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ANNUAL REPORT
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[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England
Star Small Cap Fund
[graphic omitted]
Where
The Best
Minds
Meet(R)
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DECEMBER 31, 1998
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FEBRUARY 1999
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[Photo of Bruce R. Speca]
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"Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score."
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In September 1998, I became President of New England Funds. As an 18-year
veteran of the mutual fund industry, I was pleased and honored to accept this
important post. In my first message to you, I hope to present what I believe
you, our valued shareholders, really want to know and to offer it in a
straightforward manner.
How did my fund perform?
There's no question that long-term performance is the bottom line of your
investment program. With that in mind, please review the other sections of this
report. You'll see your fund's performance and commentary from your fund manager
that summarizes the fund's successes and shortcomings and the outlook for the
year ahead.
Our assessment of New England Funds' overall performance in 1998 is that we had
a solid, but not spectacular, year. While extremely pleased with both absolute
and relative returns in many of our stock and bond portfolios, we were
disappointed by the results of those equity funds that pursue a `value' rather
than a `growth' strategy. Value stocks were largely ignored in 1998, as
investors focused on very large, high visibility growth stocks (indeed, 45% of
the gain in the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500")
- - a market value-weighted, unmanaged index of common stock prices for 500
selected stocks - came from just 10 stocks!) and select technology companies.
Much of the underperformance in value-oriented funds can be attributed to market
cycles, but we continue to pursue strategies to increase returns in these funds.
Can the stock market keep going up?
Like any winning streak, sooner or later the market will experience setbacks.
Does that mean 1999 will see the last burst of energy from the bull market? It's
easy to argue both sides of this question. Employment is high, inflation is low
and economic growth is continuing. But corporate profits may start to lag and
commodity prices, notably oil, are depressed around the world. The conclusion?
Economists, like weathermen and other forecasters, can only hope to be right
more often than they are wrong.
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Not FDIC insured May lose value No bank guarantee
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My Own Two Cents
All too often investors lament, "What I could have made if only . . ." instead
of "What I actually made." But experience has taught me that the more important
question is, "Did I stick with my investment program and make progress toward my
financial goals?"
Research indicates that saving for retirement is the number one goal for
investors. Yet, surprisingly often, investors behave like short-term traders
looking for a quick score.
The mutual fund industry has become extremely complex, with more funds, new
strategies and approaches to analyzing performance. What hasn't changed is your
financial representative's primary objective: to help you sort it all out and
increase your returns in line with your goals.
Your financial adviser can help you avoid being distracted by the daily noise
and avoid what I view as the most important risk that investors face. It's the
risk of not staying invested and possibly falling short of your long-term goals.
Your adviser will help you stick with your investment program during periods of
uncertainty.
One last thought: All of us at New England Funds appreciate the trust that you
and your representative have placed in us. We look forward to serving you in the
years ahead.
Sincerely,
/s/ Bruce R. Speca
Bruce R. Speca
President and CEO
PROGRESS ON THE Y2K FRONT
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New England Funds has been and continues to engage in initiatives aimed at
having our computer systems tested and ready to function capably for the Year
2000. We are insisting on the same standard from vendors whose systems must
interact reliably with ours as well as from the subadvisers to our funds. We are
monitoring their progress and pursuing assurances of their readiness. Our
systems are being tested on a four-digit format (2000, not 00) and updated as
needed to perform competently. Additionally, we are developing contingency plans
to diminish the possibility of inconvenience related to Year 2000. Stay informed
on our Year 2000 readiness by visiting our Web site at www.mutualfunds.com.
This material represents Year 2000 Readiness disclosure pursuant to the Year
2000 Information and Readiness Act.
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NEW ENGLAND STAR SMALL CAP FUND
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INVESTMENT RESULTS THROUGH DECEMBER 31, 1998
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Putting Performance in Perspective
The charts comparing your Fund's performance to a benchmark index provide you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
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[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in the Star Small Cap Fund's Class A shares compared to
Russell 2000. The data points to this chart are as follows:]
NAV MSC R2000
12/31/96 $10,000 $ 9,425 $10,000
3/97 $ 9,352 $ 8,814 $ 9,483
6/97 $11,040 $10,405 $11,020
9/97 $13,160 $12,403 $12,660
12/97 $12,697 $11,966 $12,236
3/98 $14,126 $13,314 $13,467
6/98 $13,341 $12,574 $12,839
9/98 $10,292 $ 9,701 $10,252
12/98 $12,956 $12,211 $11,924
These illustrations represent past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and C share
performance will differ from that shown based on differences in fees and sales
charges. All Index and Fund performance assumes reinvestment of distributions.
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NEW ENGLAND STAR SMALL CAP FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
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CLASS A (Inception 12/31/96) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.1% 13.8%
With Max. Sales Charge(2) -3.8 10.5
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CLASS B (Inception 12/31/96) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.3% 13.0%
With CDSC(3) -3.7 11.2
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CLASS C (Inception 12/31/96) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.3% 13.0%
With CDSC(3) 0.3 13.0
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COMPARATIVE PERFORMANCE 1 YEAR SINCE INCEPTION
Russell 2000 Index(4) -2.5% 9.2%
Lipper Small Cap Average(5) -0.3 9.6
Morningstar Small Growth Average(6) 4.8 10.8
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These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost.
NOTES TO CHARTS (PAGES 1 & 2)
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 5.75% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance for Class B shares
assumes a maximum 5% sales charge is applied to a redemption. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares. With CDSC performance for Class C shares assumes a
maximum 1% sales charge on redemptions within the first year of purchase.
(4) Russell 2000 Small Stock Index is a popular measure of the stock price
performance of small companies. The Index performance has not been adjusted
for ongoing management, distribution and operating expenses and sales
charges applicable to mutual fund investments. Investors cannot purchase an
index directly.
(5) Lipper Small Cap Fund Average is an average of the total return performance
(calculated on the basis of net asset value) of funds with similar
investment objectives as calculated by Lipper, Inc., an independent mutual
fund ranking service.
(6) Morningstar Small Growth Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives, as calculated by Morningstar Inc., an
independent mutual fund ranking service.
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NEW ENGLAND STAR SMALL CAP FUND
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OVERVIEW: HOW THE FUND PERFORMED
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For small-cap investors, 1998 was a year of frustration. Despite attractive
earnings, low prices and relatively little exposure to the world's financial
trouble spots, investors continued to avoid smaller-company stocks in favor of
large-company stocks. As a result, returns on small-cap stocks significantly
lagged those of their large-cap counterparts.
New England Star Small Cap Fund is composed of four separate portfolio segments,
each managed by a different leading investment management firm. This
multiple-adviser approach is the essence of the Star concept. It provides a
means to diversify among not just individual securities but investment styles
and strategies as well.
For the 12-month period that ended December 31, 1998, Class A shares at net
asset value generated a 2.1% total return, reflecting a $0.29 per share gain to
$15.66 and a $0.02 per share capital gains distribution. For the same period the
Russell 2000, an index of small-cap stocks, generated a total return of -2.5%.
In 1998, the investment environment for equity investors was nearly ideal,
although volatile. Economic growth was robust, and interest rates and inflation
were relatively low. Normally, such an environment would have been positive for
small-cap stocks. However, concerns about the economic and financial problems of
several foreign countries dominated market sentiment. As is often the case,
during times of uncertainty in the financial markets investors gravitate toward
securities they believe carry the least amount of risk. In 1998, investors
flocked to the familiar -- large, well known companies that offered liquidity
and relative safety. In this environment, small-cap stocks suffered, although
they showed strength toward the end of the year.
