<PAGE> 1
1999
Annual
Report
[PHOTO]
Morgan Stanley Dean Witter Investment Management
Miller Anderson & Sherrerd, LLP
[MAS FUNDS LOGO]
<PAGE> 2
Miller Anderson & Sherrerd, LLP Morgan Stanley Dean Witter Investment
Management
MISSION STATEMENT
We strive to meet or exceed clients' long-term investment objectives by
providing a comprehensive array of investment services, characterized by
enduring client relationships and superior investment results.
In pursuing this mission we:
- - Listen attentively to our clients
- - Communicate clearly and concisely how well our investment strategies and
results are fulfilling our clients' investment objectives
- - Manage the growth of the firm to preserve and enhance the quality of our
investment services
- - Invest continuously in people and technology to remain at the intellectual
and technological forefront of our industry
- - Maintain a culture and work environment that promote teamwork and enable us
to attract and retain the highest caliber of people and to foster their
growth and satisfaction
- - Uphold the highest standards of ethics and integrity
We measure our success through our enduring client relationships and long-term
investment results.
1
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Miller Anderson & Sherrerd, LLP Morgan Stanley Dean Witter Investment
Management
CONTENTS
CHAIRMAN'S LETTER................4
PORTFOLIO COMMENTARY AND INVESTMENT RESULTS
EQUITY
6 Value Portfolio
8 Equity Portfolio
10 Small Cap Value Portfolio
12 Mid Cap Growth Portfolio
14 Mid Cap Value Portfolio
16 Small Cap Growth Portfolio
FIXED INCOME
18 Fixed Income Portfolio
20 Domestic Fixed Income Portfolio
22 High Yield Portfolio
24 Cash Reserves Portfolio
26 Fixed Income II Portfolio
28 Limited Duration Portfolio
30 Special Purpose Fixed Income Portfolio
32 Municipal Portfolio
34 Global Fixed Income Portfolio
36 International Fixed Income Portfolio
38 Intermediate Duration Portfolio
40 Multi-Market Fixed Income Portfolio
BALANCED
42 Balanced Portfolio
44 Multi-Asset-Class Portfolio
TRUSTEES AND OFFICERS........ 47
3
<PAGE> 4
Miller Anderson & Sherrerd, LLP
CHAIRMAN'S LETTER
"WE USE PROVEN STRATEGIES THAT HAVE BEEN VALIDATED THROUGH HISTORICAL RESEARCH
AND ANALYSIS, PROVIDING THE CONSISTENCY IN INVESTMENT APPROACH THAT
INSTITUTIONAL INVESTORS SEEK."
[PHOTO]
Thomas L. Bennett,
Chairman
DEAR FELLOW SHAREHOLDERS,
1999 is a special year for MAS Funds and the Fund's adviser, Miller Anderson &
Sherrerd, LLP. This year marks the 30th anniversary of the launch of the first
MAS strategy. In addition, we celebrate the 15th year of existence for our three
flagship MAS Funds Portfolios: Value, Equity, and Fixed Income.
We are very proud to have reached these milestones through adherence to
prudent, valuation-driven investment decision-making and dedication to superior
client service. From the beginning, we have stressed the importance of a
long-term, disciplined approach to investing. We use proven strategies that have
been validated through historical research and analysis, providing the
consistency in investment approach that institutional investors seek.
Remaining disciplined does not, however, imply that we never make changes.
We are dedicated above all else to serving the best interests of our
shareholders, and that means having the willingness to look for areas of
improvement. A good example would be our Equity Portfolio. As many of our
shareholders are aware, we initiated significant changes about two years ago in
the way we execute the Portfolio's investment strategy. While we continue our
efforts to enhance the management of this portfolio, the Portfolio's superior
performance versus the S&P 500 over the past 12 months makes us feel very
positive about our progress thus far.
During the past year, we also decided to close four of the MAS Funds
portfolios. These decisions were not made lightly--we ultimately concluded that
we would better serve our entire shareholder base by reallocating our resources
and taking advantage of our close relationship with the Morgan Stanley Dean
Witter Institutional Funds. For example, as a result of closing the
International Equity and Emerging Markets Value Portfolios, the realignment of
investment teams allowed MAS Funds investors to benefit from an expanded, global
asset allocation team, while enjoying access to premier international investing
services.
Through the Fund's affiliation with Morgan Stanley Dean Witter Investment
Management, we are now able to offer our clients an even broader array of
4
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Morgan Stanley Dean Witter Investment Management
high quality investment products and services. In doing so, we have endeavored
to preserve the excellent standing of the MAS Funds portfolios. As shown in the
table below, a high percentage of the MAS Funds portfolios rated by Morningstar
continues to be awarded "Four- and Five-Star Ratings" based on their long-term
track record--76% versus 74% two years ago.
MAS Funds remains committed to the ideals of time-tested, disciplined
investing and individualized, attentive service to clients. Our dedication to
these principles will not waver, and we will continue to look for the best ways
to serve our shareholders. As always, please call your client service contact
with any questions regarding this report or the MAS Funds portfolios.
Sincerely,
/s/ THOMAS L. BENNETT
Thomas L. Bennett
Chairman
"THROUGH THE FUND'S AFFILIATION WITH MORGAN STANLEY DEAN WITTER INVESTMENT
MANAGEMENT, WE ARE NOW ABLE TO OFFER OUR CLIENTS AN EVEN BROADER ARRAY OF HIGH
QUALITY INVESTMENT PRODUCTS AND SERVICES."
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
MORNINGSTAR RATINGS FOR MAS FUNDS* For the periods ending September 30, 1997 and September 30, 1999
- -------------------------------------------------------------------------------------------------------------
Number of Funds Number of Funds Number of Funds
Rated by Morningstar Rated 4 Star Rated 5 Star
- -------------------------------------------------------------------------------------------------------------
9/30/1997 9/30/1999 9/30/1997 9/30/1999 9/30/1997 9/30/1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Portfolios 4 5 1 2 2 2
- -------------------------------------------------------------------------------------------------------------
International Equity Portfolios 1 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Fixed-Income Portfolios 10 8 7 4 3 4
- -------------------------------------------------------------------------------------------------------------
International Fixed-Income Portfolios 2 2 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Balanced Portfolios 2 2 1 1 -- --
- -------------------------------------------------------------------------------------------------------------
Total 19 17 9 7 5 6
</TABLE>
*Morningstar, Inc. assigns ratings to investment companies based on the Firm's
proprietary star-based rating system. Under this system, Morningstar assigns a
fund anywhere from one to five stars based upon a combination of performance
(three-, five-, and ten-year time periods, when available) and risk, assessed
together to form a comprehensive evaluation. The top 10% of each class receives
five stars and funds falling in the next 22.5% receive four stars. A Morningstar
rating is not a predictor of future performance and does not guarantee that a
fund will perform at its past levels in the future.
Morningstar, Inc. currently rates seventeen of the twenty MAS Funds portfolios.
Morningstar, Inc. requires that a mutual fund be in existence for a minimum of
three years in order to be rated. Therefore, the Small Cap Growth and
Multi-Market Fixed Income Portfolios are not yet rated. In addition, the Cash
Reserves Portfolio is not rated, because Morningstar, Inc. does not rate money
market funds.
5
<PAGE> 6
MAS Funds/Equity
VALUE PORTFOLIO
"THE PORTFOLIO'S P/E RATIO AT FISCAL YEAR-END WAS 11.2X, COMPARED TO 26.4X FOR
THE S&P 500."
THE VALUE PORTFOLIO combines Miller Anderson & Sherrerd's disciplined stock
valuation process with the judgment gained through considerable experience in
low P/E investing.
MAS's process is executed in two stages. An initial screen identifies
companies with flat or positive earnings growth which have underperformed the
broad market averages, and whose valuations fall into the lower segment of MAS's
investment universe. In the second stage, fundamental analysis is used to
determine the cyclical sustainability of earnings and the competitive dynamics
of a company. This approach is fortified by attention to risk management. MAS
emphasizes portfolio diversification in terms of both sectors and stocks.
Maximum sector and position limitations are imposed, thereby minimizing the risk
of any individual sector or holding.
MAS also utilizes a clearly defined, firmly enforced sell discipline. Many
value managers who are able to identify outstanding securities err by holding
successful investments past their peaks. Perhaps the greatest strategic
advantage of the MAS approach is that the sell discipline mandates the sale of
any stock that satisfies one or more of the three sell criteria--price
appreciation, earnings deterioration, or negative fundamental change.
The past two years have been difficult for low P/E value investing, and this
difficult environment continued in the Portfolio's 1999 fiscal year. The total
return of the MAS Funds Value Portfolio was 8.3%, compared to 27.8% for the S&P
500.
Early in the year, it appeared that the equity markets had become
increasingly "digital." The digital world reduces inputs to streams of 1s or 0s,
off or on, with no mention or measurement of degree. Investors seemed to have
reduced their opinions about companies and their stock prices to the same level
of simplicity. Internet, technology, and mega-cap growth stocks were switched
"on" in the equity markets. Valuations were deemed irrelevant in this new
digital investment world. Most other sectors of the market were deemed "off."
Conceptually unappealing sectors such as small- and mid-caps and economically
sensitive companies of every size were ignored, irrespective of fundamentals or
valuations.
By contrast, the third fiscal quarter represented an excellent period for
the Portfolio and a welcome respite from earlier performance comparisons. The
Portfolio returned 15.3% for that quarter, compared to 7.1% for the S&P 500. The
most important aspect of this quarter was the market's significant rotation
towards a low P/E, value style of investing. For the first time in recent years,
the trend of mega-cap growth outperformance was broken. Generally, everything
that had suffered over the past eighteen months recovered: large stocks
outperformed mega-cap stocks, cyclical stocks outperformed defensive stocks,
value stocks outperformed growth stocks, and low P/E stocks outperformed high
P/E stocks.
However, the brief outperformance of value stocks ended abruptly in the
fourth fiscal quarter of 1999. For the quarter, the Portfolio returned (16.0)%
versus (6.3)% for the S&P 500. Traditional performance attribution reveals that
stock selection contributed about 75% of the performance shortfall, and sector
allocation was responsible for the remainder. The sector allocation shortfall
was due to an underweighting in technology and overweightings in financial,
consumer durable, and transportation stocks. Stock selection in the health care,
technology, financial, heavy industry, and retail groups penalized relative
performance.
Further analysis, however, reveals that the major reason for the significant
underperformance during the quarter was the Portfolio's strict adherence to a
low P/E investment discipline. From June through September, the low P/E
universe, as defined by the two lowest P/E quintiles of all stocks greater than
$2.5 billion in market capitalization, returned (14.1)%. This reversed the
positive momentum that value investing had established in the third fiscal
quarter. It also reestablished the primary trend of the past two years--a
situation in which mega-cap growth stocks with exceptionally high valuations
appreciated, while the vast majority of low valuation shares stagnated or
declined. Unquestionably, the average stock in the Portfolio's investible
universe experienced a severe bear market during the quarter.
6
<PAGE> 7
Sector allocation in the Portfolio remained true to the low P/E investible
universe at the end of the fiscal year. Overweightings remained in the
financial, industrial, durable goods, transportation, and basic materials
sectors. During the year, larger commitments were made to the health care
services sector, and at fiscal year-end, this group also represented a
significant overweighting. MAS believed that this sector, under pressure from
reimbursement and legal concerns, represented exceptional value. Sector
underweightings remained in technology (which MAS believed was in an
Internet-led mania stage), consumer staples, telecommunications, and energy
stocks. In each of these sectors, valuations prevented the Portfolio from
participating without violating its low P/E discipline.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT OVER 10 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS
September 30 Funds Value S&P 500
<S> <C> <C> <C>
89 1000 1000 9/30/89
959 1021 12/31/89
929 990 3/31/90
957 1052 6/30/90
90 801 908 9/30/90
900 989 12/31/90
1053 1133 3/31/91
1073 1130 6/30/91
91 1166 1190 9/30/91
1239 1290 12/31/91
1240 1258 3/31/92
1269 1282 6/30/92
92 1316 1322 9/30/92
1420 1389 12/31/92
1499 1449 3/31/93
` 1508 1456 6/30/93
93 1574 1494 9/30/93
1623 1528 12/31/93
1598 1471 3/31/94
1621 1477 6/30/94
94 1692 1549 9/30/94
1680 1549 12/31/94
1860 1699 3/31/95
2078 1862 6/30/95
95 2243 2010 9/30/95
2331 2131 12/31/95
2494 2245 3/31/96
2552 2346 6/30/96
96 2656 2418 9/30/96
2975 2620 12/31/96
3024 2690 3/31/97
3466 3159 6/30/97
97 3752 3396 9/30/97
3670 3494 12/31/97
4023 3981 3/31/98
3873 4112 6/30/98
98 3136 3703 9/30/98
3564 4492 12/31/98
3505 4716 3/31/99
4041 5048 6/30/99
99 3396 4733 9/30/99
</TABLE>
Portfolio characteristics and global economic trends remained favorable for
low P/E, value-based investors. The Portfolio's P/E ratio at fiscal year-end was
11.2x, compared to 26.4x for the S&P 500. Price-to-cash flow and price-to-book
value ratios were also at substantial discounts to the benchmark, while the
Portfolio's dividend yield was 2.1%, compared to 1.3% for the index. Growth
rates and earnings estimate revisions for the Portfolio's holdings were at
slight discounts to the S&P 500, but well within traditional ranges. U.S.
economic activity was healthy, and global economic recovery continued. These
factors have historically been positive influences on relative price performance
for the Portfolio's low P/E investible universe.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Value
-------------------------------------------------
S&P 500
Institutional - Investment + Adviser ++ Index
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 8.30% 8.20% 8.10% 27.80%
- ---------------------------------------------------------------------------------------
Five Years 14.96% 14.84% 14.78% 25.03%
- ---------------------------------------------------------------------------------------
Ten Years 13.01% 12.95% 12.92% 16.82%
- ---------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
+ Represents an investment in the Investment Class which commenced operations
5/6/96. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15% Shareholder
Servicing Fee applicable to the Investment Class.
++ Represents an investment in the Adviser Class which commenced operations
7/17/96. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1 Fee
applicable to the Adviser Class.
Total returns for the Investment Class of the Portfolio reflect expenses
reimbursed by the Adviser for certain periods. Without such reimbursements,
total returns would have been lower.
* Total returns are compared to the S&P 500 Index, an unmanaged market index.
7
<PAGE> 8
MAS Funds/Equity
EQUITY PORTFOLIO
[PHOTO]
from left:
John Hevner and Jim Scott
THE EQUITY PORTFOLIO is Miller Anderson & Sherrerd's core-strategy stock fund.
The Portfolio is heavily oriented toward large-capitalization stocks, with
strategic commitments to value and growth equities. In constructing the
Portfolio, the MAS equity team applies a value-oriented discipline to three key
equity decisions: stock selection, sector allocation, and portfolio risk
control.
MAS's goals for core equity investing are to provide capital appreciation
with income through broad market exposure, and to achieve above-average,
consistent returns compared to other managers and the broad market averages over
long periods of time.
The fiscal year ended with the stock market in the throes of a general
decline. Indeed, by the end of this period, the individual stocks in the S&P 500
had fallen an average of nearly 24% from their 52-week highs. The Portfolio
outperformed its benchmark for the year by returning 30.1%, compared to 27.8%
for the S&P 500 Index. Competitively, the Portfolio outperformed the Lipper
Growth & Income Index, which returned 19.4% for the year, and nearly matched the
Lipper Growth Index, which returned 30.2%. For the trailing three-, five-, and
ten-year periods, the Portfolio surpassed the return of the Growth & Income
Index (20.6% vs. 16.8%, 20.8% vs. 18.1%, and 15.2% vs. 13.4%, respectively).
While exceeding the ten-year return of the Growth Index (15.2% vs. 15.0%), the
Portfolio slightly lagged for the three- and five-year periods (20.6% vs. 21.8%
and 20.8% vs. 21.4%, respectively).
During fiscal 1999, the market's growth style dominated value style returns
by extreme margins for the first two quarters, much as it had for the previous
three and one-half years. The Portfolio's return kept pace, however, and
actually outperformed the S&P 500 in each of these two quarters. For an
investment discipline which maintains a highly visible and consistent valuation
component, outperforming the benchmark under such difficult market conditions
was very challenging.
