[Logo] SIT
Mutual Fund Group
QUARTERLY REPORT
BOND FUNDS
December 31, 1995
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
SIT MUTUAL FUND GROUP
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
The SIT Mutual Fund Group 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.
The SIT Mutual Fund Group 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
* Electronic transfer of funds for purchases and redemptions
* Free check-writing privileges on bond funds
* Retirement accounts including IRAs, Keoghs and 401(k) Plans
SIT FAMILY OF FUNDS
Graph showing: PRINCIPAL STABILITY & CURRENT INCOME AND GROWTH POTENTIAL
STABILITY:
SAFETY OF PRINCIPAL
AND CURRENT INCOME
MONEY MARKET
INCOME:
INCREASED INCOME
U.S. GOVERNMENT SECURITIES
TAX-FREE INCOME
MINNESOTA TAX-FREE INCOME
BOND
GROWTH & INCOME:
LONG-TERM CAPITAL
APPRECIATION AND INCOME
BALANCED
GROWTH & INCOME
GROWTH:
LONG-TERM CAPITAL
APPRECIATION
GROWTH
INTERNATIONAL GROWTH
SMALL CAP GROWTH
DEVELOPING MARKETS GROWTH
SIT MUTUAL FUND GROUP
CHAIRMAN'S LETTER - DECEMBER 31, 1995
Dear Fellow Shareholders:
Domestic financial assets showed positive returns during the fourth quarter
ended December 31, 1995, as interest rates moved lower in response to an
anticipated resolution to the continuing budget debate in Washington, further
signs of economic deceleration, reasonably contained inflation, and a healthy
foreign appetite for U.S. Treasury securities.
ECONOMIC REVIEW
Domestic economic growth moderated during the fourth quarter of 1995,
although the exact magnitude of growth remains unclear at the present time. The
temporary federal government shutdown, combined with the Commerce Department's
conversion to a new chain-linked methodology for calculating GDP, created an
economic data vacuum heading into the new year. The latest official reading on
the economy indicated that real GDP grew at a +3.2% annual rate during the third
quarter under the revised method versus +4.2% when calculated using the old
method. The new chain-linked calculation will more accurately reflect yearly
price fluctuations of goods than the older, fixed-weight method. During the
third quarter, inventory buildup was curtailed, but consumer spending ticked
downward slightly to a +2.9% annual rate.
Much of the available fourth quarter data suggests economic deceleration,
although initial signals are fairly mixed. Personal income grew steadily through
November, but personal consumption expenditures were relatively modest. Weak
holiday retail sales, flat payroll employment growth, and decreases in consumer
sentiment and leading economic indicators reassured fixed income markets and
sent the 30-year Treasury bond yield to a low of 5.95% at year end. We estimate
that economic growth for calendar 1996 will approximate +2.0%. The U.S. dollar
is likely to continue on its path of gradual strength, but will likely remain
within its recent trading range and not be damaging to the favorable export
prospects for U.S. companies.
In Washington, Republicans and Democrats continue to debate the best means
for balancing the budget. Both sides have now agreed to a seven-year timeframe
and to the more conservative CBO scoring method that previously had been major
stumbling blocks. The President has even voiced his willingness to include a
capital gains tax reduction in the final package. The divisive issues yet to be
resolved include future reductions in Medicare and Medicaid spending growth and
additional tax reductions. Given the duration of the stalemate and the political
toll that has been paid by the conservatives, a compromise is likely before
March. However, Republicans are likely to resume the entitlement spending debate
during the upcoming election. Fiscal policy in 1996 will be moderately
restrictive based on the lack of a tax cut and decreased federal outlays
resulting from the federal shutdown. In the first three months of the fiscal
year, the federal deficit is $17 billion less than last year.
Inflation remained in check during the fourth quarter, a positive factor
for fixed income markets as the CPI closed out the year recording a modest
annual increase of +2.5%. We are monitoring rising price patterns in grain
commodities which appear to have been driven by extreme weather conditions. The
PPI for crude materials, which includes energy, has also risen slightly, but has
not induced broad price pressures. We believe that consumer inflation, as
measured by the year-over-year change in the CPI, should approximate +2.5% for
1996.
