THE MAXUS FUNDS
Dear Shareholder:
Judging from the performance of the S&P 500 Index alone, it would be easy to
conclude that the first half of 1996 was an extension of the wonderful bull
market of 1995. The capitalization weighted S&P advanced 10%, and, if you owned
a big capitalization stock fund, or knew a broker who could give you a few
shares of a hot new issue, you might easily conclude that it does not take a
genius to make money in the stock market.
Under the surface, however, the picture does not appear nearly as bright. While
the S&P has advanced, the substantial portion of that advance occurred between
January 10 and February 15. During most of the first half of 1996, the market
had been struggling against a number of deteriorating fundamentals, not the
least of which is a full percentage point gain in the interest rate on the 30
year U.S. Treasury Bond to the 7% level. Portfolios centered around certain
areas of high technology, for example, declined significantly during the first
six months of 1996; and those investors who believed that the country's largest
mutual fund, the very broadly based Fidelity Magellan Fund, would surely keep
pace, saw their equity increase a mere 2.8 % for the six month period.
Income investors did even worse. The one percent increase in interest rates on
the 30-year Treasury corresponds to an approximate 13% decline in market value.
While most income investors do not own many bonds with 30 year maturities,
almost all experienced declines in the value of their bond portfolios similar to
the decline in the Ryan Government Index, which covers a broad range of
maturities. That Index had a total return of -3.03%.
The Maxus Funds ended the first half of 1996 with good returns. The Maxus Equity
Fund advanced 5.57% for the period, although it held a fair amount of cash and
very few of the big capitalization names. The Maxus Income Fund produced a total
return of 3.59% in spite of the aforementioned decline in bond indices. And The
Maxus Laureate Fund, under the direction of portfolio manager, Alan G. Miller,
advanced 11.91% for the period.
Going forward, both the stock and bond markets will have to contend with a
number of troublesome statistics. For example, consumer debt levels and
subsequent delinquencies have been rising, suggesting that not only are "lending
based" industries getting into trouble, but total consumer demand may soon be
waning. On top of this,"wage-based" inflation, often associated with cost-push
inflation, is beginning to show signs of life after many years of hibernation.
Historically, this kind of inflationary pressure has been very hard to control
and its cyclical pattern has been very extended in time. Even the stronger
dollar, while comforting to long term market bulls, generally means leaner
profit margins for companies doing business offshore.
But the two most important barometers of stock and bond prices, i.e. interest
rates and corporate profits, pose the greatest concern. It is here that we must
focus our attention if we are to get a better understanding of the markets'
potential risks and rewards.
1
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Interest rates, of course, have been responding to the current increased
inflationary fears, but pure logic suggests that continuation of the long term
downward trend in rates, which began in 1981 from the 16% level in 30-year
Treasuries, clearly ended in 1993 when rates broke below 5 3/4%. Since the end
of 1993, rates have been within a 2 1/2 percentage point range, between 5 3/4%
and 8 1/4%, with current yields in the middle at 7%. In my view, interest rates
have clearly seen their lows. The best we can hope, from this point forward, is
for rates to remain a neutral influence on equity prices. Certainly long term
bulls should not expect interest rates to play a major role in their market
forecasts.
<PAGE>
Corporate profits, on the other hand, have clearly been the dominant force in
the post-1993 extended bull market in stocks. Low interest rates, refinancings,
restructurings, downsizing and the application of high technology to the
assembly line, have all led to increases in profit margins and bottom line
results. One major problematic result revolves around the fact that very little
of this success has been shared with middle-class America in the form of higher
wages. Even excepting the ultimate influence this may have on aggregate demand,
proponents of "spreading the wealth" are clearly being heard.
