<PAGE> 1
1998
SEMI-ANNUAL REPORT
ADVISORY PORTFOLIOS
[MAS FUNDS LOGO]
MAS FUNDS
<PAGE> 2
MAS Funds is pleased to present the Semi-Annual Report for the Advisory Foreign
Fixed Income and Advisory Mortgage Portfolios as of March 31, 1998.
TABLE OF CONTENTS
<TABLE>
<S> <C>
MAS Overview and Statement of Net Assets
Advisory Foreign Fixed Income
Portfolio............................. 1
Advisory Mortgage Portfolio.............. 3
Statement of Operations..................... 13
Statement of Changes in Net Assets.......... 14
Financial Highlights........................ 15
Notes to Financial Statements............... 17
</TABLE>
THIS SEMI-ANNUAL REPORT CONTAINS CERTAIN INVESTMENT RETURN INFORMATION. PAST
PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH EITHER MORE OR LESS THAN THEIR ORIGINAL COST.
THIS REPORT HAS BEEN PREPARED FOR SHAREHOLDERS AND MAY BE DISTRIBUTED TO OTHERS
ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 3
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY FOREIGN
FIXED INCOME
PORTFOLIO (UNAUDITED)
MAS OVERVIEW
- ---------------------------------------------------------
The Advisory Foreign Fixed Income Portfolio is used as a vehicle for making
opportunistic foreign bond investments in core fixed-income portfolios managed
by Miller Anderson & Sherrerd. This strategy concentrates on enhancing total
returns through investments in foreign fixed-income securities and is managed as
one component of a diversified portfolio. All securities held in the Portfolio
have a credit quality of A or better. Derivatives may be used to represent
country investments or otherwise pursue portfolio strategy.
Investment results for this fund should not be analyzed on a stand-alone basis,
but as part of the total return for a diversified fixed-income investment.
Returns are presented here in compliance with reporting requirements for mutual
funds. The Portfolio is available only to private advisory clients of Miller
Anderson & Sherrerd, LLP and Morgan Stanley Asset Management Inc.
AVERAGE ANNUAL TOTAL RETURNS ENDED 3/31/98*
<TABLE>
<CAPTION>
MAS ADVISORY SALOMON BROAD
FOREIGN INDEX
----------------------------
<S> <C> <C>
SIX MONTHS 3.61% 4.60%
ONE YEAR 11.54 11.98
SINCE INCEPTION 13.29 9.66
</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 Advisory Foreign Fixed Income Portfolio commenced operations on 10/7/94.
Total returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index. Returns for periods less than one year are cumulative.
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (49.5%)
<TABLE>
<CAPTION>
- ------------------------------------------------------------
RATINGS FACE
(STANDARD AMOUNT VALUE
MARCH 31, 1998 & POOR'S) (000) (000)#
- ------------------------------------------------------------
<S> <C> <C> <C>
DANISH KRONE (3.8%)
Kingdom of Denmark
6.00%, 11/15/02 AAA DKK 43,000 $ 6,425
- -------------------------------------------------------------
FRENCH FRANC (17.9%)
Government of France O.A.T.
8.50%, 4/25/03 AAA FRF 162,000 30,750
- -------------------------------------------------------------
GERMAN MARK (22.2%)
Deutsche Pfandbrief &
Hypothekenbank AG
5.63%, 2/7/03 AAA DEM 11,000 6,192
Government of Germany
7.38%, 12/2/02 AAA 53,000 32,032
- -------------------------------------------------------------
GROUP TOTAL 38,224
- -------------------------------------------------------------
NETHERLANDS GUILDER (3.6%)
Netherlands Government
6.50%, 4/15/03 AAA NLG 12,000 6,250
- -------------------------------------------------------------
SPANISH PESETA (2.0%)
Spanish Government
5.25%, 1/31/03 AAA ESP 525,000 3,432
- -------------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $86,767) 85,081
- -------------------------------------------------------------
CASH EQUIVALENTS (47.1%)
- -------------------------------------------------------------
COMMERCIAL PAPER (34.8%)
Atlantic Asset Securitization Corp.
5.58%, 4/15/98 $5,000 4,989
Daimler-Benz AG
5.54%, 4/16/98 5,000 4,988
Eiger Capital Corp.
5.56%, 4/16/98 5,000 4,988
General Electric Capital Corp.
5.53%, 4/8/98 5,000 4,995
General Motors Acceptance Corp.
5.54%, 4/15/98 5,000 4,989
Greenwich Funding Corp.
5.57%, 4/21/98 5,000 4,984
J.P. Morgan
5.54%, 4/8/98 5,000 4,995
MetLife Funding, Inc.
5.53%, 4/8/98 4,820 4,815
Societe General Bank
5.54%, 4/2/98 5,000 4,999
Southern California Edison Corp.
5.53%, 4/9/98 5,000 4,994
Transamerica Finance Corp.
5.53%, 5/8/98 5,000 4,972
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
1
<PAGE> 4
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO (UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(CONT'D) (000) (000)#
- -------------------------------------------------------
<S> <C> <C> <C>
Toyota Motor Corp
5.53%, 4/13/98 $5,000 $ 4,991
- -------------------------------------------------------
GROUP TOTAL 59,699
- -------------------------------------------------------
DISCOUNT NOTE (2.9%)
Federal National Mortgage
Association
4/13/98 5,000 4,991
- -------------------------------------------------------
REPURCHASE AGREEMENTS (9.4%)
Chase Securities, Inc.
5.75%, dated 3/31/98, due
to be repurchased at $5,400
collateralized by various U.S.
Government Obligations, due
4/1/98-11/15/99, valued at $5,416 5,400 5,400
Goldman Sachs & Co.
5.65%, dated 3/31/98, due
4/1/98, to be repurchased at
$5,400 collateralized by U.S.
Treasury Bonds, 8.75%, due
8/15/17, valued at $5,544 5,400 5,400
Merrill Lynch & Co., Inc.
5.75%, dated 3/31/98, due
4/1/98, to be repurchased at
$5,400 collateralized by U.S.
Treasury Notes, 6.50% due
4/30/99, valued at $5,514 5,399 5,399
- -------------------------------------------------------
GROUP TOTAL 16,199
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $80,889) 80,889
- -------------------------------------------------------
FOREIGN CURRENCY (0.3%)
- -------------------------------------------------------
French Franc FRF 2 1
German Mark DEM 1,000 541
Swedish Krona SEK 8 1
- -------------------------------------------------------
TOTAL FOREIGN CURRENCY (Cost $810) 543
- -------------------------------------------------------
TOTAL INVESTMENTS (96.9%) (Cost $168,466) 166,513
- -------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.1%)
Foreign Currency Held as Collateral on
Futures Contracts (Cost $170) 170
Interest Receivable 3,356
Receivable for Fund Shares Sold 500
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)#
=======================================================
<S> <C> <C> <C>
Unrealized Gain on Forward Foreign Currency
Contracts $ 2,159
Unrealized Gain on Futures Contracts 151
Other Assets 14
Payable for Fund Shares Redeemed (891)
Payable for Administrative Fees (12)
Payable for Trustees' Deferred Compensation
Plan-Note E (13)
Payable for Investment Advisory Fees (1)
Other Liabilities (56)
--------
5,377
- -------------------------------------------------------
NET ASSETS (100%) $171,890
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 17,469,076 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $171,890
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 9.84
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $165,252
Undistributed Net Investment Income (Loss) 2,835
Undistributed Realized Net Gain (Loss) 3,253
Unrealized Appreciation (Depreciation) on:
Investment Securities (1,686)
Foreign Currency Transactions 2,085
Futures 151
- -------------------------------------------------------
NET ASSETS $171,890
- -------------------------------------------------------
# See Note A1 to Financial Statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
2
<PAGE> 5
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO (UNAUDITED)
MAS OVERVIEW
- ---------------------------------------------------------
The Advisory Mortgage Portfolio is used as a vehicle for making mortgage
investments in core fixed-income portfolios managed by Miller Anderson &
Sherrerd. The Advisory Mortgage Portfolio invests in a broad range of mortgage
securities, collateralized mortgage obligations (CMOs), asset-backed securities,
U.S. Government and other fixed-income securities and is managed as one
component of a diversified portfolio. Miller Anderson & Sherrerd selects
mortgages that appear most attractively priced, while managing the Portfolio's
prepayment sensitivity. Derivatives may be used to pursue portfolio strategy.
Investment results for this fund should not be analyzed on a stand-alone basis,
but as part of the total return for a diversified fixed-income investment.
