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
$5.2 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:
o Free telephone exchange
o Dollar-cost averaging through automatic investment plan
o Electronic transfer of funds for purchases and redemptions
o Free check-writing privileges on bond funds
o Retirement accounts including IRAs, Keoghs and 401(k)Plans
[GRAPH]
SIT FAMILY OF FUNDS
STABILITY: INCOME: GROWTH & INCOME: GROWTH:
Safety of principal Increased income Long-term capital Long-term capital
and current income appreciation and appreciation
income
Money Market U.S. Government Balanced Mid Cap Growth
Securities Large Cap Growth International
Tax-Free Income Growth
Minnesota Tax-Free Small Cap Growth
Income Developing
Bond Markets Growth
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - DECEMBER 31, 1996
[PHOTO] Dear Fellow Shareholders:
Fixed income markets performed positively during the fourth
quarter ended December 31, 1996. Despite a year-end rise in interest
rates, the conservative, yet flexible investment strategies employed
by the Sit fixed income funds resulted in positive performance
relative to their benchmarks in 1996.
ECONOMIC OVERVIEW
Our projections for 1997 are that moderate growth and moderate inflation
will continue. We have decided to raise our forecast for fourth quarter real GDP
growth from +2.5% to +3.0%, due mainly to strength in consumer spending in the
first two months of the quarter. Despite weak initial retail reports, consumer
income and spending trends have been quite stable. Prospects for trade also
remain positive, since the trade-weighted value of the U.S. dollar remains below
recent highs, suggesting that U.S. exports will remain reasonably competitive.
If our projections are correct, the real GDP growth rate for 1996 would amount
to +2.4% for 1996. We are projecting a +2.6% growth rate for 1997, although the
quarterly pattern of growth will not likely be smooth.
With respect to inflation, at the consumer level inflation remains
tolerable with the latest year-over-year increase in the CPI showing a +3.3%
increase. Both food and energy prices rose due to what we believe are seasonal
factors. Excluding these items, the "core" rate of inflation remains +2.6%. At
the producer level, prices paid for finished goods rose +2.8% according to the
PPI. In 1997, we are forecasting consumer inflation of approximately +3.2%.
Many fiscal policy issues lie ahead including a balanced budget plan and
major entitlement reform, including possible revisions to the CPI that could
save up to $1 trillion in government expenditures over 12 years. Social Security
reform is also on the agenda with three possible plans for modification being
advanced by an advisory council.
STRATEGY SUMMARY
Given our expectations for continued moderate economic growth and contained
inflation in 1997, we expect that the Federal Reserve will maintain the neutral
policy stance that has been in place for several months but with a bias toward
restraint. Long term bond yields are expected to remain within a narrow trading
range in 1997. Although 30-year U.S. Treasury yields rose by nearly 30 basis
points during December, reversing their prior month's decline, and have edged
higher in January, we believe that from these levels should be relatively
stable. Our forecast calls for a 6 1/2% - 7% range in the first half of the
year. While taxable bond portfolios are positioned with slightly more aggressive
durations than related benchmarks, we remain focused on niches within each
sector. Within our most heavily weighted sector, pass-through securities, we
invest primarily in GNMA manufactured home loan securities. We are focusing on
home equity loan securities within the asset-backed sector. In corporates, our
holdings consist primarily of real estate investment trust (REIT) and trust
preferred securities. We also continue to use VA Vendee securities within the
collateralized mortgage obligation sector.
Since recovering from the negative impact of the prior year's threat of a
flat tax, municipal bonds are expected to remain around more normal valuation
levels relative to taxable bonds in the months ahead. Sector and security
selection remain key elements of our investment approach for municipal
portfolios in achieving their investment objectives. We continue to look for
opportunities to reduce lower yielding holdings and reinvest in higher yielding
opportunities with greater call protection. We will consider reducing
lower-rated holdings, such as those in the hospital sector, as their incremental
yields relative to higher-rated credits have narrowed significantly. We remain
focused on securities that provide high income as well as stability of
principal, such as those in the housing sector, and believe that these
securities will perform particularly well in the narrow interest rate
environment we anticipate.
