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
Money Market Fund.................................................. 6
U.S. Government Securities Fund.................................... 8
Bond Fund.......................................................... 10
Tax-Free Income Fund............................................... 12
Minnesota Tax-Free Income Fund..................................... 14
This document must be preceded or accompanied by a Prospectus.
<PAGE>
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 $6 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
* Electronic transfer of funds for purchases and redemptions
* Free check-writing privileges on bond funds
* Retirement accounts including IRAs, Keoghs and 401(k) Plans
[CHART]
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
<PAGE>
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - JUNE 30, 1997
[PHOTO]
Dear Fellow Shareholders:
Fixed income markets rebounded strongly during the three months ended
June 30, 1997 after a difficult first quarter. Bond prices rallied during the
second quarter as economic indicators confirmed slower growth and subdued
inflation.
Economic Overview
An environment of moderating economic growth and benign inflation unfolded
during the second quarter of 1997, which we believe will continue into the
second half of the year. We expect real GDP growth to decelerate from the very
strong +5.9% first quarter annual rate to +2.0% for the second quarter and +2.5%
for the second half of 1997. The key to our outlook is the material deceleration
in consumer spending. Despite robust confidence levels, we do not foresee a
strong rebound in economic activity, given the high ratio of consumer debt
service payments to income, flattening equipment investment relative to GDP and
still high real interest rates.
Through June, inflation news continues to be very favorable. The
year-over-year increase in the Consumer Price Index is a mere +2.3%, its lowest
since 1965; the Producer Price Index (PPI) recorded six months of consecutive
declines for the first time in the postwar period; and the PPI for Crude
Materials is currently recording negative year-over-year rates of change; the
price of gold is down 20% thus far in 1997; and crop conditions look good. Of
concern is the economy operating at close to full capacity, the relatively low
unemployment rate, and improving global economic conditions. Inflation appears
to be benign, but we will continue to monitor these factors closely.
On the fiscal policy front, progress has been made in crafting a tax
package that would include the first large Federal tax cut in sixteen years.
While details need to be reconciled, momentum is good and a meaningful tax
reduction package has a high probability of passage. More importantly, this
reflects a fiscal policy shift toward stimulus after years of restraint. The
fiscal 1997 budget deficit is almost certain to be smaller than the
Congressional Budget Office's most recent forecast of $67 billion.
After a single 0.25% hike in the Federal funds on March 25, the Federal
Reserve left monetary policy unchanged at its May 20th FOMC meeting and noted a
more cautious approach to further tightening. Subsequent economic reports have
since validated the Fed's position and, again, no action was taken at its
meeting in early July. The bond rally has continued into July with further
momentum. At 6.45%, the 30-year Treasury bond yield is approaching its December
1996 trough of 6.35%. For comparison, previous troughs occurred at approximately
5.95% in January 1996 and 5.79% in October 1993. With the declining U.S. federal
deficit, the issuance of Treasury debt is diminishing. In addition, the high
differential between U.S. interest rates and rates abroad has encouraged heavy
foreign buying, and, when last reported, foreigners owned 33% of U.S. Treasury
debt. These supply/demand dynamics, as well as the fundamental outlook, support
our outlook for lower interest rates in the near term.
Strategy Summary
Given our expectations for bond yields to decline further, we are
maintaining taxable bond portfolio durations at slightly extended levels
relative to their respective benchmarks. A more defensive positioning is
anticipated as interest rates move lower. We remain focused on areas within each
market sector and continue to emphasize high coupon mortgage pass-through
securities with stable prepayment rates. We continue to look for securities that
provide incremental yield, such as asset backed securities that are
collateralized by home equity loans and real estate investment trusts in the
corporate sector.
Municipal bond yields, which have declined beyond their 1996 trough levels,
are at their lowest level since October 1993. Municipal bond yields are
approaching levels where advance refunding activity should start to accelerate,
particularly among lower rated issues. Sector and security selection continue to
be key elements of our investment approach for our municipal funds. We remain
focused on issues in the housing and health care sectors, despite the fact that
relative yield spreads are historically narrow. In addition, we continue to seek
securities offering greater call protection without lengthening the average
maturity of the Funds.
As stronger economic activity or inflation could again reverse the market
outlook for interest rates, we believe that our focus on high current income and
stability of principal will help provide positive incremental returns over
longer term periods. We appreciate your continued interest in the Sit Mutual
Funds and look forward to helping you to achieve your long-term investment
goals.
