatives may be used to pursue portfolio strategy.
The Portfolio is actively managed by Miller Anderson & Sherrerd's fixed-income
team, which makes strategic decisions about its structure and composition.
The team seeks to achieve above-market returns by purchasing attractively priced
securities and by carefully managing the amount of prepayment risk, or call
risk, within the Portfolio. Most mortgages contain an option to prepay the
principal amount prior to maturity. These securities have higher yields as a
result, and MAS calculates whether the additional yield is sufficient to
compensate for the prepayment risk. The sensitivity of the Portfolio to mortgage
prepayments is increased when yields, adjusted for probable prepayments, are
attractive.
At the beginning of fiscal 1996, the Portfolio's prepayment sensitivity was less
than that of the benchmark. As spreads on fixed-rate current-coupon mortgages
widened, holdings were increased to over half of the Portfolio while the
position in adjustable-rate mortgages was completely eliminated. Holdings of
opportunistically selected mortgages which concentrate prepayment risk were
increased during the past two quarters as their spreads became very attractive
relative to their risk. Currently, the Portfolio has a sensitivity to prepayment
risk that is nearly identical to that of the benchmark.
Because the Portfolio is managed as a component of a diversified portfolio,
investment results from the Portfolio should not be analyzed on a stand-alone
basis. Results are presented in this report to comply with Securities and
Exchange Commission requirements for shareholder reporting. -
The Portfolio is only available to private advisory clients of Miller Anderson &
Sherrerd.
5
<PAGE> 8
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
GROWTH OF A $1 MILLION INVESTMENT
SINCE INCEPTION
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Years Ending September 30,) MAS ADVISORY MORTGAGE(000) LEHMAN MORTGAGE INDEX(000)
<S> <C> <C>
4/12/95 $1000 $1000
6/30/95 1034 1042
9/30/95 1060 1064
12/31/95 1096 1099
3/31/96 1095 1094
6/30/96 1104 1103
9/30/96 1130 1126
</TABLE>
AVERAGE ANNUAL RETURNS
ENDED 9/30/96*
<TABLE>
<CAPTION>
MAS ADVISORY LEHMAN MORTGAGE
MORTGAGE INDEX
<S> <C> <C>
------------------------------
ONE YEAR 6.56% 5.80%
SINCE
INCEPTION 8.68% 8.40%
</TABLE>
MAS FUNDS RETURNS ARE NET OF ALL
FEES. RETURNS REPRESENT PAST
PERFORMANCE AND ARE NOT
INDICATIVE OF FUTURE RESULTS.
THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH EITHER
MORE OR LESS THAN THEIR ORIGINAL
COST.
THE ADVISOR HAS VOLUNTARILY
AGREED TO WAIVE ITS ADVISORY
FEES AND REIMBURSE CERTAIN
EXPENSES TO THE EXTENT NECESSARY
TO KEEP TOTAL ANNUAL OPERATING
EXPENSES FOR THE ADVISORY
MORTGAGE PORTFOLIO FROM
EXCEEDING 0.08% OF AVERAGE DAILY
NET ASSETS.
*THE ADVISORY MORTGAGE PORTFOLIO
COMMENCED OPERATIONS ON 4/12/95.
ALL RETURNS ARE COMPARED TO THE
LEHMAN MORTGAGE INDEX, AN
UNMANAGED MARKET INDEX.
6
<PAGE> 9
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (96.1%)
<TABLE>
<CAPTION>
- -------------------------------------------------------
++RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1996 & POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C>
AGENCY FIXED RATE MORTGAGES (49.6%)
Federal Home Loan Mortgage
Corporation Conventional
Pools:
6.00%, 1/1/01 Agy $ 23 $ 23
6.50%, 3/1/02 Agy 21 21
6.75%, 12/1/05 Agy 215 211
8.25%, 11/1/07-7/1/08 Agy 254 262
10.00%, 10/1/10-9/1/20 Agy 11,130 11,969
10.25%, 1/1/09-9/1/16 Agy 173 187
10.50%, 1/1/11-12/1/20 Agy 4,062 4,435
11.00%, 2/1/10-9/1/20 Agy 8,544 9,430
11.25%, 6/1/10-12/1/15 Agy 199 220
11.50%, 2/1/00-9/1/19 Agy 5,481 6,109
12.00%, 10/1/09-8/1/15 Agy 1,018 1,159
12.50%, 10/1/09-9/1/13 Agy 155 179
13.00%, 9/1/13 Agy 28 31
13.50%, 2/1/10 Agy 41 47
Gold Pools:
7.00%, 1/1/24-6/1/25 Agy 24,558 23,859
9.50%, 11/1/16-12/1/22 Agy 29,268 31,294
10.00%, 2/1/19-10/1/21 Agy 2,181 2,361
10.50%, 6/1/11-3/1/21 Agy 762 836
11.00%, 5/1/12 Agy 34 38
11.50%, 8/1/15-10/1/19 Agy 268 299
12.00%, 8/1/14 Agy 321 358
October TBA
7.00%, 4/25/25 Agy 24,025 23,372
7.50%, 6/15/23-11/15/25 Agy 415,150 410,739
8.00%, 6/15/25 Agy 132,050 133,825
November TBA
7.50%, 8/15/23 Agy 10,000 9,875
Federal National Mortgage
Association Conventional
Pools:
9.00%, 11/1/09-8/1/16 Agy 9,012 9,479
9.50%, 7/1/16-7/1/17 Agy 4,558 4,886
10.00%, 9/1/16-5/1/22 Agy 31,158 33,669
10.50%, 5/1/11-4/1/22 Agy 11,908 13,074
10.75%, 10/1/11-6/1/13 Agy 230 254
11.00%, 5/1/11-11/1/20 Agy 5,702 6,324
11.25%, 1/1/11-1/1/16 Agy 491 541
11.50%, 2/1/11-9/1/25 Agy 1,237 1,387
12.00%, 1/1/13-2/1/18 Agy 368 417
12.50%, 9/1/09-9/1/15 Agy 4,942 5,670
October TBA
7.50%, 6/15/25 Agy 300 296
8.00%, 5/15/25-6/15/25 Agy 48,800 49,227
Government National
Mortgage Association
Various Pools:
10.00%, 11/15/09-11/15/18 Agy 380 415
10.50%, 10/15/00-4/15/25 Agy 31,489 34,833
11.00%, 12/15/09-5/15/26 Agy 20,086 22,450
11.50%, 1/15/13-2/15/16 Agy 2,050 2,294
12.00%, 11/15/12-4/15/15 Agy 610 697
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
12.50%, 11/15/10-7/15/15 Agy $ 659 $ 753
13.00%, 10/15/13-9/15/14 Agy 390 449
13.50%, 5/15/11-9/15/14 Agy 212 243
October TBA
7.50%, 7/15/22-3/15/26 Agy 122,850 121,334
- -------------------------------------------------------
GROUP TOTAL 979,831