In mid-April, 1999, the market saw a dramatic shift in investor sentiment
favoring value at the expense of growth. Economically sensitive stocks recorded
sharp price gains, and cyclical, value-oriented stocks were powered in a strong
upward price move. The Portfolio also outperformed the index during those
changed market conditions. The diversified approach between growth and value had
struck a good balance. The Portfolio's value themes of industrial restructurings
and under-appreciated, high-quality businesses at low valuations complemented
its growth themes, which focused on top-line growth and market penetration in
retail, and industry leadership within telephony and technology.
The fourth fiscal quarter witnessed extremely difficult investment
conditions. The Portfolio underperformed its benchmark as the market retreated
broadly and fears of inflation and rate increases surfaced (fears that MAS
believed were, for the most part, overstated). As the market declined, growth
returned suddenly as the dominant equity style. Concurrently, the Portfolio
unwound its slight value tilt and adopted a neutral style posture against the
index; this proved to be an effective strategy. What constrained performance,
however, was the reversion of large-cap investor sentiment to favor the very
largest ("mega"-cap) stocks within the S&P 500 universe. While it may be true
that periods of uncertainty could result in a flight to safety by investors, MAS
would not agree that the most appropriate proxy for equity-safety is size. A
more compelling proxy would be valuation, a cornerstone of the Portfolio. During
the
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<PAGE> 9
quarter, the market became increasingly narrow, as growth stocks (mainly
technology) outperformed most other sectors by wide margins. Within the S&P 500
stock universe, the largest fifty stocks, designated by market capitalization,
were up in August while the overall index was down. In September, while the
index declined again, the largest fifty stocks dropped proportionately less.
Investors have focused increasingly on momentum and the largest stocks, while
all but ignoring value and many small-to-medium sized companies.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT OVER 10 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS
September 30 Funds Equity S&P 500
<S> <C> <C> <C>
89 1000 1000 9/30/89
983 1021 12/31/89
953 990 3/31/90
1039 1052 6/30/90
90 883 908 9/30/90
982 989 12/31/90
1150 1133 3/31/91
1150 1130 6/30/91
91 1238 1190 9/30/91
1375 1290 12/31/91
1333 1258 3/31/92
1333 1282 6/30/92
92 1381 1322 9/30/92
1482 1389 12/31/92
1507 1449 3/31/93
1495 1456 6/30/93
93 1534 1494 9/30/93
1581 1528 12/31/93
1528 1471 3/31/94
1539 1477 6/30/94
94 1597 1549 9/30/94
1588 1549 12/31/94
1725 1699 3/31/95
1880 1862 6/30/95
95 2014 2010 9/30/95
2113 2131 12/31/95
2242 2245 3/31/96
2332 2346 6/30/96
96 2346 2418 9/30/96
2548 2620 12/31/96
2608 2690 3/31/97
2996 3159 6/30/97
97 3249 3396 9/30/97
3206 3494 12/31/97
3647 3981 3/31/98
3696 4112 6/30/98
98 3162 3703 9/30/98
3837 4492 12/31/98
4108 4716 3/31/99
4550 5048 6/30/99
99 4116 4733 9/30/99
</TABLE>
Thus, the strong fiscal year performance, in which the Portfolio combined
positive sector weighting, stock selection, and risk control, ended with
disappointing fourth quarter results. As a result of being underweight several
mega-cap stocks which generated exceptional relative returns, and overweight
several mid-cap stocks which performed poorly, the Portfolio gave back some of
its earlier gains against the market. Recent evidence suggested that economic
growth was not in jeopardy from a proactive Federal Reserve, and inflation
remained under control as of fiscal year-end. On the strength of this evidence,
the outlook for large caps at fiscal year-end appeared favorable. However, fears
of inflation and interest rate hikes continued to plague the market, thereby
increasing the likelihood of market volatility in the periods ahead.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Equity
----------------------------------------------
S&P 500
Institutional - Investment + Adviser ++ Index
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 30.15% 29.92% 29.80% 27.80%
- ---------------------------------------------------------------------------------
Five Years 20.85% 20.70% 20.74% 25.03%
- ---------------------------------------------------------------------------------
Ten Years 15.20% 15.13% 15.15% 16.82%
- ---------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
+ Represents an investment in the Investment Class which commenced operations
4/10/96. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15% Shareholder
Servicing Fee applicable to the Investment Class.
++ Represents an investment in the Adviser Class which commenced operations
1/16/98. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1 Fee
applicable to the Adviser Class. It is expected that, over time, returns for the
Adviser Class will be lower than for the other classes due to the higher
expenses charged.
Total returns for the Investment Class of the Portfolio reflect expenses
reimbursed by the Adviser for certain periods. Without such reimbursements,
total returns would have been lower.
* Total returns are compared to the S&P 500 Index, an unmanaged market index.
9
<PAGE> 10
MAS Funds/Equity
SMALL CAP VALUE PORTFOLIO
"FOR THE FISCAL YEAR, THE PORTFOLIO OUTPERFORMED THE RUSSELL 2000 INDEX BY 476
BASIS POINTS." FROM LEFT:
[PHOTO]
from left:
Marjorie Zwick, Tracey Ivey and Carolyn Patton
THE SMALL CAP VALUE PORTFOLIO applies Miller Anderson & Sherrerd's value
investment philosophy to the small- and medium-sized equity universe, combining
fundamental research with a disciplined, quantitative investment process. MAS
generally keeps sector weights within five percentage points of those of the
Russell 2000 Index, with strategic over- and under-weightings assigned to
different sectors based on their relative investment attractiveness. Decisions
about portfolio composition and structure are made by a team of MAS equity
professionals who specialize in the small- and mid-cap market segments.
MAS's investment process is driven chiefly by bottom-up considerations,
although broad macroeconomic trends that influence the outlook for certain
industries are taken into account during the decision-making process. As a
value-oriented fund, the Portfolio emphasizes stocks with below-average
valuations. However, unlike many value strategies, MAS's methodology also
includes additional quality and growth factors such as the expected future
growth in earnings and dividends, the recent pattern of earnings estimate
revisions, and subjective judgments regarding the quality of a company's
business franchise. As a result, the Portfolio will generally look similar to
the Russell 2000 Index in the quality and growth characteristics of its
holdings, while the overall valuation of the Portfolio will generally be lower.
Small-cap stocks, as represented by the Russell 2000 Index, appreciated
close to 20% during the twelve months ended September 30, 1999. This performance
was reflective of improving global economic conditions abroad and a better
earnings outlook for small- and mid-sized companies. The valuation gap between
growth and value stocks continued to approach record levels. MAS believes that
an eventual narrowing of this gap is possible, as an improving global economic
environment has had a positive impact on the earnings prospects for many small-
and mid-sized companies.
10
<PAGE> 11
For the fiscal year, the Portfolio outperformed the Russell 2000 Index by
476 basis points. Stock selection was the primary driver of outperformance
during the period, while sector allocation decisions detracted slightly from
returns. Stock selection was strongest within the technology, financial
services, and telephone services sectors. Although the Portfolio had
less-than-index exposure to technology during the year, stock selection within
that sector also had a positive effect on performance. Pinnacle Systems, Verio
Inc., and Powerwave Technologies were the top contributing stocks within the
technology sector. During recent months, the investment team increased the
Portfolio's exposure to telephone services, and at fiscal year-end, the
Portfolio held an overweight position in that sector relative to the Russell
2000 Index. McLeod, Voicestream Wireless, and Western Wireless were the top
contributing stocks within the telephone services sector. Bally's Total Fitness,
a top ten holding as of September 30, 1999, was also a strong performer during
the period.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT OVER 10 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds Small
September 30 Cap Value Russell 2000
<S> <C> <C> <C>
89 1000 1000 9/30/89
948 951 12/31/89
947 929 3/31/90
994 965 6/30/90
90 724 729 9/30/90
791 765 12/31/90
1044 993 3/31/91
1049 977 6/30/91
91 1180 1057 9/30/91
1296 1118 12/31/91
1390 1202 3/31/92
1307 1119 6/30/92
92 1347 1152 9/30/92
1591 1324 12/31/92
1624 1380 3/31/93
1691 1411 6/30/93
93 1855 1534 9/30/93
1928 1574 12/31/93
1914 1532 3/31/94
1890 1472 6/30/94
94 2004 1574 9/30/94
1970 1545 12/31/94
2008 1616 3/31/95
2140 1768 6/30/95
95 2372 1942 9/30/95
2384 1985 12/31/95
2539 2086 3/31/96
2745 2190 6/30/96
96 2942 2198 9/30/96
3223 2312 12/31/96
3193 2192 3/31/97
3724 2548 6/30/97
97 4407 2927 9/30/97
4210 2829 12/31/97
4639 3113 3/31/98
4405 2968 6/30/98
98 3599 2370 9/30/98
4150 2757 12/31/98
3999 2607 3/31/99
4717 3013 6/30/99
99 4456 2823 9/30/99
</TABLE>
During the second half of the fiscal year, the Portfolio's
greater-than-index exposure to the energy sector had a favorable impact on
performance. Additionally, less-than-index exposure to financial services and
consumer durables further enhanced Portfolio performance. Finally, the decision
to underweight technology during the period detracted from results, as did stock
selection within health care.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Small Cap Value
---------------------------------
Russell
Institutional - Adviser ++ 2000
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 23.83% 23.83% 19.07%
- ---------------------------------------------------------------------------------
Five Years 17.33% 17.33% 12.39%
- ---------------------------------------------------------------------------------
Ten Years 16.12% 16.12% 10.93%
- ---------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
++ Represents an investment in the Adviser Class which commenced operations
1/22/99. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1 Fee
applicable to the Adviser Class. It is expected that, over time, returns for the
Adviser Class will be lower than for the Institutional Class due to the higher
expenses charged.
* Total returns are compared to the Russell 2000 Index, an unmanaged market
index.
As of 9/30/99, the Portfolio's holdings in Pinnacle Systems, Verio Inc.,
Powerwave Technologies, McLeod, Voicestream Wireless, Western Wireless, and
Bally's Total Fitness were 3.1%, 0.0%, 0.9%, 1.5%, 0.7%, 0.0%, and 2.2%,
respectively.
11
<PAGE> 12
MAS Funds/Equity
MID CAP GROWTH PORTFOLIO
"THE MARKET ENVIRONMENT WAS EXTREMELY VOLATILE AS THE INTERNET BUBBLE GREW, OIL
PRICES SPIKED, AND INFLATION FEARS IN THE SPRING BEGAN TO PUT PRESSURE ON STOCK
PRICES."
THE MID CAP GROWTH PORTFOLIO seeks to capitalize on the relative inefficiencies
of the small- and mid-cap equity markets. The Portfolio targets companies with
sustainable growth that exceeds market expectations by focusing on those whose
growth surpasses Wall Street analysts' estimates. MAS looks to capture the
return potential of rapidly growing companies while avoiding stocks that are
likely to disappoint. To identify such companies, MAS's mid-cap growth strategy
employs a disciplined four-part process that incorporates quantitative,
fundamental and valuation analysis as well as a strict sell discipline.
First, MAS conducts a quantitative screen that sorts the stocks within each
economic sector based on earnings- estimate revisions and growth potential. This
screening process limits investment choices to a statistically advantaged pool.
MAS then conducts extensive fundamental research on a group of eligible
stocks to find candidates for purchase. Only high-quality companies with strong
sales growth, rising profit margins, and high returns on capital are included in
the Portfolio. Qualitative measures are then examined, including management
quality and a company's strategic position within its industry.
MAS supplements fundamental analysis with valuation analysis. In addition to
examining measures such as price/earnings, price/sales, and price/cash flow,
valuation analysis uses a discounted-cash-flow model. Each stock's valuation is
assessed relative to its growth prospects. The goal of this valuation work is to
identify and weed out the most overvalued securities.
The sell discipline mandates an ongoing reevaluation of securities and
produces a portfolio that always holds only those securities that are currently
most attractive. If a holding falls into one of the bottom two
earnings-estimate-revision quintiles of MAS's universe, it will be sold. MAS
also sells stocks when fundamental research uncovers unfavorable trends.
Analysts are often more reluctant to lower estimates than to raise them.
Therefore, companies that are having difficulties may first experience small
negative estimate revisions; such companies are frequently sold before larger
revisions materialize. Finally, holdings are sold or trimmed back when their
valuations exceed the level believed to be reasonable given their growth
prospects.
During fiscal 1999, the Portfolio returned 64.3% versus 25.5% for its
benchmark. The market environment was extremely volatile as the Internet bubble
grew, oil prices spiked, and inflation fears in the spring began to put pressure
on stock prices. The simultaneous interest rate cuts by central banks around the
world in the early fall of 1998 provided much-needed liquidity to the markets.
MAS viewed these interest rate cuts as extremely bullish, given the attractive
valuation levels in early October. The Portfolio's emphasis was shifted from
stable growth stocks to more aggressive stocks following the market sell-off in
early October. New purchases were focused in the following areas: long duration,
high beta securities such as Internet stocks; cyclical growth companies; and
companies that were mispriced because of their ongoing need for capital. The
market rewarded these aggressive actions, and while the Portfolio's exposure to
long duration securities was maintained, the other two areas were subsequently
reduced or eliminated.
In April, fears of rising interest rates caused the market to rotate
violently to traditional value and cyclical stocks. This cyclical/value rally
was short-lived as growth equities re-established their dominance six weeks
later. When the Federal Reserve raised the federal funds rate by 25 basis points
in June and again in August, equity prices came under pressure. The Portfolio
was positioned slightly in favor of cyclical growth and companies showing
improving profitability, and away from domestic stable growers. Sectors with
largely domestic earnings streams experienced signifi-
12
<PAGE> 13
cant underperformance in the early summer, as did those adversely affected by
rising interest rates, including consumer non-durables, health care, financial
services and electric utilities. Conversely, outperforming sectors included
those that stood to benefit from an improving Asian economy, such as
semiconductors.
Over the course of the Portfolio's fiscal year, sector selection benefited
performance. The overweighted telephone services, technology, consumer services,
and energy sectors and underweighted utilities, food & tobacco, financial
services, basic resources, and consumer durables sectors all contributed
significantly to performance. The underweight in transportation detracted
slightly from performance, with most of the other sectors modestly adding to
performance.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds
September 30 Mid Cap Growth S&P MidCap 400
<S> <C> <C> <C>
* 1000 1000 4/1/94
1122 1059 7/1/94
90 900 871 10/1/94
1097 979 1/1/95
1327 1204 4/1/95
1347 1195 7/1/95
91 1497 1309 10/1/95
1749 1470 1/1/96
1642 1463 4/1/96
1533 1417 7/1/96
92 1540 1472 10/1/96
1800 1645 1/1/97
1769 1699 4/1/97
1819 1739 7/1/97
93 2062 1826 10/1/97
2128 1875 1/1/98
2004 1804 4/1/98
1832 1738 7/1/98
94 1994 1855 10/1/98
2013 1808 1/1/99
2127 1956 4/1/99
2300 2126 7/1/99
95 2604 2334 10/1/99
2743 2367 1/1/00
3058 2513 4/1/00
3313 2585 7/1/00
96 3354 2660 10/1/00
3258 2821 1/1/01
2956 2779 4/1/01
3565 3188 7/1/01
97 4295 3700 10/1/01
4338 3731 1/1/02
5239 4142 4/1/02
5420 4053 7/1/02
98 4380 3467 10/1/02
5959 4444 1/1/03
6344 4161 4/1/03
7193 4750 7/1/03
99 7196 4350 10/1/03
</TABLE>
Stock selection was also strong, contributing over half of the
outperformance against the index. In technology, exposure to the rapid growth
areas of the Internet and communications-related technology companies,
especially wireless communications, drove performance. In consumer services,
although the sector as a whole underperformed, superior stock selection allowed
holdings to be additive to performance. In addition, the Portfolio's energy
focus was rewarded as the sector rebounded from severely depressed levels, aided
by the rise in oil prices. In health care, two of the Portfolio's holdings,
Lincare and Health Management Associates, detracted from performance, following
strong outperformance during fiscal 1998. Finally, the Portfolio benefited to a
small extent from participation in IPOs.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Mid Cap Growth
------------------------------
S&P MidCap
Institutional - Adviser ++ 400 Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 64.27% 63.87% 25.49%
- -----------------------------------------------------------------------------
Five Years 29.26% 29.11% 18.58%
- -----------------------------------------------------------------------------
Since Inception 23.08% 23.00% 16.73%
- -----------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
++ Represents an investment in the Adviser Class which commenced operations
1/31/97. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1 Fee
applicable to the Adviser Class.
* The Mid Cap Growth Portfolio commenced operations on 3/30/90. Total returns
are compared to the S&P MidCap 400 Index, an unmanaged market index.
As of 9/30/99, the Portfolio's holdings in Lincare and Health Management
Associates were 1.7% and 0.0%, respectively.