With best wishes,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
SIT MUTUAL FUNDS
DECEMBER 31, 1996 PERFORMANCE SUMMARY - BOND FUNDS
BOND MARKET REVIEW
After making its last of three 25 basis point easing moves in February,
continued signs of moderate economic growth and contained inflation supported
the Federal Reserve's decision to keep monetary policy unchanged for the
remainder of 1996. 3-month Treasury bill yields increased slightly during the
quarter from 5.04% to 5.18%. 3-month Treasury bill yields began the year at
5.08% and stayed within a narrow range of 4.90% to 5.36% during the year.
Longer term bond yields decreased during the quarter but remained above
beginning of the year levels. The 30-year Treasury bond yielded 6.64% at year
end, near the middle of its 12-month range of 5.95% to 7.20%, compared with
6.92% on September 30, and 5.95% one year ago. Intermediate maturity bond yields
rose similarly during the year. Despite the rise in bond yields and somewhat
increased volatility, bond markets provided modest positive returns for the
year. Although the longer duration corporate and government sectors outperformed
during the quarter, the shorter-duration mortgage pass-through and asset-backed
sectors maintained their lead over the 12-month period. The mortgage sector, in
particular, benefited from significantly higher coupon income.
Municipal bond yields followed the same trend as taxable bond yields but
were much less volatile. The Bond Buyer 40-Bond Revenue Bond Index yielded 5.72%
at year end, compared with 5.89% on September 30, and 5.56% one year ago. The
Bond Buyer 40-Bond Index yield remained within a 0.75% range, between 5.47% and
6.22%, during the year, compared with a 1.25% range for 30-year Treasury bond
yields. Although they did not keep pace with taxable bonds during the quarter
municipals remain well ahead on a year-to-date basis, benefiting from fading
concerns over tax reform. Long municipal bond yields ended the year at
approximately 86% of long Treasury bond yields, relatively unchanged over the
quarter and significantly improved from their 94% level in 1995. The hospital
revenue sector maintained its lead, which was primarily attained from narrowing
incremental yield spreads and improved credit quality during the year.
<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.)
[WIDE TABLE CONTINUED]
TOTAL RETURN - CALENDAR YEAR
YIELD AS OF DISTRIBUTION
1994 1995 1996 12/31/96 RATE (2)
<S> <C> <C> <C> <C> <C>
SIT BOND FUND -1.31% 16.83% 4.25% 6.77% 6.68%
SIT MINNESOTA TAX-FREE
INCOME FUND 0.63 11.90 5.89 5.48 (3) 5.65
(NASDAQ Symbol: SMTFX)
SIT TAX-FREE INCOME FUND -0.63 12.86 5.69 5.47 (4) 5.65
(NASDAQ Symbol: SNTIX)
SIT U.S. GOV'T. SECURITIES FUND
(NASDAQ Symbol: SNGVX) 1.77 11.50 4.99 6.10 6.31
SIT MONEY MARKET FUND 3.84 5.58 5.08 4.95 (6)
(NASDAQ Symbol: SNIXX)
LEHMAN AGGREGATE BOND INDEX -2.92 18.47 3.63
LEHMAN 5-YEAR MUNICIPAL BOND INDEX -1.28 11.65 4.22
LEHMAN INTER. GOVERNMENT BOND INDEX -1.75 14.41 4.06
3-MONTH U.S. TREASURY BILL 4.47 5.98 5.27
SIT INVESTMENT RESERVE FUND
(Inception date 1/25/85. Converted to SIT Money Market Fund on 11/1/93.)
