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 SIT MUTUAL FUNDS
Sit Mutual Funds are 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 more than $5 billion
for some of America's largest corporations, foundations and endowments.
Sit Mutual Funds are comprised of thirteen 100% NO-LOAD funds. 100% NO-LOAD
means that Sit Mutual 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]
PRINCIPLE STABILITY
& CURRENT INCOME
STABILITY: INCOME: GROWTH & INCOME: GROWTH:
Safety of principal Increased income Long-term capital Long-term capital
and current income appreciation appreciation
and income
GROWTH POTENTIAL
MONEY MARKET U.S. GOVERNMENT BALANCED MID CAP GROWTH
SECURITIES LARGE CAP GROWTH INTERNATIONAL GROWTH
TAX-FREE INCOME SMALL CAP GROWTH
MINNESOTA TAX-FREE DEVELOPING MARKETS
INCOME GROWTH
BOND
<PAGE>
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - DECEMBER 31, 1997
[PHOTO]
Dear Fellow Shareholders:
Fixed income markets continued their rally through the quarter ended
December 31, 1997 as concerns over Asian markets extended a "flight-to-quality"
rally. Investors were pleasantly surprised during the year that an economy
exhibiting +3.7% annual real Gross Domestic Product growth could also be
accompanied by decelerating inflation and falling rates.
ECONOMIC OVERVIEW
We expect that the U.S. economy is likely to slow in 1998 to real GDP
growth of +2.6% from +3.7% in 1997. Consumer spending and nonresidential
investment have remained remarkably strong, particularly with low unemployment
and rising wages. A slowdown in 1998 is more likely to emanate from the external
and industrial sectors. Asia, including Japan, remains a wild card and is
expected to dampen growth by -0.5% and perhaps materially more. Demand for U.S.
exports could be significantly reduced while, conversely, the Asian countries
will likely attempt to export their way out of recessions using their greatly
depreciated currencies. The United States' leading financial and competitive
position should result in sustained relative strength for the dollar. On the
industrial side, new construction spending has been slowing and other related
indicators show signs of softening. Capital investment is likely to slow as
corporate profitability levels turn downward from the cyclically high levels.
Consumer price inflation is expected to remain low, averaging +2.0% in
1998 versus +2.3% in 1997. Apart from wages, most other inflation indicators
have been subdued, with the Producer Price Index decreasing -1.2% for the 12
months through December and the broad PPI for Crude Materials flat compared to a
year ago. The CRB Raw Materials Spot Price Index has been declining sharply
since mid-1997 and is being closely monitored as an indicator of potentially
weaker economic activity. Deflation risks are being monitored closely.
1997 was a watershed year for U.S. fiscal policy as the federal deficit
approached zero in its latest fiscal year ended September 30th, and as many as
31 states, flush with surpluses, actually cut taxes last year. A few independent
forecasters believe a federal surplus is possible even in fiscal 1998 and the
debate has already begun as to how funds might be distributed. President Clinton
presented his fiscal 1999 budget proposal on February 2nd which included three
substantial spending initiatives directed at the homeless, Medicare and child
care tax breaks. A tobacco settlement, which will have ready bipartisan support,
is expected to provide at least one source of additional revenue. Meaningful tax
reform will likely remain on the agenda.
STRATEGY SUMMARY
Federal Reserve Board activity during 1997 was limited to a 0.25%
increase in the federal funds rate target in March and, since May, a policy
directive biased toward tightening. The crisis in Asia appeared to diminish the
Fed's ability to tighten and it was no surprise that the Fed took no policy
action at its December 1997 and early February 1998 meetings. We believe that
the Chairman's exhaustive treatment of the subject of deflation in recent weeks
is a significant development, perhaps setting the stage for future Fed easing.
With domestic economic activity likely to moderate further and little concern
over inflation, we are monitoring closely any indication of a possible change in
Fed policy.
In early January 1998, 30-year Treasury yields declined to 5.72%, their
lowest level since the U.S. Treasury first auctioned a 30-year bond in 1977.
