[MAS LOGO]
==========
MAS FUNDS
Annual Report
1 9 9 6
<PAGE>
TABLE OF CONTENTS
Equity
Value Portfolio............................................................. 2
Equity Portfolio............................................................ 4
Small Cap Value Portfolio................................................... 6
International Equity Portfolio.............................................. 8
Mid Cap Growth Portfolio.................................................... 10
Mid Cap Value Portfolio..................................................... 12
Emerging Markets Portfolio.................................................. 14
Fixed Income
Fixed Income Portfolio...................................................... 16
Domestic Fixed Income Portfolio............................................. 18
High Yield Portfolio........................................................ 20
Cash Reserves Portfolio..................................................... 22
Fixed Income Portfolio II................................................... 24
Mortgage-Backed Securities Portfolio........................................ 26
Limited Duration Portfolio.................................................. 28
Special Purpose Fixed Income Portfolio...................................... 30
Municipal Portfolio......................................................... 32
PA Municipal Portfolio...................................................... 34
Global Fixed Income Portfolio............................................... 36
International Fixed Income Portfolio........................................ 38
Intermediate Duration Portfolio............................................. 40
Balanced
Balanced Portfolio.......................................................... 42
Multi-Asset-Class Portfolio................................................. 44
MAS Investment Services Team................................................ 47
Trustees and Officers....................................................... 49
<PAGE>
To Our Clients,
[PHOTO of Thomas L. Bennett]
- --------------------------------------------------------------------------------
MAS Funds continues to provide a complete selection of established domestic
and global products designed for institutional and fiduciary investors of
many types.
- --------------------------------------------------------------------------------
Fiscal 1996 was a great year for long-term investors. The stock market again
produced double-digit returns and our strategic view of interest rates and the
bond market produced fixed-income results that make us proud of our process and
long-term focus.
MAS Funds continues to provide a complete selection of established domestic and
global products designed for institutional and fiduciary investors of many
types. This choice of investing vehicles allows Miller Anderson & Sherrerd the
flexibility to invest client assets in the most efficient way possible.
As the Fund continues to grow and garner more attention in the national press,
we reaffirm the Miller Anderson & Sherrerd Mission Statement printed inside the
back cover of this report. Institutional mutual funds are being recognized
nationally as desirable investment vehicles even for individuals. MAS's mission
nevertheless remains to provide a comprehensive array of top-quality products
and services for our institutional clients and MAS Funds continues to maintain
its focus on providing the best service possible for institutional investors.
<PAGE>
The Fund's three-tier multiple-class-structure is new this year. Financial
statements in this report reflect new share classes designed to meet the special
servicing needs of institutional investors such as defined contribution plan
sponsors. The class structure allows us to respond to changes in the employee
benefit market with pricing that provides for additional services, without
changing how we invest assets.
The strength of MAS remains the breadth and depth of expertise in our portfolio
management groups. Each description of a portfolio's structure, strategy and
investment results presented in this report highlights the efforts of a group of
our portfolio managers. Each of these groups continues to benefit from the
availability of the research, analysis and insights of all the other investing
groups. This constant reassessment and sharing of strategic insights among
investing teams results in the most rigorous analysis and comprehensive service
possible for our clients.
Please call us at Miller Anderson & Sherrerd at 800-354-8185 with any questions
you may have about this report or our investing processes. We look forward to
continuing to provide you with the highest quality institutional investing
services.
Sincerely,
/s/ Thomas L. Bennett
Thomas L. Bennett
Chairman
<PAGE>
Equity
VALUE PORTFOLIO
The Value Portfolio combines Miller Anderson & Sherrerd's disciplined stock
valuation process with the judgment gained through considerable experience in
low-P/E investing.
MAS's process is executed in two stages. An initial screen is used to identify
companies with flat or positive earnings growth which have underperformed the
broad market averages and whose valuations currently fall into the lower segment
of MAS's investment universe. In the second stage, fundamental analysis is used
to determine the cyclical sustainability of earnings and the competitive
dynamics of the company.
The hallmark of MAS's strategy is its clearly defined, firmly enforced sell
discipline. Many value managers who are able to identify outstanding securities
err in holding successful investments past their peaks. Perhaps the greatest
strategic advantage of this approach is that the sell discipline mandates the
sale of any stock that satisfies one or more of our sell criteria -- price
appreciation, earnings deterioration, or negative fundamental change. This
approach is fortified by attention to risk management. MAS emphasizes portfolio
diversification in terms of both sectors and stocks. Maximum sector limitations
are imposed and limits placed on the size of individual positions, thereby
minimizing the risk of any sector or holding.
For the fiscal year, the Value Portfolio underperformed its benchmark for the
first time in recent years. While sector selection was a very positive factor
for the year, adding roughly 280 basis points to performance, stock selection
nearly offset this, and penalized performance by 250 basis points. In addition,
cash holdings diluted performance by 180 basis points, because the strong market
returns had limited the names available for purchase under the Portfolio's
strict buy discipline.
Relative performance was aided by sector decisions to overweight heavy industry
and financial services and to underweight telephones and consumer services.
Performance was penalized by the Portfolio's significant underweight in
beverages and personal care products. The stock market shifted its favor this
year to defensive stocks and away from the economically sensitive and
interest-sensitive issues which dominate the Portfolio. Valuation restrictions
also prohibited ownership of most food and beverage, personal care, health care,
consumer service, energy and telephone issues. The Portfolio's investment
disciplines will maintain this sector concentration until the prices of current
holdings rise enough or their earnings decline enough to trigger the sell
discipline.
Stock selection in the telephone services, basic resources, and energy sectors
of the stock market added to returns, but stock selection in the technology,
heavy industry, health care, and food and tobacco sectors detracted from
returns. Some of the best performing individual holdings for the year were
American Re, British Petroleum, Deere, DuPont, Seagate, Sprint, and Western
Digital, whereas disappointing holdings were Cyprus Amax, FMC, Foundation
Health, National Semiconductor, Providian, Texas Instruments, and Trinova.
In the final quarter of the fiscal year, the Value Portfolio returned to its
previous record of outperformance against its benchmark. Sector and
stock-selection decisions each contributed positively to the Portfolio's
outperformance, with significant underweighting in telephone utilities and
overweighting in financial-service companies contributing the bulk of the
positive sector-selection impact. Individual stock selection in the technology,
financial services and energy sectors also added to the Portfolio's excess
returns.
2
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Over 10 Years
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
(1) Institutional Class - Inception Date 11/5/84
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1986 1987 1988
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/86 12/31/86 3/31/87 6/30/87 9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,000 $ 1,026 $ 1,169 $ 1,165 $ 1,230 $ 972 $ 1,076 $ 1,160 $ 1,164 $ 1,188 $ 1,278 $ 1,360
S&P 500 $ 1,000 $ 1,056 $ 1,281 $ 1,345 $ 1,434 $ 1,110 $ 1,174 $ 1,251 $ 1,255 $ 1,294 $ 1,385 $ 1,507
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,495 $ 1,434 $ 1,389 $ 1,431 $ 1,198 $ 1,346 $ 1,575 $ 1,604 $ 1,743 $ 1,852 $ 1,854 $ 1,898
S&P 500 $ 1,669 $ 1,703 $ 1,652 $ 1,756 $ 1,515 $ 1,650 $ 1,890 $ 1,886 $ 1,986 $ 2,153 $ 2,099 $ 2,139
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,967 $ 2,123 $ 2,242 $ 2,255 $ 2,354 $ 2,427 $ 2,389 $ 2,423 $ 2,529 $ 2,511 $ 2,781 $ 3,106
S&P 500 $ 2,206 $ 2,317 $ 2,418 $ 2,430 $ 2,493 $ 2,551 $ 2,454 $ 2,464 $ 2,585 $ 2,584 $ 2,836 $ 3,107
</TABLE>
- -----------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds Value $ 3,353 $ 3,485 $ 3,729 $ 3,815 $ 3,971
S&P 500 $ 3,353 $ 3,555 $ 3,746 $ 3,914 $ 4,035
<TABLE>
<CAPTION>
(2) Investment Class - Inception Date 5/6/96
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1986 1987 1988
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/86 12/31/86 3/31/87 6/30/87 9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,000 $ 1,026 $ 1,169 $ 1,165 $ 1,230 $ 972 $ 1,076 $ 1,160 $ 1,164 $ 1,188 $ 1,278 $ 1,360
S&P 500 $ 1,000 $ 1,056 $ 1,281 $ 1,345 $ 1,434 $ 1,110 $ 1,174 $ 1,251 $ 1,255 $ 1,294 $ 1,385 $ 1,507
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,495 $ 1,434 $ 1,389 $ 1,431 $ 1,198 $ 1,346 $ 1,575 $ 1,604 $ 1,743 $ 1,852 $ 1,854 $ 1,898
S&P 500 $ 1,669 $ 1,703 $ 1,652 $ 1,756 $ 1,515 $ 1,650 $ 1,890 $ 1,886 $ 1,986 $ 2,153 $ 2,099 $ 2,139
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,967 $ 2,123 $ 2,242 $ 2,255 $ 2,354 $ 2,427 $ 2,389 $ 2,423 $ 2,529 $ 2,511 $ 2,781 $ 3,106
S&P 500 $ 2,206 $ 2,317 $ 2,418 $ 2,430 $ 2,493 $ 2,551 $ 2,454 $ 2,464 $ 2,585 $ 2,584 $ 2,836 $ 3,107
</TABLE>
- -----------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds Value $ 3,353 $ 3,485 $ 3,729 $ 3,815 $ 3,968
S&P 500 $ 3,353 $ 3,555 $ 3,746 $ 3,914 $ 4,035
<TABLE>
<CAPTION>
(3) Advisor Class - Inception Date 7/17/96
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1986 1987 1988
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/86 12/31/86 3/31/87 6/30/87 9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,000 $ 1,026 $ 1,169 $ 1,165 $ 1,230 $ 972 $ 1,076 $ 1,160 $ 1,164 $ 1,188 $ 1,278 $ 1,360
S&P 500 $ 1,000 $ 1,056 $ 1,281 $ 1,345 $ 1,434 $ 1,110 $ 1,174 $ 1,251 $ 1,255 $ 1,294 $ 1,385 $ 1,507
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,495 $ 1,434 $ 1,389 $ 1,431 $ 1,198 $ 1,346 $ 1,575 $ 1,604 $ 1,743 $ 1,852 $ 1,854 $ 1,898
S&P 500 $ 1,669 $ 1,703 $ 1,652 $ 1,756 $ 1,515 $ 1,650 $ 1,890 $ 1,886 $ 1,986 $ 2,153 $ 2,099 $ 2,139
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Value $ 1,967 $ 2,123 $ 2,242 $ 2,255 $ 2,354 $ 2,427 $ 2,389 $ 2,423 $ 2,529 $ 2,511 $ 2,781 $ 3,106
S&P 500 $ 2,206 $ 2,317 $ 2,418 $ 2,430 $ 2,493 $ 2,551 $ 2,454 $ 2,464 $ 2,585 $ 2,584 $ 2,836 $ 3,107
</TABLE>
- -----------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds Value $ 3,353 $ 3,485 $ 3,729 $ 3,815 $ 3,971
S&P 500 $ 3,353 $ 3,555 $ 3,746 $ 3,914 $ 4,035
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
-----------------------------------------------
MAS Value
Institutional (1) Investment (2) Adviser (3) S&P 500 Index
-----------------------------------------------
---------------------------------------------------------------
One Year 18.41% 18.34% 18.41% 20.33%
Five Years 17.89% 17.88% 17.89% 15.23%
Ten Years 14.79% 14.78% 14.79% 14.97%
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.
(1) Represents an investment in the Institutional Class.
(2) Represents an investment in the Investment Class which commenced operations
5/6/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
(3) Represents an investment in the Adviser Class which commenced operations
7/17/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12(b)-1
Fee applicable to the Adviser Class. It is expected that, over time,
returns for the Adviser Class will be lower than for the other classes due
to the higher expenses charged.
* All returns are compared to the S&P 500 Index, an unmanaged market index.
3
<PAGE>
Equity
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
The Portfolio is heavily oriented toward large-capitalization stocks, with
a strategic commitment to smaller and faster-growing equities.
- --------------------------------------------------------------------------------
The Equity Portfolio is Miller Anderson & Sherrerd's core-strategy common-stock
fund. The Portfolio is heavily oriented toward large-capitalization stocks, with
a strategic commitment to smaller and faster-growing equities. In constructing
the Portfolio, the MAS equity team applies a value-oriented discipline to both
stock selection and sector allocation.
MAS's goals for core equity investing are to provide capital appreciation with
income, control risk through diversification, and achieve consistent returns
that compare favorably to other managers and broad market averages over long
periods of time. A focus on consistency of return and risk aversion has resulted
in better relative performance during flat or negative markets. During periods
when the overall market has been driven by speculation or when the market has
been quite strong over a relatively short period, results have tended to lag.
The MAS equity team seeks to add value to the Portfolio by exercising judgment
over three key decisions -- stock selection, sector allocation, and portfolio
risk control. Stock selection relies on both quantitative and qualitative inputs
to reach decisions. Each stock in MAS's investable universe of
large-capitalization issues is assigned to its appropriate sector and then
ranked versus its peers based on valuation and business dynamics. Those stocks
that appear attractive quantitatively are then subject to rigorous fundamental
review by our research staff. The dynamic nature of the process assures that the
Portfolio contains only those stocks that are currently most attractive.
Sector allocation refers to MAS's process for controlling the Portfolio's sector
weights versus the S&P 500. Sector overweight and underweight decisions are
guided by the same approach that governs the stock-selection process, i.e.
analysis of valuation and trends in business dynamics. Finally, when MAS
confronts a market believed to be overly risky, measures will be taken to
control the level of portfolio risk. These include raising cash above frictional
levels and/or lowering the beta of the portfolio to a level below that of the
market.
For fiscal 1996, the Portfolio trailed the S&P 500 due to stock-selection
decisions and portfolio risk-control measures, with sector allocation being a
neutral. Technology and transportation were the sectors where stock selection
detracted from performance. The cash level of the Portfolio was higher than
normal, the Portfolio's beta was lower than the market's and the Portfolio's
overweights were tilted toward defensive sectors, which tend to be less volatile
than the market. These risk-control steps were undertaken because the market's
valuation was at the upper end of its historical range and MAS believed that
corporate-profit growth would slow. Our stock-selection and sector-allocation
decisions in the telephone-services and financial sectors exerted a positive
influence on performance.
