BOND FUNDS QUARTERLY REPORT
QUARTER ENDED JUNE 30, 1998
A FAMILY OF 100% NO-LOAD FUNDS
------------------------------
MONEY MARKET FUND
U.S. GOVERNMENT SECURITIES FUND
BOND FUND
TAX-FREE INCOME FUND
MINNESOTA TAX-FREE INCOME FUND
[LOGO] SIT(SM) MUTUAL FUNDS
THE INVESTMENT IS MUTUAL(SM)
<PAGE>
SIT MUTUAL FUNDS
BOND FUNDS QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
----
A Look at 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 Associates 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 Associates currently manages approximately $6
billion as of June 30, 1998, for some of America's largest corporations,
foundations and endowments.
Sit Mutual Funds is comprised of thirteen 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 other features include:
* Free telephone exchange
* Dollar-cost averaging through automatic investment plan
* Electronic transfer for purchases and redemptions
* Free check-writing privileges on bond funds
* Retirement accounts including IRAs, Keoghs and 401(k) Plans
SIT FAMILY OF FUNDS
[GRAPHIC]
STABILITY: INCOME: GROWTH: HIGH GROWTH:
Safety of principal Increased income Long-term capital Long-term capital
and current income appreciation appreciation
and income
MONEY MARKET U.S. GOVERNMENT BALANCED MID CAP GROWTH
SECURITIES LARGE CAP GROWTH INTERNATIONAL GROWTH
TAX-FREE INCOME REGIONAL GROWTH SMALL CAP GROWTH
MINNESOTA TAX-FREE SCIENCE AND
INCOME TECHNOLOGY GROWTH
BOND DEVELOPING MARKETS
GROWTH
<PAGE>
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - QUARTER ENDED JUNE 30, 1998
[PHOTO]
EUGENE C. SIT, CFA
CHIEF INVESTMENT OFFICER
Dear Fellow Shareholders:
U.S. Treasury bond rates fell during the quarter as concerns over Asia
fueled expectations for a slowing economy and low inflation as well as further
strength in the U.S. dollar. Domestic fixed income instruments provided slightly
better than coupon rates of return during the quarter.
Economic Overview
The domestic economy appears to have slowed following the unsustainable
+5.4% rate of real GDP growth in the first quarter. Consensus expectations are
that second quarter real GDP growth should moderate to less than +2.0%, and a
few economists are even postulating a negative growth quarter. Contributing
factors are lower inventory accumulation, the GM strike and the widening trade
deficit, which is the most worrisome. However, strength in the consumer sector
makes it difficult to assign a high probability to a sudden, near-term economic
downturn. We expect U.S. real GDP growth to moderate to approximately +1.0% in
the second quarter and average +2.5% in the second half of the year. While
inflation readings remain tame, the Consumer Price Index appears to have reached
an intermediate bottom. The CPI upticked in May to a year-over-year increase of
+1.7% compared to an average of +1.4% for February-April. Our expectations are
that the CPI will increase at less than +2.0% over the balance of the year.
Federal budget trends continue to improve with a surplus of up to $90
billion projected for fiscal 1998, and possibly $175 billion in fiscal 1999.
Growth in 1999 receipts over spending is projected to result in a net surplus of
2.0% of GDP, compared to 1992 when the deficit was a record 4.7% of GDP (-$290
billion). While booming financial markets have produced huge capital gains for
taxation purposes, wage and salary withholding has also been growing nearly 10%,
reflecting high levels of employment and a strong economy.
The U.S. intervened jointly with Japan to support the yen in early June.
Most observers, including ourselves, believe this and any future interventions
will be insufficient to correct Japan's inherent problems without meaningful
internal programs. With the U.S. dollar exchange rate at the upper end of its
past ten-year trading range, the possibility of further currency intervention
holds potential for increased volatility in the months ahead.
Strategy Summary
To no one's surprise, the Federal Reserve again left unchanged the 5.50%
federal funds rate target at its July 1st meeting, but retained a "bias toward
tightening." In his testimony before the Joint Economic Committee on June 10th,
Chairman Alan Greenspan admitted that, despite conditions in Asia, the economy
was "still enjoying a virtuous cycle" and reiterated the need for continued
vigilence on inflation. As long as overall inflation remains dormant, and the
Asian economies continue to show weakness, we expect the Fed to maintain its
policy of neutrality, but with a bias toward tightening.
