BOND FUNDS QUARTERLY REPORT
QUARTER ENDED DECEMBER 31, 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 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 approximately $6
billion 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 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]
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
2
<PAGE>
SIT MUTUAL FUNDS
CHAIRMAN'S LETTER - QUARTER ENDED DECEMBER 31, 1998
[PHOTO]
EUGENE C. SIT, CFA
CHIEF INVESTMENT OFFICER
Dear Fellow Shareholders:
Despite many disquieting developments, including the U.S. President being
impeached, the financial collapse of Russia, renewed bombing in the Middle East
and a narrowly avoided hedge-fund financial meltdown in September, U.S. Treasury
bond yields rose slightly during the quarter. Rebounding from the historic lows
that were reached as long-term U.S. Treasury bond yields fell below 5% for the
first time since 1967, the quarter ended with a 30-year Treasury yield of 5.12%,
up from 4.97% at September 30th. Most domestic fixed income instruments provided
less than coupon rates of return for the quarter.
Economic Overview
The economy expanded by +3.9% over the past year. As 1998 began amidst an
environment of persistent weakness overseas and deleveraging of financial
assets, the consensus of economists was that U.S. economic growth would slow
materially. Even though net exports subtracted significantly from GDP growth,
capital investments continued to expand at a high rate until the third quarter
of 1998. The biggest surprise was the continued strength of consumer spending
which maintained a blistering pace during the year.
Although growth is likely to slow in the months ahead, there is little
evidence of a recession on the horizon. We believe a modest slowdown is more
likely, with real growth moderating to approximately +3.0% in 1999. With respect
to inflation, we can find no signs of upward pressure in commodity prices.
Excess global supplies, weak Asian demand and increasing corporate efficiencies
have worked in combination to keep prices from moving higher. The CPI in
December year over year was +1.6%. We believe the CPI should trend up slightly
in 1999, as the sharp decline in oil prices that occurred last year is unlikely
to be repeated.
The advent of European Monetary Union in 1999, we believe, is a very
significant development with long-term implications for the U.S. The eleven
initial country members have a combined population of 288 million (versus 261
million for the U.S.) and 19% of world trade (versus 16% for the U.S.). While it
remains to be seen how effectively these eleven countries will work together
under more difficult conditions, early signs of corporate consolidation and
efficiency-enhancing change suggest they will become increasingly competitive
economically. Finally, the forces that produced a federal budget surplus for the
first time in 30 years in fiscal 1998 are very much still in place and should
continue to be a source of strength for the U.S. economy in 1999.
Strategy Summary
In contrast to the relatively passive monetary policy experienced over the
previous two years, the Federal Open Market Committee implemented a series of
three interest rate cuts over a seven-week period of time starting last
September. The necessity for the rate cuts was the result of fears of a global
credit crunch brought on by the economic and financial turmoil in Asia and Latin
America, as well as the near or total collapse of a number of hedge funds; the
most publicized being Long- Term Capital Management. The Fed's quick action,
along with interest rate cuts by a number of international central banks,
stabilized and restored confidence to the marketplace. If financial markets
remain relatively stable, and the U.S. economy continues to grow modestly, we
believe that the Fed will have little reason to cut rates further in the near
term.
With stable global financial markets, we expect an environment of
generally unchanged interest rates thus making U.S. Treasuries less of a safe
haven, and resulting in Treasury returns lagging those of corporates and other
sectors. Our taxable Funds continue to be underweighted in U.S. Treasuries and
are overweighted in short- to intermediate-duration securities. In municipal
Funds, we remained 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. While municipals remain attractively valued when compared to Treasury
securities, they are fairly valued when compared to other taxable bond market
sectors. We are monitoring opportunities created from valuation as well as from
supply conditions.
Given our expectations for stable 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
3
<PAGE>
SIT MUTUAL FUNDS
QUARTER ENDED DECEMBER 31, 1998 PERFORMANCE SUMMARY - BOND FUNDS
BOND MARKET REVIEW
The Federal Reserve has indicated in word and action that it is content with
the current economic outlook; the Fed is now in a neutral posture. With a 75
basis point decline since September in the federal funds rate (currently at
4.75%), monetary policy is expected to be consistent with fostering sustained
economic expansion and keeping inflationary pressure subdued.