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN
TOTAL RETURN SIX MONTHS
QUARTER ENDED ENDED
INCEPTION 12/31/96 12/31/96
<S> <C> <C> <C>
SIT BOND FUND 12/01/93 3.15% 5.17%
SIT MINNESOTA TAX-FREE INCOME FUND 12/01/93 1.99 4.60
SIT TAX-FREE INCOME FUND 09/29/88 2.31 4.63
SIT U.S. GOV'T. SECURITIES FUND 06/02/87 2.14 3.87
SIT MONEY MARKET FUND 11/01/93 1.24 2.53
LEHMAN AGGREGATE BOND INDEX 11/30/93 4.90 2.43
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 09/30/88 1.98 3.66
LEHMAN INTER. GOVERNMENT BOND INDEX 05/31/87 2.31 4.07
3-MONTH U.S. TREASURY BILL 11/01/93 1.28 2.62
[WIDE TABLE CONTINUED]
AVERAGE ANNUAL TOTAL RETURNS FOR
THE PERIODS ENDED DECEMBER 31, 1996
1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C>
SIT BOND FUND 4.25% 6.33% ---- 6.26%
SIT MINNESOTA TAX-FREE INCOME FUND 5.89 6.04 ---- 6.42
SIT TAX-FREE INCOME FUND 5.69 5.83 7.11% 7.59
SIT U.S. GOV'T. SECURITIES FUND 4.99 6.01 6.16 8.28
SIT MONEY MARKET FUND 5.08 4.83 ---- 4.72
LEHMAN AGGREGATE BOND INDEX 3.63 6.03 7.04 6.04
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 4.22 4.73 6.09 7.17
LEHMAN INTER. GOVERNMENT BOND INDEX 4.06 5.37 6.23 8.14
3-MONTH U.S. TREASURY BILL 5.27 5.18 4.44 5.07
</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 12/31/96.
(3) For Minnesota residents in the 31%, 36% and 39.6% federal tax brackets, the
double exempt tax equivalent yields are 8.68%, 9.36% and 9.92%, 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 7.93%, 8.55% and 9.06%, 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 12/31/96 was 4.83%.
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, 1996
[PHOTO] [CAPTION]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
BRYCE A. DOTY, CFA
PORTFOLIO MANAGER
The Sit Bond Fund provided investors a +3.15% return for the fourth quarter
of 1996 and a +4.25% return for the year. The Fund ranked in the top 15% of the
Lipper Intermediate Investment Grade Bond Fund universe for its one year (out of
176 funds) and three-year (out of 108 funds) returns.
The yield on the 5-Year U.S. Treasury note declined by approximately 0.25%
over the past quarter, but increased by 0.83% for the year. For the quarter, the
Fund's securities that provided the highest total returns were its asset-backed
and REIT holdings, as yields within these sectors declined relative to Treasury
yields. The Fund's high coupon pass-through securities provided the lowest
return for the quarter, however, for the year, these pass-through securities
provided the Fund's highest income and total return compared to the other market
sectors in which the Fund invests.
The Fund's most significant sector shift involved selling U.S. Treasury
securities and purchasing trust preferred securities, a relatively new
investment vehicle. These securities are sold by a trust established by a
corporation's holding company. The Trust uses the issuance proceeds to purchase
debt of the holding company. The coupon payments on the debt are then passed
through to the trust preferred holders. Corporations are issuing trust
preferreds because these securities are considered equity for regulatory
purposes, yet the coupon payments are tax deductible as an interest expense. The
Fund's holdings in trust preferreds are A-rated and yielded approximately 8%.
The Fund maintained its duration slightly longer than the 4.6 year duration of
its benchmark, the Lehman Aggregate Bond Index, as we believe interest rates are
near the upper end of their current range.
For 1997, we expect moderate economic growth and contained inflation,
resulting in interest rates remaining in a narrow range. As a result, we intend
to maintain the Fund's duration near that of its benchmark 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 12/31/96: $9.82 Per Share
9/30/96: $9.74 Per Share
Total Net Assets: $5.46 Million
30-Day SEC Yield: 6.77%
12-Month Distribution Rate: 6.68%
Average Maturity: 17.3 Years
Effective Duration: 5.0 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.