Given our expectations for continued strength in the U.S. economy in the
second half of the year and indications that domestic inflation trends may have
bottomed, we continue to believe that Treasury bond yields are likely to remain
in a stable to slightly higher range in coming months. Thus, we have maintained
taxable fixed income portfolio durations slightly lower than related benchmarks.
In addition, we have made initial purchases of inflation-linked Treasury notes.
In municipal accounts, we remain focused on sector and security selection. As
the incremental yield provided by lower rated credits remains very narrow, we
continue to seek opportunities to improve the credit quality of portfolios
without giving up much income. Municipal bonds remain cheaply valued relative to
taxable bonds and we are watchful of opportunities created by supply conditions.
Given our expectations for stable to slightly higher interest rates, we
believe 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
achieve your long-term investment goals.
Sincerely,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
June 30, 1998
3
<PAGE>
SIT MUTUAL FUNDS
QUARTER ENDED JUNE 30, 1998 PERFORMANCE SUMMARY - BOND FUNDS
BOND MARKET REVIEW
The Federal Reserve left monetary policy unchanged during the quarter.
Concerns over Asia caused the Fed to shift to a neutral bias last December but
evidence of continued strength in the U.S. led the Fed to reinstate its bias
toward tightening on March 31, 1998. The 5.50% federal funds rate provided
resistance to falling short-term interest rates. 3-Month Treasury bill yields
declined from 5.13% to 5.08% during the second quarter of the year and remained
in a relatively narrow range between 4.97% and 5.23%.
After a relatively stable first quarter, longer term taxable bond yields
fell during the second quarter as concerns over Asia fueled expectations for a
slowing economy and low inflation as well as further strength in the dollar. The
30-year Treasury bond yield decreased from 5.94% to 5.62% during the second
quarter. These conditions resulted in a further flattening of the taxable yield
curve. The low level of interest rates resulted in heavy corporate issuance
which caused yield spreads in that sector to widen late in the quarter. Despite
corporates' higher yield levels, the government and corporate sectors were the
best performing sectors during the quarter. The lowest return came from the
mortgage sector as investors feared a repeat of the record refinancing activity
that occurred in the first quarter this year. The asset-backed sector also
lagged due to its shorter duration.
In contrast to the taxable bond market, municipal bond yields were
relatively unchanged during the quarter and year-to-date. The Bond Buyer 40-Bond
Index yield decreased from 5.27% to 5.22% during the quarter and, given the
decline in Treasury yields, the relative yield ratio of long municipals to long
Treasury bonds rose from 89% to almost 93%. Without the benefit of price
appreciation, municipal indices posted coupon rates of return during the
quarter. Electrics and housing were the top performing revenue sectors. The
hospital sector kept pace during the quarter and remains the top performer over
most longer term periods due to continued narrow incremental yield spreads.
Municipal new-issue volume is approximately 50% higher than one year ago and is
on track to keep pace with the record issuance volume of 1993.
Security selection remains a strong component of the attractive returns
earned by the Sit bond funds during the past year. These results are consistent
with the Funds' dual objectives of high income and principal stability.
1989 1990 1991
---- ---- ----
SIT MONEY MARKET FUND ---- ---- ----
SIT U.S. GOV'T. SECURITIES FUND 11.04 10.97 12.87
SIT BOND FUND ---- ---- ----
SIT TAX-FREE INCOME FUND 8.38 7.29 9.25
SIT MINNESOTA TAX-FREE
INCOME FUND ---- ---- ----
3-MONTH U.S. TREASURY BILL 8.73 8.04 5.72
LEHMAN INTER. GOVERNMENT BOND INDEX 12.68 9.56 14.11
LEHMAN AGGREGATE BOND INDEX 14.53 8.96 16.00
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 9.07 7.70 11.41
SIT INVESTMENT RESERVE FUND 8.53% 7.59% 6.14%
(Inception date 1/25/85. Converted to Sit Money Market Fund on 11/1/93)
NASDAQ
SYMBOL INCEPTION
------ ---------
SIT MONEY MARKET FUND SNIXX 11/01/93
SIT U.S. GOV'T. SECURITIES FUND SNGVX 06/02/87
SIT BOND FUND SIBOX 12/01/93
SIT TAX-FREE INCOME FUND SNTIX 09/29/88
SIT MINNESOTA TAX-FREE INCOME FUND SMTFX 12/01/93
3-MONTH U.S. TREASURY BILL 11/01/93
LEHMAN INTER. GOVERNMENT BOND INDEX 05/31/87
LEHMAN AGGREGATE BOND INDEX 11/30/93
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 09/30/88
(1) Period from Fund inception through calendar year-end. converted to the Sit
Money Market Fund.