- -------------------------------------------------------
ASSET BACKED CORPORATES (0.2%)
Security Pacific Home
Equity Trust,
Series:
91-A A2
8.90%, 3/10/06 AAA 1,229 1,234
91-AB
10.50%, 3/10/06 A+ 3,305 3,385
- -------------------------------------------------------
GROUP TOTAL 4,619
- -------------------------------------------------------
ASSET BACKED MORTGAGES (1.1%)
Advanta Mortgage Loan
Trust, Series 96-2 A5
8.08%, 6/25/27 AAA 2,786 2,823
Cityscape Home Equity Loan
Trust,
Series:
96-2 A5
8.10%, 8/25/26 AAA 7,500 7,611
96-3 A8
7.65%, 8/25/26 AAA 9,650 9,494
Delta Funding Home Equity
Loan Trust, Series 96-1
A7
7.95%, 6/25/27 AAA 1,120 1,128
GE Capital Mortgage
Services, Inc., Series
96-HE2 A6
8.00%, 6/25/26 AAA 900 906
IMC Home Equity Loan Trust,
Series 96-3 A7
8.05%, 8/25/26 AAA 300 303
- -------------------------------------------------------
GROUP TOTAL 22,265
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
AGENCY COLLATERAL SERIES (3.3%)
Collateralized Mortgage
Obligation Trust, Series
86-13 Q Inv Fl
15.682%, 1/20/03 AAA 292 310
Federal Home Loan Mortgage
Corporation,
Series:
88-17 I PAC-1 (11)
9.90%, 10/15/19 Agy 2,200 2,375
88-22 C PAC (11)
9.50%, 4/15/20 Agy 760 833
88-23 F PAC-1 (11)
9.60%, 4/15/20 Agy 1,025 1,121
89-39 F PAC-2 (11)
10.00%, 5/15/20 Agy 1,975 2,163
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
7
<PAGE> 10
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY MORTGAGE
PORTFOLIO
++RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
89-47 F PAC
10.00%, 6/15/20 Agy $ 1,435 $ 1,570
89-110 F PAC
8.55%, 1/15/21 Agy 800 829
90-129 H PAC
8.85%, 3/15/21 Agy 135 144
90-164 B12
9.50%, 7/15/21 Agy 4,700 5,103
90-1007 F Inv Fl
22.61%, 1/15/20 Agy 8 9
1632-SA Inv Fl IO REMIC
5.657%, 11/15/23 Agy 515 368
Federal National Mortgage
Association,
Series:
89-22 G PAC (11)
10.00%, 5/25/19 Agy 5,350 5,939
89-92 G PAC (11)
8.60%, 12/25/04 Agy 750 785
90-106 J PAC
8.50%, 9/25/20 Agy 2,537 2,628
90-118 S Inv Fl
29.569%, 9/25/20 Agy 212 299
90-126 S Inv Fl CMO
19.79%, 10/25/20 Agy 7,549 8,884
91-34 S Inv Fl
20.559%, 4/25/21 Agy 4,957 5,944
91-107 S Inv Fl
14.552%, 8/25/21 Agy 2,941 3,334
92-33 S Inv Fl
10.89%, 3/25/22 Agy 6,645 6,426
93-22 S Inv Fl
9.828%, 9/25/22 Agy 713 540
93-46 SD Inv Fl
4.653%, 4/25/23 Agy 8,330 4,240
93-46 SG Inv Fl
6.417%, 7/25/22 Agy 2,810 1,762
93-115 SB Inv Fl
4.22%, 7/25/23 Agy 4,760 2,737
Government National
Mortgage Association,
Series:
96-12 S Inv Fl IO
3.063%, 6/16/26 Agy 51,781 3,345
96-13 S Inv Fl IO
3.65%, 7/16/11 Agy 26,897 2,117
Kidder Peabody Mortgage
Assets Trust,
Series:
# 87 B PO
4/22/18 Aaa 179 133
# 87 B IO
9.50%, 4/22/18 Aaa 179 54
Morgan Stanley Mortgage
Trust, Series 88-28 8 PAC
9.40%, 10/1/18 AAA 125 131
- -------------------------------------------------------
GROUP TOTAL 64,123
- -------------------------------------------------------
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS-
NON-AGENCY COLLATERAL SERIES (19.3%)
American Housing Trust,
Series:
IV 2
9.553%, 9/25/20 A $ 2,525 $ 2,595
V 1G
9.125%, 4/25/21 AAA 6,865 6,936
Bear Stearns Mortgage
Securities, Inc.,
Series:
96-4 AI10
8.125%, 9/25/27 AAA 9,026 9,131
96-5 A7
8.125%, 9/25/27 AAA 8,050 8,161
Chase Mortgage Finance
Corp.,
Series:
sec. 93-1 B2
7.911%, 3/28/24
(acquired
4/28/95-7/30/96, cost
$4,209) N/R 4,364 4,328
# 93-N A8
6.75%, 11/25/24 Aaa 2,700 2,403
# 94-H A7
7.25%, 6/25/25 Aaa 2,075 1,912
Chemical Mortgage Securities,
Inc.,
Series:
sec. 93-1M
7.45%, 2/25/23 (acquired
4/28/95-10/30/95, cost
$4,262) AA 4,551 4,435
sec. 93-3 M
7.125%, 7/25/23
(acquired 6/9/95, cost
$5,722) AA 5,984 5,688
96-1 A9
7.25%, 1/25/26 AAA 12,305 11,780
Citicorp Mortgage Securities,
Inc.,
Series:
# 90-7 A7
9.50%, 6/25/05 Baa3 519 517
90-11A 5
9.50%, 7/25/20 AAA 147 149
93-9 A1
7.00%, 3/25/20 AAA 431 431
94-7 A5
6.25%, 4/25/24 AAA 3,775 3,137
sec. 95-3 A6
7.50%, 11/25/25
(acquired
11/2/95-8/14/96, cost
$4,022) AAA 3,954 3,843
CMC Securities Corp. IV,
Series 94-G A4
7.00%, 9/25/24 AAA 8,985 8,015
Countrywide Funding Corp.,
Series:
93-C A11
6.50%, 1/25/24 AAA 10,202 9,308
94-12 A10
7.00%, 5/25/24 AAA 855 765
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
8
<PAGE> 11
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
sec. 95-4 M
7.50%, 9/25/25 (acquired
9/13/95, cost $6,530) AA $ 6,611 $ 6,390
sec. FBS Mortgage
Corporation, Series 92-BB
M
8.625%, 7/25/23
(acquired
5/18/95-8/29/96, cost
$2,258) AAA 2,213 2,275
First Boston Mortgage
Securities Corp.,
Series:
sec. 92-4 B1
8.125%, 10/25/22
(acquired 4/28/95, cost
$70) A 77 74
93-2 B1
7.50%, 3/25/33 A 2,463 2,348
sec. 93-5 B1
7.30%, 7/25/23 (acquired
1/25/96-9/24/96, cost
$987) AAA 1,015 953
GE Capital Mortgage Services,
Inc.,
Series:
92-10A F
7.50%, 8/25/22 AAA 7,727 7,407
94-14 A7
7.50%, 4/25/24 AAA 4,000 3,746
94-24 A4
7.00%, 7/25/24 AAA 9,980 8,908
94-27 A6
6.50%, 7/25/24 AAA 9,125 7,838
(+) 95-6 B2
7.00%, 8/25/25 N/R 3,081 2,827
96-2 A8
7.00%, 2/25/26 AAA 9,866 9,273
Independent National
Mortgage Corp.,
Series:
sec.# 94-O B1
7.875%, 9/25/24
(acquired 11/9/95, cost
$14,711) A2 14,746 14,193
95-Q A11
7.40%, 11/25/25 AAA 497 482
sec. 95-U A3
7.13%, 9/25/24 (acquired
10/17/95-8/14/96, cost
$11,604) AAA 11,705 11,179
sec. 95-V A3
7.12%, 2/25/26 (acquired
10/24/95-9/5/96, cost