[GRAPH]
PORTFOLIO STRUCTURE
(% of total net assets)
Agency Mortgage 28.8
Pass-Through Securities
Asset-Backed Securities 20.8
Corporate Bonds & Notes 18.6
Collateralized Mortgage 10.6
Obligations
U.S. Treasury 8.4
Mutual Funds 5.2
Trust Preferred Securities 4.5
Other Assets & Liabilities 3.1
<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 3.15% 2.79% 3.00% 3.15% 2.79% 3.00%
(unannualized)
1 Year 4.25 3.13 3.63 4.25 3.13 3.63
3 Year 6.33 5.19 6.03 20.21 16.39 19.19
Inception 6.26 5.18 6.04 20.61 16.87 19.84
(12/1/93)
</TABLE>
* As of 12/31/96
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.
[GRAPH]
GROWTH OF $10,000
12/1/93 12/31/96
------- --------
SIT BOND FUND $10,000 $12,061
LEHMAN AGGREGATE BOND INDEX $10,000 $11,984
The sum of $10,000 invested at inception (12/1/93) and held until 12/31/96
would have grown to $12,061 in the Fund or $11,984 in the Lehman 5-Year
Municipal Bond Index assuming reinvestment of all dividends and capital
gains.
[GRAPH]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S OR S&P USED.
Agency Mortgage-Backed Securities & CMO's .......... 39.4%
Government & Agency ................................ 8.4
AAA ................................................ 20.8
A ................................................ 15.3
BBB ................................................ 13.0
Other Assets & Liabilities ......................... 3.1
SIT MINNESOTA TAX-FREE INCOME FUND REVIEW
DECEMBER 31, 1996
[PHOTO] [CAPTION]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
Municipal bond yields followed taxable bond yields lower during the
quarter. The yield of the Bond Buyer 40-Bond Revenue Index declined from 5.89%
to 5.72% during the quarter but remained above its 5.56% level one year ago. The
share price of the Fund increased $0.01 for the year, and during the year the
Fund's price varied 3.0%. The Fund's price was $10.24 on December 31, 1996,
compared with $10.18 on September 30, 1996 and $10.23 on December 31, 1995. The
Fund's 30-day SEC yield was 5.48% on December 31, 1996, versus 5.64% on
September 30, and 5.52% one year ago. Its distribution rate has remained
relatively stable over the last year.
The Fund's ability to provide high income and stability of principal is
highlighted in its attractive long term returns. Within the Lipper Minnesota
Municipal Bond Fund universe, the Fund's total return ranked #1 for the one year
period (of 44 funds), three year period (of 27 funds), and period since
inception (of 25 funds). Portfolio performance during the quarter benefited from
the Fund's holdings in health care bonds as well as in longer duration education
and sales tax issues.
Fund assets increased to $82.7 million from $70.9 million during the
quarter and from $62.2 million one year ago. The Fund's implied duration
increased from 3.9 years to 4.1 years as the Fund continued to focus on
purchasing securities with greater call protection. During the quarter, industry
shifts included increases in multifamily housing from 36.3% to 37.8% and in
single family housing from 17.3% to 18.5%, and a decrease in industrial revenue
bonds from 11.9% to 9.2%. Since a year ago, multifamily holdings have increased
from 32.1%, while single family, and industrial revenue issues have decreased
from 23.9% and 11.3%, respectively and health care decreased from 18.2% to
16.1%. Throughout the year, the Fund has continued to hold approximately 60% of
its portfolio in securities rated A or better. The Fund's non-rated holdings
have an internally assessed low-BBB average rating. The proportion of
BB-equivalent rated securities increased slightly during the quarter. We remain
focused on finding investments that help meet the Fund's dual objectives of high
income and stability of principal value.
