<PAGE> 1
MASFUNDS
1998 ANNUAL REPORT
[PHOTO]
[MAS FUNDS LOGO]
<PAGE> 2
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Miller Anderson & Sherrerd, LLP
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.
1 - MAS Funds
<PAGE> 3
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MAS Funds
CONTENTS
- --------------------------------------------------------------------------------
CHAIRMAN'S LETTER 4
- --------------------------------------------------------------------------------
EQUITY
6 Value Portfolio
8 Equity Portfolio
10 Small Cap Value Portfolio
12 International Equity Portfolio
14 Mid Cap Growth Portfolio
16 Mid Cap Value Portfolio
18 Emerging Markets Value Portfolio
20 Small Cap Growth Portfolio
- --------------------------------------------------------------------------------
FIXED INCOME
22 Fixed Income Portfolio
24 Domestic Fixed Income Portfolio
26 High Yield Portfolio
28 Cash Reserves Portfolio
30 Fixed Income Portfolio II
32 Mortgage-Backed Securities Portfolio
34 Limited Duration Portfolio
36 Special Purpose Fixed Income Portfolio
38 Municipal Portfolio
40 PA Municipal Portfolio
42 Global Fixed Income Portfolio
44 International Fixed Income Portfolio
46 Intermediate Duration Portfolio
48 Multi-Market Fixed Income Portfolio
- --------------------------------------------------------------------------------
BALANCED
50 Balanced Portfolio
52 Multi-Asset-Class Portfolio
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS 54
- --------------------------------------------------------------------------------
MAS INVESTMENT SERVICES TEAM 56
3 - MAS Funds
<PAGE> 4
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MAS Funds
CHAIRMAN'S LETTER
[PHOTO]
Thomas L. Bennett,
Chairman
Value Investing is a central theme in the majority of MAS Funds Portfolios. In
both equity and fixed-income strategies, this means purchasing securities which
currently appear undervalued, compared to either a benchmark index or the other
securities in a given market sector or segment. It will come as no surprise to
our investors that the Value style of equity investing has been out of favor
during fiscal 1998. A disciplined focus on value could not overcome investors'
willingness to pay historically high valuation multiples for the perceived
safety and name recognition of mega-capitalization growth stocks. On the
fixed-income side, relative valuation was also increasingly disregarded as the
"flight to quality" during the third calendar quarter resulted in sharp declines
for all sectors of the bond market except U.S. Treasuries, regardless of
fundamentals.
Value Investing has been fundamental to the success of the Fund's adviser,
Miller Anderson & Sherrerd, LLP, through the many market and style cycles of the
past 29 years. Since the launch of the first MAS strategy in 1969, the Fund's
Adviser has not changed its time-honored investing approaches. The result is
that MAS Funds continues to claim high marks for investment results above its
peers and for consistency of long-term results. This consistency is just one
factor that led to our core U.S. equity product - the Equity Portfolio -
retaining its Morningstar 4-Star overall rating (out
4 - MAS Funds
<PAGE> 5
VALUE INVESTING HAS BEEN FUNDAMENTAL TO THE SUCCESS OF THE FUND'S ADVISER,
MILLER ANDERSON & SHERRERD, LLP, THROUGH THE MANY MARKET AND STYLE CYCLES OF THE
PAST 29 YEARS.
--------------------------------------------------
of 2,678 domestic equity funds, as of September 30, 1998), despite one of the
toughest years in its history.
Shareholders of MAS Funds know that it is this long history of prudent,
valuation-driven investment decision-making and superior client service that has
earned us the privilege of managing 24 different investment portfolios in
virtually every market and asset class. The Fund's assets at fiscal year-end and
as of the date of this publication topped $20 billion. During this fiscal year
we added the Multi-Market Fixed Income and Small Cap Growth Portfolios to the
broad array of MAS Funds investment products.
The Fund's Adviser joined forces almost three years ago with the premier
financial services group Morgan Stanley Dean Witter and Co., in order to ensure
that it can continue to offer only the highest quality products and services in
an increasingly competitive global environment. As part of Morgan Stanley Dean
Witter Investment Management, the Fund's Adviser will remain committed to its
time-honored investing principles and disciplined investment strategies. The
principles of value investing continue to produce the superior long-term,
risk-adjusted results that institutional investors seek.
The specific commentaries offered in this report highlight the long-term
benefits that result from discipline and patience in investing. It is during
difficult market environments that we feel it is most important to adhere
closely to the investment mandates for which you selected MAS Funds. As always,
please call your client service contact with any questions regarding this report
or the portfolios of MAS Funds.
Sincerely,
/s/ THOMAS L. BENNETT
Thomas L. Bennett
Chairman
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.
5 - MAS Funds
<PAGE> 6
- -----------------------
MAS Funds / Equity
VALUE PORTFOLIO
The Value Portfolio combines Miller Anderson & Sherrerd's disciplined stock
valuation process with the judgment gained through considerable experience in
low-P/E investing.
MAS's process is executed in two stages. An initial screen is used to
identify companies with flat or positive earnings growth which have
underperformed the broad market averages and whose valuations currently fall
into the lower segment of MAS's investment universe. In the second stage,
fundamental analysis is used to determine the cyclical sustainability of
earnings and the competitive dynamics of the company. 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.
MAS also utilizes a 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 the MAS approach is that the sell discipline mandates the sale of
any stock that satisfies one or more of the three sell criteria -- price
appreciation, earnings deterioration or negative fundamental change.
The fiscal year ended September 30, 1998 was the most challenging on record
for the Value Portfolio. While the S&P 500 gained 9.1% during the year, the
Portfolio declined 16.4%. In a market environment characterized by financial
turmoil and market panic, as evidenced in particular toward the end of the
fiscal year, liquidity and perceived stability can command irrational premiums.
While the capitalization-weighted benchmark S&P 500 continued to be heavily
influenced by very large market capitalization growth/defensive stocks, the
smaller, cheaper, more cyclical companies continued to be out of favor. The
Portfolio is restricted from owning most of the mega-cap stocks in any sector,
including energy, health care, telephones, food, personal care, technology, and
even heavy industry. To do so would violate the Portfolio's low P/E discipline.
This year has also been extraordinary in that every investment style and
strategy employed by the Portfolio has significantly underperformed its
counterpart. For example, high P/E stocks significantly outperformed low P/E
stocks. The most expensive P/E quintile outperformed the cheapest quintile by
2600 basis points year to date. The Growth Style significantly outdistanced the
Value Style with the S&P Barra Growth Index topping the S&P Value Index.
Finally, an investment strategy utilizing economically sensitive stocks
dramatically underperformed a stable/defensive strategy. The Portfolio
represents one of the purest, most committed value portfolios in the investment
community and consequently has suffered more noticeably. Valuation, liquidity,
style, and investment strategy factors all contributed to make the past twelve
months the most challenging period ever for the Portfolio.
Relative performance was impacted by stock selection and sector allocation
decisions. Stock selection in health care, technology, heavy industry, and
retail penalized returns. The negative sector selection impact resulted from
the Portfolio's avoidance of defensive sectors such as telephones, health care
and technology. The Portfolio was also significantly overweighted in the
economically sensitive and financial service sectors, which substantially
underperformed the index. Some of the mega-cap stocks which the Portfolio can
own, such as IBM, Citicorp, and Philip Morris, represented portfolio winners.
The Portfolio's "smaller" and cyclical companies generated most of the
underperformance with holdings in Ford, Foundation Health, Case, Cummins,
Venator, and Tektronix.
Passive and active decisions contributed to some minor sector shifts during
the last quarter and the fiscal year. The Portfolio's health care, financial
and utility holdings increased as a result of relative performance and trading
activity. Heavy industry, transportation, technology, and basic resource sector
holdings were reduced in the fund. The Portfolio initiated new positions in Liz
Claiborne, St. Paul, and United Health Care. It also added to holdings in many
depressed financial and cyclical positions including Case, Sears, Lubrizol,
Tenet Health Care, PNC, Banc One, and Washington Mutual. Eliminations included
Stratus Computer, Citicorp, Caterpillar, Russell Corp., British Petroleum, Dow
Chemical and Great Lakes Chemical. The Portfolio trimmed positions in Dupont,
Ford, IBM, and Delta Airlines.
6 - MAS Funds
<PAGE> 7
At fiscal year-end, the Portfolio's largest sector overweightings included
the financial sector, heavy industry, consumer durables, and basic resources.
The Portfolio's largest underweightings remain in technology, health care,
telephone and energy stocks. The Portfolio's investable universe, the two
lowest P/E quintiles of stocks with greater than $1.5 billion market cap,
remains concentrated in the financial sector, cyclicals and electric utilities.
Technology, health care, beverages and now energy remain conspicuously absent.
The Portfolio's relative performance will increasingly rely on the relative
performance of those sectors in which its discipline mandates concentration.
Current portfolio characteristics reflect the recent, significant
underperformance of low P/E investing. At fiscal year end, the P/E ratio for
the Portfolio was 11.4x's trailing and 10.4x's estimated profits. This
contrasts to the S&P 500 P/E of 22.2x's trailing earnings and 19x's forecasted
earnings. The Portfolio's price/sales ratio of 56% contrasts with the index
price/sales ratio of 162%, the largest discount in this decade. The Portfolio's
dividend yield of 2.4% represented a 50% premium to the index yield of 1.6%,
even though the Portfolio's stocks have a lower payout ratio overall. Growth
and profitability levels are at a modest discount to those of the index, but
much less than the Portfolio's relative valuations.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Over 10 years
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Value S&P 500
DOLLARS (000)
<S> <C> <C>
'88 1000 1000
1021 1031
1099 1104
1169 1201
'89 1285 1330
1232 1358
1194 1317
1230 1399
'90 1030 1207
1156 1315
1354 1506
1379 1503
'91 1498 1583
1592 1716
1593 1673
1631 1705
'92 1691 1758
1824 1847
1926 1927
1938 1937
'93 2023 1987
2086 2033
2054 1956
2083 1964
'94 2174 2060
2158 2060
2390 2260
2669 2476
'95 2882 2673
2995 2834
3205 2986
3279 3120
'96 3413 3216
3822 3484
3886 3578
4454 4202
'97 4820 4517
4716 4647
5169 5295
4976 5470
'98 4029 4926
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS VALUE
----------------------------------------------- S&P 500
INSTITUTIONAL - INVESTMENT -- ADVISER + INDEX
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
ONE YEAR (16.41)% (16.55)% (16.66)% 9.05%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 14.77 % 14.68 % 14.64 % 19.91%
- ----------------------------------------------------------------------------------------------------------------------
TEN YEARS 14.95 % 14.91 % 14.89 % 17.29%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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. Total 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. Total 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.
Total returns for the Investment Class of the Portfolio reflect expenses
reimbursed by the Adviser for certain periods. Without such reimbursements,
total returns would have been lower.
*Total returns are compared to the S&P 500 Index, an unmanaged market index.
7 - MAS Funds
<PAGE> 8
- ---------------------
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 value and growth equities. In constructing the
Portfolio, the MAS equity team applies a value-oriented discipline to the three
key equity decisions: stock selection, sector allocation, and portfolio risk
control.
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.
The fiscal year ended with the volatile stock market down nearly 16% from its
July peak, with the Portfolio lagging the S&P 500 by returning -14.4% compared
to -10.0% for the index. Nevertheless, the Portfolio remained competitive with
other actively managed institutional equity funds. For comparison, 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 Growth Index in
100% of all ten-year trailing periods, in 89% of all five-year trailing
periods, and in 75% of all three-year trailing periods; and outperformed the
Growth & Income Index in 100% of all ten-year trailing periods, in 83% of all
five-year trailing periods, and in 68% of all three-year trailing periods.
MAS continued in this fiscal year to fine tune the investment process changes
which were started in 1996. First, MAS increased the number of portfolio
managers on each style team from two to three. Second, MAS narrowed the focus
of each team by instituting internal value and growth benchmarks, to ensure
that we achieve the desired overall portfolio characteristics of above average
profit and growth, at modest discount valuations to the broad market averages.
Third, MAS assigned research professionals directly to each team in order to
help achieve more effectively the aggressive research goals set in 1996. MAS
believes that these adjustments will further enhance the overall management
process of the Portfolio.