While the momentum in the bond market could result in even lower yields, we are
expecting a backup in interest rates from current levels as foreign events
become more settled. As a result, the durations of managed taxable fixed income
portfolios are moderately shorter than those of their respective benchmarks.
Municipal bonds remain cheap relative to long-term Treasuries. Long
municipal yields ended 1997 at approximately 89% of long-term Treasury bond
yields, compared with approximately 86% one year ago. While we expect that
municipal bonds will return to more normal valuation levels relative to taxable
bonds, we expect a backup in rates from their current lows and that more
attractive investment opportunities will emerge in the months ahead. Sector and
security selection remain key elements of our investment approach.
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 Sit Mutual
Funds and look forward to helping you to achieve your long-term investment
goals.
Sincerely,
/s/ Eugene C. Sit
<PAGE>
SIT MUTUAL FUNDS
DECEMBER 31, 1997 PERFORMANCE SUMMARY - BOND FUNDS
BOND MARKET REVIEW
After a single 0.25% increase in the Federal funds rate on March 25th, the
Federal Reserve kept monetary policy steady for the remainder of 1997. The
Treasury yield curve flattened significantly during the quarter as a
"flight-to-quality" rally caused longer term bond yields to decline further
while concern over additional Fed tightening kept short-term yields from
falling. The 30-year Treasury bond yield declined from 6.41% to 5.92% during the
quarter, compared with 6.64% on December 31, 1996 and a 1997 high of 7.17% on
April 14th. At year end, the 30-year Treasury bond yield was approaching its
longer term trough of 5.79% reached on October 15, 1993.
Bonds posted strong returns during the quarter and the year. Corporates
placed second to governments for the quarter but remained well ahead for the
year. While the corporate sector experienced widening yield spreads on Yankee
bonds (dollar denominated foreign issues), it benefitted from its longer
duration. The shorter duration asset-backed sector was the worst performer for
the quarter and the year. The mortgage sector underperformed during the quarter
as concerns about prepayments increased, but produced strong returns for the
year, helped by its higher income.
Municipal yields also reached their 1997 lows in December. The Bond Buyer
40-Bond Index yield decreased from 5.47% to 5.26% during the quarter, compared
with 5.72% on December 31, 1996 and a 12-month high of 6.01% on April 14th. At
year end, the Bond Buyer Index yield was below its longer term trough of 5.34%
on October 15, 1993. Housing sector performance lagged during the quarter, but
remained competitive over the year. BBB-rated issues continued to benefit from
increased advanced refunding activity, improving credit quality and narrowing
relative yields spreads. The health care sector was the best performing revenue
bond sector for the third year in a row.
Security selection remains a strong component of the competitive returns
earned by Sit bond funds. These results were achieved consistent with the Funds'
dual objectives of high current income and principal stability.
1988 1989
SIT MONEY MARKET FUND ---- ----
SIT U.S. GOV'T. SECURITIES FUND 7.86 11.04
SIT BOND FUND ---- ----
SIT TAX-FREE INCOME FUND 2.19(1) 8.38
SIT MINNESOTA TAX-FREE
INCOME FUND ---- ----
3-MONTH U.S. TREASURY BILL 7.10 8.73
LEHMAN INTER. GOVERNMENT BOND INDEX 6.40 12.68
LEHMAN AGGREGATE BOND INDEX 7.89 14.53
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 6.39/0.75(1) 9.07
SIT INVESTMENT RESERVE FUND 6.65% 8.53%
(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.
(2) Based on the last 12 monthly distributions of net investment income and
average NAV as of 12/31/97.
(3) For Minnesota residents in the 31%, 36% and 39.6% federal tax brackets, the
double exempt tax equivalent yields are 8.14%, 8.78% and 9.30%, 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 7.19%, 7.75% and 8.21%, respectively (income
subject to state tax, if any).