13
<PAGE> 14
MAS Funds/Equity
MID CAP VALUE PORTFOLIO
"THE VALUATION GAP BETWEEN GROWTH AND VALUE STOCKS CONTINUED TO APPROACH RECORD
LEVELS."
[PHOTO]
from left:
Helene Kennedy and Alisa Skatrud
THE MID CAP VALUE PORTFOLIO applies Miller Anderson & Sherrerd's value
investment philosophy to the medium-sized equity universe, combining fundamental
research with a disciplined, quantitative investment process. MAS generally
keeps sector weights within five percentage points of those of the S&P MidCap
400 Index, with strategic over- and under-weightings assigned to different
sectors based on their relative investment attractiveness. Decisions about
portfolio composition and structure are made by a team of MAS equity
professionals who specialize in the small- and mid-cap market segments.
MAS's investment process is driven chiefly by bottom-up considerations,
although broad macroeconomic trends that influence the outlook for certain
industries are taken into account during the decision-making process. As a
value-oriented fund, the Portfolio emphasizes stocks with below-average
valuations. However, unlike many value strategies, MAS's methodology also
includes additional quality and growth factors such as the expected future
growth in earnings and dividends, the recent pattern of earnings estimate
revisions, and subjective judgments regarding the quality of a company's
business franchise. As a result, the Portfolio will generally look similar to
the S&P MidCap 400 Index in the quality and growth characteristics of its
holdings, while the overall valuation of the Portfolio will generally be lower.
Mid-cap stocks, as represented by the S&P MidCap 400 Index, appreciated over
20% during the twelve months ended September 30, 1999. This performance was
reflective of improving global economic conditions abroad and a better earnings
outlook for small- and mid-sized companies. The valuation gap between growth and
value stocks continued to approach record levels. MAS believes that an eventual
narrowing of this gap is possible, as an improving global economic environment
has had a positive impact on the earnings prospects for many small- and
mid-sized companies.
For the fiscal year, the Portfolio outperformed the S&P MidCap 400 Index by
395 basis points. Both stock selection and sector allocation decisions had a
positive impact on performance. Stock selection was strongest within the
technology, consumer services, telephone services, and energy sectors. Valassis
Communications, a top ten holding during the past fiscal year, was a strong
performer during the period, contributing nearly 100 basis points to the
Portfolio's outperformance. Although the Portfolio
14
<PAGE> 15
had less-than-index exposure to technology during the year, stock selection
within that sector also had a positive effect on performance. During recent
months, the investment team increased the Portfolio's exposure to telephone
services, and at fiscal year-end, the Portfolio held an overweight position in
that sector relative to the S&P MidCap 400 Index. McLeod, Voicestream Wireless,
and Western Wireless were the top contributing stocks within the telephone
services sector.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds
September 30 Mid Cap Value S&P MidCap 400
<S> <C> <C> <C>
* 1000 1000 12/31/94
1107 1082 3/31/95
1217 1176 6/30/95
95 1345 1291 9/30/95
1327 1309 12/31/95
1446 1390 3/31/96
1545 1430 6/30/96
96 1645 1472 9/30/96
1868 1561 12/31/96
1873 1538 3/31/97
2202 1764 6/30/97
97 2655 2047 9/30/97
2608 2064 12/31/97
2923 2291 3/31/98
2867 2242 6/30/98
98 2471 1918 9/30/98
3026 2459 12/31/98
2914 2302 3/31/99
3431 2628 6/30/99
99 3199 2407 9/30/99
</TABLE>
During the second half of the fiscal year, the Portfolio's
greater-than-index exposure to the energy sector, predominantly oil service
companies, had a favorable impact on performance. Top performing stocks within
the energy sector included Nabors Industries and Baker Hughes. Additionally,
less-than-index exposure to utilities, heavy industry, and basic resources
enhanced Portfolio performance. Finally, the decision to underweight technology
stocks during the period detracted from results, as did stock selection within
health care.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Mid Cap Value
-----------------------------------------------
S&P MidCap
Institutional - Investment + Adviser ++ 400 Index
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 29.44% 29.30% 29.12% 25.49%
- -----------------------------------------------------------------------------------
Since Inception 27.73% 27.58% 27.67% 20.31%
- -----------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
+ Represents an investment in the Investment Class which commenced operations
5/10/96. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15% Shareholder
Servicing Fee applicable to the Investment Class.
++ Represents an investment in the Adviser Class which commenced operations
07/17/98. Total returns for periods beginning prior to this date are based on
the performance of the Institutional Class and do not include the 0.25% 12b-1
Fee applicable to the Adviser Class. It is expected that, over time, returns for
the Adviser Class will be lower than for the other classes due to the higher
expenses charged.
Total returns for the Institutional and Investment Classes of the Portfolio
reflect expenses reimbursed by the Adviser for certain periods. Without such
waivers and/or reimbursements, total returns would have been lower.
* The Mid Cap Value Portfolio commenced operations on 12/30/94. Total returns
are compared to the S&P MidCap 400 Index, an unmanaged market index.
As of 9/30/99, the Portfolio's holdings in Valassis Communications, McLeod,
Voicestream Wireless, Western Wireless, Nabors Industries, and Baker Hughes were
2.1%, 1.1%, 0.0%, 0.6%, 1.6%, and 0.1%, respectively.
15
<PAGE> 16
MAS Funds/Equity
SMALL CAP GROWTH PORTFOLIO
"THE GOAL OF THIS VALUATION WORK IS TO IDENTIFY AND WEED OUT THE MOST OVERVALUED
SECURITIES."
THE SMALL CAP GROWTH PORTFOLIO seeks to capitalize on the relative
inefficiencies of the small-cap equity markets. The Portfolio targets companies
with sustainable growth that exceeds market expectations by focusing on those
whose growth surpasses Wall Street analysts' estimates. MAS looks to capture the
return potential of rapidly growing companies while avoiding stocks that are
likely to disappoint. To identify such companies, MAS's small-cap growth
strategy employs a disciplined four-part process that incorporates quantitative,
fundamental and valuation analysis as well as a strict sell discipline.
First, MAS conducts a quantitative screen that sorts the stocks within each
economic sector based on earnings estimate revisions and growth potential. This
screening process limits investment choices to a statistically advantaged pool.
MAS then conducts extensive fundamental research on a group of eligible
stocks to find candidates for purchase. Only high-quality companies with strong
sales growth, rising profit margins, and high returns on capital are included in
the Portfolio. Qualitative measures are then examined, including management
quality and a company's strategic position within its industry.
MAS supplements fundamental analysis with valuation analysis. In addition to
examining measures such as price/earnings, price/sales, and price/cash flow,
valuation analysis uses a discounted-cash-flow model. Each stock's valuation is
assessed relative to its growth prospects. The goal of this valuation work is to
identify and weed out the most overvalued securities.
The sell discipline mandates an ongoing reevaluation of securities and
produces a portfolio that always holds only those securities that are currently
most attractive. If a holding falls into one of the bottom two
earnings-estimate-revision quintiles of MAS's universe, it will be sold. MAS
also sells stocks when fundamental research uncovers unfavorable trends.
Analysts are often more reluctant to lower estimates than to raise them.
Therefore, companies that are having difficulties may first experience small
negative estimate revisions; such companies are frequently sold before larger
revisions materialize. Finally, holdings are sold or trimmed back when their
valuations exceed the level believed to be reasonable given their growth
prospects.
During fiscal 1999, the Portfolio returned 276.7% versus 19.1% for its
benchmark. The market environment was extremely volatile as the Internet bubble
grew, oil prices spiked, and inflation fears in the spring began to put pressure
on stock prices. The simultaneous interest rate cuts by central banks around the
world in the early fall of 1998 provided much-needed liquidity to the markets.
MAS viewed these interest rate cuts as extremely bullish given the attractive
valuation levels in early October. The Portfolio's emphasis was shifted from
stable growth stocks to more aggressive stocks following the market sell-off in
early October. New purchases were focused in the following areas: long duration,
high beta securities such as Internet stocks; cyclical growth companies; and
companies that were mispriced because of their ongoing need for capital. The
market rewarded these aggressive actions, and while the Portfolio's exposure to
long duration securities was maintained, the other two areas were subsequently
reduced or eliminated.
In April, fears of rising interest rates caused the market to rotate
violently to traditional value and cyclical stocks. This cyclical/value rally
was short-lived, as growth equities re-established their dominance six weeks
later. When the Federal Reserve raised the federal funds rate by 25 basis points
in June and again in August, equity prices came under pressure. The Portfolio
was positioned slightly in favor of cyclical growth and companies showing
near-term improving profitability, and away from domestic stable growers.
Sectors with largely domestic earnings streams experienced significant
underperformance in the early summer, as did those adversely affected by rising
interest rates, including consumer non-durables, health care, financial
services, and electric utilities. Conversely, outperforming sectors included
those that stood to benefit from an improving Asian economy, such as
semiconductors.
16
<PAGE> 17
Over the course of the Portfolio's fiscal year, sector selection benefited
performance. The overweighted technology, telephone services, and consumer
services sectors, and underweighted financial services and consumer durables
sectors, contributed significantly to the Portfolio's outperformance. The food
and tobacco sector detracted marginally, with most of the other sectors modestly
adding to performance.
Stock selection was also strong, contributing much of the outperformance
against the index. In addition, short-term trading had a significant impact on
performance, as the Portfolio's smaller size afforded maximum flexibility in
managing the assets. This was particularly helpful in the rapidly rotating,
volatile market of the past twelve months. The Portfolio also benefited
substantially from participation in IPOs, which had significant performance
impacts because of the Portfolio's relatively small size. Had the Portfolio been
larger, the impact probably would have been less. In technology, exposure to the
rapid growth areas of the Internet and communications-related technology
companies, especially wireless communications, drove performance. Finally, the
Portfolio's energy focus was rewarded as the sector rebounded from severely
depressed levels, aided by the rise in oil prices.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds
September 30 Small Cap Growth Russell 2000
<S> <C> <C> <C>
* 1000 1000 6/30/98
98 857 799 9/30/98
1322 929 12/31/98
2033 878 3/31/99
2839 1015 6/30/99
99 3228 951 9/30/99
</TABLE>
It should be noted that the market conditions of the past fiscal year were
quite unusual. The levels of volatility and the explosive performance of many
IPOs were virtually unprecedented, and the Portfolio was small and nimble enough
to take full advantage of this environment. MAS would be very surprised if these
market conditions were to continue, and in the future the Portfolio cannot
expect to be able to produce the same degree of outstanding performance that it
generated during the past fiscal year.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Small Russell 2000
Cap Growth Index
- -----------------------------------------------------------------------------
<S> <C> <C>
One Year 276.66% 19.07%
- -----------------------------------------------------------------------------
Since Inception 154.96% (3.95)%
- -----------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Small-capitalization stock prices have
experienced a greater degree of market volatility than those of
large-capitalization companies.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by the
Adviser for certain periods. Without such waivers and/or reimbursements, total
returns would have been lower.
* The Small Cap Growth Portfolio commenced operations on 6/30/98. Total
returns are compared to the Russell 2000 Index, an unmanaged market index.
The Portfolio's total return reflects, among other things, the use of
short-term trading techniques as the Adviser responded to market conditions
in existence at that time, including close-in-time purchases and sales of
initial public offerings. There can be no assurance that these market
conditions will continue or re-occur, nor can the Adviser guarantee continued
access to and use of profitable short-term trading techniques that were
advantageous during that period.
17
<PAGE> 18
MAS Funds/Fixed Income
FIXED INCOME PORTFOLIO
"DESPITE A DIFFICULT MARKET ENVIRONMENT DURING THE PAST FISCAL YEAR, THE
PORTFOLIO OUTPERFORMED ITS BENCHMARK BY 60 BASIS POINTS."
[PHOTO]
from left:
Mark Foust, Joe Braccia, Bruce Rodio and Marc Crespi
THE FIXED INCOME PORTFOLIO is the core offering of the MAS Funds fixed-income
portfolios. Securities in this Portfolio include U.S. government bonds,
corporate bonds, mortgages, non-dollar bonds, and other fixed-income securities.
The Portfolio is actively managed by Miller Anderson & Sherrerd's fixed-income
team, which makes strategic decisions about portfolio structure and composition.
MAS has three major objectives for fixed-income investing. The first is to
provide investors with a positive real return--a total return including income
and capital gains that is greater than the rate of inflation. The second is to
help diversify equity-oriented strategies in other areas of clients' investment
programs. The third is to provide a hedge against a prolonged, severe economic
contraction. In order to provide this hedge, the Portfolio maintains high
average credit quality and includes a significant portion of noncallable and
longer-maturity securities. This positions the Portfolio to perform well when
other market sectors experience poor returns.
There are five key decisions that the fixed-income team makes in building
the Portfolio. The first decision relates to the amount of interest-rate risk in
the Portfolio. Bond values generally increase when interest rates fall and
decrease when interest rates rise. Consequently, there are times when it is
better to bear more interest-rate risk than others. MAS bases the interest-rate
risk decision on the level of real interest rates and the steepness of the yield
curve, tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically MAS has found it to be an
attractive time to have an above- benchmark level of interest-rate sensitivity.
The second decision involves determining which maturities offer the best
value relative to their risk. Third, the team considers which fixed-income
markets around the world offer the best value, on an opportunistic basis;
relative real interest rates, the steepness of U.S. and foreign yield curves,
and judgments about currency values drive this decision. The fourth decision
relates to how much credit risk the Portfolio should bear. MAS's research shows
that a diversified approach toward owning corporate bonds enhances overall
portfolio returns. The Portfolio includes a limited number of
opportunistically-selected bonds that are rated below investment grade.
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Most mortgages and some corporate bonds contain an option
to prepay the principal amount
18
<PAGE> 19
prior to maturity. As a result, these bonds have higher yields, and MAS's
fixed-income team calculates whether this additional yield is sufficient to
compensate for the embedded option risk.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT OVER 10 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds
September 30 Fixed Income Salomon Broad
<S> <C> <C> <C>
89 1000 1000 9/30/89
1032 1037 12/31/89
1011 1029 3/31/90
1053 1066 6/30/90
90 1038 1076 9/30/90
1106 1131 12/31/90
1149 1161 3/31/91
1169 1182 6/30/91
91 1257 1249 9/30/91
1343 1312 12/31/91
1315 1297 3/31/92
1380 1349 6/30/92
92 1437 1407 9/30/92
1457 1411 12/31/92
1525 1470 3/31/93
1581 1511 6/30/93
93 1642 1551 9/30/93
1660 1551 12/31/93
1608 1508 3/31/94
1565 1493 6/30/94
94 1570 1501 9/30/94
1568 1507 12/31/94
1645 1583 3/31/95
1738 1680 6/30/95
95 1792 1712 9/30/95
1867 1786 12/31/95
1862 1755 3/31/96
1885 1764 6/30/96
96 1929 1797 9/30/96
2004 1851 12/31/96
2002 1841 3/31/97
2082 1908 6/30/97
97 2150 1971 9/30/97
2197 2029 12/31/97
2234 2062 3/31/98
2271 2110 6/30/98
98 2320 2197 9/30/98
2348 2206 12/31/98
2355 2196 3/31/99
2317 2176 6/30/99
99 2328 2191 9/30/99
</TABLE>
The Portfolio's long-term record reflects successful judgments about these
key decisions. Despite a difficult market environment during the past fiscal
year, the Portfolio outperformed its benchmark by 60 basis points. Yields on
U.S. Treasuries increased during this period due to improving global economic
conditions and renewed inflation fears. While high levels of real interest rates
justified the Portfolio's above-benchmark interest-rate risk strategy during the
1999 calendar year, this decision had an unfavorable effect on relative
performance due to the aforementioned rise in interest rates. Higher rates also
had an adverse impact on other fixed-income sectors, yet most corporate and
mortgage-backed securities outperformed Treasuries during the period. The
decision to overweight these non-Treasury sectors, especially yankee issues, and
an opportunistic allocation to below investment-grade securities, had a very
favorable impact on the Portfolio's relative returns. A modest yield-curve
strategy, designed to benefit from a narrowing of the yield spread between
short- and long-maturities, had a favorable effect on returns, and was
eventually removed. A position in inflation-indexed Treasuries (TIPS) also had a
favorable impact on relative performance, as these securities outperformed
nominal Treasuries. The allocation to non-dollar bonds was zero for the entire
fiscal year, as it remained difficult to identify superior opportunities among
high-quality non-dollar securities.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Fixed Income
---------------------------------------------------
Salomon
Institutional - Investment + Adviser ++ Broad Index
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 0.33% 0.24% 0.07% (0.27)%
- --------------------------------------------------------------------------------------------
Five Years 8.20% 8.11% 8.04% 7.86%
- --------------------------------------------------------------------------------------------
Ten Years 8.82% 8.77% 8.73% 8.16%
- --------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
+ Represents an investment in the Investment Class which commenced operations
10/15/96. Total returns for periods beginning prior to this date are based on
the performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
++ Represents an investment in the Adviser Class which commenced operations
11/7/96. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1 Fee
applicable to the Adviser Class.
