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1997 ANNUAL REPORT
[MAS FUNDS LOGO]
<PAGE> 2
MILLER ANDERSON & SHERRERD
Mission Statement
Miller Anderson & Sherrerd, LLP 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:
- Listen attentively to our clients
- Communicate clearly and concisely how well our investment strategies
and results are fulfilling our clients' investment objectives
- Manage the growth of the firm to preserve and enhance the quality of
our investment services
- Invest continuously in people and technology to remain at the
intellectual and technological forefront of our industry
- 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
- Uphold the highest standards of ethics and integrity
We measure our success through our enduring client relationships and long-term
investment results.
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MAS FUNDS
Table of Contents
<TABLE>
<S> <C>
TO OUR SHAREHOLDERS...........................................................4
EQUITY
Value Portfolio.......................................................6
Equity Portfolio......................................................8
Small Cap Value Portfolio............................................10
International Equity Portfolio.......................................12
Mid Cap Growth Portfolio.............................................14
Mid Cap Value Portfolio..............................................16
Emerging Markets Portfolio...........................................18
FIXED INCOME
Fixed Income Portfolio...............................................20
Domestic Fixed Income Portfolio......................................22
High Yield Portfolio.................................................24
Cash Reserves Portfolio..............................................26
Fixed Income Portfolio II............................................28
Mortgage-Backed Securities Portfolio.................................30
Limited Duration Portfolio...........................................32
Special Purpose Fixed Income Portfolio...............................34
Municipal Portfolio..................................................36
PA Municipal Portfolio...............................................38
Global Fixed Income Portfolio........................................40
International Fixed Income Portfolio.................................42
Intermediate Duration Portfolio......................................44
BALANCED
Balanced Portfolio...................................................46
Multi-Asset-Class Portfolio..........................................48
TRUSTEES AND OFFICERS........................................................51
MAS INVESTMENT
SERVICES TEAM................................................................52
</TABLE>
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MAS FUNDS
To Our Shareholders
[PICTURE]
Fiscal 1997 was an extraordinary period for investing, closing the third
consecutive year of double-digit U.S. stock market returns. During this same
period of high absolute market returns, eighteen out of the twenty-two MAS Funds
Portfolios presented in this report outperformed their market indices. The table
presented on the following page provides a summary of how portfolios in every
asset class have produced outstanding results for our shareholders.
Equally important, we do not take the returns of this past fiscal year for
granted. MAS Funds remains focused on the investing principles that have proved
effective during both rising and falling markets. The table provided on the next
page illustrates that seventy-four percent of the MAS Funds portfolios rated by
Morningstar have been awarded the coveted "Four- and Five-Star Ratings" based on
their independent analysis of risk and return over the long-term. Many mutual
funds have the objective of seeking attractive returns over a full market cycle.
Many fewer advisers to mutual funds have the twenty-eight years of investing
experience Miller Anderson & Sherrerd brings to MAS Funds.
THE HISTORY OF MILLER ANDERSON & SHERRERD--
INVESTMENT ADVISER TO MAS FUNDS
MAS was founded in 1969 by a group of investors who wanted to realize their
vision of the ideal investing environment. Then as today, every MAS investing
approach and strategy is developed by a team of investors, working together to
analyze security values in the context of thorough economic and fundamental
research. The team approach avoids the pitfalls of a "star" system where
shareholders' investment results are dependent on the presence and success or
failure of an individual. MAS's client service teams work closely with each
investment group to provide superior services for Fund investors.
HIGHLIGHT ON RETIREMENT INVESTING
Many institutions invest in MAS Funds for a defined benefit pension plan,
endowment or foundation. With the growing importance of defined contribution
plans, MAS Funds has developed a variety of programs to provide access for plan
participants to its domestic and international equity, fixed-income and balanced
portfolios. To maintain our focus on providing investment services to
institutional investors, the Fund has entered into partnership programs with
recordkeeping firms. These partnerships give plan sponsors access to premier
recordkeepers with the relationship management and investment services they have
come to expect when investing in MAS Funds.
Providing the highest quality defined contribution plan services is an important
part of our commitment to institutional and fiduciary investors. Please call us
at 1-800-354-8185 if we can provide more information about MAS Funds or the
information contained in this report.
Sincerely,
/s/ THOMAS L. BENNETT
Thomas L. Bennett
Chairman
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MAS FUNDS THAT OUTPERFORMED THEIR BENCHMARKS
For periods ending September 30, 1997
<TABLE>
<CAPTION>
FISCAL 1997 5-YEAR 10-YEAR/SINCE INCEPTION
-------------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
EQUITY PORTFOLIOS 3 OF 5 60% 3 OF 4 75% 4 OF 5 80%
INTERNATIONAL EQUITY PORTFOLIOS 2 OF 2 100% 0 OF 1 0% 2 OF 2 100%
FIXED-INCOME PORTFOLIOS * 10 OF 11 91% 7 OF 8 88% 11 OF 11 100%
INTERNATIONAL FIXED-INCOME PORTFOLIOS 2 OF 2 100% - - 2 OF 2 100%
BALANCED PORTFOLIOS ** 1 OF 2 50% - - 0 OF 2 0%
TOTAL 18 OF 22 82% 10 OF 13 77% 19 OF 22 86%
</TABLE>
* While the PA Municipal Portfolio outperformed the Lehman 5-Year Municipal
Index shown in this report, it did not outperform an unmanaged index
comprised of the Lehman Long Municipal Index from 10/1/92 to 3/31/96 and
50% Lehman 10-Year Municipal Index and 50% Lehman 5-Year Municipal Index
thereafter, as described in its Prospectus, for fiscal 1997.
** While the Balanced Portfolio outperformed the Salomon Broad Investment
Grade Index shown in this report, it did not outperform an unmanaged index
comprised of 60% S&P 500 Index and 40% Salomon Broad Investment Grade
Index, as described in its Prospectus, for fiscal 1997 and since the
Portfolio's inception on 12/31/92. While the Multi-Asset-Class Portfolio
outperformed the MSCI EAFE-GDP Weighted Index and the Salomon Broad
Investment Grade Index shown in this report, it did not outperform an
unmanaged index comprised of 50% S&P 500 Index, 24% Salomon Broad
Investment Grade Index, 14% MSCI EAFE-GDP Weighted Index, 6% Salomon High
Yield Index and 6% Salomon World Government Bond Ex-U.S. Index, as
described in its Prospectus, since the Portfolio's inception on 7/29/94.
MORNINGSTAR RATINGS FOR MAS FUNDS#
For the period ending September 30, 1997
<TABLE>
<CAPTION>
FUNDS RATED BY
MORNINGSTAR FUNDS RATED 4 STAR FUNDS RATED 5 STAR
--------------- ------------------ ------------------
<S> <C> <C> <C>
EQUITY PORTFOLIOS 4 1 2
INTERNATIONAL EQUITY PORTFOLIOS 1 - -
FIXED-INCOME PORTFOLIOS 10 7 3
INTERNATIONAL FIXED-INCOME PORTFOLIOS 2 - -
BALANCED PORTFOLIOS 2 1 -
TOTAL 19 9 5
</TABLE>
# Morningstar, Inc. assigns ratings to investment companies based on the
Firm's proprietary star-based rating system. Under this system, Morningstar
assigns a fund anywhere from one to five stars based upon a combination of
performance (three-, five- and ten-year time periods, when available) and
risk, assessed together to form a comprehensive evaluation. The top 10% of
each class receives five stars and funds falling in the next 22.5% receive
four stars. A Morningstar rating is not a predictor of future performance
and does not guarantee that a fund will perform at its past levels in the
future.
Morningstar, Inc. currently rates nineteen of the twenty-two MAS Funds
portfolios. Morningstar, Inc. requires that a mutual fund be in existence
for a minimum of three years in order to be rated. The Mid Cap Value and
Emerging Markets Portfolios are not yet rated. The Cash Reserves Portfolio
is not rated because Morningstar, Inc. does not rate money market funds.
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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 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 ended September 30, 1997, the Value Portfolio once again
outperformed its benchmark, returning 41.2% versus 40.5% for the S&P 500. Stock
selection contributed the most to the Portfolio's strong relative and absolute
performance results, with sector selection also acting as a positive
contributor. The Portfolio's holdings in cash equivalent investments penalized
results somewhat, as the fiscal year witnessed another strong move upward in the
broad stock market indices and cash proved to be an underperforming asset.
For most of the fiscal year, the equity market maintained a fairly narrow focus,
with the so-called "New Nifty-Fifty" stocks accounting for most of the market's
performance. In general, these larger, growth-oriented companies tended to
outperform smaller companies or those which exhibited greater economic or
interest rate sensitivity. The Value Portfolio's disciplined approach to stock
selection which is based on attractive, low price-to-earnings valuation
characteristics, required it to maintain significant underexposure to this
narrow group of stocks. In fact, the Portfolio had significant underweightings
in three of the four best performing sectors in the S&P 500 (health care,
technology and beverages and personal care), during most of the year because of
these valuation considerations. As the fiscal year ended, market rotation away
from traditional growth sectors and toward financial services and consumer
durables enhanced the Portfolio's relative performance.
The Portfolio's largest sector commitment is to heavy industry, evidenced by
large positions in Cummins Engine, Case, Aeroquip-Vickers, Eaton, Harnischfeger,
Parker-Hannifin, and Kennametal. The consumer durable sector represents the
fund's second largest overweighting with significant positions in Ford, General
Motors, Goodyear, and Owens Corning. Financial service stocks represent the
third largest overweighting, although exposure has been reduced due to supe-rior
relative price performance and subsequent upward revaluation. Sector
underweightings remain concentrated in the higher growth segments of the market
as well as in the utility industries. Health care, consumer staples, consumer
Perhaps the greatest strategic advantage of this approach is that the
sell discipline mandates the sale of any stock that satisfies one or
more sell criteria--price appreciation, earnings deterioration, or
negative fundamental change.
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services, and technology remain underrepresented due to excessive valuations.
MAS continues to be somewhat cautious regarding the equity markets in general as
evidenced by a cash position of 15%. The recent rally in bonds combined with
high expectations for third quarter profits and healthy cash flows into equities
have driven most market indices to new highs. Valuations, at record levels in
the beginning of the quarter, expanded even more during the September period.
The Portfolio continues to invest opportunistically, but it will require a
significant market correction or sector rotation to comfortably employ its cash
reserves.