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
YIELD
AS OF DISTRIBUTION
1990 1991 1992 1993 1994 1995 1996 1997 12/31/97 RATE(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---- ---- ---- 0.46%(1) 3.84% 5.58% 5.08% 5.22% 5.49%(6)
10.97 12.87 5.43 7.34 1.77 11.50 4.99 8.19 5.65 6.09%
---- ---- ---- 0.34(1) -1.31 16.83 4.25 9.44 6.04 6.42
7.29 9.25 7.71 10.42 -0.63 12.86 5.69 9.87 4.96(4) 5.45
---- ---- ---- 1.60(1) 0.63 11.90 5.89 8.19 5.14(3) 5.38
8.04 5.72 3.56 3.13 4.47 5.98 5.27 5.32
9.56 14.11 6.93 8.17 -1.75 14.41 4.06 7.72
8.96 16.00 7.40 9.75/0.54(1) -2.92 18.47 3.63 9.65
7.70 11.41 7.62 8.73 -1.28 11.65 4.22 6.38
7.59% 6.14% 3.81% 2.34(5)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE
TOTAL RETURN PERIODS ENDED DECEMBER 31, 1997
QUARTER SIX MONTHS SINCE
ENDED 12/31/97 ENDED 12/31/97 1 YEAR 3 YEARS 5 YEARS INCEPTION
1.31% 2.63% 5.22% 5.29% ---- 4.84%
1.95 5.05 8.19 8.20 6.71% 8.27
2.11 5.80 9.44 10.06 ---- 7.03
2.69 5.91 9.87 9.43 7.54 7.83
2.70 5.10 8.19 8.63 ---- 6.85
1.31 2.62 5.32 5.47 ---- 5.13
2.21 4.83 7.72 8.65 6.39 8.10
2.94 6.36 9.65 10.42 ---- 6.91
1.70 3.87 6.38 7.37 5.85 7.09
(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 12/31/97 was 5.35%.
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
DECEMBER 31, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
PAUL J. JUNGQUIST, CFA
PORTFOLIO MANAGER
The Sit Money Market Fund provided investors with a +1.31% return for the
quarter ended December 31, 1997, compared to a +1.23% average return for the
Lipper Analytical Services, Inc. Money Market Fund universe. The Fund provided
investors with a +5.22% return for the year ended December 31, 1997, compared to
a +4.90% average return for its Lipper universe. Within its Lipper peer group
category, the Fund's performance ranked 60th of 322 funds and 49th of 303 funds,
respectively, for the three and twelve month periods ended December 31, 1997. As
of December 31, 1997, the Fund's 7-day compound yield was 5.49% and its average
maturity was 28 days, compared to 5.30% and 30 days, respectively, at September
30, 1997.
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 higher short-term financing requirements by the
Treasury during December. The Fed left the federal funds rate unchanged during
the quarter, yet the three-month Treasury bill discount rate increased from
4.97% at September 30 to 5.20% at December 31. The Fund maintained its average
maturity near 30 days during the quarter to take advantage of the flat yield
curve.
Economic growth appears to be continuing its momentum in early 1998. If
this trend continues through the first half of 1998, the possibility of
tightening by the Fed will increase significantly. However, the likelihood of
higher short-term rates is tempered by the continuing economic difficulties
being experienced in Asia, which, if severe enough, could lead to an easing by
the Fed. Accordingly, we expect to maintain the average maturity of the
portfolio in a range of 20 to 40 days. If a move by the Fed begins to look
likely, however, the Fund will adjust its average maturity to the appropriate
end of the range.
