THE MAXUS FUNDS
Dear Shareholder:
For the first six months of 1997, each of The Maxus Funds continued to
demonstrate excellent relative total return performance. At the same time, both
Alan Miller and I have been keenly aware that the most visible investment
markets , attracting both capital appreciation and income oriented investors,
appear to be exceeding most historic measures of value. Within the context of
the very positive global demand for all things American, and the exceptional
productivity of the American economy, we continue to remain cautious.
Why caution in the light of the very positive economic environment and
exceptional performance the markets have demonstrated for most of the past 15
years? My conclusions are based upon the relative comparisons between economic
growth and investor expectations, and the growing disparity I see in the
numbers.
The growth rate in gross domestic product alone is not the power point of
investor enthusiasm. The U.S. economy is growing at less than 3% annually and,
based upon the historic ratio between the annual growth in domestic product to
the level of stock prices, the expectation for the DJIA in 1997 should be more
like 4000 instead of 8000 or 9000. In fact, forecasters during most of the 20th
century would base their predictions of market performance on their forecast of
economic growth, i.e. the higher the growth rate, the higher earnings would apt
to be, and the higher the market should go. For example, in the late 1980's the
argument for 30 and 40 multiples in the Japanese stock market centered around
the 12% to 15% annual growth in the Japanese economy, and the extrapolation of
normalized earnings to the year 2000. When Japanese growth in domestic product
declined as competition heated up in the rest of Asia, the market fell
precipitously, and today, after nearly 10 years it still remains at only 60% of
an all-time high in 1989.
For the past five years, market forecasters here in the United States have based
their predictions primarily on the earnings growth resulting from increasing
productivity and increasing profit margins. Fed Chairman Greenspan has recently
stated what I have been saying all along, i.e. potential growth in GDP is higher
than the consensus forecast because of hidden productivity, and therefore price
inflation should continue to be subdued and profitability should continue to
increase. Unlike the topline growth in domestic product, however, productivity
gains, in and of themselves, create practical limitations on earnings growth and
extrapolating past earnings growth could be a very dangerous exercise for
investors.
<PAGE>
The gains in productivity have resulted primarily through corporate downsizing
and the replacement of antiquated machines and workers with high technology
capital. To date, neither labor nor the consumer have enjoyed much of the gain,
although price inflation has remained subdued and greater job opportunities has
resulted in the process. While American workers have been more concerned with
holding onto their jobs than with wage negotiations, sooner or later they are
apt to demand a greater piece of the pie. Likewise, while price inflation at the
consumer level appears almost non-existent across many industries, the entry of
additional players into high margin businesses and/or the competitive global
marketplace, should continue to put downward pressure on prices. Either way,
profit margins are apt to get squeezed and corporate profitably may well begin
to decline. Finally, downsizing almost by definition has its practical
limitations, and the cost benefits of replacing antiquated capital equipment
will begin to diminish over time, i.e. most equipment is depreciated over 5 to 7
years and replacing it before it is fully depreciated results in increasing
costs to corporations.
I have argued that much of the enthusiasm for stocks in recent years has been
the result of productivity increases and its effect of transforming the economy
from its historic cycles (where corporate earnings tend to fluctuate in a
cyclical pattern) to a more growth oriented trendline (where earnings tend to
rise every year). Growth tends to hold the market at a higher multiple, and low
interest rates tend to reinforce that multiple going forward. While this can
explain why the DJIA should be at 6000 instead of 4000, there isn't any good
explanation to explain why it should be at 8000 or 10000.
Moreover, the practical limitations imposed by downsizing and productivity gains
are already showing up. From 15% earnings gain for American corporations in
1996, the consensus forecast projects 10% gains in 1997. The best guess for 1998
is 5%. If we ignore this trend toward lower (or perhaps even negative) earnings
growth, and hold to the rosy scenario that growth will average 10% annually over
the next five years, corporate earnings will double their current level. In the
light of a low GDP growth, a fully employed economy and the ultimate profit
squeeze resulting from past productivity gains, it is hard to imagine that this
scenario will develop that smoothly. But I will make the assumption
nevertheless.
Anyone investing in today's market is doing so with a five year horizon. If the
expectation is for an annual 20% growth in the value of their portfolio, on June
30, 2002, the average market multiple for the S&P 500 will be over 40 times.
Even a 15% annual growth in portfolio value would be that multiple at 30 times.
This is a far cry from the 14 times multiple the stock market has averaged for
almost all of the 20th century, and places a great deal of faith in our
economy's ability to regain topline growth, keep global competitors out of our
markets and, to the exclusion of both labor and the consumer, maintain the
productivity gains for top executives and shareholders; then again, blind faith
is the stuff by which bull markets survive.
