<PAGE> 1
1998 ANNUAL REPORT
ADVISORY PORTFOLIOS
MAS FUNDS MAS
MAS FUNDS
<PAGE> 2
We are pleased to present the Annual Report for the Advisory Foreign Fixed
Income and Advisory Mortgage Portfolios of MAS Funds as of September 30, 1998.
TABLE OF CONTENTS
MAS Overview and Statement of Net Assets
<TABLE>
<S> <C>
Advisory Foreign Fixed Income
Portfolio............................. 1
Advisory Mortgage Portfolio.............. 4
Statement of Operations..................... 15
Statement of Changes in Net Assets.......... 16
Financial Highlights........................ 17
Notes to Financial Statements............... 19
Report of Independent Accountants........... 25
</TABLE>
THIS 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
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED INCOME PORTFOLIO
Morgan Stanley Dean Witter Investment Management uses the Advisory Foreign Fixed
Income Portfolio as a vehicle for opportunistic foreign bond investments in the
portfolios of its private advisory clients. By using the Portfolio instead of
holding foreign fixed-income securities directly, these clients may be able to
benefit from some or all of the following: (1) better diversification through
ownership of a smaller share of a larger number of holdings; (2) potentially
enhanced performance resulting from the ability to manage the foreign position
on a broader scale; (3) simplification of accounting as clients need only
account for mutual fund shares as opposed to individual securities, some of
which are subject to withholding taxes, fees, or other special treatment; (4)
economies of scale in custodial fees associated with holding foreign securities.
All securities in the Portfolio have a credit quality rating of A or better and
derivatives may be used to represent country investments or otherwise pursue
portfolio strategy. The Portfolio is actively managed by Miller Anderson &
Sherrerd's global fixed-income team, which makes strategic decisions about
non-U.S. bond exposures for client portfolios.
The Portfolio seeks to buy those foreign securities that will outperform U.S.
securities with the same duration. Interest-rate risk is not explicitly managed
in the Portfolio. Overall interest-rate risk is instead managed at the level of
the client's entire portfolio, of which the Advisory Foreign Fixed Income
Portfolio is only a part. If long-maturity foreign securities are more
attractive than long-maturity U.S. securities, the Portfolio will tend to have a
long maturity. Conversely, the Portfolio will tend to have a short maturity if
the best foreign values, relative to U.S. alternatives, are concentrated in the
front end of the yield curve.
Investments in the Portfolio reflect careful comparisons of relative interest
rates, yield curve slopes, and currency values. Historically, it has been
attractive to invest in those countries when a country offers higher real
interest rates than those available in other countries. In selecting
investments, however, MAS separates the currency decision from the country
decision and the Portfolio will hedge exposures to those foreign currencies that
are judged to be overvalued and likely to depreciate.
During the past year, the Portfolio was invested largely in continental European
government bonds, primarily German, hedged back to U.S. dollars. These
securities slightly underperformed domestic bonds.
The Advisory Foreign Fixed Income Portfolio is managed as a component of a
diversified portfolio and investment results from the Portfolio should not be
analyzed on a stand-alone basis. Results are presented in this report to comply
with Securities and Exchange Commission requirements for shareholder reporting.
The Portfolio is only available to private advisory clients of Morgan Stanley
Dean Witter Investment Management.
1
<PAGE> 4
<TABLE>
<CAPTION>
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
[Advisory Foreign Fixed Income Graph]
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
FISCAL YEARS
ENDING SEPTEMBER 30
MAS Advisory Foreign Salomon Broad
<S> <C> <C> <C>
"*" 1000 1000 10/7/94
1017 1007 12/31/94
1037 1058 3/31/95
1083 1123 6/30/95
'95 1121 1144 9/30/95
1195 1194 12/31/95
1200 1173 3/31/96
1235 1179 6/30/96
'96 1306 1201 9/30/96
1374 1237 12/31/96
1384 1231 3/31/97
1448 1275 6/30/97
'97 1490 1318 9/30/97
1509 1356 12/31/97
1543 1378 3/31/98
1574 1410 6/30/98
'98 1641 1469 9/30/98
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS ENDED 9/30/98*
MAS ADVISORY SALOMON BROAD
FOREIGN INDEX
----------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 10.19% 11.47%
Since Inception 13.26% 10.14%
</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.
2
<PAGE> 5
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY FOREIGN FIXED
INCOME PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (43.3%)
<TABLE>
<CAPTION>
- -------------------------------------------------------
++RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1998 POOR'S) (000) (000)+
- -------------------------------------------------------
<S> <C> <C> <C>
DANISH KRONE (2.8%)
Kingdom of Denmark
6.00%, 11/15/02 AAA DKK 3,000 $ 500
- -------------------------------------------------------
FRENCH FRANC (15.2%)
Government of France
O.A.T.
8.50%, 4/25/03 AAA FRF 12,500 2,684
- -------------------------------------------------------
GERMAN MARK (19.5%)
Deutsche Pfandbriefe
& Hypothekenbank AG
5.63%, 2/7/03 AAA DEM 1,000 641
Government of Germany
7.38%, 12/2/02 AAA 4,100 2,806
- -------------------------------------------------------
GROUP TOTAL 3,447
- -------------------------------------------------------
NETHERLANDS GUILDER (3.4%)
Netherlands Government
6.50%, 4/15/03 AAA NLG 1,000 591
- -------------------------------------------------------
SPANISH PESETA (2.4%)
Spanish Government
5.25%, 1/31/03 AAA ESP 57,000 425
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $6,961) 7,647
- -------------------------------------------------------
CASH EQUIVALENTS (48.5%)
- -------------------------------------------------------
DISCOUNT NOTES (38.3%)
Federal Home Loan Bank
10/7/98 $ 1,700 1,699
10/23/98 1,700 1,695
Federal Home Loan Mortgage
Corporation
11/6/98 1,700 1,691
Federal National Mortgage
Association
10/20/98 1,700 1,695
- -------------------------------------------------------
GROUP TOTAL 6,780
- -------------------------------------------------------
REPURCHASE AGREEMENTS (10.2%)
Chase Securities, Inc. 5.40%,
dated 9/30/98, due 10/1/98, to
be repurchased at $599,
collateralized by various U.S.
Government Obligations, due
10/1/98-8/31/00, valued at
$605 599 599
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
- -------------------------------------------------------
- -------------------------------------------------------
<S> <C> <C>
Goldman Sachs & Co. 5.00%, dated
9/30/98, due 10/1/98, to be
repurchased at $599,
collateralized by U.S.
Treasury Bonds, 10.375%, due
11/15/09, valued at $618 $ 599 $ 599
Merrill Lynch & Co., Inc. 5.00%,
dated 9/30/98, due 10/1/98, to
be repurchased at $599,
collateralized by U.S.
Government Obligations, 5.56%,
due 9/15/00, valued at $607 599 599
- -------------------------------------------------------
GROUP TOTAL 1,797
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $8,577) 8,577
- -------------------------------------------------------
FOREIGN CURRENCY (0.0%)
- -------------------------------------------------------
French Franc FRF 7 1
Swedish Krona SEK 8 1
- -------------------------------------------------------
TOTAL FOREIGN CURRENCY (Cost $2) 2
- -------------------------------------------------------
TOTAL INVESTMENTS (91.8%) (Cost $15,540) 16,226
- -------------------------------------------------------
OTHER ASSETS AND LIABILITIES (8.2%)
Foreign Currency Held as Collateral on
Futures Contracts (Cost $913) 913
Interest Receivable 311
Unrealized Gain on Forward Foreign Currency
Contracts 228
Unrealized Gain on Futures Contracts 46
Other Assets 12
Payable for Administrative Fees (2)
Payable for Trustees' Deferred Compensation
Plan-Note F (12)
Payable to Custodian (1)
Other Liabilities (38)
--------
1,457
- -------------------------------------------------------
NET ASSETS (100%) $17,683
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 1,736,968 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $17,683
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.18
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $ 6,197
Undistributed Net Investment Income (Loss) 8,747
Undistributed Realized Net Gain (Loss) 1,715
Unrealized Appreciation (Depreciation) on:
Investment Securities 686
Foreign Currency Transactions 292
Futures 46
- -------------------------------------------------------
NET ASSETS $17,683
- -------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
+ See Note A1 to Financial Statements.