Total returns for the Investment and Adviser Classes of the Portfolio reflect
expenses reimbursed by the Adviser for certain periods. Without such
reimbursements, total returns would have been lower.
* Total returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
19
<PAGE> 20
MAS Funds/Fixed Income
DOMESTIC FIXED INCOME PORTFOLIO
"... THE PORTFOLIO MAINTAINS HIGH AVERAGE CREDIT QUALITY AND INCLUDES A
SIGNIFICANT PORTION OF NONCALLABLE AND LONGER-MATURITY SECURITIES."
[PHOTO]
from left:
Rachel Klein and Jeffrey Alt
THE DOMESTIC FIXED INCOME PORTFOLIO invests only in dollar-denominated
fixed-income securities with a credit quality rating of BBB or better.
Fixed-income securities in this Portfolio include U.S. government bonds,
corporate bonds, mortgages, and other fixed-income securities. The Portfolio is
actively managed by Miller Anderson & Sherrerd's fixed-income team, which makes
strategic decisions about portfolio structure and composition.
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to help
diversify equity-oriented strategies in other areas of clients' investment
programs. The third is to provide a hedge against a prolonged, severe economic
contraction. In order to provide this hedge, the Portfolio maintains high
average credit quality and includes a significant portion of noncallable and
longer-maturity securities. This positions the Portfolio to perform well when
other market sectors experience poor returns.
There are four key decisions that the fixed-income team makes in building
the Portfolio. The first decision relates to the amount of interest-rate risk in
the Portfolio. Bond values generally increase when interest rates fall and
decrease when interest rates rise. Consequently, there are times when it is
better to bear more interest-rate risk than others. MAS bases the interest-rate
risk decision on the level of real interest rates and the steepness of the yield
curve, tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically MAS has found it to be an
attractive time to have an above-benchmark level of interest-rate sensitivity.
The second decision involves determining which maturities offer the best
value relative to their risk. The third decision relates to how much credit risk
the Portfolio should bear. MAS's research shows that a diversified approach
toward owning corporate bonds enhances overall portfolio returns. The Portfolio
purchases only those bonds that hold an investment grade rating.
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Most mortgages and some corporate bonds contain an option
to prepay the principal amount prior to maturity. As a result, these bonds have
higher yields, and MAS's fixed-income team calculates whether this additional
yield is sufficient to compensate for the embedded option risk.
20
<PAGE> 21
While the Portfolio's long-term record reflects successful judgments about
these key decisions, the return on the Portfolio was 85 basis points behind its
benchmark over the past fiscal year in a difficult market environment. Yields on
U.S. Treasuries increased during this period due to improving global economic
conditions and renewed inflation fears. While high levels of real interest rates
justified the Portfolio's above-benchmark interest-rate risk strategy during the
1999 calendar year, this decision had an unfavorable effect on relative
performance due to the aforementioned rise in interest rates. Higher rates also
had an adverse impact on other fixed-income sectors, although most corporate and
mortgage-backed securities outperformed Treasuries during the period. The
decision to overweight these non-Treasury sectors had a favorable impact on the
Portfolio's relative returns. A modest yield-curve strategy, designed to benefit
from a narrowing of the yield spread between short- and long-maturities, had a
favorable effect on returns, and was eventually removed. A position in
inflation-indexed Treasuries (TIPS) also had a favorable impact on relative
performance, as these securities outperformed nominal Treasuries.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT OVER 10 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds Domestic
September 30 Fixed Income Salomon Broad
<S> <C> <C> <C>
89 1000 1000 9/30/89
1033 1037 12/31/89
1015 1029 3/31/90
1053 1066 6/30/90
90 1039 1076 9/30/90
1108 1131 12/31/90
1150 1161 3/31/91
1170 1182 6/30/91
91 1257 1249 9/30/91
1346 1312 12/31/91
1316 1297 3/31/92
1384 1349 6/30/92
92 1451 1407 9/30/92
1469 1411 12/31/92
1540 1470 3/31/93
1596 1511 6/30/93
93 1655 1551 9/30/93
1671 1551 12/31/93
1636 1508 3/31/94
1604 1493 6/30/94
94 1607 1501 9/30/94
1606 1507 12/31/94
1695 1583 3/31/95
1798 1680 6/30/95
95 1838 1712 9/30/95
1909 1786 12/31/95
1873 1755 3/31/96
1882 1764 6/30/96
96 1919 1797 9/30/96
1983 1851 12/31/96
1976 1841 3/31/97
2048 1908 6/30/97
97 2115 1971 9/30/97
2174 2029 12/31/97
2203 2062 3/31/98
2251 2110 6/30/98
98 2322 2197 9/30/98
2331 2206 12/31/98
2325 2196 3/31/99
2286 2175 6/30/99
99 2296 2191 9/30/99
</TABLE>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Domestic Fixed Income
-----------------------------------
Salomon
Institutional - Adviser ++ Broad Index
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year (1.12)% (1.30)% (0.27)%
- ------------------------------------------------------------------------------
Five Years 7.39% 7.35% 7.86%
- ------------------------------------------------------------------------------
Ten Years 8.67% 8.65% 8.16%
- ------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
++ Represents an investment in the Adviser Class which commenced operations
3/1/99. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1 Fee
applicable to the Adviser Class.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by the
Adviser for certain periods. Without such waivers and/or reimbursements, total
returns would have been lower.
On December 19, 1994, shareholders approved a change in the Portfolio's
investment policies to emphasize fixed-income securities of domestic issuers
rated A or higher. Shareholders then voted on May 1, 1997, to permit the
Portfolio to invest a limited portion of its assets in fixed-income securities
of domestic issuers rated BBB at the time of purchase. The Portfolio's
performance pattern may have been affected by these changes.
* Total returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
21
<PAGE> 22
MAS Funds/Fixed Income
HIGH YIELD PORTFOLIO
[PHOTO]
from left:
Glenn Becker, Mary Jane Bobyock and Yuri Khalif
THE HIGH YIELD PORTFOLIO focuses on investments in below-investment grade
corporate bonds. The Portfolio is actively managed by Miller Anderson &
Sherrerd's high-yield fixed-income team, which is responsible for portfolio
construction and risk control. The high-yield team utilizes a disciplined, total
return-oriented investment process to actively manage diversified high-yield
portfolios. To identify the most efficient portfolio, the team engages in
fundamental analysis and valuation of high-yield securities. Individual
securities are compared on the basis of their option- and credit-risk-adjusted
expected returns. Several high-yield investment beliefs guide the process. MAS
believes that the keys to successful high-yield management are: superior,
forward-looking credit analysis; a consistent, disciplined investment process; a
value focus; and careful control of overall portfolio risk. The team manages
overall interest-rate risk and economic sensitivity, as well as the integration
of investment themes drawn from the firm's financial-market research.
MAS believes that investments in high-yield securities can improve the
diversification of a balanced portfolio and raise return for a given level of
volatility. MAS's extensive research shows that investors have been rewarded
over time for holding lower-rated securities. High-yield securities also offer
investment opportunities overlooked in the traditional stock/bond mix. MAS's
goal is to achieve superior total returns with a greater degree of consistency
than the broad market averages and other investment managers.
During the Portfolio's past fiscal year, its total return was 8.81% vs.
3.52% for the benchmark. This return is meaningful considering the interest rate
environment over the past twelve months. The rates of ten-year treasury bonds
rose nearly 150 basis points over the past year, while shorter rates rose almost
50 basis points.
Performance exceeded the benchmark primarily because of an overweight
position in the telecommunications sector and exposure to emerging market
securities, both of which were strong performers during the past fiscal year.
The emerging market sector rebounded following the Russian crisis last year. The
Portfolio also benefited from merger and investment activity in the
telecommunications and cable sectors; this activity was very favorable for the
Portfolio's credit quality. In addition, the Portfolio did a much better job of
avoiding problem credits than the market averages. Negative contributors to
relative performance included an underweighting in the commodity and cyclical
sectors, which performed well, along with an overweight position in health care,
which underperformed.
At fiscal year-end, the Portfolio continued to find value in the
telecommunications and emerging markets sectors. In telecommunications, one of
the Portfolio's largest holdings was Nextel Communications. Nextel's bonds
performed extremely well due to very strong operating results, an equity
investment by Microsoft, and takeover speculation. Other telecommunications
holdings during the year included Qwest, Rhythms
22
<PAGE> 23
Net, Level 3, Dolphin Telecom, and Global Crossing. All of these companies
either entered into a strategic partnership or raised additional equity capital,
which contributed to bond performance. In emerging markets, holdings were
concentrated in Latin America, with exposure mainly to corporate issues in
Mexico, Argentina, and Colombia.
The Portfolio added to positions in some larger, higher-quality bonds,
including Columbia/HCA and Tenet Healthcare in the health care sector, and Kmart
in the retail sector. These sectors underperformed during fiscal 1999, and MAS
believed that these names had very good value. At fiscal year-end, the Portfolio
maintained an average credit quality of BB, which was higher than that of the
benchmark.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT OVER 10 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds Salomon
September 30 High Yield High Yield
<S> <C> <C> <C>
89 1000 1000 9/30/89
934 983 12/31/89
906 953 3/31/90
960 991 6/30/90
90 837 919 9/30/90
832 914 12/31/90
1039 1074 3/31/91
1101 1146 6/30/91
91 1145 1214 9/30/91
1200 1279 12/31/91
1278 1374 3/31/92
1329 1428 6/30/92
92 1402 1487 9/30/92
1422 1507 12/31/92
1547 1598 3/31/93
1630 1668 6/30/93
93 1684 1707 9/30/93
1771 1769 12/31/93
1728 1732 3/31/94
1703 1724 6/30/94
94 1744 1747 9/30/94
1646 1747 12/31/94
1717 1850 3/31/95
1899 1964 6/30/95
95 1981 2023 9/30/95
2040 2091 12/31/95
2105 2125 3/31/96
2141 2152 6/30/96
96 2255 2240 9/30/96
2352 2327 12/31/96
2385 2360 3/31/97
2550 2466 6/30/97
97 2704 2573 9/30/97
2728 2635 12/31/97
2854 2742 3/31/98
2854 2770 6/30/98
98 2672 2637 9/30/98
2814 2730 12/31/98
2910 2771 3/31/99
2925 2778 6/30/99
99 2907 2730 9/30/99
</TABLE>
The past fiscal year was a mixed period for the high-yield market, as
performance was strong throughout the first half, but receded during the last
few months. The U.S. government bond market had a very difficult year due to
high domestic growth and a tightening of interest rates by the Federal Reserve.
Technical factors also contributed to the recent negative performance in the
high-yield market. There was a high level of new issues in the market, net cash
flows into mutual funds turned negative, and dealers were under pressure to keep
inventories low. MAS believes that these factors created a good buying
opportunity for the Portfolio.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS High Yield
-------------------------------------------------
Salomon High
Institutional - Investment + Adviser ++ Yield Index
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 8.81% 8.67% 8.44% 3.52%
- ----------------------------------------------------------------------------------------
Five Years 10.76% 10.64% 10.62% 9.34%
- ----------------------------------------------------------------------------------------
Ten Years 11.26% 11.20% 11.19% 10.56%
- ----------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. High-yield fixed-income securities,
otherwise known as "junk bonds," represent a much greater risk of default and
tend to be more volatile than higher-rated bonds.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
+ Represents an investment in the Investment Class which commenced operations
5/21/96. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15% Shareholder
Servicing Fee applicable to the Investment Class.
++ Represents an investment in the Adviser Class which commenced operations
1/31/97. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.25% 12b-1 Fee
applicable to the Adviser Class.
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.
* Total returns are compared to the Salomon High Yield Index, an unmanaged
market index.
As of 9/30/99, the Portfolio's holdings in Nextel Communications, Qwest, Rhythms
Net, Level 3, Dolphin Telecom, Global Crossing, Columbia/HCA, Tenet Healthcare,
and Kmart were 2.4%, 0.0%, 0.5%, 0.0%, 0.7%, 0.9%, 3.8%, 2.1%, and 0.8%,
respectively.
23
<PAGE> 24
MAS Funds/Fixed Income
CASH RESERVES PORTFOLIO
"THE PORTFOLIO IS MANAGED IN A CONSERVATIVE STYLE, GENERALLY WITHOUT THE USE OF
DERIVATIVES OR FUNDING AGREEMENTS."
[PHOTO]
from left:
Bill McCormick and Bill Lawrence
THE CASH RESERVES PORTFOLIO is a money-market fund whose primary objectives are
liquidity, preservation of capital, and high current income. The Portfolio is
managed in a conservative style, generally without the use of derivatives or
funding agreements. Investments are diversified across several fixed-income
sectors, and may include high quality commercial paper, negotiable certificates
of deposit, the bank notes of carefully selected, large depository institutions,
Federal agency obligations, and fully collateralized repurchase agreements.
The Portfolio allocates assets and selects fixed-income maturities based on
an analysis of MAS's interest rate forecast and the shape of the money market
yield curve. This is an ongoing, in-depth analysis of economic and financial
developments, both national and international in scope. The Portfolio's average
maturity is gradually shortened or lengthened, depending upon several factors.
These include portfolio valuations, recent cash flow experiences and trends, and
the current and forecasted shape of the money market yield curve.
Formal credit reviews and frequent monitoring of all investments are an
integral part of the Portfolio's management. While ratings by Nationally
Recognized Statistical Rating Organizations serve as the starting point for any
potential investment, the Portfolio looks well beyond these ratings as part of
its due diligence process. The team of portfolio managers and credit analysts
continuously reviews and reassesses the relative and absolute desirability of an
issuer's obligations.
During the fall of 1998, the Federal Reserve's Federal Open Market Committee
(FOMC) made three separate 25 basis point cuts in its target for the federal
funds rate. These rate reductions contributed to a decline in money market
yields of roughly 75 basis points during the final three months of calendar
1998. The Federal Reserve's actions were motivated by a need to stabilize global
financial markets. These markets had suffered major shocks from Russia's
currency and debt crisis, and from the near-collapse of a large hedge fund.
By the end of the first calendar quarter of 1999, the Federal Reserve was
faced with stabilizing overseas economies, tightening U.S. labor
24
<PAGE> 25
markets, and stronger consumer demand. In response, the Federal Reserve adopted
a bias toward higher short-term interest rates, citing concern over the
potential for a buildup in inflationary imbalances. The Federal Reserve then
acted on this concern at its June 30 meeting, raising the target federal funds
rate from 4.75% to 5.00%. At the August 24 FOMC meeting, the Federal Reserve
again raised its target federal funds rate by an additional 25 basis points, to
5.25%. This action was intended to further reverse the interest rate reductions
made during the fall of 1998.