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 subjected to rigorous fundamental review. 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 1998, the Portfolio's performance suffered due to four strong
undercurrents in the large capitalization marketplace. First, S&P 500 Index
returns were concentrated in only a small percentage of the index stocks. For
example, for the entire fiscal year the largest fifty stocks contributed 86% of
the index's return, and for the last nine months of the fiscal year, a mere
five contributed 56%. Second, high P/E stocks continued to outperform low P/E
stocks, despite the sharp market price correction in the fourth fiscal quarter.
Third, growth stocks continued to outperform value stocks, though lacking
compelling, supporting investment rationale. Fourth, economically sensitive
holdings which appeared to be priced defensively at the beginning of the fiscal
year, grew progressively out of favor compared with stable, defensive stocks.
These factors contributed directly to the poor stock selection for the year,
to which over eighty percent of the underperformance was due. Unfavorable stock
selection occurred in drugs, heavy industrials, and financials. The balance of
the shortfall resulted from an unfavorable sector allocation, due mainly to an
overweight in basic resources and heavy industry sectors which underperformed,
and an underweight in drug stocks which outperformed. On the other hand,
performance has benefited by avoiding many
8 - MAS Funds
<PAGE> 9
mega-cap stocks with suspect fundamentals and extreme valuations. These include
many in the beverage and personal products sector, whose disappointing earnings
finally resulted in contractions in valuation and serious underperformance in
the fourth fiscal quarter.
The Portfolio's overweight in economically sensitive (cyclical) sectors has
hurt performance. These cyclicals are attractive because of solid fundamentals,
balance sheet strength, positive cash flow generation, improved ability to
weather a downturn, and moreover, record low relative valuations even when
compared with prior recessions. At fiscal year end, the Portfolio remained
diversified across all economic sectors of the market. It also retained its
robust characteristics, i.e., a projected 12% premium forward earnings per
share growth forecast of 16.3% versus 14.5% for the market, with a 25% discount
P/E valuation of 13.9X versus 18.4X for the S&P 500 based on consensus 1999
earnings projections.
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Equity S&P 500
DOLLARS (000)
<S> <C> <C>
'88 1000 1000
1019 1031
1095 1104
1173 1201
'89 1330 1330
1307 1358
1267 1317
1382 1399
'90 1174 1207
1306 1315
1528 1506
1529 1503
'91 1646 1583
1828 1716
1773 1673
1773 1705
'92 1836 1758
1970 1847
2003 1927
1987 1937
'93 2039 1987
2101 2033
2032 1956
2047 1964
'94 2123 2060
2112 2060
2293 2260
2500 2476
'95 2678 2673
2809 2834
2981 2986
3101 3120
'96 3120 3216
3388 3484
3468 3578
3984 4202
'97 4319 4517
4263 4647
4849 5295
4914 5470
'98 4204 4926
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS EQUITY
------------------------------------------------- S&P 500
INSTITUTIONAL - INVESTMENT -- ADVISER + INDEX
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
ONE YEAR (2.66)% (2.78)% (2.84)% 9.05%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 15.57 % 15.47 % 15.53 % 19.91%
- ----------------------------------------------------------------------------------------------------------------------
TEN YEARS 15.44 % 15.39 % 15.42 % 17.29%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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. Total 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 1/16/98. Total 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. 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.
Total returns for the Investment Class of the Portfolio reflect expenses
reimbursed by the Adviser for certain periods. Without such reimbursements,
total returns would have been lower.
* Total returns are compared to the S&P 500 Index, an unmanaged market
index.
9 - MAS Funds
<PAGE> 10
- ------------------------
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.
[PHOTO]
ABOVE, FROM LEFT:
Jim Scott,
Elizabeth Vale,
and John Hevner
[PHOTO]
RIGHT:
Tracey Ivey and
Mary Jane Bobyock
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.
The past fiscal year was a very difficult one for small-cap stocks. The
difference between the performance of the largest stocks in the S&P 500 and the
stocks in the Russell 2000 was extraordinarily large by historical standards.
This differential performance has created a situation in which small-cap stocks
look very attractive on a relative valuation basis. Once equity markets become
less volatile, it would not be surprising if small-cap stocks enjoyed a
meaningful period of outperformance. At fiscal year-end, MAS identified a
number of stocks with solid earnings growth prospects selling at reasonable
multiples of earnings.
Both the Portfolio and its benchmark, the Russell 2000, declined over the
past year. The portfolio's return was just slightly better than that of the
benchmark. Sector selection and trading made positive contributions to
performance over the past 12 months, while stock selection detracted slightly
from returns.
10 - MAS Funds
<PAGE> 11
ONCE EQUITY MARKETS BECOME LESS VOLATILE, IT WOULD NOT BE SURPRISING IF
SMALL-CAP STOCKS ENJOYED A MEANINGFUL PERIOD OF OUTPERFORMANCE.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Over 10 Years
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Small Cap Value Russell 2000
DOLLARS (000)
<S> <C> <C>
'88 1000 1000
1007 993
1089 1070
1151 1136
'89 1249 1209
1184 1150
1183 1124
1241 1167
'90 904 881
988 926
1303 1201
1310 1182
'91 1473 1279
1618 1352
1736 1453
1632 1354
'92 1681 1393
1987 1601
2028 1669
2112 1706
'93 2316 1855
2407 1903
2390 1852
2360 1780
'94 2502 1904
2459 1868
2506 1955
2672 2138
'95 2962 2349
2977 2400
3170 2523
3428 2649
'96 3673 2658
4024 2796
3986 2652
4649 3081
'97 5502 3540
5256 3421
5791 3765
5499 3590
'98 4493 2866
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS SMALL RUSSELL 2000
CAP VALUE INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR (18.34)% (19.02)%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 14.17 % 9.09 %
- ----------------------------------------------------------------------------------------------------------------------
TEN YEARS 16.21 % 11.11 %
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
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.
* Total returns are compared to the russell 2000 index, an unmanaged market
index.
11 - MAS Funds
<PAGE> 12
- -----------------------------
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.
[PHOTO]
FROM LEFT:
Marc Crespi and
Glenn E. Becker
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.
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 3.8% per
year since inception. During fiscal 1998, the International Equity Portfolio
slightly outperformed the index: the Portfolio declined 8.4% compared to a 9.0%
decline for the Index. Stock markets around the world declined significantly in
the first and fourth quarters of the fiscal year due to fears of contagion from
the Asian crisis and from the Russian devaluation and debt default. Investors
fled from risky assets to the safety of G-7 government bonds and cash.
Stock selection was primarily responsible for value added relative to the
benchmark. Security selection in Japan, Sweden, and the United Kingdom
contributed positively to returns while selections in Germany, Hong Kong, and
Mexico detracted from results. The Portfolio's less-than-index exposure to
Japan and developed Asia helped the Portfolio's relative performance. Exposure
to Latin American markets, predominantly Argentina and Brazil, and the
underweight exposure to Switzerland, negatively impacted the Portfolio.
As of the end of September, the Portfolio's allocation to the Euro Zone was
39%, approximately 2% greater than the benchmark's exposure. Low interest rates
and slowly accelerating economic growth make this an attractive region. The
Portfolio's largest overweight position within this region is France, which has
contributed positively to the Portfolio's performance. The Portfolio's exposure
to
12 - MAS Funds
<PAGE> 13
IN DETERMINING THE PORTFOLIO'S COUNTRY ALLOCATION, MAS MEASURES VALUE THROUGH
THE COMPUTATION OF EXPECTED RETURNS FOR EACH MAJOR MARKET OR REGION.
Non-Euro Zone countries was 9%, approximately 3% less than the Index. At fiscal
year end, MAS continued to hold less-than-index exposure in Switzerland due to
high valuation.
In September, MAS continued to underweight the Portfolio's exposure to the
United Kingdom relative to the Index, in anticipation of corporate profits
declining further. The Portfolio's allocation to Japan remained 5% less than
the benchmark, as MAS awaited much needed financial system and banking reform.
The recently announced bank bailout package contains 60 trillion Yen to
recapitalize banks, but does not do enough to rationalize the industry.
Additionally, the Bank of Japan's recent business confidence survey, the
Tankan, painted a very bleak picture, citing that 1998 capital spending is
expected to fall by approximately 9%. The Portfolio's exposure to emerging
markets, predominantly in Latin America, was approximately 4%.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Since Inception
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS International Equity MSCI World Ex-U.S.
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
1011 1002
1020 1007
1033 950
'89 1204 1065
1275 1114
1164 899
1255 980
'90 1031 778
1078 857
1214 920
1184 873
'91 1249 944
1306 960
1275 849
1326 866
'92 1254 875
1262 842
1362 942
1415 1035
'93 1525 1099
1800 1113
1697 1149
1689 1203
'94 1728 1210
1618 1195
1574 1218
1626 1230
'95 1670 1280
1718 1332
1776 1372
1834 1394
'96 1818 1395
1897 1423
1937 1401
2180 1583
'97 2240 1577
2143 1455
2398 1669
2390 1682
'98 2052 1435
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS INTERNATIONAL EQUITY
--------------------------------- MSCI WORLD
INSTITUTIONAL - INVESTMENT -- EX-U.S. INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR (8.36)% (8.51)% (9.00)%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 6.12 % 6.01 % 5.48 %
- ----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 7.58 % 7.52 % 3.74 %
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to
certain risks such as currency fluctuations, economic instability, and
political developments.
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. Total 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.
Total returns for the Investment Class of the Portfolio reflect expenses
reimbursed by the Adviser for certain periods. Without such reimbursements,
total returns would have been lower.
* The International Equity Portfolio commenced operations on 11/25/88.
Total returns are compared to the Morgan Stanley Capital International
World Ex-U.S. Index, an unmanaged market index.
13 - MAS Funds
<PAGE> 14
MAS LOOKS TO CAPTURE THE RETURN POTENTIAL OF RAPIDLY GROWING COMPANIES WHILE
AVOIDING STOCKS THAT ARE LIKELY TO DISAPPOINT.
- -------------------------
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 markets. The Portfolio
targets companies with sustainable growth that 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 revisions and growth potential. This
screening process limits investment choices to a statistically advantaged pool.
MAS then 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 any of three criteria. If a
holding falls into one of the bottom two 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 1998, the Portfolio delivered a return of 2.0% versus -6.3% for
its benchmark, the S&P MidCap 400 Index. This environment was a difficult one
for smaller capitalization equities as both the Russell 2000 and the S&P 400
indices substantially underperformed the S&P 500 index. Smaller was not better
in fiscal 1998. Within the S&P 400, the capitalization-weighted index
significantly outperformed the equal weighted benchmark. The events in Asia in
October, 1997 through mid-July, 1998 strongly influenced the market. Two
investment themes dominated. Investors flocked to the more liquid stocks
leading to disparity in performance between larger and smaller stocks. Also,
investors increasingly valued the stability of earnings as concern over a
slowing global economy spread throughout the year.
The Mid Cap Growth Portfolio particularly benefited from this last theme. The
Portfolio emphasized companies with stable and predictable growth in October,
1997. This strategic shift resulted from the belief that recession and
deflation would cause the economy to slow, which in turn would put downward
pressure on interest rates. The Portfolio, therefore, also emphasized high
duration stocks that were interest rate sensitive.
This strategic shift to domestic, stable growers and interest-rate sensitive
growth stocks allowed the Portfolio to substantially outperform from October
through July. In mid July, 1998, events in Russia and fears of worldwide
deflation created a bear market for mid-cap and small-cap stocks as the
respective indices, the S&P 400 MidCap and the Russell 2000,
14 - MAS Funds
<PAGE> 15
both dropped over 20% from their peak and defensive sectors such as electric
utilities and regulated local telephone companies significantly outperformed.
Over the course of the full fiscal year, sector selection was additive. The
overweighted telephone services and underweighted basic resources and energy
sectors contributed almost 500 basis points of performance. The underweighted
sectors of financial services and electric utilities detracted almost 400 basis
points of performance with most of the other sectors modestly adding to
performance. Stock selection was also significantly additive, contributing
almost 60% of the outperformance against the index. In consumer services, the
significant emphasis on cable, radio broadcasting and outdoor advertising paid
off handsomely. In health care, two of the Portfolio's largest holdings,
Lincare and Health Management Associates, contributed over 200 basis points of
outperformance. Lastly, stock selection in heavy industry was also additive.