STRATEGY SUMMARY
Contained inflation and concerns over the progress of the economy prompted
the Federal Reserve to once again lower the federal funds rate by an additional
25 basis points to 5.25% at its meeting on January 31st. We believe short-term
rates are still relatively restrictive and anticipate that the Fed could reduce
rates even further during the first half of 1996.
Within this moderate growth/moderate inflation environment, we expect
long-term bond yields to remain within a narrower range than in the past two
years. Our longer range forecast is for somewhat higher long-term interest rates
compared to current levels. Thus, we expect the seasoned premium mortgage
holdings in our taxable bond funds will outperform the corporate sector. While
taxable portfolio durations are currently slightly longer than their respective
benchmarks, we anticipate a more defensive positioning as interest rates trend
lower and the yield curve steepens.
Tax-exempt bond yields followed taxable bond yields to lower levels at the
end of 1995, although concerns over tax reform have caused longer maturity
municipals to remain cheaply valued relative to comparable maturity Treasuries.
We continue to believe that intermediate-to-long maturity municipal bonds are
very attractive and that the risks of potential tax reform are reflected in
their relative valuations. We remain focused on securities that provide high
yield as well as stability of principal, such as those in the housing sector,
and believe that these securities will perform particularly well in the
relatively narrow interest rate range environment we anticipate.
We appreciate your continued interest and support as shareholders in the
SIT Mutual Fund Group.
With best wishes,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
SIT MUTUAL FUND GROUP
DECEMBER 31, 1995 PERFORMANCE SUMMARY - BOND FUNDS
BOND MARKET REVIEW
Following its first move in July, the Federal Reserve eased monetary policy
further by reducing the federal funds rate an additional 25 basis points to
5.50% on December 19th. This action was based on indications of a weakening
consumer sector and a continued positive outlook for inflation. Long bond yields
continued to move lower during the quarter in anticipation of a budget
compromise that has yet to be reached. The yield on the 30-year Treasury bond
declined 56 basis points from 6.51% at the beginning of the quarter to a low of
5.95% on December 31, 1995. This compares to 7.88% at the beginning of the year
and a previous low of 5.79% in October 1993. The U.S. bond market recorded one
of its best years in 1995, following its worst in 1994. This year's bond rally,
as well as the flattening yield curve, helped the longer duration government and
corporate sectors outperform while the mortgage sector lagged, particularly on a
price return basis.
Municipal bonds also provided strong positive returns for both the quarter
and the year. Yields continued to follow taxable bond yields lower as reflected
in the yield on the Bond Buyer 40-Bond Revenue Index which declined to 5.56% on
December 31, 1995 from 6.07% on September 30 and from 6.92% one year ago. Among
municipal revenue bonds, the hospital and water and sewer sectors posted the
best results, reflecting their longer maturities, while the shorter maturity
housing sector lagged slightly. Overall, the municipal market significantly
underperformed taxable bonds due to lingering concerns over tax reform that
first arose in late spring. Municipals remain cheaply valued with long maturity
revenue bonds yielding approximately 94% of comparable maturity Treasury
securities at year end.
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
1988 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C>
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.)
<TABLE>
<CAPTION>
YIELD AS OF DISTRIBUTION
1994 1995 12/31/95 RATE (2)
<S> <C> <C> <C> <C>
SIT BOND FUND -1.31% 16.83% 6.15% 6.41%
SIT MINNESOTA TAX-FREE
INCOME FUND 0.63 11.90 5.52 (3) 5.64
(NASDAQ Symbol: SMTFX)
SIT TAX-FREE INCOME FUND -0.63 12.86 5.52 (4) 5.66
(NASDAQ Symbol: SNTIX)
SIT U.S. GOV'T. SECURITIES FUND
(NASDAQ Symbol: SNGVX) 1.77 11.50 6.49 6.78
SIT MONEY MARKET FUND 3.84 5.58 5.44 (6)
(NASDAQ Symbol: SNIXX)
Lehman Aggregate Bond Index -2.92 18.47
Lehman 5-Year Municipal Bond Index -1.28 11.65
Lehman Inter. Government Bond Index -1.75 14.41
3-Month U.S. Treasury Bill 4.47 5.98
SIT Investment Reserve Fund
(Inception date 1/25/85. Converted to SIT Money Market Fund on 11/1/93.)