- --------------------------------------------------------------------------------
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ending MAS Funds Lipper Salomon
September 30 Cash Reserves Money Market 1-Month Treasury
<S> <C> <C> <C> <C>
* 1000 1000 1000 8/29/90
90 1007 1006 1006 9/30/90
1027 1025 1023 12/31/90
1044 1042 1037 3/31/91
1059 1057 1050 6/30/91
91 1074 1071 1063 9/30/91
1087 1084 1075 12/31/91
1098 1094 1085 3/31/92
1108 1104 1094 6/30/92
92 1117 1112 1102 9/30/92
1125 1120 1110 12/31/92
1132 1128 1117 3/31/93
1140 1135 1125 6/30/93
93 1148 1142 1133 9/30/93
1156 1150 1141 12/31/93
1165 1157 1150 3/31/94
1175 1166 1160 6/30/94
94 1187 1178 1171 9/30/94
1202 1191 1184 12/31/94
1219 1207 1198 3/31/95
1236 1223 1215 6/30/95
95 1253 1239 1231 9/30/95
1271 1255 1248 12/31/95
1287 1270 1262 3/31/96
1304 1284 1278 6/30/96
96 1320 1300 1293 9/30/96
1337 1315 1309 12/31/96
1354 1330 1325 3/31/97
1372 1346 1341 6/30/97
97 1391 1363 1357 9/30/97
1410 1380 1373 12/31/97
1428 1396 1389 3/31/98
1447 1413 1406 6/30/98
98 1467 1430 1423 9/30/98
1485 1447 1436 12/31/98
1503 1462 1451 3/31/99
1520 1477 1467 6/30/99
99 1538 1493 1483 9/30/99
</TABLE>
At fiscal year-end, the Portfolio favored securities with maturities due
near upcoming FOMC meeting dates, and longer-term maturities with yields that
better reflected crossover year-end yield premiums. The Portfolio's weighted
average maturity was 65 days, and 70% of holdings were due to mature in less
than three months. The Portfolio was well positioned at this point for stability
of principal with a very high degree of liquidity.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAS Cash Reserves
---------------------------------
Lipper Money Salomon 1-Month
Institutional - Investment + Market Average Treasury Bill Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 4.93% 4.91% 4.40% 4.24%
- -----------------------------------------------------------------------------------------------------
Five Years 5.33% 5.32% 4.86% 4.84%
- -----------------------------------------------------------------------------------------------------
Since Inception 4.85% 4.85% 4.51% 4.43%
- -----------------------------------------------------------------------------------------------------
7-Day Effective Yield 5.23% 5.07% NA NA
- -----------------------------------------------------------------------------------------------------
SEC 7-Day Current Yield 5.13% 4.98% NA NA
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The SEC 7-day yield quotation more closely reflects the current earnings of the
Portfolio than the total return quotation. You may obtain the Portfolio's
current SEC 7-day yield by calling 1-800-354-8185.
- - Represents an investment in the Institutional Class.
+ Represents an investment in the Investment Class which commenced operations
8/16/99. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15% Shareholder
Servicing Fee applicable to the Investment Class. It is expected that, over
time, returns for the Investment Class will be lower than for the Institutional
Class due to the higher expenses charged.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by the
Adviser for certain periods. Without such waivers and/or reimbursements, total
returns would have be lower.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
* The Cash Reserves Portfolio commenced operations on 8/29/90. Total returns are
compared to the Lipper Money Market Average of money market funds and the
Salomon 1-Month Treasury Bill Index. While the Portfolio may invest in the
government securities represented by the Salomon 1-Month Treasury Bill Index,
it also invests in non-government issues and securities with maturities
greater than one month.
25
<PAGE> 26
MAS Funds/Fixed Income
FIXED
INCOME II
PORTFOLIO
"The Portfolio purchases
only those bonds that
hold an investment
grade rating."
[PHOTO]
from left:
Barry Siegel, Kurt Dodds
and Matt Potter
THE FIXED INCOME II PORTFOLIO invests only in fixed-income securities with a
credit-quality rating of BBB or better. Securities in this Portfolio include
U.S. government bonds, corporate bonds, mortgages, non-dollar bonds, and other
fixed-income securities. The Portfolio is actively managed by Miller Anderson &
Sherrerd's fixed-income team, which makes strategic decisions about its
structure and composition.
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to help
diversify equity-oriented strategies in other areas of clients' investment
programs. The third is to provide a hedge against a prolonged, severe economic
contraction. In order to provide this hedge, the Portfolio maintains high
average credit quality and includes a significant portion of noncallable and
longer-maturity securities. This positions the Portfolio to perform well when
other market sectors experience poor returns.
There are five key decisions that the fixed-income team makes in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values generally increase when interest rates fall and decrease
when interest rates rise. Consequently, there are times when it is better to
bear more interest-rate risk than others. MAS bases the interest-rate risk
decision on the level of real interest rates and the steepness of the yield
curve, tempered by a strategic view about economic growth and the prospects for
inflation. When real rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically MAS has found it to be an
attractive time to have an above-benchmark level of interest-rate sensitivity.
The second decision involves determining which maturities offer the best
value relative to their risk. Third, the team considers which fixed-income
markets around the world offer the best value, on an opportunistic basis;
relative real interest rates, the steepness of U.S. and foreign yield curves,
and judgments about currency values drive this decision. The fourth decision
relates to how much credit risk the Portfolio should bear. MAS's research shows
that a diversified approach toward owning corporate bonds enhances overall
portfolio returns. The Portfolio purchases only those bonds that hold an
investment grade rating.
26
<PAGE> 27
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Most mortgages and some corporate bonds contain an option
to prepay the principal amount prior to maturity. As a result, these bonds have
higher yields, and the fixed-income team calculates whether this additional
yield is sufficient to compensate for the embedded option risk.
While the Portfolio's long-term record reflects successful judgments about
these key decisions, the return on the Portfolio was 30 basis points behind its
benchmark over the past fiscal year in a difficult market environment. Yields on
U.S. Treasuries increased during this period due to improving global economic
conditions and renewed inflation fears. While high levels of real interest rates
justified the Portfolio's above-benchmark interest-rate risk strategy during the
1999 calendar year, this decision had an unfavorable effect on relative
performance due to the aforementioned rise in interest rates. Higher rates also
had an adverse impact on other fixed-income sectors, yet most corporate and
mortgage-backed securities outperformed Treasuries during the period. The
decision to overweight these non-Treasury sectors, including yankee issues, had
a favorable impact on the Portfolio's relative returns. A modest yield-curve
strategy, designed to benefit from a narrowing of the yield spread between
short- and long-maturities, had a favorable effect on returns, and was
eventually removed. A position in inflation-indexed Treasuries (TIPS) also had a
favorable impact on relative performance, as these securities outperformed
nominal Treasuries. The allocation to foreign bonds was zero for the entire
fiscal year, as it remained difficult to identify superior opportunities among
high-quality non-dollar securities.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
Fixed Income II Salomon Broad
(Dollars 000)
<S> <C> <C>
* 8/31/90 1000 1000
90 9/30/90 1009 1009
12/31/90 1082 1060
3/31/91 1109 1088
6/30/91 1121 1107
91 9/30/91 1206 1170
12/31/91 1291 1229
3/31/92 1255 1215
6/30/92 1312 1264
92 9/30/92 1364 1319
12/31/92 1382 1322
3/31/93 1443 1378
6/30/93 1494 1416
93 9/30/93 1548 1453
12/31/93 1556 1454
3/31/94 1514 1413
6/30/94 1476 1399
94 9/30/94 1474 1407
12/31/94 1476 1412
3/31/95 1555 1484
6/30/95 1643 1574
95 9/30/95 1683 1604
12/31/95 1752 1674
3/31/96 1733 1645
6/30/96 1747 1653
96 9/30/96 1786 1684
12/31/96 1849 1734
3/31/97 1844 1725
6/30/97 1911 1788
97 9/30/97 1975 1847
12/31/97 2020 1902
3/31/98 2051 1932
6/30/98 2089 1977
98 9/30/98 2157 2059
12/31/98 2173 2067
3/31/99 2173 2058
6/30/99 2139 2039
99 9/30/99 2145 2053
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Fixed Salomon
Income II Broad Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year (0.57)% (0.27)%
- -----------------------------------------------------------------------------------------------------
Five Years 7.78% 7.86%
- -----------------------------------------------------------------------------------------------------
Since Inception 8.76% 8.24%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
On May 12, 1997, shareholders approved a change in the Portfolio's investment
policies to allow the Portfolio to invest in fixed-income securities of
domestic issuers rated BBB or higher at the time of purchase. The Portfolio's
performance pattern may have been affected by this change.
* The Fixed Income II Portfolio commenced operations on 8/31/90. Total returns
are compared to the Salomon Broad Investment Grade Index, an unmanaged market
index.
27
<PAGE> 28
MAS Funds/Fixed Income
LIMITED DURATION
PORTFOLIO
[PHOTO]
from left:
Marc Balcer, Susan Mislick and Brian Drummond
THE LIMITED DURATION PORTFOLIO invests in dollar-denominated bonds and maintains
a short duration. The Portfolio aims to generate attractive fixed income returns
without the volatility that accompanies a longer duration portfolio. It is
ideally suited for assets for which liquidity and principal protection over a
one-year horizon are primary goals.
The benchmark for the Portfolio is the Salomon 1-3 Year Treasury and
Government Sponsored Index. This Index has a relatively low volatility of
returns due to its low sensitivity to changes in interest rates (as approximated
by duration). The duration of the Index is usually less than two years;
therefore, for a 1% increase in interest rates, the Index is expected to lose
less than 2% of its value. Typically, this potential for loss is more than
offset by the yield, so that there are rarely negative total returns over any
twelve-month period. The goal of the Portfolio is to achieve returns in excess
of the Index without significantly higher volatility.
Value and risk control drive the Portfolio's investment decisions. The
Portfolio is diversified across market sectors and issues, and is constrained
within a range of one to three years of duration, to an average credit quality
of AA or better (with all securities being of investment grade), and to
dollar-denominated bonds only.
The portfolio management team relies on the investment research and expertise
of individual sector teams, which focus on four key elements of portfolio
structure and composition: interest-rate strategy, yield-curve positioning,
credit risk, and prepayment sensitivity.
Interest-rate strategy determines the Portfolio's overall sensitivity to
changes in interest rates. The duration decision is based on the value of extra
duration as measured by the steepness of the yield curve and the level of real
rates; it is not based on an internal forecast of the short-term direction of
interest rates or Federal Reserve policy.
MAS continually studies yield-curve positioning to determine the points along
the curve (maturities) where securities offer the most value. MAS targets the
Portfolio's investments to the area of the curve that provides the most value,
taking into account expected future changes in the shape of the yield curve.
Bearing credit risk often offers financial rewards beyond expected losses due
to defaults. Therefore, the Portfolio will typically invest a portion of its
assets in corporate bonds. In order to limit exposure to losses from defaults,
the Portfolio's exposure to an individual company's debt is generally limited to
1%.
Finally, the Portfolio's prepayment sensitivity stems from its positions in
mortgage-backed securities. The mortgage market represents one of the deepest
and most liquid sectors of the fixed-income universe, and MAS's research shows
that investors are often well compensated for assuming call risk. The aim is to
increase the Portfolio's prepayment sensitivity when the market offers adequate
compensation for doing so, and to ensure that the call risk inherent in those
positions is adequately hedged.
For fiscal 1999, the Limited Duration Portfolio returned 3.61%, or 32 basis
points more than its benchmark. The
28
<PAGE> 29
Portfolio's outperformance resulted primarily from the extra yield earned by
allocating a significant portion of the portfolio to corporate, asset-backed,
and mortgage-backed securities. Spreads began the fourth quarter of 1998 at
very wide levels, and despite some volatility, they closed the fiscal year at
similarly high levels. Some additional value was added by reducing the
Portfolio's mortgage allocation when mortgage option-adjusted spreads tightened
in the spring. The mortgage allocation was subsequently increased as spreads
widened again. The Portfolio ended the fiscal year almost completely invested
in corporates, asset-backeds, and mortgages, with allocations of approximately
36%, 22%, and 40%, respectively.
The Portfolio's interest rate strategy also helped performance through the
first half of the fiscal year. At the beginning of this period, the yield curve
was very flat, and real rates were not excessively high. This represented a lack
of bond value (i.e., investors were not paid to bear extra interest rate risk).
The Portfolio was therefore positioned with a shorter duration than the Index.
As interest rates rose, this lower sensitivity helped the Portfolio to
outperform the Index. Interest rates continued to rise through the spring and
summer of 1999, at which point MAS's value measures indicated that having extra
interest rate risk was desirable. At fiscal year-end, the Portfolio's duration
was 4/10ths of a year longer than that of the Index.
In addition, approximately 11% of the Portfolio was allocated to
Treasury-Inflation-Protected Securities at the beginning of the fiscal year.
These securities outperformed as interest rates rose and the market priced
expectations of rising rather than falling inflation. By fiscal year-end, these
securities had been sold, since they no longer represented attractive value
relative to other non-Treasury securities.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS
Limited Duration Salomon 1-3 Year
(Dollars 000)
<S> <C> <C> <C>
* 3/31/92 1000 1000
6/30/92 1034 1029
92 9/30/92 1069 1059
12/31/92 1068 1061
3/31/93 1097 1084
6/30/93 1110 1097
93 9/30/93 1126 1112
12/31/93 1131 1119
3/31/94 1121 1113
6/30/94 1119 1114
94 9/30/94 1131 1124
12/31/94 1131 1125
3/31/95 1167 1162
6/30/95 1202 1198
95 9/30/95 1220 1216
12/31/95 1248 1245
3/31/96 1255 1251
6/30/96 1266 1264
96 9/30/96 1287 1285
12/31/96 1314 1309
3/31/97 1324 1318
6/30/97 1352 1347
97 9/30/97 1377 1373
12/31/97 1396 1396
3/31/98 1416 1416
6/30/98 1434 1438
98 9/30/98 1461 1481
12/31/98 1474 1493
3/31/99 1497 1503
6/30/99 1497 1511
99 9/30/99 1514 1530
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Limited Salomon
Duration 1-3 Year Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year 3.61% 3.29%
- -----------------------------------------------------------------------------------------------------
Five Years 6.02% 6.36%
- -----------------------------------------------------------------------------------------------------
Since Inception 5.69% 5.83%
- -----------------------------------------------------------------------------------------------------
</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 Limited Duration Portfolio commenced operations on 3/31/92. Total returns
are compared to the Salomon 1-3 Year Treasury/Government Sponsored Index, an
unmanaged market index.
29
<PAGE> 30
MAS Funds/Fixed Income
SPECIAL PURPOSE
FIXED INCOME
PORTFOLIO
"The Portfolio's long-term
record reflects successful
judgments about these key
decisions."
[PHOTO]
from left:
Mary Ann Milias,
Bob Formisano and
Debbie Tickler
THE SPECIAL PURPOSE FIXED INCOME PORTFOLIO is designed specially for use as part
of a balanced investment program. Fixed-income securities in this Portfolio
include U.S. government bonds, corporate bonds, mortgages, non-dollar bonds, and
other fixed-income securities. The Portfolio is actively managed by Miller
Anderson & Sherrerd's fixed-income team, which makes strategic decisions about
portfolio structure and composition in a way that complements the equity portion
of a balanced account.
MAS has three major objectives for fixed-income investing. The first is to
provide investors a positive real return -- a total return including income and
capital gains that is greater than the rate of inflation. The second is to help
diversify equity-oriented strategies in other areas of clients' investment
programs. The third is to provide a hedge against a prolonged, severe economic
contraction. In order to provide this hedge, the Portfolio maintains high
average credit quality and includes a significant portion of noncallable and
longer-maturity securities. This positions the Portfolio to perform well when
other market sectors experience poor returns.
There are five key decisions that the fixed-income team makes in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values generally increase when interest rates fall and decrease
when interest rates rise. Consequently, there are times when it is better to
bear more interest-rate risk than others. MAS bases the interest-rate risk
decision on the level of real interest rates and the steepness of the yield
curve, tempered by views about economic growth and the prospects for inflation.
When real rates are high and longer-maturity bonds have significantly higher
yields than short-term bonds, historically MAS has found it to be an attractive
time to have an above-benchmark level of interest-rate sensitivity.
The second decision involves determining which maturities offer the best
value relative to their risk. Third, the team considers which fixed-income
markets around the world offer the best value, on an opportunistic basis;
relative real interest rates, the steepness of U.S. and foreign yield curves,
and judgments about currency values drive this decision. The fourth decision
relates to how much credit risk the Portfolio should bear. MAS's research shows
that a diversified approach toward owning corporate bonds enhances overall
portfolio returns. The Portfolio includes a limited number of
opportunistically-selected bonds that are rated below investment grade.
Finally, MAS actively manages the amount of prepayment risk, or call risk,
within the Portfolio. Most mortgages and some corporate bonds contain an option
to prepay the principal amount
30
<PAGE> 31
prior to maturity. As a result, these bonds have higher yields, and the
fixed-income team calculates whether this additional yield is sufficient to
compensate for the embedded option risk.