++ Ratings are unaudited.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 6
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE PORTFOLIO
Morgan Stanley Dean Witter Investment Management uses the Advisory Mortgage
Portfolio as a vehicle for mortgage investing in the portfolios of its private
advisory clients. By using the Portfolio instead of holding mortgages directly,
these clients may be able to benefit from some or all of the following: (1)
better diversification through ownership of a smaller share of a larger number
of holdings; (2) potentially enhanced performance resulting from the ability to
manage the mortgage position on a broader scale; (3) simplification of
accounting as clients need only account for mutual fund shares as opposed to
individual mortgage securities, some of which have unusual payment
characteristics; (4) economies of scale in custodial fees associated with the
frequent pay-downs of mortgage securities.
The Portfolio invests in a full range of mortgage securities, collateralized
mortgage obligations (CMOs), asset-backed securities, U.S. Government and other
fixed-income securities. Derivatives may be used to pursue portfolio strategy.
The Portfolio is actively managed by Miller Anderson & Sherrerd's fixed-income
team, which makes strategic decisions about its structure and composition. The
team seeks to achieve above-market returns by purchasing attractively-priced
securities and by carefully managing the amount of prepayment risk, or call
risk, within the Portfolio. Most mortgages contain an option to prepay the
principal amount prior to maturity. These securities have higher yields as a
result, and MAS calculates whether the additional yield is sufficient to
compensate for the prepayment risk. The sensitivity of the Portfolio to mortgage
prepayments is increased when yields, adjusted for probable prepayments, are
attractive.
At the beginning of fiscal 1998, the Portfolio's prepayment sensitivity was
approximately equal to three-quarters that of its benchmark, the Lehman Mortgage
Index. As spreads on fixed-rate current-coupon mortgages tightened, the
Portfolio's position in these securities was 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 a sensitivity
to prepayment risk approximately equal to that of its benchmark.
The Advisory Mortgage Portfolio is managed as a component of a diversified
portfolio and investment results from the Portfolio should not be analyzed on a
stand-alone basis. Results are presented in this report to comply with the
Securities and Exchange Commission requirements for shareholder reporting.
The Portfolio is only available to private advisory clients of Morgan Stanley
Dean Witter Investment Management.
4
<PAGE> 7
PORTFOLIO OVERVIEW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Advisory Mortgage Graph]
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
FISCAL YEARS
ENDING SEPTEMBER 30 MAS Advisory Mortgage Lehman Mortgage
<S> <C> <C> <C>
"*" 1000 1000 4/12/95
'95 1034 1042 6/30/95
1060 1064 9/30/95
1096 1099 12/31/95
1095 1094 3/31/96
1104 1103 6/30/96
'96 1130 1126 9/30/96
1167 1158 12/31/96
1168 1160 3/31/97
1212 1203 6/30/97
'97 1254 1239 9/30/97
1289 1268 12/31/97
1311 1289 3/31/98
1339 1311 6/30/98
'98 1384 1346 9/30/98
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS ENDED 9/30/98*
MAS ADVISORY LEHMAN MORTGAGE
MORTGAGE INDEX
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 10.36% 8.62%
Since Inception 9.84% 8.94%
</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.
5
<PAGE> 8
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (141.1%)
<TABLE>
<CAPTION>
- ----------------------------------------------------------
++RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1998 & POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
AGENCY FIXED RATE MORTGAGES (106.2%)
Federal Home Loan Mortgage Corporation, Conventional
Pools:
6.75%, 12/1/05 Agy $ 110 $ 112
8.00%,
3/1/07-9/1/08 Agy 407 422
8.25%,
11/1/07-7/1/08 Agy 155 162
9.50%,
10/1/19-3/1/20 Agy 23,104 25,040
10.00%,
10/1/04-12/1/20 Agy 34,122 37,291
10.25%,
1/1/09-9/1/16 Agy 166 183
10.50%,
7/1/09-3/1/27 Agy 13,715 15,154
11.00%,
7/1/00-9/1/20 Agy 8,968 10,014
11.25%,
6/1/10-12/1/15 Agy 89 100
11.50%,
1/1/07-9/1/19 Agy 4,560 5,169
11.75%,
3/1/11-8/1/14 Agy 385 440
12.00%,
10/1/09-7/1/20 Agy 4,636 5,255
12.50%,
10/1/09-6/1/15 Agy 655 749
13.00%,
9/1/10-11/1/13 Agy 68 77
13.50%, 2/1/10 Agy 26 30
Gold Pools:
9.50%,
11/1/16-12/1/22 Agy 22,766 24,836
10.00%,
6/1/17-4/1/25 Agy 15,759 17,323
10.50%,
6/1/11-3/1/21 Agy 6,939 7,709
11.00%,
5/1/12-9/1/20 Agy 4,104 4,597
11.50%,
8/1/15-6/1/20 Agy 1,199 1,345
12.00%,
8/1/14-6/1/20 Agy 4,889 5,486
12.50%, 7/1/19 Agy 114 128
October TBA
6.00%, 10/15/28 Agy 744,650 744,611
6.50%, 10/15/28 Agy 224,500 228,534
November TBA
6.00%,
10/15/28-11/15/28 Agy 1,107,500 1,106,923
6.50%, 11/25/28 Agy 115,300 117,300
Federal National Mortgage Association, Conventional Pools:
6.50%, 2/1/26 Agy 4,066 4,139
7.00%, 3/1/11 Agy 3,475 3,571
7.50%, 6/1/24 Agy 2,949 3,044
8.50%, 4/1/09 Agy 614 647
9.00%,
6/1/18-12/1/21 Agy 27,330 29,186
9.50%,
7/1/16-5/1/28 Agy 36,032 39,232
10.00%,