Returns are presented here in compliance with reporting requirements for mutual
funds. The Portfolio is available only to private advisory clients of Miller
Anderson & Sherrerd, LLP and Morgan Stanley Asset Management Inc.
AVERAGE ANNUAL TOTAL RETURNS ENDED 3/31/98*
<TABLE>
<CAPTION>
MAS ADVISORY LEHMAN MORTGAGE
MORTGAGE INDEX
------------------------------
<S> <C> <C>
SIX MONTHS 4.53% 4.04%
ONE YEAR 12.24 11.14
SINCE INCEPTION 9.56 8.92
</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 Advisory Mortgage Portfolio commenced operations on 4/12/95. Total returns
are compared to the Lehman Mortgage Index, an unmanaged market index. Returns
for periods less than one year are cumulative.
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (80.7%)
<TABLE>
<CAPTION>
- -------------------------------------------------------------
RATINGS FACE
(STANDARD AMOUNT VALUE
MARCH 31, 1998 & POOR'S) (000) (000)#
- -------------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (19.7%)
## Government National
Mortgage Association
Various Pools:
6.00%, 7/20/27-
12/20/27 Tsy $ 794,693 $ 806,303
6.50%, 10/20/27 Tsy 33,853 34,464
- --------------------------------------------------------------
GROUP TOTAL 840,767
- --------------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (20.7%)
Federal Home Loan
Mortgage Corporation
Conventional Pools:
6.50%, 3/1/02 Agy 1 1
6.75%, 12/1/05 Agy 135 136
8.00%,
3/1/07-9/1/08 Agy 494 514
8.25%, 11/1/07-
7/1/08 Agy 179 188
Gold Pools:
7.50%, 11/1/22-
1/1/26 Agy 2,347 2,412
May TBA
6.50%, 4/15/28-
6/15/28 Agy 622,800 615,957
Federal National
Mortgage Association
Conventional Pools:
6.50%, 2/1/26 Agy 4,444 4,396
7.00%, 3/1/11 Agy 3,970 4,039
7.50%, 6/1/24 Agy 190 195
8.50%, 4/1/09 Agy 694 737
May TBA
6.50%, 4/15/28-
5/15/28 Agy 250,000 246,940
Government National
Mortgage Association
Various Pools:
7.00%, 1/15/24-
6/15/24 Tsy 7,452 7,546
- --------------------------------------------------------------
GROUP TOTAL 883,061
- --------------------------------------------------------------
ASSET BACKED CORPORATES (0.0%)
Old Stone Credit Corp.
Home Equity Trust,
Series 92-3 B1
6.35%, 9/25/07 AAA 242 241
Security Pacific Home
Equity Trust, Series
91-AB
10.50%, 3/10/06 A+ 801 800
- --------------------------------------------------------------
GROUP TOTAL 1,041
- --------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 6
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------
RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)#
- -------------------------------------------------------------
<S> <C> <C> <C>
ASSET BACKED MORTGAGES (1.2%)
AFC Home Equity Loan
Trust,
Series:
96-2 1A6 SEQ
8.30%, 8/25/27 AAA $ 525 $ 554
96-3 1A6
8.07%, 2/25/27 AAA 975 1,025
96-4 1A6
7.22%, 3/25/28 AAA 900 912
Advanta Mortgage Loan
Trust,
Series:
93-3 A5
5.55%, 1/25/25 AAA 471 454
96-2 A5
8.08%, 6/25/27 AAA 7,011 7,300
Cityscape Home Equity
Loan Trust,
Series:
96-2 A5
8.10%, 8/25/26 AAA 8,150 8,376
96-3 A8
7.65%, 9/25/25 AAA 12,250 12,440
Contimortgage Home
Equity Loan Trust,
Series:
96-3 A7
8.04%, 9/15/27 AAA 2,925 3,054
96-3 A9 IO
1.30%, 9/15/27 AAA 153,157 4,965
96-3 10 IO
0.90%, 9/15/27 AAA 43,555 1,020
(+) 96-3 A3 YMA
9/15/27 N/R 263,405 440
(+) 96-3 B YMA
9/15/27 N/R 99,205 142
Crown Home Equity Loan
Trust, Series 96-1
A5
7.30%, 4/25/27 AAA 125 128
Delta Funding Home
Equity Loan Trust,
Series:
96-1 A7
7.95%, 6/25/27 AAA 4,595 4,822
96-2 A5
8.01%, 10/25/27 AAA 3,475 3,679
IMC Home Equity Loan
Trust, Series 96-3
A7
8.05%, 8/25/26 AAA 1,500 1,568
- --------------------------------------------------------------
GROUP TOTAL 50,879
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- -------------------------------------------------------------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS-
AGENCY COLLATERAL SERIES (5.3%)
## Collateralized
Mortgage
Obligation Trust,
Series 86-13 Q Inv
Fl
15.141%, 1/20/03 AAA $ 167 $ 178
Federal Home Loan
Mortgage
Corporation,
Series:
88-17 I PAC-1 (11)
9.90%, 10/15/19 Agy 6,597 7,129
88-22 C PAC (11)
9.50%, 4/15/20 Agy 815 892
88-23 F PAC-1 (11)
9.60%, 4/15/20 Agy 1,575 1,726
89-39 F PAC-2 (11)
10.00%, 5/15/20 Agy 3,676 3,975
89-47 F PAC-1 (12)
REMIC
10.00%, 6/15/20 Agy 1,925 2,089
89-110 F PAC
8.55%, 1/15/21 Agy 800 846
90-129 H PAC
8.85%, 3/15/21 Agy 135 146
90-164 B12 REMIC
9.50%, 7/15/21 Agy 4,700 5,273
1364-B Inv Fl IO
5.571%, 9/15/07 Agy 9,649 1,285
1364-E Inv Fl IO
REMIC
8.703%, 9/15/07 Agy 11,592 2,426
1369-S Inv Fl IO
REMIC
3.75%, 9/15/07 Agy 11,583 898
1415-S Inv Fl IO
18.50%, 11/15/07 Agy 109 49
1476-S Inv Fl IO
REMIC PAC
4.26%, 2/15/08 Agy 1,170 131
1485-S Inv Fl IO
REMIC
3.85%, 3/15/08 Agy 1,044 95
1600-SA Inv Fl IO
REMIC
2.25%, 10/15/08 Agy 18,499 1,025
1621-SD Inv Fl
7.314%, 11/15/23 Agy 1,100 709
1632-SA Inv Fl REMIC
5.229%, 11/15/23 Agy 3,610 3,223
1632-SB Inv Fl REMIC
4.10%, 11/15/23 Agy 9,720 6,960
1634-SC Inv Fl
6.854%, 12/15/23 Agy 4,000 3,352
1680-PB PAC-1 (11)
5.70%, 6/15/12 Agy 225 224
1699-SD Inv Fl IO
2.25%, 3/15/24 Agy 81,751 6,442
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
4
<PAGE> 7
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
1709-H PO REMIC
1/15/24 Agy $ 1,627 $ 997
1813-K PO REMIC
2/15/24 Agy 1,604 1,296
1839-A PAC (11)
REMIC
6.50%, 7/15/17 Agy 4,625 4,655
1844-PC PO REMIC
3/15/24 Agy 2,934 2,170
1854-A PO
12/15/23 Agy 2,450 1,804
1887-I PO
10/15/22 Agy 1,728 1,314
E2 F
6.05%, 2/15/24 Agy 31,013 31,017
Federal National
Mortgage
Association,
Series:
89-22 G PAC (11)
10.00%, 5/25/19 Agy 5,540 6,143
89-92 G PAC (11)
8.60%, 12/25/04 Agy 750 791
90-106 J PAC
8.50%, 9/25/20 Agy 1,812 1,905
90-118 S Inv Fl
REMIC
28.777%, 9/25/20 Agy 394 598
90-126 S Inv Fl
18.81%, 10/25/20 Agy 5,254 6,667
92-89 SQ Inv Fl IO