Despite the recent volatility in global financial markets, we do not
foresee a significant negative 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 auto finance, capital goods and insurance
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 12/31/97: $1.00 Per Share
9/30/97: $1.00 Per Share
Total Net Assets: $30.68 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Diversified Finance 19.3
Consumer Loan Finance 18.9
Captive Equipment Finance 14.3
Utilities 14.2
Captive Auto Finance 7.9
U.S. Government 7.0
Consumer Non-Durables 5.3
Captive Oil Finance 3.6
Technology/Business Equip. 3.6
Retail 3.4
Other Assets & Liabilities 2.5
<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 1.31% 1.23% 1.31% 1.31% 1.23% 1.31%
(unannualized)
1 Year 5.22 4.90 5.32 5.22 4.90 5.32
3 Year 5.29 5.05 5.47 16.74 15.94 17.32
Inception 4.84 4.63 5.13 21.77 20.76 23.21
(11/1/93)
</TABLE>
* As of 12/31/97
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]
The sum of $10,000 invested at inception (11/1/93) and held until 12/31/97 would
have grown to $12,177 in the Fund or $12,321 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%
First Tier Securities 100%
Second Tier Securities 0%
<PAGE>
SIT U.S. GOVERNMENT SECURITIES FUND REVIEW
DECEMBER 31, 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 +1.95%
return for the fourth quarter of 1997 compared to a +2.21% return of the Lehman
Intermediate Government Bond Index. For the twelve months ending December 31,
1997, the Fund's total return was +8.19% versus the +7.72% return for the Lehman
Index. As of December 31, 1997, the Fund's 30-day SEC yield was 5.65% and its
12-month distribution rate was 6.09%, compared to 5.84% and 6.17%, respectively,
at September 30, 1997.
U.S. Treasury yields declined further during the quarter providing
significant price appreciation in the Fund's longer duration U.S. Treasury and
CMO holdings. Although the Fund's pass-through holdings are more stable in
price, their high coupons made them the highest income earning securities in the
Fund. While the Fund had a strong return, it lagged its benchmark for the
quarter, the Lehman Intermediate Government Bond Index, due to its shorter (more
conservative) effective duration. However, the Fund's higher income helped it
outperform for the year.
Last quarter's investment activity involved continuing to shorten the
Fund's effective duration. The Fund accomplished this by selling longer duration
U.S. Treasuries and purchasing additional seasoned high-coupon mortgage and
manufactured home loan securities, which are less price sensitive to changes in
market yield levels.
The decline in interest rates was most noticeable for longer maturity
bonds. Specifically, the yield on the 30-year U.S. Treasury declined by 0.48%
whereas 2-year maturity treasury yields dropped by only 0.13%. The decline in
longer-term yields reflected a flight to quality rally as investors sought
safety from volatile foreign and domestic equity markets. However, concern over
the continued strength in the economy and the Federal Reserve's bias toward
raising short-term interest rates kept short-term yields relatively unchanged.
We expect continued moderate economic growth and mild inflation resulting in
stable to slightly higher interest rates. 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 12/31/97: $10.64 Per Share
9/30/97: $10.59 Per Share
Total Net Assets: $93.08 Million
30-Day SEC Yield: 5.65%
12-Month Distribution Rate: 6.09%
Average Maturity: 16.1 Years
Effective Duration: 2.7 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 60.7
Collateralized Mortgage Obligations 16.4
FNMA Pass-Through 9.4
U.S. Treasury 8.4
FHLMC Pass-Through 2.9
Closed End Mutual Funds 1.5
Cash & Cash Equivalents 0.7
<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 1.95% 3.01% 2.21% 1.95% 3.01% 2.21%
(unannualized)
1 Year 8.19 8.84 7.72 8.19 8.84 7.72
3 Years 8.20 9.25 8.65 26.66 30.41 28.25
5 Years 6.71 6.34 6.39 38.36 35.99 36.31
10 Years 8.15 7.94 8.13 118.83 114.75 118.46
Inception 8.27 7.75 8.10 132.06 120.58 128.23
(6/2/87)
</TABLE>
* As of 12/31/97
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPLE 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
[GRAPH]
The sum of $10,000 invested at inception (6/2/87) and held until 12/31/97 would
have grown to $23,206 in the Fund or $22,823 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 0.7%
1-5 80.9%
5-10 15.7%
10-20 0.0%
20+ 2.7%
<PAGE>
SIT BOND FUND REVIEW
DECEMBER 31, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
BRYCE A, DOTY, CFA
PORTFOLIO MANAGER
The Sit Bond Fund provided investors with a +2.11% return for the fourth
quarter of 1997 compared to a +2.38% average return for the Lipper Analytical
Services Investment Grade Bond Fund universe. For the twelve months ended
December 31, 1997, the Fund's total return of +9.44% exceeded the +8.57% average
return for its Lipper universe, ranking it 35th of 195 funds. Also, the Fund's
since inception performance ranked 14th of 102 funds. As of December 31, 1997,
the Fund's 30-day SEC yield was 6.04% and its 12-month distribution rate was
6.42%, compared to 5.72% and 6.42%, respectively, at September 30, 1997.