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 12/31/96: $10.24 Per Share
9/30/96: $10.18 Per Share
Total Net Assets: $82.67 Million
30-Day SEC Yield: 5.48%
Tax Equivalent Yield: 9.92% (1)
12-Month Distribution Rate: 5.65%
Average Maturity: 18.7 Years
Duration to Estimated Avg. Life: 7.2 Years (2)
Implied Duration: 4.1 Years (2)
(1) For individuals in the 39.6% Federal and 8.5% MN tax brackets.
(2) See page 9.
[GRAPH]
PORTFOLIO STRUCTURE
(% of total net assets)
Multifamily Mortgage Revenue ................................... 37.8
Single Family Mortgage Revenue ................................. 18.5
Hospital/Health Care Revenue ................................... 16.1
Industrial Revenue/Pollution Control ........................... 9.2
Other Revenue Bonds ............................................ 8.5
Municipal Lease Rental ......................................... 2.1
Education/Student Loan ......................................... 1.9
General Obligation ............................................. 1.4
Other Assets & Liabilities ..................................... 4.5
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
MN Tax-Free Lipper MN Lehman MN Tax-Free Lipper MN Lehman
Income Muni. Bond 5-Year Muni. Income Muni. Bond 5- Year Muni.
Fund Fund Avg. Bond Index Fund Fund Avg. Bond Index
---------- --------- ---------- ---------- --------- ----------
<C> <C> <C> <C> <C> <C> <C>
3 Months 1.99% 2.15% 1.98% 1.99% 2.15% 1.98%
(unannualized)
1 Year 5.89 3.11 4.22 5.89 3.11 4.22
3 Year 6.04 4.06 4.73 19.24 12.69 14.87
Inception 6.42 4.53 5.09 21.15 14.67 16.55
(12/1/93)
</TABLE>
* As of 12/31/96
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.
[BAR GRAPH]
GROWTH OF $10,000
12/1/93 12/31/96
------- --------
SIT MN TAX-FREE INCOME FUND $10,000 $12,115
LEHMAN 5-YEAR MUNI. BOND INDEX $10,000 $11,655
The sum of $10,000 invested at inception (12/1/93) and held until 12/31/96
would have grown to $12,115 in the Fund or $11,655 in the Lehman 5-Year
Municipal Bond Index assuming reinvestment of all dividends and capital
gains.
[GRAPH]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
AAA 20.6%
AA 19.8
A 11.5
BBB 7.9
Not Rated 35.7
Other Assets & Liabilities 4.5
ADVISER'S ASSESSMENT OF
NOT-RATED SECURITIES
AA 0.8%
A 1.4
BBB 24.2
B 1.1
----
Total 35.7%
SIT TAX-FREE INCOME FUND REVIEW
DECEMBER 31, 1996
[PHOTO]
[CAPTION]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
Municipal bond yields followed taxable bond yields lower during the
quarter. The yield of the Bond Buyer 40-Bond Revenue Index declined from 5.89%
to 5.72% during the quarter but remained above its 5.56% level one year ago. The
Fund's price was $10.05 on December 31, 1996, compared with $9.96 on September
30, and $10.06 on December 31, 1995. During the year, the Fund's price varied
3.2% between $9.78 and $10.09. The Fund's 30-day SEC yield was 5.47% on December
31, 1996 versus 5.65% on September 30, and 5.52% one year ago. Its distribution
rate has remained relatively stable over the last year.
The Fund returned +2.31% for the quarter and +5.69% for the year ended
December 31, 1996, compared with +1.98% and +4.22% for the Lehman 5-Year
Municipal Bond Index, respectively. The Fund's ability to provide high income
and stability of principal is highlighted in its attractive long term returns.