PAC (11)
3353.206%, 6/25/22 Agy 7 498
92-186 S Inv Fl IO
REMIC
3.287%, 10/25/07 Agy 1,907 154
93-9 SB Inv Fl IO
6.65%, 1/25/23 Agy 6,177 2,400
93-22 S Inv Fl
9.408%, 9/25/22 Agy 663 648
93-46 SD Inv Fl
3.96%, 4/25/23 Agy 8,330 5,917
93-46 SG Inv Fl
5.60%, 7/25/22 Agy 2,810 2,376
93-70 B REMIC
5.75%, 4/25/16 Agy 4,572 4,545
93-115 SB Inv Fl
3.919%, 7/25/23 Agy 4,760 3,812
93-149 O PO REMIC
8/25/23 Agy 3,491 2,536
93-205 G PO REMIC
9/25/23 Agy 13,621 9,717
93-205 H PO REMIC
9/25/23 Agy 16,550 8,618
93-235 H PO REMIC
9/25/23 Agy 4,996 4,297
96-5 NH
4/25/24 Agy 29,234 19,598
96-11 V PO REMIC
9/25/23 Agy 9,841 7,355
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
96-14 PC PO 12/25/23 Agy $ 2,780 $ 1,867
96-25 C PO
9/25/23 Agy 10,550 7,885
96-37 H PO REMIC
8/25/23 Agy 894 736
96-46 PB PO REMIC
9/25/23 Agy 2,870 2,157
96-54 O PO
11/25/23 Agy 2,258 1,557
96-68 SC Inv Fl IO
REMIC
2.35%, 1/25/24 Agy 5,950 738
97-3 E PO 12/25/23 Agy 2,200 1,667
97-30 SP Inv Fl
REMIC
3365.687%, 4/25/22 Agy 7 973
98-22 SA Inv Fl IO
2.975%, 4/18/28 Agy 203,000 12,444
G92-52 SQ Inv Fl IO
REMIC
7227.90%, 9/25/22 Agy 39 6,757
G92-53 S Inv Fl IO
REMIC
32.344%, 9/25/22 Agy 4,598 3,541
287 1 PO
12/17/07 Agy 2,214 1,540
Government National
Mortgage
Association,
Series:
96-12 S Inv Fl IO
REMIC
2.813%, 6/16/26 Tsy 38,902 2,536
96-13 S Inv Fl IO
REMIC
3.65%, 7/16/11 Tsy 20,264 1,666
+ Kidder Peabody
Mortgage Assets
Trust,
Series:
87 B IO
9.50%, 4/22/18 Aaa 131 33
87 B PO
4/22/18 Aaa 131 102
- --------------------------------------------------------------
GROUP TOTAL 227,100
- --------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
NON-AGENCY COLLATERAL SERIES (11.3%)
American Housing
Trust,
Series:
IV 2 C
9.553%, 9/25/20 A 2,292 2,407
V 1G
9.125%, 4/25/21 AAA 7,580 8,030
Bear Stearns Mortgage
Securities Inc.,
Series:
96-4 AI10
8.125%, 9/25/27 AAA 9,026 9,378
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
5
<PAGE> 8
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO (UNAUDITED)
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
96-5 A7
8.125%, 9/25/27 AAA $ 10,750 $ 11,127
96-5 A10
8.125%, 9/25/27 AAA 8,050 8,333
96-9 AI11 NAS
8.00%, 12/25/27 AAA 4,500 4,666
* Chase Mortgage
Finance Corp.,
Series 93-1 B2
7.911%, 3/28/24
(acquired 4/28/95-
7/30/96, cost
$3,997) N/R 4,144 4,186
Chemical Mortgage
Securities, Inc.,
Series:
93-1 M
7.45%, 2/25/23 AA 4,649 4,690
93-3 M
7.125%, 7/25/23 AA 5,856 5,893
Citicorp Mortgage
Securities, Inc.,
Series:
93-9 A1 REMIC
7.00%, 3/25/20 AAA 196 196
*++ 95-2 B1 REMIC
7.50%, 4/25/25
(acquired 9/4/97-
10/17/97, cost
$369) AA 364 370
CMC Securities Corp.
IV, Series 97-NAM3
FXA5
7.25%, 10/25/27 AAA 75 75
Countrywide Funding
Corp.,
Series:
93-C A11
6.50%, 1/25/24 AAA 11,312 11,003
95-4 M
7.50%, 9/25/25 AA 6,483 6,561
First Boston Mortgage
Securities Corp.,
Series:
* 92-4 B1
8.125%, 10/25/22
(acquired 4/28/95,
cost $66) A 73 76
* 93-2 B1
7.50%, 3/25/33
(acquired 4/28/95-
1/21/98, cost
$3,091) A 3,315 3,343
++ 93-5 B1
7.30%, 7/25/23 AA+ 1,091 1,095
GE Capital Mortgage
Services, Inc.,
Series:
94-14 A7
7.50%, 4/25/24 AAA 4,000 4,134
** 95-6 B2
7.00%, 8/25/25 N/R 3,029 3,015
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- ---------------------------------------------------------
<S> <C> <C> <C>
+ Headlands Mortgage
Securities, Inc.,
Series 97-5 AI5
7.25%, 11/25/27 Aaa $ 18,373 $ 18,463
ICI Funding Corp.,
Series 97-2 1A8
8.00%, 7/25/28 AAA 19,476 20,160
Independent National
Mortgage Corp.,
Series:
+ 94-O B1
7.875%, 9/25/24 A2 14,463 15,165
95-Q A11
7.40%, 11/25/25 AAA 1,385 1,405
95-U A3
7.13%, 9/25/24 AAA 11,551 11,636
95-V A3
7.12%, 2/25/26 AAA 16,524 16,601
Mid-State Trust II,
Series 88-2 A4
9.625%, 4/1/03 AAA 28,020 30,169
PNC Mortgage
Securities Corp.,
Series 96-1 B1 REMIC
7.50%, 6/25/26 AA 4,438 4,506
Prudential Home
Mortgage Securities
Co. Inc.,
Series:
90-5 A3
9.50%, 5/25/05 AAA 43 43
**+ 92-A 2B4
7.90%, 4/28/22 A1 1,484 1,455
*+ 92-33 B1
7.50%, 11/15/22
(acquired 4/28/95-
1/22/98, cost
$1,517) Aa3 1,610 1,618
*+ 93-17 B1
6.50%, 3/1/23
(acquired 4/28/95,
cost $941) A2 1,012 1,003
**++ 94-A 3B3
6.803%, 4/28/24 A 10,330 10,110
** 94-A 3B5
6.802%, 4/28/24 N/R 8,204 8,027
95-2 M
8.50%, 6/25/25 AA 4,995 5,133
95-6 M
7.50%, 9/25/25 AA 5,283 5,366
Residential Accredit
Loans, Inc.,
Series:
96-QS4 AI 10
7.90%, 8/25/26 AAA 1,450 1,494
96-QS7 AI 11
8.00%, 11/25/26 AAA 4,075 4,233
96-QS8 A13
7.75%, 12/25/26 AAA 3,900 4,008
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
6
<PAGE> 9
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
(cont'd) & POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
+ 97-QS1 A11
7.50%, 2/25/27 Aaa $ 4,450 $ 4,518
97-QS2 A8
7.75%, 3/25/27 AAA 8,975 9,263
97-QS3 A8
7.75%, 4/25/27 AAA 2,775 2,867
97-QS4 A7
7.75%, 5/25/27 AAA 11,875 12,212
97-QS8 A10
7.50%, 8/25/27 AAA 13,350 13,591
97-QS9 A8
7.25%, 9/25/27 AAA 27,345 27,506
97-QS10 A4 REMIC
7.25%, 10/25/27 AAA 32,875 33,056
97-QS12 A7 REMIC
7.25%, 11/25/27 AAA 25,553 25,694
97-QS13 A7 REMIC
7.25%, 12/25/27 AAA 4,692 4,747
98-QS2 A7
7.00%, 2/15/28 AAA 2,200 2,191
Residential Asset
Securitization Trust
Series:
96-A5 A9
7.75%, 9/25/26 AAA 4,728 4,881
96-A11 A9
7.75%, 2/25/27 AAA 1,900 1,965
97-A8 A9
7.25%, 10/25/27 AAA 9,634 9,696
97-A8 A10
7.00%, 10/25/27 AAA 19,994 19,979
97-A9 A5
7.25%, 9/15/27 AAA 23,688 23,841
98-A1 A4 REMIC
6.75%, 3/25/28 AAA 1,525 1,498
Residential Funding
Mortgage Securities
Co., Inc.,
Series:
93-S2 M2
8.00%, 1/25/23 A 868 890
93-S27 M2
7.50%, 6/25/23 A 470 475
94-S1 A19
6.75%, 1/25/24 AAA 9,627 9,512
Resolution Trust
Corp.,
Series 92-16 C2
7.75%, 8/25/25 A 2,686 2,688
Rural Housing Trust,
Series 87-1 B1 REMIC
3.33%, 10/1/28 A- 12,201 11,738
## Ryland Mortgage
Securities Corp.