VALUE
Growth of a $1 Million Investment
Over 10 Years
<TABLE>
<CAPTION>
Fiscal years S&P 500 MAS FUNDS VALUE
ending September 30
Dollars (000)
<S> <C> <C>
'87 9/30/87 1000 1000
12/31/87 775 790
3/31/88 819 875
6/30/88 873 944
'88 9/30/88 876 946
12/31/88 903 966
3/31/89 967 1039
6/30/89 1053 1106
'89 9/30/89 1166 1216
12/31/89 1190 1166
3/31/90 1154 1129
6/30/90 1226 1163
'90 9/30/90 1058 974
12/31/90 1153 1094
3/31/91 1320 1281
6/30/91 1317 1305
'91 9/30/91 1388 1418
12/31/9 1504 1506
3/31/92 1466 1507
6/30/92 1494 1543
'92 9/30/92 1541 1599
12/31/92 1619 1726
3/31/93 1689 1823
6/30/93 1697 1833
'93 9/30/93 1741 1914
12/31/93 1782 1973
3/31/94 1714 1943
6/30/94 1721 1970
'94 9/30/94 1805 2056
12/31/94 1805 2042
3/31/95 1981 2261
6/30/95 2170 2525
'95 9/30/95 2343 2727
12/31/95 2484 2833
3/31/96 2617 3032
6/30/96 2734 3102
'96 9/30/96 2819 3229
12/31/96 3054 3616
3/31/97 3136 3676
6/30/97 3683 4213
4548
4550
'97 9/30/97 3959 4560
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS VALUE
------------------------------------------------------------- S&P 500
INSTITUTIONAL + INVESTMENT ++ ADVISER ++ INDEX
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 41.25% 41.01% 40.87% 40.46%
FIVE YEARS 23.31% 23.26% 23.25% 20.77%
TEN YEARS 16.39% 16.36% 16.35% 14.75%
</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.
+ Represents an investment in the Institutional Class.
++ 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.
+++ 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.
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 Investment Class of shares of the Value Portfolio from exceeding 0.80%
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.
* All returns are compared to the S&P 500 Index, an unmanaged market index.
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MAS FUNDS/EQUITY
Equity Portfolio
The Equity Portfolio is Miller Anderson & Sherrerd's core-strategy 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 through broad market exposure, and to achieve above-average, consistent
returns compared to other managers and the broad market averages over long
periods of time.
This fiscal year-end falls in the second market cycle since the Portfolio's
inception in 1984. During the first market cycle from September 30, 1987 to June
30, 1990, the Portfolio significantly outperformed the S&P 500 with an
annualized return of 8.9% versus 7.7%. For the current cycle which began in July
of 1990, the Portfolio ended the fiscal year strongly by narrowing its gap with
the S&P 500 to 50 basis points with an annualized return of 17.0% versus 17.5%.
This strong performance is particularly significant as the recent part of this
cycle has been an extraordinary bull market which has decidedly favored stocks
held in the index.
To compare results with other managers, MAS looks at the Growth and Growth &
Income mutual fund indices calculated by Lipper Investment Services, Inc. For
returns measured quarterly since its inception through this fiscal year, the
Portfolio has outperformed the average in both categories in 100% of all
ten-year trailing periods, in 87% of all five-year trailing periods, and in 63%
of all three-year trailing periods, including the last six in a row.
The MAS equity team is charged with upholding this superb investing record
produced consistently over the past twenty-eight years of equity investing at
MAS. Earlier this decade, the group felt compelled to change its long-standing
approach and divide responsibility among separate teams for stock selection,
sector allocation and risk control. The result of this change was disappointing,
and at the beginning of this fiscal year the decision was reversed.
Responsibility is again integrated into a single, market-responsive team of
individuals. The individuals on this team, like those on earlier MAS equity
teams, focus on making decisive investment choices, within a strategic view of
sector allocation and risk control determined collectively. The positive impact
on performance has been demonstrated by the Portfolio outperforming the S&P 500
in two of the past four quarters, amidst a market led by feverish investment in
the biggest and best known companies in the Index.
Stock selection in the Portfolio is based on both quantitative and qualitative
inputs. Each stock in MAS's investable universe is ranked versus its peers based
on valuation and business dynamics. Those stocks that appear attractive are then
subject to rigorous fundamental review. Sector allocation refers to the
Portfolio's sector weightings versus the S&P 500. A sector is overweighted or
underweighted versus the Index based on the same rigorous approach that governs
the stock-selection process, i.e., analysis of valuation and trends in business
dynamics. MAS controls the level of portfolio risk and volatility by adjusting
the cash position, investing in all economic sectors, holding a large number of
widely diversified stocks, limiting single stock concentration, and limiting
variance of sector weights from the index. Each of these controls is monitored
and reviewed regularly.
During fiscal 1997, the Portfolio was progressively overweighted in
economically-sensitive stocks in the heavy industry, consumer durables and
consumer service sectors, and was neutral or underweighted in other sectors,
producing strong results. The rigorous valuation discipline of MAS's equity team
prevented the Portfolio from investing in the increasingly overvalued segments
of the market, producing cash reserves in the Portfolio. As a result, while the
return for the stocks held in the Portfolio very nearly matched the spectacular
return of the S&P 500 for the year, the higher-than-normal frictional cash
position caused the Portfolio to trail the S&P 500. The cash position served the
Portfolio well during the August market decline, contributing to the Portfolio
outperforming the S&P 500 by 200 basis points during that month.
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EQUITY
Growth of a $1 Million Investment
Over 10 Years
<TABLE>
<CAPTION>
Fiscal years S&P 500 MAS FUNDS EQUITY
ending September 30
Dollars (000)
<S> <C> <C>
'87 9/30/87 1000 1000
12/31/87 775 825
3/31/88 819 858
6/30/88 873 923
'88 9/30/88 876 916
12/31/88 903 933
3/31/89 967 1003
6/30/89 1053 1074
'89 9/30/89 1166 1218
12/31/89 1190 1197
3/31/90 1154 1160
6/30/90 1226 1265
'90 9/30/90 1058 1076
12/31/90 1153 1196
3/31/91 1320 1400
6/30/91 1317 1400
'91 9/30/91 1388 1508
12/31/91 1504 1674
3/31/92 1466 1624
6/30/92 1494 1624
'92 9/30/92 1541 1682
12/31/92 1619 1805
3/31/93 1689 1835
6/30/93 1697 1820
'93 9/30/93 1741 1868
12/31/93 1782 1925
3/31/94 1714 1861
6/30/94 1721 1874
'94 9/30/94 1805 1945
12/31/94 1805 1934
3/31/95 1981 2100
6/30/95 2170 2290
'95 9/30/95 2343 2453
12/31/95 2484 2573
3/31/96 2617 2730
6/30/96 2734 2840
'96 9/30/96 2819 2857
12/31/96 3054 3103
3/31/97 3136 3176
6/30/97 3683 3649
3943
3956
'97 9/30/97 3959 3959
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS EQUITY
------------------------------------- S&P 500
INSTITUTIONAL + INVESTMENT ++ INDEX
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 38.46% 38.12% 40.46%
FIVE YEARS 18.66% 18.58% 20.77%
TEN YEARS 14.74% 14.71% 14.75%
</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.
+ Represents an investment in the Institutional Class.
++ 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 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 Investment Class of shares of the Equity Portfolio from exceeding 0.80%
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.
* All returns are compared to the S&P 500 Index, an unmanaged market index.
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MAS FUNDS/EQUITY
Small Cap Value Portfolio
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 equity professionals who specialize 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.
[PICTURE]
FROM LEFT: Brian Towsen, Berth Cullen, and Ted Kurth
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. The last fiscal quarter was the first quarter where
small-cap stocks provided significantly higher returns than large-cap stocks
since the third calendar quarter of 1993. MAS believes a trend of outperformance
by the small-cap segment of the equity market may continue in the coming fiscal
year. This view is supported by the current strength of the dollar and the
recent changes in capital-gains tax rates.
For the past year, the Portfolio's strong results were produced by positive
stock selection across a broad range of industries. Furthermore, an
overweighting of the energy services sector, established in 1996 and maintained
throughout 1997, has continued to have a positive impact on returns. After a
brief market correction in the first calendar quarter of 1997, the small-cap
market made a sharp recovery in late April and climbed to new all-time highs by
the end of September. The Portfolio earned a return of 18.3% for the quarter
ending September 30, exceeding the Russell 2000 benchmark return by 3.4%. This
strong year-end
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.
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<PAGE> 12
performance was largely due to stock selection. Stocks with large gains during
the final fiscal quarter included Maverick Tube (+120%), Quantum (+89%), Global
Industries (+71%), Marine Drilling (+59%) and Vivus (+57%). These securities are
not necessarily representative of the Portfolio's current or future holdings.
This Portfolio is not currently being offered to new investors.
SMALL CAP VALUE
Growth of a $1 Million Investment
Over 10 Years
<TABLE>
<CAPTION>
Fiscal years RUSSELL 2000 MAS FUNDS SMALL CAP VALUE
ending September 30
(Dollars 000)
<S> <C> <C>
'87 9/30/87 1000 1000
12/31/87 712 734
3/31/88 849 853
6/30/88 906 900
'88 9/30/88 896 885
12/31/88 890 891
3/31/89 958 963
6/30/89 1018 1018
'89 9/30/89 1084 1105
12/31/89 1030 1048
3/31/90 1007 1047
6/30/90 1045 1098
'90 9/30/90 789 800
12/31/90 829 874
3/31/91 1076 1153
6/30/91 1059 1159
'91 9/30/91 1146 1304
12/31/91 1211 1432
3/31/92 1302 1536
6/30/92 1213 1444
'92 9/30/92 1248 1488
12/31/92 1434 1758
3/31/93 1496 1795
6/30/93 1528 1869
'93 9/30/93 1662 2049
12/31/93 1705 2130
3/31/94 1660 2115
6/30/94 1595 2089
'94 9/30/94 1706 2214
12/31/94 1674 2177
3/31/95 1751 2218
6/30/95 1916 2364
'95 9/30/95 2105 2621
12/31/95 2150 2635
3/31/96 2260 2805
6/30/96 2373 3034
'96 9/30/96 2381 3250
12/31/96 2505 3561
3/31/97 2376 3528
6/30/97 2760 4115
'97 9/30/97 3171 4869
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS RUSSELL 2000
SMALL CAP VALUE INDEX
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 49.81% 33.17%
FIVE YEARS 26.75% 20.51%
TEN YEARS 17.15% 12.23%
</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.