</TABLE>
<TABLE>
<CAPTION>
TOTAL
TOTAL RETURN
RETURN SIX
QUARTER MONTHS AVERAGE ANNUAL TOTAL RETURNS FOR
ENDED ENDED THE PERIODS ENDED DECEMBER 31, 1995
INCEPTION 12/31/95 12/31/95 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C> <C>
SIT BOND FUND 12/01/93 3.88% 5.73% 16.83% ---- ---- 7.25%
SIT MINNESOTA TAX-FREE INCOME FUND 12/01/93 3.13 4.99 11.90 ---- ---- 6.68
SIT TAX-FREE INCOME FUND 09/29/88 3.36 5.68 12.86 7.39% 7.82% 7.86
SIT U.S. GOV'T. SECURITIES FUND 06/02/87 2.95 4.99 11.50 6.79 7.70 8.68
SIT MONEY MARKET FUND 11/01/93 1.33 2.70 5.58 ---- ---- 4.56
Lehman Aggregate Bond Index 4.26 6.31 18.47 8.07 9.48 7.22
Lehman 5-Year Municipal Bond Index 2.05 4.49 11.65 6.22 7.52 7.59
Lehman Inter. Government Bond Index 3.34 4.94 14.41 6.74 8.21 8.63
3-Month U.S. Treasury Bill 1.36 2.77 5.82 4.47 4.53 4.99
</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 12/31/95.
(3) For Minnesota residents in the 31%, 36% and 39.6% federal tax brackets,
the double exempt tax equivalent yields are 8.74%, 9.43% and 9.99%,
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 8.00%, 8.63% and 9.14%, 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 12/31/95 was 5.30%.
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
DECEMBER 31, 1995
Michael C. Brilley
Senior Portfolio Manager
Bryce A. Doty, CFA
Portfolio Manager
The SIT Bond Fund provided investors a +3.88% return for the fourth quarter
of 1995 and a +16.83% return for the year. As of December 31, 1995, the Fund's
30-day SEC yield was 6.15% and the Fund's 12-month distribution rate was 6.41%.
The yield on the 5-Year U.S. Treasury Note dropped by approximately 0.6%
over the past quarter and by about 2.5% versus the level a year ago. This
provided a significant increase in price for intermediate maturity U.S. Treasury
Notes which was more than the price appreciation of the Fund's mortgage-backed
securities. This is not surprising since the Fund's mortgage-backed holdings are
high coupon, seasoned securities which provide a high level of income and price
stability. The decrease in yields did, however, provide a significant increase
in prices for the Fund's longer maturity CMO, Asset-Backed, and Treasury
holdings for the fourth quarter of 1995 as well as for the year.
During the past quarter, the Fund repositioned its Treasury holdings to
make cash available for securities earning a higher level of interest income.
The Fund's Treasury holdings now include longer maturity zero coupon bonds that
provide more duration than coupon bonds. As a result, the Fund has been able to
maintain its overall duration(1) while allocating a larger portion of the Fund's
assets to corporate and mortgage-backed securities. Consequently, over the past
quarter, the Fund's Treasury holdings have been reduced from 30% of the
portfolio to 23%.
For 1996, we expect interest rates to remain in a much narrower range than
the previous two years, which were among the most volatile in the history of the
bond market. As a result, we intend to maintain the Fund's duration near that of
its benchmark, the Lehman Aggregate Bond Index, and continue to maintain the
overall high quality of the Fund while investing in securities that offer
attractive total returns.
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.
