BOND FUNDS QUARTERLY REPORT
June 30, 1996
A FAMILY OF 100% NO-LOAD FUNDS
Bond Fund
Minnesota Tax-Free Income Fund
Tax-Free Income Fund
U.S. Government Securities Fund
Money Market Fund
[LOGO] SIT MUSUTAL FUNDS
SIT MUTUAL FUNDS
BOND FUNDS QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
A Look at the Sit Mutual Funds................................. 2
Chairman's Letter.............................................. 3
Performance Review............................................. 4
Fund Reviews
Bond Fund................................................ 6
Minnesota Tax-Free Income Fund........................... 8
Tax-Free Income Fund..................................... 10
U.S. Government Securities Fund.......................... 12
Money Market Fund........................................ 14
This document must be preceded or accompanied by a Prospectus.
A LOOK AT THE SIT MUTUAL FUNDS
Sit Mutual Funds is managed by Sit Investment Associates, Inc. Sit
Investment was founded by Eugene C. Sit in July 1981 and is dedicated to a
single purpose, to be one of the premier investment management firms in the
United States. Sit Investment currently manages more than $4.5 billion for some
of America's largest corporations, foundations and endowments.
Sit Mutual Funds is comprised of eleven 100% NO-LOAD funds. 100% NO-LOAD
means that the funds have no sales charges on purchases, no deferred sales
charges, no 12b-1 fees, no redemption fees and no exchange fees. Every dollar
you invest goes to work for you.
Some of the other features include:
* Free telephone exchange
* Dollar-cost averaging through automatic investment plan o
* Electronic transfer of funds for purchases and redemptions o
* Free check-writing privileges on bond funds
* Retirement accounts including IRAs, Keoghs and 401(k) Plans
SIT FAMILY OF FUNDS
[CHART]
STABILITY: INCOME: GROWTH & INCOME: GROWTH:
Safety of principal Increased income Long-term capital Long-term capital
and current income appreciation and income appreciation
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - JUNE 30, 1996
[PHOTO]
Dear Fellow Shareholders:
Investors in domestic financial assets received mixed results for the
second quarter ended June 30, 1996. Signs of second quarter economic strength
hindered the performance of fixed income securities, while domestic equities
provided strong returns amid corporate profit gains and strong cash flows into
equity mutual funds.
ECONOMIC OVERVIEW
The domestic economy expanded strongly during the second quarter at a
+4.2% annual GDP growth rate. Raised expectations for second quarter growth,
some as high as +5.0%, sparked volatility in both the equity and fixed income
markets. A series of five strong monthly employment reports, coupled with
declines in the nation's unemployment rate to a low of 5.3%, generated concerns
that growth could be running near levels typically associated with increased
inflation, particularly in the labor markets. Economic growth in the second
quarter was aided by healthy spending on housing as well as on durable goods
including furniture. Government spending also surged during the quarter,
particularly at the state and local level.
Some signs of deceleration are beginning to emerge, however, such as
slower chain-store and auto sales in July as well as diminished housing
activity. We are presently forecasting that real GDP growth will decelerate
modestly toward +3.0% in the third quarter and eventually approximate a +2.5%
annual rate for calendar 1996. Growth at this level has historically been
regarded as within an optimal range of long run economic growth consistent with
generally contained inflation.
Inflation remains contained with consumer prices and producer prices
registering +2.9% and +2.7% year-over-year gains, respectively, through June.
Inflationary jitters stemmed primarily from payroll employment data,
particularly in the wholesale and retail trade sector, but were also related to
increased agricultural prices as grain inventories hover near historic lows. On
the other hand, the waning of other commodity prices, most notably that of
copper, along with price reductions in cereal and consumer electronics, lead us
to believe that inflation should remain reasonably well constrained. We expect
the consumer price index will approximate a +3.0% increase for 1996, but we are
monitoring wage levels closely since they represent two thirds of consumer
inflation.
While the Federal Reserve opted to leave short-term interest rates
constant at its most recent FOMC meeting in July, Chairman Greenspan stated in
his Humphrey Hawkins testimony that the Fed will be closely observing trends in
economic activity and wage levels to determine if a preemptive strike against
inflation is warranted. Fixed income markets had discounted a 25 basis point
hike in the federal funds rate as early as July but now seem to expect that this
policy directive will be delayed until later in the year.
STRATEGY SUMMARY
Although currently at the low end of the range, we believe 30-year
Treasury yields will fluctuate between 6 1/2% and 7 1/4% over the near term.
Taxable bond portfolios are currently positioned slightly shorter than their
benchmark indices, and we are looking to extend durations slightly on bond
market weakness. The U.S. Government Securities Fund's seasoned pools of high
coupon mortgage-backed securities performed well during the second quarter,
primarily as a result of the substantially higher income that they generated. A
portion of the Bond Fund's mortgage-backed holdings was shifted into the
asset-backed and CMO sectors to take advantage of attractive yields as well as
possible total return opportunities in these areas.