* All returns are compared to the Russell 2000 Index, an unmanaged market
index.
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MAS FUNDS/EQUITY
International Equity Portfolio
The International Equity Portfolio provides a core vehicle for investing in
stocks from over 25 countries outside of the United States. Miller Anderson &
Sherrerd 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), the steepness of a region's yield curve (the difference
in levels between short- and long-term interest rates) and the 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.
[PICTURE]
TOP LEFT: Mary Jane Bobyock, Stephen Golding, SEATED: Tracey Ivey
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, 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 benchmark, the Morgan Stanley
Capital International World Ex-U.S. Index, by an average of 4.2% per year since
inception. During fiscal 1997, the results of the International Equity Portfolio
were exceptional: the Portfolio gained 23.2% compared to 13.0% for the index.
During the fiscal year, country allocation and stock selection were equally
responsible for value added relative to the benchmark. Greater-than-index
exposure to Southern European, Scandinavian, and Latin American markets,
combined with less-than-index exposure to Japanese and developed Asian markets
contributed positively to relative performance. A greater-than-index exposure to
emerging Asian markets, and a less-than-index exposure to Deutschemark-bloc
markets detracted from returns. Security selection in Japan, Germany,
Switzerland and the Netherlands added significantly to overall performance
throughout the year.
At fiscal year-end, the Portfolio is underweighted in Japan, as valuations are
still unattractive and business confidence remains disappointing. The fund is
overweighted in the United Kingdom, which offers good relative value compared to
other European countries. The U.K.'s stock market has benefited from a strong
economy and an increased probability of the country's membership in the European
Economic Monetary Union. The Portfolio continues to have no exposure to
Malaysia, where the currency crisis has led to poor corporate earnings estimate
revisions and a weaker economy.
12
<PAGE> 14
INTERNATIONAL EQUITY
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years MSCI WORLD MAS FUNDS
ending September 30 EX-U.S. INTERNATIONAL EQUITY
Dollars (000)
<S> <C> <C>
*11/25/88 1000 1000
'88 12/31/88 1002 1011
3/31/89 1007 1020
6/30/89 950 1033
'89 9/30/89 1065 1204
12/31/89 1114 1275
3/31/90 899 1164
6/30/90 980 1255
'90 9/30/90 778 1031
12/31/90 857 1078
3/31/91 920 1214
6/30/91 873 1184
'91 9/30/91 944 1249
12/31/91 960 1306
3/31/92 849 1275
6/30/92 866 1326
'92 9/30/92 875 1254
12/31/92 842 1262
3/31/93 942 1362
6/30/93 1035 1415
'93 9/30/93 1099 1525
12/31/93 1113 1800
3/31/94 1149 1697
6/30/94 1203 1689
'94 9/30/94 1210 1728
12/31/94 1195 1618
3/31/95 1218 1574
6/30/95 1230 1626
'95 9/30/95 1280 1670
12/31/95 1332 1718
3/31/96 1372 1776
6/30/96 1394 1834
'96 9/30/96 1395 1818
12/31/96 1423 1897
3/31/97 1401 1937
6/30/97 1583 2180
2232
'97 9/30/97 1577 2240
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS INTERNATIONAL EQUITY
--------------------------------------- MSCI WORLD
INSTITUTIONAL + INVESTMENT ++ EX-U.S. INDEX
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 23.16% 22.85% 13.02%
FIVE YEARS 12.30% 12.23% 12.51%
SINCE INCEPTION 9.54% 9.50% 5.28%
</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.
+ Represents an investment in the Institutional Class.
++ 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 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 Investment Class of shares of the International Equity Portfolio from
exceeding 0.90% 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 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.
13
<PAGE> 15
MAS FUNDS/EQUITY
Mid Cap Growth Portfolio
Miller Anderson & Sherrerd'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 those whose growth surpasses Wall Street analysts' estimates. MAS
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 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 sell discipline mandates an ongoing reevaluation of securities and produces
a portfolio that holds only those securities that are currently most attractive.
Sales can be triggered by meeting the following criteria: 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. Analysts are often more reluctant to lower
estimates than to raise them, therefore, 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 1997, the Portfolio delivered a return of 28.0% vs. 39.1% for its
benchmark, the S&P MidCap 400 Index. Last year was one of the most difficult
periods in recent memory for smaller capitalization growth investors. Through
the downdraft that began in June of 1996 and lasted until mid-April of 1997,
portfolio strategy remained disciplined, focusing on companies with strong
growth, positive analysts' earnings estimate revisions, and reasonable stock
price valuations. The sell discipline kept the fund out of some of the worst
performing issues during this time. The Portfolio used this period as an
opportunity to upgrade the quality of portfolio holdings. As a result, the
Portfolio experienced strong returns from mid-April through fiscal year end.
Over the course of the fiscal year, stock selection negatively impacted
performance, as value stocks outperformed their growth counterparts in almost
every sector. Industrial, retail and health care sectors were the Portfolio's
poorest-performing sectors. An underweight position in energy and financial
services stocks also dampened performance, while an underweight position in
electric utility stocks, another poorly-performing sector, helped performance.
Telecommunications and technology stocks were the star performers for the
fiscal year.
Although the Portfolio trailed the benchmark, its performance topped
competitors, particularly those with aggressive price momentum styles. The
return of 28.0% compares favorably to the Lipper Midcap Index which returned
24.8% for the fiscal year.
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
14
<PAGE> 16
telecommunications sector, MAS believes beneficiaries of regulatory changes and
emerging competitors to entrenched monopolies represent an excellent growth
opportunity. Technology stocks are significantly overweighted. The Portfolio is
underweighted in cyclical, financial, basic resource, and energy stocks because
relatively few companies within these sectors have met fundamental selection
criteria.
MID CAP GROWTH
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years S&P MID-CAP MAS FUNDS
ending September 30 400 MID CAP GROWTH
Dollars (000)
<S> <C> <C>
*3/30/90 1000 1000
3/31/90 1000 1000
6/30/90 1059 1122
'90 9/30/90 871 900
12/31/90 979 1097
3/31/91 1204 1327
6/30/91 1195 1347
'91 9/30/91 1309 1497
12/31/91 1470 1749
3/31/92 1463 1642
6/30/92 1417 1533
'92 9/30/92 1472 1540
12/31/92 1645 1800
3/31/93 1699 1769
6/30/93 1739 1819
'93 9/30/93 1826 2062
12/31/93 1875 2128
3/31/94 1804 2004
6/30/94 1738 1832
'94 9/30/94 1855 1994
12/31/94 1808 2013
3/31/95 1956 2127
6/30/95 2126 2300
'95 9/30/95 2334 2604
12/31/95 2367 2743
3/31/96 2513 3058
6/30/96 2585 3313
'96 9/30/96 2660 3354
12/31/96 2821 3258
3/31/97 2780 2956
6/30/97 3189 3565
4289
'97 9/30/97 3702 4295
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS MID CAP GROWTH
-------------------------------------- S&P MIDCAP
INSTITUTIONAL + ADVISER ++ 400 INDEX
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 28.05% 27.87% 39.15%
FIVE YEARS 22.77% 22.74% 20.25%
SINCE INCEPTION 21.44% 21.41% 19.05%
</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.
+ Represents an investment in the Institutional Class.
++ Represents an investment in the Adviser Class which commenced operations
1/31/97. 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.
* 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.
15
<PAGE> 17
MAS FUNDS/EQUITY
Mid Cap Value Portfolio
[PICTURE]
FROM LEFT: Jim Schmid, Marion Mitchell
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 equity professionals who specialize 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.
Equity markets moved dramatically higher this year due to strong economic and
earnings growth coupled with declining levels of inflation and interest rates.
Although valuations, as measured by price-to-earnings multiples, are now in
record territory, the mid-cap market is still cheap compared to the large-cap
market. The Portfolio remains fully invested. This policy proved particularly
useful following the correction in April.
The Portfolio beat its benchmark in all quarters, including the difficult fiscal
second quarter. Stock selection was the primary determinant of performance this
year, with support from under-weighting electric utilities and over-weighting
energy and business service stocks relative to the benchmark. For the fiscal
year, top performing stocks came from a variety of industries: Herman Miller
(+166%), Sullivan Dental (+131%), Noble Drilling (+115%), Franklin Resources
(+111%), Western Digital (+99%) and Air Express International (+94%). These
securities are not necessarily representative of the Portfolio's current or
future holdings.
Equity markets moved dramatically higher this year due to strong
economic and earnings growth coupled with declining levels of
inflation and interest rates.
16
<PAGE> 18
MID CAP VALUE
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years S&P MID-CAP MAS FUNDS
ending September 30 400 MID CAP VALUE
Dollars (000)
<S> <C> <C>
* 12/30/94 1000 1000
12/31/94 1000 1000
3/31/95 1082 1107
6/30/95 1176 1217
'95 9/30/95 1291 1345
12/31/95 1309 1327
3/31/96 1390 1446
6/30/96 1430 1545
'96 9/30/96 1472 1645
12/31/96 1561 1868
3/31/97 1538 1873
6/30/97 1764 2202
2647
'97 9/30/97 2048 2655
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS MID CAP VALUE
------------------------------------- S&P MIDCAP
INSTITUTIONAL + INVESTMENT ++ 400 INDEX
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 61.40% 61.05% 39.15%
SINCE INCEPTION 42.61% 42.46% 29.77%
</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.
+ Represents an investment in the Institutional Class.
++ 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 the Institutional and Investment Classes of shares of the Mid Cap Value
Portfolio from exceeding 0.88% and 1.10% respectively, 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 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.
17
<PAGE> 19
MAS FUNDS/EQUITY
Emerging Markets Portfolio
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 markets with 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 database to discern a market's true asset value, earnings power, and
industry-neutral price/earnings ratio.
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 liquidity measures such as the 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 securities are selected by conducting fundamental research on
securities screened for low valuations relative to cash flow or asset value and
improving business fundamentals. Management quality and integrity, strategic
position and operating environment are also considered. The Portfolio holds
approximately 45 securities in 14 markets.