III,
Series 92-A 1A
8.27%, 3/29/30 A- 4,429 4,504
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
Securitized Multiple
Asset Rated Trust,
Series 89A 1
9.00%, 9/25/19 N/R $ 123 $ 123
Securitized Asset
Sales, Inc.,
Series 95-3 B1
7.50%, 10/25/25 A 4,383 4,441
- --------------------------------------------------------------
GROUP TOTAL 481,049
- --------------------------------------------------------------
COMMERCIAL MORTGAGES (19.3%)
American Southwest
Financial Securities
Corp.,
Series:
93-2 A1
7.30%, 1/18/09 N/R 7,491 7,670
++## 93-2 S1 IO
1.079%, 1/18/09 AA 73,226 3,073
93-2 S2 IO
0.70%, 1/18/09 N/R 12,298 273
+ 95-C1 A1B
7.40%, 11/17/04 Aaa 21,125 21,854
Asset Securitization
Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 16,539 17,448
95-MD4 A1
7.10%, 8/13/29 AAA 17,781 18,493
++## 95-MD4 ACS2 IO
1.838%, 8/13/29 AAA 32,019 5,568
**+ 96-D3 A1C
7.40%, 10/13/26 Aaa 19,500 20,753
96-MD6 A1B
6.88%, 11/13/26 AAA 3,250 3,352
96-MD6 A1C
7.04%, 11/13/26 AAA 19,125 19,936
97-D5 A1B
6.66%, 2/14/41 AAA 16,425 16,772
97-D5 A1C
6.75%, 2/14/41 AAA 6,000 6,148
+## 97-D5 PSI IO
1.563%, 2/14/41 Aaa 112,448 12,120
97-MD7 A1B
7.41%, 1/13/30 AAA 29,325 31,205
Beverly Finance Corp.
Series 94-1
8.36%, 7/15/04 AA- 11,465 12,355
+ Carolina First Bank,
Series 96-C1 A1
6.50%, 3/18/27 Aa2 26 26
** Carousel Center
Finance, Inc.,
Series:
1 A1
6.828%, 11/15/07 AA 4,225 4,296
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
7
<PAGE> 10
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO (UNAUDITED)
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
1 B
7.188%, 10/15/07 A $ 16,900 $ 17,293
CBM Funding Corp.,
Series 96-1 A1
7.55%, 7/1/99 AA 41 41
Chase Commercial
Mortgage Securities
Corp.,
Series 96-2 B
6.90%, 10/19/06 AA 1,142 1,166
Commercial Mortgage
Acceptance Corp.,
Series:
97-ML1 A2
6.53%, 12/15/30 AAA 1,675 1,693
97-ML1 A3
6.57%, 12/15/30 AAA 20,000 20,229
** Creekwood Capital
Corp., Series 95-1A
8.47%, 3/16/15 AA 5,257 5,953
** Crystal Run
Properties, Inc.,
Series A
7.393%, 8/15/06 AA 15,775 16,852
** CVM Finance Corp.
7.19%, 3/1/04 AA 912 943
DLJ Mortgage
Acceptance Corp.,
Series:
93-MF7 A1
7.40%, 6/18/03 AAA 13,635 13,979
93-M10 A2
7.20%, 7/15/03 AAA 7,758 7,885
** 95-CF2 A3
7.05%, 12/17/27 A 200 203
## 96-CF1 IO
0.734%, 3/12/06 N/R 173,859 5,551
** 96-CF1 A1B
7.58%, 3/13/28 AAA 1,025 1,092
** 96-CF2 A1B
7.29%, 11/21/21 AAA 6,590 6,916
**++## 96-CF2 S IO
1.641%, 11/12/21 AAA 70,164 5,845
** 97-CF1 A1B
7.60%, 5/15/30 AAA 11,700 12,585
** 97-CF1 S IO
1.097%, 5/15/30 AAA 68,561 4,359
Federal National
Mortgage
Association,
Series 93-M2
B IO
2.57%, 7/25/03 Agy 61,840 2,166
First Union-Lehman
Brothers Commercial
Mortgage,
Series:
+ 97-C1 A2 REMIC
7.30%, 12/18/06 Aaa 32,250 33,867
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
97-C2 A2
6.60%, 5/18/07 AAA $ 35,000 $ 35,476
+ 97-C2 A3
6.65%, 11/18/29 Aaa 14,300 14,527
** Forum Finance
7.125%, 5/15/04 AA 3,050 3,126
+ GMAC Commercial
Mortgage Securities,
Inc.,
Series:
## 96-C1 X2 IO
1.917%, 3/15/21 Aaa 93,356 7,831
97-C1 A2
6.853%, 9/15/06 Aaa 26,950 27,660
## 97-C2 X IO
1.273%, 4/15/29 Aaa 285,645 21,699
97 C2 A3
6.566%, 4/15/29 Aaa 15,450 15,618
+ GS Mortgage
Securities Corp. II,
Series:
97-GL A2D
6.94%, 7/13/30 Aaa 28,575 29,671
97-GL X1A IO
0.651%, 7/13/30 Aaa 50,000 594
## 97-GL X2 IO
0.930%, 7/13/30 Aaa 44,135 2,281
J. P. Morgan
Commercial Mortgage
Finance Corp.,
Series 97-C5 A2
7.069%, 9/15/29 AAA 31,000 32,564
** Lakeside Finance
Corp.
6.47%, 12/15/00 AA 240 241
+ LB Commercial
Conduit Mortgage
Trust,
Series:
## 96-C2 A
7.424%, 10/25/26 Aaa 23,283 24,385
98-C1 IO
0.623%, 2/18/30 Aaa 276,018 18,460
98-C1 A2
6.40%, 8/18/07 Aaa 17,000 17,072
Lehman Large Loan,
Series:
97-LL1 A1
6.79%, 6/12/04 AAA 149 152
97-LLI A2
6.84%, 9/12/06 AAA 1,800 1,850
Merrill Lynch Mortgage
Investors, Inc.,
Series:
95-C1 IO
2.185%, 5/25/15 N/R 22,503 1,090
96-C1 A3
7.42%, 4/25/28 AAA 3,975 4,165
96-C2 A2
6.82%, 11/21/28 AAA 10,245 10,479
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
8
<PAGE> 11
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
++ 96-C2 IO
1.538%, 11/21/28 AAA $ 96,662 $ 8,145
+ Midland Realty
Acceptance Corp.,
Series:
96-C2 A1
7.02%, 1/25/27 Aaa 1,450 1,488
96-C2 A2
7.233%, 1/25/27 Aaa 18,366 19,205
Mortgage Capital
Funding, Inc.,
Series:
95-MC1 A1B
7.60%, 5/25/27 AAA 13,523 13,836
+ 97-MC1 A3
7.288%, 7/20/27 Aaa 28,929 30,318
+ 97-MC2 A2
6.664%, 9/20/07 Aaa 42,725 43,308
Nomura Asset
Securities Corp.,
Series:
94-MD1 A1B
7.526%, 3/15/18 N/R 4,291 4,370
## 94-MD1 A2
7.671%, 3/15/18 N/R 4,085 4,235
94-MD1 A3
8.026%, 3/15/18 N/R 4,450 4,687
**Park Avenue
Finance Corp.,
Series 97-C1 A1
7.58%, 5/12/07 N/R 4,191 4,420
**Prime Property
Funding,
Series 1 A
6.633%, 7/23/03 AA 14,174 14,348
+ Salomon Brothers
Mortgage Securities,
Series 97-TZH A2
7.174%, 3/24/22 Aa2 14,000 14,516
Sawgrass Financial
LLC,
Series 93-A1
6.45%, 1/20/06 AAA 255 257
**Stratford Finance
Corp.
6.776%, 2/1/04 AA 6,525 6,528
++## Structured Asset
Securities Corp.,
Series:
96-CFL X1A IO
1.431%, 2/25/28 AAA 97,570 2,288
96-CFL X1 IO
1.42%, 2/25/28 AAA 107,436 5,787
96-CFL X2 IO
1.225%, 2/25/28 AAA 27,619 769
+ Town & Country
Funding Corp.,
Series A
5.85%, 8/15/98 Aa2 16,595 16,567
- -------------------------------------------------------
GROUP TOTAL 823,973
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
NON-AGENCY FIXED RATE MORTGAGES (0.3%)
Bank of America,
Series A
8.375%, 5/1/07 AAA $ 857 $ 868
California Federal
Savings & Loan,
Series 86-1A
8.80%, 1/1/14 AA 69 69
* Coast Federal,
Series 84-3
7.941%, 3/1/06
(acquired 4/28/95,
cost $197) N/R 192 190
*## Dedham Savings
Participation
Certificate
8.298%, 5/1/01
(acquired 7/30/96,
cost $262) N/R 263 266
First Federal Savings
& Loan Association,
Series 92-C
8.75%, 6/1/06 AA 291 297
*## Fortune
Mortgage Corp.