While stock selection was negative in fiscal 1998 in the Portfolio's heavily
overweighted telecommunications services, reversing the strong performance of
1997, fundamentals still remained strong.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Since Inception
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Mid Cap Growth S&P MidCap 400
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
1122 1059
'90 900 871
1097 979
1327 1204
1347 1195
'91 1497 1309
1749 1470
1642 1463
1533 1417
'92 1540 1472
1800 1645
1769 1699
1819 1739
'93 2062 1826
2128 1875
2004 1804
1832 1738
'94 1994 1855
2013 1808
2127 1956
2300 2126
'95 2604 2334
2743 2367
3058 2513
3313 2585
'96 3354 2660
3258 2821
2956 2779
3565 3188
'97 4295 3700
4338 3731
5239 4142
5420 4053
'98 4380 3467
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS MID CAP GROWTH
--------------------------------- S&P MIDCAP
INSTITUTIONAL - ADVISER -- 400 INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 2.00% 1.79% (6.30)%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 16.27% 16.19% 13.68 %
- ----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 18.97% 18.92% 15.74 %
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
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. Total 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 Mid Cap Growth Portfolio commenced operations on 3/30/90. Total
returns are compared to the S&P MidCap 400 Index, an unmanaged market
index.
15 - MAS Funds
<PAGE> 16
- ------------------------
MAS Funds / Equity
MID CAP VALUE
PORTFOLIO
The Mid Cap Value Portfolio applies Miller Anderson & Sherrerd's value
investment philosophy to the medium-sized equity universe, combining
fundamental research with a disciplined, quantitative investment process. MAS
generally keeps sector weights within 5% of those of the S&P MidCap 400 Index,
with strategic over- and under-weightings assigned to different sectors based
on their relative investment attractiveness. Decisions about portfolio
composition and structure are made by a team of MAS equity professionals who
specialize in the small- and mid-cap market segments.
[PHOTO]
FROM LEFT:
Alisa Skatrud
and Matthew Allen
MAS's investment process is driven chiefly by bottom-up considerations. Broad
macroeconomic trends that influence the outlook for certain industries are also
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.
Mid-cap stocks moved modestly lower this year, reflecting a variety of
domestic and international economic and political concerns. Even with the
Federal Reserve playing a more accommodative role, the market focused on the
prospect of slowing economic growth and the questionable financial health of
large commercial and investment banks. Due to pervasive uncertainty, we have
raised our target range for cash from zero to five percent to five to ten
percent. MAS looks forward to returning to a fully invested posture in the
coming months, pending the cessation of market turmoil and volatility.
The portfolio outperformed the S&P 400 MidCap index in three of the four
quarters, while modestly trailing the index for the fiscal year. In aggregate,
sector selection was additive to performance, while stock selection detracted
from performance.
16 - MAS Funds
<PAGE> 17
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Since Inception
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Mid Cap Value S&P MidCap 400
DOLLARS (000)
<S> <C> <C>
* 1000 1000
1107 1081
1217 1176
'95 1345 1291
1327 1309
1446 139
1545 1430
'96 1644 1471
1868 1560
1873 1537
2201 1763
'97 2654 2047
2607 2064
2922 2291
2866 2242
'98 2471 1918
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS MID CAP VALUE
------------------------------------------------ S&P MIDCAP
INSTITUTIONAL - INVESTMENT -- ADVISER + 400 INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR (6.92)% (7.08)% (6.92)% (6.30)%
- ----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 27.28 % 27.12 % 27.28 % 18.96 %
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
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. Total 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 07/17/98. Total 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. 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Mid Cap Value Portfolio commenced operations on 12/30/94. Total
returns are compared to the S&P MidCap 400 Index, an unmanaged market
index.
17 - MAS Funds
<PAGE> 18
- ----------------------------
MAS Funds / Equity
EMERGING MARKETS
VALUE PORTFOLIO
The Emerging Markets Value Portfolio applies Miller Anderson & Sherrerd's value
investment philosophy to the world's fastest-changing 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.
[PHOTO]
FROM LEFT:
Rachel Klein,
George Loos,
and Mark Babiec
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 50 securities in 20 markets.
During fiscal 1998, the Portfolio outperformed its benchmark, the MSCI
Emerging Markets Free Index. Lower-than-index exposure to Asia early in the
year and lower-than-index exposure to the European emerging markets, especially
Russia, in the second half of the year, as well as security selection in Asia
and Latin America, contributed to the positive relative returns.
The Portfolio started off the fiscal year with little exposure to Asian
markets. The profit and currency outlook for the major Asian countries
continued to deteriorate throughout the year, until the fourth quarter.
Countries were slow in implementing reforms and structural changes to bring
about an end to the crisis caused by over-investment and low returns on those
investments.
During the second quarter, the Portfolio increased the allocation to Asian
markets, particularly Thailand and Korea, which were the furthest along in the
18 - MAS Funds
<PAGE> 19
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.
reform process. The Portfolio also reduced exposure to India, which had
outperformed other Asian markets. During the third quarter, the Portfolio
reduced exposure to Mexico, as fundamentals started to deteriorate, and
increased exposure to Brazil. The Brazilian market was hit hard by Russia's
default on debt. Fortunately, the Portfolio had little exposure to Russia: the
only holding was Lukoil, which sells oil in dollars.
At fiscal year end, the Portfolio still held higher-than-index exposure in
Korea. However, MAS continued to underweight the Portfolio's overall exposure
to the emerging Asian regions, since valuations were still too high relative to
plunging economic growth. MAS also continued to underweight the Portfolio's
exposure to the Emerging Europe region on valuation grounds. As of the end of
September, the Portfolio's Latin American exposure was approximately two
percentage points greater than the benchmark.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Since Inception
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Emerging Markets Value MSCI Emerging Markets Free
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
1056 1004
1152 1101
'95 1163 1089
1118 1071
1183 1132
1311 1170
'96 1235 1123
1242 1113
1361 1202
1513 1294
'97 1459 1173
1268 963
1269 1018
1003 772
'98 819 595
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MSCI EMERGING
MAS EMERGING MARKETS
MARKETS VALUE FREE INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR (43.83)% (49.23)%
- ----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION (5.41)% (13.46)%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to
certain risks such as currency fluctuations, economic instability, and
political developments.
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.
Total returns for the portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Emerging Markets Value Portfolio commenced operations on 2/28/95.
total returns are compared to the Morgan Stanley Capital International
Emerging Markets Free Index, an unmanaged market index.
19 - MAS Funds
<PAGE> 20
- --------------------------
Mas Funds / Equity
SMALL CAP GROWTH PORTFOLIO
Miller Anderson & Sherrerd's small-cap growth strategy seeks to capitalize on
the relative inefficiencies of the small-cap equity markets. 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 small-cap growth strategy employs a disciplined four-part process that
incorporates quantitative, fundamental and valuation analysis as well as a
strict sell discipline.
[PHOTO]
FROM LEFT:
Paige A. Johnson
and Mary Ann Milias
First, MAS conducts a quantitative screen that sorts the stocks within each
economic sector based on earnings-estimate revisions and growth potential. This
screening process limits investment choices to a statistically advantaged pool.
MAS then 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 always holds only those securities that are currently
most attractive. Sales can be triggered by meeting any of three criteria. If a
holding falls into one of the bottom two 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.
With an inception date of June 30, 1998, the Portfolio delivered a return of
- -14.3% versus -20.2% for its benchmark, the Russell 2000. The environment was a
difficult one for smaller capitalization equities for the fiscal year as the
Russell 2000 declined more than 35% from its high made in April to its trough,
substantially underperforming the S&P 500 index. Smaller was not better in
fiscal 1998. Within the Russell indices, the Russell 200 outperformed the
Russell 1000, which outperformed the Russell 2000. For the quarter, two of our
most heavily weighted sectors, technology and healthcare, contributed almost
all of the outper-
20 - MAS Funds
<PAGE> 21
formance. Technology, our largest sector weighting, contributed over 700 basis
points of outperformance because of stock selection and trading, as we took
advantage of the volatile markets. Healthcare added almost another 100 basis
points of relative outperformance from both strong stock selection and sector
weight. The two sectors that detracted most from performance were financial
services and consumer services. Financial services underperformed due to both
underweighting the sector and stock selection. In general, the portfolio
included more stocks that needed the capital markets for securitization to grow
than the slower growing commercial banks that have plenty of capital. In
consumer services, while the stable growers such as cable companies did well,
two stocks that were slightly under earnings estimates, Premier Parks and
Mail-Well, detracted from performance.
At year-end, MAS favored technology, consumer services, health care, and
heavy industry, while underweighting financial services, basic resources,
electric utilities and energy. MAS is constructive on the market and the
portfolio over the next fiscal year, recognizing the interim volatility and the
current bear market in small capitalization stocks. Valuation levels for small
cap stocks are arguably at the most compelling level in many years. MAS is
encouraged that it has been able to deliver relative outperformance in a
difficult environment. MAS believes that the companies that continue to deliver
above market earnings will benefit from a slow growth, low interest rate
environment.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Since Inception
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Small Cap Growth Russell 2000
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
'98 857 799
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS SMALL RUSSELL 2000
CAP GROWTH INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SINCE INCEPTION (14.30)% (20.15)%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
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.
Total returns for the portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Small Cap Growth Portfolio Commenced Operations on 6/30/98. Total
returns are compared to the Russell 2000 Index, an unmanaged market
index.
21 - MAS Funds
<PAGE> 22
- --------------------------------
Mas Funds / Fixed Income
FIXED INCOME
PORTFOLIO
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.
[PHOTO]
FROM LEFT:
Joe Braccia
and Bruce Rodio
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.
While the Portfolio's impressive long-term record reflects successful
judgments about these key decisions, an unusually volatile market environment
had an unfavorable impact on near-term relative returns. For the past year, the
return on the Portfolio
22 - MAS Funds
<PAGE> 23
was 357 basis points behind that of its benchmark. During this period, an
extraordinary confluence of global financial and economic developments
conspired to create a "flight-to-quality," producing a powerful rally in U.S.
Treasury securities. The Portfolio's value discipline, however, led us to
maintain an overweight position in corporates and mortgages while
underweighting Treasuries relative to the Portfolio's benchmark. With some
investors less willing to bear risk, especially credit risk, at a time of
global economic uncertainty, the yield spreads on corporate bonds and other
non-Treasury securities widened significantly, adversely affecting the
Portfolio's performance. The Portfolio's interest-rate risk and yield-curve
strategies were close to neutral for most of the past year, and did not have a
material impact on relative performance. With real interest rates at relatively
attractive levels in the U.S., it was difficult to identify superior
opportunities in non-dollar bonds. Accordingly, the non-dollar allocation was
quite small for the entire year, and did not have a major effect on relative
returns.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Over 10 Years
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Fixed Income Salomon Broad
DOLLARS (000)
<S> <C> <C>
'88 1000 1000
1014 1008
1031 1020
1095 1101
'89 1092 1112
1127 1153
1105 1144
1150 1186
'90 1134 1197
1208 1258
1255 1291
1277 1314
'91 1373 1389
1468 1459
1437 1442
1508 1501
'92 1570 1565
1592 1569
1666 1635
1727 1680
'93 1794 1724
1813 1725
1757 1677
1710 1660
'94 1715 1669
1713 1676
1797 1761
1899 1869
'95 1958 1904
2039 1987
2034 1952
2059 1961
'96 2107 1998
2189 2058
2188 2048
2275 2121
'97 2349 2192
2400 2257
2440 2293
2481 2346
'98 2535 2444
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS FIXED INCOME
------------------------------------------------- SALOMON
INSTITUTIONAL - INVESTMENT -- ADVISER + BROAD INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 7.90% 7.72% 7.63% 11.47%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 7.15% 7.08% 7.05% 7.22%
- ----------------------------------------------------------------------------------------------------------------------
TEN YEARS 9.75% 9.71% 9.69% 9.35%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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. Total 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. Total 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.
Total returns for the Investment and Adviser Classes of the Portfolio reflect
expenses reimbursed by the Adviser for certain periods. Without such
reimbursements, total returns would have been lower.
* Total returns are compared to the Salomon Broad Investment Grade
Index, an unmanaged market index.
23 - MAS Funds
<PAGE> 24
- --------------------------------
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.
[PHOTO]
FROM LEFT:
Kurt M. Dodds,
Eric W. Riehl,
and Deborah R. Newborn
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to
reduce the risk of investing by carefully diversifying the risks within the
Portfolio. The third is to provide investors with a deflation hedge. In order
to provide this hedge, or protection during periods of declining inflation and
interest rates, the Portfolio maintains high average credit quality and
includes a significant portion of noncallable and longer-maturity securities.
This positions the Portfolio to perform well when other market sectors
experience poor returns.