During fiscal 1997, the Portfolio outperformed its benchmark due to both stock
selection and country allocation. Greater-than-index exposure to markets in
Russia, Mexico, Brazil, India and Hong Kong contributed to outperformance, along
with less-than-index exposure to markets in Malaysia, South Africa and the
Philippines. Stock selection added value in Brazil (Telebras), Mexico (Alfa,
Soriana), Korea and Thailand (country funds).
At fiscal year-end, the Portfolio had greater-than-index exposure to Latin
American markets, primarily Mexico and Brazil, and less-than-index exposure to
Asian markets, especially Malaysia and Taiwan. European exposure remains
concentrated in Russia, although the position was reduced after the run-up in
stock prices during 1997.
This fiscal year brought excellent returns from Latin America, where markets
rose by over 50 percent. Lower inflation and interest rates combined with strong
economic growth led to this significant market advance. Southeast Asia markets
were beset by the onset of a wave of currency devaluations. For years, Asian
countries have pegged their currencies to the U.S. dollar. This provided cheap
financing, which was used to overbuild property markets and overinvest in
infrastructure projects. The rise of the dollar against the yen and the Deutsche
mark over the past two years placed additional pressure on these currency pegs.
Thailand fought devaluation with high interest rates, but eventually succumbed
in the final fiscal
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.
18
<PAGE> 20
quarter. Malaysia, Indonesia and the Philippines followed the Thai devaluation
by allowing their currencies to depreciate against the dollar. The results of
pursuing this monetary strategy created a financial environment of high interest
rates and accumulated foreign currency debt which negatively affected earnings
in these markets. Therefore, the Portfolio benefited from a lower-than-benchmark
exposure to Southeast Asian markets and currencies for the past four months.
EMERGING MARKETS
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years MAS FUNDS EMERGING MARKETS MSCI EMERGING MARKETS FREE
ending September 30
Dollars (000)
<S> <C> <C>
* 2/28/95 1000 1000
3/31/95 1056 1004
6/30/95 1152 1101
'95 9/30/95 1163 1089
12/31/95 1118 1071
3/31/96 1183 1132
6/30/96 1311 1170
'96 9/30/96 1235 1123
12/31/96 1242 1113
3/31/97 1361 1202
6/30/97 1513 1294
'97 9/30/97 1459 1173
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS EMERGING MSCI EMERGING
MARKETS MARKETS FREE INDEX
- -------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 18.08% 4.46%
SINCE INCEPTION 15.71% 6.35%
</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 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.
19
<PAGE> 21
MAS FUNDS/FIXED INCOME
Fixed Income Portfolio
[PICTURE]
FROM LEFT: Joe Braccia, Mimi Drake, Jim Scott
The Fixed Income Portfolio is the core offering of the MAS Funds fixed-income
portfolios. Securities in this Portfolio include U.S. government bonds,
corporate bonds, mortgages, non-dollar 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.
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 generally 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.
The Portfolio's impressive long-term record reflects successful judgments about
these key decisions. For the past year, the return on the Portfolio was 175
basis points better than that of its benchmark. In general, U.S. interest rates
declined over the past year, and MAS's decision to maintain a level of
interest-rate risk greater than or equal to that of the
20
<PAGE> 22
benchmark helped performance. Several barbell strategies, involving
concentrations in short- and long-term instruments, also added value versus the
benchmark as the yield differential narrowed between short- and long-term rates.
In some instances, interest rate declines were even more significant outside the
U.S., and the Portfolio's use of non-dollar bonds on a currency-hedged basis
proved successful during the year. An overweighting in mortgages and security
selection within the corporate area, such as in the finance and
telecommunications sectors, also exerted a positive influence on returns as the
yield spreads on these instruments narrowed versus those of comparable U.S.
Treasury securities.
FIXED INCOME
Growth of a $1 Million Investment
Over 10 Years
<TABLE>
<CAPTION>
Fiscal Years SALOMON BROAD MAS FUNDS FIXED INCOME
Ending September 30
Dollars (000)
<S> <C> <C>
'87 9/30/87 1000 1000
12/31/87 1058 1056
3/31/88 1099 1099
6/30/88 1112 1112
'88 9/30/88 1134 1134
12/31/88 1143 1150
3/31/89 1156 1169
6/30/89 1248 1242
'89 9/30/89 1261 1239
12/31/89 1308 1279
3/31/90 1298 1253
6/30/90 1344 1304
'90 9/30/90 1358 1286
12/31/90 1426 1370
3/31/91 1464 1424
6/30/91 1490 1448
'91 9/30/91 1575 1558
12/31/91 1654 1665
3/31/92 1635 1630
6/30/92 1702 1710
'92 9/30/92 1775 1781
12/31/92 1780 1806
3/31/93 1854 1890
6/30/93 1905 1959
'93 9/30/93 1955 2035
12/31/93 1956 2057
3/31/94 1901 1992
6/30/94 1883 1940
'94 9/31/94 1893 1945
12/31/94 1900 1943
3/31/95 1997 2039
6/30/95 2119 2154
'95 9/30/95 2159 2221
12/31/95 2253 2313
3/31/96 2213 2307
6/30/96 2224 2335
'96 9/30/96 2266 2390
12/31/96 2334 2483
3/31/97 2322 2481
6/30/97 2406 2580
2658
2660
'97 9/30/97 2486 2664
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS FIXED INCOME
--------------------------------------------------------------- SALOMON
INSTITUTIONAL + INVESTMENT ++ ADVISER +++ BROAD INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 11.47% 11.28% 11.19% 9.72%
FIVE YEARS 8.39% 8.35% 8.33% 6.97%
TEN YEARS 10.30% 10.28% 10.27% 9.53%
</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.
+ Represents an investment in the Institutional Class.
++ Represents an investment in the Investment Class which commenced operations
10/15/96. 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.
+++ Represents an investment in the Adviser Class which commenced operations
11/7/96. 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.
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 Investment and Adviser Classes of shares of the Fixed Income Portfolio
from exceeding 0.68% and 0.78% respectively, 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.
* All returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
21
<PAGE> 23
MAS FUNDS/FIXED INCOME
Domestic Fixed Income Portfolio
The Domestic Fixed Income Portfolio invests only in dollar-denominated
fixed-income securities with a credit quality rating of BBB 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.
[PICTURE]
FROM LEFT: Jeffrey Alt, Susan Mislick, Ian Jamieson, Marc Balcer, Jim Toth
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
Port-folio purchases only those bonds that hold an investment grade rating or
are deemed by MAS to be of investment grade quality.
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 return on the Portfolio was 48 basis
points better than that of its benchmark. In general, U.S. interest rates
declined over the past year, and MAS's decision to maintain a level of
interest-rate risk greater than or equal to that of the benchmark helped
relative performance. Several barbell strategies,
22
<PAGE> 24
involving concentrations in short-and long-term instruments, also added value
versus the benchmark as the yield differential narrowed between short-and
long-term rates. An overweighting in mortgages and security selection within the
corporate area, such as in the finance and telecommunications sectors, also
exerted a positive influence on returns as the yield spreads on these
instruments narrowed versus those of comparable U.S. Treasury securities. The
Portfolio underperformed other MAS Funds fixed-income portfolios because it is
restricted from investing in non-U.S. and below investment grade corporate
bonds.
DOMESTIC FIXED INCOME
Growth of a $1 Million Investment
Over 10 Years
<TABLE>
<CAPTION>
Fiscal Years SALOMON BROAD MAS FUNDS DOMESTIC FIXED INCOME
Ending September 30
Dollars (000)
<S> <C> <C>
'87 9/30/87 1000 1000
12/31/87 1058 1056
3/31/88 1099 1096
6/30/88 1112 1106
'88 9/30/88 1134 1126
12/31/88 1143 1142
3/31/89 1156 1158
6/30/89 1248 1230
'89 9/30/89 1261 1229
12/31/89 1308 1270
3/31/90 1298 1248
6/30/90 1344 1295
'90 9/30/90 1358 1277
12/31/90 1426 1362
3/31/91 1464 1413
6/30/91 1490 1438
'91 9/30/91 1575 1545
12/31/91 1654 1655
3/31/92 1635 1617
6/30/92 1702 1701
'92 9/30/92 1775 1783
12/31/92 1780 1806
3/31/93 1854 1893
6/30/93 1905 1961
'93 9/30/93 1955 2034
12/31/93 1956 2054
3/31/94 1901 2011
6/30/94 1883 1972
'94 9/31/94 1893 1976
12/31/94 1900 1974
3/31/95 1997 2084
6/30/95 2119 2210
'95 9/30/95 2159 2259
12/31/95 2253 2346
3/31/96 2213 2302
6/30/96 2224 2313
'96 9/30/96 2266 2359
12/31/96 2334 2437
3/31/97 2322 2429
6/30/97 2406 2517
'97 9/30/97 2486 2599
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS DOMESTIC SALOMON
FIXED INCOME BROAD INDEX
- -------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 10.20% 9.72%
FIVE YEARS 7.83% 6.97%
TEN YEARS 10.02% 9.53%
</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 Domestic Fixed Income Portfolio from exceeding 0.50% of average daily
net assets. Returns presented include the effects of these waivers and
reimbursements. Returns for the period from 10/1/93 to 9/30/97 would have been
lower if such waivers and reimbursements had not been made.
* Inception date for the MAS Funds - Domestic Fixed Income Portfolio:
12/19/94; Select Fixed Income: 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. Pursuant to a vote of the
Portfolio's shareholders on May 1, 1997, the Portfolio's investment
policies were changed to allow limited investments in fixed-income
securities of domestic issuers rated BBBat the time of purchase. Therefore,
it is reasonable to expect that the Portfolio's performance pattern may be
somewhat altered. All returns are compared to the Salomon Broad Investment
Grade Index, an unmanaged market index.
23
<PAGE> 25
MAS FUNDS/FIXED INCOME
High Yield Portfolio
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 Miller Anderson and Sherrerd's high yield fixed-income team, which
conducts in-depth credit analysis of high-yield issuers and selects securities
that offer the most attractive valuation. The same team is responsible for
portfolio construction and risk control.
The MAS high yield team uses a disciplined, total-return-oriented investment
process to actively manage a diversified portfolio. To identify the most
efficient portfolio, MAS engages in fundamental analysis and valuation of
fixed-income securities. Individual securities are compared on the basis of
option-and credit-risk adjusted expected returns. A dynamic, forward-looking
credit analysis is the key input to this valuation. The investment management
team also manages overall interest-rate risk and economic sensitivity as well as
the integration of investment themes drawn from ongoing research.
