SIT MUTUAL FUNDS
BOND FUNDS
QUARTERLY REPORT
JUNE 30, 2000
MONEY MARKET FUND
U.S. GOVERNMENT SECURITIES FUND
TAX-FREE INCOME FUND
MINNESOTA TAX-FREE INCOME FUND
BOND FUND
[LOGO] SIT INVESTMENT ASSOCIATES
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SIT MUTUAL FUNDS
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SIT MUTUAL FUNDS
BOND FUNDS QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
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A Look at Sit Mutual Funds 2
Chairman's Letter 3
Performance Review 4
FUND REVIEWS
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Money Market Fund 6
U.S. Government Securities Fund 8
Tax-Free Income Fund 10
Minnesota Tax-Free Income Fund 12
Bond Fund 14
This document must be preceded or accompanied by a Prospectus.
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SIT MUTUAL FUNDS
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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 $10.0
billion for some of America's largest corporations, foundations and endowments.
Sit Mutual Funds are comprised of thirteen NO-LOAD funds. 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.
Sit Mutual Funds Offer:
* Free telephone exchange
* Dollar-cost averaging through an automatic investment plan
* Electronic transfer for purchases and redemptions
* Free checkwriting privileges on bond funds
* Retirement accounts including IRAs and 401(k) plans
SIT FAMILY OF FUNDS
[CHART]
STABILITY: INCOME: GROWTH: HIGH GROWTH:
SAFETY OF PRINCIPAL INCREASED INCOME LONG-TERM CAPITAL LONG-TERM CAPITAL
AND CURRENT INCOME APPRECIATION AND APPRECIATION
INCOME
MONEY MARKET U.S. GOVERNMENT BALANCED MID CAP GROWTH
SECURITIES LARGE CAP GROWTH INTERNATIONAL GROWTH
TAX-FREE INCOME REGIONAL GROWTH SMALL CAP GROWTH
MINNESOTA TAX-FREE SCIENCE AND
INCOME TECHNOLOGY GROWTH
BOND DEVELOPING MARKETS
GROWTH
[ ] PRINCIPAL STABILITY & CURRENT INCOME GROWTH POTENTIAL
2
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[PHOTO] SIT MUTUAL FUNDS
Quarter Ended June 30, 2000 [LOGO]
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Chairman's Letter
Strong economic growth coupled with concerns of building inflation pressures led
the Federal Reserve to raise the target for the federal funds rate by an
aggressive 0.50% to 6.50% at its May 16th FOMC meeting. With the May move, the
Fed has raised interest rates by 1.75% since June of 1999. While interest rates
rose early in the quarter, they later declined as economic reports indicated
that the economy was finally beginning to slow. As a result, U.S. Treasury
yields ended the quarter essentially unchanged.
ECONOMIC OVERVIEW
Second quarter economic growth appears to have slowed significantly from the
first quarter's +5.5% annualized GDP growth rate. Recent weaker reports of
personal consumption expenditures, which represent more than two-thirds of GDP,
would suggest a second quarter growth rate of only +3.5%. Despite evidence of
lower consumer spending, we believe that the general fundamentals of the economy
remain quite strong. The unemployment rate remains very low and measures of
consumer confidence remain vigorous. Also, easing energy prices, growing export
orders and a recovery in government spending are a formula for continued
strength in the second half. As a result, we believe the second quarter slowdown
will be followed by a third quarter recovery.
The current record breaking economic expansion of 111 months has brought with it
a modest cyclical increase in inflation. Since December 1998, year-over-year
inflation, as measured by the Consumer Price Index (CPI), has risen from +1.5%
to +3.6% for June 2000. Looking forward, we expect oil and other commodity
prices to level off or trend lower. However, we believe there is still a
significant risk of wage inflation as evidenced by the latest employment report
on July 7th. The civilian unemployment rate fell from 4.1% to 4.0% and average
hourly earnings rose +3.6% compared to last year . So far, productivity gains
have kept higher wages from translating into higher price for consumer goods.
Regarding fiscal policy, forecasters have projected a $225 billion surplus for
fiscal year 2000. The enormous surplus is being driven by an +11.8% increase in
tax receipts which is a function of the strong economy, low unemployment, and
the large capital gains taxes generated by five years of a rising stock market.
We expect increases in government spending and modest tax cuts which should have
a simulative effect on the economy.
STRATEGY SUMMARY
If the economy does not reaccelerate in the third quarter following our more
moderate +3.5% growth forecast for the second quarter, we would expect the
Federal Reserve to be less concerned about inflationary pressures and to leave
interest rates unchanged at their August 22nd meeting. However, if growth
reaccelerates as we expect, the Federal Reserve will most likely be much less
tolerant of any increases in inflation. As a result, we believe it is probable
that the Federal Reserve will raise short-term rates another +0.25% sometime in
the second half of this year.