There are four key decisions that the fixed-income team makes in building the
Portfolio. The first decision relates to the amount of interest-rate risk in
the Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are times when it is better to bear
more interest-rate risk than others. MAS bases the interest-rate-risk decision
on the level of real interest rates and the steepness of the yield curve,
tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have
significantly higher yields than short-term bonds, historically it has been an
attractive time to invest in fixed-income securities and to have an
above-average interest-rate sensitivity.
The second decision involves determining which maturities offer the best
value relative to their risk. The third decision relates to credit risk. MAS's
research shows that bearing credit risk offers financial rewards and that a
diversified approach to credit risk adds to overall portfolio returns. The
Portfolio purchases only those bonds that hold an investment grade rating or
are deemed by MAS to be of investment grade quality.
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. As a result, these bonds have
higher yields and MAS's fixed-income team calculates whether the additional
yield is sufficient to compensate for the embedded option risk.
While the Portfolio's impressive long-term record reflects successful
judgments about these key deci-
24 - MAS Funds
<PAGE> 25
THE PORTFOLIO MAINTAINS HIGH AVERAGE CREDIT QUALITY AND INCLUDES A SIGNIFICANT
PORTION OF NONCALLABLE AND LONGER-MATURITY SECURITIES.
sions, an unusually volatile market environment had an unfavorable impact on
near-term relative returns. For the past year, the return on the Portfolio was
164 basis points behind that of its benchmark. During this period, an
extraordinary confluence of global financial and economic developments
conspired to create a "flight-to-quality," producing a powerful rally in U.S.
Treasury securities. The Portfolio's value discipline, however, led it to
maintain an overweighted position in corporates and mortgages while
underweighting Treasuries relative to its benchmark. With some investors less
willing to bear risk, especially credit risk, at a time of global economic
uncertainty, the yield spreads on corporate bonds and other non-Treasury
securities widened significantly, adversely affecting the Portfolio's
performance over the past year. The Portfolio's interest-rate risk and
yield-curve strategies were close to neutral for most of the past year, and did
not have a material impact on relative performance.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Over 10 Years
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Domestic Fixed Income Salomon Broad
DOLLARS (000)
<S> <C> <C>
'88 1000 1000
1014 1008
1028 1020
1092 1101
'89 1091 1112
1128 1153
1108 1144
1150 1186
'90 1134 1197
1209 1258
1255 1291
1276 1314
'91 1372 1389
1469 1459
1436 1442
1511 1501
'92 1583 1565
1603 1569
1680 1635
1742 1680
'93 1806 1724
1824 1725
1786 1677
1751 1660
'94 1754 1669
1753 1676
1850 1761
1962 1869
'95 2006 1904
2083 1987
2044 1952
2053 1961
'96 2094 1998
2164 2058
2156 2048
2235 2121
'97 2308 2192
2372 2257
2405 2293
2457 2346
'98 2535 2444
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS DOMESTIC SALOMON
FIXED INCOME BROAD INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 9.83% 11.47%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 7.01% 7.22%
- ----------------------------------------------------------------------------------------------------------------------
TEN YEARS 9.75% 9.35%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. without such waivers and/or reimbursements,
total returns would have been lower.
On December 19, 1994 shareholders approved a change in the Portfolio's
investment policies to emphasize fixed-income securities of domestic issuers
rated A or higher. Shareholders then voted on May 1, 1997, to permit the
Portfolio to invest a limited portion of its assets in fixed-income securities
of domestic issuers rated BBB at the time of purchase. The Portfolio's
performance pattern may have been affected by these changes.
* Total returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
25 - MAS Funds
<PAGE> 26
THE HIGH-YIELD TEAM UTILIZES A DISCIPLINED, TOTAL RETURN-ORIENTED INVESTMENT
PROCESS TO ACTIVELY MANAGE DIVERSIFIED HIGH-YIELD PORTFOLIOS.
- ------------------------------
Mas Funds / Fixed Income
HIGH YIELD PORTFOLIO
The High Yield Portfolio focuses on investments in below-investment-grade
corporate bonds. The Portfolio is actively managed by Miller Anderson &
Sherrerd's high-yield fixed-income team, which is responsible for portfolio
construction and risk control. The high-yield team utilizes a disciplined,
total return-oriented investment process to actively manage diversified
high-yield portfolios. To identify the most efficient portfolio, the team
engages in fundamental analysis and valuation of high yield securities.
Individual securities are compared on the basis of option- and
credit-risk-adjusted expected return. Several high-yield investment beliefs
guide our process. We believe that the keys to successful high-yield management
are: superior, forward-looking credit analysis; a consistent, disciplined
investment process; a value focus; and careful control of overall portfolio
risk. The team manages overall interest-rate risk and economic sensitivity, as
well as the integration of investment themes drawn from the firm's
financial-market research.
MAS believes that investments in high-yield securities can improve the
diversification of a balanced portfolio and raise return for a given level of
volatility. MAS's extensive research shows that investors have been rewarded
over time for holding lower-rated securities. High-yield securities also offer
investment opportunities overlooked in the traditional stock/bond mix. Our goal
is to achieve superior total returns with a greater degree of consistency than
the broad market averages and other investment managers.
During fiscal 1998, the Portfolio's returns lagged the results of the
benchmark primarily due to exposure to non-U.S. issues, a sector that
experienced substantial underperformance. An overweighting in the
telecommunications sector for most of the year also detracted from relative
performance after being a strong contributor earlier in the year. Positive
contributors to our relative performance included: a higher average credit
rating than the index; an underweight position in cyclical and commodity
sectors such as metals, paper, and energy; and superior security selection
across several sectors. Our focus on larger capitalization public companies
helped support the domestic portion of the Portfolio.
The Portfolio remained overweighted in the emerging markets and
telecommunications sectors where MAS continued to find value. The
telecommunications holdings were well diversified and emphasize the following
subsectors with examples of larger holdings: competitive local exchange
carriers (Intermedia Communications, Nextlink), wireless (Nextel
Communications, Comcast Cellular), international wireline (RSL Communications,
Global Crossings) and long distance (IXC Communications, Qwest Communications).
In emerging markets, holdings were concentrated in Asia, with Korea being the
largest exposure, and in Latin America, where the exposure was mainly to
corporate issues in Argentina and Mexico.
MAS has found value in securities of selected Western European issuers. MAS
has made small investments in out-of-favor cyclical bonds and has looked
carefully at better quality cable and energy bonds that have also declined
sharply. Other larger, higher quality positions include Columbia/HCA and Tenet
Healthcare in the healthcare sector, as well as Kmart secured bonds in the
retail sector. The Portfolio maintained an average credit quality that is
higher than that of the index, while the interest rate sensitivity remained
close to that of the benchmark.
It was a difficult year for the high yield market. The global financial
turmoil and subsequent flight to quality led risk premiums to rise
dramatically. Technical factors also contributed to the depressed
26 - MAS Funds
<PAGE> 27
level of prices in the high yield market. Leveraged investors, including many
of the hedge funds which have been in the headlines, were forced to sell to
satisfy margin calls. Dealers are under pressure to keep inventories low, and
net cash flows into mutual funds turned negative. When these factors stabilize,
prices should be able to move closer to levels that represent fair value.
As a result of recent dislocations in the financial markets, spreads widened
to levels not seen since the U. S. was facing a recession and banking crisis
earlier this decade. MAS believed at fiscal year end that high-yield prices had
discounted very high default rates at a time when most high yield issuers
remained fundamentally strong.
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Since Inception
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS High Yield Salomon High Yield
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
995 1000
1046 1039
'89 1009 1023
943 1006
914 975
968 1014
'90 845 940
840 935
1048 1098
1111 1172
'91 1155 1241
1211 1308
1290 1406
1341 1460
'92 1415 1521
1435 1541
1561 1634
1645 1706
'93 1700 1746
1787 1809
1744 1772
1719 1764
'94 1760 1786
1661 1787
1733 1892
1916 2009
'95 1999 2069
2059 2139
2124 2173
2160 2201
'96 2276 2291
2374 2380
2407 2414
2573 2522
'97 2728 2632
2753 2694
2880 2804
2880 2833
'98 2696 2697
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
MAS HIGH YIELD
-------------------------------------------------- SALOMON HIGH
INSTITUTIONAL - INVESTMENT -- ADVISER + YIELD INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR (1.17)% (1.37)% (1.37)% 2.48%
- ----------------------------------------------------------------------------------------------------------------------
FIVE YEARS 9.67 % 9.58 % 9.60 % 9.09%
- ----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 10.90 % 10.85 % 10.87 % 10.90%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. High-yield fixed-income securities,
otherwise known as "junk bonds," represent a much greater risk of default and
tend to be more volatile than higher-rated bonds.
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. Total 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. Total 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. 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.
Total returns for the Institutional and Investment Classes of the Portfolio
reflect expenses reimbursed by the Adviser for certain periods. Without such
reimbursements, total returns would have been lower.
* The High Yield Portfolio commenced operations on 2/28/89. Total
returns are compared to the Salomon High Yield Index, an unmanaged
market index.
27 - MAS Funds
<PAGE> 28
- -----------------------------
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.
[PHOTO]
FROM LEFT:
Meg Benjamin,
Pamela Levesque,
and Tina L. Irwin
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 government securities, 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.
During the past twelve months, the money market curve flattened and then
inverted as investors began to anticipate a series of easings by the Federal
Reserve instead of a series of tightenings. This complete turnaround in U.S.
market sentiment was a direct product of the global economic crisis and its
28 - MAS Funds
<PAGE> 29
IN MANAGING THE CASH RESERVES PORTFOLIO, MAS LOOKS TO MAXIMIZE CURRENT INCOME
WHILE PRESERVING CAPITAL AND LIQUIDITY.
developing impact on our economy. U.S. GDP and labor market growth have slowed
considerably and forecasts expect this trend to continue for the near term. In
addition, retail demand and consumer confidence have begun to fall from their
lofty levels set earlier this year. As a result, the Federal Reserve acted with
a 25 basis point easing of interest rates at the end of September, and the
market expects further cuts in the future (in addition to the subsequent
October 1998 rate cut).
<TABLE>
<CAPTION>
- -Growth of a $1 Million Investment Since Inception
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Funds Cash Reserves Lipper Money Market Salomon 1-Month Treasury
DOLLARS (000)
<S> <C> <C> <C>
'90 1007 1006 1006
1027 1025 1023
1044 1042 1037
1059 1056 1050
'91 1074 1070 1063
1087 1083 1075
1098 1093 1085
1108 1103 1094
'92 1116 1111 1102
1124 1118 1110
1131 1125 1117
1139 1132 1125
'93 1147 1139 1133
1155 1146 1141
1164 1154 1150
1174 1163 1160
'94 1186 1174 1171
1201 1188 1184
1218 1204 1198
1235 1220 1215
'95 1252 1235 1231
1270 1251 1248
1286 1266 1262
1303 1280 1278
'96 1319 1295 1293
1336 1311 1309
1353 1327 1325
1371 1344 1341
'97 1390 1362 1357
1408 1380 1373
1427 1398 1389
1446 1416 1406
'98 1466 1435 1423
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
SALOMON
1-MONTH
MAS CASH LIPPER MONEY TREASURY
RESERVES MARKET AVERAGE BILL INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE YEAR 5.47% 5.35% 4.87%
- ----------------------------------------------------------------------------------------------------------------------
7-DAY CURRENT YIELD 5.33% NA NA
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have be lower.
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
total returns are compared to the Lipper Money Market Average of money
market funds and the Salomon 1-Month Treasury Bill Index. While the
Portfolio may invest in the government securities represented by the
salomon 1-month treasury bill index, it also invests in non-government
issues and securities with maturities greater than one month.
29 - MAS Funds
<PAGE> 30
- ------------------------
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.
[PHOTO]
FROM LEFT:
Nanette de Groot
and Robert J. Formisano
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to
reduce the risk of investing by carefully diversifying the risks within the
Portfolio. The third is to provide investors with a deflation hedge. In order
to provide this hedge, or protection during periods of declining inflation and
interest rates, the Portfolio maintains high average credit quality and
includes a significant portion of noncallable and longer-maturity securities.
This positions the Portfolio to perform well when other market sectors
experience poor returns.
There are five key decisions that the fixed-income team makes in building
the Portfolio. The first decision relates to the amount of interest-rate risk in
the Portfolio. Bond values increase when interest rates fall and decrease when
interest rates rise. Consequently, there are times when it is better to bear
more interest-rate risk than others. MAS bases the interest-rate-risk decision
on the level of real interest rates and the steepness of the yield curve,
tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically it has been an attractive time
to invest in fixed- income securities and to have an above-average interest-rate
sensitivity.