PORTFOLIO SUMMARY
Net Asset Value 12/31/95: $10.14 Per Share
9/30/95: $ 9.91 Per Share
Total Net Assets: $5.29 Million
30-Day SEC Yield: 6.15%
Average Maturity: 15.94 Years
Modified Adjusted Duration: 4.99 Years (1)
(1) 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%. Duration is based on the Adviser's assumptions regarding future
changes in interest rates and the expected average life of individual securities
held in the portfolio.
[Bar Chart]
PORTFOLIO STRUCTURE
(% of total net assets)
Agency Mortgage
Pass-Through Securities 39.1
Government & Agency 22.9
Collateralized Mortgage
Obligations 15.1
Asset-Backed Securities 10.2
Corporate Bonds & Notes 7.4
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
<C> <C> <C> <C> <C> <C> <C>
3 Months 3.88% 3.99% 4.26% 3.88% 3.99% 4.26%
(unannualized)
1 Year 16.83 16.62 18.47 16.83 16.62 18.47
Inception 7.25 6.20 7.22 15.69 13.37 15.64
(12/1/93)
</TABLE>
* As of 12/31/95
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.
[Chart]
GROWTH OF $10,000
The sum of $10,000 invested at inception (12/1/93) and held until 12/31/95 would
have grown to $11,569 in the Fund or $11,564 in the Lehman Aggregate Bond Index
assuming reinvestment of all dividends and capital gains.
[Pie Chart]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S OR S&P USED.
Agency Mortgage-Backed Securities & CMO's 54.2%
Government & Agency 22.9%
BBB 3.6%
AAA 6.4%
AA 3.7%
A 3.9%
Other Assets & Liabilities 5.3%
SIT MINNESOTA TAX-FREE INCOME FUND REVIEW
DECEMBER 31, 1995
Michael C. Brilley
Senior Portfolio Manager
Debra A. Sit, CFA
Portfolio Manager
The SIT Minnesota Tax-Free Income Fund provided shareholders a total return
of +3.13% for the quarter and +11.90% for the year ended December 31, 1995. This
compares favorably with total returns of +2.05% and +11.65%, respectively, for
the Lehman 5-Year Municipal Bond Index. The Fund's net asset value per share
rose 0.17 cents to $10.23 at quarter end, and this compares to $9.67 at the
beginning of the year. The Fund ranks 2nd highest in total return among the 29
Minnesota funds in the Lipper Minnesota fund universe since inception of the
Fund despite its lagging price performance in 1995.
Municipal bond yields continued to follow U.S. Treasury yields lower as the
yield of the Bond Buyer 40-Bond Revenue Index declined to 5.56% from 6.07%
during the quarter and from 6.92% on December 31, 1994. Likewise, the Fund's
30-day SEC yield decreased to 5.52% from 5.66% during the quarter and from 6.23%
one year ago. Distributions per share totaled 14.3 cents during the quarter
which compares with 14.0 cents in the prior quarter, and have totaled 56.4 cents
over the last twelve months. The Fund's 12-month distribution rate, which has
remained relatively stable during this year, was 5.64% on December 31, 1995,
down slightly from 5.73% on September 30 but up slightly from 5.57% on December
31, 1994.
Fund assets grew to $62.15 million from $52.33 million at the beginning of
the quarter and from $37.47 million one year ago. As Fund assets have continued
to grow, we have kept the portfolio structure relatively unchanged. The most
significant industry sector shifts during the quarter included an increase in
multifamily housing from 30.7% to 32.1% and decreases in single family housing
from 25.3% to 23.9% and in health care from 19.3% to 18.2%. The Fund's emphasis
in housing bonds, whose shorter effective maturities caused it to outperform
other industry sectors in 1994, contributed to its relative underperformance in
1995. Holdings rated A or better by the major ratings services decreased from
56.1% to 51.4%, primarily reflecting a decrease in A-rated holdings and an
increase in cash to 5.3%. The portfolio continues to hold approximately 36% of
its holdings in non-rated securities.