$16,550) AAA 16,783 16,013
Mid-State Trust, Series
88-2 A4
9.625%, 4/1/03 AAA 18,645 20,279
Old Stone Credit Corp.,
Series 92-3 B1
6.35%, 9/25/07 AAA 297 289
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
PNC Mortgage Securities
Corp., 94-3 A8
7.50%, 7/25/24 AAA $ 4,625 $ 4,348
sec. 96-1 A5
7.50%, 6/25/26 (acquired
7/30/96, cost $283) AAA 299 290
sec. 96-1 B1
7.50%, 6/25/26 (acquired
4/15/96, cost $4,364) AA 4,509 4,381
Prudential Home Mortgage
Securities Co., Inc.,
Series:
90-5 A3
9.50%, 5/25/05 AAA 115 115
(+)# 92-A 1B4
7.90%, 4/28/22 Aaa 5,045 4,752
(+)# 92-A 2B4
7.90%, 4/28/22 A1 1,484 1,287
sec.# 92-33 B1
7.50%, 11/15/22
(acquired 4/28/95, cost
$682) A2 774 733
(+) 93-B B1
7.836%, 4/28/23 AA 4,620 4,576
sec.# 93-17 B1
6.50%, 3/1/23 (acquired
4/28/95, cost $954) A2 1,026 985
(+)## 94-A 3B3
6.803%, 4/28/24 N/R 7,530 6,810
(+) 94-A B3
6.802%, 4/28/24 N/R 8,311 7,496
sec. 95-2 M
8.50%, 6/25/25 (acquired
9/26/95, cost $346) AA 337 343
sec. 95-6 M
7.50%, 9/25/25 (acquired
8/25/95, cost $5,220) AA 5,363 5,198
sec. 96-5 A6
7.25%, 4/25/26 (acquired
2/27/96, cost $12,687) AAA 12,919 12,369
Residential Funding
Mortgage Securities Co.,
Inc.,
Series:
87-S7 A
9.00%, 8/25/17 AAA 49 50
90-2 A
10.50%, 3/25/20 AA 43 43
92-S2 M
8.00%, 1/25/22 AA 3,598 3,640
92-S15 A5
8.00%, 5/25/07 AAA 893 897
92-S20 A11
8.10%, 6/25/22 AAA 421 425
sec. 93-MZ1 A2
7.47%, 3/2/23 (acquired
6/30/95-7/30/96, cost
$1,163) AA 1,200 1,163
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 12
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
sec. 93-MZ2 A2
7.47%, 5/30/23 (acquired
4/28/95-7/30/96, cost
$3,456) AA $ 3,694 $ 3,514
sec. 93-MZ3 A2
6.97%, 8/28/23 (acquired
6/2/95-8/29/96, cost
$13,519) N/R 14,600 13,328
93-S2 M2
8.00%, 1/25/23 A 889 880
sec. 93-S43 A10
6.50%, 11/25/23
(acquired
6/12/95-7/30/96, cost
$7,677) AAA 8,288 7,559
sec. 93-S27 M2
7.50%, 6/25/23 (acquired
1/25/96, cost $487) A 485 465
sec. 94-S1 A19
6.75%, 1/25/24 (acquired
4/28/95-8/29/96, cost
$8,573) AAA 9,368 8,702
95-R20 A5
7.50%, 12/25/25 AAA 10,214 9,928
95-S16 A7
7.50%, 11/25/25 AAA 11,276 10,957
95-S17 A8
7.50%, 12/25/25 AAA 11,258 10,939
Resolution Trust Corp.,
Series 92-16 C2
7.75%, 8/25/25 A 1,575 1,562
Rural Housing Trust, Series
87-1M
3.33%, 4/1/26 A- 17,157 15,863
Ryland Mortgage Securities
Corp.,
Series:
## 92-A 1A
8.286%, 3/29/30 A- 5,066 5,009
# 93-4 A9
7.50%, 8/25/24 Aaa 11,720 11,024
94-7B 4A2
7.50%, 8/25/25 AAA 1,900 1,785
Ryland Mortgage Securities
Corp. Two, Series 1B
8.50%, 12/26/21 A 10,100 10,189
sec.# Salomon Brothers
Mortgage Securities,
Series 93-3 B1
7.20%, 8/25/23 (acquired
1/25/96-8/14/96, cost
$572) Aa2 580 550
Saxon Mortgage Securities
Corp.,
Series:
93-4 1B
7.25%, 6/25/24 AAA 500 452
93-8A A6
7.375%, 9/25/23 AAA 390 363
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
Securitized Asset Sales,
Inc.,
Series:
sec. 95-3 B1
7.50%, 10/25/25
(acquired 12/28/95, cost
$4,502) A $ 4,453 $ 4,260
sec.# 95-B M
7.41%, 9/25/24 (acquired
6/30/95-8/29/96, cost
$4,944) Aa1 5,283 4,942
- -------------------------------------------------------
GROUP TOTAL 380,180
- -------------------------------------------------------
COMMERCIAL MORTGAGES (11.8%)
American Southwest
Financial Securities
Corp.,
Series:
93-2 A1
7.30%, 1/18/09 AA 8,219 8,165
sec. 93-2 S1 IO
1.078%, 1/18/09
(acquired
6/18/96-9/24/96, cost
$4,040) AA 75,817 3,999
# 95-C1 A1B
7.40%, 11/17/04 Aaa 18,650 18,861
Asset Securitization Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 14,476 14,688
## 95-MD4 A1
7.10%, 8/13/29 AAA 17,913 17,664
95-MD4 ACS2 IO
2.41%, 8/13/29 AAA 26,056 4,613
Beverly Finance
8.36%, 7/15/04 AA- 9,515 9,850
Carousel Center Finance,
Inc.,
Series:
(+) 1 A1
6.828%, 11/15/07 AA 1,000 978
(+) 1 B
7.188%, 11/15/07 A 12,425 12,178
CBM Funding Corp., Series
96-1 A3PI
7.08%, 2/1/13 AA 15,000 14,724
(+) Creekwood Capital
Corp., Series 95-1A
8.47%, 3/16/15 AA 3,926 4,118
(+) Crystal Run Properties,
Class A
7.393%, 8/15/11 AA 15,775 15,673
(+) CVM Finance Corp.
7.19%, 3/1/04 AA 439 438
(+)# DeBartolo Capital
Corp., Series A2
7.48%, 5/1/04 Aaa 14,280 14,572
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
10
<PAGE> 13
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
DLJ Mortgage
Acceptance Corp.,
Series:
sec. 93-MF7
7.40%, 6/18/03 (acquired
4/28/95-4/29/96, cost
$9,196) AAA $ 9,100 $ 9,169
93-M10 A2
7.20%, 7/15/03 AAA 5,206 5,200
(+) 96-CF1 A1B
7.58%, 3/13/28 AAA 150 152
(+)## 96-CF1 IO
0.742%, 3/12/06 N/R 178,653 6,637
(+) FSA Finance, Inc.,
Series 95-1A
7.42%, 6/1/07 AA 5,054 5,069
J.P. Morgan Commercial
Mortgage Finance Corp.,
Series 95-C1 A1
7.268%, 7/25/10 AAA 4,125 4,130
(+) Lakeside Finance Corp.
6.47%, 12/15/00 AA 240 236
(+) Lakewood Mall Finance
Co., Series 95-C1 A
7.00%, 8/13/10 AA 12,400 12,044
Merrill Lynch Mortgage
Investors, Inc., Series
96-C1 A3
7.42%, 4/25/28 AAA 2,275 2,271
Mortgage Capital Funding,
Inc., Series 95-MC1 A1B
7.60%, 5/25/27 AAA 12,598 12,700
Nomura Asset Securities
Corp.,
Series:
94-MD1 A 1B
7.526%, 3/15/18 AAA 3,660 3,716
## 94-MD1 A2
7.673%, 3/15/18 AA 3,735 3,801
94-MD1 A3
8.026%, 3/15/18 A 4,250 4,425
Oakdale Mall
7.95%, 4/27/01 AAA 275 279
(+) Prime Property Funding
6.633%, 7/23/03 AA 17,450 17,021
Sawgrass Financial,
Series 93-A1
6.45%, 1/20/06 AAA 255 249
(+) Stratford Finance Corp.