(2) Based on the last 12 monthly distributions of net investment income and
NAV as of 6/30/98.
(3) For Minnesota residents in the 28%, 31%, 36% and 39.6% federal tax
brackets, the double exempt tax equivalent yields are 7.29%, 7.60%, 8.20%,
and 8.69%, respectively (Assumes the maximum Minnesota tax bracket of
8.5%).
(4) For individuals in the 28%, 31%, 36% and 39.6% federal tax brackets, the
federal tax equivalent yields are 6.63%, 6.91%, 7.45% and 7.90%,
respectively (income subject to state tax, if any).
4
<PAGE>
TOTAL RETURN - CALENDAR YEAR
YIELD
YTD AS OF DISTRIBUTION
1991 1992 1993 1994 1995 1996 1997 1998 6/30/98 RATE (2)
- --------------------------------------------------------- ---------------------
---- ---- 0.46%(1) 3.84% 5.58% 5.08% 5.22% 2.57% 5.30%(6)
12.87 5.43 7.34 1.77 11.50 4.99 8.19 3.12 5.63 5.72%
---- ---- 0.34(1) -1.31 16.83 4.25 9.44 3.26 5.07 5.99%
9.25 7.71 10.42 -0.63 12.86 5.69 9.87 2.83 4.77(4) 5.17%
---- ---- 1.60(1) 0.63 11.90 5.89 8.19 2.55 4.80(3) 5.21%
5.72 3.56 3.13 4.47 5.98 5.27 5.32 2.60
14.11 6.93 8.17 -1.75 14.41 4.06 7.72 3.39
16.00 7.40 0.54(1) -2.92 18.47 3.63 9.65 3.93
11.41 7.62 8.73 -1.28 11.65 4.22 6.38 2.29
6.14% 3.81% 2.34%(5)
AVERAGE ANNUAL TOTAL RETURNS FOR THE
TOTAL RETURN PERIODS ENDED JUNE 30, 1998
QUARTER SIX MONTHS SINCE
ENDED 6/30/98 ENDED 6/30/98 1 YEAR 3 YEARS 5 YEARS INCEPTION
- ----------------------------- ----------------------------------------
1.28% 2.57% 5.27% 5.21% ---- 4.88%
1.70 3.12 8.32 7.14 6.38% 8.19
2.06 3.26 9.25 7.60 ---- 7.00
1.36 2.83 8.91 8.06 6.94 7.73
1.36 2.55 7.79 7.24 ---- 6.67
1.28 2.60 5.29 5.34 ---- 5.15
1.85 3.39 8.38 6.74 5.91 8.05
2.34 3.93 10.54 7.88 ---- 7.04
1.12 2.29 6.24 5.82 5.29 6.96
(5) Period January 1, 1993, through October 31, 1993, at which time the Fund
(6) Figure represents 7-day compound effective yield. The 7-day average simple
yield as of 6/30/98 was 5.09%.
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS 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 MONEY FUND WILL MAINTAIN A $1 SHARE VALUE. YIELD FLUCTUATES.
5
<PAGE>
SIT MONEY MARKET FUND REVIEW
QUARTER ENDED JUNE 30, 1998
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
PAUL J. JUNGQUIST, CFA
PORTFOLIO MANAGER
The Sit Money Market Fund provided investors with a +1.28% return for the
second quarter of 1998, compared to a +1.20% average return for the Lipper
Analytical Services, Money Market Fund universe. The Fund's performance ranked
57th of 310 funds in its Lipper peer group category for the quarter. The Fund's
performance ranked 57th of 298 funds, 51st of 257 funds and 45th of 200 funds in
its Lipper peer group, respectively, for the year, three year and since
inception (October 31, 1993) periods ended June 30, 1998. As of June 30, 1998,
the Fund's 7-day compound yield was 5.30% and its average maturity was 33 days,
compared to 5.20% and 28 days, respectively, at March 31, 1998.