The Portfolio's long-term record reflects successful judgments about these
key decisions. Despite a difficult market environment during the past fiscal
year, the Portfolio outperformed its benchmark by 98 basis points. Yields on
U.S. Treasuries increased during this period due to improving global economic
conditions and renewed inflation fears. While high levels of real interest rates
justified the Portfolio's above-benchmark interest-rate risk strategy during the
1999 calendar year, this decision had an unfavorable effect on relative
performance due to the aforementioned rise in interest rates. Higher rates also
had an adverse impact on other fixed-income sectors, yet most corporate and
mortgage-backed securities outperformed Treasuries during the period. The
decision to overweight these non-Treasury sectors, especially yankee issues, and
an opportunistic allocation to below investment-grade securities, had a very
favorable impact on the Portfolio's relative returns. A modest yield-curve
strategy, designed to benefit from a narrowing of the yield spread between
short- and long-maturities, had a favorable effect on returns, and was
eventually removed. A position in inflation-indexed Treasuries (TIPS) also had a
favorable impact on relative performance, as these securities outperformed
nominal Treasuries. The allocation to foreign bonds was zero for the entire
fiscal year, as it remained difficult to identify superior opportunities among
high-quality non-dollar securities.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS
Special Purpose Fixed Income Salomon Broad
(Dollars 000)
<S> <C> <C> <C>
* 3/31/92 1000 1000
6/30/92 1048 1041
92 9/30/92 1095 1085
12/31/92 1110 1088
3/31/93 1169 1134
6/30/93 1214 1165
93 9/30/93 1261 1196
12/31/93 1275 1196
3/31/94 1240 1163
6/30/94 1208 1151
94 9/30/94 1211 1158
12/31/94 1211 1162
3/31/95 1275 1221
6/30/95 1349 1296
95 9/30/95 1392 1320
12/31/95 1449 1378
3/31/96 1446 1354
6/30/96 1464 1360
96 9/30/96 1500 1386
12/31/96 1557 1427
3/31/97 1558 1420
6/30/97 1622 1471
97 9/30/97 1676 1520
12/31/97 1713 1565
3/31/98 1740 1590
6/30/98 1768 1627
98 9/30/98 1799 1694
12/31/98 1821 1701
3/31/99 1829 1693
6/30/99 1804 1678
99 9/30/99 1810 1690
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Special Purpose Salomon
Fixed Income Broad Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year 0.71% (0.27)%
- -----------------------------------------------------------------------------------------------------
Five Years 8.39% 7.86%
- -----------------------------------------------------------------------------------------------------
Since Inception 8.24% 7.25%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
* The Special Purpose Fixed Income Portfolio commenced operations on 3/31/92.
Total returns are compared to the Salomon Broad Investment Grade Index, an
unmanaged market index.
31
<PAGE> 32
MAS Funds/Fixed Income
MUNICIPAL
PORTFOLIO
"... MAS views the munici-
pal market as just one of
many alternatives for help-
ing clients achieve the goal
of maximizing after-tax
returns, consistent with a
reasonable level of risk."
[PHOTO]
from left:
Jeanie Krepfle, Mark Babiec
and Brian Towsen
THE MUNICIPAL PORTFOLIO invests primarily in tax-exempt municipal debt
obligations issued by state and local governments or their agencies. The
Portfolio will also invest selectively in taxable fixed-income securities.
Normally, at least 80% of the Portfolio's income will be exempt from regular
federal income tax. The Portfolio is managed by the MAS tax-advantaged
fixed-income team. This team works closely with the MAS interest rate team to
determine the interest rate and yield curve exposure for the Portfolio. The
tax-advantaged team also works closely with the MAS fixed-income value teams to
determine sector allocation and security selection for the Portfolio. The
objective of the Portfolio is to maximize after-tax total return consistent with
the preservation of capital, while providing investors with deflation
protection.
The investment philosophy is consistent with that of the other MAS
fixed-income products. As research-based, value-driven investors, MAS does
extensive research to identify objective measures of value that have proven to
be reliable over long periods of time. Consequently, MAS does not attempt to
forecast markets. Instead, MAS is disciplined in applying these value measures
to making investment decisions. An important part of the MAS philosophy is
utilizing research which shows that taxable investors are sometimes better
served by investments in taxable bonds. Thus, MAS views the municipal market as
just one of many alternatives for helping clients achieve the goal of maximizing
after-tax returns, consistent with a reasonable level of risk.
The investment process consists of three major stages. First, the appropriate
level of interest rate sensitivity relative to the benchmark is established
using the same value measures--the level of real interest rates and the shape of
the yield curve--that are used for all of the MAS fixed-income portfolios. Next,
MAS examines the relative value offered by the various sectors of the bond
market to determine the most attractive sector allocation. In particular, MAS
attempts to add value by actively managing sector exposures based on the
prospects for the municipal market, relative to the taxable markets. The final
stage is to determine the mix of securities that will provide the most
attractive performance. Security selection involves adjustment of promised
yields for tax considerations, credit risk, and prepayment or call risk. In
general, capital gains are realized only when the prospective returns of bonds
purchased will offset the tax on any gains, and still provide excess value to
the overall Portfolio.
For the past fiscal year, the performance of the Municipal Portfolio lagged
the benchmark by 43 basis points.
32
<PAGE> 33
Interest-rate risk management had the largest negative impact on returns. The
interest rate sensitivity of the Portfolio was materially longer than that of
the benchmark as interest rates rose. Early in the year, the Portfolio
benefited handsomely as municipal bonds outperformed Treasury securities.
Exposure to taxable bonds also had a positive impact on results early in the
year. More recently, greater-than-index duration exposure to municipal bonds
and holdings of taxable bonds, primarily agency mortgages and investment grade
corporate bonds, detracted from relative performance.
MAS's primary value measure, the level of real interest rates, signaled
attractive value in the bond market. Consequently, the interest rate sensitivity
of the Portfolio remained longer than that of the benchmark at fiscal year-end.
In addition, MAS believed that a vigilant Federal Reserve would keep actual
inflation within a range well below what was then priced into the yield curve.
After a period of underperformance, prices of municipal bonds relative to
Treasuries were below fair value. In addition, high quality taxable bonds were
priced at historically low levels. These securities comprised an important
portion of the Portfolio, because expected returns on an after-tax and
risk-adjusted basis were attractive. The Portfolio Management team believed that
the recent weakness in the non-Treasury sectors of the bond market had been
driven primarily by technical factors, and MAS's research indicated that the
fundamentals remained strong. Accordingly, the Portfolio was positioned to take
advantage of the attractive value that MAS believed existed. At fiscal year-end,
the Portfolio maintained a very high average credit quality and a high degree of
call protection.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
Municipal Lehman 5 Year Municipal Lehman 10 Year Municipal Blended Municipal Index
<S> <C> <C> <C> <C> <C>
* 10/1/92 1000 1000 1000 1000
12/31/92 1016 1014 1020 1024
3/31/93 1061 1041 1059 1069
6/30/93 1103 1065 1094 1113
93 9/30/93 1142 1090 1134 1158
12/31/93 1162 1103 1150 1175
3/31/94 1077 1072 1089 1081
6/30/94 1083 1083 1105 1089
94 9/30/94 1089 1094 1113 1093
12/31/94 1089 1089 1095 1068
3/31/95 1186 1133 1171 1175
6/30/95 1180 1163 1202 1201
95 9/30/95 1235 1191 1244 1234
12/31/95 1306 1216 1283 1317
3/31/96 1300 1216 1275 1283
6/30/96 1317 1222 1279 1288
96 9/30/96 1351 1243 1304 1312
12/31/96 1379 1267 1341 1343
3/31/97 1383 1267 1341 1343
6/30/97 1426 1298 1385 1381
97 9/30/97 1466 1325 1428 1418
12/31/97 1499 1348 1465 1448
3/31/98 1518 1364 1480 1464
6/30/98 1539 1379 1503 1483
98 9/30/98 1571 1415 1554 1528
12/31/98 1586 1427 1564 1539
3/31/99 1617 1442 1573 1551
6/30/99 1580 1424 1537 1524
99 9/30/99 1573 1437 1547 1536
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Lehman 5 Year Lehman 10 Year Blended
Municipal Municipal Index Municipal Index Municipal Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 0.11% 1.55% (0.46)% 0.54%
- -----------------------------------------------------------------------------------------------------
Five Years 7.64% 5.61% 6.81% 7.04%
- -----------------------------------------------------------------------------------------------------
Since Inception 6.69% 5.32% 6.44% 6.33%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
The Portfolio was initially focused on long-term securities. On April 15, 1996,
shareholders approved a change in the Portfolio's investment policies to
emphasize fixed-income securities of shorter duration. On October 2, 1998,
shareholders approved a change in the Portfolio's investment policies to
specify that generally at least 80% of its income will be exempt from regular
federal income tax. The Portfolio's performance pattern may have been affected
by these changes.
* The Municipal Portfolio commenced operations on 10/1/92. Total returns are
compared to the Lehman 5 Year Municipal Index and the Lehman 10 Year Municipal
Index, both unmanaged market indices, as well as the Blended Municipal Index,
an unmanaged index comprised of the Lehman Long Municipal Index from 10/1/92
to 3/31/96 and 50% Lehman 10 Year Municipal Index and 50% Lehman 5 Year
Municipal Index thereafter.
33
<PAGE> 34
MAS Funds/Fixed Income
GLOBAL FIXED
INCOME PORTFOLIO
[PHOTO]
from left:
Richard Pagnoni,
Deborah Newborn and
Stacy Tomczak
THE GLOBAL FIXED INCOME PORTFOLIO invests primarily in high-grade fixed-income
securities throughout the world, normally fluctuating around a neutral position
of approximately two-thirds foreign bonds and one-third U.S. securities.
Fixed-income securities in the U.S. portion of this Portfolio include U.S.
government bonds, corporate bonds, mortgages, and other fixed-income securities.
The non-dollar portion of the Portfolio may include a wide variety of
fixed-income securities, but tends to consist largely of securities issued by
foreign governments and supranational organizations such as the World Bank. The
Portfolio is actively managed by Miller Anderson & Sherrerd's global
fixed-income team, which makes strategic decisions concerning portfolio
structure and composition.
The MAS global fixed-income team makes five key decisions when building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values generally increase when interest rates fall and decrease
when rates rise. Consequently, there are better times to bear interest-rate risk
than others. MAS bases the interest-rate decision on the level of real interest
rates and the steepness of the yield curve in bond markets throughout the world.
When real interest rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically that has been an attractive
time to invest in fixed-income securities with longer-than-average maturities.
The second key decision is the choice of fixed-income markets throughout the
world in which the Portfolio will invest. MAS bases this decision on comparisons
of real interest rates and yield-curve slopes across fixed-income markets.
Historically, it has been advantageous to invest in countries that offer higher
real interest rates than those available in other countries. Since the best bond
markets do not necessarily correspond to the best currency markets, MAS
separates the bond decision from the third key decision of currency management.
MAS manages currency exposures actively, and the Portfolio hedges (at least in
part) those currencies that are judged to be overvalued and in danger of
weakening.
The fourth and fifth decisions relate to the Portfolio's level of credit and
prepayment risk. Although interest-rate, country, and currency decisions have
typically had the largest effect on performance, MAS's research shows that
bearing credit risk often offers financial rewards and that a diversified
approach to credit risk adds to overall portfolio returns. Similarly, MAS
actively manages the amount of prepayment or call risk in the Portfolio. Many
corporate bonds and most mortgages contain an option to prepay the principal
amount prior to maturity. As a result, these bonds generally offer higher
yields, and the global fixed-income team calculates whether this additional
yield is sufficient to compensate for the embedded prepayment-option risk. Most
corporate and mortgage securities are issued in the United States, which offers
the deepest and most liquid corporate and mortgage markets in the world.
However, the Portfolio will also invest in foreign or non-dollar corporate and
mortgage securities when values are attractive.
The Portfolio's return lagged that of its benchmark over the past fiscal
year. Currency positioning was the primary source of underperformance. Exposures
34
<PAGE> 35
to interest rate risk and corporate bonds led to quarterly volatility of
relative returns, but had only a small net impact on performance.
A noteworthy strategic position in the Portfolio was a below-benchmark
exposure to the Japanese yen. The yen was viewed as comparatively unattractive
because of the structural problems of the Japanese economy and the historically
low level of interest rates there. The yen appreciated sharply, however, during
the year, more than accounting for the Portfolio's return gap versus the
benchmark.
Other currency positions relative to the benchmark contributed to
performance. Late in 1998, the Portfolio took on small exposures to the Canadian
and Australian dollars; these two currencies had fallen to very competitive
levels and were well placed to benefit from a recovery in the prices of
internationally traded commodities. Both currencies appreciated in the first
half of 1999, benefiting the Portfolio.
The most significant interest rate decision in the Portfolio was a
below-market exposure to Japanese bonds, which offered very low real yields.
This underweighting was offset by higher exposures to U.S. and European bonds,
whose real yields were much more attractive. This decision added significantly
to relative returns late in 1998 as Japanese government bonds sold off sharply.
Rising bond yields in Europe and the dollar-bloc markets eroded some of these
gains, however, limiting the net impact of interest rate decisions on Portfolio
returns over the entire fiscal year.
The Portfolio maintained a significant, well-diversified, above-benchmark
exposure to corporate bonds, which offered an unusually large yield premium over
government debt. This yield premium was volatile during the year but showed
little net change. The Portfolio benefited primarily from the higher interest
margin earned, which added to relative performance.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
Global Fixed Income Salomon World Gov't Bond
<S> <C> <C> <C>
* 4/30/93 1000 1000
6/30/93 1022 1008
93 9/30/93 1074 1053
12/31/93 1090 1053
3/31/94 1075 1053
6/30/94 1057 1060
94 9/30/94 1071 1072
12/31/94 1073 1078
3/31/95 1159 1196
6/30/95 1227 1259
95 9/30/95 1238 1246
12/31/95 1287 1283
3/31/96 1271 1259
6/30/96 1290 1264
96 9/30/96 1322 1299
12/31/96 1365 1329
3/31/97 1309 1274
6/30/97 1347 1313
97 9/30/97 1369 1330
12/31/97 1365 1333
3/31/98 1385 1343
6/30/98 1409 1370
98 9/30/98 1495 1484
12/31/98 1557 1536
3/31/99 1507 1477
6/30/99 1452 1426
99 9/30/99 1494 1491
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Global Salomon World
Fixed Income Gov't Bond Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year (0.05%) 0.48%
- -----------------------------------------------------------------------------------------------------
Five Years 6.88% 6.81%
- -----------------------------------------------------------------------------------------------------
Since Inception 6.45% 6.42%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to
certain risks such as currency fluctuations, economic instability, and
political developments.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
Total returns for the Portfolio reflect expenses waived
and/or reimbursed by the Adviser for certain periods. Without such waivers
and/or reimbursements, total returns would have been lower.
* The Global Fixed Income Portfolio commenced operations on 4/30/93. Total
returns are compared to the Salomon World Government Bond Index, an unmanaged
market index.
35
<PAGE> 36
MAS Funds/Fixed Income
INTERNATIONAL FIXED
INCOME PORTFOLIO
[PHOTO]
from left:
Nannette de Groot,
Ken Tollmann and
PaM Levesque
THE INTERNATIONAL FIXED INCOME PORTFOLIO invests primarily in high-grade
fixed-income securities, using a benchmark that is 100 percent invested in
foreign bonds. Most investments consist of securities issued by governments and
supranational organizations such as the World Bank, although the Portfolio will
also hold corporate bonds, mortgages, and other fixed-income securities. The
Portfolio will also invest to a limited extent in U.S. securities when the U.S.
fixed-income market is more attractive than foreign markets. The Portfolio is
actively managed by Miller Anderson & Sherrerd's global fixed-income team, which
makes strategic decisions concerning portfolio structure and composition.
The MAS global fixed-income team makes five key decisions in building the
Portfolio. The first decision relates to the amount of interest-rate risk in the
Portfolio. Bond values generally increase when interest rates fall and decrease
when rates rise. Consequently, there are better times to bear interest-rate risk
than others. MAS bases the interest-rate decision on the level of real interest
rates and the steepness of the yield curve in bond markets throughout the world.
When real interest rates are high and longer-maturity bonds have significantly
higher yields than short-term bonds, historically that has been an attractive
time to invest in fixed-income securities with longer-than-average maturities.
The second key decision is the choice of fixed-income markets throughout the
world in which the Portfolio will invest. MAS bases this decision on comparisons
of real interest rates and yield-curve slopes across fixed-income markets.
Historically it has been advantageous to invest in countries that offer higher
real interest rates than those available in other countries. Since the best bond
markets do not necessarily correspond to the best currency markets, MAS
separates the bond decision from the third key decision of currency management.
MAS manages currency exposures actively, and the Portfolio hedges (at least in
part) those currencies that are judged to be overvalued and in danger of
weakening.
The fourth and fifth decisions relate to the Portfolio's level of credit and
prepayment risk. Although these two decisions play a much smaller role in the
Portfolio than interest-rate, country, and currency management, MAS's research
shows that bearing credit risk often offers financial rewards and that a
diversified approach to credit risk adds to overall portfolio returns.