3/1/06-4/1/27 Agy 91,672 100,586
10.50%,
6/1/10-6/1/27 Agy 24,244 26,976
10.75%,
10/1/11-6/1/13 Agy 178 198
11.00%,
5/1/11-11/1/20 Agy 7,275 8,171
11.25%,
1/1/11-1/1/16 Agy 287 325
11.50%,
2/1/11-9/1/25 Agy 3,597 4,071
12.00%,
1/1/13-5/1/20 Agy 4,959 5,651
12.50%,
9/1/09-9/1/15 Agy 4,481 5,164
14.00%, 9/1/11 Agy 33 38
October TBA
6.00%, 10/25/28 Agy 1,032,200 1,027,307
6.50%, 10/25/28 Agy 164,000 166,785
November TBA
6.00%,
10/15/28-11/15/28 Agy 806,600 802,399
6.50%, 11/25/28 Agy 973,000 988,862
</TABLE>
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
- ----------------------------------------------------------
<S> <C> <C> <C>
Government National Mortgage
Association: Adjustable Rate
Mortgages:
6.875%,
4/20/25-6/20/26 Tsy $ 249,628 $ 252,833
6.875%, 4/20/25
TBA Tsy 40,624 41,161
7.00%,
2/20/25-11/20/25 Tsy 80,643 81,623
7.00%, 7/20/25 TBA Tsy 35,130 35,579
7.375%, 7/20/25 Tsy 4,798 4,875
Various Pools:
9.00%,
10/15/17-12/15/21 Tsy 79,704 85,632
9.50%,
10/15/16-9/15/28 Tsy 149,339 163,330
10.00%, 11/15/09-
10/15/28 Tsy 361,424 399,170
10.50%,
1/15/01-4/15/25 Tsy 68,405 76,190
11.00%,
12/15/99-8/15/27 Tsy 55,402 62,385
11.50%,
12/15/09-8/15/18 Tsy 3,722 4,230
12.00%, 11/15/12-
10/15/15 Tsy 10,407 11,932
12.50%,
11/15/10-7/15/15 Tsy 637 735
13.00%,
3/15/11-9/15/14 Tsy 249 290
13.50%,
5/15/10-9/15/14 Tsy 151 174
- ----------------------------------------------------------
GROUP TOTAL 6,795,481
- ----------------------------------------------------------
ASSET BACKED CORPORATES (11.8%)
Advanta Mortgage Loan
Trust, Series
97-3 A2
6.61%, 4/25/12 AAA 11,080 11,106
Americredit
Automobile
Receivables Trust,
Series:
96-B A
6.50%, 1/12/02 AAA 398 401
98-B A2
5.675%, 6/12/01 AAA 52,875 52,897
Case Equipment Loan
Trust,
Series 95-A A
7.30%, 3/15/02 AAA 1,518 1,527
CIT Group Home Equity
Loan Trust, Series
97-1 A3
6.25%, 9/15/11 AAA 8,959 8,978
(+) Citibank Credit
Card Master Trust I
Series 98-7 A
5.60%, 5/15/02 Aaa 68,075 68,103
## Contimortgage Home
Equity Loan Trust,
Series 98-2 A2B PAC
(11)
5.62%, 3/15/13 AAA 49,305 49,264
</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
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
Daimler-Benz Auto
Grantor Trust,
Series 97-A A
6.05%, 3/31/05 AAA $ 20,396 $ 20,541
(-) First Merchants
Auto Receivables
Corp., Series 97-2
A1
6.85%, 11/15/02 AAA 4,495 4,525
First Plus Home Loan Trust,
Series:
97-3 A2
6.48%, 9/10/08 AAA 20,440 20,449
## 98-4 A1
5.65%, 1/10/11 AAA 46,862 46,713
First Security Auto
Grantor Trust,
Series 97-B A
6.14%, 4/15/03 AAA 35,390 35,657
## First USA Credit
Card Master Trust,
Series 97-10 A
5.672%, 9/17/03 AAA 46,760 46,750
Ford Credit Auto
Owner Trust,
Series 97-B A3
6.05%, 3/15/01 AAA 27,375 27,563
General Motors
Acceptance Corp.,
Series 97-A A
6.50%, 4/15/02 AAA 12,222 12,341
Green Tree Home
Equity Loan Trust,
Series:
97-7 A3
6.18%, 9/15/09 AAA 21,485 21,563
98-C A1
5.95%, 7/15/29 AAA 845 849
Honda Auto
Receivables Grantor
Trust,
Series:
97-A A
5.85%, 2/15/03 AAA 35,127 35,260
97-B A
5.95%, 5/15/03 AAA 34,911 35,112
IMC Home Equity Loan
Trust,
Series 96-4 A3
6.81%, 7/25/11 AAA 6,000 6,020
## IndyMac Home Equity Loan,
Series 98-A AF1
5.724%, 9/25/20 AAA 76,200 76,208
MMCA Automobile
Trust, Series 97-1
A3
6.08%, 5/15/01 AAA 16,450 16,533
</TABLE>
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
Nissan Auto
Receivables Grantor
Trust, Series 97-A
A
6.15%, 2/15/03 AAA $ 40,412 $ 40,679
Old Stone Credit
Corp. Home Equity
Trust, Series 92-3
B1
6.35%, 9/25/07 AAA 195 196
(+) Residential Funding
Mortgage Securities
Co., Inc.,
Series 98-HI2 A1
5.696%, 2/25/10 Aaa 638 638
Security Pacific Home
Equity Trust,
Series 91-A B
10.50%, 3/10/06 A+ 297 297
Textron Financial
Corporation
Receivables, Series
98-A A1
5.82%, 1/15/02 AAA 50,150 50,179
## UCFC Home Equity
Loan, Series 98-C
A1
5.65%, 12/15/12 AAA 63,350 63,386
- ----------------------------------------------------------
GROUP TOTAL 753,735
- ----------------------------------------------------------
ASSET BACKED MORTGAGES (0.1%)
Contimortgage Home
Equity Loan Trust,
Series:
96-3 A9 IO
1.30%, 9/15/27 AAA 126,713 4,020
96-3 10 IO
0.90%, 9/15/27 AAA 33,925 767
(-) 96-3A YMA
9/15/27 N/R 146,637 245
(-) 96-3B YMA
9/15/27 N/R 41,623 60
- ----------------------------------------------------------
GROUP TOTAL 5,092
- ----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-AGENCY COLLATERAL
SERIES (11.1%)
Collateralized Mortgage
Obligation Trust,
Series 86-13 Q Inv Fl
15.258%, 1/20/03 AAA 133 144
Federal Home Loan
Mortgage
Corporation,
Series:
88-17 I PAC-1 (11)
9.90%, 10/15/19 Agy 5,068 5,354
88-22 C PAC (11)
9.50%, 4/15/20 Agy 818 876
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
7
<PAGE> 10
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
88-23 F PAC-1 (11)
9.60%, 4/15/20 Agy $ 1,575 $ 1,669
89-39 F PAC-2 (11)
10.00%, 5/15/20 Agy 3,006 3,183
89-47 F PAC-1 (12)
REMIC
10.00%, 6/15/20 Agy 1,640 1,734
89-110 F PAC
8.55%, 1/15/21 Agy 800 847
90-129 H PAC
8.85%, 3/15/21 Agy 135 143
90-164 B12 REMIC
9.50%, 7/15/21 Agy 4,700 5,410
1364-B Inv Fl IO
REMIC
5.786%, 9/15/07 Agy 8,267 938
1364-E Inv Fl IO
8.995%, 9/15/07 Agy 9,931 1,717
1369-S Inv Fl IO
REMIC