The tax-exempt bond portfolios continued to benefit from an emphasis on
housing and health care issues, which were the best performing sectors of the
Lehman Revenue Bond Index, as well as from security selection. In addition,
municipal market performance was helped by the increased seasonal demand for
bonds due to heavy reinvestment pressures from mid-year coupon and principal
payments. We intend to continue to take advantage of supply and demand
imbalances in the municipal market to reduce lower-yielding holdings and
reinvest proceeds in securities offering high income and greater call
protection, particularly in the multifamily sector.
The Sit Mutual Fund fixed income funds offer unique competitve advantages,
and we encourage shareholders to contact our service representatives for
detailed information. We appreciate your continued interest and support as
shareholders in the Sit Mutual Funds.
With best wishes,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
SIT MUTUAL FUNDS
JUNE 30, 1996 PERFORMANCE SUMMARY - BOND FUNDS
BOND MARKET REVIEW
Despite indications of economic strength, the Federal Reserve Board made
no changes to short-term interest rates during the quarter. 3-month Treasury
bill yields ended the quarter relatively unchanged at 5.15%, pausing from their
upward trend that began mid-February. However, longer maturity bond yields moved
to higher levels. The yield on the 30-year Treasury bond increased by +0.23% to
6.90% on June 28, 1996, and reached as high as 7.20% during the quarter.
Intermediate maturity bond yields rose more sharply as 3 to 10 year Treasury
yields increased by +0.39%. Returns for the major fixed income indices were
slightly positive for the quarter as a rally in the latter part of June helped
to offset some of the negative price returns of earlier months.
In the taxable market, asset-backed securities were the best performing
sector last quarter. Within this sector, the best performers were securities
backed by home equity loans. As these securities became more popular with
investors, their yield spreads tightened. This resulted in an attractive +1.71%
total return for home equity loan asset-backed securities for the quarter. The
mortgage-backed sector also outperformed last quarter due to its shorter
duration and higher level of interest income. This was especially true for the
seasoned high coupon mortgages held by the Sit U.S. Government and the Sit Bond
Funds, which were the best performing securities for the Funds. The Sit Bond
Fund's performance also benefited from its increased allocation to the
asset-backed sector.
The municipal market experienced greater price stability during the
quarter and thus posted higher returns than the taxable bond market. The yield
on the Bond Buyer 40-Bond Revenue Index increased only by 5 basis points during
the quarter to 6.01% and remained in a narrower range between 5.93% to 6.22%.
Municipal bonds were helped by increased seasonal demand due to heavy
reinvestment pressures from mid-year coupon and principal payments. Among
revenue bonds, the housing and hospital sectors earned the highest returns, and
the housing sector was the only revenue bond sector to post a positive return on
a calendar year-to-date basis.
In this period of rising interest rates, the Sit fixed income funds have
continued to benefit from our focus on securities that provide high income with
stability of principal value.
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
<S> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993
SIT BOND FUND ---- ---- ---- ---- ---- 0.34% (1)
SIT MINNESOTA TAX-FREE
INCOME FUND ---- ---- ---- ---- ---- 1.60 (1)
(NASDAQ Symbol: SMTFX)
SIT TAX-FREE INCOME FUND 2.19% (1) 8.38% 7.29% 9.25% 7.71% 10.42
(NASDAQ Symbol: SNTIX)
SIT U.S. GOV'T. SECURITIES FUND
(NASDAQ Symbol: SNGVX) 7.86 11.04 10.97 12.87 5.43 7.34
SIT MONEY MARKET FUND ---- ---- ---- ---- ---- 0.46 (1)
(NASDAQ Symbol: SNIXX)
LEHMAN AGGREGATE BOND INDEX 7.89 14.53 8.96 16.00 7.40 9.75/0.54 (1)
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 6.39/0.75 (1) 9.07 7.70 11.41 7.62 8.73
LEHMAN INTER. GOVERNMENT BOND INDEX 6.40 12.68 9.56 14.11 6.93 8.17
3-MONTH U.S. TREASURY BILL 7.10 8.73 8.04 5.72 3.56 3.13
SIT INVESTMENT RESERVE FUND 6.65 8.53 7.59 6.14 3.81 2.34 (5)
(Inception date 1/25/85. Converted to SIT Money Market Fund on 11/1/93.)