<PAGE>
The Maxus Funds will continue to look for investments which appear to be of high
quality, and where the underlying cash flow, earnings prospects and private
market evaluations all suggest that we are buying good value. At this juncture
our goal is to achieve, on a relative basis, a B+ in upward market spikes, an A
in flat markets, and an A+ if the market should decline.
Richard A Barone
<PAGE>
THE MAXUS INCOME FUND
The Maxus Income Fund has continued to produce superior returns compared to
competitive mutual funds. After returning over 9% in 1996 (against the 4%
returns of comparable mutual funds and 2.07% for the Ryan Index), the total
return for the first six months of 1997 reached 5.77% compared to the Ryan Index
of Government Bonds which returned 2.26%.
Additionally, The Maxus Income Fund has displayed less tendency to react when
interest rate rise. Commonly known as its "beta," The Maxus Income Fund appears
to be less connected to the bond market and less likely to drop in price when
bond prices are falling. Moreover, in spite of the fact that the portfolio
contains a variety of "hybrid" securities (closed-end funds and convertibles),
the underlying investment quality clearly averages investment grade, comparable
to a Standard & Poor's "A" rating.
Morningstar, which I consider to be an excellent service in its rankings of
mutual funds, has completely dropped the ball with The Maxus Income Fund. They
continue to categorize this Fund as an "equity" mutual fund in spite of the fact
that we do not hold a single share of common stock, and have less than 3% in the
beneficial interest shares of REIT's. The logic is that preferred shares are
equity interests, in spite of the fact that every business school graduate
considers investment grade preferred stock comparable to bonds.
The recent decline in interest rates, from the 7% level to below 6 1/2% on the
long term Treasury, has increased interest in many of the securities in our
portfolio. From relative undervaluation, these securities are beginning to show
signs of overvaluation. Should rates continue to decline and/or the demand for
these hybrid securities continue to increase, our portfolio may begin to look a
bit more traditional, taking on more of the characteristics Morningstar would
expect from their "income" categories.
RICHARD A BARONE
<PAGE>
Maxus Income Fund
Schedule of Investments
June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Shares/Principal Amount Cost Market Value % of Assets
- --------------------------------------------------------------------------------
COMMON STOCK - REAL ESTATE
10,000 Agree Realty Corp 206,250 205,000
15,000 Boykin Lodging 300,925 359,062
10,000 Lexington Corporate
Properties 137,500 140,000
------- -------
644,675 704,062 1.97%
CLOSED END INCOME FUNDS
50,000 ACM Govt Opportunity 346,125 381,250
100,000 American Opportunity Income 554,750 600,000
14,000 American Strategic Income I 152,102 161,000
50,000 American Strategic Income
Portfolio III 521,125 556,250
65,200 Americas Income Trust 438,847 537,900
170,000 Blackrock Income Trust 1,082,506 1,136,875
50,000 Blackrock North American
Government 470,022 506,250
200,000 Hyperion 1997 Term
Trust Inc 1,436,138 1,437,500
50,000 MFS Govt Mkts Income
Trust 324,494 331,250
150,000 Putnam Intermediate
Income Trust 1,116,500 1,096,875
--------- ---------
6,442,609 6,745,150 18.84%
CLOSED END GLOBAL INCOME FUNDS
50,000 Dreyfus Strategic
Governments 458,625 462,500
80,000 First Commonwealth 921,500 980,000
29,900 John Hancock Patriot
Global Dividend 371,732 377,487
50,000 Kleinwort Benson Australian 448,913 450,000
100,000 Strategic Global Income 1,171,225 1,250,000
100,000 Templeton Global Income 727,025 743,750
--------- ---------
4,099,020 4,263,737 11.91%
PREFERRED STOCK
10,000 American General Cap MIPS 250,000 257,500
10,000 American Re Capital $2.13 250,000 258,125
10,000 Associated Estates $2.43 251,850 257,500
25,500 BF Goodrich $2.07 643,018 639,094
10,000 Beacon Properties Corp A 250,000 251,875
40,500 Conagra Capitol Adj Rate 869,368 918,844
10,000 Developers Diversified
Rlty $2.37 A 251,850 260,625
10,000 Developers Diversified
Rlty $2.36 B 248,100 261,875
17,000 Equity Residential
Prop $2.34 429,770 438,813
10,000 First Indl Realty
Trust B 250,000 251,250
10,000 Gabelli Global
Multimedia $1.98 246,850 248,750
20,000 HL&P Capital Trust I 500,350 496,250
30,000 McDonalds Corp $2.09 QUIDS 778,363 757,500
10,000 MidAmerican Energy
Financing $1.99 250,000 250,000
12,000 NWPS Capital
Financing $2.03 297,220 299,250
8,000 Omega Healthcare
Invsr $2.31 200,000 209,000
20,400 Pacificorp $8.55 QUIDS 515,799 511,275
50,000 Public Storage $2.22 G 1,250,497 1,278,125
10,000 RJR Nabisco Hldgs $2.50 254,350 252,500
10,000 Rouse Cap $2.31 QUIDS 249,050 256,875
40,000 Royce Value Trust $2.00 1,001,925 1,025,000
The accompanying notes are an integral part of the financial statements.