4
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Over 10 Years
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
(1) Institutional Class - Inception Date 11/14/84
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1986 1987 1988
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/86 12/31/86 3/31/87 6/30/87 9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Equity $ 1,000 $ 1,043 $ 1,217 $ 1,226 $ 1,309 $ 1,080 $ 1,122 $ 1,208 $ 1,199 $ 1,222 $ 1,313 $ 1,406
S&P 500 $ 1,000 $ 1,056 $ 1,281 $ 1,345 $ 1,434 $ 1,110 $ 1,174 $ 1,251 $ 1,255 $ 1,294 $ 1,385 $ 1,507
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Equity $ 1,594 $ 1,567 $ 1,519 $ 1,656 $ 1,408 $ 1,566 $ 1,832 $ 1,833 $ 1,974 $ 2,191 $ 2,125 $ 2,125
S&P 500 $ 1,669 $ 1,703 $ 1,652 $ 1,756 $ 1,515 $ 1,650 $ 1,890 $ 1,886 $ 1,986 $ 2,153 $ 2,099 $ 2,139
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Equity $ 2,201 $ 2,362 $ 2,402 $ 2,382 $ 2,445 $ 2,519 $ 2,435 $ 2,453 $ 2,545 $ 2,532 $ 2,749 $ 2,997
S&P 500 $ 2,206 $ 2,317 $ 2,418 $ 2,430 $ 2,493 $ 2,551 $ 2,454 $ 2,464 $ 2,585 $ 2,584 $ 2,836 $ 3,107
</TABLE>
- -----------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds Equity $ 3,211 $ 3,368 $ 3,574 $ 3,717 $ 3,740
S&P 500 $ 3,353 $ 3,555 $ 3,746 $ 3,914 $ 4,035
<TABLE>
<CAPTION>
(2) Investment Class - Inception Date 4/10/96
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1986 1987 1988
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/86 12/31/86 3/31/87 6/30/87 9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Equity $ 1,000 $ 1,043 $ 1,217 $ 1,226 $ 1,309 $ 1,080 $ 1,122 $ 1,208 $ 1,199 $ 1,222 $ 1,313 $ 1,406
S&P 500 $ 1,000 $ 1,056 $ 1,281 $ 1,345 $ 1,434 $ 1,110 $ 1,174 $ 1,251 $ 1,255 $ 1,294 $ 1,385 $ 1,507
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Equity $ 1,594 $ 1,567 $ 1,519 $ 1,656 $ 1,408 $ 1,566 $ 1,832 $ 1,833 $ 1,974 $ 2,191 $ 2,125 $ 2,125
S&P 500 $ 1,669 $ 1,703 $ 1,652 $ 1,756 $ 1,515 $ 1,650 $ 1,890 $ 1,886 $ 1,986 $ 2,153 $ 2,099 $ 2,139
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Equity $ 2,201 $ 2,362 $ 2,402 $ 2,382 $ 2,445 $ 2,519 $ 2,435 $ 2,453 $ 2,545 $ 2,532 $ 2,749 $ 2,997
S&P 500 $ 2,206 $ 2,317 $ 2,418 $ 2,430 $ 2,493 $ 2,551 $ 2,454 $ 2,464 $ 2,585 $ 2,584 $ 2,836 $ 3,107
</TABLE>
- -----------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds Equity $ 3,211 $ 3,368 $ 3,574 $ 3,716 $ 3,737
S&P 500 $ 3,353 $ 3,555 $ 3,746 $ 3,914 $ 4,035
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
----------------------------------
MAS Equity
Institutional (1) Investment (2) S&P 500 Index
----------------------------------
------------------------------------------------------
One Year 16.48% 16.39% 20.33%
Five Years 13.64% 13.62% 15.23%
Ten Years 14.10% 14.09% 14.97%
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.
(1) Represents an investment in the Institutional Class.
(2) Represents an investment in the Investment Class which commenced operations
4/10/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
* All returns are compared to the S&P 500 Index, an unmanaged market index.
5
<PAGE>
Equity
SMALL CAP VALUE PORTFOLIO
[Photograph]
PHOTO
Left to right: Glenn Becker, Elizabeth Vale
The Small Cap Value Portfolio applies Miller Anderson & Sherrerd's value
investment philosophy to the small- and medium-sized equity universe, combining
fundamental research with a disciplined, quantitative investment process. MAS
generally keeps sector weights within 5% of those of the Russell 2000 Index,
with strategic over- and under-weightings assigned to different sectors based on
their relative investment attractiveness. Decisions about portfolio composition
and structure are made by a team of MAS's equity investors specializing in the
small- and mid-cap market segments.
MAS's investment process is driven chiefly by bottom-up considerations, although
broad macroeconomic trends that influence the outlook for certain industries are
taken into account in the decision-making process. As a value-oriented fund, the
Portfolio emphasizes stocks with below-average valuations. However, unlike many
value strategies, MAS's methodology also includes additional quality and growth
factors such as the expected future growth in earnings and dividends, the recent
pattern of earnings estimate revisions and subjective judgments regarding the
quality of a company's business franchise. As a result, the Portfolio will
generally look similar to the Russell 2000 Index in the quality and growth
characteristics of its holdings, while the overall valuation of the Portfolio
will generally be lower.
MAS's long-term view of the small-cap market remains favorable, as analysis
shows these stocks as offering solid earnings growth prospects at reasonable
multiples of earnings. While the equity market was buffeted by unsettling
volatility last July, the Portfolio's policy of remaining fully-invested served
it well and helped maintain the Portfolio's focus on selecting undervalued
stocks.
For the past year, the Portfolio's strong results were produced by positive
stock selection across a broad range of industries. Furthermore, an abundance of
attractive stocks in the energy services industry led the Portfolio to
overweight that sector last Spring, and that decision also made a notable,
positive impact on results. After the sharp correction in July, the stock market
rebounded smartly in August and September and the Portfolio produced a return of
over 7% for the quarter ending September 30, with its benchmark returning a
nearly flat return of 0.35%. This strong year-end performance resulted largely
due to stock selection, with big gains for stocks such as Precision Response
(+83%), Big B Drugstores (+76%), ETEC Systems (+53%), HMT Technology (+38%),
CasTech Aluminum (+37), and Giant Cement (+18%).
This Portfolio is not currently being offered to new investors.
6
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Over 10 Years
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1986 1987 1988
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/86 12/31/86 3/31/87 6/30/87 9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Small Cap Value $ 1,000 $ 999 $ 1,165 $ 1,099 $ 1,105 $ 811 $ 943 $ 995 $ 978 $ 985 $ 1,065 $ 1,126
Russell 2000 $ 1,000 $ 1,006 $ 1,248 $ 1,245 $ 1,297 $ 923 $ 1,100 $ 1,175 $ 1,162 $ 1,154 $ 1,243 $ 1,320
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Small Cap Value $ 1,221 $ 1,158 $ 1,157 $ 1,214 $ 884 $ 966 $ 1,275 $ 1,281 $ 1,441 $ 1,583 $ 1,698 $ 1,596
Russell 2000 $ 1,405 $ 1,336 $ 1,306 $ 1,355 $ 1,024 $ 1,075 $ 1,395 $ 1,373 $ 1,485 $ 1,571 $ 1,688 $ 1,573
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Small Cap Value $ 1,645 $ 1,943 $ 1,984 $ 2,066 $ 2,265 $ 2,354 $ 2,338 $ 2,309 $ 2,447 $ 2,406 $ 2,452 $ 2,613
Russell 2000 $ 1,618 $ 1,860 $ 1,939 $ 1,982 $ 2,155 $ 2,211 $ 2,152 $ 2,068 $ 2,212 $ 2,171 $ 2,271 $ 2,484
</TABLE>
- -----------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds
Small Cap Value $ 2,897 $ 2,912 $ 3,100 $ 3,353 $ 3,593
Russell 2000 $ 2,729 $ 2,788 $ 2,930 $ 3,077 $ 3,088
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Russell 2000
Small Cap Value Index
--------------------------------------
One Year 24.00% 13.14%
Five Years 20.04% 15.76%
Ten Years 13.64% 11.93%
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.
* All returns are compared to the Russell 2000 Index, an unmanaged
market index.
7
<PAGE>
Equity
INTERNATIONAL EQUITY PORTFOLIO
[Photograph]
PHOTO
Left to right: Justin Bullion, Scott Burney
The International Equity Portfolio provides a core vehicle for investing in
stocks from over 30 different countries outside of the United States. MAS
analyzes country allocation, stock selection and currency values to construct a
diversified portfolio for U.S.-based investors.
In determining the Portfolio's country allocation, MAS measures value through
the computation of expected returns for each major market or region. MAS focuses
on the equity risk premium (the expected excess return of stocks over bonds for
a particular country), steepness of a region's yield curve (the difference in
levels between short-and long-term interest rates) and level of real interest
rates (a country's government-bond yield less its inflation rate). MAS's
research has shown that foreign stocks tend to outperform in regions where risk
premia are large, yield curves are steep, and/or real interest rates are high.
MAS uses these tools along with disciplined, fundamental research and analysis
to create a diversified Portfolio that is based both on bottom-up valuation and
analysis of individual holdings and a top-down view of world economies and
markets. The International Equity team focuses fundamental analysis on measures
that have proven to add value over time -- attractive valuations (represented by
a stock's price/earnings (P/E), price/book and/or price/cash flow ratios)
combined with an upward trend in analyst estimate revisions.
MAS's research-based, value-oriented investment process has been the key factor
behind the Portfolio's outperformance of its index by an average of 3.6% per
year since inception. MAS's International Equity team focuses on absolute and
relative measures of value to determine those stocks, regions and currencies in
which to invest. During fiscal 1996, the International Equity Portfolio
performed well against its benchmark index -- the Morgan Stanley Capital
International World Ex.-U.S. Index. The Portfolio improved both its return and
risk profile, as it outperformed the index while also reducing its risk, or
annualized standard deviation of monthly returns, by over 25%.
In fiscal 1996, country allocation and currency management added value relative
to the benchmark, while security selection detracted from relative performance.
Less-than-index exposure in the U.K., overweight positions in Southern European
and Scandinavian markets, and a 10 percentage point exposure to emerging markets
all added to performance. In addition, partial
8
<PAGE>
hedging of Japanese and German stock positions paid off as the dollar continued
to gain in value against these countries' currencies.
At fiscal year-end, the Portfolio was underweighted in Japan, the U.K., Germany
and France, reflecting concern about the high level of profit-growth
expectations in Japan and the core European countries. In addition, none of the
focus measures described above -- risk premia, yield curves or real interest
rates -- pointed to value in these countries.
The Portfolio had higher-than-index exposure where these value measures were
attractive in both Scandanavia (especially Sweden) and Southern Europe (Spain &
Italy). The Portfolio also held 9% in selected emerging markets where there was
relative value (Brazil, Argentina and South Korea).
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
(1) Institutional Class - Inception Date 11/25/88
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990
- ------------------------------------------------------------------------------------------------------------------------------------
===========
11/25/88 12/31/88 3/31/89 6/30/89 9/30/89 12/31/89 3/31/90 6/30/90 9/30/90
-------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds International Equity $ 1,000 $ 1,011 $ 1,020 $ 1,033 $ 1,204 $ 1,275 $ 1,164 $ 1,255 $ 1,031
MSCI Ex-U.S. $ 1,000 $ 1,002 $ 1,007 $ 950 $ 1,065 $ 1,114 $ 899 $ 980 $ 778
===========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1991 1992 1993
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
International Equity $ 1,078 $ 1,214 $ 1,184 $ 1,249 $ 1,306 $ 1,275 $ 1,326 $ 1,254 $ 1,262 $ 1,362 $ 1,415 $ 1,525
MSCI Ex-U.S. $ 857 $ 920 $ 873 $ 944 $ 960 $ 849 $ 866 $ 875 $ 842 $ 942 $ 1,035 $ 1,099
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
International Equity $ 1,800 $ 1,697 $ 1,689 $ 1,728 $ 1,618 $ 1,574 $ 1,626 $ 1,670 $ 1,718 $ 1,776 $ 1,834 $ 1,818
MSCI Ex-U.S. $ 1,113 $ 1,149 $ 1,203 $ 1,210 $ 1,195 $ 1,218 $ 1,230 $ 1,280 $ 1,332 $ 1,372 $ 1,394 $ 1,395
</TABLE>
<TABLE>
<CAPTION>
(2) Investment Class - Inception Date 4/10/96
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990
- ------------------------------------------------------------------------------------------------------------------------------------
===========
11/25/88 12/31/88 3/31/89 6/30/89 9/30/89 12/31/89 3/31/90 6/30/90 9/30/90
-------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds International Equity $ 1,000 $ 1,011 $ 1,020 $ 1,033 $ 1,204 $ 1,275 $ 1,164 $ 1,255 $ 1,031
MSCI Ex-U.S. $ 1,000 $ 1,002 $ 1,007 $ 950 $ 1,065 $ 1,114 $ 899 $ 980 $ 778
===========
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1991 1992 1993
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
International Equity $ 1,078 $ 1,214 $ 1,184 $ 1,249 $ 1,306 $ 1,275 $ 1,326 $ 1,254 $ 1,262 $ 1,362 $ 1,415 $ 1,525
MSCI Ex-U.S. $ 857 $ 920 $ 873 $ 944 $ 960 $ 849 $ 866 $ 875 $ 842 $ 942 $ 1,035 $ 1,099
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
International Equity $ 1,800 $ 1,697 $ 1,689 $ 1,728 $ 1,618 $ 1,574 $ 1,626 $ 1,670 $ 1,718 $ 1,776 $ 1,832 $ 1,817
MSCI Ex-U.S. $ 1,113 $ 1,149 $ 1,203 $ 1,210 $ 1,195 $ 1,218 $ 1,230 $ 1,280 $ 1,332 $ 1,372 $ 1,394 $ 1,395
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
---------------------------------------
MAS International Equity MSCI World
Institutional (1) Investment (2) Ex-U.S. Index
---------------------------------------
------------------------------------------------------
One Year 8.87% 8.79% 9.01%
Five Years 7.80% 7.78% 8.13%
Since Inception 7.92% 7.91% 4.34%
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.
(1) Represents an investment in the Institutional Class.
(2) Represents an investment in the Investment Class which commenced operations
4/10/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
* The International Equity Portfolio commenced operations on 11/25/88. All
returns are compared to the Morgan Stanley Capital International World
Ex-U.S. Index, an unmanaged market index.
9
<PAGE>
Equity
MID CAP GROWTH PORTFOLIO
The Mid Cap Growth Portfolio employs a bottom-up stock-selection approach that
focuses on small- and medium-sized companies with superior long-term
earnings-growth potential. Using a combination of quantitative processes and
fundamental research, Miller Anderson & Sherrerd invests in companies that are
surpassing consensus earnings estimates.
MAS's mid-cap growth strategy seeks to capitalize on the relative inefficiencies
of the small- and mid-cap equity market. The Portfolio targets companies with
sustainable growth that exceeds market expectations by focusing on companies
whose growth surpasses Wall Street analysts' estimates. MAS also looks to
capture the return potential of rapidly growing companies while avoiding stocks
that are likely to disappoint. To identify such companies, MAS's mid-cap-growth
strategy employs a disciplined four-part process that incorporates quantitative,
fundamental and valuation analysis as well as a strict sell discipline.
First, MAS conducts a quantitative screen that sorts the stocks within each
economic sector into quintiles based on earnings-estimate revision and growth
potential. This screening process limits investment choices to a statistically
advantaged pool.
MAS conducts extensive fundamental research on a group of eligible stocks to
find candidates for purchase. Only high-quality companies with strong sales
growth, rising profit margins, and high returns on capital are included in the
Portfolio. Qualitative measures are then examined, including management quality
and a company's strategic position within its industry.
MAS supplements fundamental analysis with valuation analysis. In addition to
examining measures such as price/earnings, price/sales, and price/cash flow,
valuation analysis uses a discounted-cash-flow model. Each stock's valuation is
assessed relative to its growth prospects. The goal of this valuation work is to
identify and weed out the most overvalued securities.
The final step in the process is to ensure that the Portfolio reflects at all
times certain qualities. This is accomplished through the enforcement of a sell
discipline, which mandates an ongoing reevaluation of securities and produces a
portfolio that always holds only those securities that are currently most
attractive.