U.S. Treasury yields declined further during the quarter providing
significant price appreciation in the Fund's longer duration U.S. Treasury and
asset-backed holdings. The Fund's longer duration corporates, which had
previously outperformed as interest rates fell, lagged because of widening yield
spreads. As a result, the Fund's fourth quarter return was slightly less than
its Lipper peer group. However, for the year, the significant price improvement
of the Fund's longer duration U.S. Treasury, asset-backed and corporate bonds,
coupled with the high income provided by the mortgage holdings, helped the Fund
outperform its Lipper universe.
Investment activity during the quarter involved purchasing short maturity
U.S. Treasuries and high coupon seasoned pass through securities with short
average lives. These purchases shortened the Fund's effective duration, and as a
result, the Fund's per share price should be less sensitive to changes in
interest rates.
The decline in interest rates was most noticeable for longer maturity
bonds. Specifically, the yield on the 30-year U.S. Treasury declined by 0.48%
whereas 2-year maturity treasury yields dropped by only 0.13%. The decline in
longer-term yields reflected a flight to quality rally as investors sought
safety from volatile foreign and domestic equity markets. However, concern over
the continued strength in the economy and the Federal Reserve's bias towards
raising short-term interest rates kept short-term yields relatively unchanged.
We expect continued moderate economic growth and mild inflation resulting in
stable to slightly higher interest rates. 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 12/31/97: $10.06 Per Share
9/30/97: $10.03 Per Share
Total Net Assets: $ 8.63 Million
30-Day SEC Yield: 6.04%
12-Month Distribution Rate: 6.42%
Average Maturity: 16.6 Years
Effective Duration: 3.9 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 CHARTS]
Agency Pass-Through Securities 32.5
Corporate Bonds & Notes 23.7
Asset-Backed Securities 14.5
U.S. Treasury 13.5
Collateralized Mortgage Obligations 8.4
Closed End Mutual Funds 2.9
Trust Preferred Securities 1.8
Cash Equivalents 2.7
<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 2.11% 2.38% 2.94% 2.11% 2.38% 2.94%
(unannualized)
1 Year 9.44 8.57 9.65 9.44 8.57 9.65
3 Year 10.06 9.44 10.42 33.30 31.09 34.63
Inception 7.03 6.05 6.91 32.00 27.14 31.41
(12/1/93)
</TABLE>
* As of 12/31/97
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPLE 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
[GRAPH]
The sum of $10,000 invested at inception (12/1/93) and held until 12/31/97 would
have grown to $13,200 in the Fund or $13,141 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.
Government Agency Backed Securities & CMO's 40.9%
U.S. Government 13.5%
AAA 14.5%
AA 0.6%
A 16.4%
BBB 11.4%
Other Assets and Liabilities 2.7%
<PAGE>
SIT TAX-FREE INCOME FUND REVIEW
DECEMBER 31, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
Municipal yields followed taxable bond yields to their 1997 lows in
December. The Fund's price per share increased $0.07 during the quarter to
$10.39. The Fund's share price compares with $10.05 one year ago and a 12-month
range of $9.94 to $10.43, its all time high. The Fund's returns of +2.69% for
the quarter and +9.87% for the year ended December 31, 1997 compared favorably
against +1.70% and +6.38%, respectively, for the Lehman 5-Year Municipal Index.
The Fund's quarterly return ranked #158 of 251 funds in the Lipper Municipal
Bond Fund universe which averaged +2.80%. The Fund's longer term returns ranked
#43 of 235 funds over the past year, #109 of 190 funds over the past 3 years,
#12 of 111 funds for the past 5 years, and #46 of 78 funds since inception.