Sincerely,
/S/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
<PAGE>
SIT MUTUAL FUNDS
JUNE 30, 1997 PERFORMANCE SUMMARY - BOND FUNDS
BOND MARKET REVIEW
Bond prices rallied during the second quarter as economic indicators
confirmed slower growth and subdued inflation and market sentiment about further
Fed tightening dissipated. The Federal Reserve left monetary policy unchanged
during the second quarter after a single 25 basis point hike in the Federal
funds rate on March 25. The 3-month Treasury bill yield decreased from 5.33% on
March 31 to 5.17% on June 30, compared to a range of 4.84% and 5.34% during the
quarter and to 5.18% on December 31, 1996.
The 30-year Treasury bond yield decreased 0.28% during the quarter, from
7.08% to 6.80%, but was still above its latest trough of 6.35% reached in early
December 1996. Taxable bonds posted strong returns for the second quarter,
reversing their negative performance of the first quarter, and are now in
positive territory year-to-date. The corporate sector, which continued to
benefit from narrowing relative yield spreads, and governments outperformed due
to their longer durations. Market performance in the shorter duration
asset-backed and mortgage pass-throughs sectors lagged during the quarter,
although mortgages remain ahead year-to-date.
Municipal bonds followed the strong taxable bond rally during the quarter
with yields in the intermediate maturity range experiencing the largest
declines. The Bond Buyer 40-Bond Municipal Index yield decreased 0.26% during
the quarter, from 5.95% to 5.69%. During June, municipal bond yields broke
through their lows reached in early December 1996. The Bond Buyer 40-Bond Index
yield reached 5.58% in June, which compares to 5.61% in early December. The
hospital sector continued to benefit from narrowing relative yield spreads and
some advance refunding activity. While the housing sector lagged during the
second quarter, its characteristic price stability has benefited returns over
longer term periods.
Security selection remains a strong component of the attractive returns
earned by the Sit bond funds over the longer term. These results were achieved
consistent with the Funds' dual objectives of high current income and principal
stability.
<TABLE>
<CAPTION>
RETURN - CALENDAR YEAR
----------------------------------------------------------------------- YIELD
YTD AS OF DISTRIBUTION
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 6/30/97 RATE(2)
----------------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SIT MONEY MARKET FUND ---- ---- ---- ---- ---- 0.46%(1) 3.84% 5.58% 5.08% 2.53% 5.32%(6)
SIT U.S. GOV'T. SECURITIES FUND 7.86 11.04 10.97 12.87 5.43 7.34 1.77 11.50 4.99 2.99 5.95 6.27%
SIT BOND FUND ---- ---- ---- ---- ---- 0.34(1) -1.31 16.83 4.25 3.44 6.53 6.51
SIT TAX-FREE INCOME FUND 2.19(1) 8.38 7.29 9.25 7.71 10.42 -0.63 12.86 5.69 3.74 5.32(4) 5.62
SIT MINNESOTATAX-FREE
INCOME FUND ---- ---- ---- ---- ---- 1.60(1) 0.63 11.90 5.89 2.93 5.31(3) 5.53
3-MONTH U.S. TREASURY BILL 7.10 8.73 8.04 5.72 3.56 3.13 4.47 5.98 5.27
LEHMAN INTER. GOVERNMENT BOND INDEX 6.40 12.68 9.56 14.11 6.93 8.17 -1.75 14.41 4.06
LEHMAN AGGREGATE BOND INDEX 7.89 14.53 8.96 16.00 7.40 9.75/0.54(1) -2.92 18.47 3.63
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 6.39/0.75(1) 9.07 7.70 11.41 7.62 8.73 -1.28 11.65 4.22
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>
<TABLE>
<CAPTION>
TOTAL RETURN AVERAGE ANNUAL TOTAL RETURNS FOR THE
QUARTER SIX MONTHS PERIODS ENDED JUNE 30, 1997
ENDED 6/30/97 ENDED 6/30/97 -----------------------------------------
NASDAQ ------------- ------------- SINCE
SYMBOL INCEPTION 1 YEAR 3 YEARS 5 YEARS INCEPTION
------ --------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIT MONEY MARKET FUND SNIXX 11/01/93 1.30% 2.53% 5.12% 5.16% -- 4.78%
SIT U.S. GOV'T. SECURITIES FUND SNGVX 06/02/87 3.00 2.99 6.97 6.99 6.22 8.18
SIT BOND FUND SIBOX 12/01/93 3.90 3.44 8.80 8.48 -- 6.37
SIT TAX-FREE INCOME FUND SNTIX 09/29/88 3.02 3.74 8.54 7.63 7.11 7.60
SIT MINNESOTA TAX-FREE INCOME FUND SMTFX 12/01/93 2.57 2.93 7.66 7.18 -- 6.36
3-MONTH U.S. TREASURY BILL 11/01/93 1.30 2.62 5.31 5.44 -- 5.11
LEHMAN INTER. GOVERNMENT BOND INDEX 05/31/87 2.79 2.76 6.95 7.19 6.23 8.02
LEHMAN AGGREGATE BOND INDEX 11/30/93 3.67 3.09 8.15 8.53 -- 6.08
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 09/30/88 2.45 2.42 6.17 6.20 5.89 7.05
</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 6/30/97.