<PAGE>
Maxus Income Fund
Schedule of Investments
June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Shares/Principal Amount Cost Market Value % of Assets
- --------------------------------------------------------------------------------
22,000 Simon Debartolo
Group $2.19 B 549,845 569,250
29,300 Source Capital $2.40 805,426 835,050
10,000 Southern Co Capital
Tr III $1.93 250,000 242,500
10,000 Torchmark Pfd M 250,000 260,000
32,900 Williams Cos $2.40 QUICS 837,937 830,725
------- -------
11,931,568 12,117,551 33.85%
CONVERTIBLE PREFERRED
12,000 Armco Inc $3.625 513,625 511,500
15,000 Excel Realty Trust $2.12 375,900 408,750
20,500 Oasis Residential $2.25 512,372 530,437
24,700 Phoenix Duff & Phelps $1.50 606,307 676,163
10,000 Sea Containers $4.00 448,100 502,500
18,000 Thorngburg Mtg Asset $2.42 A 450,000 479,250
15,000 USX $3.25 703,775 716,250
5,400 WHX $3.75 B 226,648 209,250
------- -------
3,836,727 4,034,100 11.27%
CORPORATE BONDS
455,000 Unisys Senior
Notes 10.625%, 10-1-99 455,455 464,812 1.30%
CONVERTIBLE BONDS
350,000 Consolidated Natural
Gas 7.25%, 12-15-15 351,869 378,000
223,000 Inco 7.75%, 3-15-16 226,735 234,150
400,000 Royce Value Trust
Inc 5.75%, 6-30-04 389,914 410,000
------- -------
968,518 1,022,150 2.86%
U.S. GOVERNMENT SECURITIES
2,000,000 US Treasury 9%, 5-15-98 1,990,568 1,992,500
2,000,000 US Treasury 5.375%, 5-31-98 2,040,836 2,053,125
--------- ---------
4,031,404 4,045,625 11.29%
Total Investments 32,409,976 33,397,187 93.29%
Other Assets Less 2,400,402 6.71%
Liabilities
Net Assets - Equivalent to 35,797,589 100.00%
$11.07 per share on 3,233,659 ==========
shares of capital stock outstanding
The accompanying notes are an integral part of the financial statements.
<PAGE>
Maxus Income Fund
STATEMENT OF ASSETS & LIABILITIES
JUNE 30, 1997 (UNAUDITED)
Assets:
Investment Securities at Market Value
(Identified Cost - $32,409,976) $33,397,187
Cash 2,248,296
Receivables:
Investment Securities Sold 436,489
Dividends and Interest 205,326
------------
Total Assets 36,287,298
Liabilities
Payables:
Investment Securities Purchased 368,000
Shareholder Distributions 53,824
Accrued Expenses 67,885
------------
Total Liabilities 489,709
Net Assets $35,797,589
Net Assets Consist of:
Capital Paid In 35,508,832
Undistributed Net Investment Income 46,621
Accumulated Realized Gain (Loss) on Investments - Net (745,075)
Unrealized Appreciation in Value
of Investments Based on Identified Cost - Net 987,211
------------
Net Assets, for 3,233,659 Shares Outstanding $35,797,589
Net Asset Value and Redemption Price
Per Share ($35,797,589/3,233,659 shares) $11.07
Offering Price Per Share $11.07
STATEMENT OF OPERATIONS
JUNE 30, 1997 (UNAUDITED)
Investment Income:
Dividends $1,141,172
Interest 280,682
-----------
Total Investment Income 1,421,854
Expenses:
Registration Expense 15,507
Trustee Fees (Note 3) 400
Accounting and Pricing 20,301
Custody 9,378
Distribution Plan Expenses 86,725
Audit 10,239
Legal 4,882
Management Fees (Note 2) 174,251
Printing & Other Miscellaneous 7,485
----------
Total Expenses 329,168
Net Investment Income 1,092,686
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments 496,493
Unrealized Gain (Loss) from Appreciation
(Depreciation) on Investments 400,960
----------
Net Realized and Unrealized Gain (Loss) on Investments 897,453
Net Increase (Decrease) in Net Assets from Operations $1,990,139
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Maxus Income Fund
STATEMENT OF CHANGES IN NET ASSETS
JUNE 30, 1997 (UNAUDITED)
01/01/97 01/01/96
to to
06/30/97 12/31/96
-------- --------
From Operations:
Net Investment Income $1,092,686 $2,363,428
Net Realized Gain (Loss) on Investments 496,493 578,147
Net Unrealized Appreciation (Depreciation) 400,960 234,686
--------- ----------
Increase (Decrease) in Net Assets
from Operations 1,990,139 3,176,261
From Distributions to Shareholders:
Net Investment Income (Loss) (1,046,466) (2,363,027)
Net Realized Gain (Loss) from
Security Transactions 0 0
----------- -----------
Net Increase (Decrease) from Distributions (1,046,466) (2,363,027)
From Capital Share Transactions:
Proceeds From Sale of 250,184 Shares 2,739,335 6,179,798
Net Asset Value of 71,959 shares issued on 784,322 1,878,123
Reinvestment of Dividends
Cost of 402,690 Shares Redeemed (4,397,645) (10,530,092)