Yielding 94% of comparable maturity Treasury securities, we believe that
long municipal revenue bonds continue to be attractively valued from a
historical basis. We expect that the Fund's emphasis on income will be rewarded
as moderate economic growth and contained inflation help keep interest rates in
a narrower range than the environment experienced in the last two years.
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 12/31/95: $10.23 Per Share
9/30/95: $10.06 Per Share
Total Net Assets: $62.15 Million
30-Day SEC Yield: 5.52%
Tax Equivalent Yield: 9.99% (1)
Average Maturity: 20.08 Years
Duration to Estimated Avg. Life: 6.61 Years (2)
(1) For individuals in the 39.6% Federal and 8.5% MN tax brackets.
(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 1.0%, a
portfolio with a duration of 5 years would be expected to experience a price
change of 5%. Duration is based on the Adviser's assumptions regarding future
changes in interest rates and the expected average life of individual securities
held in the portfolio.
[Bar Chart]
PORTFOLIO STRUCTURE
(% of total net assets)
Multifamily Mortgage Revenue 32.1
Single Family Mortgage Revenue 23.9
Hospital/Health Care Revenue 18.2
Industrial Revenue/
Pollution Control 11.3
Other Revenue Bonds 6.7
General Obligation 1.4
Municipal Lease Rental 1.1
Other Assets & Liabilities 5.3
<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 3.13% 4.18% 2.05% 3.13% 4.18% 2.05%
(unannualized)
1 Year 11.90 15.39 11.65 11.90 15.39 11.65
Inception 6.68 5.03 5.51 14.41 10.77 11.83
(12/1/93)
</TABLE>
* As of 12/31/95
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 12/31/95 would
have grown to $11,441 in the Fund or $11,183 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
[Pie Chart]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
Other Assets & Liabilities 5.3%
Not Rated 35.9%
BBB 7.4%
A 9.8%
AA 20.6%
AAA 21.0%
ADVISER'S ASSESSMENT OF NOT-RATED SECURITIES
AA 1.1%
A 0.9
BBB 27.9
BB 5.1
B 1.7
----
TOTAL 35.9%
SIT TAX-FREE INCOME FUND REVIEW
DECEMBER 31, 1995
Michael C. Brilley
Senior Portfolio Manager
Debra A. Sit, CFA
Portfolio Manager
The SIT Tax-Free Income Fund provided shareholders a total return of +3.36%
for the fourth quarter of 1995 and +12.86% for the year which compares favorably
with a quarterly return of +2.05% and an annual return of +11.65% for the Lehman
5-Year Municipal Bond Index. In addition, the Fund's income returns continue to
compare quite favorably, with a year-end 12-month yield of 5.51%, as calculated
by Lipper Analytical Services, compared with their General Municipal Bond Fund
average yield of 4.94%. Because of the Fund's emphasis on high current income
and price stability, the Fund's return from appreciation lagged that of the
longer duration Lipper General Municipal Bond Fund universe during the bull
market of 1995.
In their most recent review dated December 22, 1995, Morningstar, a
nationally recognized firm which rates mutual funds, affirmed their highest
5-Star rating for the Fund which has been maintained for the past 4 1/4 years
since the Fund's initial rating. The Fund has maintained a 5.0 average rating
which is the highest possible rating within the Morningstar rating system.
Furthermore, in their December overview of national municipal bond funds, the
Fund's rating ranked #5 out of 504 funds in their universe over the past five
years.
Fund assets increased to $281.9 million at year end compared with $262.2
million at the beginning of the quarter and $243.3 million at the prior year
end. The Fund's portfolio structure has been relatively constant. During the
bullish environment of the past quarter and past year, the lowest sector returns
were earned by the shorter effective duration single family, multi-family, and
IDR/PCR sectors of the portfolio while substantially higher than average returns
were earned by the longer duration hospital, transportation and other revenue
sectors. Those relative returns are the reverse of the relative sector
performance in 1994's bearish environment.