The year began on a positive note for small-cap investors. During the first
quarter, small-cap stocks rallied, producing strong gains. A brief pullback in
stock prices in the second quarter caused small-caps to give back some of their
earlier gains, but it was the dramatic change in the investment environment in
the third quarter that prompted many investors to abandon small-caps. While
economic fundamentals in the United States and other developed markets remained
strong, the unresolved financial and economic troubles in the emerging markets
of Asia, Latin America and Russia intensified. In August, Russia devalued its
currency, further exacerbating existing problems in emerging markets. A domino
effect spread throughout world financial markets, as investors indiscriminately
sold assets that carried the slightest hint of risk. While all stocks suffered
during the period of heavy selling, small-cap stocks were particularly hard-hit.
In the third quarter, small-cap stocks, as measured by the Russell 2000 Index,
plummeted 20.2%.
During the final months of 1998, the stock market regained its footing. In a
relatively short time span, the Federal Reserve Board lowered short-term
interest rates three times, restoring a measure of confidence in the U.S.
economy and stock market. Investors returned to the market, but the "big is
beautiful" theme that had dominated the market for more than a year persisted.
However, by year-end, a flurry of buying activity in the small-cap sector
produced some solid gains and a narrowing of the performance gap between
large-cap and small-cap stocks.
Looking ahead, we believe there are compelling reasons for investing in
small-company stocks. Their values relative to large-cap stocks are more
favorable than they have been in 20 years. They have the potential for faster
earnings growth than the broader market or the economy as a whole and are
available at low prices. Because small companies depend primarily on U.S.
markets for most of their product sales, they are less vulnerable to the
economic troubles of world markets. In addition to these characteristics, we
believe the Federal Reserve Board's position on interest rates should benefit
small-cap stocks. Small-cap stocks often perform well following interest rate
cuts.
Though the four portfolio segments of New England Star Small Cap Fund are
managed autonomously, the chart below gives you a general sector profile of the
Fund as a whole. On the following pages, commentary from each of the portfolio
managers will give you insight into their investment styles and market
perspectives.
YOUR FUND'S 10 LARGEST SECTORS - 12/31/98
% OF
SECTOR NET ASSETS
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1. SOFTWARE 9.8
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2. BUSINESS SERVICES 8.5
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3. RETAIL 6.3
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4. HEALTH CARE -- SERVICES 4.9
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5. COMPUTER SOFTWARE & SERVICES 4.0
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6. BANKS & THRIFTS 3.8
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7. BROADCASTING 3.6
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8. CONSUMER GOODS & SERVICES 3.6
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9. FOOD & BEVERAGES 3.3
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10. COMMUNICATIN SERVICES 3.1
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Portfolio holdings and asset allocations will vary.
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NEW ENGLAND STAR SMALL CAP FUND
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MONTGOMERY ASSET MANAGEMENT, LLC -- ANDREW PRATT
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Note to shareholders: The following is an overview by portfolio manager Andrew
Pratt. While we were producing the report, Montgomery Asset Management, LLC,
announced a change for this segment of the Fund, which becomes effective March
1, 1999. The new portfolio manager is Kathryn Peters. Portfolio manager Andrew
Pratt remains with the firm. More detailed information is included in a
supplement to the Fund's prospectus dated February 12, 1999, which appears on
page 29 of this report.
Throughout 1998, we maintained our investment strategy of combining value and
growth criteria to uncover companies that we believe are fundamentally sound. We
found, however, that deteriorating business conditions in certain small-cap
areas resulted in a shrinking number of companies that met our investment
criteria. Nevertheless, some areas offered particularly attractive
opportunities.
For example, we favored technology stocks. As sentiment turned negative toward
companies with exposure to troublesome Asian economies, investors
indiscriminately sold these stocks. Even companies that do little or no business
in Asia were affected by the general sell-off in this sector. When technology
stocks produced strong gains in the fourth quarter of 1998, companies that did
particularly well included those which had strong economic fundamentals and
which depended on the United States or the more vibrant European markets for
product sales. Two examples are Bool and Babbage, a company that makes software
that helps stabilize computer networks, and Jack Henry, a firm that creates Year
2000 compliance software for banks.
While we sought to avoid investments that had significant exposure to Asian
economic and financial problems, we were not completely immune to them. One of
the portfolio's disappointing investments was P Com Inc., a company that makes
microwave radios for wireless communications. As some Asian economies went into
recession, prices on such products declined rapidly.
Looking ahead, we are optimistic about the promising future for small-cap
stocks. Although uncertainty continues to permeate both U.S. and foreign
economies, governments and central banks in the major industrialized countries
have made concerted efforts to address global economic issues. We believe their
actions could improve the prospects for both economic growth and corporate
profits in 1999. The main concern in our outlook is a possible decline in
corporate profits driven by continued problems in the global economy.
LARGEST HOLDINGS IN MONTGOMERY SEGMENT
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% OF % OF
SEGMENT ASSETS FUND ASSETS
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1. Acxiom Corp. 4.3 0.9
2. Catalina Marketing 4.3 0.9
3. Tetra Tech, Inc. 3.8 0.8
4. Orthodontic Centers of America 3.6 0.8
5. Synopsys, Inc. 3.6 0.8
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<PAGE>
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Loomis, Sayles & Company, L.P. -- Christopher Ely, Philip Fine & David Smith
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Despite strong fundamentals and attractive valuations, small-cap stocks
performed poorly during the 12-month period. Why? In uncertain times, investors
tend to seek the perceived safety and liquidity of large-cap stocks. In
addition, the increased popularity of index funds and foreign demand for
large-company stocks fueled the large-cap investment trend. By early October,
the gap in performance between large-cap and small-cap stocks reached
unprecedented levels. Then, in three steps, the Federal Reserve Board lowered
short-term interest rates, igniting a strong rally in financial markets around
the world. Small-cap stocks performed well, recovering from their early October
lows and slightly narrowing the performance gap with large-cap stocks.
Throughout 1998, the segment remained fully invested in small-cap stocks that
reflected our growth style of investing. As a result, our segment of the Fund
produced a small gain for the year. We are proud of this result in light of the
difficult environment small stocks faced in 1998. The other key to performance
in 1998 was stock selection. Our bottom-up, fundamental research approach helped
us identify many investment opportunities. Technology stocks were particularly
beneficial. For example, Metromedia Fiber Networks was the segment's best
performer in 1998. The stock rose from $4 a share at the start of the year to
$33 a share by the end of the year, a one-year gain of 725%. Metromedia's
network of fiber optic cables in major cities throughout the United States is a
valuable asset in the new era of digital communications.
Our focus is on stock picking, not forecasting the economy. Nevertheless, there
are macroeconomic issues to consider when selecting stocks. The Year 2000
computer problem, which has been widely discussed in the press, is such an
issue. The "Y2K" problem, as it is called, could have an impact on some of the
segment's holdings. Fortunately, most of the companies in which we invest are
young and, therefore, use newer Y2K compliant systems. We believe the Y2K
problem will manifest itself in unexpected ways, but is unlikely to seriously
disrupt the economy or the companies in which we invest. Our best defense
against the problem is to stay focused on picking high quality companies and
remaining responsive to Y2K problems, should they occur.
Despite global turmoil, the Y2K question and uncertainty in the domestic
political arena, we believe 1999 will be another year of growth. Low U.S.
interest rates, solid fundamentals and attractive valuations appear to favor
small growth stocks. We plan to maintain our stock selection discipline and
remain fully invested.
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Robertson, Stephens & Company Investment Management, L.P. -- John Wallace
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Note to shareholders: While we were producing this report, members of senior
management of Robertson Stephens agreed to purchase Robertson Stephens
Investment Management Co., Inc., from BankAmerica Corporation in a transaction
expected to be completed in March 1999. Robertson Stephens will continue to
serve as subadvisor and segment co-managers will continue to manage the fund
segment. More detailed information is included in a supplement to the Fund's
prospectus dated February 12, 1999, appearing on page 29 of this report.
The segment benefited from a robust fourth quarter and ended the year with
strong positive performance, far exceeding small-company stock indexes.
Calendar year 1998 was a volatile and difficult time for small-cap investors.