(3) For Minnesota residents in the 31%, 36% and 39.6% federal tax brackets, the
double exempt tax equivalent yields are 8.41%, 9.07% and 9.61%,
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 7.71%, 8.31% and 8.81%, 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 6/30/97 was 5.18%.
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.
<PAGE>
SIT MONEY MARKET FUND REVIEW
JUNE 30, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
PAUL J. JUNGQUIST, CFA
PORTFOLIO MANAGER
The Sit Money Market Fund provided investors with a +1.30% return for the
second quarter of 1997 compared to a +1.21% average return for the Lipper
Analytical Services, Inc. Money Market Fund universe. The Fund's performance
ranked 34th of 307 funds in its Lipper peer group category. As of June 30, 1997,
the Fund's 7-day compound yield was 5.32% and its average maturity was 29 days,
compared to 4.74% and 27 days, respectively, at March 31, 1997.
The Federal Reserve Board has held the federal funds rate steady since
raising it by 25 basis points to 5.50% during March. Three-month Treasury bill
yields decreased from 5.33% at March 31 to 5.17% at June 30. Yields fell during
the quarter in anticipation of no near term change in the federal funds rate and
a change in market expectations about future Fed policy. The current yield level
implies that the market is not expecting any additional tightening by the Fed in
the third quarter of 1997. Sharply slowing economic growth and continued low
inflation are the secular factors supporting this expectation. Accordingly, the
Fund will try to take advantage of current yield levels and maintain the average
maturity of the portfolio in a range of 25 to 35 days over the near term in
anticipation of no near term change in Fed policy. The Fund may shorten its
average maturity, however, if signs of an additional tightening begin to appear.
The Fund will lengthen its average maturity when evidence indicates that the Fed
is near the end of its tightening cycle.
Despite the slowing in economic activity in the second quarter, 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
continued pressure, however, as consumer credit exposure continues to be at
relatively high levels, 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, diversified finance 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 6/30/97: $1.00 Per Share
3/31/97: $1.00 Per Share
Total Net Assets: $34.42 Million
[GRAPH]
PORTFOLIO STRUCTURE
(% of total net assets)
Consumer Loan Finance 16.8
Diversified Finance 13.0
Captive Equipment Finance 12.4
U.S. Government 10.7
Utilities 9.5
Captive Auto Finance 6.7
Insurance 4.4
Captive Oil Finance 3.8
Retail 3.3
Energy 3.2
Technology/Business Equip. 3.2
Other Assets & Liabilities 13.0
<PAGE>
<TABLE>
<CAPTION>
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 1.30% 1.21% 1.30% 1.30% 1.21% 1.30%
(unannualized)
1 Year 5.12 4.82 5.31 5.12 4.82 5.31
3 Year 5.16 4.94 5.44 16.29 15.58 17.22
Inception 4.78 4.57 5.11 18.65 17.81 20.06
</TABLE>
* As of 6/30/97
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. MONEY FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT A FUND WILL MAINTAIN A $1 SHARE VALUE. YIELD
FLUCTUATES. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. 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.