Sales can be triggered by one or more of three factors. If a holding falls into
one of the two bottom earnings-estimate-revision quintiles of MAS's universe, it
will be sold. MAS also sells stocks when fundamental research uncovers
unfavorable trends. Because analysts are often more reluctant to lower estimates
than to raise them, companies that are having difficulties may first experience
small negative estimate revisions; such companies are frequently sold before
larger revisions materialize. Finally, holdings are sold or trimmed back when
their valuations exceed the level believed to be reasonable given their growth
prospects.
During fiscal 1996, the Portfolio delivered a return of 28.8%, more than
doubling the return of its benchmark, the S&P MidCap 400 Index. This result was
achieved through the application of MAS's bottom-up stock-selection process,
which led to investments in a number of outstanding companies. In particular,
the Portfolio benefited from positions in a number of health-care, retail, and
telecommunications-related stocks.
During the past year, the health-care sector has struggled through a difficult
period due to concerns that pricing pressures would hurt companies in an
increasingly competitive environment. Despite this obstacle, the Portfolio's
health-care stocks advanced 45.4% during the past fiscal year versus an increase
of 3.2% for the health-care sector of the benchmark. This outperformance
resulted from a focus on companies whose fundamental characteristics suggested
that they could withstand competitive pressures and deliver superior earnings
growth. This focus also led the Portfolio to favor health-care-services
companies rather than investments in HMOs and nursing homes, which suffered the
most damage during the period. Health Management Associates, Cardinal Health,
and Total Renal Care earned exceptionally strong returns.
10
<PAGE>
Stock selection in the retail sector also bolstered the Portfolio's returns
during the past fiscal year, with Gucci and Tommy Hilfiger delivering
outstanding performances. The Portfolio's retail holdings gained 53.3% during
the period versus an increase of 7.5% for retail stocks in the S&P MidCap 400
Index. In the telecommunications area, Globalstar, MFS Communications, and Uunet
Technologies made significant contributions to the Portfolio's excess return.
Technology holdings also fared moderately well, providing benchmark-like returns
within this sector.
At year-end, MAS favored service providers of many varieties. These companies,
which are not unique to an individual sector, offer very attractive growth
potential. In the telecommunications sector, MAS believes that beneficiaries of
regulatory changes and emerging competitors to entrenched monopolies represent
an excellent growth opportunity. While technology is modestly overweighted, the
commitment to this sector has been greatly reduced from last year's overweight
position. The Portfolio underweights cyclical, financial, basic resource, and
energy stocks because few companies within these sectors have met fundamental
selection criteria.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
==========
3/30/90 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92
------- ------- ------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Mid Cap Growth $ 1,000 $ 1,000 $ 1,122 $ 900 $ 1,097 $ 1,327 $ 1,347 $ 1,497 $ 1,749 $ 1,642
S&P 400 Mid-Cap $ 1,000 $ 1,000 $ 1,059 $ 871 $ 979 $ 1,204 $ 1,195 $ 1,309 $ 1,470 $ 1,463
==========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Mid Cap Growth $ 1,533 $ 1,540 $ 1,800 $ 1,769 $ 1,819 $ 2,062 $ 2,128 $ 2,004 $ 1,832 $ 1,994
S&P 400 Mid-Cap $ 1,417 $ 1,472 $ 1,645 $ 1,699 $ 1,739 $ 1,826 $ 1,875 $ 1,804 $ 1,738 $ 1,855
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- --------------------------------------------------------------------------------------------------------------
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Mid Cap Growth $ 2,013 $ 2,127 $ 2,300 $ 2,604 $ 2,743 $ 3,058 $ 3,313 $ 3,354
S&P 400 Mid-Cap $ 1,808 $ 1,956 $ 2,126 $ 2,334 $ 2,367 $ 2,513 $ 2,585 $ 2,660
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Mid Cap S&P MidCap
Growth 400 Index
-----------------------------
One Year 28.81% 14.00%
Five Years 17.51% 15.24%
Since Inception 20.45% 16.23%
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 Mid Cap Growth Portfolio commenced operations on 3/30/90. All returns
are compared to the S&P MidCap 400 Index, an unmanaged market index.
11
<PAGE>
Equity
MID CAP VALUE PORTFOLIO
The Mid Cap Value Portfolio applies Miller Anderson & Sherrerd's value
investment philosophy to the medium-sized equity universe, combining fundamental
research with a disciplined, quantitative investment process. MAS generally
keeps sector weights within 5% of those of the S&P MidCap 400 Index, with
strategic over- and under-weightings assigned to different sectors based on
their relative investment attractiveness. Decisions about portfolio composition
and structure are made by a team of MAS's equity investors specializing in the
small- and mid-cap market segments.
MAS's investment process is driven chiefly by bottom-up considerations, although
broad macroeconomic trends that influence the outlook for certain industries are
taken into account in the decision-making process. As a value-oriented fund, the
Portfolio emphasizes stocks with below-average valuations. However, unlike many
value strategies, MAS's methodology also includes additional quality and growth
factors such as the expected future growth in earnings and dividends, the recent
pattern of earnings estimate revisions and subjective judgments regarding the
quality of a company's business franchise. As a result, the Portfolio will
generally look similar to the S&P MidCap 400 Index in the quality and growth
characteristics of its holdings, while the overall valuation of the Portfolio
will generally be lower.
MAS's long-term view of the mid-cap market remains favorable, as analysis shows
these stocks as offering solid earnings growth prospects at reasonable multiples
of earnings. While the equity market was buffeted by unsettling volatility last
July, the Portfolio's policy of remaining fully-invested served it well and
helped maintain the Portfolio's focus on selecting undervalued stocks.
For the past year, the Portfolio's strong results were produced by positive
stock selection across a broad range of industries. Furthermore, an abundance of
attractive stocks in the energy services industry led the Portfolio to
overweight that sector last Spring, and that decision also made a notable,
positive impact on results. After the sharp correction in July, the stock market
rebounded smartly in August and September and the Portfolio produced a return of
over 6% for the quarter ending September 30, with its benchmark returning 2.9%.
This strong year-end performance resulted largely due to stock selection, with
big gains for stocks such as Dell Computer (+53%), Red Lion Hotels (+41%), Zale
Corp. (+30%), Amsouth Bancorp (+24%) and Seacor Holdings (+13%).
12
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
(1) Institutional Class - Inception Date 12/30/94
- ------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- ------------------------------------------------------------------------------------------------------------------------
==========
12/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Mid Cap Value $ 1,000 $ 1,000 $ 1,107 $ 1,217 $ 1,345 $ 1,327 $ 1,446 $ 1,545 $ 1,645
S&P 400 Mid-Cap $ 1,000 $ 1,000 $ 1,082 $ 1,176 $ 1,291 $ 1,309 $ 1,390 $ 1,430 $ 1,472
==========
INCEPTION
DATE
</TABLE>
<TABLE>
<CAPTION>
(2) Investment Class - Inception Date 5/10/96
- ------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- ------------------------------------------------------------------------------------------------------------------------
==========
12/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Mid Cap Value $ 1,000 $ 1,000 $ 1,107 $ 1,217 $ 1,345 $ 1,327 $ 1,446 $ 1,544 $ 1,644
S&P 400 Mid-Cap $ 1,000 $ 1,000 $ 1,082 $ 1,176 $ 1,291 $ 1,309 $ 1,390 $ 1,430 $ 1,472
==========
INCEPTION
DATE
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
------------------------------------
MAS Mid Cap Value S&P MidCap
Institutional (1) Investment (2) 400 Index
------------------------------------
-----------------------------------------------------
One Year 22.30% 22.21% 14.00%
Since Inception 32.88% 32.83% 24.70%
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.
(1) Represents an investment in the Institutional Class.
(2) Represents an investment in the Investment Class which commenced operations
5/10/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating
expenses for Institutional Class shares of the Mid Cap Value Portfolio from
exceeding 0.88% of average daily net assets. The Adviser also waived a
portion of its advisory fees for Investment Class shares of the Portfolio.
Returns presented include the effects of these waivers and reimbursements.
If such waivers and reimbursements had not been made, the actual returns
would have been lower.
* The Mid Cap Value Portfolio commenced operations on 12/30/94. All returns
are compared to the S&P MidCap 400 Index, an unmanaged market index.
13
<PAGE>
Equity
EMERGING MARKETS PORTFOLIO
[Photograph]
PHOTO
Left to right: Mark Babiec, Barry Siegel, Jeanie Krepfle
The Emerging Markets Portfolio applies Miller Anderson & Sherrerd's value
investment philosophy to the world's fastest-growing economies. Country
allocation and stock selection are both driven by the search for well-managed
companies selling at a significant discount to their intrinsic value. The high
volatility of individual emerging markets frequently pushes share prices far
from fundamental values, and the Portfolio uses these occasions to aggressively
add or reduce holdings.
The Portfolio's guiding principle is that a global convergence of valuations,
driven by growing local investor sophistication, rising international
competition, and increased mobility of capital, will reward a disciplined value
approach over time. Furthermore, focusing on fundamentally undervalued markets
leaves the Portfolio less vulnerable to unpredictable shifts in economic or
political sentiment.
The Portfolio directs its efforts toward the markets with the most attractive
valuation measures. MAS's research has shown that markets with the lowest
price/book value, price/earnings, and price/cash flow have performed best.
Because cross-border comparisons of such measures are frequently distorted by
differences in accounting, debt levels, industry mix, and economic cycles, MAS
has built a proprietary database to discern a market's true asset value,
earnings power, and industry-neutral P/E.
Local liquidity is also a factor in country allocation. MAS's research has shown
that equities become undervalued in markets where local liquidity is tight. The
MAS Emerging Markets team employs the liquidity measures used by the MAS
fixed-income team. These include steepness of a country's yield curve (the
difference between short- and long-term interest rates) and the level of real
interest rates (the government-bond yield less inflation). Individual
investments are selected by screening MAS's universe of stocks for companies
selling at a deep discount to their intrinsic value, as measured by asset
replacement cost, or, in the case of firms with strong franchise value, the
present value of their conservatively projected future cash flow. Management
quality and integrity, strategic position and operating environment are also
considered. The Portfolio holds approximately 60 securities in 22 markets.
During fiscal 1996, the Portfolio outperformed its benchmark due to both stock
selection and country allocation. Overweight positions in Russia, India and Hong
Kong contributed to outperformance, along with less-than-index
14
<PAGE>
exposure in Chile and South Africa. MAS's conservative stock selection process
added the most value in the worst-performing markets: South Africa, Chile, Korea
and Thailand.
At fiscal year-end, regional allocations were close to index levels, though
significant variations existed within each region. In Latin America, the
Portfolio remained overweight in Argentina, where local liquidity constrains
both the stock market and corporate earnings, but long-term prospects are
attractive. In Asia, the best values were in South Korea and Hong Kong. The
Portfolio remained moderately overweight in Russia, although the position was
reduced after the run-up in stock prices during 1996.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------------------------------------------------------
==========
2/28/95 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Emerging Markets $ 1,000 $ 1,056 $ 1,152 $ 1,163 $ 1,118 $ 1,183 $ 1,311 $ 1,235
MSCI Emerging Markets Free $ 1,000 $ 1,004 $ 1,101 $ 1,089 $ 1,071 $ 1,132 $ 1,170 $ 1,123
==========
INCEPTION
DATE
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Emerging MSCI Emerging
Markets Markets Free Index
--------------------------------------
One Year 6.21% 3.05%
Since Inception 14.25% 7.57%
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 Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating
expenses for the Emerging Markets Portfolio from exceeding 1.18% of average
daily net assets. Returns presented include the effects of these waivers
and reimbursements. If such waivers and reimbursements had not been made,
the actual returns would have been lower.
* The Emerging Markets Portfolio commenced operations on 2/28/95. All returns
are compared to the Morgan Stanley Capital International Emerging Markets
Free Index, an unmanaged market index.
15
<PAGE>
Fixed Income
FIXED INCOME PORTFOLIO
The Fixed Income Portfolio is the largest of the MAS Funds fixed-income
portfolios. Securities in this Portfolio include U.S. government bonds,
corporate bonds, mortgages, foreign bonds and other fixed-income securities. The
Portfolio is actively managed by Miller Anderson & Sherrerd's fixed-income team,
which makes strategic decisions about portfolio structure and composition.
MAS has three major objectives for fixed-income investing. The first is to
provide investors with a positive real return -- a total return including income
and capital gains that is greater than the rate of inflation. The second is to
reduce the risk of investing by carefully diversifying the risks within the
Portfolio. The third is to provide investors with a deflation hedge. In order to
provide this hedge, or protection during periods of declining inflation and
interest rates, the Portfolio maintains high average credit quality and includes
a significant portion of noncallable and longer-maturity securities. This
positions the Portfolio to perform well when other market sectors experience
poor returns.
- --------------------------------------------------------------------------------
...the Portfolio maintains high average credit quality and includes a
significant portion of noncallable and longer-maturity securities.
- --------------------------------------------------------------------------------
There are five key decisions that the fixed-income team makes in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are times when it is better to bear
more interest-rate risk than others. MAS bases the interest-rate-risk decision
on the level of real interest rates and the steepness of the yield curve,
tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically it has been an attractive time
to invest in fixed-income securities and to have an above-average interest-rate
sensitivity.
The second decision involves determining which maturities offer the best value
relative to their risk. Third, the team considers which fixed-income markets
around the world offer the best value. Relative real interest rates, the
steepness of U.S. and foreign yield curves and judgments about currency values
drive this decision. The fourth decision relates to credit risk. MAS's research
shows that bearing credit risk offers financial rewards and that a diversified
approach to credit risk adds to overall portfolio returns. The Portfolio
includes a limited number of opportunistically selected bonds that are rated
below investment grade.
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Many corporate bonds and most mortgages contain an option
to prepay the principal amount prior to maturity. These bonds have higher yields
as a result and MAS's fixed-income team calculates whether the additional yield
is sufficient to compensate for the embedded option risk.
16
<PAGE>
The Portfolio's impressive long-term record reflects successful judgments about
these key decisions. For the past year, the return on the Portfolio was 269
basis points better than that of the benchmark. Performance was positively
affected by all five of the portfolio decisions discussed above. During the past
year, foreign bonds have outperformed U.S. bonds, and the decision to include
positions in currency-hedged European and Canadian bonds added over 100 basis
points of extra return compared to the benchmark. Including corporate bonds with
medium-quality credit ratings also added close to 100 basis points to
performance. Holding less interest-rate risk than the benchmark early in the
year when interest rates rose and more later in the year when interest rates
improved helped returns. The overweight in mortgages also helped performance as
the price of these securities increased relative to those of U.S. Treasuries.