Our taxable bond portfolios continue to hold short average life, high coupon
mortgages. These securities typically benefit from reduced mortgage prepayment
activity when the Federal Reserve is raising interest rates. The taxable
portfolios have also reduced their weighting in U.S. Treasuries in favor of
sectors that provide as much as +2.0% incremental yield.
Despite the possibility of an additional Fed tightening, municipal bonds have
seen strength recently. In anticipation of lower municipal yields, our municipal
funds are relatively long in duration. Also, municipal portfolios are
maintaining their weightings in health care. Health care returns were
disappointing in 1999, but if history holds true, the sector will perform well
this year.
We appreciate your interest in Sit Mutual Funds and believe our continued focus
on high current income and stability of principal value will help you achieve
your long-term investment goals.
With best wishes,
/s/ Eugene C. Sit
Eugene C. Sit, CFA
Chairman and Chief Investment Officer
3
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SIT MUTUAL FUNDS
Quarter Ended June 30, 2000
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Performance Summary - Bond Funds
U.S. Bond yields were relatively stable during the quarter as economic growth
moderated and investors' expectations shifted to a more stable Federal Reserve
policy following six consecutive quarters of generally rising interest rates.
While the Federal Reserve did increase their Federal Funds target rate by +0.50%
to 6.50% in May, that rate increase was widely anticipated by late in the first
quarter of this year. The 3-month Treasury bill yield was nearly unchanged, with
a 5.86% yield on June 30, 2000. Yield changes in other maturities across the
treasury yield curve were also quite small, including minor declines in 1 to
5-year maturities, and slight increases in 10 and 30-year maturities. Interest
rate changes were also minimal across the municipal yield curve over the
quarter.
Because of the stable market environment and flat government yield curve,
despite concerns about the eventual loss of the implicit government guarantees
for FNMA and FHLMC securities, the best total returns in the government sectors
were from agency pass-through securities due to their higher market yields.
Other sectors of the taxable bond market where there was a more positively
sloped yield curve, such as intermediate maturity corporate bonds, provided
higher returns than government issues due to some narrowing in yield spreads for
these issues. However, continued widening of yield spreads within longer-term
corporate issues caused these issues to provide lower returns than those of
government issues.
Because of the positive and stable slope of the municipal yield curve during
the quarter, total returns were highest for those securities with longer
maturities. Returns across various market sectors such as general obligation,
revenue, and insured issues were quite similar. There was also little variation
in returns within revenue sectors where the funds primarily invest, such as
housing, health care, and electric revenue, etc. Institutional demand for
tax-exempt bonds remains weak, while retail demand has strengthened throughout
the first half of the year.
1991 1992
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SIT MONEY MARKET FUND (1) -- --
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SIT U.S. GOV'T. SECURITIES FUND 12.87% 5.43%
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SIT TAX-FREE INCOME FUND 9.25 7.71
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SIT MINNESOTA TAX-FREE
INCOME FUND -- --
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SIT BOND FUND -- --
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3-MONTH U.S. TREASURY BILL INDEX -- --
LEHMAN INTER. GOVERNMENT BOND INDEX 14.11 6.93
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 11.41 7.62
LEHMAN AGGREGATE BOND INDEX -- --
NASDAQ
SYMBOL INCEPTION
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SIT MONEY MARKET FUND SNIXX 11/01/93
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SIT U.S. GOV'T. SECURITIES FUND SNGVX 06/02/87
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SIT TAX-FREE INCOME FUND SNTIX 09/29/88
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SIT MINNESOTA TAX-FREE INCOME FUND SMTFX 12/01/93
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SIT BOND FUND SIBOX 12/01/93
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3-MONTH U.S. TREASURY BILL INDEX 11/01/93
LEHMAN INTER. GOVERNMENT BOND INDEX 05/31/87
LEHMAN 5-YEAR MUNICIPAL BOND INDEX 09/30/88
LEHMAN AGGREGATE BOND INDEX 11/30/93
(1) Converted from Sit Investment Reserve Fund to Sit Money Market Fund on
11/1/93.
(2) Period from Fund inception through calendar year-end.
(3) Based on the last 12 monthly distributions of net investment income and
average NAV as of 6/30/00.
(4) Figure represents 7-day compound effective yield. The 7-day simple yield as
of 6/30/00 was 6.16%.