This is really to say that the free market system has its own way of dealing
with imbalances. Market bulls will tell you that stocks are not really
overvalued based upon the "price to earnings" or P/E ratio, even though dividend
yields are historically low at 2.5%, and price to book values are historically
high at 4 times. Traditionally, each have signaled a major market top. In
comparative terms, we might say that the party has been extended into morning
hours since no one wants to go home as long as the drinks keep coming and the
band keeps playing. And, no one wants to consider how quickly the room will
empty out once the bar is closed and the fat lady begins singing.
The textbook example of free market dynamics is the current devastation in the
semi-conductor industry. Strong demand for chips and substantial decreases in
the costs of production have led to exploding profit margins. This, in turn, led
producers to increase their investment in productive capacity in order to
capture more of this booming market. As capacity came on-line and supply began
filling the pipeline, price cutting emerged at the margin in order to unload a
swelling inventory. The ultimate result has been substantially decreased profit
margins and collapsing stock prices.
While semiconductor chips and breakfast cereals may not make or break the
market, they do signify what can happen. As investors, it would be foolish to
ignore these market dynamics and their effect on corporate profits. After all,
absent meaningful increases in aggregate demand, or meaningful declines in
interest rates, stock market bulls will need to rely almost totally upon
continued increases in productivity and the ability of corporate America to hold
prices. Otherwise, inflation will be the least of our worries.
Richard A. Barone
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MAXUS INCOME FUND
The Maxus Income Fund had an excellent first half of 1996, returning 3.59%
against the clearly negative returns in the bond market as reflected in the
major market indices. As we ended this period, the interest rate on the long
Treasury was hovering around the 7% level, up nearly one full percent since the
end of 1995. Although investors are concerned that the trend toward higher rates
may now be in place, there appears very little evidence on the fundamental side
to suggest that rates will go much higher any time soon. Since the end of 1993,
rates have been in the range between 5 3/4% and 8 1/4%, and there is little in
my mind to suggest that this range is in jeopardy.
Accordingly, as rates have trended up I have continued to extend the duration of
the portfolio. Roughly translated, this means that I have been locking in the
higher rates as they have become available. During the last half of 1995, with
interest rates nearly one percent lower, I was shortening the portfolio duration
in anticipation of higher rates. This strategy has proven to be correct.
At the beginning of 1995, The Maxus Income Fund had approximately 33% of its
portfolio invested in closed-end investment companies which typically hold
longer term bonds in their portfolios. That position has increased to 43% on
June 30, as both increasing interest rates and widening discounts created some
excellent buying opportunities. Additionally, portfolio holdings of preferred
shares increased from 18% at the end of 1995 to 27% on June 30. This timely
repositioning of the portfolio has increased our internal rate of return without
subjecting an important part of our principal to the declining market.
Richard A. Barone
3
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MAXUS INCOME FUND
Schedule of Investments
June 30, 1996 (unaudited)
================================================================================
% of
Quantity Security Cost Market Value Assets
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES
4,000,000 U.S. Treasury 7.50% 01-31-97 4,048,884 4,042,500 11.26%
CONVERTIBLE BONDS
350,000 Consolidated Natural Gas Sub Deb
7.25% 12-15-15 348,934 374,500
223,000 Inco Lts Debs 7.75% 03-15-16 226,406 235,265
1,000,000 Royce Value Trust Notes
5.75% 06-30-04 972,397 1,012,500
--------- --------
1,547,737 1,622,265 4.52%
CORPORATE BONDS
300,000 RJR Notes 9.25% 08-15-13 276,685 300,000
445,000 Unisys Senior Notes 10.63% 10-01-99 455,207 457,275
--------- --------
731,892 757,275 2.11%
CONVERTIBLE PREFERRED
28,500 Oasis Residential $2.25 Ser A 716,866 726,750
20,800 Phoenix Duff & Phelps $1.50 511,673 535,600
15,000 USX Corp $3.25 703,775 654,375
10,000 WHX Corp $3.75 Ser B 424,638 423,750
45,000 Wellsford Residential $1.75 858,802 911,250
--------- --------
3,215,754 3,251,725 9.06%
PREFERRED STOCK
10,000 American General 2.11 MIPS 250,000 252,500
10,000 American Re Capital $2.12 Quics 250,000 246,250
10,000 Associated Estates Rlty 251,850 243,750
40,800 BF Goodrich $2.07 1,039,123 999,600
10,000 Carolina Pwr & Lt $2.14 Quics 255,600 258,750
9,100 Comsat $2.03 MIPS 223,496 221,813
45,000 Conagra Adj Rate B 966,950 961,875
10,000 Developers Diversified $2.37 A 251,850 246,250
10,000 Developers Diversified $2.36 B 248,100 248,750
15,000 Equity Residential $2.34 A 379,150 369,375
5,000 Equity Residential $2.28 B 122,800 121,875
20,000 Kimco $2.09 C 471,225 470,000
21,000 McDonalds $2.09 Quics 547,385 532,875
15,000 NWPS Capital $2.03 372,900 369,375
11,000 Pacificorp $2.14 Quids 278,410 275,000
20,300 Public Storage $2.50 E 521,631 545,562
7,400 Public Storage $2.30 B 177,303 188,700
21,500 Public Storage $2.22 G 540,640 532,125
10,000 RJR Nabisco Hldgs $2.50 254,350 241,250
10,000 Rouse Cap $2.31 Quics 249,050 248,750
15,000 Salomon $2.40 C 383,425 375,000
32,000 Source Capital $2.40 880,025 908,000
10,000 TCI $2.50 Pfd 250,000 248,750
10,000 Torchmark Cap $2.29 MIPS 250,000 262,500
14,000 Williams Cos $2.40 Quics 367,253 364,000
--------- --------
9,782,516 9,732,675 27.11%
The accompanying notes are an integral part of the financial statements.
4
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MAXUS INCOME FUND
Schedule of Investments
June 30, 1996 (unaudited)
================================================================================
% of
Quantity Security Cost Market Value Assets
- --------------------------------------------------------------------------------
CLOSED END INCOME FUNDS
42,900 All Amrican Term 549,442 541,612
100,000 American Opportunity Income 554,750 575,000
50,000 Americas Income 333,625 331,250
60,000 Blackrock Income 382,594 367,500
71,000 Blackrock North American Government 670,054 674,500
50,000 Current Income 558,923 543,750
120,000 Kemper Intermediate Government 868,675 870,000
200,000 MFS Gov't Mkts Income 1,328,569 1,325,000
100,000 MFS Intermediate Income 674,208 675,000
51,300 Preferred Income 686,050 718,200
100,000 Preferred Income Management 1,249,300 1,275,000
20,000 Preferred Income Opportunity 208,450 222,500
126,300 Putnam Dividend Income 1,166,174 1,120,912
125,000 Quest for Value Income Shares 1,483,792 1,468,750
--------- --------
10,714,606 10,708,974 29.83%
CLOSED END GLOBAL INCOME FUNDS
66,000 Dreyfus Strategic Government 605,385 577,500
32,300 First Commonwealth 353,120 359,338
14,200 Oppenheimer Multi-Govt 100,075 102,950
100,000 RCM Strategic Global Govt 987,475 950,000
100,000 Strategic Global Income 1,171,225 1,162,500
52,200 Templeton Global Governments 355,955 358,875
150,000 Templeton Global Income 1,066,899 1,050,000
--------- --------
4,640,134 4,561,163 12.71%
TOTAL INVESTMENTS $34,681,523 $34,676,577 96.60%
Other Assets Less Liabilities 1,222,022 3.40%
Net Assets Equivalent to $10.59 per share on
3,390,430 shares of capital stock outstanding $35,898,599 100.00%
The accompanying notes are an integral part of the financial statements.