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
YTD YIELD AS OF DISTRIBUTION
1994 1995 1996 6/30/96 RATE (2)
-1.31% 16.83% -0.88% 6.41% 6.55%
0.63 11.90 1.24 5.77(3) 5.62
-0.63 12.86 1.01 5.66(4) 5.63
1.77 11.50 1.09 7.41 6.45
3.84 5.58 2.48 5.10(6)
-2.92 18.47 -1.21
-1.28 11.65 0.54
-1.75 14.41 -0.01
4.47 5.98 2.58
<TABLE>
<CAPTION>
TOTAL TOTAL
RETURN RETURN
QUARTER SIX MONTHS AVERAGE ANNUAL TOTAL RETURNS FOR
ENDED ENDED THE PERIODS ENDED JUNE 30, 1996
INCEPTION 6/30/96 6/30/96 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C> <C> <C> <C>
SIT BOND FUND 12/01/93 0.47% -0.88% 4.81% ---- ---- 5.46%
SIT MINNESOTA TAX-FREE INCOME FUND 12/01/93 1.22 1.24 6.29 ---- ---- 5.87
SIT TAX-FREE INCOME FUND 09/29/88 1.42 1.01 6.75 5.76% 7.22% 7.48
SIT U.S. GOV'T. SECURITIES FUND 06/02/87 0.66 1.09 6.13 5.55 7.17 8.31
SIT MONEY MARKET FUND 11/01/93 1.22 2.48 5.25 ---- ---- 4.66
LEHMAN AGGREGATE BOND INDEX 0.57 -1.21 5.02 5.27 8.26 5.30
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 0.53 0.54 5.05 4.69 6.79 7.17
LEHMAN INTER. GOVERNMENT BOND INDEX 0.67 -0.01 4.93 4.75 7.38 8.14
3-MONTH U.S. TREASURY BILL 1.29 2.58 5.42 4.82 4.44 5.05
</TABLE>
(1) Period from Fund inception through calendar year-end.
(2) Based on the last 12 monthly distributions of net investment income and
average NAV as of 6/30/96.
(3) For Minnesota residents in the 31%, 36% and 39.6% federal tax brackets,
the double exempt tax equivalent yields are 9.15%, 9.86% and 10.45%,
respectively (Assumes the maximum Minnesota tax bracket of 8.5%).
(4) For individuals in the 31%, 36%, and 39.6% federal tax brackets, the
federal tax equivalent yields are 8.20%, 8.84% and 9.37%, respectively
(Income subject to state tax, if any).
(5) Period January 1, 1993, through October 31, 1993, at which time the Fund
converted to the Sit Money Market Fund.
(6) Figure represents 7-day compound effective yield. The 7-day simple yield
as of 6/30/96 was 4.98%.
PLEASE REMEMBER THAT PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS AND
IS ONLY ONE OF THE FACTORS TO CONSIDER IN CHOOSING A FUND. AS WITH ALL
INVESTMENTS, THE SHARE PRICE AND RETURN MAY VARY AND YOU MAY HAVE A GAIN OR LOSS
AT THE TIME OF SALE.
SIT BOND FUND REVIEW
JUNE 30, 1996
[PHOTO]
MICHAEL C. BRILLEY
Senior Portfolio Manager
BRYCE A. DOTY, CFA
Portfolio Manager
The Sit Bond Fund provided investors a +0.47% total return for the three
months and a +4.81% return for the 12 months ended June 30, 1996. The Fund
ranked in the top third of the Lipper Intermediate Investment Grade Bond Fund
universe for its three month (out of 144 funds) and twelve month (out of 169
funds) returns.
The yield on the 10-year Treasury note rose by as much as +0.75% during
the quarter, but finished the period only +0.39% higher than its level on March
31, 1996. The Fund took advantage of fluctuations in interest rates during the
quarter to enhance returns. 10-year Treasury notes were purchased during the May
auction to lengthen the Fund's duration. These treasuries were subsequently sold
after their yields had declined by 0.20%, resulting in price appreciation of
1.47%. Toward the end of the quarter, as long-term Treasury yields moved below
7.0%, additional bonds were sold to further shorten the Fund's duration. The
Fund's duration is currently 4.6 years, slightly shorter than the 4.8 year
duration of the Lehman Aggregate Bond Index.
The Fund benefited from greater price stability and higher income returns
on its mortgage pass-through holdings. The Fund's asset-backed securities also
provided high income returns, but declined in price as a result of the rise in
interest rates for the quarter. The Fund's longest duration holdings are its
U.S. Treasury securities which provided the lowest returns due to their greater
price sensitivity to the rising interest rate trend.
The Fund's most significant sector shift was a reduction in mortgage
pass-throughs securities and increases in the asset-backed and CMO sectors. The
purchases in the asset-backed sector included two manufactured home loan
securities. The purchases in the CMO sector included two VA Vendee
mortgage-backed securities. The purchased securities are backed by loans
exhibiting stable prepayment characteristics similar to the mortgage-backed
securities that were sold. The newly purchased securities provide 0.25%-0.50%
additional yield and have longer expected average lives offering greater total
return potential.
While interest rates may not have peaked, we believe that the +1.14%
increase in yield since the beginning of the year for the 10-year U.S. Treasury
note reflects the majority of the rise in yield for the current interest rate
cycle. We will continue to invest in securities that offer attractive total
return potential while maintaining the high credit quality of the Fund's
investments.