6.776%, 2/1/04 AA 5,705 5,441
Woodland Finance Corp.
8.20%, 5/15/04 AA 700 720
- -------------------------------------------------------
GROUP TOTAL 233,781
- -------------------------------------------------------
[ ] HEDGED MORTGAGES (2.7%)
Federal Home Loan Mortgage
Corporation,
Series:
13 B IO
10.00%, 6/1/20 Agy 2,837 929
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
16 B IO
10.00%, 6/1/20 Agy $ 1,474 $ 467
18 B IO
10.00%, 5/1/20 Agy 752 239
1364-B Inv Fl IO CMO
6.00%, 9/15/07 Agy 12,425 1,553
1364-E Inv Fl IO CMO
9.287%, 9/15/07 Agy 14,926 2,975
1415-S Inv Fl IO CMO
19.75%, 11/15/07 Agy 144 61
1476-S Inv Fl IO REMIC
PAC
4.431%, 2/15/08 Agy 1,572 158
1485-S Inv Fl IO REMIC
4.10%, 3/15/08 Agy 1,574 123
1600-SA Inv Fl IO REMIC
2.50%, 10/15/08 Agy 23,930 1,204
1632-SB Inv Fl REMIC
4.60%, 11/15/23 Agy 9,720 4,589
1634-SC Inv Fl IO REMIC
7.426%, 12/15/23 Agy 4,000 2,333
1699-SD Inv Fl IO CMO
2.50%, 3/15/24 Agy 92,923 5,993
Federal National Mortgage
Association,
Series:
91-46 S Inv Fl CMO
1252.344%, 5/25/21 Agy 37 1,140
91-90 S Inv Fl CMO
547.044%, 7/25/21 Agy 115 1,523
92-186 Inv Fl IO
3.431%, 10/25/07 Agy 2,523 188
93-9 SB Inv Fl IO REMIC
PAC
7.16%, 1/25/23 Agy 6,177 1,869
G 92-32 SQ Inv Fl IO
2673.513%, 6/25/22 Agy 26 1,717
sec. G 92-52 SQ IO REMIC
7478.19%, 9/25/22
(acquired 7/11/96, cost
$9,449) Agy 53 9,466
G 92-53 S Inv Fl IO REMIC
33.469%, 9/25/22 Agy 6,335 4,802
G 92-63 S Inv Fl IO REMIC
3.819%, 11/25/22 Agy 34,099 2,990
G 94-2 S Inv Fl IO REMIC
2.569%, 1/25/24 Agy 39,511 2,137
Morgan Stanley Mortgage
Trust, Series 41-2 Inv Fl
CMO
11,248.15%, 2/20/22 AAA 26 6,604
- -------------------------------------------------------
GROUP TOTAL 53,060
- -------------------------------------------------------
NON-AGENCY FIXED RATE MORTGAGES (0.1%)
sec. Coast Federal, Series
84-3
7.941%, 3/1/06 (acquired
4/28/95, cost $288) N/R 281 273
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
11
<PAGE> 14
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY MORTGAGE
PORTFOLIO
++RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
sec.## Dedham Savings
Participation Certificate
8.144%, 5/1/01 (acquired
7/30/96, cost $449) N/R $ 451 $ 451
sec.## Fortune Mortgage
Corp. Participation
Certificate
7.812%, 8/1/99 (acquired
7/30/96, cost $284) N/R 291 286
sec. Great American
Federal, Series 84-2
8.595%, 4/1/99 (acquired
4/28/95, cost $30) N/R 32 32
sec. Household Bank, Series
85-1
7.94%, 5/1/02 (acquired
5/31/95, cost $340) N/R 337 335
- -------------------------------------------------------
GROUP TOTAL 1,377
- -------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (1.3%)
Bank of America,
Series:
79-1
9.50%, 7/1/08 AAA 70 72
79-3
9.50%, 7/1/08 AAA 405 414
79-7
9.50%, 12/1/08 AAA 170 173
79-9
9.50%, 1/1/09 AAA 169 173
A
8.375%, 5/1/07 AAA 966 968
California Federal Savings
& Loan, Series 86-1A
8.80%, 1/1/14 AA 89 89
First Federal Savings &
Loan Association, Series
92-C
8.75%, 6/1/06 AA 341 343
sec.## Gemsco Mortgage Pass
Through Certificate,
Series 87-A
8.635%, 11/25/10
(acquired
4/28/95-11/29/95, cost
$835) AA 823 829
Marine Midland Bank NA,
Series 91-1 A7
8.50%, 4/25/22 AA 3 3
## Resolution Trust Corp.,
Series 92-5 C
8.62%, 1/25/26 AA 6,643 6,765
Ryland Acceptance Corp. IV,
Series 79-A
6.65%, 7/1/11 AA 3,907 3,707
Ryland Mortgage Securities
Corp., Series 93-A 1A
7.45%, 1/28/23 AAA 1,978 1,881
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
Sears Mortgage Securities,
Series:
sec. 82-1
9.25%, 11/1/10 (acquired
4/28/95-11/13/95, cost
$738) AA $ 723 $ 735
sec. 82-3
10.00%, 11/1/12
(acquired 4/28/95, cost
$600) AA 577 587
sec. Shearson American
Express, Series A
9.625%, 12/1/12
(acquired
4/28/95-10/30/95, cost
$340) AA 332 340
+++# Town & Country Funding
Corp.
5.85%, 8/15/98 Aa2 8,425 8,304
Travelers Mortgage
Services, Inc., Series
86-3 A
10.00%, 8/25/16 AA 109 111
Washington Mutual Savings
Bank, Series A 1
9.00%, 5/25/08 AA 79 80
- -------------------------------------------------------
GROUP TOTAL 25,574
- -------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES-
AGENCY COLLATERAL SERIES (4.3%)
Federal Home Loan Mortgage
Corporation, Series 1603
QA PO
10/15/23 Agy 15,266 5,491
Federal National Mortgage
Association,
Series:
43-2 IO
9.50%, 9/1/18 Agy 56 17
93-205 G PO
9/25/23 Agy 12,408 6,558
93-235 H PO
9/25/23 Agy 5,192 3,468
93-237 E PO
11/25/23 Agy 15,905 10,607
93-243 C PO
11/25/23 Agy 3,403 2,156
93-M2 B IO
2.572%, 7/25/03 Agy 64,322 4,901
94-25 C PO
11/25/23 Agy 7,844 4,881
96-34 C PO REMIC
3/25/23 Agy 2,086 870
249 1 PO
10/25/23 Agy 32,943 20,122
254 1 PO
1/1/24 Agy 6,699 4,368
260 1 PO
4/1/24 Agy 9,127 5,876
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
12
<PAGE> 15
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
263 1 PO
5/25/24 Agy $ 26,201 $ 15,833
First Boston Mortgage
Corp., Series 87-B2 IO
8.985%, 4/25/17 AAA 136 42
- -------------------------------------------------------
GROUP TOTAL 85,190
- -------------------------------------------------------
U.S. TREASURY SECURITY (2.4%)
U.S. Treasury Note
7.50%, 2/15/05 Tsy 45,000 47,355
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$1,890,873) 1,897,355
- -------------------------------------------------------
STRUCTURED INVESTMENT (0.6%) -- Note A7
- -------------------------------------------------------
Morgan Guaranty Trust Co.,
11/20/03; monthly
payments equal to 1% per
annum of the outstanding
notional balance, indexed
to GNMA ARM pools (Cost
$11,980) N/R 338,711 10,991
- -------------------------------------------------------
PURCHASED OPTIONS (0.0%)
- -------------------------------------------------------
@ U.S. Treasury Note, Call
Option, expiring 6/25/03,
strike price $106.50
(Cost $251) 27,200 --
- -------------------------------------------------------
CASH EQUIVALENTS (42.7%)
- -------------------------------------------------------
COMMERCIAL PAPER (37.9%)
American Express Credit Corp.