GROWTH OF $10,000
[GRAPH]
SIT MONEY MARKET FUND
3-MONTH U.S. TREASURY BILL INDEX
The sum of $10,000 invested at inception (11/1/93) and held until 6/30/97 would
have grown to $11,865 in the Fund or $12,006 in the 3-Month U.S. Treasury Bill
Index assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
[GRAPH]
(% 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%
<PAGE>
SIT U.S. GOVERNMENT SECURITIES FUND REVIEW
JUNE 30, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
BRYCE A. DOTY, CFA
PORTFOLIO MANAGER
The Sit U.S. Government Securities Fund provided investors with a +3.00%
return for the second quarter of 1997 compared to a +2.79% average return for
the Lehman Intermediate Government Bond Index. For the twelve months ended June
30, 1997, the Fund's total return of +6.97% was in line of with the +6.95%
average return for its benchmark. As of June 30, 1997, the Fund's 30-day SEC
yield was +5.95% and its 12-month distribution rate was +6.27%, compared to
+6.65% and +6.29%, respectively, at March 31, 1997.
U.S. Treasury yields fell sharply across all maturities during the past
quarter. As a result, longer duration securities provided better returns than
those with intermediate or shorter maturities. The Fund continues to focus on
intermediate maturity securities that provide a high level of income. The
decrease in interest rates over the past quarter resulted in higher prices for
the Fund's Treasury and collateralized mortgage obligation holdings. In
addition, the Fund's holdings in seasoned, high coupon mortgage and manufactured
housing loan pass-through securities, which are relatively more stable in price
because of their shorter average lives, provided high returns due to their high
coupon income. Despite this strong performance, however, the Fund's return
lagged that of its Lipper universe due to its shorter effective duration.
Investment activity for the past three months consisted of reducing emphasis on
mortgage pass-through securities and increasing exposure to Treasury securities
as well as investing in certain government closed-end bond funds. The shares of
the closed-end funds were purchased at a price below the funds' net asset value,
producing a high dividend yield comparable to other securities held in the Fund.
Economic growth slowed in the second quarter from the torrid +5.9% of the
first quarter and inflation has continued to subside, thereby reducing pressure
on the Federal Reserve to raise short term interest rates in the near term.
However, a reacceleration of growth in the second half of the year and/or a
reversal in the positive trend of inflation could result in the Fed raising
short term interest rates in the second half of 1997. Given this somewhat
cautious outlook regarding future Fed policy, the Fund's continued emphasis on
investing in securities that produce high current income takes on increased
importance.
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 6/30/97: $10.43 Per Share
3/31/97: $10.28 Per Share
Total Net Assets: $77.65 Million
30-Day SEC Yield: 5.95%
12-Month Distribution Rate: 6.27%
Average Maturity: 15.2 Years
Effective Duration: 3.8 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)
GNMA Pass-Through Securities 52.6
U.S. Treasury Bonds 20.3
Collateralized Mortgage Obligations 13.1
FNMA Pass-Through Securities 5.1
Mutual Funds 3.9
FHLMC Pass-Through Securities 3.2
Cash & Cash Equivalents 1.8
<PAGE>
<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
---- ------------ ----- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
3 Months 3.00% 3.51% 2.79% 3.00% 3.51% 2.79%
(unannualized)
1 Year 6.97 7.01 6.95 6.97 7.01 6.95
3 Years 6.99 7.09 7.19 22.48 22.81 23.16
5 Years 6.22 6.01 6.23 35.20 33.87 35.27
10 Years 8.14 7.45 7.96 118.72 105.09 115.18
Inception 8.18 7.48 8.02 120.91 107.14 117.72
(6/2/87)
</TABLE>
* As of 6/30/97
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. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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.
GROWTH OF $10,000
[GRAPH]
SIT U.S. GOV'T. SECURITIES FUND
LEHMAN INTER. GOV'T. BOND INDEX
The sum of $10,000 invested at inception (6/2/87) and held until 6/30/97
would have grown to $22,091 in the Fund or $21,772 in the Lehman Intermediate
Government Bond Index assuming reinvestment of all dividends and capital gains.
The Adviser's estimates of the dollar weighted average life of the portfolio's
securities, which may vary from their stated maturities.
ESTIMATED AVERAGE LIFE PROFILE
[GRAPH]
Years
- --------------------------------------------
0-1 1-5 5-10 10-20 20+
- --- --- ---- ----- ---
1.8% 74.2% 14.3% 5.9% 3.8%
The Advisor's estimates of the dollar weighted average life of the portfolio's
securities, which may vary from their stated maturities.