During the fourth quarter, three-month Treasury bill yields increased
slightly from 4.36% to 4.46%. Long-term taxable bond yields remained relatively
stable as we saw elections that endorsed the status quo rather than radical
change, increased IMF funding, and Japan's new stimulus package. The 30-year
Treasury bond yield rose slightly from 4.97% to 5.12%.
The Fed's easing moves restored investor confidence and liquidity in the
corporate sector, resulting in yield spread tightening that helped the sector
outperform Treasuries for the quarter. As interest rates rebounded off of record
lows earlier in the year, refinancing slowed and, as a result, the mortgage
sector outperformed Treasuries as well. Similarly, the asset-backed sector
outperformed for the quarter due to its relatively shorter duration.
Consistent with taxable bond yields, municipal bond yields rose slightly
during the fourth quarter. The yield on the Bond Buyer 40- Bond Index increased
12 basis points during the quarter to 5.16% on December 31st. The relative yield
ratio of long municipal bonds to long Treasury bonds was 101.3% on December
31st, making municipals seem attractive relative to Treasuries. While municipals
remain cheaply valued when compared to Treasury securities, they are more fairly
valued when compared to other taxable bond market sectors.
Security selection remains a strong factor of the 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
------------------
SIT MONEY MARKET FUND ---- ----
SIT U.S. GOV'T. SECURITIES FUND 11.04 10.97
SIT BOND FUND ---- ----
SIT TAX-FREE INCOME FUND 8.38 7.29
SIT MINNESOTA TAX-FREE
INCOME FUND ---- ----
3-MONTH U.S. TREASURY BILL 8.73 8.04
LEHMAN INTER. GOVERNMENT BOND INDEX 12.68 9.56
LEHMAN AGGREGATE BOND INDEX 14.53 8.96
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 9.07 7.70
SIT INVESTMENT RESERVE FUND 8.53 7.59
(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 12/31/98.
(3) For Minnesota residents in the 28%, 31%, 36% and 39.6% federal tax
brackets, the double exempt tax equivalent yields are 7.09%, 7.40%, 7.97%,
and 8.45%, 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 6.36%, 6.64%, 7.16% and 7.58%,
respectively (income subject to state tax, if any).
4
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN - CALENDAR YEAR
YIELD
AS OF DISTRIBUTION
1991 1992 1993 1994 1995 1996 1997 1998 12/31/98 RATE (2)
- --------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---- ---- 0.46%(1) 3.84% 5.58% 5.08% 5.22% 5.17% 4.70%(6)
12.87 5.43 7.34 1.77 11.50 4.99 8.19 6.52 5.25 5.32%
---- ---- 0.34(1) -1.31 16.83 4.25 9.44 6.52 5.25 5.49%
9.25 7.71 10.42 -0.63 12.86 5.69 9.87 6.29 4.58(4) 4.99%
---- ---- 1.60(1) 0.63 11.90 5.89 8.19 6.14 4.67(3) 5.02%
5.72 3.56 3.13 4.47 5.98 5.27 5.32 5.01
14.11 6.93 8.17 -1.75 14.41 4.06 7.72 8.49
16.00 7.40 0.54(1) -2.92 18.47 3.63 9.65 8.69
11.41 7.62 8.73 -1.28 11.65 4.22 6.38 5.84
6.14 3.81 2.34(5)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE
TOTAL RETURN PERIODS ENDED DECEMBER 31, 1998
QUARTER SIX MONTHS SINCE
ENDED 12/31/98 ENDED 12/31/98 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
- -------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1.22% 2.53% 5.17% 5.16% 4.98% ---- 4.90%
0.94 3.30 6.52 6.56 6.55 8.01% 8.12
0.03 3.15 6.52 6.72 6.98 ---- 6.93
0.53 3.36 6.29 7.27 6.72 7.66 7.68
0.86 3.49 6.14 6.73 6.49 ---- 6.71
1.10 2.35 5.01 5.20 5.18 ---- 5.11
0.25 4.93 8.49 6.74 6.45 8.34 8.13
0.34 4.58 8.69 7.29 7.27 ---- 7.26
0.82 3.47 5.84 5.47 5.28 7.07 7.14
</TABLE>
(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 12/31/98 was 4.59%.