INVESTMENT RESULTS
Growth of a $1 Million Investment Over 10 Years
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1986 1987 1988
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/86 12/31/86 3/31/87 6/30/87 9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Fixed Income $ 1,000 $ 1,047 $ 1,078 $ 1,053 $ 1,025 $ 1,083 $ 1,127 $ 1,140 $ 1,163 $ 1,179 $ 1,199 $ 1,273
Salomon Broad $ 1,000 $ 1,033 $ 1,047 $ 1,030 $ 1,002 $ 1,060 $ 1,101 $ 1,114 $ 1,136 $ 1,145 $ 1,158 $ 1,250
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Fixed Income $ 1,271 $ 1,311 $ 1,285 $ 1,337 $ 1,319 $ 1,405 $ 1,460 $ 1,485 $ 1,597 $ 1,707 $ 1,671 $ 1,754
Salomon Broad $ 1,263 $ 1,310 $ 1,300 $ 1,347 $ 1,360 $ 1,429 $ 1,467 $ 1,493 $ 1,578 $ 1,657 $ 1,638 $ 1,705
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Fixed Income $ 1,827 $ 1,852 $ 1,938 $ 2,009 $ 2,087 $ 2,109 $ 2,043 $ 1,989 $ 1,995 $ 1,993 $ 2,091 $ 2,209
Salomon Broad $ 1,778 $ 1,783 $ 1,857 $ 1,909 $ 1,959 $ 1,960 $ 1,905 $ 1,886 $ 1,896 $ 1,904 $ 2,000 $ 2,123
</TABLE>
- -----------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds
Fixed Income $ 2,278 $ 2,372 $ 2,366 $ 2,395 $ 2,451
Salomon Broad $ 2,163 $ 2,257 $ 2,217 $ 2,228 $ 2,270
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Fixed Salomon
Income Broad Index
-------------------------------
One Year 7.63% 4.94%
Five Years 8.94% 7.54%
Ten Years 9.38% 8.54%
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.
* All returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
17
<PAGE>
Fixed Income
DOMESTIC FIXED INCOME PORTFOLIO
[Photograph]
PHOTO
Left to right: Mary Jane Bobyock, Jim Morrissey
The Domestic Fixed Income Portfolio invests only in domestic fixed-income
securities with a credit quality rating of A or better. Fixed-income securities
in this Portfolio include U.S. government bonds, corporate bonds, mortgages, and
other fixed-income securities. The Portfolio is actively managed by Miller
Anderson & Sherrerd's fixed-income team, which makes strategic decisions about
portfolio structure and composition.
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to
reduce the risk of investing by carefully diversifying the risks within the
Portfolio. The third is to provide investors with a deflation hedge. In order to
provide this hedge, or protection during periods of declining inflation and
interest rates, the Portfolio maintains high average credit quality and includes
a significant portion of noncallable and longer-maturity securities. This
positions the Portfolio to perform well when other market sectors experience
poor returns.
There are four key decisions that the fixed-income team makes in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are times when it is better to bear
more interest-rate risk than others. MAS bases the interest-rate-risk decision
on the level of real interest rates and the steepness of the yield curve,
tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically it has been an attractive time
to invest in fixed-income securities and to have an above-average interest-rate
sensitivity.
The second decision involves determining which maturities offer the best value
relative to their risk. The third decision relates to credit risk. MAS's
research shows that bearing credit risk offers financial rewards and that a
diversified approach to credit risk adds to overall portfolio returns. The
Portfolio purchases only those bonds that hold an investment grade rating or are
deemed by MAS to be of investment grade quality.
18
<PAGE>
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Many corporate bonds and most mortgages contain an option
to prepay the principal amount prior to maturity. These bonds have higher yields
as a result and MAS's fixed-income team calculates whether the additional yield
is sufficient to compensate for the embedded option risk.
The Portfolio's impressive long-term record reflects successful judgments about
these key decisions. For the past year, the Portfolio underperformed the
benchmark, which is not affected by investment management fees, by approximately
the amount of its total expense ratio for the year. Holding less interest-rate
risk than the benchmark early in the year when interest rates rose and more
later in the year when interest rates improved helped. The overweight in
mortgages also modestly helped performance as the prices of these securities
increased relative to those of U.S. Treasuries. The Portfolio underperformed
other MAS Funds fixed-income portfolios partially because it is restricted from
investing in non-U.S. and medium-quality corporate bonds.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1987 1988 1989
- ----------------------------------------------------------------------------------------------------------
==========
9/30/87 12/31/87 3/31/88 6/30/88 9/30/88 12/31/88 3/31/89 6/30/89 9/30/89
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Domestic Fixed Income $ 1,000 $ 1,056 $ 1,096 $ 1,106 $ 1,126 $ 1,142 $ 1,158 $ 1,230 $ 1,229
Salomon Broad $ 1,000 $ 1,058 $ 1,099 $ 1,112 $ 1,134 $ 1,143 $ 1,156 $ 1,248 $ 1,261
==========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92 9/30/92
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Domestic Fixed Income $ 1,270 $ 1,248 $ 1,295 $ 1,277 $ 1,362 $ 1,413 $ 1,438 $ 1,545 $ 1,655 $ 1,617 $ 1,701 $ 1,783
Salomon Brand $ 1,308 $ 1,298 $ 1,344 $ 1,358 $ 1,426 $ 1,464 $ 1,490 $ 1,575 $ 1,654 $ 1,635 $ 1,702 $ 1,775
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds
Domestic Fixed Income $ 1,806 $ 1,893 $ 1,961 $ 2,034 $ 2,054 $ 2,011 $ 1,972 $ 1,976 $ 1,974 $ 2,084 $ 2,210 $ 2,259
Salomon Brand $ 1,780 $ 1,854 $ 1,905 $ 1,955 $ 1,956 $ 1,901 $ 1,883 $ 1,893 $ 1,900 $ 1,997 $ 2,119 $ 2,159
</TABLE>
- ----------------------------------------------------------
X-AXIS LABELS: 1996
- ----------------------------------------------------------
12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- -------
MAS Funds
Domestic Fixed Income $ 2,346 $ 2,302 $ 2,313 $ 2,359
Salomon Brand $ 2,253 $ 2,213 $ 2,224 $ 2,266
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Domestic Salomon
Fixed Income Broad Index
-----------------------------------
One Year 4.41% 4.94%
Five Years 8.83% 7.54%
Since Inception 10.00% 9.51%
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 Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating
expenses for the Domestic Fixed Income Portfolio from exceeding 0.50% of
average daily net assets. Returns for the period from 10/1/93 to 9/30/96
would have been lower if such waivers and reimbursements had not been made.
* The Portfolio commenced operations on 9/30/87. Pursuant to a vote of the
Portfolio's shareholders on December 19, 1994, the Portfolio's investment
policies were changed to emphasize fixed-income securities of domestic
issuers that have been rated A or higher. Therefore, it is reasonable to
expect that its performance pattern will be somewhat altered. All returns
are compared to the Salomon Broad Investment Grade Index, an unmanaged
market index.
19
<PAGE>
Fixed Income
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
The Portfolio is actively managed by a team of investors who specialize in this
sector and use in-depth financial analysis to uncover opportunities in
higher-yielding issues.
- --------------------------------------------------------------------------------
The High Yield Portfolio is a specialized fixed-income portfolio that focuses on
investments in below-investment-grade corporate bonds. The Portfolio is actively
managed by a team of investors who specialize in this sector and use in-depth
financial analysis to uncover opportunities in higher-yielding issues.
The High Yield Portfolio seeks to provide above-average long-term total returns
through diversified investments in below-investment-grade corporate bonds. The
MAS high yield team combines strategic decisions about portfolio structure,
including average credit quality and average maturity, with careful fundamental
research on individual securities to manage the Portfolio. The investment
process emphasizes bonds of corporations with strong industry positions and
favorable outlooks for growth in cash flow and asset values. Both equity and
fixed-income valuation techniques and analyses of economics and industry trends
support the security-selection process. The Portfolio maintains a high level of
diversification in order to reduce risk.
In fiscal 1996, the Portfolio outperformed its benchmark due to favorable
security selection in the telecommunications and media sectors and selective
investments in U.S.-dollar-denominated foreign-issued securities. The Portfolio
also benefited from an opportunistic overweighting in paper and packaging
companies, which outperformed other industrial investments available in the
market. The Portfolio has maintained an average to above-average credit quality
compared to the benchmark, as well as a continued emphasis on the media and
telecommunications sectors.
[Photograph]
PHOTO
Left to right: Marion Mitchell, Jim Schmid
20
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
(1) Institutional Class - Inception Date 2/28/89
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
===========
2/28/89 3/31/89 6/30/89 9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91
------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds High Yield $ 1,000 $ 995 $ 1,046 $ 1,009 $ 943 $ 914 $ 968 $ 845 $ 840 $ 1,048 $ 1,111 $ 1,155
Salomon High Yield $ 1,000 $ 1,000 $ 1,039 $ 1,023 $ 1,006 $ 975 $ 1,014 $ 940 $ 935 $ 1,098 $ 1,172 $ 1,241
===========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/91 3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds High Yield $ 1,211 $ 1,290 $ 1,341 $ 1,415 $ 1,435 $ 1,561 $ 1,645 $ 1,700 $ 1,787 $ 1,744 $ 1,719 $ 1,760
Salomon High Yield $ 1,308 $ 1,406 $ 1,460 $ 1,521 $ 1,541 $ 1,634 $ 1,706 $ 1,746 $ 1,809 $ 1,772 $ 1,764 $ 1,786
<CAPTION>
- -----------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------------------------------------
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds High Yield $ 1,661 $ 1,733 $ 1,916 $ 1,999 $ 2,059 $ 2,124 $ 2,160 $ 2,276
Salomon High Yield $ 1,787 $ 1,892 $ 2,009 $ 2,069 $ 2,139 $ 2,173 $ 2,201 $ 2,291
</TABLE>
<TABLE>
<CAPTION>
(2) Investment Class - Inception Date 5/21/96
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
===========
2/28/89 3/31/89 6/30/89 9/30/89 12/31/89 3/31/90 6/30/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91
------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds High Yield $ 1,000 $ 995 $ 1,046 $ 1,009 $ 943 $ 914 $ 968 $ 845 $ 840 $ 1,048 $ 1,111 $ 1,155
Salomon High Yield $ 1,000 $ 1,000 $ 1,039 $ 1,023 $ 1,006 $ 975 $ 1,014 $ 940 $ 935 $ 1,098 $ 1,172 $ 1,241
===========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/91 3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds High Yield $ 1,211 $ 1,290 $ 1,341 $ 1,415 $ 1,435 $ 1,561 $ 1,645 $ 1,700 $ 1,787 $ 1,744 $ 1,719 $ 1,760
Salomon High Yield $ 1,308 $ 1,406 $ 1,460 $ 1,521 $ 1,541 $ 1,634 $ 1,706 $ 1,746 $ 1,809 $ 1,772 $ 1,764 $ 1,786
<CAPTION>
- -----------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -----------------------------------------------------------------------------------------------
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds High Yield $ 1,661 $ 1,733 $ 1,916 $ 1,999 $ 2,059 $ 2,124 $ 2,160 $ 2,273
Salomon High Yield $ 1,787 $ 1,892 $ 2,009 $ 2,069 $ 2,139 $ 2,173 $ 2,201 $ 2,291
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
----------------------------------
MAS High Yield Salomon High
Institutional (1) Investment (2) Yield Index
----------------------------------
--------------------------------------------------
One Year 13.83% 13.71% 10.72%
Five Years 14.52% 14.50% 13.04%
Since Inception 11.45% 11.43% 11.55%
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.
(1) Represents an investment in the Institutional Class.
(2) Represents an investment in the Investment Class which commenced operations
5/21/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
For the period from 10/1/91 to 8/28/96, the Adviser voluntarily agreed to
waive its advisory fees and reimburse certain expenses to the extent
necessary to keep total annual operating expenses for Institutional Class
shares of the High Yield Portfolio from exceeding 0.525% of average daily
net assets. Returns for time periods where the total annual operating
expenses of the Portfolio would have exceeded 0.525%, were it not for these
waivers and reimbursements, would have been lower.
* The High Yield Portfolio commenced operations on 2/28/89. All returns are
compared to the Salomon High Yield Index, an unmanaged market index.
21
<PAGE>
Fixed Income
CASH RESERVES PORTFOLIO
[Photograph]
PHOTO
Left to right: Andrea Silverman, Carol Neilson, Ted Kurth, Beth Campion
The Cash Reserves Portfolio is a money-market fund managed with the same
principles as Miller Anderson & Sherrerd's longer-duration fixed-income
products. MAS believes strongly that a money-market fund should be invested
across the different sectors of the fixed-income market to be effectively
diversified and to provide the highest yield for the lowest possible risk. In
managing the Cash Reserves Portfolio, MAS looks to maximize current income while
preserving capital and liquidity.
The Cash Reserves Portfolio is managed by a team of managers rather than a
single portfolio manager, allowing the Portfolio to benefit from the best
thinking of a group of individuals as well as the expertise of smaller working
groups. Sub-groups focus on managing the Portfolio's credit quality,
interest-rate and yield-curve strategies.
The Cash Reserves Portfolio is actively managed based on three active
decision-making processes which should be central to managing any money-market
portfolio. The first of these is the Portfolio's interest-rate strategy,
reflecting the Portfolio's sensitivity to changes in interest rates. The average
maturity of the Cash Reserves Portfolio and other money-market funds is limited
by regulators to a maximum of 90 days, thereby limiting the effect of a
significant change in interest rates on the Portfolio. MAS closely monitors such
factors as the level of real interest rates, the steepness of the yield curve
(the difference between short- and longer-term interest rates) and Federal
Reserve policy to determine the appropriate level of interest-rate risk to
assume.
Second, MAS continually studies yield-curve positioning, or where along the
yield curve, including the very front end, the Portfolio should be invested.
Yield-curve strategy is based on an analysis of relative values and expected
future changes in the shape of the curve. MAS targets the Portfolio's
investments to the area of the curve that provides the most value.
Third, the Portfolio's credit quality is constrained to allow investments only
in commercial paper and corporate securities of the very highest grade. This
policy restricts the Portfolio to even higher-quality paper than is generally
required for money-
22
<PAGE>
market funds. Buying only A1/P1 commercial paper and high-quality floating-rate
notes provides extra assurance that the Portfolio will maintain the very highest
credit quality.
The Cash Reserves Portfolio has performed well versus its benchmark -- the
Lipper Money Market Average -- outperforming for fiscal 1996, for the past five
years and since inception in 1990. In the second half of fiscal 1996, yields
below one year rose in the expectation of higher future interest rates due to a
Federal Reserve tightening (raising) of interest rates. However, the Portfolio
was still able to outperform the Lipper Money Market Average due to a short
average maturity. While expectations of an increase in the Federal Funds Rate
had subsided for the moment, the Portfolio's average maturity at year-end
remained at about 15 days (a duration of about 0.04 years). With this change in
expectations, the front part of the yield curve had flattened as well, offering
less compensation for greater interest-rate risk.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------------------
==========
8/29/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92 9/30/92
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Cash Reserves $ 1,000 $ 1,007 $ 1,027 $ 1,044 $ 1,059 $ 1,074 $ 1,087 $ 1,098 $ 1,108 $ 1,116
Lipper Money Market $ 1,000 $ 1,006 $ 1,025 $ 1,042 $ 1,056 $ 1,070 $ 1,083 $ 1,093 $ 1,103 $ 1,111
Salomon Broad $ 1,000 $ 1,011 $ 1,063 $ 1,091 $ 1,110 $ 1,173 $ 1,232 $ 1,218 $ 1,268 $ 1,322
==========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1993 1994
- ------------------------------------------------------------------------------------------------------------
12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Cash Reserves $ 1,124 $ 1,131 $ 1,139 $ 1,147 $ 1,155 $ 1,164 $ 1,174 $ 1,186
Lipper Money Market $ 1,118 $ 1,125 $ 1,132 $ 1,139 $ 1,146 $ 1,154 $ 1,163 $ 1,174
Salomon Broad $ 1,326 $ 1,381 $ 1,419 $ 1,457 $ 1,457 $ 1,416 $ 1,403 $ 1,410
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- ------------------------------------------------------------------------------------------------------------
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Cash Reserves $ 1,201 $ 1,218 $ 1,235 $ 1,252 $ 1,270 $ 1,286 $ 1,303 $ 1,319
Lipper Money Market $ 1,188 $ 1,204 $ 1,220 $ 1,235 $ 1,251 $ 1,266 $ 1,280 $ 1,295
Salomon Broad $ 1,416 $ 1,487 $ 1,578 $ 1,608 $ 1,678 $ 1,649 $ 1,657 $ 1,688
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Cash Lipper Money Salomon
Reserves Market Average Broad Index
-----------------------------------------------
One Year 5.35% 4.87% 4.94%
SEC 7-Day
Effective Yield 5.24% NA NA
MAS Funds returns are net of all fees. Returns represent past performance
and are not indicative of future results.