The Fund's 30-day SEC yield declined from 5.05% to 4.96% during the
quarter, compared with 5.47% one year ago. The Fund's distribution rate of 5.45%
has remained relatively stable, slightly less than 5.65% one year ago. Housing
issues contributed to the Fund's high income return and relative price
stability, while health care holdings continued to benefit from improving credit
quality and narrowing relative yield spreads.
Fund assets increased from $435.3 to $453.0 million during the quarter,
compared with $305.4 million one year ago. Aside from a decrease in prerefunded
bonds from 2.7% to 1.1%, sector weightings varied less than 1%. The Fund has
accumulated a 5.3% position in closed end bond funds in recent months and
remains focused on intermediate duration funds that offer attractive yields
relative to individual bonds. Over the past year, increases in health care,
education and other revenue bonds were offset by decreases in multifamily
housing, transportation and industrial revenue issues. Holdings in securities
rated "A" or better increased from 63.3% to 66.6% during the quarter, compared
with 60.2% one year ago.
The Fund's average maturity and duration to estimated average life remained
at approximately 17.7 years and 7.6 years, respectively, during the quarter,
compared with 16.9 years and 6.1 years, respectively, one year ago. The Fund's
implied duration of 5.2 years was also relatively stable, compared to 4.3 years
one year ago. This lengthening reflects the Fund's efforts to increase call
protection as interest rates declined. The Fund remains focused on security
selection. We continue to seek investments that provide a high relative 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 12/31/97: $10.39 Per Share
9/30/97: $10.32 Per Share
Total Net Assets: $453.03 Million
30-Day SEC Yield: 4.96%
Tax Equivalent Yield: 8.21% (1)
12-Month Distribution Rate: 5.45%
Average Maturity: 17.7 Years
Duration to Estimated Avg. Life: 7.6 Years (2)
Implied Duration: 5.2 Years (2)
(1) For individuals in the 39.6% federal tax bracket.
(2) See page 11.
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Multifamily Mortgage Revenue 30.1
Hospital/Health Care Revenue 24.6
Single Family Mortgage Revenue 15.6
Other Revenue 7.1
Closed End Mutual Funds 5.3
Industrial Revenue/Pollution Control 4.5
Transportation 2.5
Municipal Lease Rental 1.9
Education/Student Loan 1.4
Escrowed to Maturity/Pre-Refund 1.1
Public Facilities 1.0
Sales Tax Revenue 0.7
Utility 0.5
General Obligation 0.2
Cash & Cash Equivalents 3.5
<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 2.69% 2.80% 1.70% 2.69% 2.80% 1.70%
(unannualized)
1 Year 9.87 9.11 6.38 9.87 9.11 6.38
3 Years 9.43 9.66 7.37 31.06 31.86 23.79
5 Years 7.54 6.85 5.85 43.80 39.28 32.87
Inception 7.83 7.99 7.09 101.07 103.84 88.54
(9/29/88)
</TABLE>
* As of 12/31/97
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPLE 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
[GRAPH]
The sum of $10,000 invested at inception (9/29/88) and held until 12/31/97 would
have grown to $20,107 in the Fund or $18,854 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.
[PIE CHART]
A 32.2%
AA 12.4%
AAA 18.5%
Other Assets
& Liailities 3.5%
BBB 33.4%
<PAGE>
SIT MINNESOTA TAX-FREE INCOME FUND REVIEW
DECEMBER 31, 1997
[PHOTO]
MICHAEL C. BRILLEY
SENIOR PORTFOLIO MANAGER
DEBRA A. SIT, CFA
PORTFOLIO MANAGER
Municipal yields followed taxable bond yields to their 1997 lows in
December. The Fund's price per share increased from $0.14 during the quarter to
an all time high of $10.50. The Fund's share price compared with $10.24 one year
ago and a 12-month low of $10.11. The Fund's returns of +2.70% for the quarter
and +8.19% for the year ended December 31, 1997 compared favorably against
+1.70% and +6.38%, respectively, for the Lehman 5-Year Municipal Index. The
Fund's quarterly return ranked #14 of 47 funds in the Lipper Minnesota Municipal
Bond Fund universe which averaged +2.51%. The Fund's longer term returns ranked
#23 of 45 funds over the past year, #25 of 37 funds over the past 3 years, and
#1 of 25 funds since inception.