(5) For individuals in the 28%, 31%, 36%, and 39.6% federal tax brackets, the
federal tax equivalent yields are 7.63%, 7.96%, 8.58% and 9.09%,
respectively (Income subject to state tax, if any).
4
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TOTAL RETURN - CALENDAR YEAR
<TABLE>
<CAPTION>
YIELD
YTD AS OF DISTRIBUTION
1993 1994 1995 1996 1997 1998 1999 2000 6/30/00 RATE (3)
-------------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.46%(2) 3.84% 5.58% 5.08% 5.22% 5.17% 4.79% 2.83% 6.35%(4)
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7.34 1.77 11.50 4.99 8.19 6.52 1.37 3.27 6.70 5.91%
-----------------------------------------------------------------------------------------------------------
10.42 -0.63 12.86 5.69 9.87 6.29 -4.01 2.73 5.49(5) 5.30
-----------------------------------------------------------------------------------------------------------
1.60(2) 0.63 11.90 5.89 8.19 6.14 -3.82 2.72 5.60(6) 5.33
-----------------------------------------------------------------------------------------------------------
0.34(2) -1.31 16.83 4.25 9.44 6.52 -0.34 2.14 7.06 6.29
-----------------------------------------------------------------------------------------------------------
0.53(2) 4.47 5.98 5.27 5.32 5.01 4.88 2.93
8.17 -1.75 14.41 4.06 7.72 8.49 0.49 3.49
8.73 -1.28 11.65 4.22 6.38 5.84 0.74 2.79
0.54(2) -2.92 18.47 3.63 9.65 8.69 -0.82 3.99
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR THE
PERIODS ENDED JUNE 30, 2000
TOTAL RETURN
QUARTER SIX MONTHS SINCE
ENDED 6/30/00 ENDED 6/30/00 1 YEAR 5 YEARS 10 YEARS INCEPTION
-------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1.46% 2.83% 5.40% 5.17% -- 4.95%
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1.72 3.27 4.64 5.87 6.92% 7.54
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1.14 2.73 -0.59 5.16 6.29 6.55
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1.03 2.72 -1.15 4.75 -- 4.95
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0.84 2.14 2.45 5.52 -- 5.60
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1.48 2.93 5.53 5.25 -- 5.14
1.82 3.49 4.48 5.82 7.15 7.49
1.57 2.79 3.77 4.89 6.22 6.36
1.74 3.99 4.56 6.25 -- 6.06
</TABLE>
(6) For Minnesota residents in the 28%, 31%, 36% and 39.6% federal tax brackets,
the double exempt tax equivalent yields are 8.45%, 8.82%, 9.51% and 10.08%,
respectively (Assumes the maximum Minnesota tax bracket of 8.0%). Investment
income in Sit Minnesota Tax-Free Income Fund may be subject to the federal
alternative minimum tax.
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.
5
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[PHOTO] SIT MONEY MARKET FUND
Quarter Ended June 30, 2000
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Michael C. Brilley, Senior Portfolio Manager
Paul J. Jungquist, CFA, Senior Portfolio Manager
The Sit Money Market Fund provided investors with a +1.46% return for the
three months ended June 30, 2000, compared to a +1.37% average return for the
Lipper Analytical Services Money Market Fund universe. The Fund's performance
ranked 89th of 375 funds in its Lipper peer group category for the second
quarter of 2000. For the one year, three year, five year and since inception
periods ended June 30, 2000, the Fund's performance ranked 65th of 364 funds,
57th of 281 funds, 52nd of 244 funds and 41st of 187 funds, respectively, in its
Lipper peer group. As of June 30, 2000, the Fund's 7-day compound yield was
6.35% and its average maturity was 29 days, compared to 5.49% and 30 days,
respectively, at March 31, 2000.
The Federal Reserve Board increased the federal funds rate by 0.50% in one
tightening move during the past quarter to 6.50%, in response to continued
strong growth in the economy, commodity price inflation and tightness in labor
markets. Three-month Treasury bill yields were volatile over the past quarter,
ranging from 6.2% after the Fed tightening on May 16th to 5.6% by the end of
May, finishing at 5.85% on June 30th. Current yield levels imply that the market
is not expecting additional tightening by the Fed in the third quarter of 2000.
While economic data reported in June and early July is indicative of a slowing
economy, another tightening by the Fed in August is still a real possibility.
Until Fed policy becomes more clear, the Fund anticipates maintaining an average
maturity near 30 days over the near term.
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 domestic economic
activity slows from a very strong level, and global economic activity appears to
be strengthening, we do not foresee a significant impact on the short-term
creditworthiness of top tier commercial paper issuers in general. The Fund
continues to diversify its core holdings and its industry exposure. In the
months ahead, we hope to add top tier credits in the financial services and
consumer non-durable industries to our list of permissible holdings.