The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating
expenses for the Cash Reserves Portfolio from exceeding 0.32% of average
daily net assets. Returns for the period from 10/1/90 to 9/30/96 would have
been lower if such waivers and reimbursements had not been made.
An investment in the Cash Reserves Portfolio is neither insured nor
guaranteed by the U.S. Government. The Portfolio seeks to maintain, but
does not guarantee, a constant net asset value of $1.00 per share.
* The Cash Reserves Portfolio commenced operations on 8/29/90. One Year
returns are compared to the Lipper Money Market Average of money market
funds and the Salomon Broad Investment Grade Index, an unmanaged market
index.
23
<PAGE>
Fixed Income
FIXED INCOME PORTFOLIO II
The Fixed Income Portfolio II invests only in fixed-income securities with a
credit-quality rating of A or better. Securities in this Portfolio include U.S.
government bonds, corporate bonds, mortgages, foreign bonds and other
fixed-income securities. The Portfolio is actively managed by Miller Anderson &
Sherrerd's fixed-income team, which makes strategic decisions about portfolio
structure and composition.
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to
reduce the risk of investing by carefully diversifying the risks within the
Portfolio. The third is to provide investors with a deflation hedge. In order to
provide this hedge, or protection during periods of declining inflation and
interest rates, the Portfolio maintains high average credit quality and includes
a significant portion of noncallable and longer-maturity securities. This
positions the Portfolio to perform well when other market sectors experience
poor returns.
There are five key decisions that the fixed-income team makes in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are times when it is better to bear
more interest-rate risk than others. MAS bases the interest-rate-risk decision
on the level of real interest rates and the steepness of the yield curve,
tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically it has been an attractive time
to invest in fixed-income securities and to have an above-average interest-rate
sensitivity.
The second decision involves determining which maturities offer the best value
relative to their risk. Third, the team considers which fixed-income markets
around the world offer the best value. Relative real interest rates, the
steepness of U.S. and foreign yield curves and judgments about currency values
drive this decision. The fourth decision relates to credit risk. MAS's research
shows that bearing credit risk offers financial rewards and that a diversified
approach to credit risk adds to overall portfolio returns.
[Photograph]
PHOTO
Left to right: Susan Mislick, Jeffrey Alt, Alisa Attardi
24
<PAGE>
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Many corporate bonds and most mortgages contain an option
to prepay the principal amount prior to maturity. These bonds have higher yields
as a result and the fixed-income team calculates whether the additional yield is
sufficient to compensate for the embedded option risk.
The Portfolio's impressive long-term record reflects successful judgments about
these key decisions. For the past year, the return on the Portfolio was 118
basis points better than that of the benchmark. Performance was positively
affected by all five of the portfolio decisions discussed above. During the past
year, foreign bonds have outperformed U.S. bonds, and the decision to include
positions in currency-hedged European and Canadian bonds added the majority of
the extra return compared to the benchmark. The corporate position also
performed well as spreads relative to Treasuries tightened significantly.
Holding less interest-rate risk than the benchmark early in the year when
interest rates rose and more later in the year when interest rates improved
helped returns. The overweight in mortgages also modestly helped performance as
the price of these securities increased relative to those of U.S. Treasuries.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------------------
==========
8/31/90 9/30/90 12/31/90 3/31/91 6/30/91 9/30/91 12/31/91 3/31/92 6/30/92 9/30/92
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Fixed Income II $ 1,000 $ 1,009 $ 1,082 $ 1,109 $ 1,121 $ 1,206 $ 1,291 $ 1,255 $ 1,312 $ 1,364
Salomon Broad $ 1,000 $ 1,009 $ 1,060 $ 1,088 $ 1,107 $ 1,170 $ 1,229 $ 1,215 $ 1,264 $ 1,319
==========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1993 1994
- ------------------------------------------------------------------------------------------------------------
12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Fixed Income II $ 1,382 $ 1,443 $ 1,494 $ 1,548 $ 1,556 $ 1,514 $ 1,476 $ 1,474
Salomon Broad $ 1,322 $ 1,378 $ 1,416 $ 1,453 $ 1,454 $ 1,413 $ 1,399 $ 1,407
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- ------------------------------------------------------------------------------------------------------------
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Fixed Income II $ 1,476 $ 1,555 $ 1,643 $ 1,683 $ 1,752 $ 1,733 $ 1,747 $ 1,786
Salomon Broad $ 1,412 $ 1,484 $ 1,574 $ 1,604 $ 1,674 $ 1,645 $ 1,653 $ 1,684
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Fixed Salomon
Income II Broad Index
-------------------------------------
One Year 6.12% 4.94%
Five Years 8.16% 7.54%
Since Inception 10.00% 8.94%
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 Fixed Income Portfolio II commenced operations on 8/31/90. All returns
are compared to the Salomon Broad Investment Grade Index, an unmanaged
market index.
25
<PAGE>
Fixed Income
MORTGAGE-BACKED SECURITIES PORTFOLIO
The Mortgage-Backed Securities Portfolio invests in a full range of mortgage
securities, collateralized mortgage obligations (CMOs), asset-backed securities,
U.S. Government and other fixed-income securities. The Portfolio is actively
managed by Miller Anderson & Sherrerd's fixed-income team, which makes strategic
decisions about portfolio structure and composition.
The fixed-income team seeks to earn superior returns by identifying attractively
priced securities and by managing the interest-rate sensitivity, yield-curve
strategy and prepayment sensitivity of the Portfolio. Bond values increase when
interest rates fall and decrease when interest rates rise. Consequently, there
are times when it is better to bear more interest-rate risk than others. MAS
bases the interest-rate-risk decision on the level of real interest rates and
the steepness of the yield curve, tempered by a strategic view about economic
growth and the prospects for inflation. When real rates are high and
longer-maturity bonds have significantly higher yields than short-term bonds,
historically it has been an attractive time to invest in fixed-income securities
and to have an above-average interest-rate sensitivity. Management of the
yield-curve strategy involves determining which maturities along the yield curve
offer the best value relative to their risk. The team actively manages 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 risk. The sensitivity of
the Portfolio to mortgage prepayments is increased when yields, adjusted for
probable prepayments, are attractive.
For the past year, the Portfolio outperformed its benchmark by 30 basis points.
Performance was positively impacted by all three of the portfolio decisions
discussed above. The interest-rate sensitivity of the Portfolio was modestly
less than that of the benchmark during the fourth quarter of 1995 and the
beginning of 1996, but was increased following a rise in interest rates in March
of 1996. A modest barbell was maintained in the Portfolio throughout the year,
which added slightly to returns. At the beginning of the past fiscal year, the
Portfolio was fully invested in mortgages, although 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 that concentrate prepayment risk were
increased during the past two quarters as their spreads became very attractive
relative to their risk. At fiscal year-end, the Portfolio had both an
interest-rate sensitivity and a sensitivity to prepayment risk slightly greater
than those of the benchmark, and a neutral yield-curve sensitivity.
26
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993
- -----------------------------------------------------------------------------------------------------------------------------------
=========
1/31/92 3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94
--------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Mortgage-
Backed Securities $ 1,000 $ 1,002 $ 1,043 $ 1,058 $ 1,082 $ 1,103 $ 1,138 $ 1,174 $ 1,171 $ 1,149 $ 1,136
Lehman Mortgage $ 1,000 $ 1,003 $ 1,043 $ 1,074 $ 1,082 $ 1,114 $ 1,135 $ 1,146 $ 1,156 $ 1,129 $ 1,123
=========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------
9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Mortgage-
Backed Securities $ 1,139 $ 1,131 $ 1,195 $ 1,246 $ 1,282 $ 1,328 $ 1,318 $ 1,326 $ 1,360
Lehman Mortgage $ 1,133 $ 1,138 $ 1,197 $ 1,260 $ 1,286 $ 1,329 $ 1,323 $ 1,333 $ 1,361
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS
Mortgage-Backed Lehman
Securities Mortgage Index
----------------------------------
One Year 6.10% 5.80%
Since Inception 6.82% 6.83%
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 Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating
expenses for the Mortgage-Backed Securities Portfolio from exceeding 0.50%
of average daily net assets. Returns presented include the effects of these
waivers and reimbursements. If such waivers and reimbursements had not been
made, the actual returns would have been lower.
* The Mortgage-Backed Securities Portfolio commenced operations on 1/31/92.
All returns are compared to the Lehman Brothers Mortgage Index, an
unmanaged market index.
27
<PAGE>
Fixed Income
LIMITED DURATION PORTFOLIO
The Limited Duration Portfolio is a duration-constrained fund investing only in
the U.S. bond market, managed according to the same principles as Miller
Anderson & Sherrerd's core fixed-income products. The Portfolio is managed by a
team of managers rather than a single portfolio manager, allowing it to benefit
from the best thinking of a group of individuals as well as the expertise of
smaller working groups. Sub-groups focus on the four key elements of portfolio
structure and composition -- interest-rate strategy, yield-curve positioning,
credit risk and prepayment sensitivity. In addition, the Portfolio is
diversified across market sectors and issues to control further risk.
Interest-rate strategy determines the Portfolio's overall sensitivity to changes
in the level of interest rates. If, for example, interest rates were to decrease
by 1% and the average duration of the Portfolio is two years, the value of the
Portfolio would be expected to rise by 2%. Portfolio policy confines the average
duration of the Portfolio to a range of between one and three years. By
restricting duration in this way, the Portfolio strives to avoid negative
quarterly returns.
MAS continually studies yield-curve positioning to determine the point along the
curve (maturity) where securities offer the most value. MAS targets the
Portfolio's investments to the area of the curve that provides the most value,
taking into account expected future changes in the shape of the yield curve.
The Portfolio's credit quality is constrained to allow inclusion of only
securities rated at least investment grade (BBB/Baa) or higher. MAS's research
shows that bearing credit risk offers financial rewards beyond expected losses
due to defaults. In addition, MAS believes that a key to successful
corporate-bond management is diversification, and generally limits exposure to
individual credits to less than 1%. Historically, the Portfolio has maintained
an average credit quality of AAA/Aaa.
Finally, prepayment sensitivity of the Portfolio is monitored to ensure that
investors are being paid to take call risk. Successful analysis of prepayment
sensitivity requires MAS to be at the forefront of changes in technology and
research. MAS's fixed-income management team maintains key efforts to understand
and manage each fixed-income portfolio's prepayment sensitivity. Generally, the
Limited Duration Portfolio has invested in mortgage securities that offer only a
limited amount of prepayment risk.
The Portfolio lagged its benchmark index slightly for fiscal 1996, remaining
ahead of the index since inception. During the fiscal year, interest rates fell
dramatically, and the duration of the Portfolio was shortened. Interest rates
then rose again at the beginning of calendar 1996, at which time the duration
was lengthened. The Portfolio lagged the index while rates were falling, but
outperformed the index in the rising-rate environment.
At the end of the fiscal year, the Portfolio had 30% in corporate and
asset-backed securities, 12% in mortgages and 53% in U.S. Treasuries. With the
rise in rates since March, especially at the two-year part of the curve, the
yield-curve strategy moved from a modest barbell to more of a bullet around the
two-year note. The narrowing of spreads on mortgages and corporates has led to a
reduction over the last six months in these areas. Overall, duration at fiscal
year-end was only slightly greater than that of the market.
28
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993
- ------------------------------------------------------------------------------------------------------------------------------------
=========
3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94
--------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Limited Duration $ 1,000 $ 1,034 $ 1,069 $ 1,068 $ 1,097 $ 1,110 $ 1,126 $ 1,131 $ 1,121 $ 1,119
Salomon 1-3 Year $ 1,000 $ 1,029 $ 1,059 $ 1,061 $ 1,084 $ 1,097 $ 1,112 $ 1,119 $ 1,113 $ 1,114
=========
INCEPTION
DATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Limited Duration $ 1,131 $ 1,131 $ 1,167 $ 1,202 $ 1,220 $ 1,248 $ 1,255 $ 1,266 $ 1,287
Salomon 1-3 Year $ 1,124 $ 1,125 $ 1,162 $ 1,198 $ 1,216 $ 1,245 $ 1,251 $ 1,264 $ 1,285
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Limited Salomon
Duration 1-3 Year Index
----------------------------------
One Year 5.47% 5.70%
Since Inception 5.77% 5.73%
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.
For the period from 10/1/92 to 8/28/96, the Adviser voluntarily agreed to
waive its advisory fees and reimburse certain expenses to the extent
necessary to keep total annual operating expenses for the Limited Duration
Portfolio from exceeding 0.42% of average daily net assets. Returns for
time periods where the total annual operating expenses of the Portfolio
would have exceeded 0.42%, were it not for these waivers and
reimbursements, would have been lower.
* The Limited Duration Portfolio commenced operations on 3/31/92. All returns
are compared to the Salomon 1-3 Year Treasury Index, an unmanaged market
index.
29
<PAGE>
Fixed Income
SPECIAL PURPOSE FIXED INCOME PORTFOLIO
The Special Purpose Fixed Income Portfolio is designed specially for use as part
of a balanced investment program. Fixed-income securities in this Portfolio
include U.S. government bonds, corporate bonds, mortgages, foreign bonds, and
other fixed-income securities. The Portfolio is actively managed by Miller
Anderson & Sherrerd's fixed-income team, which makes strategic decisions about
portfolio structure and composition in a way that complements the equity portion
of a balanced account.
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to
reduce the risk of investing by carefully diversifying the risks within the
Portfolio. The third is to provide investors with a deflation hedge. In order to
provide this hedge, or protection during periods of declining inflation and
interest rates, the Portfolio maintains high average credit quality and includes
a significant portion of noncallable and longer-maturity securities. This
positions the Portfolio to perform well when other market sectors experience
poor returns.
There are five key decisions that the fixed-income team makes in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are times when it is better to bear
more interest-rate risk than others. MAS bases the interest-rate-risk decision
on the level of real interest rates and the steepness of the yield curve,
tempered by views about economic growth and the prospects for inflation. When
real rates are high and longer-maturity bonds have significantly higher yields
than short-term bonds, it has historically been an attractive time to invest in
fixed-income securities and to have an above-average interest-rate sensitivity.