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 DECEMBER 31, 1998
[PHOTO]
SENIOR PORTFOLIO MANAGERS
MICHAEL C. BRILLEY
PAUL J. JUNGQUIST, CFA
The Sit Money Market Fund provided investors with a +1.22% return for the
three months ended December 31, 1998, compared to a +1.14% average return for
the Lipper Analytical Services' Money Market Fund universe. The Fund's
performance ranked 59th of 328 funds in its Lipper peer group category for the
fourth quarter of 1998. For the one-year, five-year and since inception (October
31, 1993) periods ended December 31, 1998, the Fund's performance ranked 66th of
309 funds, 47th of 201 funds and 44th of 195 funds in its Lipper peer group,
respectively. As of December 31, 1998, the Fund's 7-day compound yield was 5.70%
and its average maturity was 32 days, compared to 5.31% and 25 days,
respectively, at September 30, 1998.
The Federal Reserve decreased the federal funds rate twice during the quarter
to 4.75%, in response to the economic and political turmoil roiling the global
financial markets. Three-month Treasury bill yields were volatile over the past
three months, ranging from a low of 3.62% in October to a high of 4.64% in
November. Yields stabilized near the 4.50% level in December, however, as
additional Fed easings appear unlikely in the near term. Current yield levels
imply that the market is expecting no move by the Fed in the first quarter of
1999. Our forecast of growth slowing to +3.0% with inflation ticking up to +2.0%
over the next year would support this Fed policy. Accordingly, the Fund will try
to take advantage of current yield levels while extending its average maturity
slightly.
The Fund has focused on credit research, optimizing average maturity and
avoiding the use of risky derivatives. We intend to continue these conservative
policies in the future. Given the recent stabilization in global financial
markets -- with the exception of Brazil -- and continued strong economic
activity, we do not foresee a significant impact on the short-term
creditworthiness of top-tier commercial paper issuers in general. Despite the
recent stabilization, financial services and industrial companies are the most
likely to experience difficulties. Therefore, we will monitor the Fund's
permissible credits in these sectors particularly closely.
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 12/31/98: $1.00 Per Share
9/30/98: $1.00 Per Share
Total Net Assets: $36.01 Million
PORTFOLIO STRUCTURE
(% of total net assets)
[BAR CHART]
Diversified Finance 18.7
Consumer Non-Durables 17.5
Captive Auto Finance 14.6
Consumer Loan Finance 14.3
Captive Equipment Finance 12.3
Financial Services 7.2
Technology/Business Equip. 4.2
Retail 4.2
Energy 4.0
Other Assets & Liabilities 3.0
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 1.22% 1.14% 1.10% 1.22% 1.14% 1.10%
(not annualized)
1 Year 5.17 4.84 5.01 5.17 4.84 5.01
3 Years 5.16 4.87 5.20 16.28 15.34 16.42
5 Years 4.98 4.77 5.18 27.48 26.25 28.70
Inception 4.90 4.70 5.11 28.06 28.70 29.38
(11/1/93)
</TABLE>
* As of 12/31/98
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. TREASURY BILL INDEX SIT MONEY MARKET FUND
The sum of $10,000 invested at inception (11/1/93) and held until 12/31/98 would
have grown to $12,806 in the Fund or $12,938 in the 3-Month U.S. Treasury Bill
Index assuming reinvestment of all dividends and capital gains.