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 short-term debt instruments
which mature in 397 days or less and by maintaining a dollar-weighted portfolio
maturity of 90 days or less.
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 6/30/00: $ 1.00 Per Share
3/31/00: $ 1.00 Per Share
Total Net Assets: $161.3 Million
PORTFOLIO STRUCTURE
(% OF TOTAL NET ASSETS)
[BAR CHART]
Diversified Finance 17.6
Consumer Loan Finance 13.6
Consumer Non-Durables 12.0
Utilities 10.2
Captive Equip. Finance 9.7
Captive Auto Finance 9.0
Energy 6.8
Financial Services 4.0
Sectors Under 4.0% 17.1
6
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AVERAGE ANNUAL TOTAL RETURNS*
SIT MONEY 3-MONTH LIPPER
MARKET U.S. TREASURY MONEY
FUND BILL MARKET AVG.
--------- ------------- -----------
3 Month** 1.46% 1.48% 1.37%
1 Year 5.40 5.53 5.06
3 Year 5.16 5.17 4.88
5 Year 5.17 5.25 4.92
Inception 4.95 5.14 4.76
(11/1/93)
CUMULATIVE TOTAL RETURNS*
SIT MONEY 3-MONTH LIPPER
MARKET U.S. TREASURY MONEY
FUND BILL MARKET AVG.
--------- ------------- -----------
1 Year 5.40% 5.53% 5.06%
3 Year 16.31 16.34 15.37
5 Year 28.69 29.16 27.12
Inception 38.00 39.68 36.37
(11/1/93)
*AS OF 6/30/00. **NOT ANNUALIZED.
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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 3-MONTH U.S. TREASURY
BILL. THE LIPPER AVERAGES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A
LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (11/1/93) and held until 6/30/00 would
have grown to $13,800 in the Fund or $13,968 in the 3-Month U.S. Treasury Bill
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]
First Tier Securities
100%
First Tier Securities 100%
Second Tier Securities 0%
7
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[PHOTO] SIT U.S. GOVERNMENT SECURITIES FUND
Quarter Ended June 30, 2000
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Michael C. Brilley, Senior Portfolio Manager
Bryce A. Doty, CFA, Senior Portfolio Manager
The Sit U.S. Government Securities Fund provided investors with a +1.72%
return for the quarter ended June 30, 2000, compared to a +1.39% return of the
Lipper U.S. Government Fund average. For the twelve months ended June 30, 2000,
the Fund's total return was +4.64% versus +3.60% for the Lipper U.S. Government
Fund average. The Fund holds a 5-Star Overall rating by Morningstar(1) out of
1,684 funds in the taxable bond category for the period ended June 30, 2000. The
Fund was rated #4 for Morningstar's Highest 5-Year Rating category for its
combined low risk and high return characteristics and #3 in Morningstar's Best
5-Year Return category out of 133 funds.
Last quarter witnessed significant shifts in interest rates. However, U.S.
Treasury yields finished essentially unchanged for the quarter while yields for
all other sectors ended modestly higher. As a result, the Fund's U.S. Treasury
holdings provided the highest return for the quarter, followed by its holdings
in government agency collateralized mortgage obligation bonds and, lastly, its
mortgage pass-through holdings.
Late in the first quarter, the Fund purchased Treasury Inflation Protection
Securities (TIPS). The principal of these security increases at the rate of CPI
while also paying a fixed coupon. The purchase of the TIPS was made to take
advantage of the sharp (yet brief) rise in inflation that occurred from March
through May. The coupon yields, or real yields, of TIPS at more than +4.0%,
combined with annualized inflation rates that peaked at +10.4%, provided a very
attractive combined yield. The TIPS were sold at the end of May because the
annualized inflation rate had fallen to less than one percent. With the
resurgence of gasoline prices, we expect additional investment opportunities in
TIPS.
Our economic outlook is for a modest rise in inflation and slowing economic
growth. These offsetting factors should result in a much less active Federal
Reserve, and consequently, more stable interest rates. In this environment, we
will continue to invest in securities that offer high levels of interest income.
INVESTMENT OBJECTIVE AND STRATEGY
The objective of the U.S. Government Securities Fund is to provide high
current income and safety of principal, which it seeks to attain by investing
solely in debt obligations issues, 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 including those issued by Government
National Mortgage Association (GNMA), Federal National Mortgage Asociation
(FNMA), and Federal Home Loan Mortgage Corporation (FHLMC).