5.30%, 10/15/96 30,000 29,938
American General Finance Corp.
5.30%, 11/1/96 30,000 29,863
Ameritech Corp
5.38%, 10/23/96 30,000 29,901
AT&T Corp.
5.25%, 10/1/96 30,000 30,000
Banc One Corp.
5.35%, 10/30/96 30,000 29,871
Beneficial Corp.
5.40%, 11/4/96 30,000 29,847
CIT Group Holdings, Inc.
5.32%, 11/12/96 30,000 29,814
Commercial Credit Co.
5.32%, 10/25/96 30,000 29,894
Dun & Bradstreet
5.35%, 10/29/96 30,000 29,875
E.I. DuPont de Nemours & Co.
5.25%, 10/3/96 30,000 29,991
Ford Motor Credit Corp.
5.35%, 10/24/96 30,000 29,898
General Electric Credit Corp.
5.28%, 11/1/96 30,000 29,864
H.J. Heinz Co.
5.30%, 11/15/96 30,000 29,801
Household Finance Corp.
5.28%, 10/16/96 30,000 29,934
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
- -------------------------------------------------------
<S> <C> <C>
IBM Credit Corp.
5.30%, 10/16/96 $ 30,000 $ 29,934
JC Penney Funding Corp.
5.32%, 10/21/96 30,000 29,911
Monsanto Co.
5.42%, 10/22/96 30,000 29,905
PHH Corp.
5.30%, 10/8/96 30,000 29,969
Philip Morris Cos., Inc.
5.35%, 10/9/96 30,000 29,964
Prudential Funding Corp.
5.25%, 10/7/96 30,000 29,974
Raytheon Corp.
5.27%, 10/28/96 30,000 29,881
Southwestern Bell Telephone Co.
5.33%, 10/7/96 30,000 29,973
U.S. West Communications, Inc.
5.32%, 10/17/96 30,000 29,929
Warner Lambert Co.
5.28%, 10/2/96 30,000 29,996
Xerox Corp.
5.25%, 10/1/96 30,000 30,000
- -------------------------------------------------------
GROUP TOTAL 747,927
- -------------------------------------------------------
REPURCHASE AGREEMENT (4.8%)
Chase Securities, Inc. 5.60%,
dated 9/30/96, due 10/1/96, to
be repurchased at $96,101,
collateralized by various U.S.
Government Obligations due
10/3/96-7/17/98, valued at
$97,048 96,086 96,086
<CAPTION>
- -------------------------------------------------------
<S> <C>
TOTAL CASH EQUIVALENTS (Cost $844,013) 844,013
- -------------------------------------------------------
TOTAL INVESTMENTS (139.4%) (Cost $2,747,117) 2,752,359
- -------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-39.4%)
Cash 1,878
Interest Receivable 10,691
Receivable for Investments Sold 120,127
Receivable from Investment Adviser 113
Receivable for Fund Shares Sold 11,300
Receivable for Daily Variation on Futures
Contracts 386
Other Assets 20
Payable for Investments Purchased (904,774)
Payable for Fund Shares Redeemed (2,350)
Payable for Administrative Fees (127)
Written Interest Rate Floors, at Value (14,646)
Payable for Trustees' Deferred Compensation
Plan-Note E (13)
Other Liabilities (372)
--------
(777,767)
- -------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------
Applicable to 191,962,337 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $1,974,592
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.29
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
13
<PAGE> 16
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY MORTGAGE
PORTFOLIO
VALUE
(CONT'D) (000)+
- -------------------------------------------------------
<S> <C>
NET ASSETS CONSIST OF:
Paid In Capital $1,957,553
Undistributed Net Investment Income (Loss) 11,202
Undistributed Realized Net Gain (Loss) (3,576)
Unrealized Appreciation (Depreciation) on:
Investment Securities 5,242
Futures and Written Floors 4,171
- -------------------------------------------------------
NET ASSETS $1,974,592
- -------------------------------------------------------
</TABLE>
sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1996 was $164,655 or 8.3% of net assets.
+ See Note A1 to Financial Statements.
++ Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
+++ A portion of these securities was pledged to
cover margin requirements for futures
contracts.
# Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
## Variable or floating rate security-rate
disclosed is as of September 30, 1996.
@ Value is less than $500.
[ ] Securities purchased with proceeds from written
floors. See Note A6 to Financial Statements.
CMO Collateralized Mortgage Obligation
Inv Fl Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1996.
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation, or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
14
<PAGE> 17
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
---------------------------------------------------
Year Ended September 30, 1996
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest + $ 31,972 $ 117,482
- --------------------------------------------------------------------------------------------------------------------------
Total Income 31,972 117,482
- --------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $ 1,933 $ 6,056
Less: Waived Fees (1,933) -- (6,056) --
Administrative Fee--Note C 412 1,292
Custodian Fee--Note D 130 153
Other Expenses 103 295
Reimbursement from Investment Adviser -- (294)
- --------------------------------------------------------------------------------------------------------------------------
Total Expenses 645 1,446
- --------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note H (6) (153)
- --------------------------------------------------------------------------------------------------------------------------
Net Expenses 639 1,293
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income 31,333 116,189
- --------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities 16,518 1,867
Foreign Currency Transactions 27,570 --
Futures 13,909 348
- --------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 57,997 2,215
- --------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)--Note F2
Investment Securities (15,077) (14,993)
Foreign Currency Transactions (2,474) --
Futures and Written Floors (1,179) 5,184
- --------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) (18,730) (9,809)
- --------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 39,267 (7,594)
- --------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 70,600 $ 108,595
==========================================================================================================================
</TABLE>
+ Net of $12 withholding tax for Advisory Foreign Fixed Income Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
15
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
------------------------------------------------------------------------
October 7, Year April 12, Year
1994** to Ended 1995** to Ended
September 30, September 30, September 30, September 30,
(In Thousands) 1995 1996 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 32,367 $ 31,333 $ 30,663 $ 116,189
Realized Net Gain (Loss) (6,860) 57,997 671 2,215
Change in Unrealized Appreciation
(Depreciation)--Note F2 21,670 (18,730) 19,222 (9,809)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 47,177 70,600 50,556 108,595
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS--NOTE A11:
Net Investment Income (14,709) (35,248) (21,968) (112,093)
Realized Net Gain -- (6,574) -- (4,475)
In Excess of Realized Net Gain -- -- -- (3,577)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (14,709) (41,822) (21,968) (120,145)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued 666,544 349,384 1,479,265 826,456
In Lieu of Cash Distributions 9,187 29,798 15,811 87,865
Redeemed (171,066) (709,001) (80,626) (371,217)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share
Transactions 504,665 (329,819) 1,414,450 543,104
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 537,133 (301,041) 1,443,038 531,554
NET ASSETS:
Beginning of Period -- 537,133 -- 1,443,038
- ----------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 537,133 $ 236,092 $ 1,443,038 $ 1,974,592
============================================================================================================================
Undistributed net investment income (loss) included
in end of period net assets $ 7,214 $ 37,078 $ 8,695 $ 11,202
- ----------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
Shares Issued 65,358 31,539 144,912 80,399
In Lieu of Cash Distributions 910 2,758 1,535 8,555
Shares Redeemed (16,545) (63,889) (7,785) (35,654)
- ----------------------------------------------------------------------------------------------------------------------------
49,723 (29,592) 138,662 53,300
============================================================================================================================
</TABLE>
** Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
--------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO October 7,
1994** to Year Ended
September September
30, 30,
1995 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.80
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.74 0.68
Net Realized and Unrealized Gain (Loss) on Investments 0.44 1.02
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.18 1.70
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.38) (0.66)
Net Realized Gain -- (0.11)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.38) (0.77)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.80 $ 11.73
==========================================================================================================================
TOTAL RETURN 12.12% 16.47%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $537,133 $236,092
Ratio of Expenses to Average Net Assets ## 0.16%*++ 0.12%++
Ratio of Net Investment Income to Average Net Assets 7.44%* 6.06%
Portfolio Turnover Rate 96% 170%
==========================================================================================================================
</TABLE>
* Annualized. ** Commencement of Operations.