The Fund's 30-day SEC yield declined from 5.23% to 5.14% during the
quarter, compared with 5.48% one year ago. The Fund's distribution rate of 5.38%
has remained relatively stable, slightly less than 5.65% one year ago. Non-rated
issues contributed to the Fund's high income return and relative price
stability, although these securities have not benefitted as much from the recent
increase in advance refunding activity.
Fund assets increased from $116.0 to $128.8 million during the quarter,
compared with $82.7 million one year ago. Sector shifts included increases in
multifamily housing from 38.2% to 41.3% and cash from 4.5% to 7.5%, and
decreases in single family housing from 17.4% to 15.6%, health care from 14.1%
to 12.7% and industrial revenue from 8.2% to 4.0%. Closed end bond funds
increased from 0.2% to 2.5%, and the Fund remains focused on intermediate
duration funds that offer attractive yields relative to individual bonds. For
the year 1997, the increase in multifamily was offset by decreases in single
family, health care and industrial revenue. Holdings in securities rated "A" or
better averaged 60% over the quarter, compared with 56% one year ago, while
non-rated holdings averaged 36%.
The Fund's average maturity and duration to estimated average life remained
at approximately 18.7 years and 7.6 years, respectively, during the quarter,
compared with 18.7 years and 7.2 years, respectively, one year ago. The Fund's
implied duration of 4.8 years was also relatively stable, compared to 4.1 years
one year ago. This lengthening reflects the Fund's efforts to increase call
protection as interest rates declined. The Fund remains focused on security
selection. We continue to seek investments that provide a high relative 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 12/31/97: $10.50 Per Share
9/30/97: $10.36 Per Share
Total Net Assets: $128.80 Million
30-Day SEC Yield: 5.14%
Tax Equivalent Yield: 9.30% (1)
12-Month Distribution Rate: 5.38%
Average Maturity: 18.7 Years
Duration to Estimated Avg. Life: 7.6 Years (2)
Implied Duration: 4.8 Years (2)
(1) For individuals in the 39.6% Federal and 8.5% MN tax brackets.
(2) See page 9.
PORTFOLIO STRUCTURE
Multifamily Mortgage Revenue 41.3
Single Family Mortgage Revenue 15.6
Hospital/Health Care Revenue 12.7
Other Revenue Bonds 7.8
Industrial Revenue/Pollution Control 4.0
Lease 3.1
Closed End Mutual Funds 2.5
ETM/Pre-Ref 1.7
Public Facilities 1.6
Education/Student Loan 1.3
General Obligation 0.9
Cash & Cash Equivalents 7.5
<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 2.70% 2.51% 1.70% 2.70% 2.51% 1.70%
(unannualized)
1 Year 8.19 8.15 6.38 8.19 8.15 6.38
3 Year 8.63 8.84 7.37 28.19 28.93 23.79
Inception 6.85 5.47 5.40 31.07 24.32 23.98
(12/1/93)
</TABLE>
* As of 12/31/97
PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPLE 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
[GRAPH]
The sum of $10,000 invested at inception (12/1/93) and held until 12/31/97 would
have grown to $13,107 in the Fund or $12,398 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.
[PIE CHART]
AA 18.3%
AAA 21.3%
Other Assets
& Liabilities 7.5%
Not Rated 35.6%
BBB 4.3%
A 13.0%
ADVISER'S ASSESSMENT OF
NOT-RATED SECURITIES
AAA 0.4%
AA 0.5
A 1.9
BBB 20.6
BB 11.6
B 0.6
--- ----
Total 35.6%
<PAGE>
[LOGO] SIT MUTUAL FUNDS
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, CFA 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.