[PICTURE]
FROM LEFT: Barry Siegel, Jeanie Krepfle, Mark Babiec
In fiscal 1997 the Portfolio outperformed its benchmark due to an overweighted
position in the telecommunications sector and superior security selection within
the telecommunications, cable television and retail sectors of the high-yield
markets. The Portfolio also benefited from selective investments in U.S.
dollar-dominated foreign-issued securities. Early in fiscal 1997 the Portfolio
increased its investment in attractive cable television bonds, as investors'
fears about competition from direct satellite broadcast television caused these
issues to underperform. Several key issuers responded to these pressures by
taking steps to improve their balance sheets and by investing in new
technologies that will increase their competitiveness. As these investments
subsequently outperformed, the Portfolio reduced its commitment to the cable
sector. In the retail sector, Kmart Corporation was the Portfolio's most
significant investment. Kmart's fixed-income securities benefited from a
continuing recovery in operating performance and improvement in balance sheet
strength. The Portfolio continued to build its commitment to the
telecommunications sector over the course of fiscal 1997, focusing on companies
most likely to benefit from the rising demand for voice and data services. Many
of these companies are newly able to compete with incumbent telephone companies
due to deregulation.
At the end of the fiscal year, the Portfolio maintained an average to
above-average credit quality compared to the benchmark, an interest rate
sensitivity close to the benchmark, and a continued overweighting of the
telecommunications industry relative to the benchmark.
24
<PAGE> 26
HIGH YIELD
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years SALOMON HIGH YIELD MAS FUNDS HIGH YIELD
ending September 30
Dollars (000)
<S> <C> <C>
* 2/28/89 1000 1000
3/31/89 1000 995
6/30/89 1039 1046
'89 9/30/89 1023 1009
12/31/89 1006 943
3/31/90 975 914
6/30/90 1014 968
'90 9/30/90 940 845
12/31/90 935 840
3/31/91 1098 1048
6/30/91 1172 1111
'91 9/30/91 1241 1155
12/31/91 1308 1211
3/31/92 1406 1290
6/30/92 1460 1341
'92 9/30/92 1521 1415
12/31/92 1541 1435
3/31/93 1634 1561
6/30/93 1706 1645
'93 9/30/93 1746 1700
12/31/93 1809 1787
3/31/94 1772 1744
6/30/94 1764 1719
'94 9/30/94 1786 1760
12/31/94 1787 1661
3/31/95 1892 1733
6/30/95 2009 1916
'95 9/30/95 2069 1999
12/31/95 2139 2059
3/31/96 2173 2124
6/30/96 2201 2160
'96 9/30/96 2291 2276
12/31/96 2380 2374
3/31/97 2414 2407
6/30/97 2522 2573
2632
2723
2726
'97 9/30/97 2632 2728
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS HIGH YIELD
--------------------------------------------------------------- SALOMON HIGH
INSTITUTIONAL + INVESTMENT ++ ADVISER +++ YIELD INDEX
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 19.90% 19.77% 19.77% 14.88%
FIVE YEARS 14.03% 13.99% 14.01% 11.59%
SINCE INCEPTION 12.40% 12.37% 12.39% 11.93%
</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.
+ Represents an investment in the Institutional Class.
++ 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.
+++ Represents an investment in the Adviser Class which commenced operations
1/31/97. 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.
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. The Adviser has
also voluntarily agreed to waive its advisory fees and reimburse certain
expenses to the extent necessary to keep total annual operating expenses for the
Investment Class of shares of the High Yield Portfolio from exceeding 0.70% of
average daily net assets. Returns presented include the effects of these waivers
and reimbursements. Returns for time periods where the total annual operating
expenses of the Portfolio would have exceeded 0.525% and 0.70% respectively,
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.
25
<PAGE> 27
MAS FUNDS/FIXED INCOME
Cash Reserves Portfolio
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 highest grade. This policy
restricts the Portfolio to even higher-quality paper than is generally required
for money-market funds. Buying only A1/P1 commercial paper and high-quality
floating-rate notes provides extra assurance that the Portfolio will maintain
the highest credit quality.
In fiscal 1997, the Cash Reserves Portfolio outpaced its peer group, represented
by the Lipper Money Market Average, by an impressive 16 basis points. Continued
careful high-quality commercial paper investment and correct interest rate risk
decisions led to the Portfolio's strong relative performance.
In the past twelve months, the front-end of the yield curve flattened with the
rally in the U.S. Treasury market. The Portfolio has a very low maturity; with
no protection against possible Federal Reserve tightening built into the front
end of the yield curve, there is little value to be found in the market. After
revisions to second quarter GDP, the economy still appears to be growing at a
decent rate, unemployment is low and factory utilization remains high. MAS
remains concerned that tight labor markets and an inventory boost could push
inflation higher, which would prompt further action from the Federal Reserve.
Finally, anchored by a 5.5% Fed funds rate, the entire yield curve, including
the shorter-end, has continued its flattening, offering even less compensation
for extending maturity.
In fiscal 1997, the Cash Reserves Portfolio outpaced its peer
group, represented by the Lipper Money Market Average, by an
impressive 16 basis points.
26
<PAGE> 28
CASH RESERVES
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years SALOMON BROAD MAS FUNDS CASH RESERVES LIPPER MONEY MARKET SALOMON 1-MONTH TREASURY
ending September 30
Dollars (000)
<S> <C> <C> <C> <C>
*8/29/90 1000 1000 1000 1000
'90 9/30/90 1011 1007 1006 1006
12/31/90 1063 1027 1025 1023
3/31/91 1091 1044 1042 1037
6/30/91 1110 1059 1056 1050
'91 9/30/91 1173 1074 1070 1063
12/31/91 1232 1087 1083 1075
3/31/92 1218 1098 1093 1085
6/30/92 1268 1108 1103 1094
'92 9/30/92 1322 1116 1111 1102
12/31/92 1326 1124 1118 1110
3/31/93 1381 1131 1125 1117
6/30/93 1419 1139 1132 1125
'93 9/30/93 1457 1147 1139 1133
12/31/93 1457 1155 1146 1141
3/31/94 1416 1164 1154 1150
6/30/94 1403 1174 1163 1160
'94 9/30/94 1410 1186 1174 1171
12/31/94 1416 1201 1188 1184
3/31/95 1487 1218 1204 1198
6/30/95 1578 1235 1220 1215
'95 9/30/95 1608 1252 1235 1231
12/31/95 1678 1270 1251 1248
3/31/96 1649 1286 1266 1262
6/30/96 1657 1303 1280 1278
'96 9/30/96 1688 1319 1295 1293
12/31/96 1739 1336 1311 1309
3/31/97 1730 1353 1327 1325
6/30/97 1792 1371 1344 1341
'97 9/30/97 1852 1390 1362 1357
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS CASH LIPPER MONEY SALOMON SALOMON 1-MONTH
RESERVES MARKET AVERAGE BROAD INDEX** TREASURY BILL INDEX
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 5.32% 5.16% 9.72% 4.90%
SEC 7-DAY EFFECTIVE YIELD 5.46% NA NA NA
</TABLE>
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 9/30/97 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.
** Shown for comparative purposes only. The Fund believes that a more
appropriate comparison for the Portfolio is the Salomon 1-Month Treasury
Bill Index which is a better indicator of short-term money market
performance. While the Portfolio may invest in the government securities
represented by the Salomon 1-Month Treasury Bill Index, it may also invest
in non-government issues and securities with maturities greater than one
month.
27
<PAGE> 29
MAS FUNDS/FIXED INCOME
Fixed Income Portfolio II
The Fixed Income Portfolio II invests only in fixed-income securities with a
credit-quality rating of BBB or better. Securities in this Portfolio include
U.S. government bonds, corporate bonds, mortgages, non-dollar bonds and other
fixed-income securities. The Portfolio is actively managed by Miller Anderson &
Sherrerd's fixed-income team, which makes strategic decisions about its
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 generally 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.
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 86 basis
points better than that of its benchmark. In general, U.S. interest rates
declined over the past year, and MAS's decision to maintain a level of
interest-rate risk greater than or equal to that of the benchmark helped
relative performance. Several barbell strategies, involving concentrations in
short- and long-term instruments, also added value versus the benchmark as the
yield differential narrowed between short- and long-term rates. In some
instances, interest rate declines were even more significant outside the U.S.,
and the Portfolio's exposure to non-dollar bonds on a currency-hedged basis
proved successful during the year. An overweighting in mortgages and security
selection decisions within the corporate area, such as in the finance and
telecommunications sectors, also exerted a positive influence on returns as the
yield spreads on these instruments narrowed versus those of comparable U.S.
Treasury securities. The Portfolio underperformed the MAS Funds Fixed Income
Portfolio because it is restricted from investing in below investment grade
corporate bonds.
28
<PAGE> 30
FIXED INCOME II
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years SALOMON BROAD MAS FUNDS FIXED INCOME II
ending September 30
Dollars (000)
<S> <C> <C>
*8/31/90 1000 1000
'90 9/30/90 1009 1009
12/31/90 1060 1082
3/31/91 1088 1109
6/30/91 1107 1121
'91 9/30/91 1170 1206
12/31/91 1229 1291
3/31/92 1215 1255
6/30/92 1264 1312
'92 9/30/92 1319 1364
12/31/92 1322 1382
3/31/93 1378 1443
6/30/93 1416 1494
'93 9/30/93 1453 1548
12/31/93 1454 1556
3/31/94 1413 1514
6/30/94 1399 1476
'94 9/30/94 1407 1474
12/31/94 1412 1476
3/31/95 1484 1555
6/30/95 1574 1643
'95 9/30/95 1604 1683
12/31/95 1674 1752
3/31/96 1645 1733
6/30/96 1653 1747
'96 9/30/96 1684 1786
12/31/96 1734 1849
3/31/97 1725 1844
6/30/97 1788 1911
'97 9/30/97 1847 1975
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS FIXED SALOMON
INCOME II BROAD INDEX
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 10.58% 9.72%
FIVE YEARS 7.69% 6.97%
SINCE INCEPTION 10.08% 9.05%
</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 Fixed Income Portfolio II commenced operations on 8/31/90. Pursuant to
a vote of the Portfolio's shareholders on May 12, 1997, the Portfolio's
investment policies were changed to allow investments in fixed-income
securities of domestic issuers rated BBB or higher at the time of purchase.