PORTFOLIO SUMMARY
Net Asset Value 6/30/00: $10.23 Per Share
3/31/00: $10.22 Per Share
Total Net Assets: $138.3 Million
30-day SEC Yield: 6.70%
12-Month Distribution Rate: 5.91%
Average Maturity: 15.0 Years
Effective Duration: 3.0 Years(2)
(2) 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 38.6
Collateralized Mortgage Obligations 21.0
FHLMC Pass-Through 15.8
FNMA Pass-Through 14.4
U.S. Treasury 5.3
Cash & Other Net Assets 4.9
8
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AVERAGE ANNUAL TOTAL RETURNS*
SIT
U.S. GOV'T. LEHMAN LIPPER
SECURITIES INTER. GOV'T. U.S. GOV'T.
FUND BOND INDEX FUND AVG.
----------- ------------- -----------
3 Month** 1.72% 1.82% 1.39%
1 Year 4.64 4.48 3.60
5 Year 5.87 5.82 5.20
10 Year 6.92 7.15 6.84
Inception 7.54 7.49 7.03
(6/2/87)
CUMULATIVE TOTAL RETURNS*
SIT
U.S. GOV'T. LEHMAN LIPPER
SECURITIES INTER. GOV'T. U.S. GOV'T.
FUND BOND INDEX FUND AVG.
----------- ------------- -----------
1 Year 4.64% 4.48% 3.60%
5 Year 32.99 32.71 28.85
10 Year 95.23 99.58 93.80
Inception 158.77 157.47 143.29
(6/2/87)
*AS OF 6/30/00. **NOT ANNUALIZED.
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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 ARE OBTAINED FROM LIPPER ANALYTICAL
SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
(1) Morningstar proprietary ratings reflect historical risk-adjusted performance
through 6/30/99. These ratings are subject to change monthly and are calculated
from the fund's 3-, 5-, and 10-year average annual returns in excess of 90-day
Treasury bill returns with appropriate fee adjustments and a risk factor that
reflects fund performance below 90-day Treasury bill returns. Ten percent of the
funds in an investment category receive 5 stars. In the taxable bond category,
Sit U.S. Government Securities Fund received a 5-star rating for the 3-, 5-, and
10-year periods out of 1684, 1287, and 381 funds respectively.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (6/2/87) and held until 6/30/00 would
have grown to $25,877 in the Fund or $25,747 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]
0 - 1 Year 4.9%
1 - 5 Years 77.3%
5 - 10 Years 17.6%
10 - 20 Years 0.2%
20+ Years 0.0%
9
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[PHOTO] SIT TAX-FREE INCOME FUND
Quarter Ended June 30, 2000
-----------------------------------------------------------------------
Michael C. Brilley, Senior Portfolio Manager
Debra A. Sit, CFA, Senior Portfolio Manager
Municipal yields ended the quarter lower after approaching their January
highs again in mid-May. The Fund provided a return of +1.14% for the quarter
ended June 30, 2000, compared to +1.57% for the Lehman 5-year Municipal Index
and +1.09 for the Lipper General Municipal Bond Fund average. The Fund's price
per share ended the quarter at $9.55, down $0.02 after rebounding from a low of
$9.33 in May. The Fund benefited from stabilizing yields in the health care
sector. The Fund's 30-day SEC yield ended the quarter with little change at
5.49% while its 12-month distribution rate increased from 5.18% to 5.30%.
The Fund's implied duration ended the quarter unchanged at 7.7 years. Longer
duration holdings were sold to offset the increase in price sensitivity of bonds
as they became priced to maturity rather than to shorter call dates. Thus, the
Fund's average maturity decreased from 17.2 years to 16.5 years. Fund assets
declined from $582.5 million to $559.3 million during the quarter. Health care
bonds decreased from 24.5% to 23.4% as the Fund sold lesser quality credits. In
addition, single family bonds decreased from 12.1% to 10.7% as longer duration
issues were sold to contain the Fund's duration. Purchases were made across
industry sectors and had little impact on other sector weightings aside from
increasing cash from 4.3% to 6.4% and securities rated A or better from 60.6% to
62.0%.
We are monitoring multifamily housing credits closely as well as those in the
health care sector, which was subject to operating margin pressure last year. We
are maintaining the Fund's health care weighting, as underperformance in that
sector has historically been followed by a period of strong outperformance. Our
focus remains on issuers that are sole community providers, are financially
flexible and have strong managements. Despite the possibility of an additional
Fed tightening at the next FOMC meeting on August 22nd, municipal bonds have
seen continued strength in prices in recent weeks. Municipals remain very
attractively valued, particularly on an after-tax basis. We intend to maintain
the Fund's current duration positioning in anticipation of lower municipal
yields later this year. We believe that bonds in the 8 to 15 year maturity range
continue to offer the most attractive risk/reward profile.