QUALITY RATINGS
(% of total net assets)
AS RATED BY MOODY'S, S&P AND FITCH
First Tier Securities 100%
[PIE CHART]
First Tier Securities 100%
Second Tier Securities 0%
7
<PAGE>
SIT U.S. GOVERNMENT SECURITIES FUND REVIEW
QUARTER ENDED DECEMBER 31, 1998
[PHOTO]
SENIOR PORTFOLIO MANAGERS
MICHAEL C. BRILLEY
BRYCE A. DOTY, CFA
The Sit U.S. Government Securities Fund provided investors with a +0.94%
return for the fourth quarter of 1998 compared to a +0.25% return of the Lehman
Intermediate Government Bond Index. Morningstar, a nationally recognized mutual
fund rating service, gave the Fund its highest rating of 5 stars. Morningstar
also ranked the Fund #1 for highest return and #4 for lowest risk in its
category of Short-Term Government funds for the five years ended November 30,
1998 out of 116 funds. As of December 31, 1998, the Fund's 30-day SEC yield was
5.25% and its 12-month distribution rate was 5.32%, compared to 5.48% and 5.55%,
respectively, at September 30, 1998.
The Federal Reserve lowered short-term interest rates three times from
September 29th to November 17th of 1998. The Federal Reserve's actions calmed
the bond and stock markets. As a result, we saw a small reversal of the "flight
to quality" that occurred in the third quarter in which investor demand caused a
significant drop in U. S. Treasury yields. In the fourth quarter, U.S. Treasury
bond yields rose with the yield on the 2-year maturity U.S.
Treasury increasing by +0.26% to 4.54% at year end.
The rise in yields caused prices of the Fund's longer duration securities to
fall and resulted in negative returns for those holdings. The Fund's mortgage
holdings provided the highest return for the quarter due to their relatively
stable prices and high income.
Activity last quarter primarily involved selling some larger pools of
mortgage pass-through securities. While the sale proceeds were reinvested in
U.S. Treasuries, the Fund will most likely purchase additional mortgage
pass-through securities. We expect to purchase relatively smaller pools of
mortgage pass-through securities, which will most likely provide a higher yield
than the larger pools that were sold.
As global financial markets stabilize, we expect demand for U.S. Treasuries
as a safe haven to lessen. As a result, we expect U.S. Treasury yields to rise
relative to other sectors. We anticipate moderately slower economic growth in
1999 with continued moderate inflation. We also expect the Federal Reserve to
lower short-term rates if growth slows significantly or if the recent liquidity
crisis returns. As a result, the Fund continues to be heavily weighted in short-
to intermediate-average life mortgage securities that provide high 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 12/31/98: $10.64 Per Share
9/30/98: $10.78 Per Share
Total Net Assets: $142.40 Million
30-Day SEC Yield: 5.25%
12-Month Distribution Rate: 5.32%
Average Maturity: 13.8 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 48.7
U.S. Treasury 24.4
FNMA Pass-Through 10.5
Collateralized Mortgage Obligations 7.8
FHLMC Pass-Through 5.1
Cash Equivalent 3.5
8
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
------------------------------------------ ------------------------------------------
Sit Sit
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. Gov't Bond
Fund Fund Average Index Fund Fund Average Index
----------- ------------ ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
3 Months 0.94% -0.31% 0.25% 0.94% -0.31% 0.25%
(not annualized)
1 Year 6.52 8.07 8.49 6.52 8.07 8.49
5 Years 6.55 6.16 6.45 37.30 34.86 36.71
10 Years 8.01 8.22 8.34 116.09 120.31 122.75
Inception 8.12 7.88 8.13 147.19 141.05 147.59
(6/2/87)
</TABLE>
* As of 12/31/98
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. SECURITIES FUND LEHMAN INTER. GOV'T. BOND INDEX
The sum of $10,000 invested at inception (6/2/87) and held until 12/31/98 would
have grown to $24,719 in the Fund or $24,759 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 3.5%
1-5 76.5%
5-10 15.4%
10-20 4.6%
20+ 0.0%
9
<PAGE>
SIT BOND FUND REVIEW
QUARTER ENDED DECEMBER 31, 1998
[PHOTO]
SENIOR PORTFOLIO MANAGERS
MICHAEL C. BRILLEY
BRYCE A. DOTY, CFA
The Sit Bond Fund provided investors with a +0.03% return for the fourth
quarter of 1998, which equaled the +0.03% average return for the Lipper
Analytical Services Intermediate Investment Grade Bond Fund universe. For the
three years ended December 31, 1998, the Fund's annualized total return of
+6.72% exceeded the +6.33% average return for its Lipper universe, ranking it
48th of 167 funds. Also, the Fund's performance since inception (December 1,
1993) ranked it 24th of 104 funds. As of December 31, 1998, the Fund's 30-day
SEC yield was 5.25% and its 12-month distribution rate was 5.49%, compared to
5.73% and 5.80%, respectively, at September 30, 1998.