The Federal Reserve Board maintained the federal funds rate at 5.50% for
the entire quarter. Three-month Treasury bill yields were again confined to a
narrow range over the past three months, ranging from 4.97% to 5.23%. Current
yield levels imply that the market is expecting no policy change by the Fed in
the third quarter of 1998. Strong but slowing economic growth and signs of
incipient wage inflation are offset by continued weakness in Asian economies and
reduced financing needs by the Treasury. Accordingly, the Fund will try to take
advantage of current yield levels and maintain the average maturity of the
portfolio in a range of 20 to 40 days in anticipation of no near term change in
policy by the Fed.
The Fund has produced competitive returns by focusing on credit research,
optimizing average maturity and avoiding the use of risky derivatives. We intend
to continue these conservative policies in the future. As economic activity
starts to slow, we do not foresee a significant impact on the short-term
creditworthiness of top tier commercial paper issuers in general. However,
merger and acquisition activity has heated up considerably, particularly in the
financial services and telecommunications sectors, so we will monitor the Fund's
permissible credits in these industries particularly closely. The Fund continues
to diversify its core holdings and its industry exposure. In the months ahead,
we plan to add top tier credits in the technology, capital goods 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 6/30/98: $1.00 Per Share
3/31/98: $1.00 Per Share
Total Net Assets: $40.92 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Diversified Finance 19.9
Consumer Loan Finance 17.1
Captive Equipment Finance 11.9
U.S. Government 10.0
Captive Auto Finance 9.8
Consumer Non-Durables 3.4
Retail 3.3
Captive Oil Finance 3.2
Energy 3.2
Utilities 2.8
Insurance 2.2
Technology/Business Equip. 1.5
Capital Goods 1.1
Other Assets & Liabilities 10.6
6
<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 1.28% 1.20% 1.28% 1.28% 1.20% 1.28%
(unannualized)
1 Year 5.27 4.96 5.29 5.27 4.96 5.29
3 Year 5.21 4.94 5.34 16.48 15.56 16.89
Inception 4.88 4.67 5.15 24.91 23.75 26.41
(11/1/93)
</TABLE>
* As of 06/30/98
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 NOT A 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
[PLOT POINTS CHART]
3-MONTH U.S.
SIT MONEY TREASURY
MARKET FUND BILL INDEX
The sum of $10,000 invested at inception (11/1/93) and held until 06/30/98 would
have grown to $12,491 in the Fund or $12,641 in the 3-Month U.S. Treasury Bill
Index assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
[PIE CHART]
(% of total net assets)
AS RATED BY MOODY'S, S&P AND FITCH
First Tier Securities 100%
Second Tier Securities 0%
7
<PAGE>
SIT U.S. GOVERNMENT SECURITIES FUND REVIEW
QUARTER ENDED JUNE 30, 1998
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
BRYCE A. DOTY, CFA
PORTFOLIO MANAGER
The Sit U.S. Government Securities Fund provided investors with a +1.70%
return for the first quarter of 1998 compared to a +1.85% return of the Lehman
Int. Government Bond Index. For the twelve months ending June 30, 1998, the
Fund's total return was +8.32% versus +8.38% return for the Lehman Index. As of
June 30, 1998, the Fund's 30-day SEC yield was 5.63% and its 12-month
distribution rate was 5.72%, compared to 5.61% and 5.93%, respectively, at March
31, 1998.
Interest rates fell during the second quarter with longer maturity yields
falling the furthest. Specifically, the yield on the 30-year maturity U. S.
Treasury fell -0.32% while the 2-year maturity yield fell only -0.12%.
Consequently, prices appreciated significantly in the Fund's longer duration
Collateralized Mortgage Obligation and U.S. Treasury holdings. The decline in
yields renewed concerns of higher prepayments in the mortgage pass-through
sector. As a result, the pass-through holdings provided the lowest return in the
Fund for the quarter.