The second decision involves determining which maturities offer the best value
relative to their risk. Third, the team considers which fixed-income markets
around the world offer the best value. Relative real interest rates, the
steepness of U.S. and foreign yield curves and judgments about currency values
drive this decision. The fourth decision relates to credit risk. MAS's research
shows that bearing credit risk offers financial rewards and that a diversified
approach to credit risk adds to overall portfolio returns. The Portfolio
includes a limited number of opportunistically selected bonds that are rated
below investment grade.
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Many corporate bonds and
[Photograph]
PHOTO
Left to right: Paige Johnson, Cecelia Vollaro, Mary Ann Milias, Rita Garcia
(front), Marjorie Bennett, Mari Chazen (front)
30
<PAGE>
most mortgages contain an option to prepay the principal amount prior to
maturity. These bonds have higher yields as a result and the fixed-income team
calculates whether the additional yield is sufficient to compensate for the
embedded option risk.
The Portfolio's impressive long-term record reflects successful judgments about
these key decisions. For the past year, the return on the Portfolio was 280
basis points better than that of its benchmark. Performance was positively
affected by all five of the portfolio decisions discussed above. During the past
year, foreign bonds have outperformed U.S. bonds, and the decision to include
positions in currency-hedged European and Canadian bonds added over 100 basis
points of extra return compared to the benchmark. Including corporate bonds with
medium-quality credit ratings also added close to 100 basis points to
performance. Holding less interest-rate risk than the benchmark early in the
year when interest rates rose and more later in the year when interest rates
improved helped returns. The overweight in mortgages also modestly helped
performance as the price of these securities increased relative to those of U.S.
Treasuries.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
(1) Institutional Class - Inception Date 3/31/92
- -------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993
- -------------------------------------------------------------------------------------------------------------------------------
=========
3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94
--------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Special
Purpose Fixed Income $ 1,000 $ 1,048 $ 1,095 $ 1,110 $ 1,169 $ 1,214 $ 1,261 $ 1,275 $ 1,240 $ 1,208
Salomon Broad $ 1,000 $ 1,041 $ 1,085 $ 1,088 $ 1,134 $ 1,165 $ 1,196 $ 1,196 $ 1,163 $ 1,151
=========
INCEPTION
DATE
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Special
Purpose Fixed Income $ 1,211 $ 1,211 $ 1,275 $ 1,349 $ 1,392 $ 1,449 $ 1,446 $ 1,464 $ 1,500
Salomon Broad $ 1,158 $ 1,162 $ 1,221 $ 1,296 $ 1,320 $ 1,378 $ 1,354 $ 1,360 $ 1,386
<CAPTION>
(2) Investment Class - Inception Date 4/10/96
- -------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1992 1993
- -------------------------------------------------------------------------------------------------------------------------------
=========
3/31/92 6/30/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94
--------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Special
Purpose Fixed Income $ 1,000 $ 1,048 $ 1,095 $ 1,110 $ 1,169 $ 1,214 $ 1,261 $ 1,275 $ 1,240 $ 1,208
Salomon Broad $ 1,000 $ 1,041 $ 1,085 $ 1,088 $ 1,134 $ 1,165 $ 1,196 $ 1,196 $ 1,163 $ 1,151
=========
INCEPTION
DATE
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Special
Purpose Fixed Income $ 1,211 $ 1,211 $ 1,275 $ 1,349 $ 1,392 $ 1,449 $ 1,446 $ 1,463 $ 1,497
Salomon Broad $ 1,158 $ 1,162 $ 1,221 $ 1,296 $ 1,320 $ 1,378 $ 1,354 $ 1,360 $ 1,386
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
-----------------------------------
MAS Special Purpose Fixed Income
----------------------------------- Salomon
Institutional(1) Investment(2) Broad Index
-------------------------------------------------------
One Year 7.74% 7.57% 4.94%
Since Inception 9.42% 9.38% 7.51%
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.
(1) Represents an investment in the Institutional Class.
(2) Represents an investment in the Investment Class which commenced operations
4/10/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
* The Special Purpose Fixed Income Portfolio commenced operations on 3/31/92.
All returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
31
<PAGE>
Fixed Income
MUNICIPAL PORTFOLIO
The Municipal Portfolio invests in long- and short-term debt obligations issued
by state and local governments or their agencies and in other fixed-income
securities. The Portfolio is actively managed by Miller Anderson & Sherrerd's
municipal investment management team, which manages the Portfolio's
interest-rate exposure and composition by making strategic shifts in portfolio
structure and conducting extensive valuation analysis of individual sectors and
securities. The goal of MAS's fixed-income management for taxable investors is
to provide a positive after-tax total return, to provide protection against
deflation and to reduce the risk of an investor's overall investment portfolio,
particularly through reduction of exposure to changes in tax rates.
MAS's research shows that there have been many times when taxable investors
would have been better served by investments in taxable bonds. Thus, MAS views
the municipal market as just one of many alternatives for helping clients
achieve their goal of maximizing after-tax returns within a given level of risk.
Sector commitments within the Portfolio are varied based on the prospects for
the municipal market relative to the taxable markets. Normally, at least 80% of
the Portfolio will be invested in municipal securities.
MAS's investment process consists of two major stages. First, MAS establishes a
forecast for inflation and economic activity in order to make judgments about
the most desirable duration and maturity targets for the portfolio. Next, MAS
examines the relative value offered by different bond sectors and determines the
mix of securities that will provide the most attractive performance. Security
selection involves adjustment of promised yields for tax considerations, credit
risk, and call risk. Capital gains are realized only when the prospective
returns of bonds purchased with the proceeds from the sales will offset the tax
on the gains and still provide excess value to the overall portfolio.
- --------------------------------------------------------------------------------
The Portfolio's outstanding performance over the past year is primarily
attributable to the decision to overweight tax-exempt bonds versus Treasuries...
- --------------------------------------------------------------------------------
The Portfolio's outstanding performance over the past year is primarily
attributable to the decision to overweight tax-exempt bonds versus Treasuries,
as the long-municipal-to-Treasury yield ratio fell from more than 90% to
slightly more than 80% during the period. In addition, strategic management of
interest-rate risk made a positive impact on performance. The Portfolio was
somewhat short versus the index when rates rose in early 1996, and duration was
lengthened before the market rallied later in the year. Investments in
long-dated, non callable zero-coupon municipal bonds were beneficial to
performance as that sector of the market performed well over the period. Swaps
and futures were also used to increase the Portfolio's exposure to municipals
when they appeared attractive earlier in the year. Finally, a small allocation
to high-yield taxable corporate bonds, the best performing sector of the
fixed-income market over the period, also added to the return of the Portfolio.
At year-end, MAS believed that municipal bond yields had reached fair value and
trimmed positions as appropriate. Portfolio duration remained somewhat longer
than that of the index; however, because the municipal yield curve was perceived
to be relatively flat, i.e., investors were not being adequately compensated for
purchasing long-term municipals, the Portfolio was seeking to increase its
exposure to shorter-maturity issues when they become available.
32
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1993 1994
- ---------------------------------------------------------------------------------------------------------------------------
=========
10/1/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Municipal $ 1,000 $ 1,016 $ 1,061 $ 1,103 $ 1,142 $ 1,162 $ 1,077 $ 1,083 $ 1,089
Lehman Long-Term Municipal $ 1,000 $ 1,024 $ 1,069 $ 1,113 $ 1,158 $ 1,175 $ 1,081 $ 1,089 $ 1,093
Lehman 5 Year Municipal $ 1,000 $ 1,014 $ 1,041 $ 1,065 $ 1,090 $ 1,103 $ 1,072 $ 1,083 $ 1,094
Lehman 10 Year Municipal $ 1,000 $ 1,020 $ 1,059 $ 1,094 $ 1,134 $ 1,150 $ 1,089 $ 1,105 $ 1,113
=========
INCEPTION
DATE
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- ---------------------------------------------------------------------------------------------------------------
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Municipal $ 1,089 $ 1,186 $ 1,180 $ 1,235 $ 1,306 $ 1,300 $ 1,317 $ 1,351
Lehman Long-Term Municipal $ 1,068 $ 1,175 $ 1,201 $ 1,234 $ 1,317 $ 1,283 $ 1,298 $ 1,338
Lehman 5 Year Municipal $ 1,089 $ 1,133 $ 1,163 $ 1,191 $ 1,216 $ 1,216 $ 1,222 $ 1,243
Lehman 10 Year Municipal $ 1,095 $ 1,171 $ 1,202 $ 1,244 $ 1,283 $ 1,275 $ 1,279 $ 1,304
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
<TABLE>
<CAPTION>
MAS Lehman 5 Year Lehman 10 Year Lehman Long Term
Municipal Municipal Index Municipal Index Municipal Index**
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 9.46% 4.31% 4.84% 8.40%
Since Inception 7.83% 5.58% 6.87% 7.56%
</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 Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating expenses
for the Municipal Portfolio from exceeding 0.50% of average daily net assets.
Returns presented include the effects of these waivers and reimbursements. If
such waivers and reimbursements had not been made, the actual returns would have
been lower. Pursuant to a vote of the Portfolio's shareholders on April 15,
1996, the Portfolio's investment policies were changed to emphasized
fixed-income securities of shorter duration. For more information concerning
this change, see the Shareholder Meeting Information following the Notes to the
Financial Statements.
* The Municipal Portfolio commenced operations on 10/1/92. All returns are
compared to the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index, both unmanaged market indices.
** Shown for comparative purposes only. The Fund believes that since the April
15, 1996 change in policy, a more appropriate comparison for the Portfolio
is a blend of the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index.
33
<PAGE>
Fixed Income
PA MUNICIPAL PORTFOLIO
The PA Municipal Portfolio invests in long- and short-term municipal debt
securities exempt from Pennsylvania income tax and in other fixed-income
securities when appropriate. The Portfolio is actively managed by Miller
Anderson & Sherrerd's municipal investment management team, which manages the
Portfolio's interest-rate exposure and composition by making strategic shifts in
portfolio structure and conducting extensive valuation analysis of individual
sectors and securities. The goal of MAS's fixed-income management for taxable
investors is to provide investors with a positive after-tax total return, to
provide protection against deflation, and to reduce the risk of an investor's
overall investment portfolio, particularly through reduction of exposure to
changes in tax rates.
MAS's research shows that there have been many times when taxable investors
would have been better served by investments in taxable bonds. Thus, MAS views
the municipal market as just one of many alternatives for helping clients
achieve their goal of maximizing after-tax returns within a given level of risk.
Sector commitments within the Portfolio are varied based on prospects for the
municipal market relative to the taxable markets. Normally, at least 80% of the
Portfolio will be invested in municipal securities, with at least 65% invested
in Pennsylvania municipal securities.
MAS's investment process consists of two major stages. First, MAS establishes a
forecast for inflation and economic activity and makes judgments about the most
desirable duration and maturity targets for the Portfolio. Next, relative value
offered by different bond sectors is examined to determine the mix of securities
that will provide the most attractive performance. Security selection involves
adjustment of promised yields for tax considerations, credit risk and call risk.
Capital gains are realized only when the prospective returns of bonds purchased
with the proceeds from the sales will offset the tax on the gains and still
provide excess value to the overall portfolio.
The Portfolio's performance over the past year is primarily attributable to the
decision to overweight tax-exempt bonds versus Treasuries, as the
long-municipal-to-Treasury yield ratio fell from more than 90% to slightly more
than 80% during the period. Although it was difficult to overweight the
Portfolio to the extent that would have been desirable because of a shortage in
issuance of PA municipal bonds, swaps and futures were used to increase the
Portfolio's exposure to municipals when they appeared attractive earlier in the
year. In addition, strategic management of interest-rate risk made a positive
impact on performance. The Portfolio was somewhat short versus the index when
rates rose in early 1996, and duration was lengthened before the market rallied
later in the year. Finally, a small allocation to high-yield taxable corporate
bonds, the best-performing sector of the fixed-income market over the period,
also added to the return of the Portfolio.
Over the past year, a tremendous shortage of PA municipal bonds drove prices to
historically rich levels. Although certain positions were trimmed accordingly,
tax considerations relating to the high levels of embedded capital gains made
MAS reluctant to sell many other holdings. The availability of PA municipal
bonds is not expected to increase in the near future.
34
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1993 1994
- --------------------------------------------------------------------------------------------------------------------------
=========
10/1/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds PA Municipal $ 1,000 $ 1,032 $ 1,075 $ 1,122 $ 1,158 $ 1,185 $ 1,095 $ 1,099 $ 1,111
Lehman Long-Term Municipal $ 1,000 $ 1,024 $ 1,069 $ 1,113 $ 1,158 $ 1,175 $ 1,081 $ 1,089 $ 1,093
Lehman 5 Year Municipal $ 1,000 $ 1,014 $ 1,041 $ 1,065 $ 1,090 $ 1,103 $ 1,072 $ 1,083 $ 1,094
Lehman 10 Year Municipal $ 1,000 $ 1,020 $ 1,059 $ 1,094 $ 1,134 $ 1,150 $ 1,089 $ 1,105 $ 1,113
=========
INCEPTION
DATE
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- ---------------------------------------------------------------------------------------------------------------
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds PA Municipal $ 1,104 $ 1,202 $ 1,203 $ 1,264 $ 1,337 $ 1,328 $ 1,350 $ 1,378
Lehman Long-Term Municipal $ 1,068 $ 1,175 $ 1,201 $ 1,234 $ 1,317 $ 1,283 $ 1,298 $ 1,338
Lehman 5 Year Municipal $ 1,089 $ 1,133 $ 1,163 $ 1,191 $ 1,216 $ 1,216 $ 1,222 $ 1,243
Lehman 10 Year Municipal $ 1,095 $ 1,171 $ 1,202 $ 1,244 $ 1,283 $ 1,275 $ 1,279 $ 1,304
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
<TABLE>
<CAPTION>
MAS Lehman 5 Year Lehman 10 Year Lehman Long Term
PA Municipal Municipal Index Municipal Index Municipal Index**
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 9.03% 4.31% 4.84% 8.40%
Since Inception 8.35% 5.58% 6.87% 7.56%
</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 Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating expenses
for the PA Municipal Portfolio from exceeding 0.50% of average daily net assets.
Returns presented include the effects of these waivers and reimbursements. If
such waivers and reimbursements had not been made, the actual returns would have
been lower. Pursuant to a vote of the Portfolio's shareholders on April 15,
1996, the Portfolio's investment policies were changed to emphasized
fixed-income securities of shorter duration. For more information concerning
this change, see the Shareholder Meeting Information following the Notes to the
Financial Statements.
* The PA Municipal Portfolio commenced operations on 10/1/92. All returns are
compared to the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index, both unmanaged market indices.
** Shown for comparative purposes only. The Fund believes that since the April
15, 1996 change in policy, a more appropriate comparison for the Portfolio
is a blend of the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index.
35
<PAGE>
Fixed Income
GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio invests in high-grade fixed-income securities
throughout the world, using a benchmark that is about two-thirds invested in
foreign bonds and one-third invested in U.S. securities as a neutral starting
point. Fixed-income securities in the U.S. portion of this Portfolio include
U.S. government bonds, corporate bonds, mortgages, and other fixed-income
securities. The non-U.S. portion of this Portfolio may also include a wide
variety of fixed-income securities, although these investments tend to consist
largely of securities issued by foreign governments and supranational
organizations such as the World Bank. The Portfolio is actively managed by
Miller Anderson & Sherrerd's global fixed-income team, which makes strategic
decisions about portfolio structure and composition.