Similarly, MAS actively manages the amount of prepayment or call risk in the
Portfolio. Many corporate bonds and most mortgages contain an option to prepay
the principal amount prior to maturity. As a result, these bonds generally offer
higher yields, and the global fixed-income team calculates whether this
additional yield is sufficient to compensate for the embedded prepayment-option
risk.
The Portfolio's return lagged that of its benchmark over the past fiscal
year. Currency positioning was the primary source of underperformance. Exposure
to interest-rate risk led to quarterly volatility of relative returns, but had
only a small net impact on performance. A small exposure to corporate bonds had
little effect on returns.
36
<PAGE> 37
A noteworthy strategic position in the Portfolio was a below-benchmark
exposure to the Japanese yen. The yen was viewed as comparatively unattractive
because of the structural problems of the Japanese economy and the historically
low level of interest rates there. The yen appreciated sharply, however, during
the year, more than accounting for the Portfolio's return gap versus the
benchmark.
Other currency positions relative to the benchmark contributed to performance.
late in 1998, the Portfolio took on small exposures to the Canadian and
Australian dollars; these two currencies had fallen to very competitive levels
and were well placed to benefit from a recovery in the prices of internationally
traded commodities. Both currencies appreciated in the first half of 1999,
benefiting the Portfolio.
The most significant interest rate decision in the Portfolio was a
below-market exposure to Japanese bonds, which offered very low real yields.
This underweighting was offset by higher exposures to U.S. and European bonds,
whose real yields were much more attractive. This decision added significantly
to relative returns late in 1998 as Japanese government bonds sold off sharply.
Rising bond yields in Europe and the dollar-bloc markets eroded some of these
gains, however, limiting the net impact of interest rate decisions on Portfolio
returns over the entire fiscal year.
During the fiscal year, the Portfolio added to its small exposure in
corporate bonds, which are not included in the benchmark. With the establishment
of the Euro as Europe's common currency, the Portfolio had a much wider choice
of corporate securities. The yield premium on this position had a small positive
impact on returns.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
International Fixed Income Salomon World Gov't Bond Ex-U.S.
<S> <C> <C> <C>
* 4/29/94 1000 1000
6/30/94 998 1010
94 9/30/94 1010 1027
12/31/94 1012 1033
3/31/95 1122 1182
6/30/95 1186 1240
95 9/30/95 1175 1210
12/31/95 1211 1235
3/31/96 1196 1214
6/30/96 1214 1219
96 9/30/96 1247 1259
12/31/96 1286 1285
3/31/97 1212 1211
6/30/97 1244 1245
97 9/30/97 1253 1248
12/31/97 1235 1231
3/31/98 1245 1236
6/30/98 1267 1256
98 9/30/98 1383 1377
12/31/98 1454 1449
3/31/99 1381 1379
6/30/99 1312 1317
99 9/30/99 1370 1398
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS International Salomon World Gov't
Fixed Income Bond Ex-U.S. Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year (0.93)% 1.51%
- -----------------------------------------------------------------------------------------------------
Five Years 6.29% 6.36%
- -----------------------------------------------------------------------------------------------------
Since Inception 5.98% 6.37%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to certain
risks such as currency fluctuations, economic instability, and political
developments.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The International Fixed Income Portfolio commenced operations on 4/29/94.
Total returns are compared to the Salomon World Government Bond Ex-U.S. Index,
an unmanaged market index.
37
<PAGE> 38
MAS Funds/Fixed Income
INTERMEDIATE
DURATION PORTFOLIO
[PHOTO]
from left:
Jenn Pindle, Tracy Bell
and Dan Rocheleau
THE INTERMEDIATE DURATION PORTFOLIO is a duration-constrained fund managed using
the same principles and strategies as Miller Anderson & Sherrerd's core
fixed-income products. The Portfolio is managed by a team, allowing it to
benefit from the best thinking of a group of individuals, as well as the
expertise of smaller working groups. Sub-groups focus on five key elements of
portfolio structure and composition: interest-rate strategy, yield-curve
positioning, credit risk, prepayment sensitivity and country exposure. In
addition, the Portfolio is diversified across market sectors and issues to
control risk further.
MAS manages the Portfolio's interest-rate strategy, limiting the average
duration (the Portfolio's sensitivity to changes in interest rates) to between
two and five years. MAS continually studies yield-curve positioning to determine
the point along the curve (maturity) where securities offer the most value. MAS
targets the Portfolio's investments to the area of the curve that provides the
most value, taking into account MAS's expectation of future changes in the shape
of the yield curve.
The Portfolio purchases only those bonds rated investment grade (BBB/Baa) or
higher. MAS's research shows that bearing credit risk often offers financial
rewards beyond expected losses due to defaults. MAS also believes that a key to
successful corporate-bond management is diversification, and generally limits
exposure to individual credits to less than 1% of the Portfolio. The prepayment
sensitivity of the Portfolio is managed to add value, but not bear unnecessary
call risk. MAS's research shows that mortgage-backed securities offer attractive
returns relative to equal-duration Treasury bonds, but also contain prepayment
risk due to homeowners' rights to prepay their mortgages. MAS strives to manage
this prepayment risk by modeling mortgage-backed securities using state-of-the
art research and technology.
MAS manages country exposure opportunistically by investing up to 20% of the
Portfolio in high-quality bonds issued by foreign governments when yields abroad
are particularly attractive. Generally, this country exposure is currency
hedged.
For the past fiscal year, the Portfolio returned 0.64%, essentially matching
the Lehman Intermediate Government/ Corporate Index, which returned 0.63%. This
slightly positive return masked a turbulent market environment, which saw
interest rates rise dramatically and yield premiums in the corporate and
mortgage sectors, after much volatility, narrow. A stronger economic recovery
overseas eased the flight-to-quality that dominated the bond market in the
second half of 1998. This restored some degree of confidence in the corporate
and mortgage sectors. However, it also heightened inflation fears, which pushed
long-term interest rates significantly higher.
The Portfolio's interest rate strategy detracted from relative performance
during the year. The Portfolio's duration began the period neutral to the
benchmark, but was extended modestly late in 1998. As interest rates continued
to rise in the spring of 1999, the duration was extended further to be 0.6 years
longer than that of the benchmark. Because of this greater interest rate
sensitivity, the continued rise in interest rates through the summer hurt the
Portfolio's
38
<PAGE> 39
performance. The interest rate strategy was premised on the extremely high
levels of real interest rates, one of the Portfolio's primary value indicators.
Offsetting this early commitment to interest rate sensitivity was an
overweighted position in mortgage and corporate securities. The Portfolio
reacted to the extremely attractive valuations resulting from the
flight-to-quality by adding additional exposure to the already heavy commitments
in these sectors. This strategy gave the Portfolio a significant income
advantage on its benchmark, and allowed it to take advantage of the subsequent
narrowing of the yield spread that occurred in the first half of 1999. Most of
the additions to the Portfolio were made in high-grade industrial and financial
obligations and agency mortgage pass-through securities.
Additional relative performance was added by several tactical maneuvers that
were made during the year. The Portfolio reduced its mortgage exposure by almost
15% in the second calendar quarter, as yield spreads narrowed to more
historically normal levels. This exposure was then added back in the summer as
yields widened again, due to heavy new issuance in the corporate, asset-backed,
and agency sectors. Also helping relative performance was a nearly 10% position
in Treasury Inflation Protected Securities (TIPS). As inflation fears
heightened, within a tight labor market and a period of rising oil prices,
increased investor interest in TIPS allowed for significant outperformance of
these securities. These holdings were eliminated during the third calendar
quarter in favor of more attractively valued corporate and mortgage securities.
As of September 30, 1999, the Portfolio's weightings in the higher-yielding
corporate and mortgage sectors were 43% and 56%, respectively.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
Intermediate Duration Lehman Intermediate Gov't/Corp.
<S> <C> <C> <C>
* 10/3/94 1000 1000
12/31/94 995 999
3/31/95 1043 1043
6/30/95 1088 1095
95 9/30/95 1114 1113
12/31/95 1148 1152
3/31/96 1150 1142
6/30/96 1158 1150
96 9/30/96 1184 1170
12/31/96 1216 1199
3/31/97 1219 1197
6/30/97 1255 1233
97 9/30/97 1289 1266
12/31/97 1314 1293
3/31/98 1336 1313
6/30/98 1358 1338
98 9/30/98 1400 1398
12/31/98 1407 1402
3/31/99 1415 1399
6/30/99 1400 1394
99 9/30/99 1409 1407
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Funds
Intermediate Duration
-----------------------------------------
Lehman Intermediate
Institutional - Investment + Gov't/Corp. Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 0.64% 0.64% 0.63%
- -----------------------------------------------------------------------------------------------------
Since Inception 7.11% 7.11% 7.08%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
+ Represents an investment in the Investment Class which commenced operations
8/16/99. Total returns for periods beginning prior to this date are based on
the performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class. It is expected
that, over time, returns for the Investment Class will be lower than for the
Institutional Class due to the higher expenses charged.
Total returns for the Institutional Class of the Portfolio reflect expenses
reimbursed by the Adviser for certain periods. Without such waivers and/or
reimbursements, total returns would have been lower.
* The Intermediate Duration Portfolio commenced operations on
10/3/94. Total returns are compared to the Lehman Brothers Intermediate
Government/Corporate Bond Index, an unmanaged market index.
39
<PAGE> 40
MAS Funds/Fixed Income
MULTI-MARKET FIXED
INCOME PORTFOLIO
"With robust retail sales,
consumption, and invest-
ment spending, the U.S.
economy demonstrated
strength throughout
the year."
THE MULTI-MARKET FIXED INCOME PORTFOLIO seeks to provide investors with a
superior real rate of return by investing in domestic and foreign fixed-income
instruments and high-yield securities. MAS believes that the Portfolio's
strategy marks the evolution of U.S.-based core fixed-income portfolios towards
a more substantial commitment to alternative asset classes, including
high-yield, emerging market, and non-dollar securities. All investments made in
these sectors reflect MAS's assessment of market opportunities based upon a
value-driven investment philosophy. Through careful research, MAS has
identified a set of valuation tools which, when coupled with expertise and
experience, helps identify undervalued sectors and securities through a variety
of market environments.
The Multi-Market Fixed Income Portfolio is actively managed by the MAS
fixed-income management team, which is responsible for portfolio construction
and risk control. The investment process combines top-down and bottom-up
strategies. Using a top-down approach, the team first determines the appropriate
global interest rate and currency exposures, utilizing value-based
decision-making tools. These include the relative level of real interest rates
and an analysis of yield curve slopes. The team then formulates a sector
allocation strategy that tilts the Portfolio toward the most favorable
opportunities in the market. This sector allocation is strongly influenced by
the second element in the process: bottom-up security selection. A goal of this
strategy is to incorporate the best individual investment ideas of portfolio
managers specializing in U.S. high quality bonds, international bonds, U.S.
high-yield bonds, and emerging market debt. The primary valuation tool used to
select securities is an option-adjusted and credit-risk-adjusted yield spread.
In fiscal 1999, the Portfolio outperformed its custom blended benchmark. This
occurred primarily as a result of an overweighting in U.S. high-yield bonds and
emerging market debt, as well as positive security selection across several
sectors. This outperformance was reduced by the impact of a
longer-than-benchmark duration strategy implemented as rates began to rise early
in the fiscal year.
The global fixed-income environment during fiscal 1999 was characterized by
several critical factors: a recovery from the flight-to-quality phenomenon that
occurred during the summer of 1998; a steady rise in interest rates driven by
strong economic growth in the U.S.; and buildup of liquidity on the part of
issuers and investors ahead of the upcoming Year 2000 event.
Throughout the fiscal year, the Portfolio benefited from an overweighting in
riskier fixed-income sectors, which had suffered the most during the market's
reaction to a series of financial crises throughout fiscal 1998. These sectors
had the strongest performance during fiscal 1999, driven by very high levels of
yield spreads. U.S. Treasury yields rose significantly during this period. As
the year began, investors realized that recession and more severe problems in
the global economy were not materializing. With robust retail sales,
consumption, and investment spending, the U.S. economy demonstrated strength
throughout the year. The Federal Reserve raised interest rates twice to reduce
the risk that this growth would result in higher inflation in the U.S.
Other regions of the world began to see economic recovery as well. As the
fiscal year progressed, Europe showed definite signs of economic growth. Japan
took increasingly aggressive steps to stimulate its economy, and these efforts
appeared to have an effect. Recovering growth in these regions helped contribute
to the general trend toward higher interest rates across developed markets.
Because MAS's measures of value, including the level of real rates, indicated
that bonds represented good investment value, the Portfolio's duration was
lengthened during the fiscal year. To the extent that some of this lengthening
occurred early in the year and rates continued to rise, performance was
negatively impacted.
40
<PAGE> 41
In addition to overweighting the high-yield and emerging market sectors, the
Portfolio overweighted certain sectors within the U.S. investment grade market.
Specifically, MAS believed that mortgage-backed securities and investment grade
corporate bonds represented excellent value. When these sectors outperformed
U.S. Treasuries early in the fiscal year, the Portfolio reduced its position.
Later in the year, however, pressures again caused these sectors to underperform
U.S. Treasuries. Specifically, the buildup of liquidity on the part of
investors, coupled with record new issuance by corporations, caused dislocation
in the high quality sectors. Yield spreads versus U.S. Treasuries for
mortgage-backed securities and investment grade corporate bonds approached
ten-year highs, in some cases surpassing the very wide spreads experienced
during 1998's flight-to-quality. MAS believed that these events represented an
opportunity for investors, so in the spring of 1999, the Portfolio increased
commitments to these sectors, particularly mortgage-backed securities.
Finally, the Portfolio was underweight the non-dollar sector at fiscal
year-end. While good values existed, particularly in Europe, MAS still believed
that the value in the U.S. market was superior. For the fiscal year, the
Portfolio's investments in non-dollar securities reduced absolute performance,
particularly due to the general strength of the U.S. dollar for most of the
year. Security selection in this sector also had a modestly negative impact on
portfolio performance.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
Multi-Market Fixed Income Salomon Broad Salomon World Gov't Bond Ex-US 60/12/10/10/8 Blended
<S> <C> <C> <C> <C> <C>
* 10/1/97 1000 1000 1000 1000
12/31/97 1005 1026 987 1016
3/31/98 1031 1042 991 1039
6/30/98 1034 1066 1008 1054
98 9/30/98 1027 1110 1105 1075
12/31/98 1058 1115 1163 1096
3/31/99 1064 1110 1107 1096
6/30/99 1050 1099 1057 1086
99 9/30/99 1051 1107 1121 1097
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Multi-Market Salomon Broad Salomon World Gov't 60/20/12/8
Fixed Income Index Bond Ex-U.S. Index Blended Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 2.36% (0.27)% 1.51% 2.07%
- -----------------------------------------------------------------------------------------------------
Since Inception 2.54% 5.24% 5.91% 4.74%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to certain
risks such as currency fluctuations, economic instability, and political
developments. High-yield fixed-income securities, otherwise known as "junk
bonds," represent a much greater risk of default and tend to be more volatile
than higher-rated bonds.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
Total returns for the Portfolio reflect expenses waived and/or reimbursed by
the Adviser for certain periods. Without such waivers and/or reimbursements,
total returns would have been lower.
* The Multi-Market Fixed Income Portfolio commenced operations on 10/1/97.
Total returns are compared to the Salomon Broad Investment Grade Index and
the Salomon World Government Bond Ex-U.S. Index, both unmanaged market
indices, as well as the 60/20/12/8 Blended Index, an unmanaged index
comprised of 60% Salomon Broad Investment Grade Index, 20% Salomon World
Government Bond Ex-U.S. Index (one half hedged into U.S. dollars), 12%
Salomon High Yield Index, and 8% J.P. Morgan Emerging Markets Bond Index.
41
<PAGE> 42
MAS Funds/Balanced
BALANCED
PORTFOLIO
"Management of the
Portfolio also draws on
asset allocation exper-
tise from the entire
Morgan Stanley Dean
Witter Investment
Management global
organization."
[PHOTO]
from left:
Karen Igler, Ruth Hughes-Guden,
Deborah Reyner Roberts and
Gregg Robinson
THE BALANCED PORTFOLIO provides active asset allocation management using Miller
Anderson & Sherrerd's core equity and fixed-income strategies in a single
portfolio. MAS shifts assets as relative values change, using a 60% equity and
40% fixed-income allocation as a neutral starting point, and manages
diversification and risk control across both asset classes.