Investment activity involved the successful combination of smaller
mortgage-backed securities into one large security. This combination increases
the value of the assets due to the greater demand that exists for larger-sized
pools. Also, the Fund purchased a 4-year maturity inflation-linked Treasury
note. The principal value of this security increases at the rate of CPI and the
security pays a fixed rate coupon. The coupon yield or real yield on the note
was 3.87% at the time of purchase while a traditional equivalent-maturity
Treasury had a yield of approximately 5.50%. Therefore, if inflation is higher
than the differential of 1.63%, the inflation-linked note will outperform.
Interest rates declined last quarter as weakening Asian economies were
expected to further slow domestic growth. However, the Federal Reserve continues
to maintain a bias toward tightening due to concerns that tight labor markets
and strong consumer demand will lead to higher inflation. We expect inflation to
increase slightly and interest rates to move modestly higher. This outlook 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 6/30/98: $10.67 Per Share
3/31/98: $10.63 Per Share
Total Net Assets: $112.99 Million
30-Day SEC Yield: 5.63%
12-Month Distribution Rate: 5.72%
Average Maturity: 14.6 Years
Effective Duration: 2.6 Years (1)
(1) Effective duration is a measure which reflects estimated price sensitivity
to a given change in interest rates. For example, for an interest rate change of
1.0%, a portfolio with a duration of 5 years would be expected to experience a
price change of 5%. Effective duration is based on current interest rates and
the Adviser's assumptions regarding the expected average life of individual
securities held in the portfolio.
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
GNMA Pass-Through 50.4
U.S. Treasury 18.5
Collateralized Mortgage Obligations 11.4
FNMA Pass-Through 10.5
FHLMC Pass-Through 4.3
Closed-End Mutual Funds 1.5
Municipal 0.6
Other Assets and Liabilities 2.8
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 1.70% 2.30% 1.85% 1.70% 2.30% 1.85%
(unannualized)
1 Year 8.32 10.17 8.38 8.32 10.17 8.38
3 Years 7.14 6.91 6.74 22.98 22.21 21.62
5 Years 6.38 5.76 5.91 36.25 32.16 33.23
10 Years 7.91 7.91 8.05 114.03 114.04 116.90
Inception 8.19 7.81 8.05 139.30 130.15 135.96
(6/2/87)
</TABLE>
* As of 6/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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
[PLOT POINTS CHART]
SIT U.S. GOV'T. LEHMAN INTER.
SECURITIES GOV'T. BOND INDEX
FUND
The sum of $10,000 invested at inception (6/2/87) and held until 6/30/98 would
have grown to $23,930 in the Fund or $23,596 in the Lehman Intermediate
Government Bond Index assuming reinvestment of all dividends and capital gains.
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.
[BAR CHART]
Years
0-1 2.8%
1-5 80.7%
5-10 11.2%
10-20 2.9%
20+ 2.4%
9
<PAGE>
SIT BOND FUND REVIEW
QUARTER ENDED JUNE 30, 1998
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
BRYCE A. DOTY, CFA
PORTFOLIO MANAGER
The Sit Bond Fund provided investors with a +2.06% return for the second
quarter of 1998 compared to a +2.05% average return for the Lipper Analytical
Services Intermediate Investment Grade Bond Fund universe. For the three years
ended June 30, 1998, the Fund's annualized total return of +7.60% exceeded the
+7.09% average return for its Lipper universe, ranking of 37th of 160 funds.
Also, the Fund's performance since inception (December 1, 1993) ranked 21st of
105 funds. As of June 30, 1998, the Fund's 30-day SEC yield was 5.07% and its
12-month distribution rate was 5.99%, compared to 5.43% and 6.35%, respectively,
at March 31, 1998.
Interest rates fell during the second quarter with longer maturity yields
falling the furthest. Specifically, the yield on the 30-year maturity U. S.
Treasury fell -0.32% while the 2-year maturity yield fell only -0.12%. This
resulted in significant price appreciation in the Fund's longer duration
corporate, asset-backed, and U.S. Treasury holdings. The decline in yields
renewed concerns of higher prepayments in the mortgage pass-through sector. As a
result, the pass-through holdings provided the lowest return in the Fund for the
quarter.