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
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 6/30/00: $ 9.55 Per Share
3/31/00: $10.39 Per Share
Total Net Assets: $559.3 Million
30-day SEC Yield: 5.49%
Tax Equivalent Yield: 9.09%(1)
12-Month Distribution Rate: 5.30%
Average Maturity: 16.5 Years
Duration to Estimated Avg. Life: 7.2 Years(2)
Implied Duration: 7.7 Years(2)
(1) For individuals in the 39.6% federal tax bracket.
(2) See next page.
PORTFOLIO STRUCTURE
(% OF TOTAL NET ASSETS)
[BAR CHART]
Multifamily Mortgage Revenue 30.4
Hospital/Health Care Revenue 23.4
Other Revenue 11.0
Single Family Mortgage Revenue 10.7
Education/Student Loan 5.7
Closed-End Mutual Funds 4.6
Sectors Under 3.0% 7.8
Cash & Other Net Assets 6.4
10
<PAGE>
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AVERAGE ANNUAL TOTAL RETURNS*
SIT LIPPER
TAX-FREE LEHMAN GENERAL
INCOME 5-YEAR MUNI. MUNI. BOND
FUND BOND INDEX FUND AVG.
-------- ------------ ----------
3 Month** 1.14% 1.57% 1.09%
1 Year -0.59 3.77 0.98
5 Year 5.16 4.89 4.76
10 Year 6.29 6.22 6.41
Inception 6.55 6.36 6.70
(9/29/88)
CUMULATIVE TOTAL RETURNS*
SIT LIPPER
TAX-FREE LEHMAN GENERAL
INCOME 5-YEAR MUNI. MUNI. BOND
FUND BOND INDEX FUND AVG.
-------- ------------ ----------
1 Year -0.59% 3.77% 0.98%
5 Year 28.63 26.96 26.19
10 Year 84.01 82.86 86.06
Inception 110.76 106.44 114.25
(9/29/88)
*AS OF 6/30/00. **NOT ANNUALIZED.
--------------------------------------------------------------------------------
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 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]
The sum of $10,000 invested at inception (9/29/88) and held until 6/30/00 would
have grown to $21,076 in the Fund or $20,644 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 24.4%
AA 14.8%
AAA 16.4%
Cash & Other Net Assets 6.4%
Less than BBB 0.8%
BBB 37.2%
Total number of holdings: 400
11
<PAGE>
[PHOTO] SIT MINNESOTA TAX-FREE INCOME FUND
Quarter Ended June 30, 2000
-----------------------------------------------------------------------
Michael C. Brilley, Senior Portfolio Manager
Debra A. Sit, CFA, Senior Portfolio Manager
Municipal yields ended the quarter lower after approaching their January
highs again in mid-May. The Fund provided a return of +1.03% for the quarter
ended June 30, 2000, compared to +1.57% for the Lehman 5-year Municipal Index
and +1.01% for the Lipper Minnesota Municipal Bond Fund average. The Fund's
price per share ended the quarter at $9.70, down $0.03 after rebounding from a
low of $9.55 in May. The Fund benefited from stabilizing yields in the health
care sector. The Fund's 30-day SEC yield rose during the quarter from 5.42% to
5.60%, while its 12-month distribution rate increased from 5.19% to 5.33%.
The Fund's implied duration increased from 7.1 years to 7.8 years during the
quarter, reflecting the increase in price sensitivity of the Fund's holdings as
bonds became priced to maturity rather than to shorter call dates. The Fund's
average maturity extended from 16.6 years to 17.1 years. The Fund's lengthening
was, in part, impacted by the decrease in cash from 10.6% to 4.9% as assets
declined from $172.9 million to $162.6 million. Multifamily housing bonds
increased from 37.5% to 38.2%, despite net sales. Purchases in hospital and
other revenue bonds caused those sectors to increase from 21.5% to 23.4% and
from 6.0% to 7.6%, respectively. The decline in cash also impacted the
portfolio's quality breakdown. Securities rated A or better decreased from 52.1%
to 49.1% and non-rated holdings increased from 40.0% to 42.4%. The Fund has
sought to retain its positions in higher yielding securities while preserving
liquidity. Thus, non-rated holdings will likely remain around their current
weighting.