<PAGE>
SIT BOND FUND REVIEW
JUNE 30, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
BRYCE A, DOTY, CFA
PORTFOLIO MANAGER
The Sit Bond Fund provided investors with a +3.90% return for the second
quarter of 1997 compared to a +3.30% average return for the Lipper Analytical
Services, Inc. Investment Grade Bond Fund universe. The Fund's performance
ranked 20th of 200 funds in its Lipper peer group category for the quarter. For
the twelve months ended June 30, 1997, the Fund's total return of +8.80%
substantially exceeded the +7.54% average return for its Lipper universe and
ranked 23rd of 183 funds, and 12th of 102 funds since inception. As of June 30,
1997, the Fund's 30-day SEC yield was +6.53% and its 12-month distribution rate
was +6.51%, compared to +6.68% and +6.54%, respectively, at March 31, 1997.
U.S. Treasury yields fell sharply across all maturities during the past
quarter. As a result, longer duration securities provided better returns than
those with intermediate or shorter maturities. This decrease in interest rates
resulted in higher prices for the Fund's holdings across all sectors. The
asset-backed sector produced the most favorable return for the portfolio during
the quarter due to its relatively longer effective duration. While the agency
pass-through sector produced high levels of interest income, it had the weakest
total return due to its relatively shorter duration.
The Fund's most significant sector shifts during the quarter reduced
emphasis on Treasury securities and increased exposure to the higher yielding
corporate and agency pass-through sectors. Increased exposure to the corporate
sector should enhance performance if the bond market rally continues, while
increased exposure to the agency pass-through sector should help reduce
volatility in the Fund's net asset value if interest rates should rise again.
Economic growth slowed in the second quarter from the torrid +5.9% of the
first quarter and inflation has subsided, thereby reducing pressure on the
Federal Reserve to raise short term interest rates in the near term. However,
reacceleration of growth in the second half of the year and/or a reversal in the
positive trend of inflation could result in the Fed raising short term interest
rates in the second half of 1997. Given this somewhat cautious outlook regarding
Fed policy, the Fund's continued emphasis on investing in securities that
produce high current income is increasingly important. Our longer term outlook
forecasts moderate economic growth combined with low inflation, resulting in
relatively stable interest rates. As a result, we are maintaining the Fund's
duration at 5.0 years, slightly longer than the 4.6 year duration of its
benchmark, the Lehman Aggregate Bond Index, enabling the Fund to invest in
higher yielding 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 6/30/97: $9.83 Per Share
3/31/97: $9.62 Per Share
Total Net Assets: $6.70 Million
30-Day SEC Yield: 6.53%
12-Month Distribution Rate: 6.51%
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.
PORTFOLIO STRUCTURE
(% of total net assets)
Agency Pass-Through Securities 30.6
Corporate Bonds & Notes 26.0
Asset-Backed Securities 15.4
Collateralized Mortgage Obligations 8.5
U.S. Treasury 5.5
Mutual Funds 4.4
Trust Preferred Securities 2.2
Cash Equivalents 7.4
<PAGE>
<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 3.90% 3.30% 3.67% 3.90% 3.30% 3.67%
(unannualized)
1 Year 8.80 7.54 8.15 8.80 7.54 8.15
3 Year 8.48 7.63 8.53 27.67 24.67 27.83
Inception 6.37 5.25 6.08 24.77 20.14 23.55
(12/1/93)
</TABLE>
* As of 6/30/97
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. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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.
GROWTH OF $10,000
SIT BOND FUND
LEHMAN AGGREGATE BOND INDEX
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/97 would
have grown to $12,477 in the Fund or $12,355 in the Lehman Aggregate Bond Index
assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S OR S&P USED.
AAA 15.4%
A 15.9%
BBB 17.3%
Other Assets & Liabilities 7.4%
Agency Backed Securities & CMO's 39.1%
U.S. Government 5.5%
<PAGE>
SIT TAX-FREE INCOME FUND REVIEW
JUNE 30, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
The Sit Tax-Free Income Fund provided shareholders with a total return of
+3.02% for the 3 months and +3.74% for the 6 months ended June 30, 1997. As bond
yields declined during the quarter, the Fund's focus on securities that provide
higher income and greater stability of principal value, such as those in the
housing sector, caused the Fund's return to lag. The Fund's quarterly
performance ranked #209 of 245 general municipal funds tracked by Lipper
Analytical Services, which averaged +3.41% for the quarter. Over longer term
periods, the Fund continues to benefit from its emphasis on yield. Compared to
its Lipper peer group, the Fund's returns ranked #50 of 226 funds for the
12-month period, #47 of 176 funds for the 3-year period, #17 of 107 funds for
the 5-year period and #44 of 78 funds since inception.