The second decision involves determining which maturities offer the best
value relative to their risk. Third, the team considers which fixed-income
markets around the world offer the best value. Relative real interest rates,
the steepness of U.S. and foreign yield curves and judgments about currency
values drive this decision. The fourth decision relates to credit risk. MAS's
research shows that bearing credit risk offers financial rewards and that a
diversified approach to credit risk adds to overall portfolio returns.
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.
While the Portfolio's impressive long-term record reflects successful
judgments about these key decisions, an unusually volatile market environment
had an unfavorable impact on near-term relative
30 - MAS FUNDS
<PAGE> 31
WITH REAL INTEREST RATES AT RELATIVELY ATTRACTIVE LEVELS IN THE U.S., IT WAS
DIFFICULT TO IDENTIFY SUPERIOR OPPORTUNITIES IN NON-DOLLAR BONDS.
returns. For the past year, the return on the Portfolio was 224 basis points
behind that of its benchmark. During this period, an extraordinary confluence
of global financial and economic developments conspired to create a
"flight-to-quality," producing a powerful rally in U.S. Treasury securities.
Our value discipline, however, led us to maintain an overweighted position in
corporates and mortgages while underweighting Treasuries relative to the
Portfolio's benchmark. With some investors less willing to bear risk,
especially credit risk, at a time of global economic uncertainty, the yield
spreads on corporate bonds and other non-Treasury securities widened
significantly, adversely affecting the Portfolio's performance over the past
year. The Portfolio's interest-rate risk and yield-curve strategies were close
to neutral for most of the past year, and did not have a material impact on
relative performance. With real interest rates at relatively attractive levels
in the U.S., it was difficult to identify superior opportunities in non-dollar
bonds. Accordingly, the non-dollar allocation was quite small for the entire
year, and did not have a major effect on relative returns.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Fixed Income II Salomon Broad
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
'90 1009 1009
1082 1060
1109 1088
1121 1107
'91 1206 1170
1291 1229
1255 1215
1312 1264
'92 1364 1319
1382 1322
1443 1378
1494 1416
'93 1548 1453
1556 1454
1514 1413
1476 1399
'94 1474 1407
1476 1412
1555 1484
1643 1574
'95 1683 1604
1752 1674
1733 1645
1747 1653
'96 1786 1684
1849 1734
1844 1725
1911 1788
'97 1975 1847
2020 1901
2051 1932
2089 1977
'98 2157 2059
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS FIXED SALOMON
INCOME II BROAD INDEX
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 9.23 % 11.47 %
- ----------------------------------------------------------------------------------------
FIVE YEARS 6.86 % 7.22 %
- ----------------------------------------------------------------------------------------
SINCE INCEPTION 9.98 % 9.35 %
- ----------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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.
On May 12, 1997, shareholders approved a change in the Portfolio's investment
policies to allow the Portfolio to invest in fixed-income securities of
domestic issuers rated BBB or higher at the time of purchase. The Portfolio's
performance pattern may have been affected by this change.
* The Fixed Income Portfolio II commenced operations on 8/31/90. Total
returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
31 - MAS Funds
<PAGE> 32
- ------------------------
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.
[PHOTO]
ABOVE, FROM LEFT:
Jennifer Pindle,
Susan Mislick, and
Andrea Silverman
RIGHT: [PHOTO]
Scott Burneyand
and Jim Schmid
The fixed-income team seeks to earn superior returns by identifying
attractively priced securities and by managing the interest-rate sensitivity,
yield-curve strategy, and prepayment sensitivity of the Portfolio. Bond values
increase when interest rates fall and decrease when interest rates rise.
Consequently, there are times when it is better to bear more interest-rate
risk than others. MAS bases the interest-rate-risk decision on the level of
real interest rates and the steepness of the yield curve, tempered by a
strategic view about economic growth and the prospects for inflation. When real
rates are high and longer-maturity bonds have significantly higher yields than
short-term bonds, historically it has been an attractive time to invest in
fixed-income securities and to have an above-average interest-rate sensitivity.
Management of the yield-curve strategy involves determining which maturities
along the yield curve offer the best value relative to their risk. The team
actively manages the amount of prepayment risk, or call risk, within the
Portfolio. Most mortgages contain an option to prepay the principal amount
prior to maturity. As a result, these securities have higher yields and MAS
calculates whether the additional yield is sufficient to compensate for the
risk. The sensitivity of the Portfolio to mortgage prepayments is increased
when yields, adjusted for probable prepayments, are attractive.
For the past year, the Portfolio underperformed its benchmark by 309 basis
points. The majority of this underperformance came from a dramatic widening of
spreads. The interest-rate sensitivity of the Portfolio paralleled the
benchmark throughout fiscal 1998. Similarly, due to a lack of perceived
relative value, the yield-curve strategy of the Portfolio was equivalent to the
benchmark. At the beginning of the fiscal year, the Portfolio was fully
invested in mortgage securities, although prepayment and spread exposure were
only slightly greater than
32 - MAS FUNDS
<PAGE> 33
the index. As spreads on fixed-rate current-coupon mortgages widened, these
holdings were increased, while positions in bonds that exhibited less exposure
to spread changes were sold. The large rally in Treasury yields caused
prepayment fears to reach extremely high levels. Therefore, bonds that suffer
from further increases in prepayment expectations were added, as their
distressed valuations were attractive relative to the risk of further spread
widening. 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 greater than that of the index.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS Mortgage-Backed
SEPTEMBER 30 Securities Lehman Mortgage
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
1002 1003
1043 1043
'92 1058 1074
1082 1082
1103 1114
1138 1135
'93 1174 1146
1171 1156
1149 1129
1136 1123
'94 1139 1133
1131 1138
1195 1197
1246 1260
'95 1282 1286
1328 1329
1318 1323
1326 1333
'96 1360 1361
1405 1400
1413 1402
1464 1455
'97 1506 1497
1536 1533
1560 1558
1580 1585
'98 1594 1626
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS
MORTGAGE-BACKED LEHMAN
SECURITIES MORTGAGE INDEX
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 5.53 % 8.62 %
- ---------------------------------------------------------------------------------------------------------
FIVE YEARS 6.24 % 7.26 %
- ---------------------------------------------------------------------------------------------------------
SINCE INCEPTION 7.20 % 7.57 %
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Mortgage-Backed Securities Portfolio commenced operations on 1/31/92.
Total returns are compared to the Lehman Brothers Mortgage Index, an
unmanaged market index.
33 - MAS Funds
<PAGE> 34
- ------------------------
MAS Funds / Fixed Income
LIMITED DURATION
PORTFOLIO
The Limited Duration Portfolio is a duration-constrained fund investing only in
the U.S. bond market. It is 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 further control risk.
[PHOTO]
FROM LEFT:
Matt Potter,
Ted Kurth, and
Carol Neilson
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%.
Finally, prepayment sensitivity of the Portfolio is monitored to ensure
that investors are compensated for taking 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.
For fiscal 1998, the Limited Duration Portfolio underperformed its index
by 177 basis points. This twelve month period was one of the most extraordinary
time periods seen by the bond market and included several phases of the so-
called Asian crisis, and a dramatic decline in equity markets globally. The
Portfolio suffered from two periods of tremendous spread widening - the first
in the fourth quarter of 1997 when corporates widened significantly, and the
second in the third quarter of 1998 when both corporates and mortgages widened.
At the same time, a flight to quality brought Treasury rates across the yield
curve to record lows. MAS took advantage of the spread widening in late 1997 to
reduce asset-backed securities in favor of corporate notes. The Portfolio also
increased the mortgage
34 - MAS FUNDS
<PAGE> 35
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.
pass-through position in 1998 by reducing ARMs. With the spread widening in the
third quarter of this year, these positions underperformed. The Portfolio also
kept interest rate sensitivity at or below neutral throughout the year. The
view was that the level of rates left no room for an increase early in the
year, and then later predicted significant cutting by the Federal Reserve. At
the end of the year, the Portfolio was 35 basis points shorter in interest rate
sensitivity than the benchmark.
At the close of fiscal 1998, mortgages represented approximately 39% of
the Portfolio's holdings, almost all of which are TBAs. Corporates represented
17% and asset-backeds represented 25%. Treasuries represented 9%, all in
Treasury Inflation-Protected Securities (TIPs). The remainder was held in cash
equivalents.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Limited Salomon 1-3 Year
Duration
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
1034 1029
'92 1069 1059
1068 1061
1097 1084
1110 1097
'93 1126 1112
1131 1119
1121 1113
1119 1114
'94 1131 1124
1131 1125
1167 1162
1202 1198
'95 1220 1216
1248 1245
1255 1251
1266 1264
'96 1287 1285
1314 1309
1324 1318
1352 1347
'97 1377 1373
1396 1396
1416 1416
1434 1438
'98 1461 1481
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS LIMITED SALOMON
DURATION 1-3 YEAR INDEX
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 6.13 % 7.90 %
- -------------------------------------------------------------------------------------------------------
FIVE YEARS 5.35 % 5.90 %
- -------------------------------------------------------------------------------------------------------
SINCE INCEPTION 6.01 % 6.23 %
- -------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser .
* The Limited Duration Portfolio commenced operations on 3/31/92. Total
returns are compared to the Salomon 1-3 Year Treasury/Government
Sponsored Index, an unmanaged market index.
35 - MAS Funds
<PAGE> 36
DURING THIS PERIOD, AN EXTRAORDINARY CONFLUENCE OF GLOBAL FINANCIAL AND
ECONOMIC DEVELOPMENTS CONSPIRED TO CREATE A "FLIGHT-TO-QUALITY," PRODUCING A
POWERFUL RALLY IN U.S. TREASURY SECURITIES.
- ------------------------
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.
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.
While the Portfolio's impressive long-term record reflects successful
judgments about these key decisions, an unusually volatile market environment
had an unfavorable impact on near-term relative returns. For the past year, the
return on the Portfolio was 416 basis points behind that of its benchmark.
During this period, an extraordinary confluence of global financial and
economic developments conspired to create a "flight-to-quality," producing a
powerful rally in U.S. Treasury securities. The MAS value discipline, however,
led the Portfolio to maintain an overweighted position in corporates and
mortgages while underweighting Treasuries relative to the Portfolio's
benchmark. With some investors less willing to bear risk, especially credit
risk, at a
36 - MAS FUNDS
<PAGE> 37
time of global economic uncertainty, the yield spreads on corporate bonds and
other non-Treasury securities widened significantly, adversely affecting the
Portfolio's performance over the past year. The Portfolio's interest-rate risk
and yield-curve strategies were close to neutral for most of the past year, and
did not have a material impact on relative performance. With real interest
rates at relatively attractive levels in the U.S., it was difficult to identify
superior opportunities in non-dollar bonds. Accordingly, the non-dollar
allocation was quite small for the entire year, and did not have a major effect
on relative returns.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS Special Purpose
SEPTEMBER 30 Fixed Income Salomon Broad
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
1048 1041
'92 1095 1085
1110 1088
1169 1134
1214 1165
'93 1261 1196
1275 1196
1240 1163
1208 1151
'94 1211 1158
1211 1162
1275 1221
1349 1296
'95 1392 1320
1449 1378
1446 1354
1464 1360
'96 1500 1386
1557 1427
1558 1420
1622 1471
'97 1676 1520
1713 1565
1740 1590
1768 1627
'98 1799 1695
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS SPECIAL PURPOSE SALOMON
FIXED INCOME BROAD INDEX
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 7.31 % 11.47 %
- --------------------------------------------------------------------------------------------------
FIVE YEARS 7.36 % 7.22 %
- --------------------------------------------------------------------------------------------------
SINCE INCEPTION 9.45 % 8.45 %
- --------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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 Special Purpose Fixed Income Portfolio commenced operations on
3/31/92. Total returns are compared to the Salomon Broad Investment Grade
Index, an unmanaged market index.
37 - MAS Funds
<PAGE> 38
- ------------------------
MAS Funds / Fixed Income
MUNICIPAL
PORTFOLIO
The Municipal Portfolio invests primarily in tax exempt municipal debt
obligations issued by state and local governments or their agencies. The
Portfolio will also invest selectively in taxable fixed-income securities.