We continue to monitor credits closely, particularly those in the health care
sector, which was subject to operating margin pressure last year. We are
maintaining the Fund's health care weighting, as underperformance in that sector
has historically been followed by a period of strong outperformance. Our focus
remains on issuers that are sole community providers, financially flexible and
have strong managements. Despite the possibility of an additional Fed tightening
at the next FOMC meeting on August 22nd, municipal bonds have seen continued
strength in prices in recent weeks. Municipals remain very attractively valued,
particularly on an after-tax basis. We intend to maintain the Fund's current
duration positioning in anticipation of lower municipal yields later this year.
We believe that bonds in the 8 to 15 year maturity range continue to offer the
most attractive risk/reward profile.
INVESTMENT OBJECTIVE AND STRATEGY
The investment objective of the Minnesota Tax-Free Income 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 alternative minimum taxable income.
PORTFOLIO SUMMARY
Net Asset Value 6/30/00: $ 9.70 Per Share
3/31/00: $ 9.73 Per Share
Total Net Assets: $162.6 Million
30-day SEC Yield: 5.60%
Tax Equivalent Yield: 10.08%(1)
12-Month Distribution Rate: 5.33%
Average Maturity: 17.1 Years
Duration to Estimated Avg. Life: 7.3 Years(2)
Implied Duration: 7.8 Years(2)
(1) For individuals in the 39.6% federal tax and 8.0% MN tax brackets.
(2) See next page.
PORTFOLIO STRUCTURE
(% OF TOTAL NET ASSETS)
[BAR CHART]
Multifamily Mortgage Revenue 38.2
Hospital/Health Care Revenue 23.4
Single Family Mortgage Revenue 9.3
Other Revenue Bonds 7.6
Industrial Revenue/Pollution Control 4.4
Education/Student Loan 3.8
Sectors under 3.0% 8.4
Cash & Other Net Assets 4.9
12
<PAGE>
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AVERAGE ANNUAL TOTAL RETURNS*
SIT LEHMAN LIPPER
MN TAX-FREE 5-YEAR MUNI. MN MUNI. BOND
INCOME FUND BOND INDEX FUND AVG.
----------- ------------ -------------
3 Month** 1.03% 1.57% 1.01%
1 Year -1.15 3.77 0.53
3 Year 3.29 4.41 3.33
5 Year 4.75 4.89 4.51
Inception 4.95 4.77 4.18
(12/1/93)
CUMULATIVE TOTAL RETURNS*
SIT LEHMAN LIPPER
MN TAX-FREE 5-YEAR MUNI. MN MUNI. BOND
INCOME FUND BOND INDEX FUND AVG.
----------- ------------ -------------
1 Year -1.15% 3.77% 1.01%
3 Year 10.21 13.82 10.32
5 Year 26.12 26.96 24.69
Inception 37.44 35.87 30.93
(12/1/93)
*AS OF 6/30/00. **NOT ANNUALIZED.
--------------------------------------------------------------------------------
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 MUNI. BOND
INDEX. THE LIPPER AVERAGES 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]
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/00 would
have grown to $13,744 in the Fund or $13,587 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 15.0% ASSESSMENT OF
AA 13.9% NON-RATED
AAA 15.3% SECURITIES
Cash & Other Net Assets 4.9%
Not Rated 42.4% AAA 0.7%
BBB 8.5% AA 0.4
A 2.4
BBB 24.3
BB 13.5
B 1.1
-------------
TOTAL 42.4%
13
<PAGE>
[PHOTO] SIT BOND FUND
Quarter Ended June 30, 2000
-----------------------------------------------------------------------
Michael C. Brilley, Senior Portfolio Manager
Bryce A. Doty, CFA, Senior Portfolio Manager
The Sit Bond Fund provided investors with a +0.84% return for the quarter
ending June 30, 2000, compared to a +1.26% average return for the Lipper
Analytical Services Intermediate Investment Grade Bond Fund universe. For the
period since its inception, the Fund ranked in the top 25% of its Lipper
universe (out of 101 funds).
Last quarter witnessed significant shifts in interest rates. However, U.S.
Treasury yields finished essentially unchanged for the quarter while yields for
all other sectors ended modestly higher. As a result, the Fund's U.S. Treasury
holdings provided the highest return for the quarter followed by the Fund's
government agency mortgage pass-through and collateralized mortgage obligation
holdings. The Fund's corporate holdings earned just under 1.0% while its
asset-backed holdings had the only negative return for the quarter.