The Fund's price per share, which has reached all time highs in recent
weeks, was $10.14 on June 30, 1997. This compares to $9.98 on March 31, and
$10.05 on December 31, 1996. Year-to-date, the Fund's price remained within a
range of 2.2%, varying between $9.94 and $10.16. The Fund's 30-day SEC yield,
which had been relative stable around 5.45% since January, decreased slightly to
5.32% on June 30. The Fund's 12-month distribution rate has approximated 5.60%
for over a year.
Fund assets increased from $342.5 million to $376.0 million during the
quarter. Industry sector weightings were relatively unchanged, aside from
multifamily housing which decreased from 34.3% to 32.4%. A Texas hospital issue
was advance refunded, causing the health care sector to decrease from 19.6% to
18.6% and prerefunded bonds to increase from 1.7% to 3.4%. In addition, the
Fund's weighting in securities rated "A" or better increased from 61.7% to
62.6%. Cash increased from 2.6% to 5.2%.
The Fund's average maturity shortened slightly from 17.9 years to 17.5
years. The Fund's duration to estimated average life of 7.3 years on June 30,
1997 was unchanged from March 31, and compares to 6.1 years on December 31,
1996. The Fund's implied duration, which more closely represents the Fund's
historical price sensitivity to changes in interest rates, decreased from 5.0
years to 4.6 years. This shortening in implied duration occurred despite the
Fund's focus on increasing call protection to lock in higher yields over the
longer term. We intend to keep the Fund fully invested and continue to seek
opportunities that provide a high level of current income.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the Tax-Free Income 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. The Adviser does not
intend to invest in securities that generate interest income treated as a tax
preference for alternative minimum taxable income purposes.
PORTFOLIO SUMMARY
Net Asset Value 6/30/97: $10.14 Per Share
3/31/97: $9.98 Per Share
Total Net Assets: $375.95 Million
30-Day SEC Yield: 5.32%
Tax Equivalent Yield: 8.81% (1)
12-Month Distribution Rate: 5.62%
Average Maturity: 17.5 Years
Duration to Estimated Avg. Life: 7.3 Years (2)
Implied Duration: 4.6 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 32.4
Hospital/Health Care Revenue 18.6
Single Family Mortgage Revenue 16.7
Transportation 6.4
Industrial Revenue/Pollution Control 5.3
Other Revenue 4.9
Escrowed to Maturity/Pre-Refund 3.4
Public Facilities 1.8
Municipal Lease Rental 1.8
Education/Student Loan 1.7
Sales Tax Revenue 0.8
Utility 0.6
General Obligation 0.4
Cash & Cash Equivalents 5.2
<PAGE>
<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
---- --------- ---------- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
3 Months 3.02% 3.41% 2.45% 3.02% 3.41% 2.45%
(unannualized)
1 Year 8.54 7.81 6.17 8.54 7.81 6.17
3 Years 7.63 7.10 6.20 24.69 22.86 19.77
5 Years 7.11 6.51 5.89 41.00 37.10 33.11
Inception 7.60 7.73 7.05 89.85 91.93 81.52
(9/29/88)
</TABLE>
* As of 6/30/97
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. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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.
GROWTH OF $10,000
[GRAPH]
SIT TAX-FREE INCOME FUND
LEHMAN 5-YEAR MUNI. BOND INDEX
The sum of $10,000 invested at inception (9/29/88) and held until 6/30/97 would
have grown to $18,985 in the Fund or $18,152 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
AAA 14.0%
AA 11.5%
A 31.9%
BBB 37.4%
Other Assers & Liabilities 5.2%
<PAGE>
SIT MINNESOTA TAX-FREE INCOME FUND REVIEW
JUNE 30, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
The Sit Minnesota Tax-Free Income Fund provided shareholders with a total
return of +2.57% for the 3 months and +2.93% for the 6 months ended June 30,
1997. As bond yields declined during the quarter, the Fund's focus on securities
that provide higher income and greater stability of principal value, such as
those in the housing sector, caused the Fund's return to lag. The Fund's
quarterly performance ranked #40 of 44 Minnesota municipal funds tracked by
Lipper Analytical Services, which averaged +3.10% for the quarter. Over longer
term periods, the Fund continues to benefit from its emphasis on yield. Compared
to its Lipper peer group, the Fund's returns ranked #13 of 44 funds for the
12-month period, #6 of 30 funds for the 3-year period, and #1 of 25 funds since
inception.