The MAS global fixed-income team makes five key decisions in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are better times to bear interest-rate
risk than others. MAS bases the interest-rate decision on the level of real
interest rates and the steepness of the yield curve in bond markets throughout
the world. When real interest rates are high and longer-maturity bonds have
significantly higher yields than short-term bonds, historically it has been an
attractive time to invest in fixed-income securities and to have an
above-average maturity.
The second key decision is the choice of fixed-income markets throughout the
world in which the Portfolio will invest. MAS bases this decision on comparisons
of real interest rates and yield-curve slopes across fixed-income markets.
Historically, it has been advantageous to invest in countries that offer higher
real interest rates than those available in other countries. Because the best
bond markets need not be the best currency markets, MAS separates the bond
decision from the third key decision of currency management. MAS manages
currency exposures actively, and the Portfolio hedges at least in part those
currencies that are judged to be overvalued and in danger of weakening.
The fourth and fifth decisions relate to credit and prepayment risk. Although
interest-rate, country, and currency decisions have typically had the largest
effect on performance, MAS's research shows that bearing credit risk offers
financial rewards and that a diversified approach to credit risk adds to overall
portfolio returns. Similarly, MAS actively manages the amount of prepayment or
call risk in the Portfolio. Many corporate bonds and most mortgages contain an
option to prepay the principal amount prior to maturity. These bonds offer
higher yields as a result and the global fixed-income team calculates whether
the additional yield is sufficient to compensate for the embedded-option risk.
Generally, most corporate and mortgage securities are issued in the United
States, which offers the deepest and most liquid corporate and mortgage markets
in the world. However, the Portfolio will also invest in non-U.S. corporate and
mortgage securities when values are attractive.
The Portfolio's impressive long-term record reflects successful judgments about
these key decisions. For the past year, the decisions to favor European and
Canadian bonds over U.S. securities and to hedge some of the exposures to
European and Japanese bonds had a positive impact on returns. Throughout the
year, interest-rate exposure has been similar to that of the benchmark.
Individual country positions have changed during the year with relative changes
in value. Early in the fiscal year, Japanese bond exposures were drawn down to
fund investments in Denmark and the U.S.. Short-term Canadian bonds were
similarly eliminated as Canada pushed short-term rates below U.S. rates, but the
Portfolio maintained positions in long-term Canadian bonds. French bonds were
cut back in favor of German bonds as the French market rallied by the end of the
first calendar quarter. Italian bonds were reduced to fund an investment in
Spanish bonds, while the Portfolio maintained exposure to the undervalued Lira.
36
<PAGE>
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
=========
4/30/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Global Fixed Income $ 1,000 $ 1,022 $ 1,074 $ 1,090 $ 1,075 $ 1,057 $ 1,071 $ 1,073 $ 1,159 $ 1,227
Salomon World Gov't Bond $ 1,000 $ 1,008 $ 1,053 $ 1,053 $ 1,053 $ 1,060 $ 1,072 $ 1,078 $ 1,196 $ 1,259
=========
INCEPTION
DATE
</TABLE>
- --------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- --------------------------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds Global Fixed Income $ 1,238 $ 1,287 $ 1,271 $ 1,290 $ 1,322
Salomon World Gov't Bond $ 1,246 $ 1,283 $ 1,259 $ 1,264 $ 1,299
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS Global Salomon World
Fixed Income Gov't Bond Index
------------------------------------
One Year 6.83% 4.20%
Since Inception 8.51% 7.94%
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.
For the period from inception to 8/28/96, the Adviser voluntarily agreed to
waive its advisory fees and reimburse certain expenses to the extent
necessary to keep total annual operating expenses for the Global Fixed
Income Portfolio from exceeding 0.58% of average daily net assets. Returns
for time periods where the total annual operating expenses of the Portfolio
would have exceeded 0.58%, were it not for these waivers and
reimbursements, would have been lower.
* The Global Fixed Income Portfolio commenced operations on 4/30/93. All
returns are compared to the Salomon World Government Bond Index, an
unmanaged market index.
37
<PAGE>
Fixed Income
INTERNATIONAL FIXED INCOME PORTFOLIO
[Photograph]
PHOTO
Left to right: Kathy Engebretson, Marc Crespi
The International Fixed Income Portfolio invests in high-grade fixed-income
securities, using a benchmark that is 100 percent invested in foreign bonds.
Most investments consist of securities issued by governments and supranational
organizations such as the World Bank, although the Portfolio will also hold
corporate bonds, mortgages, and other fixed-income securities. The Portfolio
will also invest to a limited extent in U.S. securities when the U.S.
fixed-income market is more attractive than foreign markets. The Portfolio is
actively managed by Miller Anderson & Sherrerd's global fixed-income team, which
makes strategic decisions about portfolio structure and composition.
The MAS global fixed-income team makes five key decisions in building the
Portfolio. The first decision relates to the amount of interest-rate risk within
the Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are better times to bear interest-rate
risk than others. MAS bases the interest-rate decision on the level of real
interest rates and the steepness of the yield curve in bond markets throughout
the world. When real interest rates are high and longer-maturity bonds have
significantly higher yields than short-term bonds, historically it has been an
attractive time to invest in fixed-income securities and to have an
above-average maturity.
The second key decision is the choice of fixed-income markets throughout the
world in which the Portfolio will invest. MAS bases this decision on comparisons
of real interest rates and yield-curve slopes across fixed-income markets.
Historically it has been advantageous to invest in countries that offer higher
real interest rates than those available in other countries. Because the best
bond markets need not be the best currency markets, MAS separates the bond
decision from the third key decision of currency management. MAS manages
currency exposures actively, and the Portfolio hedges at least in part those
currencies that are judged to be overvalued and in danger of weakening.
The fourth and fifth decisions relate to credit and prepayment risk. Although
these two decisions play a much smaller role in the Portfolio than
interest-rate, country, and currency management, MAS's research shows that
bearing credit risk offers financial rewards and that a diversified approach to
credit risk adds to overall portfolio returns. Similarly, MAS actively manages
the amount of prepayment or call risk in the Portfolio. Many corporate bonds and
most mortgages contain an option to prepay the principal
38
<PAGE>
amount prior to maturity. These bonds offer higher yields as a result and the
global fixed-income team calculates whether the additional yield is sufficient
to compensate for the embedded-option risk.
Over the past year, the Portfolio benefited from its investments in
high-yielding European markets (Italy, Spain, and Sweden) and from its hedging
of several foreign currencies, especially the Japanese yen. Throughout the year,
interest-rate exposure has been similar to that of the benchmark.
Individual country positions have changed during the year with relative changes
in value. Early in the fiscal year Japanese bond exposures were drawn down to
fund investments in Denmark. Short-term Canadian bonds were similarly eliminated
as Canada pushed short-term rates below U.S. rates, but the Portfolio maintained
positions in long-term Canadian bonds. French bonds were cut back in favor of
German bonds as the French market rallied by the end of the first calendar
quarter. Italian bonds were reduced to fund an investment in Spanish bonds,
while the Portfolio maintained exposure to the undervalued Lira.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Years ending September 30
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1994 1995
- --------------------------------------------------------------------------------------------------------------------------
=========
4/29/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95
------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds International Fixed Income $ 1,000 $ 998 $ 1,010 $ 1,012 $ 1,122 $ 1,186 $ 1,175 $ 1,211
Salomon World Gov't Bond Ex-U.S. $ 1,000 $ 1,010 $ 1,027 $ 1,033 $ 1,182 $ 1,240 $ 1,210 $ 1,235
=========
INCEPTION
DATE
</TABLE>
- ----------------------------------------------------------------------
X-AXIS LABELS: 1996
- ----------------------------------------------------------------------
3/31/96 6/30/96 9/30/96
------- ------- -------
MAS Funds International Fixed Income $ 1,196 $ 1,214 $ 1,247
Salomon World Gov't Bond Ex-U.S. $ 1,214 $ 1,219 $ 1,259
AVERAGE ANNUAL RETURNS*
Ended 9/30/96
MAS International Salomon World Gov't
Fixed Income Bond Ex-U.S. Index
-----------------------------------------------
One Year 6.13% 4.04%
Since Inception 9.55% 9.96%
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.
For the period from inception to 8/28/96, the Adviser voluntarily agreed to
waive its advisory fees and reimburse certain expenses to the extent
necessary to keep total annual operating expenses for the International
Fixed Income Portfolio from exceeding 0.60% of average daily net assets.
Returns for time periods where the total annual operating expenses of the
Portfolio would have exceeded 0.60%, were it not for these waivers and
reimbursements, would have been lower.
* The International Fixed Income Portfolio commenced operations on 4/29/94.
All returns are compared to the Salomon World Government Bond Ex-U.S.
Index, an unmanaged market index.
39
<PAGE>
Fixed Income
INTERMEDIATE DURATION PORTFOLIO
The Intermediate Duration Portfolio is a duration-constrained fund managed using
the same principles and strategies as Miller Anderson & Sherrerd's core
fixed-income products. The Portfolio is managed by a team of managers rather
than a single portfolio manager, allowing it to benefit from the best thinking
of a group of individuals as well as the expertise of smaller working groups.
Sub-groups focus on the five key elements of portfolio structure and composition
- -- interest-rate strategy, yield-curve positioning, credit risk, prepayment
sensitivity and country exposure. In addition, the Portfolio is diversified
across market sectors and issues to further control risk.
MAS manages the Portfolio's interest-rate strategy, limiting the average
duration of the Portfolio -- or the Portfolio's sensitivity to changes in
interest rates -- to between two and five years. MAS continually studies
yield-curve positioning to determine the point along the curve (maturity) where
securities offer the most value. MAS targets the Portfolio's investments to the
area of the curve that provides the most value, taking into account MAS's
expectation of future changes in the shape of the yield curve.
The Portfolio's credit quality is constrained to allow inclusion of only bonds
rated investment grade (BBB/Baa) or higher. MAS's research shows that bearing
credit risk offers financial rewards beyond expected losses due to defaults. MAS
also believes that a key to successful corporate-bond management is
diversification, and generally limits exposure to individual credits to less
than 1% of the Portfolio. The prepayment sensitivity of the Portfolio is managed
to add value, but not bear unnecessary call risk. MAS's research shows that
mortgage-backed securities offer attractive returns relative to equal-duration
Treasury bonds, but also contain prepayment risk due to homeowners' rights to
prepay their mortgages. MAS strives to manage this prepayment risk by modeling
mortgage-backed securities using state-of-the art research and technology.
- --------------------------------------------------------------------------------
...the Portfolio is diversified across market sectors and issues to further
control risk.
- --------------------------------------------------------------------------------
MAS manages country exposure opportunistically by investing up to 20% of the
Portfolio in high-quality bonds issued by foreign governments when yields abroad
are particularly attractive. Generally, this country exposure is currency
hedged.
The Portfolio has outperformed its benchmark index, the Lehman Brothers
Intermediate Government/Corporate Index, for fiscal 1996 and since inception.
The Portfolio benefited from maintaining an overweight relative to the index in
corporate bonds as corporate spreads tightened. Exposure to foreign bonds also
added significant value, as foreign
40
<PAGE>
countries such as Germany and Sweden produced deflationary economic environments
in which their interest rates declined.
At year-end, the Portfolio cut back exposure to both foreign and corporate bonds
due to rising values, while exposure to mortgage-backed securities -- the only
sector of the fixed-income market offering good value versus U.S. Treasuries --
constituted over 40% of the Portfolio. In the last 12 months, real interest
rates increased and the yield curve steepened (the difference between short- and
long-term term interest rates was greater). MAS viewed this as a more positive
U.S. bond environment than existed at this time last year; therefore, the
Portfolio's duration was slightly longer than that of the index.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Year ending September 30
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -------------------------------------------------------------------------------------------------------------------------------
=========
10/3/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Intermediate Duration $ 1,000 $ 995 $ 1,043 $ 1,088 $ 1,114 $ 1,148 $ 1,150 $ 1,158 $ 1,184
Lehman Intermediate Gov't/Corp. $ 1,000 $ 999 $ 1,043 $ 1,095 $ 1,113 $ 1,152 $ 1,142 $ 1,150 $ 1,170
=========
INCEPTION
DATE
</TABLE>
AVERAGE ANNUAL RETURN
Ended 9/30/96*
MAS Intermediate Lehman Intermediate
Duration Gov't/Corp. Index
-------------------------------------------
One Year 6.27% 5.13%
Since Inception 8.84% 8.20%
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 Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating
expenses for the Intermediate Duration Portfolio from exceeding 0.52% of
average daily net assets. Returns presented include the effects of these
waivers and reimbursements. If such waivers and reimbursements had not been
made, the actual returns would have been lower.
* The Intermediate Duration Portfolio commenced operations on 10/3/94. All
returns are compared to the Lehman Brothers Intermediate
Government/Corporate Bond Index, an unmanaged market index.
41
<PAGE>
Balanced
BALANCED PORTFOLIO
The Balanced Portfolio provides active asset allocation management of Miller
Anderson & Sherrerd's core equity and fixed-income strategies in a single
portfolio. MAS shifts assets as relative values change, using a 60% equity and
40% fixed-income allocation as a starting point, and manages diversification and
risk control across both asset classes.
Management of the Portfolio incorporates expertise from MAS's entire investment
team. Members of the domestic equity, international equity, domestic
fixed-income and international fixed-income teams comprise the MAS Asset
Allocation Committee, which also includes representatives from the
interest-rate, economic, and currency-management teams. The Asset Allocation
Committee evaluates the relative risks and returns of the Portfolio's two asset
classes and makes strategic asset allocation decisions. The Portfolio's
management team then makes decisions about portfolio composition and structure,
drawing on the strategies employed by MAS's equity and fixed-income portfolio
management teams.
The three key influences considered in determining asset allocation strategy are
relative real interest rates, the shape of the yield curve, and the equity risk
premium. To make the asset-allocation decision, MAS starts by calculating
expected returns on capital. The expected return on fixed-income investments
depends on the real interest rate and the steepness of the yield curve. MAS then
measures the risk-adjusted return an investor can expect to earn by investing in
the equity market versus the return he can expect to earn by investing in
fixed-income securities; the difference between these two expected returns
represents the equity risk premium. Measurement of the risk premium enables MAS
to determine whether the Portfolio should favor equities or fixed-income
securities; a higher premium would generally lead to a greater focus on
equities, while a lower premium would lead to an emphasis on fixed-income
securities. Asset-allocation decisions couple measures of value with economic
analysis. MAS's economic analysis focuses on fiscal and monetary policy and
prospective levels of inflation.
During fiscal 1996, the Portfolio returned less than its custom benchmark
composed 60% of the S&P 500 and 40% of the Salomon Broad Index. Value-added
relative to the benchmark came from a higher-than-index exposure to equities,
but this was more than offset by security selection within the equity portion of
the portfolio. Security selection and duration strategy in the fixed-income
portion of the Portfolio added to relative performance.
The Portfolio started the fiscal year with an overweight position in equities,
but with a defensive equity portfolio. Expected returns for stocks and bonds
pointed to equities offering better value than bonds, but high absolute
valuations created concern about overall stock market returns. Therefore, as the
market continued to rally, the equity portion of the Portfolio underperformed.