Early in the quarter, yields for U.S. Treasuries rose and yields for all
other sectors rose even more causing incremental spreads to widen. The Fund sold
U.S. Treasuries and purchased intermediate investment grade corporate securities
early in the quarter to take advantage of these relatively high yields
(approximately 8.25%) provided by corporates. Later in the quarter, interest
rates fell and corporate yield spreads narrowed. However, asset-backed yields
remained relatively high. Consequently, in June, the Fund sold corporates and
U.S. Treasuries and purchased home equity asset-backed securities. The
asset-backed securities were all AAA-rated and insured while still offering
yields about 2.0% higher than U.S. Treasuries with equivalent durations.
As a result of last quarter's investment activity, the Fund's weighting in
the asset-backed sector grew by 7.0% to 23.0% at quarter end. U.S. Treasury
holdings were reduced from 11.0% to 3.0% of the Fund as of June 30, 2000. The
Fund's weightings in the corporate and mortgage sectors ended the quarter nearly
unchanged.
Our economic outlook is for a modest rise in inflation and slowing economic
growth. These offsetting factors should result in a much less active Federal
Reserve and, consequently, more stable interest rates. In this environment, we
will continue to maximize yield while focusing on 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 pursues this objective by
investing in a diversified portfolio of fixed-income securities.
The Fund will pursue its objective by investing in a diversified portfolio
or 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 6/30/00: $ 9.35 Per Share
3/31/00: $ 9.43 Per Share
Total Net Assets: $11.8 Million
30-day SEC Yield: 7.06%
12-Month Distribution Rate: 6.29%
Average Maturity: 17.1 Years
Effective Duration: 4.4 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]
Corporate Bonds & Notes 31.4
Mortgage Pass Through 23.3
Asset-Backed Securities 23.0
Closed-End Mutual Funds 4.4
Collateralized Mortgage Obligations 4.1
U.S. Treasury 3.0
Federal Agency 0.7
Cash & Other Net Assets 10.1
14
<PAGE>
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AVERAGE ANNUAL TOTAL RETURNS*
LIPPER INTER.
SIT LEHMAN INVESTMENT
BOND AGGREGATE GRADE BOND
FUND BOND INDEX FUND AVG.
---- ---------- ------------
3 Month** 0.84% 1.74% 1.26%
1 Year 2.45 4.56 3.42
3 Year 4.68 6.04 5.03
5 Year 5.52 6.25 5.36
Inception 5.60 6.06 5.18
(12/1/93)
CUMULATIVE TOTAL RETURNS*
LIPPER INTER.
SIT LEHMAN INVESTMENT
BOND AGGREGATE GRADE BOND
FUND BOND INDEX FUND AVG.
---- ---------- ------------
1 Year 2.45% 4.56% 3.42%
3 Year 14.71 19.22 15.86
5 Year 30.80 35.41 29.81
Inception 43.12 47.30 39.50
(12/1/93)
*AS OF 6/30/00. **NOT ANNUALIZED.
--------------------------------------------------------------------------------
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 ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A
LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS.
GROWTH OF $10,000
[PLOT POINTS CHART]
The sum of $10,000 invested at inception (12/1/93) and held until 6/30/00 would
have grown to $14,312 in the Fund or $14,730 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 RATING USED.
[PIE CHART]
A 15.4%
BBB 17.7%
Cash and other Assets and Liabilities 10.1%
Government Agency Backed Securities 24.0%
AA 3.0%
AAA 26.8%
U.S. Government 3.0%
15
<PAGE>
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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
Bond Funds Officers:
Eugene C. Sit, CFA Chairman
Peter L. Mitchelson, CFA Vice Chairman
Michael C. Brilley Senior Vice President
Debra A. Sit, CFA Vice President - Investments,
Assistant Treasurer
Bryce A. Doty, CFA(1) Vice President - Investments
Paul J. Jungquist, CFA(2) Vice President - Investments
Michael P. Eckert Vice President
Michael J. Radmer Secretary
Paul E. Rasmussen Vice President & Treasurer
Carla J. Rose Assistant Secretary
(1) Bond and U.S. Government Securities Funds only.
(2) Money Market Fund only.
16
<PAGE>
QUARTERLY REPORT BOND FUNDS
Quarter Ended June 30, 2000
INVESTMENT ADVISER
Sit Investment Associates, Inc.
4600 Wells Fargo Center
Minneapolis, MN 55402
612-334-5888 (Metro Area)
800-332-5580
DISTRIBUTOR
SIA Securities Corp.
4600 Wells Fargo 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
PFPC Inc.
P.O. Box 5166
Westboro, MA 01581-5166
AUDITORS
KPMG LLP
4200 Wells Fargo Center
Minneapolis, MN 55402
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
[LOGO] SIT INVESTMENT ASSOCIATES
-------------------------
SIT MUTUAL FUNDS