++ Advisory Foreign Fixed Income Portfolio expense ratios are net of voluntarily
waived and reimbursed expenses of 0.38%* and 0.38% for the period ended
September 30, 1995 and the year ended September 30, 1996, respectively.
## For the period ended September 30, 1995 and the year ended September 30,
1996, the Ratio of Expenses to Average Net Assets for the Advisory Foreign
Fixed Income Portfolio excludes the effect of expense offsets. If expense
offsets were included, the Ratio of Expenses to Average Net Assets would be
0.15%* and 0.12%, respectively.
<TABLE>
<CAPTION>
---------------------------------------
ADVISORY MORTGAGE PORTFOLIO April 12,
1995** to Year Ended
September September
30, 30,
1995 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.41
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.72
Net Realized and Unrealized Gain (Loss) on Investments 0.35 (0.06)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.60 0.66
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.19) (0.72)
Net Realized Gain -- (0.03)
In Excess of Realized Net Gain -- (0.03)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.19) (0.78)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.41 $ 10.29
==========================================================================================================================
TOTAL RETURN 6.03% 6.56%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $1,443,038 $1,974,592
Ratio of Expenses to Average Net Assets ## 0.10%*++ 0.09%++
Ratio of Net Investment Income to Average Net Assets 6.72%* 7.17%
Portfolio Turnover Rate 110% 139%
==========================================================================================================================
</TABLE>
* Annualized. ** Commencement of Operations.
++ Advisory Mortgage Portfolio expense ratios are net of voluntarily waived and
reimbursed expenses of 0.49%* and 0.39% for the period ended September 30,
1995 and the year ended September 30, 1996, respectively.
## For the period ended September 30, 1995 and the year ended September 30,
1996, the Ratio of Expenses to Average Net Assets for the Advisory Mortgage
Portfolio excludes the effect of expense offsets. If expense offsets were
included, the Ratio of Expenses to Average Net Assets would be 0.08%* and
0.08%, respectively.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MAS Funds (the "Fund") is registered under the Investment Company Act of 1940
as an open-end investment company. Advisory Foreign Fixed Income Portfolio and
Advisory Mortgage Portfolio, each referred to as a "Portfolio", commenced
operations on October 7, 1994 and April 12, 1995, respectively. At September
30, 1996, the Fund was comprised of twenty-four active portfolios. The
financial statements of the remaining portfolios are presented separately.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of its
financial statements. Generally accepted accounting principles may require
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results may differ from
those estimates.
1. SECURITY VALUATION: Securities listed on foreign exchanges are valued at
the latest quoted sales prices. Bonds, including municipal bonds, and other
fixed income securities are valued using brokers' quotations or on the
basis of prices, provided by a pricing service, which are based primarily
on institutional size trading in similar groups of securities.
Mortgage-backed securities issued by certain government-related
organizations are valued using brokers' quotations which are based on a
matrix system which considers such factors as other security prices, yields
and maturities. Short term securities are valued using the amortized cost
method of valuation, which in the opinion of the Board of Trustees reflects
fair value. Securities for which no quotations are readily available
(including restricted securities) are valued at their fair value as
determined in good faith using methods approved by the Board of Trustees.
2. FEDERAL INCOME TAXES: It is each Portfolio's intention to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
Undistributed net investment income (loss) and undistributed realized net
gain (loss) for the Advisory Foreign Fixed Income Portfolio have been
adjusted for permanent book-tax differences arising from the differing book
and tax treatment for foreign currency transactions.
3. REPURCHASE AGREEMENTS: Securities pledged as collateral for repurchase
agreements are held by the Portfolios' custodian bank until maturity of the
repurchase agreements. Provisions of the agreements ensure that the market
value of the collateral is at least equal to the repurchase value in the
event of default; however, in the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, each Portfolio may transfer its uninvested cash balances into a
joint trading account with other Portfolios of the Fund which invests in
one or more repurchase agreements. This joint repurchase agreement is
covered by the same collateral requirements as discussed above.
4. FUTURES: Futures contracts (secured by securities deposited with brokers as
"initial margin") are valued based upon their quoted daily settlement
prices; changes in initial settlement value (represented by cash paid to or
received from brokers as "variation margin") are accounted for as
unrealized appreciation (depreciation). When futures contracts are closed,
the difference between the opening value at the date of purchase and the
value at closing is recorded as realized gains or losses in the Statement
of Operations.
Futures contracts may be used by the Portfolios in order to hedge against
unfavorable changes in the value of securities or to
- --------------------------------------------------------------------------------
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
attempt to realize profits from the value of the underlying securities.
Futures contracts involve market risk in excess of the amount recognized in
the statement of net assets. Risks arise from the possible movements in
security values underlying these instruments. The change in value of
futures contracts primarily corresponds with the value of their underlying
instruments, which may not correlate with the change in value of the hedged
investments. In addition, there is risk that a Portfolio may not be able to
enter into a closing transaction because of an illiquid secondary market.
5. SWAP AGREEMENTS: The Portfolios can enter into swap agreements to exchange
the return generated by one instrument for the return generated by another
instrument.
Interest Rate Swaps: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation (depreciation) in the Statement of Operations.
Total Return Swaps: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security or index underlying the transaction
exceeds or falls short of the offsetting interest obligation, the Portfolio
will receive a payment from or make a payment to the counterparty,
respectively. Total return swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation (depreciation) in the Statement of Operations.
Periodic payments received or made at the end of each measurement period
and prior to the termination of the swap, are recorded as realized gain or
loss in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Portfolio terminated its position in the agreement. Risks
may arise upon entering into these agreements from the potential inability
of the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or any
favorable movements in the value of the underlying security at the date of
default.
6. WRITTEN INTEREST RATE FLOOR AGREEMENTS: A Portfolio will utilize written
interest rate floors to protect itself against fluctuations in interest
rates. When a Portfolio writes an interest rate floor, it agrees to make
periodic interest payments based on a notional principal amount to the
extent that a specified interest index falls below a specified interest
rate in exchange for the premium received. When a Portfolio writes an
interest rate floor the premium received by the Portfolio is recorded as a
liability and is amortized to interest income over the life of the
agreement. Interest rate floors are marked-to-market daily based on
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
Periodic payments of interest, if any, are reported as reductions to
interest income in the Statement of Operations. Realized gains or losses
from these agreements are disclosed in the Statement of Operations.
Because there is no organized market for these agreements, the value
reported in the Statement of Net Assets may differ from that which would be
realized in the event the Portfolio terminated its position in the
agreement. Entering into these agreements
- --------------------------------------------------------------------------------
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
involves, to varying degrees, elements of interest rate and market risk in
excess of the amount recognized in the Statement of Net Assets. Such risk
involves the possibility that there may be no liquid market for these
agreements, and that there may be adverse changes in interest rates or the
index underlying these transactions.