During the 12 months, investors experienced a short but major bear market in
which small-caps declined 30% to 60% on average from April through October. In
managing the segment, we continued to seek companies with improving business
fundamentals that we believe are positioned for considerable growth.
Despite the market downturn, selected stocks had a positive impact on
performance. A 10% weighting in media stocks, specifically in cable and
programming/content companies, was very positive. Companies such as TCI Ventures
Group and MediaOne Group generated very strong returns. Technology stocks, which
accounted for 15% to 25% of assets throughout the year, included outstanding
performers such as Komag, Electronics For Imaging, Macromedia, and Creative
Computers Applications.
LARGEST HOLDINGS IN ROBERTSON STEPHENS SEGMENT
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% OF % OF
SEGMENT ASSETS FUND ASSETS
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1. Novell, Inc. 2.6 0.8
2. Millennium Pharmaceuticals 2.5 0.7
3. MediaOne Group, Inc. 2.4 0.7
4. Netscape Communictions Corp. 2.4 0.7
5. National Media Corp. 2.2 0.6
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Investments that held back performance included energy companies and some
telecommunications and paging service stocks. We continue to believe these
investments offer excellent risk/reward potential, but we will not hesitate to
cut our losses if industry or company fundamentals deteriorate.
During the year, large-cap stocks continued to dominate the investment
environment, and both the Standard & Poor's 500 Stock Index (S&P 500) and the
Dow Jones Industrial Average registered their fourth consecutive year of
positive performance. The "big is beautiful" theme has overshadowed small-cap
performance since 1994, as restructuring, mergers and global exposure have
contributed to superior results for large-cap companies. There are indications,
however, that this situation could change in 1999 as large-cap companies incur
profitability problems at a time when their valuations are at record high
levels. The deflationary forces of global excess capacity coupled with slowing
demand in most emerging markets have already had a negative effect on the
profits of some multinationals.
Not only do we expect profitability of smaller, more domestically oriented
companies to be stronger, but we believe there are several factors in place that
bode well for a prolonged period of dominance for small-caps. The first is the
Federal Reserve's stance on interest rates. During 1998, the Fed lowered short
term interest rates three times. These cuts are significant for small-caps as
pointed out by a study conducted by Prudential Securities in late 1998. The
study indicates that in eight of the last ten periods analyzed, small-caps
outperformed large-caps by an average of 8% 12 months after the Fed began
cutting rates. We believe the interest rate environment will continue to be
favorable for all equities, especially small-caps in 1999. A second factor that
we believe will lead to small-cap outperformance is the current valuation gap
between small and large-cap companies. The last time such a large valuation gap
existed was in 1974, which was followed by a seven-year period in which
small-cap stocks outperformed large-caps.
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Oakmark/Harris Associates L.P. -- Steven Reid
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During the 12-month period that ended December 31, 1998, we maintained our value
approach, focusing in stocks selling below their intrinsic value that we believe
should perform well over the long term.
The investment environment for small-cap value investors continued to be
difficult. Despite a positive economic market environment, investors tended to
favor large-company stocks, particularly those in the technology and Internet
areas. During the market drop that occurred in July and August, prices on
small-cap value stocks declined significantly more than prices on larger company
stocks.
While we believe the retreat from small-cap stocks was extreme, we took
advantage of the low prices to purchase shares of high quality companies. We
added more new investments to the portfolio during the second half of the year
than at any other time since the Fund's inception. For example, we purchased
Prime Hospitality Corp., a hotel chain. We were attracted to the company because
of its low valuation and potential for a strong increase in price. In the past
few months, a lack of credit in the real estate sector halted financing for
hotel projects. Recently, more funding has become available for hotels to expand
their facilities and their services. We also added Symantec Corp., a company
that produces anti-virus software for personal computers. We believe Symantec
Corp. has a very strong balance sheet and strong revenues and earnings
potential.
LARGEST HOLDINGS IN OAKMARK/HARRIS SEGMENT
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% OF % OF
SEGMENT ASSETS FUND ASSETS
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1. People's Bank 7.2 1.6
2. U.S. Industries, Inc. 6.5 1.4
3. Department 56, Inc. 5.2 1.1
4. Catellus Development 5.0 1.1
5. Symantec Corp. 3.8 0.8
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During the second half of the year, we eliminated two long-term holdings from
the portfolio. We sold Cablevision Systems when it reached our price target.
Cablevision had been a significant portion of assets and the best performing
stock in the segment. In addition, Clorox Co. acquired First Brands Corp, a
consumer products company, at a significant profit to the portfolio.
Looking ahead, we believe the great divergence in valuation between large-cap
growth companies and smaller value companies provides tremendous opportunities
for small-cap value stocks. Toward the end of 1998, we began to see a pick-up in
investor interest in small-caps. Throughout the segment's history, we have found
that being consistent with our investment style has paid off. We believe
small-cap value stocks are solid long-term investments, and the key to being a
successful value investor is to seek companies that are fundamentally attractive
with the potential for producing strong returns several years out.
The opinions expressed are those of the managers and advisers and are subject to
change. The occurrence of forecasted events and predictions is not certain and
cannot be assured. The portfolio is actively managed and holdings are subject to
change.
The Fund invests in foreign securities which involves special risks. Investments
in small-cap companies involve greater risk than is customarily associated with
more established companies. This Fund invests in derivative securities for
hedging purposes. See a prospectus for more complete information.
<PAGE>
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PORTFOLIO COMPOSITION
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Investments as of December 31, 1998
COMMON STOCK--93.8% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE
- ------ ----------- -----
AIRLINES--0.4%
20,100 Atlantic Coast Airlines, Inc. ................ $ 502,500
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APPAREL--0.4%
15,000 Jones Apparel Group (c) ...................... 330,938
15,000 Reebok International, Ltd. (c) ............... 223,125
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554,063
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AUTOMOTIVE--1.7%
15,000 SPX Corp. (c) ................................ 1,005,000
25,000 Standard Motor Products, Inc. ................ 606,250
30,000 Stoneridge, Inc. (c) ......................... 682,500
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2,293,750
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BANKS & THRIFTS--3.8%
45,000 America Bank Note Holographic, Inc. .......... 787,500
31,250 BankAtlantic Bancorp, Inc. ................... 201,172
23,150 Commercial Federal ........................... 536,791
32,200 FirstFed Financial (c) ....................... 575,575
20,000 Niagara Bancorp, Inc. (c) .................... 210,000
30,000 Northwest Bancorp, Inc. ...................... 292,500
75,000 People's Bank ................................ 2,071,875
17,000 Staten Island Bancorp, Inc. .................. 338,937
-----------
5,014,350
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BIOTECHNOLOGY--0.7%
37,000 Millennium Pharmaceuticals (c) (d) ........... 957,375
-----------
BROADCASTING--3.6%
17,000 Adelphia Communications Corp. ................ 777,750
40,000 Ascent Entertainment Group, Inc. (c) ......... 295,000
13,900 Citadel Communications Corp. ................. 359,663