INVESTMENT OBJECTIVE AND STRATEGY
The investment objective of the Fund is to maximize total return,
consistent with preservation of capital. The Fund's "total return" is a
combination of income, changes in principal value and reinvested dividends.
The Fund will pursue its objective by investing in a diversified portfolio
of fixed-income securities which include, but are not limited to, the following:
U.S. government securities; corporate debt securities; corporate commercial
paper; mortgage and other asset-backed securities.
PROTFOLIO SUMMARY
Net Asset Value 6/30/96: $9.71 Per Share
3/31/96: $9.83 Per Share
Total Net Assets: $5.31 Million
30-Day SEC Yield: 6.41%
12-Month Distribution Rate: 6.55%
Average Maturity: 16.6 Years
Effective Duration: 4.6 Years (1)
(1) Effective duration is a measure which reflects estimated price sensitivity
to a given change in interest rates. For example, for an interest rate change of
1.0%, a portfolio with a duration of 5 years would be expected to experience a
price change of 5%. Effective duration is based on current interest rates and
the Adviser's assumptions regarding the expected average life of individual
securities held in the portfolio.
[BAR CHART]
PORTFOLIO STRUCTURE
(% of total net assets)
Agency Mortgage 26.6
Pass-Through Securities
Asset-Back Securities 20.7
Collaterized Mortage 19.4
Obligations
Government & Agency 13.3
Corporate Bonds & Notes 9.5
Miscellaneous 5.2
Other Assets & Liabilities 5.3
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Lipper Inter. Lehman Lipper Inter. Lehman
Bond Investment Grade Aggregate Bond Investment Grade Aggregate
Fund Bond Fund Avg. Bond Index Fund Bond Fund Avg. Bond Index
<S> <C> <C> <C> <C> <C> <C>
3 Months 0.47% 0.37% 0.57% 0.47% 0.37% 0.57%
(unannualized)
1 Year 4.81 4.27 5.02 4.81 4.27 5.02
Inception 5.46 4.41 5.30 14.68 11.80 14.24
(12/1/93)
</TABLE>
* As of 6/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
LEHMAN 5-YEAR MUNICIPAL BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED
FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL
FUNDS.
[CHART]
GROWTH OF $10,000
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/96 would
have grown to $11,468 in the Fund or $11,424 in the Lehman Aggregate Bond Index
assuming reinvestment of all dividends and capital gains.
[CHART]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S OR S&P USED.
Agency Mortgage-Backed
Securities & CMO's 43.2%
Other Assets
& Liabilities 5.3%
A 5.2%
AA 11.4%
AAA 12.0%
BBB 9.6%
Government &
Agency 13.3%
SIT MINNESOTA TAX-FREE INCOME FUND REVIEW
JUNE 30, 1996
[PHOTO]
MICHAEL C. BRILLEY
Senior Portfolio Manager
DEBRA A. SIT, CFA
Portfolio Manager
Despite the increase in taxable bond yields, municipal bond yields
remained in a narrow range during the quarter. The Sit Minnesota Tax-Free Income
Fund provided shareholders with a total return of +1.22% for the three months
and +6.29% for the 12 months ended June 30, 1996. The Fund's quarterly
performance ranked #5 of 47 Minnesota municipal funds tracked by Lipper
Analytical Services, while its 12-month return ranked #6 of 46 of funds in its
category. In addition, the Fund remains ranked #1 out of 28 funds in the period
since its inception, providing an annual incremental return of +2.25% versus the
Lipper Minnesota fund average. The Fund's quarterly return was primarily derived
from income. The Fund's 30-day SEC yield increased slightly from 5.72% on March
31, 1996 to 5.77% on June 30, 1996, while its 12-month distribution rate of
5.62% reflected little change over the quarter. The Fund's performance benefited
not only from its emphasis on housing and health care, which were the best
performing sectors of the Lehman Revenue Bond Index, but also from security
selection, particularly among industrial revenue issues.
Portfolio structure remained relatively stable during the quarter. The
most significant industry sector shifts included a decrease in single family
housing bonds from 23.4% to 19.2% as issues with short refunding call dates were
sold. Proceeds were reinvested in multifamily housing bonds which increased from
36.1% to 38.4%. In addition, the Fund's weighting in industrial revenue bonds
decreased from 13.8% to 11.1%. These shifts reflect the Fund's continued desire
to seek greater call protection in its reinvestments.
In the portfolio summary section we provide the Fund's estimated average
life duration which is computed using estimates of the expected redemptions of
the securities held by the Fund. Duration is an estimate of the portfolio's
price sensitivity to changes in interest rates. We believe that this traditional
method of computing duration overstates the portfolio's actual price sensitivity
to interest rate changes under certain conditions. Beginning with this report,
we will also provide the portfolio's implied duration which is based on the
historical price sensitivity of individual securities held by the Fund. We
believe that the implied duration provides a more accurate estimate of the
Fund's price sensitivity while interest rates are within their recent historical
ranges.