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MAXUS INCOME FUND
Statement of Assets & Liabilities
June 30, 1996 (unaudited)
Assets:
Investment Securities at Market Value
(Identified Cost - $34,681,523) ....................... $ 34,676,577
Cash ................................................... 1,069,640
Receivables:
Investment Securities Sold ............................. 9,759
Dividends and Interest ................................. 378,909
---------
Total Assets ......................................... 36,134,885
Liabilities
Payables:
Investment Securities Purchased ....................... 130,962
Dividends Payable to Shareholders ..................... 44,703
Accrued Expenses ...................................... 60,621
---------
Total Liabilities .................................... 236,286
Net Assets ............................................... $ 35,898,599
Net Assets Consist of:
Capital Paid In ........................................ 37,188,441
Undistributed Net Investment Income .................... 75,878
Accumulated Realized Gain on Investments - Net ......... (1,360,774)
Unrealized Appreciation in Value
of Investments Based on Identified Cost - Net ......... (4,946)
---------
Net Assets, for 3,390,430 Shares Outstanding ............. $ 35,898,599
Net Asset Value and Redemption Price
Per Share ($35,898,599/3,390,430 shares) ............... $ 10.59
Offering Price Per Share ................................. $ 10.59
Statement of Operations
January 1 through June 30, 1996 (unaudited)
Investment Income:
Dividends .............................................. $ 1,139,127
Interest ............................................... 416,404
---------
Total Investment Income .............................. 1,555,531
Expenses:
Registration Expense ................................... 10,734
Trustee Fees (Note 3) .................................. 1,100
Transfer Agent and Pricing ............................. 21,421
Custody ................................................ 5,844
Distribution Plan Expenses ............................. 93,591
Accounting ............................................. 7,616
Legal .................................................. 9,562
Management Fees (Note 2) ............................... 183,184
Printing & Other Miscellaneous ......................... 27,089
---------
Total Expenses ....................................... 360,141
Net Investment Income .................................... $ 1,195,390
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments .................... 458,941
Unrealized Gain (Loss) from
Appreciation (Depreciation) on Investments............. (356,511)
---------
Net Realized and Unrealized Gain (Loss) on Investments ... 102,430
Net Increase (Decrease) in Net Assets from Operations .... $ 1,297,820
The accompanying notes are an integral part of the financial statements.
6
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MAXUS INCOME FUND
Statement of Changes in Net Assets
January 1 through June 30, 1996 (unaudited)
01/01/96 01/01/95
to to
06/30/96 12/31/95
From Operations:
Net Investment Income ....................... $ 1,195,390 $ 2,506,927
Net Realized Gain (Loss) on Investments ..... 458,941 (673,078)
Net Unrealized Appreciation (Depreciation) .. (356,511) 3,484,108
----------- -----------
Increase (Decrease) in Net
Assets from Operations ...................... 1,297,820 5,317,957
From Distributions to Shareholders
Net Investment Income (Loss) ................ (1,122,652) (2,513,294)
Net Realized Gain (Loss) from
Security Transactions ..................... 0 0
----------- -----------
Net Increase (Decrease) from Distributions .. (1,122,652) (2,513,294)
From Capital Share Transactions:
Proceeds From Sale of 354,775 Shares ........ 3,764,801 8,297,341
Net Asset Value of 85,628 shares
issued on Reinvestment of Dividends ....... 907,471 2,098,884
Cost of 597,112 Shares Redeemed ............. (6,335,682) (9,238,866)
----------- -----------
(1,663,410) 1,157,359
Net Increase in Net Assets ..................... (1,488,242) 3,962,022
Net Assets at Beginning of Period (including
undistributed net investment income
of $3,140 and $9,507, respectively) ........ 37,386,841 33,424,819
Net Assets at End of Period (including
undistributed net investment income
of $75,878 and $3,140, respectively) ....... $ 35,898,599 $ 37,386,841
=========== ===========
Financial Highlights
Selected data for a share of common stock outstanding throughout the period:
01/01/96 01/01/95 01/01/94 01/01/93 01/01/92
to to to to to
06/30/96 12/31/95 12/31/94 12/31/93 12/31/92
Net Asset Value -
Beginning of Period ........... $ 10.54 $ 9.73 $ 10.94 $ 10.88 $ 10.98
Net Investment Income ........... 0.35 0.72 0.74 0.68 0.42
Net Gains or Losses on Securities
(realized and unrealized) ..... 0.03 0.81 (1.22) 0.22 (0.01)
------ ------ ------ ------ ------
Total from Investment Operations. 0.38 1.53 (0.48) 0.90 0.41
Dividends
(from net investment income) .. (0.33) (0.72) (0.73) (0.68) (0.42)
Distributions(from capital gains) 0.00 0.00 0.00 (0.16) (0.09)
Return of Capital ............... 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions ........... (0.33) (0.72) (0.73) (0.84) (0.51)
Net Asset Value -
End of Period ................. $ 10.59 $ 10.54 $ 9.73 $ 10.94 $ 10.88
Total Return .................... 3.59% 16.15% (4.39)% 8.74% 7.89%
Ratios/Supplemental Data
Net Assets -
End of Period (Thousands) ..... 35,899 37,387 33,425 36,147 28,591
Ratio of Expenses to
Average Net Assets ............ 0.97% 1.90% 1.81% 1.90% 1.94%
Ratio of Net Income to
Average Net Assets ............ 3.22% 7.01% 7.10% 6.06% 7.18%
Portfolio Turnover Rate ......... 0.41 1.21 1.38 0.88 0.91
Average Commission Rate Paid..... $0.0502
*Weighted Average Used
The accompanying notes are an integral part of the financial statements.
7
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MAXUS INCOME FUND
Notes to Financial Statements
June 30, 1996 (unaudited)
1.)SIGNIFICANT ACCOUNTING POLICIES
The Fund is a diversified, open-end management investment company, organized
as a Trust under the laws of the State of Ohio by a Declaration of Trust
dated October 31, 1984. Significant accounting policies of the Fund are
presented below:
SECURITY VALUATION:
The Fund intends to invest in a wide variety of equity and debt securities.
The investments in securities are carried at market value. The market
quotation used for common stocks, including those listed on the NASDAQ
National Market System, is the last sale price on the date on which the
valuation is made or, in the absence of sales, at the closing bid price.
Over-the-counter securities will be valued on the basis of the bid price at
the close of each business day. Short-term investments are valued at
amortized cost, which approximates market. The cost of securities sold is
determined on the identified cost basis. Securities for which market
quotations are not readily available will be valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Directors.
INCOME TAXES:
It is the Fund's policy to distribute annually, prior to the end of the
calendar year, dividends sufficient to satisfy excise tax requirements of the
Internal Revenue Service. This Internal Revenue Service requirement may cause
an excess of distributions over the book year-end accumulated income. In
addition, it is the Fund's policy to distribute annually, after the end of
the calendar year, any remaining net investment income and net realized
capital gains.
2.)INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an investment advisory and administration agreement
with Maxus Asset Management Inc, a wholly owned subsidiary of Resource
Management Inc. The Investment Advisor receives from the Fund as compensation
for its services to the Fund an annual fee of 1% on the first $150,000,000 of
the Fund's net assets, and 0.75% of the Fund's net assets in excess of
$150,000,000. The Investment Advisor agrees to reimburse its fee to the Fund
in the amount by which the Fund expenses exceed 2% of average annual net
assets.
3.)RELATED PARTY TRANSACTIONS
Resource Management Inc has three wholly owned subsidiaries which provide
services to the Fund. These subsidiaries are Maxus Asset Management Inc,
Maxus Securities Corp, and Maxus Informations Systems Inc. Maxus Asset
Management Inc was paid $183,184 in investment advisory fees during the six
months ended June 30, 1996. Maxus Securities Corp, who served as the national
distributor of the Fund's shares, was reimbursed $93,591 for distribution
expenses. Maxus Information Systems Inc, who provides accounting and
shareholder services, received fees totaling $21,421 for services rendered to
the Fund for the six months ended June 30, 1996. Maxus Securities Corp is a
registered broker-dealer. Maxus Securities Corp effected substantially all of
the investment portfolio transactions for the Fund. For this service Maxus
Securities Corp received commissions of $136,578 for the six months ending
June 30, 1996.