3.875%, 9/15/07 Agy 9,033 608
## 1377-F REMIC
6.125%, 9/15/07 Agy 7,407 7,462
1381-SB Inv Fl IO
10.209%, 10/15/07 Agy 3,745 602
1395-S Inv Fl IO
4.439%, 10/15/22 Agy 28,215 2,243
1415-S Inv Fl IO
19.125%, 11/15/07 Agy 135 49
1463-B Inv Fl IO
2.725%, 1/15/23 Agy 30,092 1,824
1476-S Inv Fl IO
REMIC PAC
4.339%, 2/15/08 Agy 1,485 123
1485-S Inv Fl IO
REMIC
3.975%, 3/15/08 Agy 1,318 91
## 1591-FG REMIC
6.188%, 10/15/23 Agy 2,707 2,711
1600-SA Inv Fl IO
REMIC
2.375%, 10/15/08 Agy 17,214 862
1621-SD Inv Fl
7.511%, 11/15/23 Agy 1,100 830
1632-SA Inv Fl
REMIC
5.443%, 11/15/23 Agy 3,610 3,508
1632-SB Inv Fl
REMIC
4.35%, 11/15/23 Agy 9,720 8,208
1634-SC Inv Fl
7.113%, 12/15/23 Agy 4,000 3,980
1699-SD Inv Fl IO
2.375%, 3/15/24 Agy 77,063 3,607
## 1710-D REMIC
6.075%, 6/15/20 Agy 30,891 31,120
## 1890-F REMIC
6.125%, 6/15/24 Agy 30,748 30,911
## 1933-FM REMIC
6.375%, 3/15/25 Agy 1,151 1,157
</TABLE>
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
## 1933-FO REMIC
6.375%, 3/15/25 Agy $ 1,652 $ 1,661
## 1933-FQ REMIC
6.375%, 3/15/25 Agy 391 393
## 1987-FO REMIC
5.975%, 11/15/24 Agy 17,095 17,123
## 2006-FA REMIC
6.025%, 10/15/23 Agy 4,248 4,261
## 2027-F REMIC
5.99%, 3/15/27 Agy 20,711 20,789
## 2027-FA
5.99%, 3/15/27 Agy 20,728 20,807
## 2030-F
6.09%, 2/15/28 Agy 53,679 54,097
## 2040-FC
5.99%, 2/15/23 Agy 38,850 38,979
## 2054-FC
6.025%, 5/15/28 Agy 36,584 36,910
## E2 F
5.988%, 2/15/24 Agy 24,400 24,421
Federal National
Mortgage
Association,
Series:
89-22 G PAC (11)
10.00%, 5/25/19 Agy 5,540 5,927
89-86 E PAC (11)
8.75%, 11/25/19 Agy 166 171
89-92 G PAC (11)
8.60%, 12/25/04 Agy 750 788
90-106 J PAC
8.50%, 9/25/20 Agy 1,395 1,462
## 90-118 S Inv Fl
REMIC
28.579%, 9/25/20 Agy 313 464
90-126 S Inv Fl
19.091%, 10/25/20 Agy 4,257 5,493
## 92-43 FC REMIC
6.288%, 10/25/21 Agy 1,340 1,354
92-73 SQ Inv Fl IO
3362.50%, 5/25/22 Agy 1 74
92-89 SQ Inv Fl IO
PAC (11)
3321.956%, 6/25/22 Agy 5 350
92-186 S Inv Fl IO
REMIC
3.339%, 10/25/07 Agy 2,382 156
93-9 SB Inv Fl IO
6.796%, 1/25/23 Agy 6,177 2,384
93-46 SD Inv Fl
4.158%, 4/25/23 Agy 8,330 8,096
93-46 SG Inv Fl
5.833%, 7/25/22 Agy 2,810 2,817
93-115 SB Inv Fl
4.005%, 7/25/23 Agy 4,760 4,681
93-205 H PO REMIC
9/25/23 Agy 17,305 13,765
## 94-50 FD REMIC
6.138%, 3/25/24 Agy 8,294 8,328
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
8
<PAGE> 11
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
## 94-73 F
6.188%, 12/25/20 Agy $ 150 $ 151
96-11 V PO REMIC
9/25/23 Agy 210 210
96-14 PC PO
12/25/23 Agy 5,934 5,519
96-54 O PO
11/25/23 Agy 4,660 4,201
96-68 SC Inv Fl IO
REMIC
2.413%, 1/25/24 Agy 6,175 756
## 96-69 FC REMIC
6.188%, 10/18/23 Agy 4,475 4,492
97-30 SP Inv Fl
REMIC
3428.187%, 4/25/22 Agy 8 985
## 97-43 FM REMIC
6.188%, 7/18/27 Agy 10,209 10,282
97-57 PV IO
8.00%, 9/18/27 Agy 56,700 15,564
## 97-70 FA REMIC
6.138%, 7/18/20 Agy 4,938 4,969
## 97-76 FM
6.138%, 9/17/27 Agy 11,737 11,829
## 97-76 FN
6.088%, 9/17/27 Agy 11,623 11,700
## 97C FC TBA
6.388%, 3/25/24 Agy 20,964 21,174
## 98-22 FA
5.99%, 4/18/22 Agy 111,832 112,162
98-22 SA Inv Fl IO
2.955%, 4/18/28 Agy 152,626 8,394
G92-52 SQ Inv IO
REMIC
7163.487%, 9/25/22 Agy 32 4,715
G92-53 S Inv Fl IO
REMIC
32.063%, 9/25/22 Agy 3,878 2,634
G93-11 FA REMIC
6.088%, 12/25/08 Agy 12,837 12,924
191 IO
8.00%, 1/1/28 Agy 98,575 12,568
267 2 IO
8.50%, 10/1/24 Agy 33,970 4,501
281 2 IO
9.00%, 11/1/26 Agy 27,592 3,966
291 2 IO
8.00%, 11/1/27 Agy 101,902 12,849
Government National
Mortgage
Association,
Series:
96-12 S Inv Fl IO
REMIC
2.813%, 6/16/26 Tsy 31,188 1,899
96-13 S Inv Fl IO
REMIC
3.65%, 7/16/11 Tsy 18,654 1,358
</TABLE>
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
97-13 F TBA
6.188%, 9/16/27 Tsy $ 33,481 $ 33,737
(+) Kidder Peabody
Mortgage Assets
Trust,
Series:
87 B IO
9.50%, 4/22/18 Aaa 129 22
87 B PO
4/22/18 Aaa 110 96
## Salomon Brothers Mortgage Securities VII,
Series 96-6E A1
6.15%, 3/30/25 AAA 7,902 7,906
- ----------------------------------------------------------
GROUP TOTAL 709,225
- ----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-NON-AGENCY COLLATERAL
SERIES (1.1%)
American Housing Trust,
Series:
IV 2 C
9.553%, 9/25/20 A 2,592 2,732
V 1G
9.125%, 4/25/21 AAA 6,771 7,205
Sec. Chase Mortgage
Finance Corp.,
Series 93-1 B2
7.911%, 3/28/24
(acquired
4/28/95-8/27/98,
cost $5,045) N/R 5,160 5,279
Sec. Citicorp Mortgage
Securities, Inc.,
Series 95-2 B1 REMIC
7.50%, 4/25/25
(acquired
9/4/97-10/17/97,
cost $1) AAA 1 1
Countrywide Funding
Corp.,
95-4 M
7.50%, 9/25/25 AA 6,421 6,621
Countrywide Mortgage
Backed Securities,
Inc.
93-C A11
6.50%, 1/25/24 AAA 938 938
GE Capital Mortgage
Services, Inc.,
Series:
94-14 A7
7.50%, 4/25/24 AAA 4,000 4,129
95-6 B2
7.00%, 8/25/25 N/R 3 3
## Kidder Peabody
Funding Corp.,
Series 92-4 B2
8.285%, 5/28/22 N/R 41 41
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 12
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
Mid-State Trust II,
Series 88-2 A4
9.625%, 4/1/03 AAA $ 27,218 $ 29,570
Prudential Home Mortgage
Securities Co. Inc.,
Series:
90-5 A3
9.50%, 5/25/05 AAA 11 11
(+) 93-17 B1
6.50%, 3/1/23 A2 1 1
Rural Housing Trust,
Series 87-1
B1 REMIC
3.33%, 10/1/28 A- 8,474 8,266
## Ryland Mortgage
Securities Corp.