Investment activity included selling two corporate securities to take
advantage of attractive bids. Later in the quarter, as interest rates continued
to fall, corporate issuance of debt rose substantially as corporations rushed to
lock in lower rates. The heavy supply caused corporate yield spreads to reach
their widest level in five years. The Fund took advantage of this opportunity by
purchasing three corporate bonds.
Interest rates declined last quarter as weakening Asian economies were
expected to further slow domestic growth. However, the Federal Reserve continues
to maintain a bias toward tightening due to concerns that tight labor markets
and strong consumer demand will lead to higher inflation. We expect inflation to
increase slightly and interest rates to move modestly higher. The Fund will
continue to focus on high quality securities that offer attractive total return
opportunities.
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 6/30/98: $10.11 Per Share
3/31/98: $10.03 Per Share
Total Net Assets: $10.91 Million
30-Day SEC Yield: 5.07%
12-Month Distribution Rate: 5.99%
Average Maturity: 17.8 Years
Effective Duration: 4.0 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)
[BAR CHART]
Government Agency Pass-Through Securities 46.5
Corporate Bonds & Notes 15.1
U.S. Treasury 14.0
Asset-Backed Securities 10.7
Closed-End Mutual Funds 4.7
Collateralized Mortgage Obligations 3.7
Trust Preferred Securities 1.4
Municipal 0.5
Other Assets & Liabilities 3.4
10
<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 2.06% 2.05% 2.34% 2.06% 2.05% 2.34%
(unannualized)
1 Year 9.25 9.42 10.54 9.25 9.42 10.54
3 Year 7.60 7.09 7.88 24.57 22.82 25.55
Inception 7.00 6.20 7.04 36.31 31.72 36.57
(12/1/93)
</TABLE>
* As of 6/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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
[PLOT POINTS CHART]
SIT BOND LEHMAN AGGREGATE
FUND BOND INDEX
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/98 would
have grown to $13,631 in the Fund or $13,657 in the Lehman Aggregate Bond Index
assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
[PIE CHART]
(% of total net assets)
LOWER OF MOODY'S OR S&P USED.
U.S. Government 14.0%
Government Agency Backed Securities & CMO's 50.2%
AAA 11.2%
AA 2.6%
A 10.0%
BBB 8.6%
Other Assets & Liabilities 3.4%
11
<PAGE>
SIT TAX-FREE INCOME FUND REVIEW
QUARTER ENDED JUNE 30, 1998
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
Municipal bond yields remained relatively stable over the quarter. The Sit
Tax-Free Income Fund provided shareholders a total return of +1.36% for the
quarter and +8.91% for the 12 months ended June 30, 1998. The Fund's total
return ranked #125 of 248 general municipal funds tracked by Lipper Analytical
Services for the quarter and ranked #57 of 233 funds for the twelve month
period. In addition, the Fund's returns ranked #31 of 192 funds for the three
year period, #4 of 124 funds for the five year period and #44 of 75 funds since
its inception on September 29, 1988.
The Fund's price per share increased $0.01 during the quarter to $10.42 on
June 30, 1998 and remains below its all-time high of $10.48 reached in early
January 1998. As of June 30th, the Fund's 30-day SEC yield was 4.77% and its
12-month distribution rate was 5.17%, compared to 4.70% and 5.30%, respectively,
on March 31, 1998.
Fund assets increased from $519.6 million to $561.4 million during the
quarter, contributing to an increased cash position from 3.8% to 6.5%. Purchases
were made in the education sector which increased from 1.8% to 2.6% of total
assets and in other revenue bonds which increased from 6.0% to 7.2%. Despite
additional purchases across other sectors, the rest of the Fund's industry
weightings remained unchanged or were diluted by cash flow. Multifamily housing
issues decreased from 29.4% to 27.8% and health care holdings decreased from
23.5% to 22.3%. Prerefunded bonds increased from 3.6% to 4.1% as a result of
continued advance refunding activity. Securities rated BBB decreased from 32.2%
to 30.9%, reflecting lesser emphasis on lower rated credits as incremental yield
spreads remain narrow. Holdings in securities rated "A" or better comprised more
than two-thirds of the portfolio at quarter end. The Fund has focused on
purchasing new issue securities with greater call protection. With the increase
in cash position, the Fund's implied duration remained stable during the quarter
at 5.7 years while its average maturity decreased from 18.7 years to 17.9 years.