We continue to expect slower economic growth in the second half of
calendar 1996 with contained inflation and believe there is significant
probability of tighter monetary policy in the months ahead. In addition, we hope
to continue to take advantage of supply and demand imbalances in the municipal
market to reduce lower-yielding holdings and increase call protection.
INVESTMENT OBJECTIVE AND STRATEGY
The investment objective of the Fund is to provide a high level of current
income exempt from federal regular income tax and Minnesota regular personal
income tax as is consistent with the preservation of capital.
The Fund will endeavor to invest 100% of its assets in municipal
securities, the income from which is exempt from federal regular income tax and
Minnesota regular personal income tax. The Fund anticipates that substantially
all of its distributions to its shareholders will be exempt as such. For
investors subject to the alternative minimum tax ("AMT"), up to 20% of the
Fund's income may be treated as an item of tax preference that is included in
the alternative minimum taxable income.
PORTFOLIO SUMMARY
Net Asset Value 6/30/96: $10.07 Per Share
3/31/96: $10.09 Per Share
Total Net Assets: $63.61 Million
30-Day SEC Yield: 5.77%
Tax Equivalent Yield: 10.45% (1)
12-Month Distribution Rate: 5.62%
Average Maturity: 18.9 Years
Duration to Estimated Avg. Life: 7.1 Years (2)
Implied Duration: 3.6 Years (2)
(1) For individuals in the 39.6% Federal and 8.5% MN tax brackets.
(2) See page 9.
PORTFOLIO STRUCTURE
(% of total net assets)
Multifamily Mortgage Revenue 38.4
Single Family Mortgage Revenue 19.2
Hospital/Health Care Revenue 17.5
Industrial Revenue/ 11.1
Pollution Control
Other Revenue Bonds 9.1
General Obligation 1.0
Municipal Lease Rental 1.0
Other Assets & Liabilities 2.7
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
MN Tax-Free Lipper Lehman MN Tax-Free Lipper Lehman
Income MN Muni. 5-Year Muni. Income MN Muni. 5- Year Muni.
Fund Bond Fund Avg. Bond Index Fund Bond Fund Avg. Bond Index
<C> <C> <C> <C> <C> <C> <C>
3 Months 1.22% 0.76% 0.53% 1.22% 0.76% 0.53%
(unannualized)
1 Year 6.29 5.20 5.05 6.29 5.20 5.05
Inception 5.87 3.62 4.65 15.83 9.62 12.43
(12/1/93)
</TABLE>
* As of 6/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
LEHMAN AGGREGATE BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM
LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
(2) Duration is a measure which reflects estimated price sensitivity to a given
change in interest rates. For example, for an interest rate change of 1%, a
portfolio with a duration of 5 years would be expected to experience a price
change of 5%. Estimated average life duration is based on current interest rates
and the Adviser's assumptions regarding the expected average life of individual
securities held in the portfolio. Implied duration is calculated based on
historical price changes of securities held by the Fund. The Adviser believes
that the portfolio's implied duration is a more accurate estimate of price
sensitivity provided interest rates remain within their historical range. If
interest rates exceed the historical range, the estimated average life duration
may be a more accurate estimate of price sensitivity.
[CHART]
GROWTH OF $10,000
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/96 would
have grown to $11,583 in the Fund or $11,243 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
[CHART]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
AAA 22.1%
AA 20.3%
A 9.5%
BBB 6.0%
NOT RATED 39.4%
OTHER ASSETS
& LIABILITIES 2.7%
ADIVSER'S ASSESSMENT OF
NOT-RATED SECURITIES
AA 1.0%
A 1.7
BBB 27.9
BB 7.1
B 1.7
TOTAL 39.4%
SIT TAX-FREE INCOME FUND REVIEW
JUNE 30, 1996
[PHOTO]
MICHAEL C. BRILLEY
Senior Portfolio Manager
DEBRA A. SIT, CFA
Portfolio Manager
Despite the increase in taxable bond yields, municipal bond yields
remained in a narrow range during the quarter. The Sit Tax-Free Income Fund
provided shareholders with a total return of +1.42% for the three months and
+6.75% for the 12 months ended June 30, 1996. The Fund's quarterly performance
ranked #2 of 241 general municipal funds tracked by Lipper Analytical Services,
while its 12-month return ranked among the top 15% of 229 funds in its category.
The Fund's quarterly return was primarily derived from income, as its $9.88 per
share net asset value was unchanged from March 31, 1996 and varied by less than
1.3% during the quarter. The Fund's 30-day SEC yield decreased slightly from
5.71% on March 31, 1996 to 5.66% on June 30, 1996, while its 12-month
distribution rate of 5.63% reflected little change over the quarter. The Fund's
performance benefited not only from its emphasis on housing and health care,
which were the best performing sectors of the Lehman Revenue Bond Index, but
also from security selection, particularly among hospital and industrial revenue
issues.