7. STRUCTURED INVESTMENTS: Each Portfolio may invest in structured investments
whose values are linked either directly or inversely to changes in foreign
currencies, interest rates, commodities, indices, or other underlying
instruments. A Portfolio uses these securities to increase or decrease its
exposure to different underlying instruments and to gain exposure to
markets that might be difficult to invest in through conventional
securities. Structured investments may be more volatile than their
underlying instruments, but any loss is limited to the amount of the
original investment.
8. DELAYED DELIVERY COMMITMENTS: Each Portfolio may purchase or sell
securities on a when-issued or forward commitment basis. Payment and
delivery may take place a month or more after the date of the transaction.
The price of the underlying securities and the date when the securities
will be delivered and paid for are fixed at the time the transaction is
negotiated. Collateral consisting of liquid securities or cash is
maintained in an amount at least equal to these commitments.
9. PURCHASED OPTIONS: The Advisory Mortgage Portfolio may purchase call and
put options on its portfolio securities. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price.
The purchase of a call option might be intended to protect the Portfolio
against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may
purchase the instrument. A put option gives the purchaser of the option,
upon payment of a premium, the right to sell, and the writer the obligation
to buy, the instrument at the exercise price. A Portfolio may purchase a
put option to protect its holdings in the underlying instrument, or a
similar instrument, against a substantial decline in the market value of
such instrument by giving the Portfolio the right to sell the instrument at
the option exercise price. Possible losses from purchased options cannot
exceed the total amount invested.
10. FOREIGN EXCHANGE AND FORWARD FOREIGN CURRENCY CONTRACTS: The books and
records of the Fund are maintained in U.S. dollars. Foreign currency
amounts are translated into U.S. dollars at the bid prices of such
currencies against U.S. dollars quoted by a bank. Net realized gains
(losses) on foreign currency transactions represent net foreign exchange
gains (losses) from forward foreign currency contracts, disposition of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of investment income and foreign withholding taxes recorded on a
Portfolio's books and the U.S. dollar equivalent amounts actually received
or paid.
A forward foreign currency contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The Advisory Foreign
Fixed Income Portfolio may enter into forward foreign currency contracts to
protect securities and related receivables and payables against future
changes in foreign exchange rates. Fluctuations in the value of such
contracts are recorded as unrealized appreciation (depreciation). Realized
gains or losses, which are disclosed in the Statement of Operations,
include net gains or losses on contracts which have been terminated by
settlements. Risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their
- --------------------------------------------------------------------------------
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
contracts and are generally limited to the amount of unrealized gain on the
contract (if any) at the date of default. Risks may also arise from
unanticipated movements in the value of the foreign currency relative to
the U.S. dollar.
11. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Advisory Foreign Fixed
Income Portfolio and the Advisory Mortgage Portfolio will normally
distribute substantially all of their net investment income to shareholders
in the form of quarterly and monthly dividends, respectively. Net realized
capital gains are distributed at least annually. The amount and character
of income and gains to be distributed are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions.
12. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are amortized over their
respective lives. Most expenses of the Fund can be directly attributed to a
portfolio. Expenses which can not be directly attributed are apportioned
among the portfolios on the basis of their relative net assets.
Permanent book-tax differences, if any, are not included in ending
undistributed net investment income (loss) for the purpose of calculating
net investment income (loss) per share in the Financial Highlights.
B. INVESTMENT ADVISORY FEE: Under the terms of an Investment Advisory
Agreement, the Portfolios pay Miller Anderson & Sherrerd, LLP ("MAS" or the
"Adviser") for investment advisory services performed at a fee calculated by
applying a quarterly rate based on an annual percentage rate of 0.375% of the
Portfolio's average daily net assets for the quarter.
Until further notice, the Adviser has voluntarily agreed to waive its advisory
fees and, if necessary, reimburse each Portfolio if annual operating expenses
exceed 0.15% and 0.08% of average daily net assets of the Advisory Foreign
Fixed Income and Advisory Mortgage Portfolios, respectively.
On January 3, 1996, Morgan Stanley Group Inc. acquired the Adviser in a
transaction in which Morgan Stanley Asset Management Holdings Inc., an indirect
wholly owned subsidiary of Morgan Stanley Group Inc., became the sole general
partner of the Adviser. In addition, Morgan Stanley Asset Management Holdings
Inc. and two other wholly owned subsidiaries of Morgan Stanley Group Inc.
became the limited partners of the Adviser. In connection with this
transaction, on January 3, 1996, the Adviser entered into a new Investment
Advisory Agreement with MAS Funds under the same terms and conditions as stated
above.
C. ADMINISTRATION FEE: MAS serves as Administrator to the Fund pursuant to an
Administration Agreement. Under the agreement, MAS receives an annual fee
accrued daily and payable monthly, of 0.08% of each Portfolio's average daily
net assets. Chase Global Funds Services Company serves as Transfer Agent to the
Fund and provides fund accounting and other services pursuant to a
sub-administration agreement with MAS.
D. CUSTODY. Morgan Stanley Trust Company (NY) ("MSTC"), an affiliate of the
Funds, serves as custodian for the Fund's assets held outside of the United
States in accordance with a custodian agreement. MSTC is a wholly owned
subsidiary of Morgan Stanley Group Inc.
For the year ended September 30, 1996, the Advisory Foreign Fixed Income
Portfolio incurred fees of $124,000 with MSTC, of which $19,000 was payable to
MSTC at September 30, 1996.
- --------------------------------------------------------------------------------
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
E. TRUSTEES FEES: The Fund pays each Trustee, who is not also an officer or
affiliated person, an annual fee plus travel and other expenses incurred in
attending Board meetings. Trustees who are also officers or affiliated persons
receive no remuneration for their service as Trustees.
Each eligible Trustee of the Fund who is not an officer or affiliated person as
defined under the Investment Company Act of 1940, as amended, participates in
the Trustees' Deferred Compensation Plan. Under the Plan, such Trustees must
defer at least 25% of their fees and may elect to defer payment up to 100% of
their total fees earned as a Trustee of the Fund. These deferred amounts are
credited to an account that will be treated as if they had been invested in the
Portfolios selected by the Trustee. The deferred fees payable, and the
corresponding value of shares owned by the Portfolios to hedge the potential
change in value of the payable, at September 30, 1996 totaled $18,000. The
value of shares owned by the Portfolios is included in Other Assets in each
Portfolio's Statement of Net Assets.