11,000 Comcast ...................................... 645,562
20,000 MediaOne Group, Inc. (c) ..................... 940,000
12,900 Metro Networks (c) ........................... 549,862
80,000 National Media Corp. ......................... 855,000
50,000 The Kushner-Locke Co. ........................ 371,875
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4,794,712
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BUILDING & RELATED--2.6%
21,400 Champion Enterprises (c) 585,825
40,700 D.R.Horton ................................... 936,100
37,500 Interface, Inc. .............................. 348,047
20,000 Kaufman & Broad Home ......................... 575,000
12,800 Manitowoc Co. ................................ 568,000
20,000 TJ International, Inc. ....................... 513,750
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3,526,722
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BUSINESS SERVICES--8.5%
14,500 Abacus Direct Corp. (c) ...................... 659,750
27,600 BA Merchant Services (c) ..................... 555,450
16,100 Caribiner International (c) .................. 146,913
18,100 Catalina Marketing (c) ....................... 1,237,587
35,000 CellNet Data Systems (c) ..................... 175,000
25,000 Cendant Corp. (c) ............................ 476,563
40,000 Condor Technology Solutions (d) .............. 400,000
19,000 CSG Systems International, Inc. (c) .......... 1,501,000
9,800 Fair Issac & Co. ............................. 452,638
48,700 HA-LO Industries (c) ......................... 1,832,337
29,200 Interim Services (c) ......................... 682,550
9,100 Lason Inc. (c) ............................... 529,506
10,018 NOVA Corp. (c) ............................... 347,499
15,000 Saville Systems plc (ADR) (c) ................ 285,000
40,350 Tetra Tech, Inc. (c) ......................... 1,091,972
23,100 TMP Worldwide, Inc. (c) ...................... 970,200
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11,343,965
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CHEMICALS--1.1%
57,000 Ferro Corp. .................................. 1,482,000
-----------
COAL--0.4%
31,100 Westmoreland Coal Co. ........................ 552,025
-----------
COMMUNICATION SERVICES--3.1%
10,650 Exodus Communications, Inc. .................. 684,262
12,400 Metromedia Fiber Network (c) ................. 415,400
55,000 Novell, Inc. (c) ............................. 996,875
14,100 Pacific Gateway Exchange, Inc. ............... 677,681
57,500 PageMart Wireless (c) (d) .................... 319,844
30,000 Powerwave Technologies, Inc. ................. 558,750
22,000 SkyTel Communications, Inc. .................. 486,750
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4,139,562
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COMPUTER SOFTWARE &
SERVICES--4.0%
40,000 Acxiom Corp. (c) ............................. 1,240,000
22,300 Analysts International ....................... 429,275
10,000 Complete Busines Solutions, Inc. ............. 338,750
30,500 Computer Task Group .......................... 827,312
22,500 Digital Courier Technologies ................. 160,313
12,500 National Data Corp. .......................... 608,594
6,800 Sapient Corp. ................................ 380,800
50,000 Symantec Corp. (c) ........................... 1,087,500
10,000 USWeb Corp. .................................. 263,750
-----------
5,336,294
-----------
COMPUTERS & BUSINESS
EQUIPMENT--0.9%
17,550 Cybex Computer Products Corp. ................ 515,531
16,200 Network Appliance (c) ........................ 729,000
-----------
1,244,531
-----------
COMPUTER HARDWARE--1.5%
30,000 Digi International (c) ....................... 333,750
25,000 FORE Systems (c) ............................. 457,812
25,000 Micron Electronics (c) ....................... 432,813
20,000 Sequent Computer Systems, Inc. ............... 241,250
6,500 Sun Microsystems, Inc. (c) .................. 556,562
-----------
2,022,187
-----------
CONSUMER GOODS &
SERVICES--3.6%
36,000 Education Management (c) ..................... 850,500
20,000 First Brands Corp. ........................... 788,750
23,300 Libbey, Inc. ................................. 674,244
45,000 P. H. Glatfelter ............................. 556,875
50,000 R.G. Barry Corp. (c) ......................... 550,000
12,800 Regis Corp. .................................. 512,000
20,000 Scotsman Industries, Inc. .................... 411,250
206,657 U-Ship, Inc. (c) ............................. 387,482
25,000 U-Ship, Inc., Warrants ....................... 36,440
-----------
4,767,541
-----------
DIVERSIFIED CONGLOMERATES--1.4%
100,000 U.S. Industries, Inc. (c) .................... 1,862,500
-----------
DRUGS & HEALTH CARE--2.5%
35,000 Alkermes, Inc. ............................... 776,563
14,600 Anesta Corp. ................................. 388,725
9,700 Coulter Pharmaceutical, Inc. ................. 291,000
10,200 Emisphere Technologies, Inc. ................. 159,375
14,400 ICOS Corp. ................................... 428,400
3,900 Medimmune, Inc. (c) .......................... 387,806
32,400 Playtex Products (c) ......................... 520,425
4,000 Sepracor, Inc. (c) ........................... 352,500
-----------
3,304,794
-----------
ELECTRONIC COMPONENTS--2.6%
9,450 Applied Micro Circuits Corp. ................. 321,005
20,000 Level One Communications, Inc. ............... 710,000
7,300 Micrel, Inc. ................................. 401,500
10,600 PMC-Sierra, Inc. ............................. 669,125
2,900 QLogic Corp. ................................. 379,538
3,800 Rambus, Inc. (c) ............................. 365,750
19,300 Sipex Corp. (c) .............................. 677,912
-----------
3,524,830
-----------
ELECTRONICS--2.2%
37,500 Adaptec, Inc. (c) (d) ........................ 658,594
22,800 ATMI, Inc. (c) ............................... 575,700
7,400 Conexant Systems, Inc. ....................... 123,950
9,300 Flextronics International .................... 796,312
14,300 Novellus Systems, Inc. ....................... 707,850
-----------
2,862,406
-----------
FINANCE--1.2%
35,000 ARM Financial Group .......................... 776,563
15,000 Duff & Phelps Credit Rating .................. 822,187
-----------
1,598,750
-----------
FINANCIAL SERVICES--1.2%
50,000 AMRESCO, Inc. ................................ 437,500
20,200 Healthcare Financial Partners, Inc. .......... 805,475
8,400 Profit Recovery Group International, Inc. .... 314,475
-----------
1,557,450
-----------
FOOD & BEVERAGES--3.3%
35,750 Hain Food Group, Inc. ........................ 893,750
20,000 International Multifoods ..................... 516,250
40,000 M&F Worldwide ................................ 402,500
50,000 Ralcorp Holdings, Inc. (c) ................... 912,500
16,900 The Earthgrains Co. .......................... 522,844
40,000 Triarc Companies, Inc. (c) ................... 640,000
20,000 Vlasic Foods International, Inc. ............. 476,250
-----------
4,364,094
-----------
HEALTH CARE -- MEDICAL
TECHNOLOGY--1.6%
13,400 Cooper Cos. (c) .............................. 277,212
47,500 Endocardial Solutions, Inc. (d) .............. 475,000
4,400 MiniMed, Inc. ................................ 460,900
11,500 Osteotech, Inc. .............................. 534,750
8,200 ResMed, Inc. ................................. 372,075
-----------
2,119,937
-----------
HEALTH CARE -- SERVICES--4.9%
15,000 Alternative Living Services .................. 513,750
50,000 Balanced Care Corp. (d) ...................... 400,000
25,000 Brookdale Living Communities, Inc. ........... 487,500
24,900 Medquist, Inc. (c) ........................... 983,550
53,400 Orthodontic Centers of America (c) ........... 1,037,962
15,700 Province Healthcare Co. ...................... 563,238
19,300 Renal Care Group ............................. 556,081
12,200 Serologicals Corp. ........................... 366,000
17,100 Sierra Health Services, Inc. (c) ............. 360,169
23,300 Sunrise Assisted Living, Inc. (c) (d) ........ 1,208,687
-----------
6,476,937
-----------
HOTELS & RESTAURANTS--0.8%
18,400 P.F. Chang's China Bistro, Inc. .............. 418,600
16,000 Papa John's International (c) ................ 706,000
-----------
1,124,600
-----------
INDUSTRIAL GOODS & SERVICES--2.7%
47,300 Binks Manufacturing Co. ...................... 780,450
25,000 Columbus McKinnon ............................ 450,000
15,000 HB Fuller Co. ................................ 721,875
60,000 MagneTek, Inc. (c) ........................... 693,750
30,000 Teekay Shipping Corp. ........................ 564,375
22,500 Watts Industries, Inc. ....................... 374,062