Portfolio structure remained relatively stable during the quarter.
However, the Fund has continued to seek greater call protection in its
reinvestments. This is reflected in the Fund's purchases of local agency issued
multifamily bonds and its increased weighting from 24.2% to 27.9%. Other shifts
included decreases in single family housing from 17.3% to 16.5% and in
industrial revenue bonds from 9.8% to 6.8%.
In the portfolio summary section we provide the Fund's estimated average
life duration which is computed using estimates of the expected redemptions of
the securities held by the Fund. Duration is an estimate of the portfolio's
price sensitivity to changes in interest rates. We believe that this traditional
method of computing duration overstates the portfolio's actual price sensitivity
to interest rate changes under certain conditions. Beginning with this report,
we will also provide the portfolio's implied duration which is based on the
historical price sensitivity of individual securities held by the Fund. We
believe that the implied duration provides a more accurate estimate of the
Fund's price sensitivity while interest rates are within their recent historical
ranges.
We continue to expect slower economic growth in the second half of
calendar 1996 with contained inflation, and believe there is significant
probability of tighter monetary policy in the months ahead. In addition, we hope
to continue to take advantage of supply and demand imbalances in the municipal
market to reduce lower-yielding holdings and increase call protection.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Fund is to provide a high level of current income
that is exempt from federal income tax, consistent with the preservation of
capital, by investing in investment-grade municipal securities.
Such municipal securities generate interest that is exempt from regular
federal income taxes. Of the municipal securities in which the Fund invests,
100% will be rated investment grade at time of purchase.
PORTFOLIO SUMMARY
Net Asset Value 6/30/96: $9.88 Per Share
3/31/96: $9.88 Per Share
Total Net Assets: $275.40 Million
30-Day SEC Yield: 5.66%
12-Month Distribution Rate: 5.63%
Tax Equivalent Yield: 9.37% (1)
Average Maturity: 16.1 Years
Duration to Estimated Avg. Life: 6.1 Years (2)
Implied Duration: 3.8 Years (2)
[CHART]
PORTFOLIO STRUCTURE
(% of total net assets)
Multifamily Mortgage Revenue 27.9
Hospital/Health Care Revenue 23.5
Single Family Mortgage Revenue 16.5
Industrial Revenue/Pollution Control 6.8
Other Revenue 5.6
Transportation 4.8
Public Facilities 3.0
Municipal Lease Rental 2.3
Escrowed to Maturity/Pre-Refund 1.7
Sales Tax Revenue 1.1
Education/Student Loan 0.9
Utilities 0.6
Other Assets & Liabilities 5.3
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
Lipper Lehman Lipper Lehman
Tax-Free General Muni. 5-Year Muni. Tax-Free General Muni. 5-Year Muni.
Income Fund Bond Fund Avg. Bond Index Income Fund Bond Fund Avg. Bond Index
<C> <C> <C> <C> <C> <C> <C>
3 Months 1.42% 0.52% 0.53% 1.42% 0.52% 0.53%
(unannualized)
1 Year 6.75 5.67 5.05 6.75 5.67 5.05
3 Years 5.76 4.13 4.69 18.30 12.91 14.73
5 Years 7.22 7.34 6.79 41.72 42.53 38.86
Inception 7.48 7.66 7.17 74.91 77.27 70.98
(9/29/88)
</TABLE>
* As of 6/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
LEHMAN 5-YEAR MUNICIPAL BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED
FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL
FUNDS.
(2) Duration is a measure which reflects estimated price sensitivity to a given
change in interest rates. For example, for an interest rate change of 1%, a
portfolio with a duration of 5 years would be expected to experience a price
change of 5%. Estimated average life duration is based on current interest rates
and the Adviser's assumptions regarding the expected average life of individual
securities held in the portfolio. Implied duration is calculated based on
historical price changes of securities held by the Fund. The Adviser believes
that the portfolio's implied duration is a more accurate estimate of price
sensitivity provided interest rates remain within their historical range. If
interest rates exceed the historical range, the estimated average life duration
may be a more accurate estimate of price sensitivity.