Therefore, it is reasonable to expect that the Portfolio's performance
pattern may be somewhat altered. All returns are compared to the Salomon
Broad Investment Grade Index, an unmanaged market index.
29
<PAGE> 31
MAS FUNDS/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 its 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 generally
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.
[PICTURE]
FROM LEFT: Paige Johnson, Cecelia Vollaro, Mary Ann Milias, Debbie Tickler, Mari
Chazen
For the past year, the Portfolio outperformed its benchmark by 66 basis points.
The majority of this performance came from prepayment risk and spread
compression in the mortgage market. The interest-rate sensitivity of the
Portfolio paralleled the benchmark throughout fiscal 1997. Similarly, due to a
lack of perceived relative value, the yield-curve strategy of the Portfolio was
equivalent to that of the benchmark. At the beginning of the fiscal year, the
Portfolio was fully invested in mortgage securities, although prepayment
exposure was greater than the benchmark. As spreads on fixed-rate current-coupon
mortgages tightened, these holdings were trimmed and replaced by a position in
adjustable rate mortgages, whose spreads had widened, and in older, more
seasoned mortgages, which exhibit more stable prepayment profiles.
Opportunistically-selected mortgages that significantly benefit from an increase
in prepayments were purchased as their spreads became attractive relative to
their risk and their ability to lower the overall prepayment exposure of the
Portfolio. At fiscal year-end, the Portfolio had both a neutral interest-rate
sensitivity and a neutral yield curve sensitivity, while it had an exposure to
prepayment risk slightly greater than that of the index.
30
<PAGE> 32
MORTGAGE-BACKED SECURITIES
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years LEHMAN MORTGAGE MAS FUNDS MORTGAGE-BACKED SECURITIES
ending September 30
Dollars (000)
<S> <C> <C>
*1/31/92 1000 1000
3/31/92 1003 1002
6/30/92 1043 1043
'92 9/30/92 1074 1058
12/31/92 1082 1082
3/31/93 1114 1103
6/30/93 1135 1138
'93 9/30/93 1146 1174
12/31/93 1156 1171
3/31/94 1129 1149
6/30/94 1123 1136
'94 9/30/94 1133 1139
12/31/94 1138 1131
3/31/95 1197 1195
6/30/95 1260 1246
'95 9/30/95 1286 1282
12/31/95 1329 1328
3/31/96 1323 1318
6/30/96 1333 1326
'96 9/30/96 1361 1360
12/31/96 1400 1405
3/31/97 1402 1413
6/30/97 1455 1464
'97 9/30/97 1497 1506
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS
MORTGAGE-BACKED LEHMAN
SECURITIES MORTGAGE INDEX
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 10.70% 10.04%
FIVE YEARS 7.32% 6.86%
SINCE INCEPTION 7.50% 7.39%
</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 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.
31
<PAGE> 33
MAS FUNDS/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 risk further.
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 bonds 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.
For fiscal 1997, the Limited Duration Portfolio outperformed its index by 12
basis points. Careful interest-rate sensitivity and yield curve position
management, exposure to corporate and asset- backed securities and a
mortgage-backed securities overweight helped the Portfolio outperform its
benchmark. With no protection against possible Federal Reserve tightening built
into the front end of the yield curve, there is very little value to be found in
the market. The Portfolio is maintaining a lower-than-market interest rate
sensitivity posture. With revisions to second quarter GDP, the economy still
appears to be growing at a decent rate, the unemployment rate is low and factory
utilization remains high. MAS remains concerned that tight labor markets could
push inflation higher, which would prompt further action from the Federal
Reserve.
At the close of fiscal 1997, mortgages represented 43% of portfolio holdings,
which included 19% in ARMs. Corporates represented 39% of holdings, which
included 25% in asset-backed securities. Treasuries represented 13% of holdings,
which included 10% in Treasury Inflation-Protected Securities (TIPS). Cash
represented the remaining 5% of the Portfolio. TIPS
Careful interest-rate sensitivity and yield curve position
management, exposure to corporate and asset-backed securities and
a mortgage-backed securities overweight helped the Portfolio
outperform its benchmark.
32
<PAGE> 34
yields suggest that the market continues to assign only a very small probability
to an increase in inflation, making them attractive relative to nominal Treasury
instruments with similar maturities. Overall, spreads remain tight in the
mortgage and corporate sectors but new supply in the corporate and asset-backed
markets has provided a buying opportunity.
LIMITED DURATION
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years SALOMON 1-3 YEAR MAS FUNDS LIMITED DURATION
ending September 30
Dollars (000)
<S> <C> <C>
*3/31/92 1000 1000
6/30/92 1029 1034
'92 9/30/92 1059 1069
12/31/92 1061 1068
3/31/93 1084 1097
6/30/93 1097 1110
'93 9/30/93 1112 1126
12/31/93 1119 1131
3/31/94 1113 1121
6/30/94 1114 1119
'94 9/30/94 1124 1131
12/31/94 1125 1131
3/31/95 1162 1167
6/30/95 1198 1202
'95 9/30/95 1216 1220
12/31/95 1245 1248
3/31/96 1251 1255
6/30/96 1264 1266
'96 9/30/96 1285 1287
12/31/96 1309 1314
3/31/97 1318 1324
6/30/97 1347 1352
'97 9/30/97 1373 1377
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS LIMITED SALOMON
DURATION 1-3 YEAR INDEX
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 6.98% 6.86%
FIVE YEARS 5.19% 5.32%
SINCE INCEPTION 5.99% 5.93%
</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 Limited Duration Portfolio from exceeding 0.42% of average daily net
assets. Returns for time periods where 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.
33
<PAGE> 35
MAS FUNDS/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, non-dollar 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.
[PICTURE]
FROM LEFT: John Hevner, Marc Crespi, Gerry Barth, Justin Bullion
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 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 206
basis points better than that
34
<PAGE> 36
of its benchmark. In general, U.S. interest rates declined over the past year,
and MAS's decision to maintain a level of interest-rate risk greater than or
equal to the benchmark helped relative performance. Several barbell strategies,
involving concentrations in short- and long-term instruments, added value versus
the benchmark as the yield differential narrowed between short- and long-term
rates. In some instances, interest rate declines were even more significant
outside the U.S., and the Portfolio's exposure to non-dollar bonds on a
currency-hedged basis proved successful during the year. An overweighting in
mortgages and security selection decisions within the corporate area, such as in
the finance and telecommunications sectors, also exerted a positive influence on
returns as the yield spreads on these instruments narrowed versus those of
comparable U.S. Treasury securities.
SPECIAL PURPOSE FIXED INCOME
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years SALOMON BROAD MAS FUNDS SPECIAL PURPOSE FIXED INCOME
ending September 30
Dollars (000)
<S> <C> <C>
*3/31/92 1000 1000
6/30/92 1041 1048
'92 9/30/92 1085 1095
12/31/92 1088 1110
3/31/93 1134 1169
6/30/93 1165 1214
'93 9/30/93 1196 1261
12/31/93 1196 1275
3/31/94 1163 1240
6/30/94 1151 1208
'94 9/30/94 1158 1211
12/31/94 1162 1211
3/31/95 1221 1275
6/30/95 1296 1349
'95 9/30/95 1320 1392
12/31/95 1378 1449
3/31/96 1354 1446
6/30/96 1360 1464
'96 9/30/96 1386 1500
12/31/96 1427 1557
3/31/97 1420 1558
6/30/97 1471 1622
1671
'97 9/30/97 1520 1676
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS SPECIAL PURPOSE FIXED INCOME
--------------------------------------- SALOMON
INSTITUTIONAL + INVESTMENT ++ BROAD INDEX
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 11.78% 11.62% 9.72%
FIVE YEARS 8.90% 8.83% 6.97%
SINCE INCEPTION 9.84% 9.78% 7.91%
</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.
+ Represents an investment in the Institutional Class.
++ 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 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 Investment Class of shares of the Special Purpose Fixed Income Portfolio
from exceeding 0.68% 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 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.
35
<PAGE> 37
MAS FUNDS/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 inves-tor'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 performance over the past year was heavily influenced by changes
in the shape of the municipal yield curve. The 10-year portion of the curve had
the best performance, with yields falling about 45 basis points, compared to
about 20 basis points for the 20-year portion of the curve and 30 basis points
for the 5-year portion of the curve. As a result, the Portfolio's positions in
15 to 20-year non-callable zero-coupon municipal bonds performed well relative
to 5-year securities, but lagged duration-equivalent 10-year bonds. In addition,
strategic management of interest-rate risk made a positive impact on
performance. Interest-rate exposure was greater than the index when interest
rates fell in the first fiscal quarter. Interest rate exposure was reduced to
neutral in the late Spring. Management of municipal market exposure also boosted
performance. Futures were used to reduce the Portfolio's sensitivity to
municipal yield changes during the third fiscal quarter. These futures were
liquidated after the municipal market cheapened due to a heavy supply of new
issues in the final fiscal quarter. 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 Portfolio's return.
At fiscal year-end, MAS believes that the recent cheapening of municipal bonds
has returned a fair valuation to the municipal markets. Accordingly, the
Portfolio's exposure to municipal securities has been increased by removing
futures hedges. Since MAS perceives the municipal yield curve to be relatively
flat, i.e., investors are not being adequately compensated for purchasing
long-term municipals, recent purchases have been concentrated in
shorter-maturity issues.
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.
36
<PAGE> 38
MUNICIPAL
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years LEHMAN 5 YEAR MUNICIPAL MAS FUNDS MUNICIPAL LEHMAN 10 YEAR MUNICIPAL
ending September 30
Dollars (000)
<S> <C> <C> <C>
*10/1/92 1000 1000 1000
12/31/92 1014 1016 1020
3/31/93 1041 1061 1059
6/30/93 1065 1103 1094
'93 9/30/93 1090 1142 1134
12/31/93 1103 1162 1150
3/31/94 1072 1077 1089
6/30/94 1083 1083 1105
'94 9/30/94 1094 1089 1113
12/31/94 1089 1189 1095
3/31/95 1133 1186 1171
6/30/95 1163 1180 1202
'95 9/30/95 1191 1235 1244
12/31/95 1216 1306 1283
3/31/96 1216 1300 1275
6/30/96 1222 1317 1279
'96 9/30/96 1243 1351 1304
12/31/96 1267 1379 1341
3/31/97 1267 1383 1341
6/30/97 1298 1426 1385
'97 9/30/97 1325 1466 1428
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS LEHMAN 5 YEAR LEHMAN 10 YEAR
MUNICIPAL MUNICIPAL INDEX MUNICIPAL INDEX
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 8.47% 6.67% 9.50%
SINCE INCEPTION 7.95% 5.80% 7.39%
</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.