[Photograph]
PHOTO
Left to right: Joe Braccia, Gerry Barth
42
<PAGE>
Throughout the fiscal year, as equities outperformed bonds, MAS reduced
positions to better reflect relative values. During the third quarter of the
fiscal year, the equity position was further reduced as expected returns
relative to bonds had become less attractive. At fiscal year-end, the Portfolio
had higher-than-benchmark investments in fixed-income securities and slightly
higher-than-index interest-rate exposure. The Portfolio was underweight
equities, reflecting concern about the profit outlook for the market and
relatively high valuations.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Year ending September 30
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1993 1994
- -----------------------------------------------------------------------------------------------------------------------------------
=========
12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
-------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Balanced $ 1,000 $ 1,034 $ 1,048 $ 1,083 $ 1,104 $ 1,069 $ 1,060 $ 1,085 $ 1,082 $ 1,157 $ 1,247
S&P 500 $ 1,000 $ 1,044 $ 1,049 $ 1,076 $ 1,101 $ 1,059 $ 1,064 $ 1,116 $ 1,115 $ 1,224 $ 1,341
Salomon Broad $ 1,000 $ 1,042 $ 1,071 $ 1,099 $ 1,099 $ 1,068 $ 1,058 $ 1,064 $ 1,068 $ 1,122 $ 1,191
=========
INCEPTION
DATE
</TABLE>
- -------------------------------------------------------------------------
X-AXIS LABELS: 1995 1996
- -------------------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
MAS Funds Balanced $ 1,317 $ 1,378 $ 1,431 $ 1,473 $ 1,494
S&P 500 $ 1,447 $ 1,534 $ 1,617 $ 1,689 $ 1,742
Salomon Broad $ 1,213 $ 1,266 $ 1,244 $ 1,250 $ 1,273
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
MAS S&P 500 Salomon
Balanced Index Broad Index
------------------------------------------
One Year 13.47% 20.33% 4.94%
Since Inception 11.31% 15.95% 6.65%
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 Balanced Portfolio commenced operations on 12/31/92. All returns are
compared to the S&P 500 Index and the Salomon Broad Investment Grade Index,
both unmanaged market indices.
43
<PAGE>
Balanced
MULTI-ASSET-CLASS PORTFOLIO
The Multi-Asset-Class Portfolio provides global asset allocation among U.S. and
foreign stocks, bonds and high-yield securities for U.S. investors. Miller
Anderson & Sherrerd actively shifts assets as relative values and risks change
and manages diversification and risk control across all five asset classes.
Diversification across this wide array of asset types offers a risk/return
profile that historically has been more attractive than balanced portfolios
consisting only of domestic stocks and bonds.
Management of the Portfolio incorporates expertise from MAS's entire investment
team. Members of the domestic equity, international equity, domestic
fixed-income and international fixed-income teams comprise the MAS Asset
Allocation Committee, which also includes representatives from the
interest-rate, economic, and currency-management teams. The Asset Allocation
Committee evaluates the relative risks and returns of broad asset classes and
sectors and makes strategic asset allocation decisions. The portfolio management
team then makes decisions about portfolio composition and structure, drawing on
the strategies employed by MAS's product teams for each of the five asset
classes represented in the Portfolio.
The investment process consists of five interrelated decisions: allocation among
global asset classes, country allocation, allocation to equities versus
fixed-income securities within markets, currency exposures, and value
determinations within markets. Asset-allocation decisions couple measures of
value with economic analysis, focusing on fiscal and monetary policy,
prospective levels of inflation, and political stability.
In making global asset-allocation decisions, MAS measures risk-adjusted returns
in each country's equity market versus its fixed-income market; the difference
between these two expected returns represents the equity risk premium. A higher
premium would generally lead to a greater focus on equities, while a lower
premium would favor fixed-income securities. MAS then reviews the equity risk
premia in aggregate to determine whether to favor equities or fixed-income
securities globally.
Country-allocation decisions are based on the belief that investors generally
require a higher return to invest in countries with relatively higher risks.
Using an assessment of each country's risk-adjusted expected return to capital,
MAS selects markets that offer higher expected returns. While MAS generally
avoids investing in countries with low returns on capital, it also distinguishes
between the opportunities in each country's fixed-income and equity markets,
favoring equity markets with high risk premia relative to the country's history
and to other countries and fixed-income markets that offer high real interest
rates and high premia for extending maturity (steep yield curves).
While currency valuations help shape MAS's view of the relative value of
non-dollar investments and thus influence the Portfolio's country allocations,
currency exposure is viewed as a separate decision. The degree of currency
exposure is based on MAS's analysis of deviations from purchasing-power parity,
with particular attention directed towards over- or under-valuation that cannot
be explained by differences in real interest rates. Decisions regarding value
within each country's stock and bond markets are made by members of the MAS
management team for that asset class.
During fiscal 1996, the Portfolio performed well against its custom benchmark
composed of 50% U.S. equities, 14% foreign equities, 24% U.S. fixed-income, 6%
foreign fixed-income, and 6% high yield. Value added relative to the benchmark
came from a higher-than-index exposure to equities and high-yield debt, exposure
to emerging-market debt, and security selection in the fixed-income and
international equity portions of the portfolio. Currency hedging also added
value, while security selection in U.S. stocks detracted from relative
performance.
44
<PAGE>
The Portfolio started the fiscal year with overweight positions in high yield
and emerging market debt, international equities, and non-U.S. bonds. Yield
spreads of high yield and emerging market debt relative to U.S. Treasuries were
very attractive and more than compensated investors for the higher risk of these
asset classes. International equities offered investors higher expected returns
than U.S. stocks, but as the year progressed, higher actual returns in local
currencies were partially offset by a rally in the dollar against the Japanese
yen and European currencies. Also, non-U.S. bonds offered significantly higher
real interest rates than U.S. bonds.
Throughout the fiscal year, MAS reduced positions in top-performing asset
classes to capitalize on market gains and reflect changed relative values.
During the third quarter, MAS reduced the equity position as expected returns
relative to bonds became less attractive, and shifted assets from international
bonds to U.S. bonds as real interest rates converged on U.S. levels. Yield
spreads for high yield bonds and emerging market debt relative to U.S.
Treasuries moved to lower-than-average levels, also leading to a reduction of
those positions.
At year-end, the Portfolio had higher-than-benchmark investments in
international equities and in high yield bonds, though both have been reduced
from the levels held during fiscal 1996. The Portfolio ended the year
significantly underweight in U.S. equities, reflecting concern about the profit
outlook and relatively high valuations, with other asset classes at
near-benchmark weights.
INVESTMENT RESULTS
Growth of a $1 Million Investment Since Inception
[The following table was represented as a line graph in the printed material.]
Dollars (000)
Fiscal Year ending September 30
<TABLE>
<CAPTION>
(1) Institutional Class - Inception Date 7/29/94
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
=========
7/29/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Multi-Asset-Class $ 1,000 $ 997 $ 986 $ 1,044 $ 1,125 $ 1,179 $ 1,229 $ 1,280 $ 1,326 $ 1,341
S&P 500 $ 1,000 $ 1,016 $ 1,015 $ 1,114 $ 1,221 $ 1,318 $ 1,397 $ 1,472 $ 1,538 $ 1,585
Salomon Broad $ 1,000 $ 987 $ 991 $ 1,041 $ 1,104 $ 1,125 $ 1,174 $ 1,154 $ 1,159 $ 1,181
MSCI EAFE-GDP (Weighted) $ 1,000 $ 981 $ 973 $ 990 $ 1,013 $ 1,046 $ 1,082 $ 1,113 $ 1,140 $ 1,137
=========
INCEPTION
DATE
</TABLE>
<TABLE>
<CAPTION>
(2) Investment Class - Inception Date 6/10/96
- ------------------------------------------------------------------------------------------------------------------------------------
X-AXIS LABELS: 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
=========
7/29/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAS Funds Multi-Asset-Class $ 1,000 $ 997 $ 986 $ 1,044 $ 1,125 $ 1,179 $ 1,229 $ 1,280 $ 1,325 $ 1,340
S&P 500 $ 1,000 $ 1,016 $ 1,015 $ 1,114 $ 1,221 $ 1,318 $ 1,397 $ 1,472 $ 1,538 $ 1,585
Salomon Broad $ 1,000 $ 987 $ 991 $ 1,041 $ 1,104 $ 1,125 $ 1,174 $ 1,154 $ 1,159 $ 1,181
MSCI EAFE-GDP (Weighted) $ 1,000 $ 981 $ 973 $ 990 $ 1,013 $ 1,046 $ 1,082 $ 1,113 $ 1,140 $ 1,137
=========
INCEPTION
DATE
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/96*
<TABLE>
<CAPTION>
------------------------------
MAS Multi-Asset-Class S&P 500 Salomon MSCI EAFE
Institutional(1) Investment(2) Index Broad Index GDP Weighted
------------------------------- Index
<S> <C> <C> <C> <C> <C>
One Year 13.75% 13.66% 20.33% 4.94% 8.67%
Since Inception 14.48% 14.43% 23.63% 7.96% 6.09%
</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.
(1) Represents an investment in the Institutional Class.
(2) Represents an investment in the Investment Class which commenced operations
6/10/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating
expenses for Institutional Class shares of the Multi-Asset-Class Portfolio
from exceeding 0.58% of average daily net assets. The Adviser also waived a
portion of its advisory fees for Investment Class shares of the Portfolio.
Returns presented include the effects of these waivers and reimbursements.
If such waivers and reimbursements had not been made, the actual returns
would have been lower.
* The Multi-Asset-Class Portfolio commenced operations on 7/29/94. All
returns are compared to the S&P 500 Index, the Salomon Broad Investment
Grade Index and the Morgan Stanley Capital International EAFE-GDP Weighted
Index, all unmanaged market indices.
45
<PAGE>
[This page intentionally left blank]
46
<PAGE>
MAS INVESTMENT SERVICES TEAM
Investment
Robert E. Angevine Abhi Y. Kanitkar
Arden C. Armstrong, CFA Nicholas J. Kovich, CFA
Richard M. Behler Steven K. Kreider, PhD, CFA
Thomas L. Bennett, CFA Michele A. Kreisler, PhD
John D. Connolly, CFA Michael Kushma
Timothy G. Connors, CFA Gordon Loery, CFA
Boykin Curry Angelo G. Manioudakis
Bradley S. Daniels, CFA Robert J. Marcin, CFA
Kenneth B. Dunn, PhD Paul F. O'Brien, PhD
Paul A. Durose James M. Olness
Hassan Elmasry, CFA Scott F. Richard, DBA
Stephen F. Esser, CFA Christian G. Roth, CFA
William B. Gerlach, CFA Gary G. Schlarbaum, PhD, CFA
J. David Germany, PhD Roberto M. Sella
Benjamin J. Gord Horacio A. Valeiras, CFA
Ellen D. Harvey, CFA A. Morris Williams Jr., CFA
Gary D. Haubold, CFA Dean Williams
James J. Jolinger Richard B. Worley
Client Service
Gerry Barth John D. Hevner, CFA
Glenn E. Becker Tracey H. Ivey, CFA
Marjorie A. Bennett Helene Kennedy
Mary Jane Bobyock, CFA Yuri Khalif
Joseph A. Braccia, CFA Laura G. Kirkpatrick
Justin G. Bullion, CFA Katharine E. McCoid
Scott A. Burney, CFA James J. Manley
Janet E. Cauley Lisa A. Marlin
Mari M. Chazen Mary Ann Milias
Marc Crespi James A. Morrissey
Mimi K. Drake Kim Savander
Kathryn J. Engebretson, PhD,CFA Angela Tenga, PhD
Alexis E. McCarthy Elizabeth A. Vale, CFA
W. Blair Garff Marna C. Whittington, PhD
Robert L. Hagin, PhD
MAS Funds Client Service Administration
Jeffrey L. Alt Marion S. Mitchell
Alisa M. Attardi Carol N. Neilson
Mark Babiec Barry A. Siegel
Jeanie A. Krepfle Andrea E. Silverman
Susan M. Mislick
47
<PAGE>
[This page intentionally left blank]
48
<PAGE>
MAS FUNDS TRUSTEES AND OFFICERS
The following is a list of the Trustees and the principal executive officers of
the Fund and a brief statement of their present positions and principal
occupations during the past five years:
THOMAS L. BENNETT, CFA*
Chairman of the Board of Trustees; Portfolio Manager and member of the Executive
Committee, Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution,
Inc. and Morgan Stanley Universal Fund, Inc.; Managing Director, Morgan Stanley
& Co. Incorporated.
JOSEPH P. HEALEY
Trustee; Headmaster, Haverford School; formerly: Dean, Hobart College; Associate
Dean, William & Mary College.
JOSEPH J. KEARNS
Trustee; Vice President and Treasurer, The J. Paul Getty Trust; Director,
Electro Rent Corporation; Trustee, Southern California Edison Nuclear
Decommissioning Trust; Director, The Ford Family Foundation.
VINCENT R. McLEAN
Trustee; Director, Alexander and Alexander Services, Inc., Director, Legal and
General America, Inc., Director, William Penn Life Insurance Company of New
York; formerly Executive Vice President, Chief Financial Officer, Director and
Member of the Executive Committee of Sperry Corporation (now part of Unisys
Corporation).
C. OSCAR MORONG, JR.
Trustee; Managing Director, Morong Capital Management; Director, Ministers and
Missionaries Benefit Board of American Baptist Churches, The Indonesia Fund, The
Landmark Funds; formerly Senior Vice President and Investment Manager for CREF,
TIAA-CREF Investment Management, Inc.
JAMES D. SCHMID
President; Head of Mutual Funds, Miller Anderson & Sherrerd, LLP; Director, MAS
Fund Distribution, Inc.; Chairman of the Board of Directors, The Minerva Fund,
Inc.; Principal, Morgan Stanley & Co. Incorporated.
LORRAINE TRUTEN, CFA
Vice President; Head of Mutual Fund Services, Miller Anderson & Sherrerd, LLP;
President, MAS Fund Distribution, Inc.; Principal, Morgan Stanley & Co.
Incorporated.
DOUGLAS W. KUGLER, CFA
Treasurer; Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP.;
Vice President, Morgan Stanley & Co. Incorporated.
JOHN H. GRADY, JR.
Secretary; Partner, Morgan Lewis & Bockius, LLP.
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the Investment Company Act of 1940, as amended.
This report should be preceeded or accompanied by a prospectus.
MAS Fund Distribution, Inc. serves as General Distribution Agent for MAS Funds.
49
<PAGE>
MILLER ANDERSON & SHERRERD
MISSION STATEMENT
Miller Anderson & Sherrerd strives to meet or exceed clients' long-term
investment objectives by providing a comprehensive array of investment
services, characterized by enduring client relationships and superior
investment results.
In pursuing this mission we:
o Listen attentively to our clients
o Communicate clearly and concisely how well our investment strategies and
results are fulfilling our clients' investment objectives
o Manage the growth of the firm to preserve and enhance the quality of our
investment services
o Invest continuously in people and technology to remain at the intellectual
and technological frontier of our industry
o Maintain a culture and work environment that promote teamwork and enable us
to attract and retain the highest caliber of people, and to foster their
growth and satisfaction
o Uphold the highest standards of ethics and integrity
We measure our success through our enduring client relationships and
long-term investment results.
<PAGE>
MAS
- ---------
MAS FUNDS
MILLER
ANDERSON
& SHERRERD, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
Investment Adviser: (610) 940-5000
MAS Funds: (800) 354-8185