The Federal Reserve lowered short-term interest rates three times from
September 29th to November 17th of 1998. The Federal Reserve's actions calmed
the bond and stock markets. As a result, we saw a small reversal of the "flight
to quality" that occurred in the third quarter in which investor demand caused a
significant drop in U. S. Treasury yields. In the fourth quarter, U.S. Treasury
bond yields rose with the yield on the 30-year maturity U.S.
Treasury increasing by +0.13% to 5.12% at year end.
The rise in yields caused prices of the Fund's longer duration securities to
fall which resulted in negative returns for those holdings. The Fund's mortgage
holdings provided the highest return for the quarter due to their relatively
stable prices and high income. On average, the Fund earned enough income for the
quarter to offset the decline in security prices.
Activity last quarter primarily involved decreasing the Fund's weighting in
collateralized mortgage obligations and mortgage pass-through securities and
increasing the Fund's weighting in corporate securities. This shift was done to
take advantage of the relatively higher yield available in corporate securities
as spreads versus Treasury securities widened.
As global financial markets stabilize, we expect demand for U.S. Treasuries
as a safe haven to lessen. As a result, we expect U.S. Treasury yields to rise
relative to other sectors. We anticipate moderately slower economic growth in
1999 with continued moderate inflation. We also expect the Federal Reserve to
lower short-term rates if growth slows significantly or if the recent liquidity
crisis returns. As a result, the Fund continues to be underweighted in U.S.
Treasuries and is overweighted in short- to intermediate-average life corporate,
mortgage-backed, and asset-backed securities.
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 12/31/98: $10.08 Per Share
9/30/98: $10.28 Per Share
Total Net Assets: $11.51 Million
30-Day SEC Yield: 5.25%
12-Month Distribution Rate: 5.49%
Average Maturity: 18.0 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)
[BAR CHART]
Mortgage Pass Through 39.2
Corporate Bonds & Notes 22.0
U.S. Treasury 20.0
Asset-Backed Securities 11.3
Closed-End Mutual Funds 3.7
Collateralized Mortgage Obligations 2.2
Other Assets and Liabilities and Cash Equivalents 1.6
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 0.03% 0.03% 0.34% 0.03% 0.03% 0.34%
(not annualized)
1 Year 6.52 7.25 8.69 6.52 7.25 8.69
3 Years 6.72 6.33 7.29 21.53 20.23 23.51
5 Years 6.98 6.36 7.27 40.13 36.13 42.06
Inception 6.93 6.34 7.26 40.60 36.73 42.83
(12/1/93)
</TABLE>
* As of 12/31/98
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 FUND LEHMAN AGGREGATE BOND INDEX
The sum of $10,000 invested at inception (12/1/93) and held until 12/31/98 would
have grown to $14,060 in the Fund or $14,283 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.