[CHART]
GROWTH OF $10,000
The sum of $10,000 invested at inception (9/29/88) and held until 6/30/96 would
have grown to $17,491 in the Fund or $17,098 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
[CHART]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
AAA 8.6%
AA 8.8%
A 35.0%
BBB 41.8%
BB 0.5%
Other Assets
& Liabilities 5.3%
Total number of holdings: 204
SIT U.S. GOVERNMENT SECURITIES FUND REVIEW
JUNE 30, 1996
[PHOTO]
MICHAEL C. BRILLEY
Senior Portfolio Manager
BRYCE A. DOTY, CFA
Portfolio Manager
The Sit U.S. Government Securities Fund provided investors a +0.66% total
return for three months and a +6.13% return for the 12 months ended June 30,
1996. The Fund ranked #6 out of 178 funds within the Lipper U.S. Government Bond
Fund universe for the past quarter and ranked #3 out of 169 funds for its 12
month return. Also, Morningstar, a nationally recognized firm which evaluates
mutual funds, recently reviewed 198 government bond funds. They ranked the Fund
#1 for having the lowest risk and ranked the Fund #4 for its risk and return
characteristics for the five years ended March 31, 1996.
The Fund has continued to focus on securities that provide a high level of
income and relative price stability. The yield on the 3-year U.S. Treasury note
rose +0.39% over the past quarter. The increase in bond yields resulted in lower
prices for most fixed income securities. The Fund's holdings in seasoned, high
coupon mortgage pass-through securities provided substantially higher income
returns than other market sectors in which the Fund invests, but with comparable
price performance to that of the Lehman Intermediate Government Bond Index. The
Fund's holdings of U.S. Treasury securities provided the lowest returns, as
those positions have relatively longer durations and, therefore, experienced
greater market depreciation resulting from the rise in interest rates.
While interest rates may not have peaked, we believe that the +1.06%
increase in yield since the beginning of the year for the 3-year U.S. Treasury
note reflects the majority of the rise in yield for the current interest rate
cycle. We will continue to invest in securities that help protect our investors'
principal and that also provide a high level of interest income.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Fund is to provide high current income and safety of
principal. The Fund invests solely in securities issued, guaranteed or insured
by the U.S. government or its agencies or its instrumentalities.
Agency mortgage securities and U.S. Treasury securities will be the
principal holdings in the Fund. The mortgage securities that the Fund will
purchase consist of pass-through securities (Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA), and Federal
Home Loan Mortgage Corporation (FHLMC)).
PORTFOLIO SUMMARY
Net Asset Value 6/30/96: $10.38 Per Share
3/31/96: $10.47 Per Share
Total Net Assets: $50.88 Million
30-Day SEC Yield: 7.41%
12-Month Distribution Rate: 6.45%
Average Maturity: 13.7 Years
Effective Duration: 2.8 Years (1)
(1) Effective duration is a measure which reflects estimated price sensitivity
to a given change in interest rates. For example, for an interest rate change of
1.0%, a portfolio with a duration of 5 years would be expected to experience a
price change of 5%. Effective duration is based on current interest rates and
the Adviser's assumptions regarding the expected average life of individual
securities held in the portfolio.
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
GNMA Pass-Through Securities 65.4
U.S. Treasury Bonds 12.8
Collateralized Mortgage Obligations 10.4
FHLMC Pass-Through Securities 4.8
FNMA Pass-Through Securities 3.4
Other Assets & Liabilities 3.2
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
U.S. Gov't. Lipper U.S. Gov't. Lehman Inter. U.S. Gov't. Lipper U.S. Gov't. Lehman Inter.
Securities Fund Fund Average Gov't. Bond Index Securities Fund Fund Average Gov't. Bond Index
<C> <C> <C> <C> <C> <C> <C>
3 Months 0.66% 0.05% 0.67% 0.66% 0.05% 0.67%
(unannualized)
1 Year 6.13 3.48 4.93 6.13 3.48 4.93
3 Years 5.55 3.74 4.75 17.58 11.64 14.94
5 Years 7.17 7.15 7.38 41.40 41.23 42.75
Inception 8.31 7.56 8.14 106.51 93.90 103.57
(6/2/87)
</TABLE>
* As of 6/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE
OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF
MUTUAL FUNDS.
[CHART]
GROWTH OF $10,000
The sum of $10,000 invested at inception (6/2/87) and held until 6/30/96 would
have grown to $20,651 in the Fund or $20,357 in the Lehman Intermediate
Government Bond Index assuming reinvestment of all dividends and capital gains.
[BAR CHART]
ESTIMATED AVERAGE LIFE PROFILE
The Adviser's estimates of the dollar weighted average life of the portfolio's
securities, which may vary from their stated maturities.
Years
0-1 3.2%
1-5 88.0%
5-10 8.8%
10-20 0.0%
SIT MONEY MARKET FUND REVIEW
JUNE 30, 1996
[PHOTO]
MICHAEL C. BRILLEY
Senior Portfolio Manager
PAUL J. JUNGQUIST
Portfolio Manager
The Sit Money Market Fund provided investors with a +1.22% return for the
second quarter of 1996 compared to a +1.15% average return for the Lipper
Analytical Services, Inc. Money Market Fund universe. The Fund's performance
ranked 46th of 291 funds in its Lipper peer group category. As of June 30, 1996,
the Fund's 7-day compound yield was 5.10% and its average maturity was 39 days,
compared to 4.93% and 36 days, respectively, at March 31, 1996.