-----------
3,584,512
-----------
INFORMATION SERVICES--0.2%
15,000 Nielsen Media Research, Inc. ................. 270,000
-----------
INSURANCE--1.1%
15,100 Annuity & Life Re Holdings ................... 405,813
20,000 The MONY Group, Inc. (c) ..................... 626,250
11,750 W. R. Berkley Corp. .......................... 400,234
-----------
1,432,297
-----------
INTERNET CONTENT--0.2%
5,900 CNET, Inc. ................................... 314,175
-----------
INVESTMENT COMPANIES--0.7%
20,000 TCI Ventures Group (c) ....................... 471,250
18,000 Waddell & Reed Financial, Inc. ............... 426,375
-----------
897,625
-----------
LEISURE & LODGING--0.5%
37,500 Acclaim Entertainment, Inc. .................. 459,375
25,000 Global Vacation Group, Inc. .................. 215,625
-----------
675,000
-----------
MACHINERY--0.8%
20,000 D T Industries ............................... 315,000
10,000 Graco, Inc. .................................. 295,000
25,000 Northwest Pipe Co. (c) ....................... 403,125
-----------
1,013,125
-----------
MANUFACTURING--0.5%
40,000 Commscope, Inc. (d) .......................... 672,500
-----------
MORTGAGE--0.2%
36,000 Franchise Mortgage Acceptance (c) ............ 279,000
-----------
MUTUAL FUNDS--0.4%
28,000 WEBS Index Fund, Inc., HK Index Series ....... 262,500
30,000 WEBS Index Fund, Inc., JP Index Series ....... 307,500
-----------
570,000
-----------
PACKAGING--0.7%
10,000 AptarGroup, Inc. ............................. 280,625
28,300 Ivex Packaging (c) ........................... 657,975
-----------
938,600
-----------
PAPER & FOREST PRODUCTS--0.1%
5,000 Schweitzer-Mauduit International, Inc. ....... 77,188
-----------
PETROLEUM SERVICES--0.3%
375,000 Bonus Resource Services Corp. ................ 368,008
-----------
PUBLISHING--1.0%
18,400 Big Flower Holdings (c) ...................... 405,950
17,200 Lamar Advertising (c) ........................ 640,700
16,500 Ziff-Davis, Inc. (c) ......................... 260,906
-----------
1,307,556
-----------
REAL ESTATE--1.8%
100,000 Catellus Development (c) ..................... 1,431,250
90,000 Prime Hospitality (c) ........................ 950,625
-----------
2,381,875
-----------
RETAIL--6.3%
21,750 99 Cents Only Stores ......................... 1,068,469
19,200 AnnTaylor Stores ............................. 757,200
20,000 Chico's FAS (c) .............................. 467,500
9,500 Creative Computers, Inc. ..................... 301,625
40,000 Department 56, Inc. .......................... 1,502,500
20,000 Hollywood Entertainment Corp. ................ 545,000
193,500 Krause's Furniture (c) ....................... 326,531
22,300 Linens'n Things .............................. 883,637
80,000 Paul Harris Stores, Inc. ..................... 650,000
35,000 PETsMART, Inc. (c) ........................... 385,000
23,500 The Men's Wearhouse, Inc. (c) ................ 746,125
75,000 Ugly Duckling Corp. (c) ...................... 346,875
8,500 Whole Foods Market, Inc. (c) ................. 411,188
-----------
8,391,650
-----------
RETAIL -- SPECIALTY--0.1%
14,000 Coldwater Creek (c) .......................... 192,500
-----------
SEMI-CONDUCTORS--0.6%
42,100 Actel Corp. (c) .............................. 842,000
-----------
SOFTWARE--9.8%
10,000 Check Point Software Technolgies, Ltd. ....... 458,125
12,200 Concord Communications, Inc. (c) ............. 692,350
35,000 Discreet Logic, Inc. ......................... 660,625
14,600 Documentum, Inc. (c) ......................... 780,187
78,900 DSET Corp. ................................... 818,587
15,000 Egghead, Inc. ................................ 312,188
15,000 Electronics For Imaging (c) .................. 602,812
23,700 Geotek Communications Corp. (c) .............. 882,825
12,500 Hyperion Solutions Corp. ..................... 225,000
15,000 IMRglobal Corp. .............................. 441,563
62,000 Information Advantage, Inc. .................. 468,875
33,000 INSO Corp. ................................... 825,000
45,000 JDA Software Group (c) ....................... 435,938
23,900 Macromedia, Inc. (c) ......................... 805,131
19,300 NetGravity, Inc. ............................. 323,275
15,000 Netscape Communications Corp. ................ 911,250
10,000 New Era of Networks, Inc. .................... 440,000
25,000 Secure Computing Corp. (d) ................... 476,563
19,100 Synopsys, Inc. (c) ........................... 1,036,175
65,000 System Software Associates, Inc. ............. 457,031
44,000 VIASOFT, Inc. ................................ 308,000
15,100 Wind River Systems (c) ....................... 709,700
-----------
13,071,200
-----------
SPECIALTY PRINTING--0.3%
11,200 World Color Press, Inc. (c) .................. 340,900
-----------
STEEL--0.3%
10,500 Carpenter Technology ......................... 356,344
-----------
TECHNOLOGY--2.0%
21,400 Kronos, Inc. (c) ............................. 948,287
23,000 Manugistics Group, Inc. (c) .................. 287,500
23,900 SBS Technologies, Inc. (c) ................... 442,150
11,200 Waters Corp. (c) ............................. 977,200
-----------
2,655,137
-----------
TELECOMMUNICATION--2.0%
45,000 CapRock Communications Corp. (d) ............. 300,937
15,800 Dycom Industries, Inc. ....................... 902,575
35,000 FaxSav, Inc. ................................. 216,563
145,000 Metrocall, Inc. .............................. 634,375
60,000 Startec Global Communications ................ 577,500
-----------
2,631,950
-----------
TELECOMMUNICATION
EQUIPMENT--1.8%
28,000 Advanced Fibre Communications ................ 306,250
24,700 Aspect Telecommunications Corp. (c) .......... 426,075
13,000 Comverse Technology (c) ...................... 923,000
10,600 Uniphase Corp. (c) ........................... 735,375
-----------
2,390,700
-----------
TOYS & AMUSEMENTS--0.6%
21,500 Action Performance Cos. (c) .................. 760,563
-----------
TRUCKING & FREIGHT
FORWARDING--0.8%
75,000 Simon Transportation Services, Inc. .......... 435,938
20,000 USFreightways Corp. .......................... 582,500
-----------
1,018,438
-----------
Total Common Stock (Identified Cost $106,652,009) ......... 124,760,718
-----------
<TABLE>
<CAPTION>
OPTIONS--0.4%
CONTRACTS DESCRIPTION VALUE(a)
- --------------------------------------------------------------------------------------------
<S> <C>
150 America Online, Inc., 160 Call, 1/16/1999 ................ $ 120,000
100 Cisco Systems, Inc., 80 Call, 1/16/1999 .................. 146,250
250 Microsoft Corp., 130 Call, 1/16/1999 ..................... 259,375
75 Microsoft Corp., 145 Call, 1/16/1999 ..................... 14,063
-----------
Total Options (Identified Cost $301,881) ...... 539,688
-----------
</TABLE>
<TABLE>
SHORT TERM INVESTMENTS--2.4%
FACE
AMOUNT
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
$1,561,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/1998 at 4.00% to be repurchased at
$1,561,694 on 1/04/1999, collateralized by 1,175,000
U.S. Treasury Bond 8.125% due 8/15/2019 with a value of
$1,605,779 (d) ......................................... $ 1,561,000
1,615,000 Repurchase Agreement with State Street Bank & Trust Co.
dated 12/31/1998 at 4.50% to be repurchased at
$1,615,808 on 1/04/1999, collateralized by 1,210,000
U.S. Treasury Bond 8.125% due 8/15/2019 with a value of
$1,653,609 ............................................. 1,615,000
------------
Total Short Term Investments (Identified Cost $3,176,000) 3,176,000
------------
Total Investments--96.6% (Identified Cost $110,129,890)
(b) .................................................... 128,476,406
Other assets less liabilities ............................ 4,505,652
------------
Total Net Assets--100% ................................... $132,982,058
============
</TABLE>
<TABLE>
SECURITIES SOLD SHORT
SHARES
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
1,300 Creditrust Corp. ......................................... $ 33,150
10,000 Stericycle, Inc. ......................................... 161,250
</TABLE>
<TABLE>
<CAPTION>
SECURITIES SOLD SHORT AGAINST THE BOX
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
3,000 Rambus, Inc. ............................................. $ 288,750
-------------
Total Securities Sold Short (Total Proceeds $371,100) .... $ 483,150
=============
</TABLE>
<TABLE>
<CAPTION>
WRITTEN OPTION CONTRACTS
NET UNREALIZED
APPRECIATION
CONTRACTS DESCRIPTION (DEPRECIATION)
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
50 KBW Banking Index, 850 Call, 1/16/1999 ................... $ 44,222
------------
$ 44,222
============
(a) See Note 1a of Notes to Financial Statements.