Normally, at least 80% of the Portfolio will be invested in municipal
securities. The Portfolio is managed by the MAS tax-advantaged fixed-income
team. This team works closely with the MAS interest rate team to determine the
interest rate and yield curve exposure for the Portfolio. The tax-advantaged
team also works closely with the MAS fixed-income value teams to determine
sector allocation and security selection for the Portfolio. The objective of
the Portfolio is to maximize after- tax total return consistent with the
preservation of capital, while providing investors with deflation protection.
[PHOTO]
FROM LEFT:
Debbie Tickler,
Cecelia Vollaro,
and Mari M. Chazen
The investment philosophy is consistent with that of the other MAS
fixed-income products. As research based, value driven investors, MAS does
extensive research to identify objective measures of value that have proven to
be reliable over long periods of time. Consequently, MAS does not attempt to
forecast markets. Instead, MAS is disciplined in applying these value measures
to making investment decisions. An important part of the MAS philosophy is
utilizing research which shows that taxable investors are sometimes better
served by investments in taxable bonds. Thus, MAS views the municipal market as
just one of many alternatives for helping clients achieve the goal of
maximizing after-tax returns, consistent with a reasonable level of risk.
The MAS investment process consists of three major stages. First, the
appropriate level of interest rate sensitivity relative to the benchmark is
established using the same value measures -- the level of real interest rates
and the shape of the yield curve -- that are used in all of the MAS
fixed-income portfolios. Next, MAS examines the relative value offered by the
various sectors of the bond market to determine the most attractive sector
allocation. In particular, MAS attempts to add value by actively managing
sector exposures based on the prospects for the municipal market, relative to
the taxable markets. The final stage is 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
prepayment or call risk. In general, capital gains are realized only when the
prospective returns of bonds purchased will offset the tax on any gains, and
still provide excess value to the overall Portfolio.
Municipal bonds dramatically lagged the performance of Treasury
securities during the year. The yield ratio of 30 year municipal bonds to
Treasuries has risen from 82% to 97%. The cheapening of municipal bonds has
been due to a massive volume of new supply driven by declining rates
38 - MAS FUNDS
<PAGE> 39
and to a slow response by retail investors to the attractive level of municipal
yields relative to taxable yields. In addition, municipals along with all
non-Treasury sectors of the bond market significantly lagged the performance of
Treasuries during the recent flight to quality. The Portfolio's
underperformance compared to the benchmark is primarily a result of this
cheapening because the Portfolio was more sensitive to changes in municipal
yield ratios than the benchmark as the ratios rose. Positive contributions to
relative performance included a flattening of the municipal yield curve earlier
in the year and an emphasis on securities that have much better call protection
than the average bond in the benchmark. A small position in lower quality
corporate bonds throughout the year, as well as exposure to the mortgage
sector, detracted from relative performance.
The tax-exempt market offers a historic opportunity: yield ratios are at
a historic high and MAS feels that there is little fear of an adverse change in
the tax code. At fiscal year end, the Portfolio maintained a very high average
credit quality and a high degree of call protection.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS Lehman 5 Year Lehman 10 Year Blended
SEPTEMBER 30 Municipal Municipal Municipal Municipal Index
DOLLARS (000)
<S> <C> <C> <C> <C>
"*" 1000 1000 1000 1000
1016 1014 1020 1024
1061 1041 1059 1069
1103 1065 1094 1113
'93 1142 1090 1134 1158
1162 1103 1150 1175
1077 1072 1089 1081
1083 1083 1105 1089
'94 1089 1094 1113 1093
1089 1089 1095 1068
1186 1133 1171 1175
1180 1163 1202 1201
'95 1235 1191 1244 1234
1306 1216 1283 1317
1300 1216 1275 1283
1317 1222 1279 1288
'96 1351 1243 1304 1312
1379 1267 1341 1343
1383 1267 1341 1343
1426 1298 1385 1381
'97 1466 1325 1428 1418
1499 1348 1465 1448
1518 1364 1480 1464
1539 1379 1503 1483
'98 1571 1415 1554 1528
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS LEHMAN 5 YEAR LEHMAN 10 YEAR BLENDED
MUNICIPAL MUNICIPAL INDEX MUNICIPAL INDEX MUNICIPAL INDEX
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 7.20 % 6.76 % 8.82 % 7.79 %
- ----------------------------------------------------------------------------------------------------------------------------
FIVE YEARS 6.59 % 5.36 % 6.52 % 5.71 %
- ----------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 7.83 % 5.96 % 7.63 % 7.32 %
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
The Portfolio was initially focused on long-term securities. On April 15, 1996,
shareholders approved a change in the Portfolio's investment policies to
emphasize fixed-income securities of shorter duration. On October 2, 1998,
shareholders approved a change in the Portfolio's investment policies to
specify that generally at least 80% of its income will be exempt from regular
federal income tax. The Portfolio's performance pattern may have been affected
by these changes
* The Municipal Portfolio commenced operations on 10/1/92. Total returns
are compared to the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index, both unmanaged market indices, as well as the Blended
Municipal Index, 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.
39 - MAS Funds
<PAGE> 40
- ------------------------
MAS Funds / Fixed Income
PA MUNICIPAL
PORTFOLIO
The PA Municipal Portfolio invests primarily in tax exempt municipal debt
obligations issued by state and local governments or their agencies. The
Portfolio will also invest selectively in taxable fixed-income securities.
Normally, at least 80% of the Portfolio will be invested in municipal
securities. The Portfolio is managed by the MAS tax-advantaged fixed-income
team. This team works closely with the MAS interest rate team to determine the
interest rate and yield curve exposure for the Portfolio. The tax-advantaged
team also works closely with the MAS fixed-income value teams to determine
sector allocation and security selection for the Portfolio. The objective of
the Portfolio is to maximize after- tax total return for Pennsylvania
residents, consistent with the preservation of capital, while providing
investors with deflation protection.
[PHOTO]
ABOVE LEFT:
Jim Toth,
Brian Towsen,
and Marc Balcer
The investment philosophy is consistent with that of the other MAS
fixed-income products. As research based, value driven investors, MAS does
extensive research to identify objective measures of value that have proven to
be reliable over long periods of time. Consequently, MAS does not attempt to
forecast markets. Instead, MAS is disciplined in applying these value measures
to making investment decisions. An important part of the MAS philosophy is
utilizing research which shows that taxable investors are sometimes better
served by investments in taxable bonds. Thus, MAS views the municipal market as
just one of many alternatives for helping clients achieve the goal of
maximizing after-tax returns, consistent with a reasonable level of risk.
The MAS investment process consists of three major stages. First, the
appropriate level of interest rate sensitivity relative to the benchmark is
established using the same value measures -- the level of real interest rates
and the shape of the yield curve -- that are used in all of the MAS
fixed-income portfolios. Next, MAS examines the relative value offered by the
various sectors of the bond market to determine the most attractive sector
allocation. In particular, MAS attempts to add value by actively managing
sector exposures based on the prospects for the municipal market, relative to
the taxable markets. The final stage is 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
prepayment or call risk. In general, capital gains are realized only when the
prospective returns of bonds purchased will offset the tax on any gains, and
still provide excess value to the overall Portfolio.
Tax exempt municipal bonds have dramatically lagged the performance of
Treasury securities during the year. For example, the yield ratio of 30 year
municipals to Treasuries has risen from 82% to 97%. The cheapening of municipal
bonds has been due to a massive volume of new supply driven by declining rates
and to a slow response by retail investors
40 - MAS FUNDS
<PAGE> 41
to the attractive level of municipal yields relative to taxable yields. In
addition, municipals along with all non- Treasury sectors of the bond market
significantly lagged the performance of Treasuries during the recent flight to
quality. The Portfolio's underperformance compared to the benchmark is
primarily a result of this cheapening because the Portfolio was more sensitive
to changes in municipal yield ratios than the benchmark as the ratios rose.
Positive contributions to relative performance included a flattening of the
municipal yield curve earlier in the year and an emphasis on securities that
have much better call protection than the average bond in the benchmark. A
small position in lower quality corporate bonds throughout the year as well as
exposure to the mortgage sector more recently detracted from relative
performance.
The tax-exempt market offers a historic opportunity: yield ratios are at a
historic high and MAS feels that there is little fear of an adverse change in
the tax code. At fiscal year end, the Portfolio maintained a very high average
credit quality and a high degree of call protection.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS PA Lehman 5 Year Lehman 10 Year Blended
SEPTEMBER 30 Municipal Municipal Municipal Municipal Index
DOLLARS (000)
<S> <C> <C> <C> <C>
"*" 1000 1000 1000 1000
1032 1014 1020 1024
1075 1041 1059 1069
1122 1065 1094 1113
'93 1158 1090 1134 1158
1185 1103 1150 1175
1095 1072 1089 1081
1099 1083 1105 1089
'94 1111 1094 1113 1093
1104 1089 1095 1068
1202 1133 1171 1175
1203 1163 1202 1201
'95 1264 1191 1244 1234
1337 1216 1283 1317
1328 1216 1275 1283
1350 1222 1279 1288
'96 1378 1243 1304 1312
1407 1267 1341 1343
1409 1267 1341 1343
1450 1298 1385 1381
'97 1488 1325 1428 1418
1525 1348 1465 1448
1542 1364 1480 1464
1556 1379 1503 1483
'98 1589 1415 1554 1528
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS LEHMAN 5 YEAR LEHMAN 10 YEAR BLENDED
PA MUNICIPAL MUNICIPAL INDEX MUNICIPAL INDEX MUNICIPAL INDEX
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 6.81 % 6.76 % 8.82 % 7.79 %
- -------------------------------------------------------------------------------------------------------------------------
FIVE YEARS 6.54 % 5.36 % 6.52 % 5.71 %
- -------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 8.03 % 5.96 % 7.63 % 7.32 %
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
The Portfolio was intially focused on long-term securities. On April 15, 1996,
the Portfolio's investment policies were changed by share-holder vote to
emphasize fixed-income securities of shorter duration. The Portfolio's
performance pattern ma have been affected by this change.
* The PA Municipal Portfolio commenced operations on 10/1/92. Total returns
are compared to the Lehman 5 Year Municipal Index and the Lehman 10 Year
Municipal Index, both unmanaged market indices, as well as the Blended
Municipal Index, 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.
41 - MAS Funds
<PAGE> 42
OVER LONG PERIODS OF TIME THE INCREMENTAL YIELD RECEIVED ON HIGH-QUALITY
CORPORATE BONDS CONSISTENTLY EXCEEDS AVERAGE LOSSES TO DEFAULT.
- ------------------------
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.
The underperformance of the Portfolio over the past year versus its
benchmark resulted almost entirely from its position in U.S.-dollar denominated
corporate bonds. These securities are not included in the Portfolio's benchmark
index, which is composed exclusively of sovereign government bonds. Over long
periods of time the incremental yield received on high-quality corporate bonds
has consistently exceeded average losses to default. However, in periods of
severe financial stress, such as has occurred over the past year, returns on
cor-
42 - MAS FUNDS
<PAGE> 43
porate bonds can lag those of Treasury bonds. The Portfolio's holdings of
corporate bonds are well diversified and represent good long term value
relative to the health of the economy and strong credit quality of the
corporate sector. During the year the Portfolio gradually increased its
holdings of corporate bonds, while maintaining high overall credit quality and
diversification.
The Portfolio's exposure to interest rate risk had a modest negative
impact on relative performance over the year, while currency positioning had an
offsetting positive impact, relative to the benchmark. Early in the year the
Portfolio had a defensive posture towards Japanese bonds based on their very
low real and nominal yields, and a market-neutral exposure to bonds in Europe
and the dollar-bloc countries. This position proved disappointing as Japanese
bonds continued to rally. Later in the year the Portfolio reduced further its
exposure to Japanese bonds, but added substantially to exposure to bonds in
other countries. This decision added marginally to relative returns as
non-Japanese bonds performed best in the big bond rally during the third
quarter of 1998. Portfolio returns also suffered from a position in South
African government bonds taken in the spring of 1998. Current Portfolio
strategy is neutral relative to market interest rate risk, but positioned to
benefit from a convergence between bond yields in Japan and those in other
major countries.