At June 30, 1996, Maxus Securities Corp owned 60,000 shares in the Fund.
Certain officers and/or trustees of the Fund are officers and/or directors of
the Investment Advisor and Administrator. Each director who is not an
"affiliated person" receives an attendance fee of $100 per meeting.
8
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MAXUS INCOME FUND
Notes to Financial Statements
June 30, 1996 (unaudited)
4.)CAPITAL STOCK AND DISTRIBUTION
At June 30, 1996 an indefinite number of shares of capital stock ($.10 par
value) were authorized, and paid-in capital amounted to $37,188,441.
Transactions in common stock were as follows:
Shares sold.................................................... 354,775
Shares issued to shareholders in reinvestment of dividends.. 85,628
--------
440,403
Shares redeemed ............................................... 597,112
--------
Net Increase (Decrease)...................................... (156,709)
Shares Outstanding:
Beginning of Period ......................................... 3,547,139
--------
End of Period ............................................... 3,390,430
Distributions to shareholders are recorded on the ex-dividend date. Payments
in excess of net investment income or of accumulated net realized gains
reported in the financial statements are due primarily to book/tax
differences. Payments due to permanent differences have been charged to paid
in capital. Payments due to temporary differences have been charged to
distributions in excess of net investment income or realized gains.
5.)SECURITY TRANSACTION TIMING
Security transactions are recorded on the dates transactions are entered into
(the trade dates). Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income is recorded as earned. The
Fund uses the identified cost basis in computing gain or loss on sale of
investment securities. Discounts and premiums on securities purchased are
amortized over the life of the respective securities.
6.)PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 1996, purchases and sales of investment
securities other than U.S. Government obligations and short-term investments
aggregated $19,134,670 and $15,126,749 respectively. Purchases and sales of
U.S. Government obligations aggregated $2,050,313 and $7,018,086
respectively.
7.)FINANCIAL INSTRUMENTS DISCLOSURE
There are no reportable financial instruments which have any off-balance
sheet risk as of June 30, 1996.
8.)SECURITY TRANSACTIONS
For Federal income tax purposes, the cost of investments owned at June 30,
1996 was the same as identified cost.
At June 30, 1996, the composition of unrealized appreciation (the excess of
value over tax cost) and depreciation (the excess of tax cost over value) was
as follows:
Appreciation (Depreciation) Net Appreciation (Depreciation)
461,410 (466,356) (4,946)
9
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THE MAXUS FUNDS
28601 Chagrin Boulevard, Cleveland, Ohio 44122
(216) 292-3434
INVESTMENT ADVISOR
Maxus Asset Management Inc
28601 Chagrin Boulevard
Cleveland, Ohio 44122
BOARD OF TRUSTEES
Richard A. Barone
N. Lee Dietrich
Sanford A. Fox, D.D.S.
Burton D. Morgan
Michael A. Rossi
Robert A. Schenkelberg, Jr.
F. Carl Walter
OFFICERS
Richard A. Barone, Chairman
James C. Onorato, Vice-President
Robert W. Curtin, Secretary
CUSTODIAN
Star Bank, N. A.
425 Walnut Street
P. O. Box 1118
Cincinnati, Ohio 45201-1118
TRANSFER AGENT
Maxus Information Systems Inc
28601 Chagrin Boulevard
Cleveland, Ohio 44122
DISTRIBUTOR
Maxus Securities Corp
28601 Chagrin Boulevard
Cleveland, Ohio 44122
LEGAL COUNSEL
Benesch, Friedlander, Coplan & Aronoff
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378
AUDITOR
McCurdy & Associates CPA's Inc
27955 Clemens Road
Westlake, Ohio 44145