The Portfolio was initially focused on long-term securities. On April 15, 1996,
the Portfolio's investment policies were changed by shareholder vote to
emphasize fixed-income securities of shorter duration. Therefore, it is
reasonable to expect that its performance pattern will be altered.
* 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.
37
<PAGE> 39
MAS FUNDS/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 was heavily influenced by changes
in the shape of the municipal yield curve. The 10-year portion of the curve had
the best performance, with yields falling about 45 basis points, compared to
about 20 basis points for the 20-year portion of the curve and 30 basis points
for the 5-year portion of the curve. As a result, the Portfolio's positions in
15 to 20-year non-callable zero-coupon municipal bonds performed well relative
to 5-year securities, but lagged duration-equivalent 10-year bonds. In addition,
strategic management of interest-rate risk made a positive impact on
performance. Interest-rate exposure was greater than the index when interest
rates fell in the first fiscal quarter. Interest rate exposure was reduced to
neutral in the late Spring. Management of municipal market exposure also boosted
performance. Futures were used to reduce the Portfolio's sensitivity to
municipal yield changes during the third fiscal quarter. These futures were
liquidated after the municipal market cheapened due to a heavy supply of new
issues in the final fiscal quarter. Finally, a small allocation to high-yield,
taxable corporate bonds, the best-performing sector of the
[PICTURE]
STANDING, FROM LEFT: Matt Allen, Matt Potter, Kurt Dodds,
SEATED, FROM LEFT: Alisa Attardi, Carol Neilson
38
<PAGE> 40
fixed-income market over the period, also added to the Portfolio's return.
At fiscal year-end, MAS believes that the recent cheapening of municipal bonds
has returned a fair valuation to the municipal markets. Accordingly, the
Portfolio's exposure to municipal securities has been increased by removing
futures hedges. Since MAS perceives the municipal yield curve to be relatively
flat, i.e., investors are not being adequately compensated for purchasing
long-term municipals, recent purchases have been concentrated in
shorter-maturity issues.
PA MUNICIPAL
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years LEHMAN 5 YEAR MUNICIPAL MAS FUNDS PA MUNICIPAL LEHMAN 10 YEAR MUNICIPAL
ending September 30
Dollars (000)
<S> <C> <C> <C>
*10/1/92 1000 1000 1000
12/31/92 1014 1032 1020
3/31/93 1041 1075 1059
6/30/93 1065 1122 1094
'93 9/30/93 1090 1158 1134
12/31/93 1103 1185 1150
3/31/94 1072 1095 1089
6/30/94 1083 1099 1105
'94 9/30/94 1094 1111 1113
12/31/94 1089 1104 1095
3/31/95 1133 1202 1171
6/30/95 1163 1203 1202
'95 9/30/95 1191 1264 1244
12/31/95 1216 1337 1283
3/31/96 1216 1328 1275
6/30/96 1222 1350 1279
'96 9/30/96 1243 1378 1304
12/31/96 1267 1407 1341
3/31/97 1267 1409 1341
6/30/97 1298 1450 1385
'97 9/30/97 1325 1488 1428
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS LEHMAN 5 YEAR LEHMAN 10 YEAR
PA MUNICIPAL MUNICIPAL INDEX MUNICIPAL INDEX
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 8.01% 6.67% 9.50%
SINCE INCEPTION 8.28% 5.80% 7.39%
</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.
The Portfolio was initially focused on long-term securities. On April 15, 1996,
the Portfolio's investment policies were changed by shareholder vote to
emphasize fixed-income securities of shorter duration. Therefore, it is
reasonable to expect that its performance pattern will be altered.
* 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.
39
<PAGE> 41
MAS FUNDS/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. Since 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.
During the year the Portfolio benefited from its overweighting of European and
Canadian bonds versus U.S. securities and from its hedging of European and
Japanese currencies. Overall interest-rate management was a modest drag on
performance as the decision to underweight Japanese bonds resulted in a
moderately below-market exposure to interest-rate risk in the second half of the
fiscal year.
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.
40
<PAGE> 42
Individual exposures have changed during the year to accommodate movements in
relative values. Towards the end of 1996 the Portfolio reduced its exposure to
Japanese and Irish bonds as well as its overweight position in U.S. and Irish
currencies. European bond holdings were trimmed further early in 1997 in
response to the outperformance of these securities relative to U.S. bonds. From
this point, overall interest-rate exposures to both the dollar bloc and European
regions were close to market levels while the underweighting of Japanese bonds
gave the Portfolio a slightly defensive posture with respect to overall
interest-rate risk. This defensive position in Japanese bonds was adjusted
during the year in response to movements in Japanese interest rates. Japanese
exposures were increased in the Spring following a sharp rise in interest rates
and were then reduced in September to the original defensive levels as the
subsequent rally in yen-denominated securities pushed real interest rates in
Japan to low levels. The Portfolio also began hedging Japanese yen exposures
following its sharp recovery in April and the subsequent decline in the yen
contributed to performance.
GLOBAL FIXED INCOME
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years SALOMON WORLD GOV'T BOND MAS FUNDS GLOBAL FIXED INCOME
ending September 30
Dollars (000)
<S> <C> <C>
*4/30/93 1000 1000
6/30/93 1008 1022
'93 9/30/93 1053 1074
12/31/93 1053 1090
3/31/94 1053 1075
6/30/94 1060 1057
'94 9/30/94 1072 1071
12/31/94 1078 1073
3/31/95 1196 1159
6/30/95 1259 1227
'95 9/30/95 1246 1238
12/31/95 1283 1287
3/31/96 1259 1271
6/30/96 1264 1290
'96 9/30/96 1299 1322
12/31/96 1329 1365
3/31/97 1274 1309
6/30/97 1313 1347
'97 9/30/97 1330 1369
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS GLOBAL SALOMON WORLD
FIXED INCOME GOV'T BOND INDEX
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 3.53% 2.41%
SINCE INCEPTION 7.36% 6.66%
</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
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 presented include the
effects of these waivers and reimbursements. 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.
41
<PAGE> 43
MAS FUNDS/FIXED INCOME
International Fixed Income Portfolio
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, it has historically been an
attractive time to invest in fixed-income securities and to have an
above-average maturity.
[PICTURE]
FROM LEFT: Bruce Rodio, Scott Burney, Elizabeth Vale, Glenn Becker
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. Since 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 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.
During the year the Portfolio benefited from its emphasis on European and
Canadian bonds and from its hedging of European and Japanese currencies. Overall
interest-rate management was a modest drag on performance as the decision to
underweight Japanese bonds resulted in a moderately below-market exposure to
interest-rate risk in the second half of the fiscal year.
42
<PAGE> 44
Individual exposures have changed during the year to accommodate movements in
relative values. Towards the end of 1996 the Portfolio reduced its exposure to
Japanese and Irish bonds as well as its overweight position in U.S. and Irish
currencies. European bond holdings were trimmed further early in 1997. From this
point, overall interest-rate exposures to both the dollar bloc and European
regions were close to market levels while the underweighting of Japanese bonds
gave the Portfolio a slightly defensive posture with respect to overall
interest-rate risk. This defensive position in Japanese bonds was adjusted
during the year in response to movements in Japanese interest rates. Japanese
exposures were increased in the Spring following a sharp rise in interest rates
and were then reduced in September to the original defensive levels as the
subsequent rally in yen-denominated securities pushed real interest rates in
Japan to low levels. The Portfolio also began hedging Japanese yen exposures
following its sharp recovery in April and the subsequent decline in the yen
contributed to performance.
INTERNATIONAL FIXED INCOME
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years SALOMON WORLD GOV'T BOND EX-U.S. MAS FUNDS INTERNATIONAL FIXED INCOME
ending September 30
Dollars (000)
<S> <C> <C>
*4/29/94 1000 1000
6/30/94 1010 998
'94 9/30/94 1027 1010
12/31/94 1033 1012
3/31/95 1182 1122
6/30/95 1240 1186
'95 9/30/95 1210 1175
12/31/95 1235 1211
3/31/96 1214 1196
6/30/96 1219 1214
'96 9/30/96 1259 1247
12/31/96 1285 1286
3/31/97 1211 1212
6/30/97 1245 1244
'97 9/30/97 1248 1253
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS INTERNATIONAL SALOMON WORLD GOV'T
FIXED INCOME BOND EX-U.S. INDEX
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 0.44% (0.86)%
SINCE INCEPTION 6.81% 6.68%
</TABLE>
MAS Funds returns are net of all fees. Returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
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 presented
include the effects of these waivers and reimbursements. 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.
43
<PAGE> 45
MAS FUNDS/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 control risk further.
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 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.
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.
In fiscal 1997, the Intermediate Duration Portfolio outpaced its index by 74
basis points. For the past twelve months, careful interest-rate sensitivity and
yield curve position management, corporate bond exposure and a mortgage-backed
securities overweight helped the Portfolio's relative performance. The
interest-rate sensitivity of the Portfolio became progressively shorter
throughout the year, as MAS's outlook for real interest rates continued to be
dampened by a slightly-higher inflation forecast. With no protection against
possible Federal Reserve tightening built into the front end of the yield curve,
there is very little value to be found in the market.
The Portfolio initiated a position in Treasury Inflation-Protected Securities
(TIPS), as their yields suggest that the market continues to assign only a very
small probability to an increase in inflation, making them attractive relative
to nominal Treasury instruments with similar maturities. Mortgage holdings have
decreased slightly during the year, but the makeup
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.
44
<PAGE> 46
was altered substantially. As spreads tightened, current coupon mortgages were
sold in favor of an increased allocation to adjustable rate mortgages and
commercial mortgage-backed securities. Although credit spreads remain tight, the
Portfolio was able to increase the corporate bond weighting by finding pockets
of value during the year, especially in bank capital notes and asset-backed
securities. Following a narrowing of real yield premiums overseas, the
Portfolio's non-dollar position has been reduced to 1%. This small position is
in German Bunds on a currency-hedged basis.
