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ANNUAL REPORT
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[Logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England Star Worldwide 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 WORLDWIDE 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 below 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 and does not have expenses that affect the results.
It is not possible to invest directly in an index. In addition, few investors
could purchase all of the securities necessary to match the index and would
incur transaction costs and other expenses even if they could.
In the past, the MSCI EAFE served as the primary benchmark for the New England
Star Worldwide Fund. Going forward, the MSCI World Index will serve as the
primary benchmark for the Fund and as an additional point of reference, the MSCI
EAFE Index will serve as the secondary benchmark. While no one benchmark is a
perfect match for a managed fund, the World Index contains a higher proportion
of the markets that could be represented in the Fund than does the EAFE Index,
including U.S. and major foreign markets. However, the Fund can invest in
emerging markets, which are not represented in the World Index but are
represented in the EAFE Index.
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 Class A Shares compared to Morgan Stanley Capital
International World Index(4) and to Morgan Stanley EAFE Index(5).]
DECEMBER 1995 (INCEPTION) THROUGH DECEMBER 1998
NAV(1) MSC(2) MSCI World(4) EAFE(5)
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12/29/95 $10,000 $9,425 $10,000 $10,000
6/96 $11,176 $10,533 $10,733 $10,467
12/96 $11,667 $10,996 $11,400 $10,637
6/97 $13,628 $12,844 $13,180 $11,845
12/97 $13,147 $12,391 $13,249 $10,855
6/98 $14,056 $13,248 $15,481 $12,600
12/98 $13,674 $12,888 $16,534 $13,061
This Illustration represents 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 WORLDWIDE FUND
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AVERAGE ANNUAL TOTAL RETURNS -- 12/31/98
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CLASS A (12/29/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 4.0% 11.0%
With Max. Sales Charge(2) -2.0 8.8
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CLASS B (Inception 12/29/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 3.3% 10.2%
With CDSC(3) -1.7 9.3
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CLASS C (Inception 12/29/95) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 3.3% 10.2%
With CDSC(3) 2.3 10.2
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COMPARATIVE PERFORMANCE 1 YEAR SINCE FUND'S INCEPTION
MSCI World Index(4) 24.8% 18.2%
MSCI EAFE Index(5) 20.3 9.3
Lipper Global Average(6) 14.5 14.7
Morningstar World Stock Average(7) 11.6 12.8
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Returns represent past performance. Investment return and principal value will
fluctuate so that shares, upon redemption, may be worth more or less than their
original cost. All Index and Fund performance assumes reinvestment of
distributions.
NOTES TO CHARTS
(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 that a maximum 5% sales charge is applied to redemptions. 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)Morgan Stanley Capital International (MSCI) World Index is a market
cap-weighted index comprised of the performance of 1,481 (as of 12/31/98)
companies representing stock markets in 23 developed markets including the
U.S., Canada, Australia, New Zealand and those in Europe and the Far East.
The unmanaged Index is not available for direct investment and its
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)Morgan Stanley Capital International (MSCI) Europe Australasia Far East Index
(EAFE) is an arithmetical average (weighted by market value) of the
performance (in U.S. dollars) of 1,032 companies (as of 12/31/98)
representing stock markets in Europe, Australia, New Zealand and the Far
East. The unmanaged 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.
(6)Lipper Global 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.
(7)Morningstar World Stock 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 WORLDWIDE FUND
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OVERVIEW: HOW YOUR FUND PERFORMED
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Calendar year 1998 was a turbulent time for global investors, as economic
troubles in emerging markets cast a long shadow over world stock markets. Asia's
persistent financial problems, the devaluation of the Russian currency and
unstable Latin American economies created an uncertainty that permeated
financial markets worldwide. While many markets ended the year with positive
returns, they did so only after experiencing significant short-term setbacks.
New England Star Worldwide Fund is composed of five different segments managed
by leading investment management companies. This multiple-adviser approach is
the foundation of the Star concept and provides a means to diversify not just
among individual securities, but among investment styles and strategies.
For the 12-month period that ended December 31, 1998, New England Star Worldwide
Fund's Class A shares produced a total return based on net asset value of 4.0%,
reflecting a $0.62 per share gain to $16.08. The Fund's primary benchmark, the
MSCI World Index, gained 24.8% during 1998. The MSCI EAFE Index, which serves as
a secondary benchmark, gained 20.3% for the same period. During 1998, the
interdependence of global markets was clearly evident. Economic troubles in one
area of the world had a profound effect on markets in other regions of the
world. One factor that held back performance was the requirement during the
first half of the year that the Montgomery-managed portfolio invest exclusively
in emerging markets. As you know, emerging market investments suffered the
greatest volatility during the year. This requirement was relaxed in August,
freeing the Montgomery portfolio to invest outside the emerging markets.