The Fund's price per share, which has reached new highs in recent weeks,
was $10.26 on June 30, 1997. This compares to $10.14 on March 31, and $10.24 on
December 31, 1996. Year-to-date, the Fund's price remained within a range of
1.9%, varying between $10.11 and $10.30. The Fund's 30-day SEC yield, which had
been relatively stable around 5.50% since January, decreased slightly to 5.31%
on June 30. The Fund's 12-month distribution rate has approximated 5.60% for
over a year.
Fund assets increased from $94.1 million to $108.1 million during the
quarter. Industry sector weightings were relatively unchanged, aside from the
health care sector which increased from 12.2% to 13.9%. The Fund's weighting in
securities rated "A" or better remained at approximately 61%, as holdings in
BBB-rated securities decreased from 6.1% to 4.8% and non-rated securities
increased from 33.1% to 35.7%. Cash decreased from 5.1% to 3.7%.
The Fund's average maturity lengthened from 18.8 years during the first
quarter to 19.6 years. The Fund's duration to estimated average life increased
to 7.6 years on June 30, 1997, which compares to 7.2 years on March 31 and 6.9
years on December 31, 1996. The Fund's implied duration, which more closely
represents the Fund's historical price sensitivity to changes in interest rates,
increased from 4.1 years during the first quarter to 4.4 years. This lengthening
in portfolio duration reflects the Fund's efforts to increase call protection
and lock in higher yields over the longer term. We are monitoring the Fund's
duration measures closely to avoid approaching extended levels. We intend to
keep the Fund fully invested and continue to seek opportunities that provide a
high level of current income.
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 6/30/97: $10.26 Per Share
3/31/97: $10.14 Per Share
Total Net Assets: $108.11 Million
30-Day SEC Yield: 5.31%
Tax Equivalent Yield: 9.61% (1)
12-Month Distribution Rate: 5.53%
Average Maturity: 19.6 Years
Duration to Estimated Avg. Life: 7.6 Years (2)
Implied Duration: 4.4 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 39.6
Single Family Mortgage Revenue 18.1
Hospital/Health Care Revenue 13.9
Industrial Revenue/Pollution Control 8.8
Other Revenue Bonds 8.7
Municipal Lease Rental 2.7
Public Facilities 1.9
Education/Student Loan 1.5
General Obligation 1.1
Cash & Cash Equivalents 3.7
<PAGE>
<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
---- --------- ---------- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
3 Months 2.57% 3.10% 2.45% 2.57% 3.10% 2.45%
(unannualized)
1 Year 7.66 7.19 6.17 7.66 7.19 6.17
3 Year 7.18 6.63 6.20 23.11 21.23 19.77
Inception 6.36 4.71 5.07 24.70 17.93 19.37
(12/1/93)
</TABLE>
* As of 6/30/97
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. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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.
GROWTH OF $10,000
[GRAPH]
SIT MN TAX-FREE INCOME FUND
LEHMAN 5-YEAR MUNI. BOND INDEX
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/97 would
have grown to $12,470 in the Fund or $11,937 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
[GRAPH]
AAA 20.4%
AA 21.0%
A 14.4%
BBB 4.8%
Not Rated 35.7%
Other Assets & Liabilities 3.7%
ADVISER'S ASSESSMENT OF
NOT-RATED SECURITIES
AA 0.6%
A 1.8
BBB 25.2
BB 7.2
B 0.8
-----
Total 35.7%
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
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:
<S> <C> <C>
Eugene C. Sit, CFA Chairman
Peter L. Mitchelson, CFA Vice Chairman
Michael C. Brilley Senior Vice President
Mary K. Stern President
Paul E. Rasmussen Vice President & Treasurer
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
Michael P. Eckert Vice President - Group Manager
Michael J. Radmer Secretary
Carla J. Rose Assistant Secretary
</TABLE>
(1) Bond and U.S. Government Securities Funds only.
(2) Money Market Fund only.