F. PORTFOLIO INVESTMENT ACTIVITY:
1. PURCHASES AND SALES OF SECURITIES. For the year ended September 30, 1996,
purchases and sales of investment securities other than short-term
investments were:
<TABLE>
<CAPTION>
(000)
------------------------
Portfolio Purchases Sales
- ---------------------------------- ----------- -----------
<S> <C> <C>
Advisory Foreign
Fixed Income $ 561,804 $ 747,754
Advisory Mortgage 2,756,128 2,272,592
</TABLE>
2. FEDERAL INCOME TAX COST AND UNREALIZED APPRECIATION (DEPRECIATION). At
September 30, 1996, cost and unrealized appreciation (depreciation) of
securities for Federal income tax purposes were:
<TABLE>
<CAPTION>
(000)
-----------------------------------------------
Portfolio Cost Appreciation Depreciation Net
- ------------------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Advisory Foreign
Fixed Income $ 223,521 $ 1,675 $ (3,504) $(1,829)
Advisory Mortgage 2,747,117 20,456 (15,214) 5,242
</TABLE>
3. FORWARD FOREIGN CURRENCY CONTRACTS. Under the terms of the forward foreign
currency contracts open at September 30, 1996, the Advisory Foreign Fixed
Income Portfolio is obligated to deliver or receive currency in exchange for
U.S. dollars as indicated in the following table:
<TABLE>
<CAPTION>
(000)
----------------------------------------------------------------
Currency In Net Unrealized
to Exchange Settlement Appreciation
Deliver For Date Value (Depreciation)
--------- -------------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Purchases
US$ 31,191 DKK 178,000 10/21/96 US$30,410 US$ (781)
11,037 FIM 49,260 11/5/96 10,812 (225)
15,061 SEK 99,400 11/8/96 15,017 (44)
25,338 SEK 167,200 11/13/96 25,262 (76)
6,071 SEK 40,225 12/3/96 6,081 10
26,514 SEK 175,650 12/6/96 26,556 42
1,824 SEK 12,050 12/6/96 1,822 (2)
----------
US$ (1,076)
----------
Sales
ATS 78,350 US$ 7,512 10/21/96 US$ 7,306 US$ 206
DKK 214,500 37,536 10/21/96 36,646 890
DKK 30,000 5,251 10/21/96 5,125 126
DEM 18,000 12,162 10/23/96 11,813 349
FIM 49,260 11,047 11/5/96 10,812 235
DEM 65,790 43,577 11/8/96 43,218 359
DKK 108,500 18,979 11/8/96 18,552 427
DKK 54,000 9,462 11/8/96 9,234 228
SEK 99,400 15,065 11/8/96 15,017 48
DEM 22,535 15,268 11/12/96 14,808 460
SEK 170,000 25,774 11/13/96 25,685 89
DKK 38,155 6,659 11/22/96 6,529 130
SEK 40,225 6,076 12/3/96 6,081 (5)
SEK 235,500 35,502 12/6/96 35,604 (102)
DEM 2,570 1,711 12/13/96 1,693 18
FRF 18,100 3,543 12/24/96 3,524 19
ESP 902,000 7,054 12/27/96 7,008 46
FIM 35,085 7,796 12/27/96 7,729 67
----------
US$ 3,590
----------
NET US$ 2,514
----------
ATS -- Austrian Schilling
DEM -- German Mark
DKK -- Danish Krone
ESP -- Spanish Peseta
FIM -- Finnish Markka
FRF -- French Franc
SEK -- Swedish Krona
US$ -- U.S. Dollar
</TABLE>
4. FUTURES CONTRACTS. At September 30, 1996, the Portfolios had the following
futures contracts open:
<TABLE>
<CAPTION>
Unrealized
Aggregate Appreciation
Number of Face Value Expiration (Depreciation)
Contracts (000) Date (000)
--------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Purchases:
ADVISORY FOREIGN
FIXED INCOME
German 10 yr.
Government Bond 127 DEM 20,537 Dec-96 US$ 274
United Kingdom
Long Treasury
Gilt 360 GBP 30,560 Dec-96 16
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Aggregate Appreciation
Number of Face Value Expiration (Depreciation)
Contracts (000) Date (000)
--------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
ADVISORY MORTGAGE
U.S. Treasury
Long Bond 163 US$ 17,798 Dec-96 US$ 193
Sales:
ADVISORY MORTGAGE
90 day
Eurodollar 1,074 US$ 251,012 Dec-96- 2,127
Mar-01
U.S. Treasury 2
yr. Note 96 US$ 19,770 Dec-96 5
U.S. Treasury 5
yr. Note 873 US$ 92,183 Dec-96 349
U.S. Treasury 10
yr. Note 1,255 US$ 134,638 Dec-96 (1,395)
</TABLE>
DEM -- German Mark
GBP -- British Pound
US$ -- U.S. Dollar
5. INTEREST RATE FLOOR AGREEMENTS. At September 30, 1996 the Advisory Mortgage
Portfolio had the following open Written Amortizing Interest Rate Floor
Agreements. Each Amortizing Interest Rate Floor described in the table below
requires that in exchange for a premium received from the counterparty, the
Portfolio will make monthly payments until maturity to the counterparty
equal to the notional amount multiplied by the difference between the strike
rate and the index rate as long as the index rate is below the strike rate.
<TABLE>
<CAPTION>
Notional Amortized
Strike Amount Premium Value
Counterparty Rate Index Maturity (000) (000) (000)
- ------------------- ------ --------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Bankers Trust 9.25% 1 month 11/1/99 $1,203 $ 101 $ 97
Company COFI
Bankers Trust 8.25% 1 month 11/25/99 2,046 125 123
Company COFI
Morgan Guaranty 8.61% 1 month 2/25/00 14,400 1,269 1,059
Trust LIBOR
Morgan Guaranty 8.00% 1 month 6/15/05 21,864 1,563 1,619
Trust LIBOR
Bankers Trust 8.10% 1 Month 6/25/05 40,319 3,076 3,083
Company LIBOR
Morgan Guaranty 9.00% 1 Month 7/15/05 21,122 2,401 2,134
Trust LIBOR
Morgan Guaranty 8.00% 1 Month 5/15/08 68,660 5,298 3,189
Trust LIBOR
Bankers Trust 9.45% 1 Month 9/15/09 656 100 84
Company LIBOR
Barclay's Bank plc 9.60% 1 month 11/15/09 1,691 230 219
LIBOR
Bankers Trust 7.80% 1 month 2/15/15 19,440 3,375 3,039
Company LIBOR
-------
$14,646
=======
COFI -- Cost of Funds Index
LIBOR -- London Interbank Offer Rate
</TABLE>
G. POST OCTOBER LOSSES. Under current tax law, certain capital and net foreign
exchange losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended September 30, 1996, the Advisory Foreign Fixed Income Portfolio and the
Advisory Mortgage Portfolio may elect to defer capital losses occurring between
November 1, 1995 and September 30, 1996 up to the amount of $884,000 and
$252,000, respectively.
H. EXPENSE OFFSETS. Custodian Fees have been adjusted to include expense
offsets for custodian balance credits of $6,000 and $153,000 for the Advisory
Foreign Fixed Income and the Advisory Mortgage Portfolios, respectively.
I. OTHER. At September 30, 1996, the Advisory Foreign Fixed Income Portfolio's
net assets were substantially comprised of foreign denominated securities and
currency. The net assets of the Portfolio are presented at the foreign exchange
rates and market values at the close of the period. The Portfolio does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end. Similarly,
the Portfolio does not isolate the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of securities
sold during the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and unrealized gains
(losses) on investment transactions and balances. Changes in currency exchange
rates will affect the value of and investment income from such securities and
currency.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibly lower level of
governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.
At September 30, 1996 the Advisory Foreign Fixed Income Portfolio had one
shareholder owning an aggregate percentage of 10% or greater.
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REPORT OF INDEPENDENT ACCOUNTANTS
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To the Shareholders and Board of Trustees
MAS Funds
In our opinion, the accompanying statements of net assets (excluding Standard
& Poor's ratings) and the related statements of operations and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of the Advisory Foreign Fixed Income Portfolio and the
Advisory Mortgage Portfolio, each a portfolio of the MAS Funds (hereafter
referred to as the "Fund"), at September 30, 1996 and the results of their
operations, the changes in their net assets and their financial highlights for
the periods indicated in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1996 by correspondence with the
custodians and brokers and the application of alternative auditing procedures
where broker confirmations were not received, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
November 21, 1996
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FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
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Each Portfolio hereby designates the following amount as a long-term capital
gain dividend for the purpose of the dividend paid deduction on its federal
income tax return of $1,854,000 and $732,000 for the Advisory Foreign Fixed
Income Portfolio and the Advisory Mortgage Portfolio, respectively.
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[MAS LOGO]
MILLER
ANDERSON
& SHERRERD, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
Investment Adviser: (610) 940-5000
MAS Funds: (800) 354-8185
Printed in U.S.A.
This Report has been prepared for
Shareholders and may be distributed to
others only if preceded or accompanied by a
current propectus.