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 12/31/95: $10.06 Per Share
9/30/95: $ 9.87 Per Share
Total Net Assets: $281.93 Million
30-Day SEC Yield: 5.52%
12 Month Distribution Rate: 5.66%
Tax Equivalent Yield: 9.14% (1)
Average Maturity: 15.08 Years
Duration to Estimated Avg. Life: 6.29 Years (2)
(1) For individuals in the 39.6% federal tax bracket.
(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 1.0%, a
portfolio with a duration of 5 years would be expected to experience a price
change of 5%. Duration is based on the Adviser's assumptions regarding future
changes in interest rates and the expected average life of individual securities
held in the portfolio.
[Bar Chart]
PORTFOLIO STRUCTURE
(% of total net assets)
Hospital/Health Care Revenue 24.9
Multifamily Mortgage Revenue 22.8
Single Family Mortgage Revenue 16.0
Industrial Revenue/Pollution Control 11.3
Other Revenue 7.7
Transportation 4.5
Municipal Lease Rental 3.7
Public Facilities 2.8
Education/Student Loan 1.0
Utilities 0.8
Escrowed to Maturity/Pre-Refund 0.6
General Obligation 0.4
Other Assets & Liabilities 3.5
<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 3.36% 4.67% 2.05% 3.36% 4.67% 2.05%
(unannualized)
1 Year 12.86 16.84 11.65 12.86 16.84 11.65
3 Years 7.39 7.19 6.22 23.84 23.16 19.84
5 Years 7.82 8.48 7.52 45.73 50.25 43.69
Inception 7.86 8.39 7.59 73.16 79.36 70.06
(9/29/88)
</TABLE>
* As of 12/31/95
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 (9/29/88) and held until 12/31/95 would
have grown to $17,316 in the Fund or $17,006 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
[Pie Chart]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
Other Assets & Liabilities 3.5%
BBB 43.6%
BB 0.8%
A 35.9%
AA 8.2%
AAA 8.0%
Total number of holdings: 227
SIT U.S. GOVERNMENT SECURITIES FUND REVIEW
DECEMBER 31, 1995
Michael C. Brilley
Senior Portfolio Manager
Bryce A. Doty, CFA
Portfolio Manager
The SIT U.S. Government Securities Fund provided investors a +2.95% return
for the fourth quarter of 1995 and a +11.50% return for the year. As of December
31, 1995, the Fund's 30-day SEC yield was 6.49% and the Fund's 12-month
distribution rate was 6.78%. Morningstar, a nationally recognized firm which
rates mutual funds, ranked the Fund #1 in their latest review of a universe of
375 government bond funds for having the lowest risk, and rated the Fund #4 for
its risk and return characteristics for the five years ended September 30, 1995.
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
dropped by approximately 0.7% over the past quarter and by about 2.5% for the
year. This provided a significant increase in price for shorter and intermediate
maturity U.S. Treasury Notes which appreciated more in price than the Fund's
mortgage-backed securities. This is not surprising since the Fund invests in
high coupon, seasoned mortgage-backed securities for their high level of income
and price stability. The decrease in yields did, however, provide a significant
increase in price for the Fund's longer maturity Treasury holdings for the
fourth quarter of 1995 as well as for the year.
During the past quarter, the Fund sold some of its Treasury holdings and
purchased additional mortgage pass-through securities. The Fund also replaced a
portion of its coupon Treasury holdings with zero coupon Treasury securities.
For 1996, we expect interest rates to remain in a much narrower range than
the previous two years, which were among the most volatile in the history of the
bond market. This forecast for relatively stable interest rates adds increased
importance to the Fund's continued emphasis on 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 12/31/95: $10.60 Per Share
9/30/95: $10.46 Per Share
Total Net Assets: $48.18 Million
30-Day SEC Yield: 6.49%
12 Month Distribution Rate: 6.78%
Average Maturity: 14.88 Years
Modified Adjusted Duration: 2.81 Years (1)
(1) 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%. Duration is based on the Adviser's assumptions regarding future
changes in interest rates and the expected average life of individual securities
held in the portfolio.