(b) Federal Tax Information: At December 31, 1998 the net unrealized
appreciation on investments based on cost of $111,577,336 for
federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost .............. $ 24,656,354
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............... (7,757,284)
------------
Net unrealized appreciation ..................................... $ 16,899,070
============
(c) Non-income producing security.
(d) A portion of this security has been segregrated as collateral for
options and short sales.
ADR An American Depository Receipt is a certificate issued by a U.S.
bank representing the right to receive securities of the foreign
issuer described. The values of ADR's are significantly
influenced by trading on exchanges not located in the United
States or Canada.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS & LIABILITIES
ASSETS
<S> <C> <C>
Investments at value (Identified cost $110,129,890) ...... $128,476,406
Cash - Restricted ........................................ 2,080,729
Receivable for:
Fund shares sold ....................................... 3,193,013
Securities sold ........................................ 2,181,080
Dividends and interest ................................. 20,636
Unamortized organization expense ....................... 26,013
------------
135,977,877
LIABILITIES
Payable for:
Securities purchased ................................... $1,395,749
Open short sales - (proceeds received $371,100) ........ 483,150
Open written options - (proceeds received $62,972) ..... 18,750
Fund shares redeemed ................................... 839,341
Due to custodial bank .................................... 8,920
Accrued expenses:
Management fees ........................................ 110,895
Deferred trustees' fees ................................ 3,552
Accounting and administrative .......................... 3,069
Other .................................................. 132,393
----------
2,995,819
------------
NET ASSETS ................................................. $132,982,058
============
Net Assets consist of:
Capital paid in ........................................ $114,451,157
Undistributed net investment income (loss) ............. (3,552)
Accumulated net realized gains (losses) ................ 255,765
Unrealized appreciation (depreciation) on investments,
securities sold short and written option transactions 18,278,688
------------
NET ASSETS ................................................. $132,982,058
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($56,161,125 divided by 3,585,459 shares of beneficial
interest) .............................................. $15.66
======
Offering price per share (100/94.25 of $15.66) ......... $16.62*
======
Net asset value and offering price of Class B shares
($61,409,169 divided by 3,979,602 shares of beneficial
interest) .............................................. $15.43**
======
Net asset value and offering price of Class C shares
($15,411,764 divided by 998,564 shares of beneficial
interest) .............................................. $15.43**
======
*Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes of $493) ................... $ 379,970
Interest ................................................... 303,343
----------
683,313
Expenses
Management fees .......................................... $1,304,538
Service fees - Class A ................................... 132,793
Service and distribution fees - Class B .................. 569,200
Service and distribution fees - Class C .................. 142,047
Trustees' fees and expenses .............................. 11,087
Accounting and administrative ............................ 35,775
Custodian ................................................ 205,571
Transfer agent ........................................... 470,517
Audit and tax services ................................... 44,300
Legal .................................................... 5,363
Printing ................................................. 59,365
Registration ............................................. 89,795
Amortization of organization expenses .................... 8,906
Insurance ................................................ 1,333
Dividend expense on short sales .......................... 900
Miscellaneous ............................................ 19,607
----------
Total expenses ............................................. 3,101,097
----------
Net investment income (loss) ............................... (2,417,784)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, SECURITIES
SOLD SHORT AND WRITTEN OPTIONS
Realized gain (loss) on:
Investments - net ........................................ 1,823,337
Securites sold short - net ............................... (125,085)
Written Options - net .................................... (79,526)
----------
Total realized gain (loss) on investments, securities sold
short and written options .................................. 1,618,726
----------
Unrealized appreciation (depreciation) on:
Investments - net ........................................ 2,822,090
Securities sold short - net .............................. (158,764)
Written Options - net .................................... 44,601
----------
Net unrealized appreciation (depreciation) on investments,
securities sold short and written options .................. 2,707,927
----------
Net gain (loss) on investment transactions ................. 4,326,653
----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ........ $1,908,869
==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss) ............................. $ (1,317,113) $ (2,417,784)
Net realized gain (loss) on investments, securities sold
short and written options .............................. 3,552,679 1,618,726
Unrealized appreciation (depreciation) on investments,
securities sold short and written options .............. 15,570,761 2,707,927
------------ ------------
Increase (decrease) in net assets from operations ........ 17,806,327 1,908,869
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net realized gain on investments
Class A ................................................ (1,512,427) (72,914)
Class B ................................................ (1,578,060) (81,808)
Class C ................................................ (386,249) (19,163)
------------ ------------
(3,476,736) (173,885)
------------ ------------
Increase (decrease) in net assets derived from capital
share transactions ..................................... 104,322,991 12,594,454
------------ ------------
Total increase (decrease) in net assets .................. 118,652,582 14,329,438
NET ASSETS
Beginning of the year .................................... 38 118,652,620
------------ ------------
End of the year .......................................... $118,652,620 $132,982,058
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)
End of the year .......................................... $ (1,357) $ (3,552)
============ ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
CLASS A CLASS B CLASS C
--------------------- ---------------------- ---------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------- ---------------------- --------------------
1997 1998 1997 1998 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year (a) ........................... $12.50 $15.37 $12.50 $15.26 $12.50 $15.26
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations
Net investment income (loss) (b) ..... (0.20) (0.23) (0.30) (0.33) (0.30) (0.33)
Net realized and unrealized gain on
investments ........................ 3.55 0.54 3.54 0.52 3.54 0.52
------ ------ ------ ------ ------ ------
Total from investment operations ..... 3.35 0.31 3.24 0.19 3.24 0.19
------ ------ ------ ------ ------ ------
Less distributions
Distributions from net realized
capital gains ...................... (0.48) (0.02) (0.48) (0.02) (0.48) (0.02)
------ ------ ------ ------ ------ ------
Total distributions .................. (0.48) (0.02) (0.48) (0.02) (0.48) (0.02)
------ ------ ------ ------ ------ ------
Net asset value, end of year ......... $15.37 $15.66 $15.26 $15.43 $15.26 $15.43
====== ====== ====== ====== ====== ======
Total return (%) (c) ................. 27.0 2.1 26.1 1.3 26.1 1.3
Ratio of operating expenses to average
net assets (%) ..................... 2.20 2.07 2.95 2.82 2.95 2.82
Ratio of net investment income (loss)
to average net assets (%) .......... (1.44) (1.52) (2.19) (2.27) (2.19) (2.27)
Portfolio turnover rate (%) .......... 140 182 140 182 140 182
Net assets, end of year (000) ........ $52,066 $56,161 $52,616 $61,409 $13,970 $15,412
(a) Fund commenced operations on December 31, 1996.
(b) Per share net investment loss has been calculated using the average shares outstanding during the year.
(c) A sales charge in the case of Class A shares and a contingent deferred sales charge in the case of Class B and Class C
shares is not reflected in total return calculations.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. The Fund is a series of New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended, (the "1940 Act") as an open-end management investment
company. The Fund seeks capital appreciation. The Declaration of Trust permits
the trustees to issue an unlimited number of shares of the Trust in multiple
series (each such series of shares a "Fund").