Participation
Certificate
7.744%, 8/1/99
(acquired 7/30/96-
2/3/98, cost $284) N/R 286 286
* Gemsco Mortgage
Pass Through
Certificate,
Series 87-A
8.701%, 11/25/10
(acquired 4/28/95-
8/28/97, cost $844) AA 834 851
* Great American
Federal Savings &
Loan,
Series 84-2
8.595%, 4/1/99
(acquired 4/28/95,
cost $13) N/R 13 13
* Household Bank,
Series 85-1 CMO
7.94%, 5/1/02
(acquired 5/31/95,
cost $220) N/R 218 220
Residential Funding
Mortgage Securities
Co., Inc.,
Series 90-2 A
10.50%, 3/25/20 AA 14 14
## Resolution Trust
Corp.,
Series 92-5 C
8.617%, 1/25/26 AA 5,954 5,952
Ryland Acceptance
Corp. IV,
Series 79-A
6.65%, 7/1/11 AA 3,177 3,080
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 12
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO (UNAUDITED)
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
* Sears Mortgage
Securities,
Series 82-3
10.00%, 11/1/12
(acquired 4/28/95,
cost $420) AA $ 404 $ 413
* Shearson American
Express, Series A
CMO
9.625%, 12/1/12
(acquired 4/28/95-
2/25/98, cost $448) AA 436 452
Travelers Mortgage
Services, Inc.,
Series 86-3 A
10.00%, 8/25/16 AA 63 65
* Virginia Beach
Federal Savings &
Loan Participation
Certificate
6.90%, 3/1/01
(acquired 3/27/97,
cost $300) N/R 314 307
- ---------------------------------------------------------------
GROUP TOTAL 13,343
- ---------------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES-
AGENCY COLLATERAL SERIES (2.9%)
Federal Home Loan
Mortgage
Corporation,
Series:
13-B IO REMIC
10.00%, 6/1/20 Agy 1,959 535
16-B IO REMIC
10.00%, 6/1/20 Agy 1,033 271
18-B IO REMIC
10.00%, 5/1/20 Agy 554 145
1603-QA PO REMIC
10/15/23 Agy 15,266 8,262
1911-C PO
11/15/23 Agy 6,141 3,643
Federal National
Mortgage
Association,
Series:
43-2 IO
9.50%, 9/1/18 Agy 38 9
95-21 C PO REMIC
5/25/24 Agy 10,117 5,300
96-20 E PO
11/25/22 Agy 1,217 694
96-34 C PO
3/25/23 Agy 5,861 3,498
249 1 PO
10/25/23 Agy 58,633 41,090
260 1 PO
4/1/24 Agy 10,808 8,349
263 1 PO
5/25/24 Agy 26,805 18,653
282 1 PO
9/1/25 Agy 45,816 33,785
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
First Boston Mortgage
Securities Corp.,
Series 87-B2 IO
8.985%, 4/25/17 AAA $ 98 $ 24
- --------------------------------------------------------------
GROUP TOTAL 124,258
- --------------------------------------------------------------
TOTAL FIXED INCOME SECURITIES
(Cost $3,385,329) 3,445,471
- --------------------------------------------------------------
PREFERRED STOCK (2.0%)
- --------------------------------------------------------------
MORTGAGES-OTHER (2.0%)
**+ Home Ownership
Funding Corp.
13.331%
(Cost $88,855) Aaa 88,700 85,074
- --------------------------------------------------------------
STRUCTURED INVESTMENT (0.1%)-SEE NOTE A7
- --------------------------------------------------------------
Morgan Guaranty Trust
Co., 11/20/05:
monthly payments
equal to 1% per
annum of the
outstanding notional
balance, indexed to
GNMA ARM pools (Cost
$11,079) 246,467 5,734
- --------------------------------------------------------------
INTEREST RATE CAP (0.0%)-SEE NOTE A6
- --------------------------------------------------------------
J.P. Morgan and Co.,
Inc., terminating
10/15/99, to receive
on 10/15/99 the
excess, as measured
on 10/15/98, of 12
month LIBOR over
6.34% multiplied by
the notional amount
(Premium Paid
$5,860) N/R 1,384,500 1,287
- --------------------------------------------------------------
CASH EQUIVALENTS (36.5%)
- --------------------------------------------------------------
CASH INVESTMENTS-MORTGAGE (33.3%)
Federal Home Loan
Mortgage Corporation
Conventional Pools:
9.50%, 3/1/20 Agy 9,103 9,904
10.00%, 2/1/09-
12/1/20 Agy 40,599 44,744
10.25%, 1/1/09-
9/1/16 Agy 214 236
10.50%, 7/1/09-
3/1/27 Agy 12,140 13,354
11.00%, 2/1/10-
9/1/20 Agy 10,280 11,587
11.25%, 6/1/10-
12/1/15 Agy 101 115
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
10
<PAGE> 13
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
11.50%, 1/1/07-
9/1/19 Agy $ 4,941 $ 5,613
12.00%, 10/1/09-
7/1/20 Agy 3,520 4,082
12.50%, 10/1/09-
6/1/15 Agy 761 894
13.00%, 9/1/10-
11/1/13 Agy 79 92
13.50%, 12/1/09-
2/1/10 Agy 102 117
Gold Pools:
9.50%, 11/1/16-
12/1/22 Agy 22,056 24,169
10.00%, 2/1/19-
2/1/22 Agy 16,970 18,804
10.50%, 5/1/16-
3/1/21 Agy 6,970 7,777
11.00%, 5/1/12-
9/1/20 Agy 4,977 5,623
11.50%, 8/1/15 Agy 171 194
12.00%, 8/1/14-
6/1/20 Agy 5,946 6,720
Series:
## 1377-F REMIC
6.25%, 9/15/07 Agy 8,968 9,028
## 1591-FG REMIC
6.313%, 10/15/23 Agy 6,238 6,243
## 1890-F REMIC
6.25%, 6/15/24 Agy 40,628 40,813
## 1933-FM REMIC
6.50%, 3/15/25 Agy 680 683
## 1933-FO REMIC
6.50%, 3/15/25 Agy 987 992
## 1933-FQ REMIC
6.50%, 3/15/25 Agy 222 223
## 1987-FO REMIC
6.10%, 11/15/24 Agy 25,299 25,322
## 2006-FA REMIC
6.15%, 10/15/23 Agy 4,777 4,788
## 2027-F
6.088%, 3/15/27 Agy 23,240 23,280
## 2027-FA
6.088%, 3/15/27 Agy 23,260 23,300
## 2040-FC
5.975%, 2/15/23 Agy 46,500 46,620
Federal National
Mortgage Association
Conventional Pools:
9.00%, 6/1/18-
12/1/21 Agy 14,761 15,888
9.50%, 7/1/16-
6/1/20 Agy 11,684 12,772
10.00%, 3/1/06-
4/1/27 Agy 103,492 114,556
10.50%, 3/1/13-
4/1/22 Agy 18,588 20,966
10.75%, 10/1/11-
6/1/13 Agy 216 243
</TABLE>
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
11.00%, 5/1/11-
11/1/20 Agy $ 8,280 $ 9,353
11.25%, 1/1/11-
1/1/16 Agy 292 328
11.50%, 2/1/11-
9/1/25 Agy 3,376 3,852
12.00%, 1/1/13-
5/1/16 Agy 430 496
12.50%, 9/1/09-
9/1/15 Agy 4,844 5,664
Series:
## 92-43 FC REMIC
6.35%,10/25/21 Agy 485 489
## 94-50 FD REMIC
6.106%, 3/25/24 Agy 4,491 4,506
## 96-69 FC REMIC
6.25%, 10/18/23 Agy 9,509 9,545
## 97-43 FM REMIC
6.25%, 7/18/27 Agy 12,900 12,983
## 97-70 FA REMIC
6.138%, 7/18/20 Agy 1,969 1,980
## 97-76 FM
6.20%, 9/17/27 Agy 13,676 13,772
## 97-76 FN
6.15%, 9/17/27 Agy 13,404 13,483
## 98-22 FA REMIC
6.025%, 4/18/22 Agy 140,550 140,859
## G93-11 FA REMIC
6.15%, 12/25/08 Agy 14,733 14,821
Government National
Mortgage Association
Adjustable Rate
Mortgages:
6.875%, 11/20/25 Agy 5,199 5,301
7.00%, 1/15/24-
3/20/25 Agy 26,377 26,904
7.125%, 7/20/25 Agy 14,628 14,920
7.375%, 4/20/25-
6/20/26 Agy 247,075 252,294
7.50%, 1/20/25 Agy 294 300
Various Pools:
9.00%, 8/15/21 Agy 3,373 3,636
9.50%, 12/15/21-
1/15/28 Agy 31,939 34,922
10.00%, 11/15/09-
12/25/26 Agy 170,828 189,770
10.50%, 1/15/01-
9/15/20 Agy 70,385 79,393
11.00%, 12/15/99-
8/15/27 Agy 58,344 66,925
11.50%, 1/15/13-
4/15/20 Agy 2,933 3,377
12.00%, 11/15/12-
8/15/15 Agy 701 815
12.50%, 11/15/10-
7/15/15 Agy 471 546
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
11
<PAGE> 14
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO (UNAUDITED)
<TABLE>
<CAPTION>
RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)#
- --------------------------------------------------------------
<S> <C> <C> <C>
13.00%, 3/15/11-
9/15/14 Agy $ 270 $ 318
13.50%, 4/15/11-
9/15/14 Agy 218 252
## Salomon Brothers
Mortgage Securities
VII,
Series 96-6E A1
6.213%, 3/30/25 AAA 9,976 9,974
- --------------------------------------------------------------
GROUP TOTAL 1,421,520
- --------------------------------------------------------------
COMMERCIAL PAPER (2.8%)
Eiger Capital Corp.