III, Series 92-A 1A
8.262%, 3/29/30 A- 4,227 4,304
Securitized Multiple
Asset Rated Trust,
Series 89-A 1
9.00%, 9/25/19 AAA 122 122
- ----------------------------------------------------------
GROUP TOTAL 69,223
- ----------------------------------------------------------
COMMERCIAL MORTGAGES (10.0%)
American Southwest Financial Securities Corp.,
Series:
93-2 A1
7.30%, 1/18/09 N/R 6,923 7,356
93-2 S2 IO
0.70%, 1/18/09 N/R 11,366 221
## 93-2 S1 IO
1.042%, 1/18/09 N/R 70,275 2,449
(+) 95-C1 A1B
7.40%, 11/17/04 Aaa 21,820 22,591
Asset Securitization Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 16,386 17,543
95-MD4 A1
7.10%, 8/13/29 AAA 3,443 3,655
## 95-MD4 ACS2 IO
2.354%, 8/13/29 AAA 29,360 4,816
96-MD6 A1B
6.88%, 11/13/26 AAA 17,650 18,626
96-MD6 A1C
7.04%, 11/13/26 AAA 19,705 21,196
(+)## 97-D5 PS1 IO
1.571%, 2/14/41 Aaa 141,264 14,541
97-MD7 A1B
7.41%, 1/13/30 AAA 29,325 32,228
Beverly Finance
Corp., Series 94-1
8.36%, 7/15/04 AA- 11,590 13,027
(+) Carolina First
Bank, Series 96-C1
A1
6.50%, 3/18/27 Aa2 3 3
</TABLE>
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
(-) Carousel Center
Finance, Inc.,
Series:
1 A1
6.828%, 11/15/07 AA $ 4,800 $ 4,970
1 B
7.188%, 10/15/07 A 16,900 17,602
CBM Funding Corp.,
Series 96-1 A1
7.55%, 7/1/99 AA 25 25
Commercial Mortgage
Acceptance Corp.,
Series:
97-ML1 A2
6.53%, 12/15/30 AAA 6,150 6,421
97-ML1 A3
6.57%, 12/15/30 AAA 20,000 21,054
(-) Creekwood Capital Corp.,
Series 95-1A
8.47%, 3/16/15 AA 5,215 6,053
(-) Crystal Run
Properties, Inc.,
Series 1-A
7.393%, 8/15/06 AA 15,900 16,964
(-) CVM Finance Corp.
7.19%, 3/1/04 AA 907 941
DLJ Mortgage
Acceptance Corp.,
Series:
93-MF7 A1
7.40%, 6/18/03 AAA 13,710 14,330
93-M10 A2
7.20%, 7/15/03 AAA 7,614 7,773
(-) 96-CF2 A1B
7.29%, 11/12/21 AAA 6,770 7,255
(-)## 96-CF2 S IO
1.638%, 11/12/21 N/R 72,838 5,253
(-) 97-CF1 S IO
1.097%, 5/15/30 AAA 98,223 5,833
## Federal National
Mortgage
Association Series
93-M2 B IO
2.57%, 7/25/03 Agy 45,421 725
(+) First Union-Lehman
Brothers
Commercial Mortgage,
Series 97-C1 A2
REMIC
7.30%, 12/18/06 Aaa 38,445 41,652
(-) Forum Finance
7.125%, 5/15/04 AA 7,000 7,475
(+) GMAC Commercial
Mortgage
Securities, Inc.,
Series:
## 96-C1 X2 IO
1.888%, 3/15/21 Aaa 95,777 7,012
97-C1 A2
6.853%, 9/15/06 Aaa 33,925 36,022
## 97-C2 X IO
1.273%, 4/15/29 Aaa 338,028 23,979
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
10
<PAGE> 13
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
(+) GS Mortgage
Securities Corp.
II,
Series:
97-GL A2D
6.94%, 7/13/30 Aaa $ 34,535 $ 37,206
## 97-GL X1A IO
0.651%, 7/13/30 Aaa 49,871 452
## 97-GL X2 IO
1.068%, 7/13/30 Aaa 58,120 2,884
(-) Lakeside Finance
Corp.
6.47%, 12/15/00 AA 240 244
(+) LB Commercial
Conduit Mortgage
Trust,
Series:
## 96-C2 A
7.428%, 10/25/26 Aaa 22,870 24,791
98-C1 A2
6.40%, 8/18/07 Aaa 17,000 17,704
Lehman Large Loan,
Series:
97-LL1 A1
6.79%, 6/12/04 AAA 3,037 3,258
97-LLI A2
6.84%, 9/12/06 AAA 7,200 7,639
## Merrill Lynch
Mortgage Investors,
Inc.,
Series:
95-C1 IO
2.165%, 5/25/15 N/R 31,262 1,424
96-C2 IO
1.541%, 11/21/28 AAA 99,822 8,085
(+) Midland Realty
Acceptance Corp.,
Series:
96-C2 A1
7.02%, 1/25/29 Aaa 1,211 1,261
96-C2 A2
7.233%, 1/25/29 Aaa 19,606 21,048
Mortgage Capital
Funding, Inc.,
Series:
95-MC1 A1B
7.60%, 5/25/27 AAA 11,358 11,741
(+) 97-MC1 A3
7.288%, 7/20/27 Aaa 36,289 39,263
Nomura Asset
Securities Corp.,
Series:
94-MD1 A1B
7.526%, 3/15/18 N/R 4,255 4,295
## 94-MD1 A2
7.666%, 3/15/18 N/R 4,585 4,798
94-MD1 A3
8.026%, 3/15/18 N/R 5,015 5,352
(-) Park Avenue Finance Corp.,
Series 97-C1 A1
7.58%, 5/12/07 N/R 8,590 9,305
</TABLE>
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
(-) Prime Property
Funding Series 1A
6.633%, 7/23/03 AA $ 14,554 $ 14,803
(+) Salomon Brothers
Mortgage
Securities, Series
97-TZH A2
7.174%, 3/24/22 Aa2 17,200 18,354
Sawgrass Financial
LLC, Series 93-A1
6.45%, 1/20/06 AAA 255 260
(-)+++ Stratford
Finance Corp.