With relatively stable municipal bond yields during the quarter, the Fund's
performance was driven by its emphasis on securities which provide higher coupon
income. We expect economic activity to moderate in the second half of the year
and municipal bond yields to remain relatively stable. In this environment, we
will continue to focus on securities that provide incremental yield.
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 6/30/98: $10.42 Per Share
3/31/98: $10.41 Per Share
Total Net Assets: $561.36 Million
30-Day SEC Yield: 4.77%
Tax Equivalent Yield: 7.90%(1)
12-Month Distribution Rate: 5.17%
Average Maturity: 17.9 Years
Duration to Estimated Avg. Life: 7.2 Years(2)
Implied Duration: 5.7 Years(2)
(1) For individuals in the 39.6% federal tax bracket.
(2) See page 13.
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Multifamily Mortgage Revenue 27.8
Hospital/Health Care Revenue 22.3
Single Family Mortgage Revenue 15.2
Other Revenue 7.2
Closed-End Mutual Funds 5.7
Escrowed to Maturity/Pre-Refund 4.1
Industrial Revenue/Pollution Control 3.9
Education/Student Loan 2.6
Transportation 2.1
Municipal Lease Rental 1.0
Public Facilities 0.8
Sales Tax Revenue 0.7
Utility 0.1
Other Assets and Liabilities 6.5
12
<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 1.36% 1.33% 1.12% 1.36% 1.33% 1.12%
(unannualized)
1 Year 8.91 8.39 6.24 8.91 8.39 6.24
3 Years 8.06 7.33 5.82 26.19 23.63 18.50
5 Years 6.94 5.78 5.29 39.85 32.41 29.41
Inception 7.73 7.87 6.96 106.77 109.31 92.86
(9/29/88)
</TABLE>
* As of 6/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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
[PLOT POINTS CHART]
SIT TAX-FREE LEHMAN 5-YEAR
INCOME FUND MUNI. BOND INDEX
The sum of $10,000 invested at inception (9/29/88) and held until 6/30/98 would
have grown to $20,677 in the Fund or $19,286 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
[PIE CHART]
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
BBB 30.9%
A 28.2%
AA 12.9%
AAA 21.5%
Other Assets & Liabilities 6.5%
13
<PAGE>
SIT MINNESOTA TAX-FREE INCOME FUND REVIEW
QUARTER ENDED JUNE 30, 1998
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
Municipal bond yields remained relatively stable during the quarter. The
Sit Minnesota Tax-Free Income Fund provided shareholders a total return of
+1.36% for the quarter and +7.79% for the 12 months ended June 30, 1998. The
Fund's total return ranked #27 of 47 Minnesota municipal funds tracked by Lipper
Analytical Services for the quarter and ranked #25 of 45 funds for the
twelve-month period. In addition, the Fund's returns ranked #12 of 44 funds for
the three-year period and #1 of 25 funds since its inception on December 1,
1993.
The Fund's price per share increased $0.01 during the quarter to $10.50 on
June 30, 1998 and remains below its all-time high of $10.56 reached in early
January 1998. As of June 30th, the Fund's 30-day SEC yield was 4.80% and its
12-month distribution rate was 5.21%, compared to 5.02% and 5.31%, respectively,
on March 31, 1998.
Fund assets increased from $143.6 million to $167.8 million during the
quarter. Cash decreased from 7.0% to 5.6% of total assets as purchases were made
in the multi-family housing sector which increased from 42.3% to 44.0% and in
industrial revenue bonds which increased from 3.6% to 5.2%. In addition,
closed-end bond fund holdings increased from 4.1% to 4.8% and health care
increased from 12.5% to 13.1%. Other sector weightings were slightly diluted by
the new cash flow. Non-rated holdings increased slightly from 33.4% to 35.1%
during the quarter while securities rated "A" or better remained at
approximately 60%. The Fund's focus on purchasing new issue securities with
greater call protection and the reduction in cash position resulted in its
implied duration lengthening from 5.0 years to 6.0 years and its average
maturity increasing from 19.5 years to 20.2 years during the quarter.