Asset allocation decisions combine measures of value, earnings, interest rate
and inflation dynamics, and economic analysis. Sentiment and liquidity are taken
into account when they reach extreme levels. When making asset allocation
decisions, MAS calculates risk-adjusted expected returns for equities and
fixed-income securities. These returns are derived from proprietary models that
incorporate valuation levels, earnings trends, interest rate and inflation
dynamics, and sentiment measures. MAS then allocates a greater portion of the
Portfolio's assets to the asset class with the highest risk-adjusted expected
returns. Total portfolio risk is monitored in absolute terms as well as against
the product's benchmark.
Management of the Portfolio also draws on asset allocation expertise from the
entire Morgan Stanley Dean Witter Investment Management global organization. The
Asset Allocation Committee provides the portfolio management team with input on
topics such as developments in the Mergers and Acquisitions area and trends in
credit markets. Using this information, the team evaluates the relative risks
and returns of the broad asset classes and makes decisions about portfolio
composition. The individual holdings within the Portfolio are managed based on
the expertise of MAS's specific product teams for each asset class represented.
During fiscal 1999, the Portfolio returned 58 basis points more than its
custom benchmark of 60% S&P 500 and 40% Salomon Broad Index. Security selection
in both the equity and fixed- income portions of the Portfolio were responsible
for the outperformance. The contribution from asset allocation was neutral.
Between August and October of 1998, there was a significant sell-off in
equities around the world on the heels of the Russian debt default, the bailout
of a large hedge fund, and a rally in the bond market. Relative valuations moved
in favor of equities, and in mid-October, the
42
<PAGE> 43
Portfolio started to increase equity weighting from a low of 48% to a neutral
position (60%) relative to the benchmark. In April, after equities had rallied
by almost 30%, and bond yields in the U.S. and abroad had moved up by about 100
basis points, the Portfolio started to reduce equity exposure once again.
At fiscal year-end, the Portfolio had a higher-than-benchmark allocation to
U.S. fixed income, offset by a 6-percentage point underweight in equities.
Valuations for U.S. equities were high relative to bonds, and the profit outlook
had started to deteriorate. The Portfolio also had a higher-than-benchmark
allocation to corporate and mortgage-backed fixed income securities. Spreads
relative to Treasuries were near their highs, and MAS believed that these
spreads were more than sufficient to compensate investors for default and
prepayment risks.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
Balanced S&p 500 Salomon Broad 60/40 Blend
<S> <C> <C> <C> <C> <C>
* 12/31/92 1000 1000 1000 1000
3/31/93 1034 1044 1042 1043
6/30/93 1048 1049 1071 1057
93 9/30/93 1083 1076 1099 1085
12/31/93 1104 1101 1099 1100
3/31/94 1069 1059 1068 1063
6/30/94 1060 1064 1058 1061
94 9/30/94 1085 1116 1064 1095
12/31/94 1082 1115 1068 1097
3/31/95 1157 1224 1122 1183
6/30/95 1247 1341 1191 1279
95 9/30/95 1317 1447 1213 1350
12/31/95 1378 1534 1266 1422
3/31/96 1431 1617 1244 1458
6/30/96 1473 1689 1250 1500
96 9/30/96 1494 1742 1273 1539
12/31/96 1590 1887 1312 1635
3/31/97 1612 1937 1305 1658
6/30/97 1786 2275 1352 1855
97 9/30/97 1904 2446 1397 1963
12/31/96 1902 2516 1438 2020
3/31/97 2068 2867 1461 2203
6/30/97 2100 2962 1495 2267
98 9/30/97 1959 2667 1557 2169
12/31/98 2195 3235 1563 2450
3/31/99 2285 3396 1556 2518
6/30/99 2408 3636 1541 2615
99 9/30/99 2291 3408 1553 2525
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Balanced
- ------------------------------------------------------- S&P 500 Salomon 60/40 Blended
Institutional - Investment ** Adviser + Index Broad Index Index
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
One Year 16.99% 16.84% 16.76% 27.80% (0.27)% 16.41%
- --------------------------------------------------------------------------------------------------------
Five Years 16.13% 16.01% 15.96% 25.03% 7.86% 18.19%
- --------------------------------------------------------------------------------------------------------
Since Inception 13.07% 12.99% 12.96% 19.93% 6.74% 14.71%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
** Represents an investment in the Investment Class which commenced operations
4/3/97. Total returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15% Shareholder
Servicing Fee applicable to the Investment Class.
+ Represents an investment in the Adviser Class which commenced operations
11/1/96. Total returns for periods beginning prior to this date are based on
the performance of the Institutional Class and do not include the 0.25% 12b-1
Fee applicable to the Adviser Class. Total returns for the Adviser Class of the
Portfolio reflect expenses reimbursed by the Adviser for certain periods.
Without such reimbursements, total returns would have been lower.
* The Balanced Portfolio commenced operations on 12/31/92. Total returns are
compared to the S&P 500 Index and the Salomon Broad Investment Grade Index,
both unmanaged market indices, as well as the 60/40 Blended Index, an
unmanaged index comprised of 60% S&P 500 Index and 40% Salomon Broad
Investment Grade Index.
43
<PAGE> 44
MAS Funds/Balanced
MULTI-ASSET-CLASS
PORTFOLIO
"When making global
asset-allocation decisions,
MAS calculates risk-
adjusted expected returns
for each asset class."
THE MULTI-ASSET-CLASS PORTFOLIO provides global asset allocation among U.S. and
foreign stocks, bonds, and high-yield securities. Miller Anderson & Sherrerd
actively shifts assets among them as their relative values and risks change and
manages diversification and risk control across all five asset classes.
Diversification across this wide array of asset types offers a risk/return
profile that historically has been more attractive than balanced portfolios
consisting only of domestic stocks and bonds.
The investment process consists of five interrelated decisions: allocation
among global asset classes, country allocation, allocation to equities versus
fixed-income securities within markets, currency exposures, and value
determinations within markets. Asset-allocation decisions couple measures of
value, earnings, interest rate and inflation dynamics, and economic analysis.
Sentiment and liquidity are taken into account when they reach extreme levels.
When making global asset-allocation decisions, MAS calculates risk-adjusted
expected returns for each asset class. These returns are derived from
proprietary models that incorporate valuation levels, earnings trends, inflation
and interest rate dynamics, and sentiment measures. MAS allocates a greater
portion of the Portfolio's assets to the asset classes with the highest risk
adjusted expected returns. Total portfolio risk is monitored in absolute terms
as well as against the product's benchmark.
While currency valuations help shape MAS's view of the relative value of
foreign investments and thus influence the Portfolio's country allocations,
currency exposure is viewed as a separate decision. The degree of currency
exposure is based on MAS's analysis of deviations from purchasing-power parity,
with particular attention directed towards over- or under-valuation that cannot
be explained by differences in real interest rates.
Management of the Portfolio also draws on asset allocation expertise from
the entire Morgan Stanley Dean Witter Investment Management global organization.
The Asset Allocation Committee provides the portfolio management team with input
on topics such as developments in the Mergers and Acquisitions area and trends
in credit markets. Using this information, the team evaluates the relative risks
and returns of the broad asset classes and makes decisions about portfolio
composition. The individual holdings of the Portfolio are managed based on the
expertise of MAS's specific product teams for each of the five asset classes
represented.
During fiscal 1999, the MAS Funds Multi-Asset-Class Portfolio underperformed
against its custom benchmark of 50% U.S. equities, 14% foreign equities, 24%
U.S. fixed income, 6% foreign fixed income, and 6% high yield. Asset allocation
decisions, particularly the less-than-index exposure to U.S. equities, and
security selection in the international equity portion of the Portfolio
contributed to the underperformance. Security selection in U.S. equities, U.S.
fixed income, and high-yield added value relative to the benchmark.
The Portfolio began its fiscal year with overweighted positions in
international equities, high-yield, and emerging market debt securities. The
overall equity position was approximately 10 percentage points less than that of
the benchmark. Yield spreads of high-yield and emerging market debt securities
relative to U.S. Treasuries were very attractive, and MAS believed that these
spreads more than compensated investors for the higher riskiness of these asset
classes. International equities offered investors higher expected returns than
U.S. stocks. Foreign bonds offered significantly lower real interest rates than
U.S. bonds; therefore, the Portfolio had significantly lower-than-benchmark
exposure to this asset class.
In the first quarter of the fiscal year, after a significant sell-off in
equities, the Russian debt default, and the bailout of a large hedge fund in the
U.S., the Portfolio increased its exposure to U.S. equities and reduced its
exposure to bonds. However, the equity weight was brought into line with the
benchmark only after part of the late 1998 rally had already taken place. In
April, 1999, after equities had rallied almost 30%,
44
<PAGE> 45
and bond yields in the U.S. and abroad had moved up by about 100 basis points,
the Portfolio began to reduce equity exposure.
Additionally, interest rates in the Euro area increased more than interest
rates in the U.S. and yield curves steepened significantly. The Portfolio
therefore increased exposure to foreign fixed income to bring its allocation
more in line with the benchmark.
At fiscal year-end, the Portfolio had a higher-than-benchmark allocation to
U.S. fixed income, offset by an underweight in U.S. equities. Valuations for
U.S. equities were high relative to bonds, and the profit outlook had started to
deteriorate. The Portfolio also had a higher-than-benchmark allocation to
international equities, focused on Japanese equities. The Japanese economy had
shown signs of an accelerating recovery, and the corporate earnings outlook was
improving. Valuations were attractive, especially relative to other equity
markets around the world. Finally, the Portfolio had a higher-than-benchmark
allocation to high-yield securities. Spreads relative to Treasuries were near
their highs and, while defaults had increased, MAS believed that these spreads
were more than sufficient to compensate investors for default risks.
GROWTH OF A $1 MILLION INVESTMENT SINCE INCEPTION
<TABLE>
<CAPTION>
MAS Funds
Multi-Asset-Class S&P 500 Salomon Broad MSCI EAFE 50/24/14/6/6 Blended
<S> <C> <C> <C> <C> <C> <C>
* 7/29/94 1000 1000 1000 1000 1000
94 9/30/94 997 1016 987 991 1003
12/31/94 986 1015 991 981 1003
3/31/95 1044 1114 1041 1000 1079
6/30/95 1125 1221 1104 1007 1157
95 9/30/95 1179 1318 1125 1049 1214
12/31/95 1229 1397 1174 1091 1273
3/31/96 1280 1472 1154 1123 1306
6/30/96 1326 1538 1159 1141 1343
96 9/30/96 1341 1585 1181 1139 1375
12/31/96 1425 1718 1217 1157 1452
3/31/97 1443 1764 1210 1139 1467
6/30/97 1604 2071 1254 1287 1638
97 9/30/97 1697 2227 1296 1278 1719
12/31/97 1674 2291 1334 1178 1741
3/31/98 1835 2610 1355 1351 1916
6/30/98 1849 2696 1387 1365 1972
98 9/30/98 1689 2428 1444 1171 1859
12/31/98 1906 2945 1450 1413 2125
3/31/99 1967 3092 1443 1433 2175
6/30/99 2062 3310 1430 1469 2249
99 9/30/99 1988 3103 1440 1534 2203
</TABLE>
Fiscal Years Ending September 30
AVERAGE ANNUAL TOTAL RETURNS Ended 9/30/99*
<TABLE>
<CAPTION>
MAS Multi-Asset-Class
----------------------------- S&P 500 Salomon Broad MSCI EAFE 50/24/14/6/6
Institutional - Investment ** Index Index Index Blended Index
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
One Year 17.71% 17.53% 27.80% (0.27)% 30.95% 18.48%
- -------------------------------------------------------------------------------------------------------
Five Years 14.80% 14.68% 25.03% 7.86% 9.12% 17.04%
- -------------------------------------------------------------------------------------------------------
Since Inception 14.21% 14.09% 24.47% 7.31% 8.62% 16.49%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Total returns are net of all fees. Total returns represent past performance and
are not indicative of future results. Foreign investments are subject to certain
risks such as currency fluctuations, economic instability, and political
developments. High-yield fixed-income securities, otherwise known as "junk
bonds," represent a much greater risk of default and tend to be more volatile
than higher-rated bonds.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth either more or less than
their original cost.
- - Represents an investment in the Institutional Class.
** Represents an investment in the Investment Class which commenced operations
6/10/96. Total returns for periods beginning prior to this date are based on
the performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class. Total returns for
the Portfolio reflect expenses waived and/or reimbursed by the Adviser for
certain periods. Without such waivers and/or reimbursements, total returns
would have been lower.
* The Multi-Asset-Class Portfolio commenced operations on 7/29/94. Total
returns are compared to the S&P 500 Index, the Salomon Broad Investment Grade
Index, and the Morgan Stanley Capital International EAFE Index, all unmanaged
market indices, as well as the 50/24/14/6/6 Blended Index, an unmanaged index
comprised of 50% S&P 500 Index, 24% Salomon Broad Investment Grade Index, 14%
MSCI EAFE Index, 6% Salomon High Yield Index and 6% Salomon World Government
Bond Ex-U.S. Index. Prior to 1/1/99, the above blend reflected 14% MSCI
EAFE-GDP Weighted Index instead of 14% MSCI EAFE Index. The benchmark was
changed because the MSCI EAFE Index has become more representative of the
portfolio's investment opportunities than the MSCI EAFE - GDP Weighted Index.
45
<PAGE> 46
Miller Anderson & Sherrerd, LLP Morgan Stanley Dean Witter Investment Management
TRUSTEES AND
OFFICERS
The following is a list of the Trustees and the principal executive officers of
the Fund as well as a brief statement of their present positions and principal
occupations:
THOMAS L. BENNETT, CFA*
Chairman of the Board of Trustees; Managing Director, Morgan Stanley Dean Witter
& Co.; Member of the Morgan Stanley Dean Witter Investment Management Executive
Committee; Portfolio Manager and Head of Fixed Income Investment Team, Miller
Anderson & Sherrerd, LLP; Trustee, Haverford School.
THOMAS P. GERRITY
Trustee; Professor of Management, Director of the Electronic Commerce Forum, and
formerly Dean, Wharton School of Business, University of Pennsylvania; Director,
Sunoco; Fannie Mae; Reliance Group Holdings; CVS Corporation; IKON Office
Solutions, Inc.; Knight-Ridder, Inc.; Fiserv; Internet Capital Group; formerly
Director, Digital Equipment Corporation and Union Carbide Corporation.
JOSEPH P. HEALEY
Trustee; Headmaster, Ethical Culture Fieldston School; Trustee, Springside
School; formerly Headmaster, Haverford School; Dean, Hobart College; Associate
Dean, William & Mary College.
JOSEPH J. KEARNS
Trustee; investment consultant; Director, Electro Rent Corporation; Trustee,
Southern California Edison Nuclear Decommissioning Trust; Director, The Ford
Family Foundation; formerly, CFO of The J. Paul Getty Trust.
VINCENT R. MCLEAN
Trustee; Director, Legal and General America, Inc.; Director, Banner Life
Insurance Co.; Director, William Penn Life Insurance Company of New York;
formerly Executive Vice President, Chief Financial Officer, Director and Member
of the Executive Committee of Sperry Corporation (now part of Unisys
Corporation).
C. OSCAR MORONG, JR.
Trustee; Managing Director, Morong Capital Management; Director, CitiFunds,
CitiSelect Folios and related portfolios; formerly Senior Vice President and
Investment Manager for CREF, TIAA-CREF Investment Management, Inc.; Director,
The Indonesia Fund and the Landmark Funds; Director, Ministers and Missionaries
Benefit Board of American Baptist Churches.
LORRAINE TRUTEN, CFA
President, MAS Funds; Principal, Morgan Stanley Dean Witter & Co.; Head of
Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS Fund
Distribution, Inc.
JAMES A. GALLO
Vice President and Treasurer, MAS Funds; Head of Fund Administration, Miller
Anderson & Sherrerd, LLP; Vice President, Morgan Stanley Dean Witter & Co.;
formerly Vice President and Director of Investment Accounting, PFPC, Inc.
RICHARD J. SHOCH
Secretary, MAS Funds; Fund Administration Manager, Miller Anderson & Sherrerd,
LLP; Vice President, Morgan Stanley Dean Witter & Co.; formerly Counsel, Vice
President and Assistant Secretary, SEI Corporation.
*Trustee Bennett is deemed to be an "interested person" of the Fund as that
term is defined in the Investment Company Act of 1940, as amended.
This report should be preceded or accompanied by a prospectus.
MAS Fund Distribution, Inc. serves as General Distribution Agent for MAS Funds.
Date of first use: November, 1999
47
<PAGE> 47
[MAS FUNDS LOGO]
Morgan Stanley Dean Witter Investment Management
Miller Andersen & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
Investment Adviser:(610) 940-5000 - MAS Funds:(800) 354-8185