5.55%, 4/28/98 22,262 22,169
Household Finance
Corp.
5.54%, 4/3/98 50,000 49,985
Prudential Funding
5.53%, 4/17/98 50,000 49,877
- --------------------------------------------------------------
GROUP TOTAL 122,031
- --------------------------------------------------------------
REPURCHASE AGREEMENT (0.4%)
Chase Securities, Inc.
5.75%, dated 3/31/98, due
4/1/98, to be repurchased
at $15,636, collateralized
by various U.S. Government
Obligations, due 4/1/98-
11/15/99, valued at
$15,680 15,633 15,633
- --------------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $1,556,780) 1,559,184
- --------------------------------------------------------------
TOTAL INVESTMENTS (119.3%)
(Cost $5,047,903) 5,096,750
- --------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-19.3%)
Dividends Receivable 2,956
Interest Receivable 29,432
Receivable for Investments Sold 389,120
Receivable for Fund Shares Sold 58,616
Receivable from Investment Adviser 126
Unrealized Gain on Swap Agreements 734
Other Assets 111
Payable for Investments Purchased (1,304,242)
Payable for Administrative Fees (281)
Payable for Daily Variation on Futures
Contracts (366)
Payable for Trustees' Deferred
Compensation Plan-Note E (93)
Other Liabilities (457)
----------
(824,344)
- --------------------------------------------------------------
NET ASSETS (100%) $4,272,406
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
VALUE
(000)#
- -------------------------------------------------------
<S> <C>
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 403,161,384 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $4,272,406
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.60
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $4,181,941
Undistributed Net Investment Income (Loss) 29,131
Undistributed Realized Net Gain (Loss) 11,917
Unrealized Appreciation (Depreciation) on:
Investment Securities 48,847
Futures and Swaps 570
- -------------------------------------------------------
NET ASSETS $4,272,406
- -------------------------------------------------------
* Restricted Security-Total market value of
restricted securities owned at March 31, 1998 was
$13,594 or 0.3% of net assets.
# See Note A1 to Financial Statements.
** 144A security. Certain conditions for public sale
may exist.
*** A portion of these securities was pledged to cover
margin requirements for futures contracts.
+ Moody's Investors Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
++ Fitch rating. Security is not rated by Standard &
Poor's Corporation or Moody's Investors Service,
Inc.
## Variable or floating rate security-rate disclosed
is as of March 31, 1998.
CMO Collateralized Mortgage Obligation
Inv FL Inverse Floating Rate-Interest rate fluctuates with
an inverse relationship to an associated interest
rate. Indicated rate is the effective rate at
March 31, 1998.
IO Interest Only
N/R Not rated by Moody's Investors Service, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See Note
A6 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
12
<PAGE> 15
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
Six Months Ended March 31, 1998
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME +
Interest $ 5,275 $121,218
Dividends -- 5,573
- --------------------------------------------------------------------------------------------------------------------------
Total Income 5,275 126,791
- --------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $398 $ 6,816
Less: Waived Fees (398) -- (6,816) --
Administrative Fee--Note C 85 1,453
Custodian Fee--Note D 22 196
Audit Fee 18 22
Legal Fee 2 29
Other Expenses 17 178
Reimbursement of Expenses--Note B -- (229)
- --------------------------------------------------------------------------------------------------------------------------
Total Expenses 144 1,649
- --------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note H (3) (196)
- --------------------------------------------------------------------------------------------------------------------------
Net Expenses 141 1,453
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income 5,134 125,338
- --------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities (2,640) 24,823
Foreign Currency Transactions 2,353 --
Futures and Written Floors 4,352 5,248
- --------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 4,065 30,071
- --------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (2,216) (3,468)
Foreign Currency Transactions 2,721 --
Futures and Swaps (390) (215)
- --------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) 115 (3,683)
- --------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 4,180 26,388
- --------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 9,314 $151,726
==========================================================================================================================
</TABLE>
+ Net of $5 withholding tax for Advisory Foreign Fixed Income Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(Amounts for the six months ended March 31, 1998 are unaudited)
<TABLE>
<CAPTION>
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
-------------------------- -------------------------------
<S> <C> <C> <C> <C>
Six Months Six Months
Year Ended Ended Year Ended Ended
September 30, March 31, September 30, March 31,
(In Thousands) 1997 1998 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 10,811 $ 5,134 $ 184,498 $ 125,338
Realized Net Gain (Loss) 18,256 4,065 30,589 30,071
Change in Unrealized Appreciation (Depreciation) (2,505) 115 43,687 (3,683)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 26,562 9,314 258,774 151,726
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A10
Net Investment Income (46,240) (19,854) (164,543) (116,636)
Realized Net Gain (23,578) -- (16,800) (35,687)
In Excess of Realized Net Gain (812) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (70,630) (19,854) (181,343) (152,323)
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued 259,262 210,227 1,250,383 1,337,233
In Lieu of Cash Distributions 57,629 15,504 137,342 123,997
Redeemed (414,976) (137,240) (368,321) (259,654)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share
Transactions (98,085) 88,491 1,019,404 1,201,576
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (142,153) 77,951 1,096,835 1,200,979
NET ASSETS:
Beginning of Period 236,092 93,939 1,974,592 3,071,427
- ---------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 93,939 $ 171,890 $3,071,427 $4,272,406
=================================================================================================================================
Undistributed net investment income included in end of
period net assets $ 17,555 $ 2,835 $ 20,429 $ 29,131
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
Shares Issued 23,853 20,877 120,019 125,875
In Lieu of Cash Distributions 5,964 1,609 13,249 11,777
Shares Redeemed (40,846) (14,119) (35,328) (24,393)
- ---------------------------------------------------------------------------------------------------------------------------------
(11,029) 8,367 97,940 113,259
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
(Amounts for the six months ended March 31, 1998 are unaudited)
<TABLE>
<CAPTION>
Institutional Class
-----------------------------------------------------
Year Ended
October 7, September 30, Six
1994** to ---------------- Months
September Ended
30, 1996 1997++ March 31,
ADVISORY FOREIGN FIXED INCOME PORTFOLIO 1995 1998++
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.80 $ 11.73 $ 10.32
- ---------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.74 0.68 0.58 0.24
Net Realized and Unrealized Gain (Loss) on Investments 0.44 1.02 0.80 0.11
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.18 1.70 1.38 0.35
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.38) (0.66) (1.88) (0.83)
Realized Net Gain -- (0.11) (0.88) --
In Excess of Realized Net Gain -- -- (0.03) --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.38) (0.77) (2.79) (0.83)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.80 $ 11.73 $ 10.32 $ 9.84
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 12.12% 16.47% 14.08% 3.61%
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $537,133 $236,092 $93,939 $171,890
Ratio of Expenses to Average Net Assets (1) 0.16%* 0.12% 0.14% 0.15%*
Ratio of Net Investment Income to Average Net Assets 7.44%* 6.06% 5.68% 4.83%*
Portfolio Turnover Rate 96% 170% 208% 208%
- ---------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.38%* 0.38% 0.38% 0.38%*
Ratio Including Expense Offsets 0.15%* 0.12% 0.14% 0.13%*
- ---------------------------------------------------------------------------------------------------------------------------
* Annualized
** Commencement of Operations
++ Per share amounts for the year ended September 30, 1997 and
six months ended March 31, 1998, are based on average
outstanding shares.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
(Amounts for the six months ended March 31, 1998 are unaudited)
<TABLE>
<CAPTION>
Institutional Class
---------------------------------------------------------
Year Ended
April 12, September 30, Six
1995** to ------------------- Months
September Ended
30, 1996 1997 March 31,
ADVISORY MORTGAGE PORTFOLIO 1995 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.41 $ 10.29 $ 10.59
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.72 0.75 0.35
Net Realized and Unrealized Gain (Loss) on Investments 0.35 (0.06) 0.34 0.12
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.60 0.66 1.09 0.47
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.19) (0.72) (0.71) (0.35)
Realized Net Gain -- (0.03) (0.08) (0.11)
In Excess of Realized Net Gain -- (0.03) -- --
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.19) (0.78) (0.79) (0.46)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.41 $ 10.29 $ 10.59 $ 10.60
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 6.03% 6.56% 11.03% 4.53%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $1,443,038 $1,974,592 $3,071,427 $4,272,406
Ratio of Expenses to Average Net Assets (1) 0.10%* 0.09% 0.09% 0.09%*
Ratio of Net Investment Income to Average Net Assets 6.72%* 7.17% 7.55% 6.90%*
Portfolio Turnover Rate 110% 139% 144% 29%
- -------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.49%* 0.39% 0.40% 0.39%*
Ratio Including Expense Offsets 0.08%* 0.08% 0.08% 0.08%*
- -------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Commencement of Operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
MAS Funds (the "Fund") is registered under the Investment Company Act of 1940
as an open-end investment company. At March 31, 1998, the Fund was comprised of
twenty-five active portfolios. The accompanying financial statements and
financial highlights are those of the Advisory Foreign Fixed Income and
Advisory Mortgage Portfolios (each referred to as a "Portfolio") only. The
financial statements of the remaining portfolios are presented separately.