Within the Lipper Municipal Bond Fund universe, the Fund ranked 2nd of 225 funds
based on its one year return and 5th of 159 funds based on its three year
return. The single family and multifamily housing sectors lagged in returns
during the quarter, but helped on a year-to-date basis. Performance during the
quarter also benefited from holdings in longer duration transportation issues,
and in lease and other revenue bonds. The Fund's longer term performance
continues to benefit from sector and security selection.
Fund assets increased to $305.5 million from $294.9 million during the
quarter and from $281.9 million one year ago. The Fund's implied duration
increased from 4.1 years to 4.4 years as the Fund continued to focus on
purchasing securities with greater call protection. During the quarter, industry
shifts included an increase in multifamily housing from 32.0% to 33.0% and a
decrease in other revenue bonds from 6.3% to 4.8%. Multifamily holdings have
steadily increased from 22.8% since one year ago while hospital bonds have
decreased from 24.9% to 21.1% and industrial revenue bonds have decreased from
11.3% to 6.5%. The Fund's holdings in securities rated A or better increased
from 55.6% on December 31, 1995 and from 59.4% on September 30 to 60.2% at year
end, as the Fund continues to take advantage of narrowing incremental yield
spreads to reduce lower rated credits. We remain focused on finding investments
that help meet the Fund's dual objectives of high income and stability of
principal value.
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 12/31/96: $10.05 Per Share
9/30/96: $9.96 Per Share
Total Net Assets: $305.47 Million
30-Day SEC Yield: 5.47%
Tax Equivalent Yield: 9.06% (1)
12-Month Distribution Rate: 5.65%
Average Maturity: 16.9 Years
Duration to Estimated Avg. Life: 6.5 Years (2)
Implied Duration: 4.4 Years (2)
(1) For individuals in the 39.6% federal tax bracket.
(2) See page 11.
PORTFOLIO STRUCTURE
(% of total net assets)
Multifamily Mortgage Revenue ................................... 33.0
Hospital/Health Care Revenue ................................... 21.1
Single Family Mortgage Revenue ................................. 16.5
Industrial Revenue/Pollution Control ........................... 6.5
Other Revenue .................................................. 4.8
Transportation ................................................. 4.7
Escrowed to Maturity/Pre-Refund ................................ 2.7
Public Facilities .............................................. 2.7
Miscellaneous .................................................. 1.9
Municipal Lease Rental ......................................... 1.8
Sales Tax Revenue .............................................. 1.0
Other Assets & Liabilities ..................................... 3.3
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
Tax-Free Lipper General Lehman Tax-Free Lipper General Lehman
Income Muni. Bond 5-Year Muni. Income Muni. Bond 5-Year Muni.
Fund Fund Avg. Bond Index Fund Fund Avg. Bond Index
---------- --------- ---------- ---------- --------- ----------
<C> <C> <C> <C> <C> <C> <C>
3 Months 2.31% 2.40% 1.98% 2.31% 2.40% 1.98%
(unannualized)
1 Year 5.69 3.30 4.22 5.69 3.30 4.22
3 Years 5.83 4.14 4.73 18.54 12.95 14.87
5 Years 7.11 6.79 6.09 40.98 38.89 34.42
Inception 7.59 7.82 7.17 83.01 86.19 77.23
(9/29/88)
</TABLE>
* As of 12/31/96
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.
[GRAPH]
GROWTH OF $10,000
9/29/88 12/31/96
------- --------
SIT TAX-FREE INCOME FUND $10,000 $18,301
LEHMAN 5-YEAR MUNI. BOND INDEX $10,000 $17,723
The sum of $10,000 invested at inception (9/29/88) and held until 12/31/96
would have grown to $18,301 in the Fund or $17,723 in the Lehman 5-Year
Municipal Bond Index assuming reinvestment of all dividends and capital
gains.