With relatively stable municipal bond yields during the quarter, the Fund's
performance was driven by its emphasis on securities which provide higher coupon
income. We expect economic activity to moderate in the second half of the year
and municipal bond yields to remain relatively stable. In this environment, we
will continue to focus on securities that provide incremental yield.
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 6/30/98: $10.50 Per Share
3/31/98: $10.49 Per Share
Total Net Assets: $167.82 Million
30-Day SEC Yield: 4.80%
Tax Equivalent Yield: 8.69%(1)
12-Month Distribution Rate: 5.21%
Average Maturity: 20.2 Years
Duration to Estimated Avg. Life: 8.0 Years(2)
Implied Duration: 6.0 Years(2)
(1) For individuals in the 39.6% Federal and 8.5% MN tax brackets.
(2) See page 15.
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Multifamily Mortgage Revenue 44.0
Hospital/Health Care Revenue 13.1
Single Family Mortgage Revenue 13.0
Other Revenue Bonds 6.0
Industrial Revenue/Pollution Control 5.2
Closed-End Mutual Funds 4.8
General Obligation 3.5
Lease 2.3
Public Facilities 1.5
Education/Student Loan 1.0
Other Assets and Liabilities 5.6
14
<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 1.36% 1.39% 1.12% 1.36% 1.39% 1.12%
(unannualized)
1 Year 7.79 7.72 6.24 7.79 7.72 6.24
3 Year 7.24 6.72 5.82 23.35 21.54 18.50
Inception 6.67 5.43 5.32 34.42 27.41 26.82
(12/1/93)
</TABLE>
*As of 6/30/98
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE
PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. 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
[PLOTS POINTS CHART]
SIT MN TAX-FREE LEHMAN 5-YEAR
INCOME FUND MUNI. BOND INDEX
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/98 would
have grown to $13,442 in the Fund or $12,682 in the Lehman 5-Year Municipal Bond
Index assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
[PIE CHART]
(% of total net assets)
LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED.
Not Rated 35.1%
BBB 4.9%
A 10.7%
AA 21.8%
AAA 21.9%
Other Assets & Liabilities 5.6%
ADVISER'S ASSESSMENT OF
NOT-RATED SECURITIES
AA 0.4%
A 1.9
BBB 21.1
BB 11.0
B 0.7
Total 35.1%
15
<PAGE>
[LOGO]
Directors:
Eugene C. Sit, CFA
Peter L. Mitchelson, CFA
Michael C. Brilley
John E. Hulse
Sidney L. Jones
Donald W. Phillips
William E. Frenzel
Director Emeritus:
Melvin C. Bahle
Officers:
Eugene C. Sit, CFA Chairman
Peter L. Mitchelson, CFA Vice Chairman
Mary K. Stern, CFA President
Michael C. Brilley Senior Vice 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
(1) Bond and U.S. Government Securities Funds only.
(2) Money Market Fund only.
<PAGE>
QUARTERLY REPORT
BOND FUNDS
QUARTER ENDED JUNE 30, 1998
INVESTMENT ADVISER
SIT INVESTMENT ASSOCIATES, INC.
4600 NORWEST CENTER
MINNEAPOLIS, MN 55402
612-334-5888 (METRO AREA)
800-332-5580
DISTRIBUTOR
SIA SECURITIES CORP.
4600 NORWEST CENTER
MINNEAPOLIS, MN 55402
612-334-5888 (METRO AREA)
800-332-5580
CUSTODIAN
THE NORTHERN TRUST COMPANY
50 SOUTH LASALLE STREET
CHICAGO, IL 60675
TRANSFER AGENT AND
DISBURSING AGENT
FIRST DATA INVESTOR SERVICES
P.O. BOX 5166
WESTBORO, MA 01581-5166
AUDITORS
KPMG PEAT MARWICK LLP
4200 NORWEST CENTER
MINNEAPOLIS, MN 55402
LEGAL COUNSEL
DORSEY & WHITNEY LLP
220 SOUTH SIXTH STREET
MINNEAPOLIS, MN 55402
MEMBER OF
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