A. SIGNIFICANT ACCOUNTING POLICIES. The following significant accounting
policies are in conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed by the Fund in
the preparation of its financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results may differ from those estimates.
1. SECURITY VALUATION: Market values for equity securities listed on the New
York Stock Exchange ("NYSE") or other U.S. exchanges or NASDAQ are based on
the latest quoted sales prices as of the close of the NYSE (normally 4:00
p.m. Eastern Time) on the valuation date; securities not traded on the
valuation date are valued at the mean of the most recent quoted bid and
asked prices. Equity securities not listed are valued at the mean of the
most recent bid and asked prices. Securities listed on foreign exchanges
are valued at the latest quoted sales prices. Bonds and other fixed income
securities are valued using brokers' quotations or on the basis of prices,
provided by a pricing service, which are based primarily on institutional
size trading in similar groups of securities. Mortgage-backed securities
issued by certain government-related organizations are valued using
brokers' quotations which are based on a matrix system which considers such
factors as other security prices, yields and maturities. Short term
securities are valued using the amortized cost method of valuation, which
in the opinion of the Board of Trustees reflects fair value. Securities for
which no quotations are readily available are valued at their fair value as
determined in good faith using methods approved by the Board of Trustees.
2. FEDERAL INCOME TAXES: It is each Portfolio's intention to continue to
qualify as a regulated investment company and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is required in
the financial statements.
3. REPURCHASE AGREEMENTS: Securities pledged as collateral for repurchase
agreements are held by the Portfolios' custodian bank until maturity of the
repurchase agreements. Provisions of the agreements ensure that the market
value of the collateral is at least equal to the repurchase value in the
event of a default; however, in the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Portfolios may transfer their uninvested cash balances into
a joint trading account with other Portfolios of the Fund which invests in
one or more repurchase agreement. This joint repurchase agreement is
covered by the same collateral requirements as discussed above.
4. FUTURES: Futures contracts (secured by cash and securities deposited with
brokers as "initial margin") are valued based upon their quoted daily
settlement prices; changes in initial settlement value (represented by cash
paid to or received from brokers as "variation margin") are accounted for
as unrealized appreciation (depreciation). When futures contracts are
closed, the difference between the opening value at the date of purchase
and the value at closing is recorded as realized gains or losses in the
Statement of Operations.
- --------------------------------------------------------------------------------
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Futures contracts may be used by each Portfolio in order to hedge against
unfavorable changes in the value of securities or to attempt to realize
profits from the value of the underlying securities. Futures contracts
involve market risk in excess of the amounts recognized in the Statement of
Net Assets. Risks arise from the possible movements in security values
underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in value of the hedged investments. In
addition, there is the risk that a Portfolio may not be able to enter into
a closing transaction because of an illiquid secondary market.
5. SWAP AGREEMENTS: Each Portfolio may enter into swap agreements to exchange
the return generated by one instrument for the return generated by another
instrument. The following summarizes swaps entered into by the Portfolios:
Interest Rate Swaps: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
Total Return Swaps: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security or index underlying the transaction
exceeds or falls short of the offsetting interest obligation, the Portfolio
will receive a payment from or make a payment to the counterparty,
respectively. Total return swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gains or losses in the Statement of Operations. Periodic
payments received or made at the end of each measurement period, but prior
to termination, are recorded as realized gains or losses in the Statement
of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Portfolio terminated its position in the agreement. Risks
may arise upon entering into these agreements from the potential inability
of the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received, if any, at
the date of default.
6. INTEREST RATE FLOOR AND CAP AGREEMENTS:
A Portfolio may hold or write interest rate floors or caps to protect
itself against fluctuation in interest rates. When a Portfolio writes an
interest rate floor, it agrees to make periodic interest payments to the
holder of the interest rate floor based on a notional principal amount to
the extent that a specified interest index falls below a specified interest
rate. When a Portfolio writes an interest rate cap, it agrees to make
periodic interest payments to the holder of the interest rate cap based on
a notional principal amount to the extent that a specified interest index
rises above a specified interest rate. Any premium received by a Portfolio
is recorded as a liability and is amortized to interest income over the
term of the agreement. Any premium paid by a Portfolio is recorded as an
asset and is accreted against interest income over the term of the
agreement. Interest rate caps and floors are marked-to-market daily based
on quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement
- --------------------------------------------------------------------------------
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
of Operations. Periodic receipts or payments of interest, if any, are
recorded in the interest income account on the Statement of Operations.
Realized gains or losses from these agreements are disclosed in the
Statement of Operations.
Because there is no organized market for these agreements, the value
reported in the Statement of Net Assets may differ from that which would be
realized in the event the Portfolio terminated its position in the
agreement. Entering into these agreements involves, to varying degrees,
elements of interest rate and market risk in excess of the amount recognized
in the Statement of Net Assets. Such risks involve the possibility that
there may be no liquid market for these agreements and that there may be
adverse changes in interest rates or the index underlying these
transactions. Risk may arise upon entering into these agreements from the
potential inability of the counterparties to meet the terms of the
agreements and are generally limited to the amount of net interest payments
to be received.
7. STRUCTURED INVESTMENTS: Each Portfolio may invest in structured investments
whose values are linked either directly or inversely to changes in foreign
currencies, interest rates, commodities, indices, or other underlying
instruments. A Portfolio uses these securities to increase or decrease its
exposure to different underlying instruments and to gain exposure to
markets that might be difficult to invest in through conventional
securities. Structured investments may be more volatile than their
underlying instruments, but any loss is limited to the amount of the
original investment.
8. DELAYED DELIVERY COMMITMENTS: Each Portfolio may purchase or sell
securities on a when-issued or forward commitment basis. Payment and
delivery may take place a month or more after the date of the transaction.
The price of the underlying securities and the date when the securities
will be delivered and paid for are fixed at the time the transaction is
negotiated. Collateral consisting of liquid securities or cash is
maintained in an amount at least equal to these commitments.
9. FOREIGN EXCHANGE AND FORWARD CURRENCY CONTRACTS: The books and records of
the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the bid prices of such currencies against
U.S. dollars quoted by a bank. Net realized gains (losses) on foreign
currency transactions represent net foreign exchange gains (losses) from
forward foreign currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on a Portfolio's
books and the U.S. dollar equivalent of amounts actually received or paid.
A forward foreign currency contract is an agreement between two parties to
buy or sell currency at a set price on a future date. Each Portfolio may
enter into forward foreign currency contracts to protect securities and
related receivables and payables against future changes in foreign exchange
rates. Fluctuations in the value of such contracts are recorded as
unrealized appreciation or depreciation; realized gains or losses, which
are disclosed in the Statement of Operations, include net gains or losses
on contracts which have been terminated by settlements. Risks may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and are generally
limited to the amount of unrealized gain on the contract, if any, at the
date of default. Risks may also arise from unanticipated movements in the
value of the foreign currency relative to the U.S. dollar.