INTERMEDIATE DURATION
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years LEHMAN INTERMEDIATE GOV'T/CORP. MAS FUNDS INTERMEDIATE DURATION
ending September 30
Dollars (000)
<S> <C> <C>
*10/3/94 1000 1000
12/31/94 999 995
3/31/95 1043 1043
6/30/95 1095 1088
'95 9/30/95 1113 1114
12/31/95 1152 1148
3/31/96 1142 1150
6/30/96 1150 1158
'96 9/30/96 1170 1184
12/31/96 1199 1216
3/31/97 1197 1219
6/30/97 1233 1255
'97 9/30/97 1266 1289
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS INTERMEDIATE LEHMAN INTERMEDIATE
DURATION GOV'T/CORP. INDEX
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 8.93% 8.19%
SINCE INCEPTION 8.87% 8.20%
</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 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.
45
<PAGE> 47
MAS FUNDS/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 1997, the Portfolio returned slightly 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 fund. Security selection in the fixed-income portion of the
Portfolio added to relative performance.
The Portfolio started the fiscal year with a lower-than-benchmark position in
equities. Expected returns for stocks and bonds pointed to bonds offering better
value than equities, and high absolute valuations created concern about overall
stock market returns. However, after the brief market correction in the first
calendar quarter of 1997, equities became more attractive and in April stock
exposure was increased to 63%, which was maintained for the rest of the year.
At fiscal year-end, the Portfolio had higher-than-benchmark investments in
equity securities and slightly higher-than-index interest-rate exposure. The
Portfolio holds almost no cash, since all valuation measures indicate that
equity and bond markets will continue to perform well.
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.
46
<PAGE> 48
BALANCED
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years S&P 500 MAS FUNDS BALANCED SALOMON BROAD
ending September 30
Dollars (000)
<S> <C> <C> <C>
*12/31/92 1000 1000 1000
3/31/93 1044 1034 1042
6/30/93 1049 1048 1071
'93 9/30/93 1076 1083 1099
12/31/93 1101 1104 1099
3/31/94 1059 1169 1068
6/30/94 1064 1060 1058
'94 9/30/94 1116 1085 1064
12/31/94 1115 1082 1068
3/31/95 1224 1157 1122
6/30/95 1341 1247 1191
'95 9/30/95 1447 1317 1213
12/31/95 1534 1378 1266
3/31/96 1617 1431 1244
6/30/96 1689 1473 1250
'96 9/30/96 1742 1494 1273
12/31/96 1887 1590 1312
3/31/97 1937 1612 1305
6/30/97 2276 1786 1352
'97 9/30/97 2446 1904 1397
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS BALANCED
--------------------------------------------------------------- S&P 500 SALOMON
INSTITUTIONAL + INVESTMENT ++ ADVISER +++ INDEX BROAD INDEX
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE YEAR 27.44% 27.35% 27.24% 40.46% 9.72%
SINCE INCEPTION 14.53% 14.51% 14.49% 20.73% 7.29%
</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.
+ Represents an investment in the Institutional Class.
++ Represents an investment in the Investment Class which commenced operations
4/3/97. 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.
+++ Represents an investment in the Adviser Class which commenced operations
11/1/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1
fee applicable to the Adviser 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 the Adviser Class of shares of the Balanced Portfolio from exceeding 0.90%
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 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.
47
<PAGE> 49
MAS FUNDS/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 1997, the Portfolio outperformed 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.
The Portfolio started the fiscal year with overweight positions in high yield
and emerging market debt and international equities. Yield spreads on high yield
and emerging market debt relative to U.S. Treasuries continued to be attractive
and more than compensated investors for the higher risk of these asset classes.
International equities offered investors higher expected returns
48
<PAGE> 50
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.
Throughout the fiscal year, MAS reduced positions in top-performing asset
classes to capitalize on market gains and reflect changed relative values.
During the second quarter, MAS reduced the emerging and high yield debt
positions as spreads relative to bonds became less attractive, and continued to
shift assets from international bonds to U.S. bonds as real interest rates
converged on U.S. levels. At the same time, the Portfolio increased exposure to
U.S. equities after the brief market correction which occurred in the first
calendar quarter of 1997.
At year-end, the Portfolio had a higher-than-benchmark investment in
international equities and in high yield bonds, a neutral investment in U.S.
equities, reflecting concern about the profit outlook and relatively high
valuations, and a lower-than-benchmark investment in domestic and international
fixed-income securities.
MULTI-ASSET-CLASS
Growth of a $1 Million Investment
Since Inception
<TABLE>
<CAPTION>
Fiscal years S&P 500 MAS FUNDS SALOMON BROAD MSCI EAFE-GDP (WEIGHTED)
ending September 30 MULTI-ASSET-CLASS
Dollars (000)
<S> <C> <C> <C> <C>
*7/29/94 1000 1000 1000 1000
'94 9/30/94 1016 997 987 981
12/31/94 1015 986 991 973
3/31/95 1114 1044 1041 990
6/30/95 1221 1125 1104 1013
'95 9/30/95 1318 1179 1125 1046
12/31/95 1397 1229 1174 1082
3/31/96 1472 1280 1154 1113
6/30/96 1538 1326 1159 1140
'96 9/30/96 1585 1341 1181 1137
12/31/96 1718 1425 1217 1164
3/31/97 1764 1443 1210 1172
6/30/97 2072 1604 1254 1304
'97 9/30/97 2227 1697 1296 1316
</TABLE>
AVERAGE ANNUAL RETURNS
Ended 9/30/97*
<TABLE>
<CAPTION>
MAS MULTI-ASSET-CLASS MSCI
--------------------------------------- S&P 500 SALOMON EAFE-GDP
INSTITUTIONAL + INVESTMENT ++ INDEX BROAD INDEX WEIGHTED INDEX
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE YEAR 26.50% 26.32% 40.46% 9.72% 15.75%
SINCE INCEPTION 18.14% 18.05% 28.71% 8.51% 9.05%
</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.
+ Represents an investment in the Institutional Class.
++ 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 the Institutional and Investment Classes of shares of the Multi-Asset-Class
Portfolio from exceeding 0.78% and 1.05% respectively, 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 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.
49
<PAGE> 51
50
<PAGE> 52
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; Managing Director, Morgan Stanley; Portfolio
Manager and member of the Executive Committee, Miller Anderson & Sherrerd, LLP;
Director, MAS Fund Distribution, Inc.; formerly Director, Morgan Stanley
Universal Funds, Inc.
THOMAS P. GERRITY
Trustee; Dean and Reliance Professor of Management and Private Enterprise,
Wharton School of Business, University of Pennsylvania; Director, Digital
Equipment Corporation; Director, Sun Company, Inc.; Director, Fannie Mae;
Director, Reliance Group Holdings; Director, Melville Corporation.
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, MAS Funds; Principal, Morgan Stanley; Head of Mutual Funds, Miller
Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.; Chairman of the
Board of Directors, The Minerva Fund, Inc.
LORRAINE TRUTEN, CFA
Vice President, MASFunds; Principal, Morgan Stanley; Head of Mutual Fund
Services, Miller Anderson & Sherrerd, LLP; President, MAS Fund Distribution,
Inc.
DOUGLAS W. KUGLER, CFA
Treasurer, MAS Funds; Vice President, Morgan Stanley; Head of Mutual Fund
Administration, Miller Anderson & Sherrerd, LLP.
JOHN H. GRADY, JR., ESQ.
Secretary, MAS Funds; 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 preceded or accompanied by a prospectus.
MAS Fund Distribution, Inc. serves as General Distribution Agent for MAS Funds.
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MAS FUNDS
MAS Investment Services Team
INVESTMENT
Robert E. Angevine Brian Kramp
Arden C. Armstrong, CFA Steven K. Kreider, PhD, CFA
Richard M. Behler, PhD Michele A. Kreisler, PhD
Thomas L. Bennett, CFA Michael B. Kushma
Steven B. Chulik Chris Leavy
John D. Connolly, CFA Gordon Loery, CFA
Bradley S. Daniels, CFA Deanna Loughnane
Kenneth B. Dunn, PhD Angelo G. Manioudakis
Paul A. Durose Robert J. Marcin, CFA
Hassan Elmasry, CFA Paul F. O'Brien, PhD
Steven P. Epstein James M. Olness
Stephen F. Esser, CFA Scott F. Richard, DBA
Andre L. Gatien Christian G. Roth, CFA
William B. Gerlach, CFA Eric Sharpf
J. David Germany, PhD Gary G. Schlarbaum, PhD, CFA
Benjamin J. Gord Roberto M. Sella
Ellen D. Harvey, CFA Neil Stone
James J. Jolinger Matthew Todorow
Abhi Y. Kanitkar Horacio A. Valeiras, CFA
Nicholas J. Kovich, CFA Richard B. Worley
CLIENT SERVICE
Gerald Barth Helene M. Kennedy
Glenn E. Becker Yuri Khalif
Mary Jane Bobyock, CFA Mark Laskin
Joseph A. Braccia, CFA Lisa A. Marlin
Justin G. Bullion, CFA Katharine E. McCoid
Scott A. Burney, CFA Mary Ann Milias
Janet E. Cauley James A. Morrissey
Mari M. Chazen Patricia Roarty
Marc Crespi Bruce A. Rodio
Mimi K. Drake Christine Rose
Stephen T. Golding Kim A. Savander
Dave Gutheil James H. Scott
Robert L. Hagin, PhD Elizabeth A. Vale, CFA
John D. Hevner, CFA Marna C. Whittington, PhD
Tracey H. Ivey, CFA
MAS FUNDS
CLIENT SERVICE ADMINISTRATION
Matthew F. Allen Susan M. Mislick
Jeffrey L. Alt Marion S. Mitchell
Alisa M. Attardi Carol N. Neilson
Mark Babiec Matthew Potter
Kurt Dodds Barry A. Siegel
Jeanie A. Krepfle Andrea E. Silverman
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[MAS FUNDS LOGO]
MILLER
ANDERSON
& SHERRERD, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
Investment Adviser: (610) 940-5000
MAS Funds: (800) 354-8185