6.776%, 2/1/04 AA 7,125 7,481
## Structured Asset
Securities Corp.,
Series:
96-CFL X1A IO
1.337%, 2/25/28 N/R 80,258 1,581
96-CFL X1 IO
1.447%, 2/25/28 N/R 101,430 5,448
96-CFL X2 IO
1.169%, 2/25/28 N/R 24,451 574
- ----------------------------------------------------------
GROUP TOTAL 638,842
- ----------------------------------------------------------
FINANCE (0.0%)
Washington Mutual
Capital
8.375%, 6/1/27 BBB- 75 83
- ----------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (0.2%)
Bank of America,
Series A
8.375%, 5/1/07 AAA 698 698
California Federal
Savings & Loan,
Series 86-1A
8.80%, 1/1/14 AA 55 55
sec. Coast Federal,
Series 84-3
7.941%, 3/1/06
(acquired 4/28/95,
cost $189) N/R 184 184
sec.## Dedham Savings Participation
Certificate
8.198%, 5/1/01
(acquired 7/30/96,
cost $233) N/R 235 235
First Federal Savings
& Loan Association,
Series 92-C
8.75%, 6/1/06 AA 228 228
sec.## Fortune Mortgage Corp. Participation
Certificate
7.80%, 8/1/99
(acquired 7/30/96-
2/3/98, cost $193) N/R 194 194
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
11
<PAGE> 14
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
Sec. Gemsco Mortgage
Pass Through
Certificate, Series
87-A
8.701%, 11/25/10
(acquired 4/28/95-
8/28/97, cost
$794) AA $ 786 $ 819
Sec. Great American
Federal Savings &
Loan,
Series 84-2
8.595%, 4/1/99
(acquired 4/28/95,
cost $9) N/R 9 9
Sec. Household Bank,
Series 85-1 CMO
7.94%, 5/1/02
(acquired 5/31/95,
cost $210) N/R 208 208
Residential Funding
Mortgage Securities
Co., Inc., Series
90-2 A
10.50%, 3/25/20 AA 12 12
## Resolution Trust
Corp., Series 92-5C
8.613%, 1/25/26 AA 5,630 5,587
Ryland Acceptance
Corp. IV, Series
79-A
6.65%, 7/1/11 AA 2,971 2,925
Sec. Sears Mortgage
Securities, Series
82-3
10.00%, 11/1/12
(acquired 4/28/95,
cost $366) AA 352 352
Sec. Shearson
American Express,
Series A CMO
9.625%, 12/1/12
(acquired 4/28/95-
6/29/98, cost
$292) AA 284 284
Travelers Mortgage
Services, Inc.,
Series 86-3 A
10.00%, 8/25/16 AA 57 57
Sec. Virginia Beach
Federal Savings
& Loan
Participation Certificate
6.90%, 3/1/01
(acquired 3/27/97,
cost $236) N/R 246 246
- ----------------------------------------------------------
GROUP TOTAL 12,093
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES-AGENCY COLLATERAL
SERIES (0.5%)
Federal Home Loan
Mortgage
Corporation
Series:
13-B IO REMIC
10.00%, 6/1/20 Agy $ 1,896 $ 366
16-B IO REMIC
10.00%, 6/1/20 Agy 1,001 194
18-B IO REMIC
10.00%, 5/1/20 Agy 540 104
1603-QA PO REMIC
10/15/23 Agy 15,266 13,739
1911-C PO
11/15/23 Agy 6,141 5,568
Federal National
Mortgage
Association
Series:
43-2 IO
9.50%, 9/1/18 Agy 37 6
95-21 C PO REMIC
5/25/24 Agy 10,117 8,173
96-20 E PO
11/25/22 Agy 1,217 1,116
96-34 C PO
3/25/23 Agy 5,861 4,984
282 1 PO
5/15/24 Agy 695 695
First Boston Mortgage
Securities Corp.,
Series 87-B2 IO
8.985%, 4/25/17 AAA 88 18
- ----------------------------------------------------------
GROUP TOTAL 34,963
- ----------------------------------------------------------
U.S. TREASURY BILL (0.1%)
+++ U.S. Treasury Bill
3/11/99 Tsy 5,000 4,895
- ----------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$8,942,690) 9,023,632
- ----------------------------------------------------------
PREFERRED STOCK (1.7%)
- ----------------------------------------------------------
SHARES
------
<S> <C> <C> <C>
MORTGAGES-OTHER (1.7%)
(-)(+) Home Ownership Funding
Corp.
13.331% (Cost
$98,464) Aaa 108,825 109,070
- ----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
12
<PAGE> 15
STATEMENT OF NET ASSETS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
++RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)+
- ----------------------------------------------------------
STRUCTURED INVESTMENT (0.1%)-SEE NOTE A7
- ----------------------------------------------------------
<S> <C> <C> <C>
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 $10,556) N/R $ 202,365 $ 2,813
- ----------------------------------------------------------
INTEREST RATE CAPS (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) AA- 1,384,500 --
- ----------------------------------------------------------
CASH EQUIVALENTS (38.2%)
- ----------------------------------------------------------
COMMERCIAL PAPER (32.5%)
AI Credit
5.50%, 10/23/98 25,000 24,916
Ameritech Capital
5.41%, 11/13/98 32,000 31,793
5.50%, 10/5/98 32,735 32,715
Associates Corp. of
North America
5.50%, 10/8/98 50,000 49,946
5.51%, 10/6/98 50,000 49,962
American Express
Credit Corp.
5.42%, 11/9/98 50,000 49,706
Canadian Imperial Holdings
5.52%, 10/7/98 50,000 49,954
CIT Group Holdings
5.28%, 11/6/98 50,000 49,736
5.51%, 10/13/98 50,000 49,908
Eastman Kodak
5.40%, 11/19/98 60,000 59,559
6.40%, 11/9/98 25,000 24,827
E.I. DuPont de Nemours, Inc.
5.43%, 11/5/98 50,000 49,736
5.49%, 10/16/98 50,000 49,886
First Chicago Finance
5.49%, 10/26/98 35,800 35,664
5.52%, 10/2/98 32,000 31,995
Ford Motor Credit Corp.
5.50%, 10/16/98 50,000 49,885
5.52%, 10/5/98 50,000 49,969
General Electric Capital
5.42%, 11/19/98 50,000 49,631
5.49%, 10/19/98 50,000 49,863
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
General Motors Corp.
5.52%, 10/16/98 $ 100,000 $ 99,770
Glaxo Wellcome
5.55%, 10/22/98 25,000 24,919
H.J. Heinz Corp.
5.41%, 11/10/98 50,000 49,699
5.43%, 11/9/98 19,650 19,534
Household Finance Corp.
5.43%, 12/4/98 50,000 49,517
5.50%, 10/8/98 50,000 49,947
IBM Credit Corp.
5.50%, 10/7/98 44,750 44,709
J.P. Morgan
5.42%, 11/16/98 50,000 49,654
Koch Industries
5.49%, 10/1/98 50,000 50,000
Metlife Funding
5.50%, 10/16/98 23,093 23,040
National Rural Utilities
5.40%, 11/17/98 25,000 24,824
Pfizer Corp.
5.49%, 10/30/98 100,000 99,558
Procter & Gamble
5.40%, 11/5/98 49,800 49,539
Prudential Funding
5.49%, 10/15/98 50,000 49,893
5.50%, 10/15/98 50,000 49,893
SBC Communications
5.45%, 11/6/98 50,000 49,727
SunTrust Corp.
5.39%, 11/4/98 45,500 45,268
5.51%, 10/9/98 37,000 36,955
SunTrust Capital Corp. II
5.40%, 11/20/98 20,000 19,850
Texaco Capital Corp.
5.51%, 10/7/98 38,300 38,265
Toyota Motor Credit
5.48%, 10/7/98 22,946 22,925
5.40%, 10/23/98 38,000 37,875
Toys 'R' Us
5.51%, 10/5/98 52,000 51,968
USAA Capital Corp.
5.50%, 10/30/98 35,000 34,845
Wachovia Corp.
5.48%, 10/14/98 32,000 31,937
Westdeutsche
Landesbank
5.52%, 10/16/98 50,000 49,885
Xerox Credit Corp.
5.40%, 11/17/98 50,000 49,648
5.50%, 10/2/98 38,750 38,744
- ----------------------------------------------------------
GROUP TOTAL 2,082,039
- ----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------
13
<PAGE> 16
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
ADVISORY MORTGAGE
PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(CONT'D) (000) (000)+
- ----------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT (5.7%)
Chase Securities, Inc. 5.40%,
dated 9/30/98, due 10/1/98, to
be repurchased at $366,348,
collateralized by various U.S.