The Fund offers Class A, Class B, and Class C shares. Class A shares are sold
with a maximum front end sales charge of 5.75%. Class B shares do not pay a
front end sales charge, but pay a higher ongoing distribution fee than Class A
shares for eight years (at which point they automatically convert to Class A
shares), and are subject to a contingent deferred sales charge if those shares
are redeemed within six years of purchase (or five years if purchased before
May 1, 1997). Class C shares do not pay a front end sales charge and do not
convert to any other class of shares, but they do pay a higher ongoing
distribution fee than Class A shares and may be subject to a contingent
deferred sales charge if those shares are redeemed within one year. Expenses
of the Fund are borne pro rata by the holders of each class of shares, except
that each class bears expenses unique to that class (including the Rule 12b-1
service and distribution fees applicable to such class), and votes as a class
only with respect to its own Rule 12b-1 plan. Shares of each class would
receive their pro rata share of the net assets of the Fund, if the Fund were
liquidated. In addition, the trustees approve separate dividends on each class
of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which service provides the last reported sale price for securities
listed on an applicable securities exchange or on the NASDAQ national market
system, or, if no sale was reported and in the case of over-the-counter
securities not so listed, the last reported bid price. Short-term obligations
with a remaining maturity of less than sixty days are stated at amortized
cost, which approximates market value. All other securities and assets are
valued at their fair value as determined in good faith by the Fund's adviser
and the relevant subadvisers under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date or when the Fund learns of
the dividend, and interest income is recorded on the accrual basis. In
determining net gain or loss on securities sold, the cost of securities has
been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The timing and characterization of
certain income and capital gains distributions are determined in accordance
with federal tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for organization costs, wash sales, post October losses and net
investment loss. Permanent book and tax basis differences will result in
reclassification to capital accounts.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price including interest. Each subadviser is
responsible for determining that the value of the collateral is at all times
at least equal to the repurchase price. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other party
including possible delays or restrictions upon the Fund's ability to dispose
of the underlying securities.
F. SHORT SALES. A short sale is a transaction in which the Fund sells
securities it does not own (but has borrowed) in anticipation of a decline in
the market price of the securities. When the Fund makes a short sale, the
proceeds it receives from the sale will be held on behalf of the broker
effecting the sale until the Fund replaces the borrowed securities. To deliver
the securities to the buyer, the Fund arranges through the broker to borrow
the securities and, in doing so, the Fund becomes obligated to replace the
securities borrowed at their market value at the time of replacement, whatever
that price may be. The Fund may have to pay a premium to borrow the securities
and must pay any dividends or interest payable on the borrowed securities
until the securities are replaced. At December 31, 1998, the amount of cash
segregated to cover short positions was $483,150. Securities sold short at
December 31, 1998 and their related market values are set forth in the
portfolio composition.
G. SHORT SALES AGAINST THE BOX. In a short sale against the box, the Fund
sells a borrowed security, while at the same time owning an identical security
in the portfolio. While the short sale is outstanding, the Fund will not
dispose of the security hedged by the short sale.
When the Fund sells short against the box, it will establish a margin account
with the broker lending the security sold short. While the short sale is
outstanding, the broker retains the proceeds of the short sale, and the Fund
pledges securities or cash as additional collateral. The Fund earns interest
from the broker on the proceeds of the short sale and accrues such interest on
a daily basis.
H. OPTIONS. The Fund may use options to enhance investment return, or to
hedge against changes in the values of securities the Fund owns or expects to
purchase. Writing puts and buying calls tends to increase the Fund's exposure
to the underlying instrument and writing calls or buying puts tends to
decrease the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
For options purchased to hedge the Fund's investments, the potential risk to
the Fund is that the change in value of options contracts may not correspond
to the change in value of the hedged instruments. In addition, losses may
arise from changes in the value of the underlying instruments, if there is an
illiquid secondary market for the contracts, or if the counterparty is unable
to perform. The maximum loss for purchased options is limited to the premium
initially paid for the option. For options written by the Fund, the maximum
loss is not limited to the premium initially received for the option.
Exchange traded options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask price for
written options. Options traded over the counter are valued using prices
supplied by dealers.
I. ORGANIZATION EXPENSE. Costs incurred in connection with the Fund's
organization and initial registration, amounting to approximately $41,674 in
the aggregate, were paid by the Fund and are being amortized over 60 months.
2. PURCHASES AND SALES OF SECURITIES. For the year ended December 31, 1998,
purchases and sales of securities (excluding short-term investments) were
$224,982,554 and $213,465,212 respectively.
Transactions in written options for the year ended December 31, 1998 are
summarized as follows:
WRITTEN OPTIONS
---------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ------------
Open at December 31, 1997 (125) $ (30,871)
Contracts opened (6,120) (4,439,024)
Contracts closed 6,195 4,406,923
------- -----------
Open at December 31, 1998 (50) $ (62,972)
======= ===========
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM") at the annual rate of 1.05% of the Fund's average daily net assets.
NEFM pays the Fund's four investment subadvisers, Harris Associates, L.P.,
Loomis, Sayles & Company, L.P., Montgomery Asset Management, L.P. and
Robertson, Stephens & Company Investment Management, L.P. a subadvisory fee as
follows: Harris Associates, L.P., at the annual rate of 0.70% of the average
daily net assets of its segment of the Fund, Loomis, Sayles & Company, L.P.
and Robertson, Stephens & Company Investment Management, L.P. at the annual
rate of 0.55% of the first $50 million of the average daily net assets of the
segment of the Fund which that sub-adviser manages, and 0.50% of such assets
in excess of $50 million, and Montgomery Asset Management, L.P. at the annual
rate of 0.65% of the first $50 million of the average daily net assets of the
segment of the Fund which that subadviser manages, and 0.50% of such assets in
excess of $50 million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM, Harris Associates, L.P. and Loomis, Sayles & Company, L.P. are
wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest"), formerly known
as New England Investment Companies, L.P., which is a subsidiary of
Metropolitan Life Insurance Company (MetLife). Fees earned by NEFM and the
sub-advisers under the management agreement in effect during the year ended
December 31, 1998, are as follows:
FEES EARNED
- -----------
$ 546,287 NEFM
215,690 Harris Associates, L.P.
170,090 Loomis, Sayles & Company, L.P.
186,559 Montgomery Asset Management, L.P.
185,912 Robertson, Stephens & Company Investment
Management, L.P.
- ----------
$1,304,538
==========
The effective management fee for the year ended December 31, 1998 was 1.05%.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of Nvest
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting, financial reporting
functions and clerical functions relating to the Fund and (ii) expenses for
services required in connection with the preparation of registration
statements and prospectuses, registration of shares in various states,
shareholder reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the year ended December 31, 1998, these
expenses amounted to $ 35,775 and are shown separately in the financial
statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds Service Corporation ("NEFSCO") is
the transfer and shareholder servicing agent to the Fund and Boston Financial
Data Services serves as the sub-transfer agent for the Fund. For the year
ended December 31, 1998, the Fund paid NEFSCO $333,340 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $2,583 in transfer agent credits. The transfer agent expense in the
Statement of Operations is net of these credits.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares
(the "Class A Plan") and Service and Distribution Plans relating to the Fund's
Class B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the year
ended December 31, 1998, the Fund paid New England Funds $132,793 in fees
under the Class A Plan.
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C
shares and/or the maintenance of shareholder accounts. For the year ended
December 31, 1998 the Fund paid New England Funds $142,300 and $35,512 in
service fees under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plan, the Fund pays New England Funds
monthly distribution fees at the annual rate of 0.75% of the average daily net
assets attributable to the Fund's Class B and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in connection with the marketing or sale of Class B and Class C shares.