The Federal Reserve Board made no changes to short-term interest rates
during the second quarter. Three-month Treasury bill yields ended the quarter
relatively unchanged at 5.15% after dropping below 5.0% in mid-April due to the
influx of income tax receipts. Economic growth appears to be accelerating in the
second and third quarters of 1996, as consumer income growth and spending has
been strong. In addition, employment gains have been strong throughout the first
half of 1996, raising concerns about wage inflation. Given this data, most
market analysts now expect the Fed to increase the federal funds rate by 25 to
50 basis points during the third quarter. Accordingly, the Fund will shorten its
average maturity closer to 35 days during the third quarter in anticipation of a
hike in interest rates by the Fed, thereby positioning itself to take advantage
of the anticipated increase in yields.
The improving strength in the economy should be a positive influence on
the short-term creditworthiness of top tier commercial paper issuers. We
continue to be concerned about the relatively high levels of consumer debt,
however, and will continue to monitor our eligible consumer finance credits
closely. The Fund continues to diversify its core holdings and its industry
exposure. In the months ahead, we plan to add Tier I credits in the technology
and consumer non-durable industries.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Fund is to achieve maximum current income to the
extent consistent with the preservation of capital and maintenance of liquidity.
The Fund pursues this objective by investing in a diversified portfolio of high
quality short-term debt instruments. The Fund seeks to maintain a stable net
asset value of $1.00 per share. However, there is no assurance of a constant
share price.
An investment in the Fund is neither insured nor guaranteed by the U.S.
government and there can be no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share.
PORTFOLIO SUMMARY
Net Asset Value 6/30/96: $1.00 Per Share
3/31/96: $1.00 Per Share
Total Net Assets: $22.30 Million
PORTFOLIO STRUCTURE
(% of total net assets)
Utilities 18.0
Consumer Loan Finance 17.1
Diversified Finance 15.2
CaptIve Equipment Finance 12.4
Captive Auto Finance 10.4
Insurance 9.9
Retail 4.9
U.S. Government 4.5
Consumer Non-Durables 4.4
Captive Oil Finance 2.8
Technology/Business Equipment 2.0
Other Assets & Liabilities -1.6
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR CUMULATIVE TOTAL RETURNS*
Money Lipper Money U.S. Treasury Money Lipper Money U.S. Treasury
Market Fund Market Avg. Bill (3-Month) Market Fund Market Avg. Bill (3-Month)
<C> <C> <C> <C> <C> <C> <C>
3 Months 1.22% 1.15% 1.27% 1.22% 1.15% 1.29%
(unannualized)
1 Year 5.25 5.02 5.42 5.25 5.02 5.42
Inception 4.66 4.45 5.05 12.87 12.31 14.00
(11/1/93)
</TABLE>
* As of 6/30/96
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED
WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF
FUTURE PERFORMANCE. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN
THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE
U.S. TREASURY BILL. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER
ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
[CHART]
GROWTH OF $10,000
The sum of $10,000 invested at inception (11/1/93) and held until 6/30/96 would
have grown to $11,287 in the Fund or $11,400 in the 3-Month U.S. Treasury Bill
Index assuming reinvestment of all dividends and capital gains.
[CHART]
QUALITY RATINGS
(% of total net assets)
AS RATED BY MOODY'S, S&P AND FITCH
First Tier Securities 100%
Second Tier Securities 0%
[LOGO]
Directors:
Eugene C. Sit, CFA
Peter L. Mitchelson, CFA
Michael C. Brilley
John E. Hulse
Sidney L. Jones
Donald W. Phillips
William E. Frenzel
Director Emeritus:
Melvin C. Bahle
Officers:
Eugene C. Sit, CFA Chairman
Peter L. Mitchelson, CFA Vice Chairman
Michael C. Brilley Senior Vice President
Mary K. Stern President
Debra A. Sit, CFA Vice President - Investments,
Assistant Treasurer
Paul E. Rasmussen Vice President & Treasurer
Michael P. Eckert Vice President - Group Manager
Michael J. Radmer Secretary
Parnell M. Kingsley Assistant Secretary
Carla J. Rose Assistant Secretary
QUARTERLY REPORT
BOND FUNDS
June 30, 1996
INVESTMENT ADVISER
Sit Investment Associates, Inc.
4600 Norwest Center
Minneapolis, MN 55402
612-334-5888 (Metro Area)
800-332-5580
DISTRIBUTOR
SIA Securities Corp.
4600 Norwest Center
Minneapolis, MN 55402
612-334-5888 (Metro Area)
800-332-5580
CUSTODIAN
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
TRANSFER AGENT AND
DISBURSING AGENT
First Data Investor Services
P.O. Box 9763
Providence, RI 02940-9763
AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
MEMBER OF
100%
NO-LOAD
MUTUAL FUND
COUNCIL