Government Obligations, due
10/1/98-8/31/00, valued at
$369,956 $ 366,293 $ 366,293
- ----------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $2,448,332) 2,448,332
- ----------------------------------------------------------
TOTAL INVESTMENTS (181.1%) (Cost $11,505,902) 11,583,847
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-81.1%)
Cash 270
Dividends Receivable 3,627
Interest Receivable 39,884
Receivable for Investments Sold 4,538
Receivable for Forward Commitments 2,950,178
Receivable from Investment Adviser 745
Unrealized Gain on Swap Agreements 24,977
Other Assets 110
Payable for Investments Purchased (132,104)
Payable for Forward Commitments (8,069,598)
Payable for Fund Shares Redeemed (500)
Payable for Administrative Fees (407)
Payable for Daily Variation on Futures
Contracts (5,803)
Payable for Trustees' Deferred Compensation
Plan-Note F (107)
Other Liabilities (2,893)
-----------
(5,187,083)
- ----------------------------------------------------------
NET ASSETS (100%) $ 6,396,764
- ----------------------------------------------------------
INSTITUTIONAL CLASS
- ----------------------------------------------------------
NET ASSETS
Applicable to 589,208,292 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $6,396,764
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)+
- ----------------------------------------------------------
- ----------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.86
- ----------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $ 6,164,009
Undistributed Net Investment Income (Loss) 17,560
Undistributed Realized Net Gain (Loss) 127,931
Unrealized Appreciation (Depreciation) on:
Investment Securities 77,945
Futures and Swaps 9,319
- ----------------------------------------------------------
NET ASSETS $6,396,764
- ----------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1998 was $7,811 or 0.1% of net assets.
+ See Note A1 to Financial Statements.
++ Ratings are unaudited.
(-) 144A security. Certain conditions for public
sale may exist.
+++ A portion of these securities was pledged to
cover margin requirements for futures
contracts.
(+) Moody's Investors Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
## Variable or floating rate security-rate
disclosed is as of September 30, 1998.
@ Amount is less than $500.
CMO Collateralized Mortgage Obligation
Inv F1 Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1998.
IO Interest Only
N/R Not rated by Moody's Investors Service, Inc., or
Standard & Poor's Corporation.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
14
<PAGE> 17
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
Year Ended September 30, 1998
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 9,231 $304,187
Dividends -- 2,456
- ---------------------------------------------------------------------------------------------------------------
Total Income 9,231 306,643
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $ 699 $ 16,638
Less: Waived Fees (699) -- (16,638) --
Administrative Fee--Note C 149 3,549
Custodian Fee--Note E 32 447
Audit Fee 28 50
Legal Fee 2 61
Filing & Registration Fees -- 856
Other Expenses 13 227
Reimbursement of Expenses--Note B -- (1,199)
- ---------------------------------------------------------------------------------------------------------------
Total Expenses 224 3,991
- ---------------------------------------------------------------------------------------------------------------
Expense Offset--Note H (5) (447)
- ---------------------------------------------------------------------------------------------------------------
Net Expenses 219 3,544
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income 9,012 303,099
- ---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities 200 120,840
Foreign Currency Transactions 4,188 --
Futures 5,092 (10,759)
- ---------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 9,480 110,081
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 156 25,630
Foreign Currency Transactions 928 --
Futures and Swaps (495) 8,534
- ---------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) 589 34,164
- ---------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 10,069 144,245
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $19,081 $447,344
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
15
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVISORY
FOREIGN ADVISORY
FIXED INCOME MORTGAGE
PORTFOLIO PORTFOLIO
-------------------------------------------------------------------
Year Ended September 30, Year Ended September 30,
------------------------------- ------------------------------------
(In Thousands) 1997 1998 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $10,811 $ 9,012 $ 184,498 $ 303,099
Realized Net Gain (Loss) 18,256 9,480 30,589 110,081
Change in Unrealized Appreciation (Depreciation) (2,505) 589 43,687 34,164
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 26,562 19,081 258,774 447,344
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS--Note A10
Net Investment Income (46,240) (24,773) (164,543) (270,978)
Realized Net Gain (23,578) -- (16,800) (35,687)
In Excess of Realized Net Gain (812) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (70,630) (24,773) (181,343) (306,665)
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued 259,262 245,094 1,250,383 3,594,760
In Lieu of Cash Distributions 57,629 19,123 137,342 244,268
Redeemed (414,976) (334,781) (368,321) (654,370)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share
Transactions (98,085) (70,564) 1,019,404 3,184,658
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (142,153) (76,256) 1,096,835 3,325,337
NET ASSETS:
Beginning of Period 236,092 93,939 1,974,592 3,071,427
- ---------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 93,939 $ 17,683 $3,071,427 $ 6,396,764
- ---------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income included in end
of period net assets $ 17,555 $ 8,747 $ 20,429 $ 17,560
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
Shares Issued 23,853 24,440 120,019 337,613
In Lieu of Cash Distributions 5,964 1,981 13,249 23,087
Shares Redeemed (40,846) (33,786) (35,328) (61,395)
- ---------------------------------------------------------------------------------------------------------------------------------
(11,029) (7,365) 97,940 299,305
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Institutional Class
ADVISORY FOREIGN FIXED INCOME PORTFOLIO ---------------------------------------------------------------------
October 7,
1994** to Year Ended September 30,
September 30, ---------------------------------------
1995 1996 1997++ 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 0.48
Net Realized and Unrealized Gain (Loss) on
Investments 0.44 1.02 0.80 0.48
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.18 1.70 1.38 0.96
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.38) (0.66) (1.88) (1.10)
Realized Net Gain -- (0.11) (0.88) --
In Excess of Realized Net Gain -- -- (0.03) --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.38) (0.77) (2.79) (1.10)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.80 $ 11.73 $ 10.32 $ 10.18
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 12.12% 16.47% 14.08% 10.19%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $537,133 $236,092 $ 93,939 $ 17,683
Ratio of Expenses to Average Net Assets (1) 0.16%* 0.12% 0.14% 0.12%
Ratio of Net Investment Income to Average Net
Assets 7.44%* 6.06% 5.68% 4.84%
Portfolio Turnover Rate 96% 170% 208% 318%
- ---------------------------------------------------------------------------------------------------------------------------------
(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% 0.12%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Commencement of Operations
++ Per share amounts for the years ended September 30, 1997 and September 30,
1998 are based on average outstanding shares.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
17
<PAGE> 20
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION> Institutional Class
----------------------------------------------------------------------------
April 12, Year Ended September 30,
1995** to -----------------------------------------------------------------
September 30, 1996 1997 1998
ADVISORY MORTGAGE PORTFOLIO 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<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 0.69
Net Realized and Unrealized Gain (Loss) on
Investments 0.35 (0.06) 0.34 0.36
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.60 0.66 1.09 1.05
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.19) (0.72) (0.71) (0.67)
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) (0.78)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.41 $ 10.29 $ 10.59 $ 10.86
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 6.03% 6.56% 11.03% 10.36%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $1,443,038 $1,974,592 $3,071,427 $6,396,764
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% 6.83%
Portfolio Turnover Rate 110% 139% 144% 126%
- ---------------------------------------------------------------------------------------------------------------------------------
(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% 0.40%
Ratio Including Expense Offsets 0.08%* 0.08% 0.08% 0.08%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Commencement of Operations
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MAS Funds (the "Fund") is registered under the Investment Company Act of 1940
as an open-end investment company. At September 30, 1998, the Fund was
comprised of twenty-six 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 agreements. 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.
- --------------------------------------------------------------------------------
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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. Any premium paid by a Portfolio is recorded as an asset.
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 of Operations.
Periodic receipts or payments of interest, if any, are recorded in the
interest income account on the Statement of Operations.
- --------------------------------------------------------------------------------
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. 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.
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 September 30, 1998, the Advisory Foreign Fixed Income Portfolio's net
assets included foreign denominated securities and currency. The net assets
of the Portfolio are presented at the foreign exchange rates and market
values at the close of the period. The
- --------------------------------------------------------------------------------
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, the component of realized and unrealized foreign currency
gains (losses) representing foreign exchange changes on investments is
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
possibility of 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 cannot 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 Company ("CGFSC") serves as Transfer
Agent to the Fund and provides fund accounting and other services pursuant to a
sub-administration
- --------------------------------------------------------------------------------
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
agreement with MAS and receives compensation from MAS for these services.