[PIE CHART]
U.S. Government 20.0%
Government Agency Backed Securities & CMO's 41.4%
AAA 10.9%
AA 1.7%
A 10.5%
BBB 13.9%
Other Assets & Liabilities 1.6%
11
<PAGE>
SIT TAX-FREE INCOME FUND REVIEW
QUARTER ENDED DECEMBER 31, 1998
[PHOTO]
SENIOR PORTFOLIO MANAGERS
MICHAEL C. BRILLEY
DEBRA A. SIT, CFA
Municipal bond yields rose slightly during the quarter and have remained
within a narrow range throughout the year. The Sit Tax-Free Income Fund provided
shareholders a total return of +0.53% for the quarter and +6.29% for the year
ended December 31, 1998. The Fund's total return ranked 18th of 262 general
municipal funds tracked by Lipper Analytical Services for the past quarter and
19th of 246 funds for the past year. For the past three years, five years and
ten years, the Fund's performance ranked 7th of 198 funds, 5th of 141 funds and
38th of 74 funds, respectively. The Fund's price per share decreased $0.12
during the quarter to $10.46 on December 31, 1998, and ranged between $10.28 and
$10.62 during the year. As of December 31, 1998, the Fund's 30-day SEC yield was
4.58% and its 12-month distribution rate was 4.99%, compared to 4.54% and 5.10%,
respectively, on September 30, 1998.
Fund assets increased to $805.2 million from $684.8 million at September 30,
1998, and from $453.5 million one year ago. Cash flow was used to purchase bonds
across several industry and ratings categories, and most sector weightings were
relatively unchanged during the quarter. Multifamily housing bonds increased
from 25.0% to 27.9% and health care increased from 22.2% to 23.6%. Single family
housing bonds decreased from 14.5% to 12.6% as purchases did not keep pace with
incoming cash flow. Cash decreased from 11.5% to 8.0%. Securities rated BBB
decreased from 28.5% to 27.3% and securities rated "A" or better comprised well
over two-thirds of the Fund. While the Fund's implied duration increased from
5.6 years to 7.0 years, its average maturity increased only slightly from 17.0
years to 17.8 years.
The Fund's performance continues to be driven by its emphasis on securities
which provide higher coupon income and principal stability. The Fund continues
to focus on purchasing bonds in the 8- to 20-year maturity range where the
municipal yield curve is steepest. We believe that municipal bonds are currently
very attractively valued relative to U.S. Treasury securities and that they
should provide strong relative performance in 1999.
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 12/31/98: $10.46 Per Share
9/30/98: $10.58 Per Share
Total Net Assets: $805.17 Million
30-Day SEC Yield: 4.58%
Tax Equivalent Yield: 7.58% (1)
12-Month Distribution Rate: 4.99%
Average Maturity: 17.8 Years
Duration to Estimated Avg. Life: 7.2 Years (2)
Implied Duration: 7.0 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 27.9
Hospital/Health Care Revenue 23.6
Single Family Mortgage Revenue 14.4
Other Revenue 8.1
Closed-End Mutual Funds 4.9
Education/Student Loan 3.6
Industrial Revenue/Pollution Control 2.9
Escrowed to Maturity/Pre-Refund 2.0
Transportation 1.5
Public Facilities 1.0
Municipal Lease Rental 0.7
Gen. Obligation 0.6
Sales Tax Revenue 0.5
Utility 0.3
Cash Equivalent 8.0
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 0.53% 0.09% 0.82% 0.53% 0.09% 0.82%
(not annualized)
1 Year 6.29 5.32 5.84 6.29 5.32 5.84
5 Years 6.72 5.44 5.28 38.43 30.33 29.33
10 Years 7.66 7.70 7.07 109.14 109.94 98.06
Inception 7.68 7.79 7.14 113.72 115.76 99.38
(9/29/88)
</TABLE>
* As of 12/31/98
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 INCOME FUND LEHMAN 5-YEAR MUNI. BOND INDEX
The sum of $10,000 invested at inception (9/29/88) and held until 12/31/98 would
have grown to $21,372 in the Fund or $19,955 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]
BBB 27.3%
A 25.6%
AA 15.9%
AAA 23.2%
Other Assets & Liabilities 8.0%
13
<PAGE>
SIT MINNESOTA TAX-FREE INCOME FUND REVIEW
QUARTER ENDED DECEMBER 31, 1998
[PHOTO]
SENIOR PORTFOLIO MANAGERS
MICHAEL C. BRILLEY
DEBRA A. SIT, CFA
Municipal bond yields rose slightly during the quarter and have remained
within a narrow range throughout the year. The Sit Minnesota Tax-Free Income
Fund provided shareholders a total return of +0.86% for the quarter and +6.14%
for the year ended December 31, 1998. The Fund's total return ranked 5th of 47
Minnesota municipal funds tracked by Lipper Analytical Services for the past
quarter and 11th of 47 funds for the past year. For the past three years, five
years and period since inception on December 1, 1993, the Fund's performance
ranked 2nd of 45 funds, 1st of 27 funds and 1st of 25 funds, respectively. The
Fund's price per share decreased $0.04 during the quarter to $10.60 on December
31, 1998, and ranged between $10.42 and $10.67 during the year. As of December
31, 1998, the Fund's 30-day SEC yield was 4.67% and its 12-month distribution
rate was 5.02% compared to 4.74% and 5.12%, respectively, on September 30, 1998.