The two main currency exposures in the Portfolio were to underweight the
Japanese yen in favor of the U.S. dollar and Deutchemark, and the Swiss franc
versus several European currencies. These positions were based on the very low
level of interest rates in Japan and Switzerland and the poor health of their
economies. Both positions made a net positive contribution to relative
portfolio returns, as both currencies depreciated on balance.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Global Salomon World
Fixed Income Gov't Bond
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
1022 1008
'93 1074 1053
1090 1053
1075 1053
1057 1060
'94 1071 1072
1073 1078
1159 1196
1227 1259
'95 1238 1246
1287 1283
1271 1259
1290 1264
'96 1322 1299
1365 1329
1309 1274
1347 1313
'97 1369 1330
1365 1333
1385 1343
1409 1370
'98 1496 1484
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
SALOMON
MAS GLOBAL WORLD GOV'T
FIXED INCOME BOND INDEX
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 9.18 % 11.58 %
- -------------------------------------------------------------------------------------------------
FIVE YEARS 6.83 % 7.09 %
- -------------------------------------------------------------------------------------------------
SINCE INCEPTION 7.70 % 7.55 %
- -------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to
certain risks such as currency fluctuations, economic instability, and
political developments.
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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Global Fixed Income Portfolio commenced operations on 4/30/93. Total
returns are compared to the Salomon World Government Bond Index, an
unmanaged market index.
43 - MAS Funds
<PAGE> 44
- ------------------------
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 Portfolio will alobal
fixed-income team, which makes strategic decisions about portfolio structure
and composition.
[PHOTO]
FROM LEFT:
Barry Siegel,
Jeanie Krepfle,
and Ian Jamieson
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.
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.
The Portfolio's return over the past year was very close to the return of
its benchmark index. Exposures to interest rate risk had a modest negative
impact on relative performance over the year, while currency positioning had an
offsetting positive impact, relative to the benchmark. Early in the
44 - MAS FUNDS
<PAGE> 45
year the Portfolio had a defensive posture towards Japanese bonds, based on
their very low real and nominal yields, and a market-neutral exposure to bonds
in Europe and the dollar-bloc countries. This position proved disappointing as
Japanese bonds continued to rally. Later in the year the Portfolio reduced
further its exposure to Japanese bonds, but added substantially to exposure in
bonds of other countries. This decision added marginally to relative returns as
non-Japanese bonds performed best in the big bond rally during the third
quarter of 1998. Portfolio returns also suffered from a position in South
African government bonds taken in the Spring of 1998. Current Portfolio
strategy is neutral relative to market interest rate risk, but positioned to
benefit from a convergence between bond yields in Japan and those in other
major countries.
The two main currency exposures in the Portfolio were to underweight the
Japanese yen in favor of the U.S. dollar and Deutschemark, and the Swiss franc
versus several European currencies. These positions were based on the very low
level of interest rates in Japan and Switzerland and the poor health of their
economies. Both positions made a net positive contribution to relative
portfolio returns as both currencies depreciated on balance.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS International Salomon World
SEPTEMBER 30 Fixed Income Gov't Bond Ex-U.S.
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
998 1010
'94 1010 1027
1012 1033
1122 1182
1186 1240
'95 1175 1210
1211 1235
1196 1214
1214 1219
'96 1247 1259
1286 1285
1212 1211
1244 1245
'97 1253 1248
1235 1231
1245 1236
1267 1256
'98 1383 1377
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
SALOMON WORLD
MAS INTERNATIONAL GOV'T BOND
FIXED INCOME EX-U.S. INDEX
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 10.38 % 10.35 %
- -----------------------------------------------------------------------------------------------------
SINCE INCEPTION 7.61 % 7.50 %
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to
certain risks such as currency fluctuations, economic instability, and
political developments.
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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The International Fixed Income Portfolio commenced operations on 4/29/94.
Total returns are compared to the Salomon World Government Bond Ex-U.S.
Index, an unmanaged market index.
45 - MAS Funds
<PAGE> 46
- ------------------------
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.
[PHOTO]
FROM LEFT:
Deborah Reyner
Roberts, Karen Igler,
Gregg Robinson, and
Ruth Hughes-Guden
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.
While the portfolio's long term results reflect successful judgments
regarding these key decisions, the unique and highly volatile market conditions
during this period had an unfavorable impact on the portfolio's relative
performance to its benchmark. In fiscal 1998, the Intermediate Duration
Portfolio underperformed its index by 186 basis points. The financial and
economic crisis that began in Asia during the fourth quarter of 1997 heightened
investor caution, forcing market participants to place a greater premium on
safety and liquidity. This "flight to quality" allowed yields on intermediate
U.S. Treasury securities, as measured by the five year treasury note, to fall
1.75%.
The Portfolio's value oriented investment process led to an overweighted
exposure to the corporate and mortgage sectors of the market, which
significantly lagged the powerful rally in treasury securities. The
underweighted position in treasuries versus the benchmark index was
the primary source
46 - MAS FUNDS
<PAGE> 47
MAS'S RESEARCH SHOWS THAT BEARING CREDIT RISK OFFERS FINANCIAL REWARDS BEYOND
EXPECTED LOSSES DUE TO DEFAULTS.
of the portfolio's underperformance. The Portfolio's interest rate sensitivity
was maintained at a neutral position relative to the index, as our value
indicators (yield curve shape and real interest rate level) remained in
conflict during most of 1998. Therefore, interest rate strategy had little
relative effect on the fund's performance. An almost 5% position in foreign
bonds (German Bunds) added modestly to relative performance and was ultimately
eliminated as their value was realized in the market.
As mortgage valuations declined to historically attractive levels, the
mortgage component of the Portfolio was increased during the period from a low
of 33% to 47% at fiscal year end. The makeup of the mortgage component was
altered significantly, increasing the exposure to fixed rate current coupon
pass-throughs and eliminating or reducing holdings in CMO's, adjustable rate
mortgages, and commercial mortgages. Likewise, corporate exposure was also
increased as the sector cheapened during the year. Holdings were added in
higher grade domestically oriented industrial and financial names. The
Portfolio's position in Treasury Inflation-Protected Securities (TIPS), which
detracted from relative performance in 1998, was increased to almost 7% of the
Portfolio. The high real yield offered by these securities continues to make
them an attractive value.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS Intermediate Lehman Intermediate
SEPTEMBER 30 Duration Gov't/Corp.
DOLLARS (000)
<S> <C> <C>
"*" 1000 1000
995 999
1043 1043
1088 1095
'95 1114 1113
1148 1152
1150 1142
1158 1150
'96 1184 1170
1216 1199
1219 1197
1255 1233
'97 1289 1266
1314 1293
1336 1313
1358 1338
'98 1400 1398
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
MAS INTERMEDIATE GOV'T/CORP.
DURATION INDEX
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ONE YEAR 8.57 % 10.43 %
- -----------------------------------------------------------------------------------------------------------
SINCE INCEPTION 8.79 % 8.75 %
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Intermediate Duration Portfolio commenced operations on 10/3/94. Total
returns are compared to the Lehman Brothers Intermediate
Government/Corporate Bond Index, an unmanaged market index.
47 - MAS Funds
<PAGE> 48
THE PRIMARY VALUATION TOOL USED TO SELECT SECURITIES IS AN OPTION-ADJUSTED AND
CREDIT-RISK-ADJUSTED YIELD SPREAD.
- ------------------------
MAS Funds / Fixed Income
MULTI-MARKET FIXED
INCOME PORTFOLIO
The MAS Multi-Market Fixed Income Portfolio seeks to provide investors with a
superior real rate of return by investing in domestic and foreign fixed-income
instruments and high yield securities. MAS believes that the portfolio's
strategy marks the evolution of U.S.-based core fixed income portfolios towards
a more substantial commitment to alternative asset classes, including high
yield, emerging market, and non-dollar securities. All investments made in
these sectors reflect MAS's assessment of market opportunities based upon our
value-driven investment philosophy. Through careful research, MAS has
identified a set of valuation tools which, when coupled with our expertise and
experience, enables us to identify undervalued sectors and securities through a
variety of market environments.
The Multi-Market Fixed Income Portfolio is actively managed by the MAS
fixed-income management team, which is responsible for portfolio construction
and risk control. The investment process combines top-down and bottom-up
elements. Using a top-down approach, the team first determines the appropriate
global interest rate and currency exposures, utilizing value-based decision
making tools. These include the relative level of real interest rates and an
analysis of yield curve slopes. The team then formulates a sector allocation
strategy that tilts the portfolio towards the most favorable opportunities in
the market. This sector allocation is strongly influenced by the second element
in the process: bottom-up security selection. A goal of the strategy is to
incorporate the best individual investment ideas of each portfolio manager
specializing in U.S. high quality bonds, international bonds, U.S. high-yield
bonds, and emerging market debt. The primary valuation tool used to select
securities is an option-adjusted and credit-risk-adjusted yield spread.
In fiscal 1998, the Portfolio's return lagged the results for the blended
benchmark, primarily due to an overweighting in emerging market debt and a
negative contribution from security selection in both the emerging markets and
the U.S. investment-grade sector. The global fixed-income market environment
during fiscal 1998 was characterized by a series of financial crises, primarily
in emerging countries. During the summer and fall of 1997, several southeast
Asian countries had significant currency devaluations which resulted in
financial stress for the sovereign governments as well as the corporate and
banking sectors. These problems were exacerbated by continuing economic
problems in Japan which continued to concern investors as we entered 1998.
Finally, in August of 1998, the difficulties in the emerging markets hit a new
peak as Russia devalued its currency and defaulted on its ruble-denominated
debt. The impact of these events on the bond market was to create a
"flight-to-quality" effect, as investors fled riskier securities in pursuit of
safety. This development produced powerful price appreciation for U.S. Treasury
securities. In contrast, riskier securities such as U.S. high-yield bonds and
emerging market debt declined in price. Even higher-quality sectors such as
investment-grade corporate bonds and mortgages failed to keep up with rising
prices of U.S. government bonds. This environment has been a challenging one
for the multi-market fixed income strategy. MAS's strategy has involved
significant commitments to the emerging market and high-yield sectors, and the
Portfolio has carried a greater than neutral weighting in these sectors since
its inception. The emerging markets exposure, in particular, has hurt relative
results.
In the U.S. investment-grade sector, the Portfolio continues to emphasize
holdings of corporate bonds and mortgage-backed securities, which have
underperformed the market this year. Yield spreads on these sectors versus U.S.
Treasuries have approached or reached 10-year highs. MAS is focusing on
long-maturity industrial and utility bonds in the corporate sector, and
current-coupon 30-year fixed-rate agency issues in the mortgage sector.
MAS has placed less emphasis on the non-dollar international sector, and
as of September 30, the
48 - MAS FUNDS
<PAGE> 49
Portfolio had an 11% weighting relative to a normal position of 20%. Real
interest rates were lower in the DM-bloc countries and Japan when compared to
the U.S. Widening spreads in "second-tier" countries compared to the G3 markets
offered some opportunity, and the Portfolio built a two percent position in
Canada as one way to take advantage of this.
Towards the end of the fiscal year, the emerging debt sector began to
rebound. This was helped by a reduction in U.S. rates and supportive comments
from members of the G7, the IMF, and the World Bank regarding the need to stop
the continuing spread of financial problems. Brazil is a current focus of
market participants, with a significant fiscal adjustment and multilateral aid
seen as steps necessary to put the country on a sounder financial footing. The
Portfolio invested in attractive corporate bonds, many of which have strong
balance sheets and export capabilities which support their debt service. The
Portfolio maintained an 11% commitment to the sector at year-end.
MAS looks forward to employing our fundamental research and valuation
tools toward the goal of realizing superior absolute and relative returns for
the Multi-Market strategy.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS Multi-Market Salomon World Gov't 60/20/12/8
SEPTEMBER 30 Fixed Income Salomon Broad Bond Ex-US Blended
DOLLARS (000)
<S> <C> <C> <C> <C>
"*" 1000 1000 1000 1000
"9/98" 1027 1110 1105 1072
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
SALOMON WORLD
MAS MULTI-MARKET SALOMON BROAD GOV'T BOND 60/20/12/8
FIXED INCOME INDEX EX-U.S. INDEX BLENDED INDEX
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SINCE INCEPTION 2.72 % 11.04 % 10.48 % 7.20 %
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to
certain risks such as currency fluctuations, economic instability, and
political developments.
High-yield fixed income securities, otherwise known as "junk bonds," represent
a much greater risk of default and tend to be more volatile than higher-rated
bonds.
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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Multi-Market Fixed Income Portfolio commenced operations on 10/1/97.