D. DISTRIBUTOR. MAS Funds Distribution, Inc. ("MASDI" or the "Distributor"), a
wholly owned subsidiary of Morgan Stanley Asset Management Holdings, Inc., is
the distributor for the Fund. MASDI is a limited-purpose broker/dealer whose
only function is to distribute open-end mutual fund shares.
E. 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 was a wholly owned
subsidiary of Morgan Stanley Dean Witter & Co. Effective October 1, 1998, MSTC
was acquired by Chase Manhattan Bank.
For the year ended September 30, 1998, the Advisory Foreign Fixed Income
Portfolio incurred custody fees of $31,000 with MSTC, of which $2,000 was
payable to MSTC at September 30, 1998.
F. 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 of up to 100% of their total fees earned as a Trustee of
the Fund. These deferred amounts are invested in the Portfolios selected by the
Trustee. Total Trustees' fees incurred for the year ended September 30, 1998 by
the Portfolios were $92,000.
Expenses for the year ended September 30, 1998 include legal fees paid to
Morgan, Lewis & Bockius, LLP. A partner of that firm is secretary to the Fund.
G. PORTFOLIO INVESTMENT ACTIVITY:
1. PURCHASES AND SALES OF SECURITIES: For the year ended September 30, 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 $ 250,598 $ 283,993
Advisory Mortgage 13,454,048 6,962,259
</TABLE>
2. FEDERAL INCOME TAX COST AND UNREALIZED APPRECIATION (DEPRECIATION): At
September 30, 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 $ 15,538 $ 686 $ -- $ 686
Advisory Mortgage 11,505,903 135,213 (57,269) 77,944
</TABLE>
3. FORWARD FOREIGN CURRENCY CONTRACTS: Under the terms of the forward foreign
currency contracts open at September 30, 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> <C>
ADVISORY FOREIGN FIXED INCOME
Purchases
US$ 9,374 DEM 16,810 10/6/98 US$10,073 US$ 699
2,997 FRF 18,000 11/4/98 3,221 224
30,215 DEM 54,100 11/5/98 32,468 2,253
6,201 DKK 42,400 11/5/98 6,685 484
3,511 ESP 535,000 11/5/98 3,774 263
31,065 FRF 186,700 11/5/98 33,410 2,345
6,205 NLG 12,535 11/5/98 6,669 464
1,571 ESP 239,000 11/9/98 1,686 115
-----------
US$ 6,847
-----------
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Deliver For Date Value (Depreciation)
-------- -------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales
DEM 11,430 US$ 6,322 10/6/98 US$ 6,849 US$ (527)
DEM 5,380 3,036 10/6/98 3,224 (188)
FRF 18,000 3,034 11/4/98 3,221 (187)
DEM 60,085 33,832 11/5/98 36,060 (2,228)
DKK 45,700 6,745 11/5/98 7,205 (460)
ESP 535,000 3,542 11/5/98 3,774 (232)
FRF 202,000 33,921 11/5/98 36,147 (2,226)
NLG 13,665 6,824 11/5/98 7,270 (446)
ESP 300,000 1,992 11/9/98 2,117 (125)
-----------
US$(6,619)
-----------
US$ 228
===========
</TABLE>
<TABLE>
<S> <C> <C>
DEM -- German Mark
DKK -- Danish Krone
ESP -- Spanish Peseta
FRF -- French Franc
NLG -- Netherlands Guilder
US$ -- U.S. Dollar
</TABLE>
4. FUTURES CONTRACTS: At September 30, 1998, the 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 37 DEM 10,043 Dec-98 US$ 46
===========
Sales:
ADVISORY MORTGAGE
90 day Eurodollar 413 US$ 98,381 Dec-98- US$ (1,613)
Mar-01
U.S. Treasury 10
yr. Note 525 US$ 63,755 Dec-98 (1,447)
U.S. Treasury Long
Bond 3,680 US$ 483,805 Dec-98 (12,598)
------------
US$(15,658)
============
</TABLE>
<TABLE>
<S> <C> <C>
DEM -- German Mark
US$ -- U.S. Dollar
</TABLE>
5. SWAP AGREEMENTS: At September 30, 1998, the Advisory Mortgage Portfolio had
the following open Interest Rate Swap Agreements:
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation
Amount (Depreciation)
(000) Description (000)
- ---------------------------------------------------------------
<C> <S> <C>
$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. $ 1,953
$115,000 Agreement with Bankers Trust
Company terminating August 25,
2008 to pay 3 month LIBOR monthly
and to receive fixed rate at
6.04% semiannually. 6,985
$50,000 Agreement with Bankers Trust
Company terminating August 27,
2008 to pay 3 month LIBOR
quarterly and to receive fixed
rate at 6.08% semiannually. 3,210
$116,000 Agreement with Bankers Trust
Company terminating August 27,
2008 to pay 3 month LIBOR
quarterly and to receive fixed
rate at 6.10% semiannually. 7,581
$29,000 Agreement with Bankers Trust
Company terminating August 28,
2008 to pay 3 month LIBOR monthly
and to receive fixed rate at
6.03% semiannually. 1,747
$47,500 Agreement with Bankers Trust
Company terminating September 17,
2008 to pay 3 month LIBOR
quarterly and to receive fixed
rate at 5.64% semiannually. 1,439
$78,000 Agreement with Bankers Trust
Company terminating September 21,
2008 to pay 3 month LIBOR
quarterly and to receive fixed
rate at 5.59% semiannually. 2,062
------------
$24,977
============
</TABLE>
<TABLE>
<S> <C> <C>
LIBOR -- London Interbank Offer Rate
</TABLE>
H. EXPENSE OFFSETS. Custodian fees appearing in the Statement of Operations
have been adjusted to include expense offsets for custodian balance credits of
$5,000 and $447,000 for the Advisory Foreign Fixed Income and the Advisory
Mortgage Portfolios, respectively.
- --------------------------------------------------------------------------------
24
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
MAS Funds
In our opinion, the accompanying statements of net assets (excluding Standard
& Poor's ratings) and the related statements of operations and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of the Advisory Foreign Fixed Income Portfolio and the
Advisory Mortgage Portfolio (each a portfolio of the MAS Funds, hereafter
referred to as the "Fund") at September 30, 1998, the results of each of their
operations, the changes in each of their net assets and the financial highlights
for each of the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodians and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 20, 1998
- --------------------------------------------------------------------------------
25
<PAGE> 28
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
The Advisory Mortgage Portfolio hereby designates $6,650,000 and $454,000 as
long-term 28% and 20%, respectively, capital gain dividends for the purpose of
the dividend paid deduction on its federal income tax return.
For the year ended September 30, 1998*, the Advisory Mortgage Portfolio earned
11.3% of income from direct U.S. Treasury obligations.
* Amounts for the period ending December 31, 1998 will be provided with Form
1099-DIV, to be mailed in January 1999.
- --------------------------------------------------------------------------------
26
<PAGE> 29
MAS
MAS FUNDS
MILLER ANDERSON & SHERRERD,LLD
One Tower Bridge,
West Conshohocken, PA
19428-2899
Investment Adviser:
(610) 940-5000
MAS Funds:
(800) 354-8185
Printed in U.S.A.
This Report has been prepared for
shareholders and may be distributed to
others only if preceded or accompanied by a
current prospectus.