For the year ended December 31, 1998, the Fund paid New England Funds $426,900
and $106,535 in distribution fees under the Class B and Class C plans,
respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the year ended
December 31, 1998 amounted to $684,044.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, New England Funds, NEFSCO, Nvest or their affiliates, other than
registered investment companies. Each other trustee is compensated by the Fund
as follows:
Annual Retainer $632
Meeting Fee 152/meeting
Annual Committee Meeting Retainer 95
Annual Committee Chairman Retainer 63
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have been, had it been invested in the
Fund on the normal payment date.
4. CAPITAL SHARES. At December 31, 1998 there was an unlimited number of
shares of beneficial interest authorized, divided into three classes, Class A,
Class B and Class C capital stock. Transactions in capital shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------- ------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Shares sold ......................... 7,382,397 $102,447,455 10,007,052 $ 145,480,024
Shares issued in connection with
the reinvestment of:
Distributions from net realized
gain .............................. 99,843 1,454,709 5,652 69,350
---------- ------------ ---------- -------------
7,482,240 103,902,164 10,012,704 145,549,374
Shares repurchased .................. (4,094,809) (58,848,512) (9,814,676) (142,857,804)
---------- ------------ ---------- -------------
Net increase ........................ 3,387,431 $ 45,053,652 198,028 $ 2,691,570
---------- ------------ ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------- ------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Shares sold ......................... 3,659,528 $ 49,771,350 1,448,884 $ 21,668,586
Shares issued in connection with
the reinvestment of:
Distributions from net realized
gain .............................. 98,691 1,428,060 6,043 73,183
---------- ------------ ---------- -------------
3,758,219 51,199,410 1,454,927 21,741,769
Shares repurchased .................. (310,396) (4,301,792) (923,148) (13,235,193)
---------- ------------ ---------- -------------
Net increase ........................ 3,447,823 $ 46,897,618 531,779 $ 8,506,576
---------- ------------ ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------- ------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Shares sold ......................... 1,397,972 $ 19,301,406 415,402 $ 6,261,996
Shares issued in connection with
the reinvestment of:
Distributions from net realized
gain .............................. 25,323 366,428 1,496 18,135
---------- ------------ ---------- -------------
1,423,295 19,667,834 416,898 6,280,131
Shares repurchased .................. (507,874) (7,296,113) (333,755) (4,883,823)
---------- ------------ ---------- -------------
Net increase ........................ 915,421 $ 12,371,721 83,143 $ 1,396,308
---------- ------------ ---------- -------------
Increase derived from capital shares
transactions ...................... 7,750,675 $104,322,991 812,950 $ 12,594,454
========== ============ ========== =============
</TABLE>
5. LINE OF CREDIT. The Fund along with the other portfolios that comprise
the New England Funds (the "Funds") participate in a $100,000,000 committed
line of credit provided by Citibank, N.A. under a credit agreement (the
"Agreement") dated March 5, 1998. Advances under the Agreement are taken
primarly for temporary or emergency purposes. Borrowings under the Agreement
bear interest at a rate tied to one of several short-term rates that may be
selected from time to time. In addition, the Funds are charged a facility fee
equal to 0.07% per annum on the unused portion of the line of credit. The
annual cost of maintaining the line of credit and the facility fee is
apportioned pro rata among the participating Funds. There were no borrowings
as of or during the period ended December 31, 1998.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of New England Funds Trust I and the Shareholders of
NEW ENGLAND STAR SMALL CAP FUND
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio composition, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of the New England Star Small
Cap Fund (the "Fund"), a series of New England Funds Trust I, at December 31,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 1999
<PAGE>
SUPPLEMENT DATED FEBRUARY 12, 1999 TO NEW ENGLAND STAR FUNDS PROSPECTUS DATED
MAY 1, 1998 AND NEW ENGLAND STOCK FUNDS CLASS Y PROSPECTUS DATED MAY 1, 1998
NEW ENGLAND STAR SMALL CAP FUND
CHANGE IN PORTFOLIO MANAGER
The following supplements the paragraph entitled "Montgomery" in the "Fund
Management" section of each prospectus:
Effective March 1, 1999, Kathryn Peters replaces Andrew Pratt as the
portfolio manager of the Montgomery segment of the Fund. Ms. Peters, Vice
President of Montgomery, joined the firm in 1995. Prior to 1995 she was an
associate in the investment banking division of Donaldson, Lufkin & Jenrette
in New York.
CHANGE IN CONTROL
Effective February 12, 1999, the following supplements the paragraph entitled
"Robertson Stephens" in the "Fund Management" section of each Prospectus:
Members of senior management of Robertson Stephens have agreed to purchase
Robertson Stephens Investment Management Co. Inc., Robertson Stephens's
parent company, from BankAmerica Corporation, in a transaction expected to
be completed in March 1999. Robertson Stephens will continue to serve as a
subadviser to the Star Small Cap Fund following the transaction, and it is
expected that John L. Wallace and John Seabern will continue to serve as co-
managers of Robertson Stephens segment of the Fund. The trustees of the New
England Funds Trust I approved the continuation of the Star Small Cap Fund's
current arrangements with Robertson Stephens following the consummation of
the transaction.
NEW ENGLAND STAR ADVISERS FUND
CHANGE IN PORTFOLIO MANAGERS
The following supplements the paragraph entitled "Founders" in the "Fund
Management" section of each Prospectus:
Effective January 1999, the Founders segment of the Star Advisers Fund is
managed by Scott A. Chapman and Thomas M. Arrington. Mr. Chapman and Mr.
Arrington have been Vice Presidents of Investments at Founders since
December 1998. Prior to joining Founders, Mr. Chapman was Vice President and
Director of Growth Strategy and Mr. Arrington served as Vice President and
Director of Income Equity Strategy at HighMark Capital Management.
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- -------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
PRICE/EARNINGS RATIO - Current market price of a stock divided by its earnings
per share. Also known as the "multiple," the price/earnings ratio gives
investors an idea of how much they are paying for a company's earning power and
is a useful tool for evaluating the costs of different issues.
GROWTH INVESTING - An investment style that emphasizes companies with strong
earnings growth. Growth investing is generally considered more aggressive than
"value" investing.
VALUE INVESTING - A relatively conservative investment approach that focuses on
companies that may be temporarily out of favor or whose earnings or assets
aren't fully reflected in their stock prices. Value stocks will tend to have a
lower price/earnings ratio than that of growth stocks.
STANDARD & POOR'S 500 - Market value-weighted index showing the change in
aggregate market value of 500 stocks relative to the base period of 1941-1943.
It is composed mostly of companies listed on the New York Stock Exchange.
<PAGE>
- --------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. while it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins investing at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of Investor B's commitment -- and
for less than half the time. Yet Investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<PAGE>
NEW ENGLAND FUNDS
LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth Opportunities Fund
Balanced Fund
Value Fund
ALL-CAP EQUITY FUNDS
Star Advisers Fund
Star Worldwide Fund
International Equity Fund
Bullseye Fund
Equity Income Fund
SMALL-CAP EQUITY FUNDS
Star Small Cap Fund
CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund
GOVERNMENT INCOME FUNDS
Limited Term U.S. Government Fund
Government Securities Fund
TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free Fund of California
Tax Free Income Fund of New York
(formerly Intermediate Term Tax Free Fund of NY)
Massachusetts Tax Free Income Fund
MONEY MARKET FUNDS
Cash Management Trust
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
Visit our World Wide Web site at www.mutualfunds.com
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective investors when it
is preceded or accompanied by the Fund's current prospectus, which contains
information about distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
New England Funds, L.P., and other firms selling shares of New England Funds are
members of the National Association of Securities Dealers, Inc. (NASD).
As a service to investors, the NASD has asked that we inform you of
the availability of a brochure on its Public Disclosure Program.
The program provides access to information about securities firms and their
representatives. Investors may obtain a copy by contacting the NASD
at 800-289-9999 or by visiting their Web site at www.NASDR.com.
<PAGE>
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