Total returns are compared to the Salomon Broad Investment Grade Index and
the Salomon World Government Bond Ex-U.S. Index, both unmanaged market
indices, as well as the 60/20/12/8 Blended Index, an unmanaged index
comprised of 60% Salomon Broad Investment Grade Index, 20% Salomon World
Government Bond Ex-U.S. Index, 12% Salomon High Yield Index, and 8% J.P.
Morgan Emerging Markets Bond Index.
49 - MAS Funds
<PAGE> 50
- --------------------
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.
[PHOTO]
FROM LEFT:
Jeffrey Alt and
Marion Mitchell
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 one 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. These asset-allocation decisions utilize measures of
value with economic analysis. The economic analysis focuses on fiscal and
monetary policy, as well as prospective levels of inflation.
During fiscal 1998, the MAS Balanced Portfolio returned less than its
custom benchmark composed of 60% S&P 500 and 40% Salomon Broad Index. MAS's
asset allocation decisions contributed positively to relative performance but
were more than offset by negative contributions from security selection in both
equity and fixed income.
The Portfolio started the fiscal year with an overweight position in
equities, but with an equity portfolio biased towards cyclical companies.
Expected returns for stocks and bonds pointed to equities offering better value
than bonds, but high absolute valuations were a concern. As the Asian crisis
spread worldwide, the types of stocks owned by the Portfolio suffered from
declining earnings outlook and investor flight-to-quality. Now, relative val-
50 - MAS FUNDS
<PAGE> 51
uations of economically sensitive companies are at all time lows.
The same flight-to-quality hurt the relative performance of our fixed
income portfolio. Spreads of all kinds of securities widened relative to
Treasuries, hurting the Portfolio's relative returns. Spreads of corporate
securities are now at very attractive levels, and the Portfolio has increased
its exposure to these instruments.
Throughout the first half of the fiscal year, as equities outperformed
bonds, the Portfolio reduced positions to better reflect relative values.
During the third quarter of 1998, MAS reduced the Portfolio's equity position,
since expected returns relative to bonds had become less attractive, and the
overall market's profit outlook had deteriorated significantly. At fiscal year
end the Portfolio has significantly higher than benchmark investments in fixed
income securities and slightly lower than index interest rate exposure. The
Portfolio was underweight equities, a result of concerns about the profit
outlook for the market and relatively high valuations.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING
SEPTEMBER 30 MAS Funds Balanced S&P 500 Salomon Broad Blended
DOLLARS (000)
<S> <C> <C> <C> <C>
"*" 1000 1000 1000 1000
1034 1044 1042 1043
1048 1049 1071 1057
'93 1083 1076 1099 1085
1104 1101 1099 1100
1069 1059 1068 1063
1060 1064 1058 1061
'94 1085 1116 1064 1095
1082 1115 1068 1097
1157 1224 1122 1183
1247 1341 1191 1279
'95 1317 1447 1213 1350
1378 1534 1266 1422
1431 1617 1244 1458
1473 1689 1250 1500
'96 1494 1742 1273 1539
1590 1887 1312 1635
1612 1937 1305 1658
1786 2275 1352 1855
'97 1903 2446 1397 1963
1901 2516 1438 2020
2064 2867 1461 2203
2093 2962 1495 2267
'98 1952 2667 1557 2169
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS BALANCED
------------------------------------------ S&P 500 SALOMON 60/40 BLENDED
INSTITUTIONAL- INVESTMENT-- ADVISER+ INDEX BROAD INDEX INDEX
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR 2.85 % 2.56 % 2.49 % 9.05 % 11.47 % 10.47 %
- ---------------------------------------------------------------------------------------------------------------------------------
FIVE YEARS 12.58 % 12.50 % 12.47 % 19.91 % 7.22 % 14.86 %
- ---------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 12.41 % 12.34 % 12.31 % 18.61 % 8.01 % 14.42 %
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total 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. Total 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. Total 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.
Total returns for the Adviser Class of the Portfolio reflect expenses
reimbursed by the Adviser for certain periods. Without such reimbursements,
total returns would have been lower.
* The Balanced Portfolio commenced operations on 12/31/92. Total returns
are compared to the S&P 500 Index and the Salomon Broad Investment Grade
Index, both unmanaged market indices, as well as the 60/40 Blended Index,
an unmanaged index comprised of 60% S&P 500 Index and 40% Salomon Broad
Investment Grade Index.
51 - MAS Funds
<PAGE> 52
THE ASSET ALLOCATION COMMITTEE EVALUATES THE RELATIVE RISKS AND RETURNS OF
BROAD ASSET CLASSES AND SECTORS AND MAKES STRATEGIC ASSET ALLOCATION DECISIONS.
- --------------------
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. 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 classe and
manages diversification and res 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 1998, the MAS Multi-Asset-Class Portfolio underperformed
against its custom benchmark composed of 50% U.S. equities, 14% foreign
equities, 24% U.S. fixed income, 6% foreign fixed income, and 6% high yield.
Asset allocation decisions added about 30 basis points relative to the
benchmark, but that was more than offset by negative contributions from
security selection in U.S. equities and fixed income and in the high yield
sector.
52 - MAS FUNDS
<PAGE> 53
The Portfolio started the fiscal year with overweight positions in
international equities, high-yield, and emerging market debt. Yield spreads of
high-yield and emerging market debt relative to U.S. Treasuries were very
attractive and more than compensated investors for the higher riskiness of
these asset classes. International equities offered investors higher expected
returns than U.S. stocks. Non-U.S. bonds offered significantly lower real
interest rates than U.S. bonds; therefore, the Portfolio had significantly
less-than-benchmark exposure to this asset class.
Throughout the fiscal year, as the Asian crisis spread, MAS reduced the
riskiness of the Portfolio, and in April moved to an underweighted position in
equities for the first time in three years by selling both U.S. and foreign
stocks. The Portfolio continued to reduce risk positions throughout the third
quarter by selling emerging market and high-yield debt.
At fiscal year-end, the Portfolio had a significantly higher than
benchmark allocation to U.S. fixed income, offset by a large underweight in
U.S. equities. MAS was concerned about the profit outlook for the market, and
valuations were still relatively high. The other asset classes were held at
near benchmark weights.
- -Growth of a $1 Million Investment Since Inception
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING MAS Funds Multi- MSCI EAFE-GDP
SEPTEMBER 30 Asset-Class S&P 500 Salomon Broad Weighted Blended
DOLLARS (000)
<S> <C> <C> <C> <C> <C>
"*" 1000 1000 1000 1000 1000
'94 997 1016 987 981 1003
986 1015 991 973 1003
1044 1114 1041 990 1079
1125 1221 1104 1013 1157
'95 1179 1318 1125 1046 1214
1229 1397 1174 1082 1273
1280 1472 1154 1113 1306
1326 1538 1159 1140 1343
'96 1341 1585 1181 1137 1375
1425 1718 1217 1164 1452
1443 1764 1210 1172 1467
1604 2071 1254 1304 1638
'97 1697 2227 1296 1316 1719
1674 2291 1334 1232 1741
1835 2610 1355 1445 1916
1849 2696 1387 1501 1972
'98 1689 2428 1444 1283 1859
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Ended 9/30/98*
<TABLE>
<CAPTION>
MAS MULTI-ASSET-CLASS MSCI EAFE- 50/24/14/6/6
----------------------------- S&P 500 SALOMON GDP WEIGHTED BLENDED
INSTITUTIONAL- INVESTMENT-- INDEX BROAD INDEX INDEX INDEX
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR (0.46)% (0.61)% 9.05 % 11.47 % (2.49)% 8.18 %
- ------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION 13.39 % 13.28 % 23.69 % 9.21 % 6.16 % 16.02 %
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to
certain risks such as currency fluctuations, economic instability, and
political developments. High-yield fixed-income securities, otherwise known as
"junk bonds," represent a much greater risk of default and tend to be more
volatile than higher-rated bonds.
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. Total 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.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Multi-Asset-Class Portfolio commenced operations on 7/29/94. Total
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, as well as the 50/24/14/6/6 Blended
Index, 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.
53 - MAS Funds
<PAGE> 54
- ---------
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, CVS Corporation; Director, IKON
Office Solutions, Inc.; Director, Knight-Ridder, Inc.; Formerly Director, Union
Carbide Corporation.
JOSEPH P. HEALEY
Trustee; Headmaster, Ethical Culture Fieldston School; Trustee, Springside
School; formerly Headmaster, Haverford School; Dean, Hobart College; Associate
Dean, William & Mary College.
JOSEPH J. KEARNS
Trustee; Investment consultant, 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, 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.
LORRAINE TRUTEN, CFA
Vice President, MAS Funds; Principal, Morgan Stanley; Head of Mutual Fund
Services, Miller Anderson & Sherrerd, LLP; President, MAS Fund Distribution,
Inc.; Vice President, Morgan Stanley Universal Funds.
JAMES A. GALLO
Treasurer, MAS Funds; Head of Fund Administration, Miller Anderson & Sherrerd,
LLP; formerly Manager, Investment Accounting and then Vice President and
Director of Investment Accounting, PFPC, Inc.
JOHN H. GRADY, JR.
Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius, LLP.
RICHARD J. SHOCH
Assistant Secretary, MAS Funds; Fund Compliance Officer, Miller Anderson &
Sherrerd, LLP; formerly Fund Legal Administrator and then Counsel, Vice
President and Assistant Secretary, SEI Corporation.
* 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.
55 - MAS Funds
<PAGE> 55
- ---------
MAS Funds
MAS INVESTMENT SERVICES TEAM
- --------------------------------------------------------------------------------
INVESTMENT AND CLIENT SERVICES STAFF
Robert E. Angevine
Arden C. Armstrong, CFA
W. David Armstrong
Gerald P. Barth
Glenn E. Becker
Richard M. Behler, PhD
Thomas L. Bennett, CFA
Mary Jane Bobyock, CFA
Joseph A. Braccia, CFA
Scott A. Burney, CFA
Mari M. Chazen
David P. Chu
Steven B. Chulik
Stephanie J. Colantuno
Marc Crespi
Elizabeth C. Cullen
Bradley S. Daniels, CFA
Christopher S. Davis
Nannette De Groot
Mimi K. Drake
Kenneth B. Dunn, PhD
Paul A. Durose
Hassan Elmasry, CFA
Stephen F. Esser, CFA
Steven P. Epstein
Nicole M. Flynn
Robert J. Formisano
Andre L. Gatien
William B. Gerlach, CFA
Stephen T. Golding
Benjamin J. Gord
David Gutheil
Robert L. Hagin, PhD
Ellen D. Harvey, CFA
John D. Hevner, CFA
Tracey H. Ivey, CFA
Timothy H. Jannetta
James J. Jolinger
Abhi Y. Kanitkar
Helene M. Kennedy
Yuri Khalif
Amy L. Koffler
Nicholas J. Kovich, CFA
Brian L. Kramp
Steven K. Kreider, PhD, CFA
Michele A. Kreisler, PhD
William T. Lawrence
Chris M. Leavy
Felix B. Lim
Gordon W. Loery, CFA
Deanna L. Loughnane
Angelo G. Manioudakis
Robert J. Marcin, CFA
Lisa A. Marlin
William L. McCormick
Mary Ann Milias
James A. Morrissey
Paul F. O'Brien, PhD
Scott F. Richard, DBA
Daniel C. Roarty
Patricia E. Roarty
Joyce R. Rodgers
Bruce A. Rodio
Christine M. Rose
Christian G. Roth, CFA
Eric F. Scharpf
Gary G. Schlarbaum, PhD, CFA
James H. Scott
Roberto M. Sella
Jaidip Singh
Alisa M. Skatrud
Randolph B. Smith
Neil Stone
Matthew Todorow
Kenneth H. Tollman, Jr.
Elizabeth A. Vale, CFA
Horacio A. Valeiras, CFA
Marna C. Whittington, PhD
Richard B. Worley
- --------------------------------------------------------------------------------
FUND CLIENT SERVICE STAFF
Matthew F. Allen
Jeffrey L. Alt, CFA
Mark Babiec
Marc Balcer
Kurt M. Dodds
Rachel P. Klein
Jeanie A. Krepfle
Susan M. Mislick
Marion S. Mitchell
Carol N. Neilson
Matthew E. Potter
Eric W. Riehl
Barry A. Siegel
Andrea E. Silverman
56 - MAS Funds
<PAGE> 56
MILLER ANDERSON & SHERRERD, LLP
One Tower Bridge, West Conshohocken, PA 19428-2899
Investment Adviser: (610) 940-5000
MAS Funds: (800) 354-8185
[MAS FUNDS LOGO]