[GRAPH]
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
AAA 9.8%
AA 10.7
A 36.4
BBB 39.3
BB 0.5
Other Assets & Liabilities 3.3
SIT U.S. GOVERNMENT SECURITIES FUND REVIEW
DECEMBER 31, 1996
[PHOTO]
[CAPTION]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
BRYCE A, DOTY, CFA
PORTFOLIO MANAGER
The Sit U.S. Government Securities Fund provided investors a +2.14% total
return for the fourth quarter of 1996 and a +4.99% return for the year. As of
December 31, 1996, the Fund's 30-day SEC yield was 6.10% and the Fund's 12-month
distribution rate was +6.31%. The Fund ranked #4 out of 114 funds within the
Lipper U.S. Government Bond Fund universe for its cumulative 3-year return of
+19.14% for the period ended December 31, 1996. In addition, Morningstar, a
nationally recognized firm which evaluates mutual funds, recently ranked the
Fund #1 in their latest review of the universe of 120 short-term government bond
funds for having the highest return and rated the Fund #2 for its risk and
return characteristics for the five years ended October 31, 1996.
The Fund has achieved its superior results by continuing to focus on
securities that provide a high level of income. The yield on the 3-year U.S.
Treasury note declined by 0.25% over the past quarter, but increased by 0.80%
for the year. For the quarter, the drop in yields resulted in significant price
appreciation for the Fund's Treasury and collateralized mortgage obligation
holdings. As a result, these sectors provided the Fund's highest returns for the
quarter. For the year, the Fund's holdings in seasoned, high coupon mortgage
pass-through securities that are relatively stable in price provided the Fund's
highest income and total return compared to the other market sectors in which
the Fund invests.
Investment activity for the past three months primarily consisted of
investing Fund contributions into GNMA mobile home loan securities and U.S.
Treasuries. For 1997, we expect moderate economic growth and contained
inflation, resulting in interest rates remaining in a narrow range. 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 12/31/96: $10.45 Per Share
9/30/96: $10.39 Per Share
Total Net Assets: $64.93 Million
30-Day SEC Yield: 6.10%
12-Month Distribution Rate: 6.31%
Average Maturity: 13.3 Years
Effective Duration: 4.5 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)
GNMA Pass-Through Securities 58.0
U.S. Treasury Bonds 23.6
Collateralized Mortgage Obligations 7.7
FNMA Pass-Through Securities 5.4
FHLMC Pass-Through Securities 3.3
Other Assets & Liabilities 2.0
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
U.S. Gov't. Lipper Lehman Inter. U.S. Gov't. Lipper Lehman Inter.
Securities U.S. Gov't. Gov't. Bond Securities U.S. Gov't. Bond Fund
Fund Fund Average Index Fund Fund Average Index
------------ ------------ ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C> <C>
3 Months 2.14% 2.87% 2.31% 2.14% 2.87% 2.31%
(unannualized)
1 Year 4.99 1.73 4.06 4.99 1.73 4.06
3 Years 6.01 4.52 5.37 19.14 14.17 16.98
5 Years 6.16 5.90 6.23 34.83 33.20 35.30
Inception 8.28 7.61 8.14 114.49 102.18 111.87
(6/2/87)
</TABLE>
* As of 12/31/96
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.
[GRAPH]
GROWTH OF $10,000
6/2/87 12/31/96
------- --------
SIT U.S. GOV'T. SECURITIES FUND $10,000 $21,449
LEHMAN INTER. GOV'T. BOND INDEX $10,000 $21,187
The sum of $10,000 invested at inception (6/2/87) and held until 12/31/96
would have grown to $21,449 in the Fund or $21,187 in the Lehman
Intermediate Government Bond Index assuming reinvestment of all dividends
and capital gains.