----------- ------------
(873,988 (2,472,171)
Net Increase in Net Assets 69,685 (1,658,937)
Net Assets at Beginning of Period (including
undistributed net investment income of $3,541
and $3,140, respectively) 35,727,904 37,386,841
Net Assets at End of Period (including
undistributed net investment income
of $46,220 and $3,541, respectively) $35,797,589 $35,727,904
=========== ===========
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout the period:
<TABLE>
<S> <C> <C> <C> <C> <C>
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93
to to to to to
06/30/97 12/31/96 12/31/95 12/31/94 12/31/93
-------- -------- -------- -------- --------
Net Asset Value -
Beginning of Period $10.78 $10.54 $9.73 $10.94 $10.88
Net Investment Income 0.34 0.70 0.72 0.74 0.68
Net Gains or Losses on Securities
(realized and unrealized) 0.28 0.24 0.81 (1.22) 0.22
---- ---- ---- ------ ----
Total from Investment Operations 0.62 0.94 1.53 (0.48) 0.90
Dividends
(from net investment income) (0.33) (0.70) (0.72) (0.73) (0.68)
Distributions (from capital gains) 0.00 0.00 0.00 0.00 (0.16)
Return of Capital 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions (0.33) (0.70) (0.72) (0.73) (0.84)
Net Asset Value -
End of Period $11.07 $10.78 $10.54 $9.73 $10.94
Total Return 5.77% 9.20% 16.15% (4.39)% 8.74%
Ratios/Supplemental Data
Net Assets -
End of Period (Thousands) 35,798 35,728 37,387 33,425 36,147
Ratio of Expenses to Average Net Assets 1.92% 1.90% 1.81% 1.90% 1.86%*
Ratio of Net Income to Average Net Assets 6.19%* 6.50% 7.01% 7.10% 6.06%
Portfolio Turnover Rate 79%* 78% 121% 138% 88%
*Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
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. 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.
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.
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.
ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
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 Information Systems Inc. Maxus Asset
Management was paid $174,251 in investment advisory fees during the six
months ended June 30, 1997. Maxus Securities, who served as the national
distributor of the Fund's shares, was reimbursed $86,725 for distribution
expenses. Maxus Information Systems, who provides accounting and
shareholder services, received fees totaling $20,301 for services rendered
to the Fund for the six months ended June 30, 1997. Maxus Securities is a
registered broker-dealer. Maxus Securities effected substantially all of
the investment portfolio transactions for the Fund. For this service Maxus
Securities received commissions of $89,015 for the six months ending June
30, 1997.
<PAGE>
At June 30, 1997, 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 $100 per meeting.
4. CAPITAL STOCK AND DISTRIBUTION
At June 30, 1997 an indefinite number of shares of capital stock ($.10 par
value) were authorized, and paid-in capital amounted to $35,508,832.
Transactions in common stock were as follows:
Shares sold 250,184
Shares issued to shareholders in reinvestment of dividends 71,959
---------
322,143
Shares redeemed (402,690)
---------
Net Increase (Decrease) (80,547)
Shares Outstanding:
Beginning of Period 3,314,206
----------
End of Period 3,233,659
==========
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. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 1997, purchases and sales of
investment securities other than U.S. Government obligations and short-term
investments aggregated $13,902,484 and $15,853,111 respectively. Purchases
and sales of U.S. Government obligations aggregated $2,081,250 and
$2,000,781 respectively.
6. FINANCIAL INSTRUMENTS DISCLOSURE
There are no reportable financial instruments which have any off-balance
sheet risk as of June 30, 1997.
7. SECURITY TRANSACTIONS
For Federal income tax purposes, the cost of investments owned at June 30,
1997 was the same as identified cost.
At June 30, 1997, 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)
------------ ------------- -------------------------------
1,092,039 (104,828) 987,211
<PAGE>
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
Jerry Murphy
Michael A. Rossi
Robert A. Schenkelberg, Jr.
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
<PAGE>