[Bar Chart]
PORTFOLIO STRUCTURE
(% of total net assets)
GNMA Pass-Through Securities 66.1
U.S. Treasury Bonds 9.1
Collateralized Mortgage Obligations 7.2
FHLMC Pass-Through Securities 6.3
FNMA Pass-Through Securities 5.9
Other Assets & Liabilities 5.4
<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
<S> <C> <C> <C> <C> <C> <C>
3 Months 2.95% 4.39% 3.34% 2.95% 4.39% 3.34%
(unannualized)
1 Year 11.50 17.34 14.41 11.50 17.34 14.41
3 Years 6.79 6.98 6.74 21.80 22.45 21.60
5 Years 7.70 8.38 8.21 44.94 49.51 48.37
Inception 8.68 8.35 8.63 104.29 99.15 103.60
(6/2/87)
</TABLE>
* As of 12/31/95
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 12/31/95 would
have grown to $20,429 in the Fund or $20,360 in the Lehman Intermediate
Government Bond Index assuming reinvestment of all dividends and capital gains.
[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 Percent
- ----- -------
0- 1 5.4%
1- 5 83.3%
5-10 2.2%
10-20 3.2%
20-30 5.9%
SIT MONEY MARKET FUND REVIEW
DECEMBER 31, 1995
Michael C. Brilley
Senior Portfolio Manager
Paul J. Jungquist
Portfolio Manager
The SIT Money Market Fund provided investors with a +1.33% return for the
fourth quarter of 1995 compared to a +1.29% average return for the Lipper
Analytical Services, Inc. Money Market Fund universe. As of December 31, 1995,
the Fund's 7-day compound yield was 5.44% and its average maturity was 35 days,
compared to 5.44% and 42 days, respectively, at September 30, 1995.
The Federal Reserve lowered the federal funds rate by 25 basis points to
5.50% on December 19. Three-month Treasury bill rates decreased from 5.33% at
September 30 to 4.96% at December 31. This rate level implies that the market is
expecting further easing by the Fed in the first quarter of 1996. Moderate
economic growth and controlled inflation are the secular factors supporting this
expectation. Accordingly, the Fund will try to take advantage of current yield
levels and extend the maturity of the portfolio slightly during the quarter in
anticipation of this further easing by the Fed.
As economic activity continues to slow, we do not foresee a significant
impact on the short-term creditworthiness of top tier commercial paper issuers
in general. Consumer finance companies may experience some pressure, however, so
we will monitor the Fund's permissible credits in this industry particularly
closely. The Fund continues to diversify its core holdings and its industry
exposure of permissible credits. 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 12/31/95: $1.00 Per Share
9/30/95: $1.00 Per Share
Total Net Assets: $18.50 Million
[Chart]
PORTFOLIO STRUCTURE
(% of total net assets)
Diversified Finance 20.4
Captive Equipment Finance 16.2
Utilities 15.0
Consumer Loan Finance 12.8
Captive Auto Finance 10.1
Insurance 7.7
Technology/Business
Equip. Services 6.3
Retail 4.8
Energy 4.6
Other Assets & Liabilities 2.1
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* 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)
<S> <C> <C> <C> <C> <C> <C>
3 Months 1.33% 1.29% 1.36% 1.33% 1.29% 1.36%
(unannualized)
1 Year 5.58 5.37 5.82 5.58 5.37 5.82
Inception 4.56 4.37 4.99 10.13 9.72 11.13
(11/1/93)
</TABLE>
* As of 12/31/95
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 12/31/95 would
have grown to $11,013 in the Fund or $11,130 in the 3-Month U.S. Treasury Bill
Index assuming reinvestment of all dividends and capital gains.
[Pie Chart]
QUALITY RATINGS
(% of total net assets)
As rated by Moody's, S&P and Fitch
First Tier Securities 100%
First Tier Securities 100%
Second Tier Securities 0%
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
December 31, 1995
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
Norwest Bank Minnesota, N.A.
733 Marquette Avenue
Minneapolis, MN 55479
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 P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
MEMBER OF
100%
NO-LOAD
MUTUAL FUND
COUNCIL