[GRAPH]
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 1-5 5-10 10-20 20+
2.0% 76.6% 16.5% 3.4% 1.5%
SIT MONEY MARKET FUND REVIEW
DECEMBER 31, 1996
[PHOTO]
[CAPTION]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
PAUL J. JUNGQUIST, CFA
PORTFOLIO MANAGER
The Sit Money Market Fund provided investors with a +1.24% return for the
quarter ended December 31, 1996, compared to a +1.18% average return for the
Lipper Analytical Services, Inc. Money Market Fund universe. The Fund provided
investors with a +5.08% return for the year ended December 31, 1996, compared to
a +4.80% average return for its Lipper universe. Within its Lipper peer group
category, the Fund's performance ranked 80th of 297 funds and 49th of 288 funds,
respectively, for the three and twelve month periods ended December 31, 1996. As
of December 31, 1996, the Fund's 7-day compound yield was 4.95% and its average
maturity was 35 days, compared to 5.06% and 31 days, respectively, at September
30, 1996.
Three-month Treasury bill rates continued to be volatile over the past
three months. Unlike prior periods, this volatility was not due to uncertainty
over Fed policy but rather to lower short-term financing requirements by the
Treasury during December. As expected, the Fed left the federal funds rate
unchanged during the quarter, and the three-month Treasury bill rate actually
increased to from 5.04% at September 30 to 5.20% at December 31 after reaching a
low of 4.92% in mid-December. The Fund lengthened its average maturity during
the quarter to lock in higher yields in anticipation of no change in Fed policy
over the near term. Economic growth appears to be regaining momentum in late
1996 and early 1997. If this trend continues through the first quarter of 1997,
the possibility of an increase to short-term rates will increase significantly.
Accordingly, we will continue to take advantage of current yield levels, and
expect to maintain the average maturity of the portfolio in a range of 30 to 40
days. If a tightening by the Fed begins to look likely, however, the Fund will
reduce its average maturity to the lower end of the range discussed above in
anticipation of higher future yield levels.
While economic activity has picked up in the fourth quarter, we do not
foresee a significant impact on the creditworthiness of top tier commercial
paper issuers. We remain concerned about the relatively high levels of consumer
bankruptcies and 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 captive finance, technology, entertainment 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 12/31/96: $1.00 Per Share
9/30/96: $1.00 Per Share
Total Net Assets: $34.98 Million
[GRAPH]
PORTFOLIO STRUCTURE
Diversified Finance 15.1
U.S. Government 14.9
Consumer Loan Finance 14.3
Captive Equipment Finance 9.2
Utilities 6.9
Captive Auto Finance 6.8
Insurance 3.2
Retail 3.1
Captive Oil Finance 2.7
Technology/Business Equip. 2.4
Consumer Non-Durables 2.4
Other Assets & Liabilities 19.0
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
----------------------------- -------------------------
Money Lipper Money U.S. Treasury Money Lipper Money U.S. Treasury
Market Market Bill Market Market Bill
Fund Average (3-Month) Fund Average (3-Month)
<S> <C> <C> <C> <C> <C> <C>
3 Months 1.24% 1.18% 1.28% 1.24% 1.18% 1.28%
(unannualized)
1 Year 5.08 4.80 5.27 5.08 4.80 5.27
3 Year 4.83 4.63 5.18 15.20 14.55 16.37
Inception 4.72 4.52 5.07 15.73 15.03 16.99
(11/1/93)
</TABLE>
* As of 12/31/96
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.
[GRAPH]
GROWTH OF $10,000
11/1/93 12/31/96
------- --------
SIT MONEY MARKET FUND $10,000 $11,573
3-MONTH TREASURY BILL INDEX $10,000 $11,699
The sum of $10,000 invested at inception (11/1/93) and held until 12/31/96
would have grown to $11,573 in the Fund or $11,699 in the 3-Month U.S.
Treasury Bill Index assuming reinvestment of all dividends and capital
gains.
[GRAPH]
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%
<TABLE>
[LOGO]
<S> <C> <C>
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
Bryce A. Doty, CFA (1) Vice President - Investments
Paul J. Jungquist, CFA (2) Vice President - Investments
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
</TABLE>
(1) Bond, Balanced and U.S. Government Securities Funds only.
(2) Money Market Fund only.