At March 31, 1998, the Advisory Foreign Fixed Income Portfolio's net assets
were substantially comprised of foreign denomi-
- --------------------------------------------------------------------------------
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
nated securities and currency. The net assets of the Portfolio are
presented at the foreign exchange rates and market values at the close of
the period. The Portfolio does not isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates
from the fluctuations arising from changes in the market prices of the
securities held at period end. Similarly, the Portfolio does not isolate
the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the
period. Accordingly, realized and unrealized foreign currency gains
(losses) are included in the reported net realized and unrealized gains
(losses) on investment transactions and balances. Changes in currency
exchange rates will affect the value of and investment income from such
securities and currency.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the possibly
lower level of governmental supervision and regulation of foreign
securities markets and the possibility of political or economic
instability.
10. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are declared and paid quarterly for the Advisory Foreign
Fixed Income Portfolio and monthly for the Advisory Mortgage Portfolio. Net
realized capital gains are distributed at least annually. The amount and
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book
and tax treatments for foreign currency transactions.
Permanent book and tax differences relating to shareholder distributions may
result in reclassifications to undistributed net investment income (loss),
undistributed realized net gain (loss) and paid in capital.
Permanent book-tax differences, if any, are not included in ending
undistributed net investment income (loss) for the purpose of calculating
net investment income (loss) per share in the Financial Highlights.
11. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are amortized over their
respective lives. Most expenses of the Fund can be directly attributed to a
particular Portfolio. Expenses which can not be directly attributed are
apportioned among the Portfolios on the basis of their relative net assets.
B. INVESTMENT ADVISORY FEE: Under the terms of an Investment Advisory
Agreement, each Portfolio pays Miller Anderson & Sherrerd, LLP ("MAS" or the
"Adviser"), wholly owned by indirect subsidiaries of Morgan Stanley Dean
Witter, & Co., for investment advisory services performed at a fee calculated
by applying a quarterly rate based on an annual percentage rate of 0.375% of
the Portfolio's average daily net assets for the quarter.
The Adviser has voluntarily agreed to reduce the fees payable to it and, if
necessary, reimburse the Portfolios if annual operating expenses exceed 0.15%
and 0.08% of average daily net assets of the Advisory Foreign Fixed Income and
Advisory Mortgage Portfolios, respectively.
C. ADMINISTRATION FEE: MAS serves as Administrator to the Fund pursuant to an
Administration Agreement. Under the Agreement, MAS receives an annual fee
accrued daily and payable monthly, of 0.08% of each Portfolio's average daily
net assets. Chase Global Funds Services
- --------------------------------------------------------------------------------
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Company (CGFSC) serves as Transfer Agent to the Fund and provides fund
accounting and other services pursuant to a sub-administration agreement with
MAS and receives compensation from MAS for these services.
D. CUSTODY: Morgan Stanley Trust Company (NY) ("MSTC"), an affiliate of the
Fund, serves as custodian for certain of the Fund's assets held outside of the
United States in accordance with a custodian agreement. MSTC is a wholly owned
subsidiary of Morgan Stanley Dean Witter & Co.
For the six months ended March 31, 1998, the Advisory Foreign Fixed Income
Portfolio incurred custody fees of $19,000 with MSTC, of which $6,000 was
payable to MSTC at March 31, 1998.
E. TRUSTEES' FEES: The Fund pays each Trustee, who is not also an officer or
affiliated person, an annual fee plus travel and other expenses incurred in
attending Board meetings. Trustees who are also officers or affiliated persons
receive no remuneration for their service as Trustees.
Each eligible Trustee of the Fund who is not an officer or affiliated person, as
defined under the Investment Company Act of 1940, as amended, participates in
the Trustees' Deferred Compensation Plan. Under the Trustees' Deferred
Compensation Plan, such Trustees must defer at least 25% of their fees and may
elect to defer payment up to 100% of their total fees earned as a Trustee of the
Fund. Total trustees fees incurred, for the six months ended March 31, 1998 by
the Portfolios were $30,000.
Expenses for the six months ended March 31, 1998 include legal fees paid to
Morgan, Lewis & Bockius, LLP. A partner of that firm is secretary to the Fund.
F. PORTFOLIO INVESTMENT ACTIVITY:
1. PURCHASES AND SALES OF SECURITIES. For the six months ended March 31, 1998,
purchases and sales of investment securities other than temporary cash
investments were:
<TABLE>
<CAPTION>
(000)
-----------------------
Portfolio Purchases Sales
- ---------------------------------- ---------- ----------
<S> <C> <C>
Advisory Foreign Fixed Income $ 242,803 $ 194,363
Advisory Mortgage 3,061,168 1,086,788
</TABLE>
2. FEDERAL INCOME TAX COST AND UNREALIZED APPRECIATION (DEPRECIATION). At March
31, 1998, cost, unrealized appreciation, unrealized depreciation and net
unrealized appreciation (depreciation) of securities for Federal income tax
purposes were:
<TABLE>
<CAPTION>
(000)
--------------------------------------------------
Portfolio Cost Appreciation Depreciation Net
--------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Advisory Foreign
Fixed Income $ 167,656 $ -- $ (1,686) $(1,686)
Advisory Mortgage 5,047,903 77,546 (28,699) 48,847
</TABLE>
3. FORWARD FOREIGN CURRENCY CONTRACTS. Under the terms of the forward foreign
currency contracts open at March 31, 1998, the Advisory Foreign Fixed Income
Portfolio is obligated to deliver or receive currency in exchange for U.S.
dollars as indicated in the following table:
<TABLE>
<CAPTION>
(000)
- ------------------------------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Deliver For Date Value (Depreciation)
- ------------------------------- ---------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
ADVISORY FOREIGN FIXED INCOME
Purchases
US$ 6,024 FRF 36,000 4/7/98 US$ 5,815 US$ (209)
Sales
DKK 45,700 US$ 6,655 5/5/98 US$ 6,494 US$ 161
FRF 36,000 6,044 4/7/98 5,816 228
FRF 202,000 33,484 5/5/98 32,685 799
DEM 11,430 6,344 5/5/98 6,194 150
DEM 60,085 33,349 5/5/98 32,562 787
NLG 13,665 6,732 5/5/98 6,570 162
ESP 535,000 3,495 5/5/98 3,414 81
--------
US$2,368
--------
Net US$2,159
--------
DEM -- German Mark
DKK -- Danish Krone
FRF -- French Franc
ESP -- Spanish Peseta
NLG -- Netherlands Guilder
US$ -- U.S. Dollar
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
4. FUTURES CONTRACTS. At March 31, 1998, the following Portfolios had futures
contracts open:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER AGGREGATE APPRECIATION
OF FACE VALUE EXPIRATION (DEPRECIATION)
PORTFOLIO CONTRACTS (000) DATE (000)
--------- --------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Purchases:
ADVISORY FOREIGN FIXED INCOME
German 5 yr.
Government Bond 525 DEM 137,904 Jun-98 US$151
ADVISORY MORTGAGE
U.S. Treasury
2 yr. Note 3,450 US$ 375,619 Jun-98 (716)
U.S. Treasury
5 yr. Note 1,331 US$ 276,744 Jun-98 (804)
Sales:
ADVISORY MORTGAGE
90 day
Eurodollar 541 US$ 127,282 Jun-98- (363)
Mar-01
U.S. Treasury
10 yr. Note 3,250 US$ 365,219 Jun-98 2,013
U.S. Treasury
Long Bond 1,183 US$ 142,256 Jun-98 (294)
DEM -- German Mark
</TABLE>
5. SWAP AGREEMENTS. At March 31, 1998, the following Portfolio had an open
Interest Rate Swap Agreement:
<TABLE>
<CAPTION>
UNREALIZED
NOTIONAL APPRECIATION
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
- ------------------------------------------------------------
<S> <C> <C>
ADVISORY MORTGAGE
$230,000 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $ 734
---------
</TABLE>
LIBOR -- London Interbank Offer Rate
G. CAPITAL LOSS CARRY FORWARD. At March 31, 1998, the Advisory Foreign Fixed
Income Portfolio had $525,000 unused capital losses available for Federal
income tax purposes, all of which will expire on September 30, 2005.
H. EXPENSE OFFSETS. Custodian fees appearing in the Statement of Operations
have been adjusted to include expense offsets for custodian balance credits of
$3,000 and $196,000 for the Advisory Foreign Fixed Income and the Advisory
Mortgage Portfolios, respectively.
- --------------------------------------------------------------------------------
22
<PAGE> 25
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