Fund assets increased to $231.4 million from $194.3 million at September 30,
1998, and from $128.8 million one year ago. Cash flow was used to purchase bonds
across several industry and ratings categories. Health care bonds increased from
15.9% to 19.3% as the Fund has continued to focus on adding bonds in this higher
yielding sector. In addition, lease bonds increased from 2.0% to 3.3% and
escrowed to maturity/prerefunded bonds increased to 1.7%. The Fund's weighting
in multifamily housing decreased from 41.5% to 37.2% as purchases did not keep
pace with incoming cash flow. Cash was relatively unchanged at 5.8% at quarter
end. Non-rated holdings increased from 36.3% to 38.0% as securities rated "A" or
better decreased from 57.7% to 49.9%. While the Fund's implied duration
increased from 6.2 years to 6.9 years, its average maturity decreased slightly
from 19.8 years to 19.4 years.
The Fund's performance continues to be driven by its emphasis on securities
which provide higher coupon income and principal stability. The Fund continues
to focus on purchasing bonds in the 8- to 20-year maturity range where the
municipal yield curve is steepest. We believe that municipal bonds are currently
very attractively valued relative to U.S. Treasury securities and that they
should provide strong relative performance in 1999.
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 12/31/98: $10.60
9/30/98: $10.64 Per Share
Total Net Assets: $231.42 Million
30-Day SEC Yield: 4.67%
Tax Equivalent Yield: 8.45% (1)
12-Month Distribution Rate: 5.02%
Average Maturity: 19.4 Years
Duration to Estimated Avg. Life: 7.4 Years (2)
Implied Duration: 6.9 Years (2)
(1) For individuals in the 39.6% Federal and 8.5% MN tax brackets.
(2) See page 15.
PORTFOLIO STRUCTURE
[BAR CHART]
Multifamily Mortgage Revenue 37.2
Hospital/Health Care Revenue 19.3
Single Family Mortgage Revenue 12.6
Industrial Revenue/Pollution Control 4.8
Other Revenue Bonds 4.7
Closed-End Mutual Funds 4.4
Lease 3.3
General Obligation 3.0
Education/Student Loan 2.4
Escrowed to Maturity/Pre-Refund 1.7
Public Facilities 0.8
Cash Equivalent 5.8
14
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
------------------------------------------ -------------------------------------------
Sit Sit
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 0.86% 0.40% 0.82% 0.86% 0.40% 0.82%
(not annualized)
1 Year 6.14 5.55 5.84 6.14 5.55 5.84
3 Years 6.73 5.56 5.47 21.59 17.62 17.34
5 Years 6.49 5.27 5.28 36.92 29.26 29.33
Inception 6.71 5.52 5.49 39.11 31.43 31.22
(12/1/93)
</TABLE>
* As of 12/31/98
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 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 12/31/98 would
have grown to $13,911 in the Fund or $13,122 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]
Not Rated 38.0%
BBB 6.3%
A 8.4%
AA 21.0%
AAA 20.5%
Other Assets & Liabilities 5.8%
ADVISER'S ASSESSMENT OF
NOT-RATED SECURITIES
AAA 0.3%
AA 0.3
A 3.5
BBB 21.2
BB 11.7
B 1.0
Total 38.0%
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
Roger J. Sit 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
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 DECEMBER 31, 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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