In the United States, stocks got off to a strong start. Solid economic growth
along with relatively low interest rates and inflation provided a positive
backdrop for the equity markets, and by midyear stocks had produced double-digit
gains. In the third quarter, however, Russia devalued its currency, Long-Term
Capital Management -- a hedge fund that uses borrowed money to speculate in
different types of securities -- nearly collapsed and concerns rose about
declining profits of U.S. multinational companies. These events caused investor
unrest and triggered a stock market sell-off. Stocks were affected universally
and, in a relatively short period of time, most stocks gave back their 1998
gains. By the time the heaviest selling subsided the U.S. stock market had
declined nearly 20%. Fortunately, the market correction was relatively
short-lived. In the fall, the Federal Reserve Board eased monetary policy and
lowered interest rates three times. The Fed's action boosted confidence in the
U.S. economy and in equity securities, and bringing investors back to the
market. By the end of the year, the U.S. stock market recaptured its earlier
gains and for the fourth consecutive year produced double-digit returns.
The story in Europe was much the same. Buoyed by economic expansion, a wave of
corporate restructuring, declining interest rates and the prospects of economic
and monetary union, returns in most European stock markets exceeded those of
U.S. markets during the first half of the year. As troubles in Asia, Russia and
Latin America intensified, however, Europeans followed the lead of U.S.
investors and sold stocks. In the developed European markets, stock market
downturns were relatively steep and swift. Market advances began to occur when
European central banks lowered interest rates, and the International Monetary
Fund (IMF) and individual governments took steps to heal ailing emerging market
economies. Most European markets responded to these initiatives and ended the
year with relatively strong gains.
In the emerging markets of Asia and Latin America, most stock markets continued
to struggle. The first nine months of the year were particularly volatile for
Asian markets. Despite government initiatives and IMF bailouts, several Asian
countries devalued their currencies, and stock prices declined significantly. As
1998 drew to a close, however, a measure of stability returned to some Asian
economies. Stock prices had reached very low levels in Asian markets generally,
and investors purchased shares of high quality companies at what they believed
were bargain prices. Some Far Eastern stock markets -- most notably South Korea,
Thailand and the Philippines -- ended 1998 with positive returns.
Japan was Asia's wild card. Despite a new government, a large-scale plan to
repair the troubled banking sector and new policies designed to jump start the
economy, Japan remained in a prolonged recession. Over the year, interest rates
tripled and unemployment inched up. While Japan's stock market closed out the
year with negative returns measured in local currency, many experts are hopeful
that a new focus on stimulating the economy with additional spending and tax
cuts will put Japan on the road to recovery in 1999.
In Latin America most stock markets declined early in the year and remained at
relatively low levels throughout 1998. Although individual Latin American
countries grappled with problems that were unique to their specific economic and
financial situations; however, many of the region's difficulties were rooted in
Asia. Weak Asian demand for Latin American commodities -- oil, steel, paper,
copper -- had a negative effect on corporate profits. With lower revenues from
exports, the balance of trade worsened in many countries creating concerns about
economic stability. In this environment of unrest, investors around the world
avoided Latin American stocks. As the large inflows of foreign money that had
historically boosted Latin American stock markets diminished, stock prices
continued to fall. Most of the region's major markets closed the year with 20%
to 50% declines.
Although the five segments of the Fund are managed autonomously, the chart below
gives you a general profile of the Fund's portfolio as a whole. In the next
several pages, New England Star Worldwide Fund's portfolio managers discuss how
they managed their segments during the past year.
YOUR FUND'S 10 LARGEST INVESTMENTS -- 12/31/98
% OF
TOP 10 HOLDINGS NET ASSETS
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1. CISCO SYSTEMS 1.9
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2. PHILIP MORRIS COS. 1.8
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3. MANNESMANN AG 1.6
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4. FIRST DATA CORP. 1.6
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5. MCI WORLDCOM, INC. 1.5
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6. BLACK & DECKER CORP. 1.5
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7. NTT MOBILE COMMUNICATION NETWORK, INC. 1.5
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8. ELAN CORP. PLC (ADR) 1.3
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9. H&R BLOCK, INC. 1.2
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10. BANC ONE CORP. 1.2
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COUNTRY DIVERSIFICATION -- 12/31/98
% OF
TOP 10 COUNTRIES NET ASSETS
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1. UNITED STATES 41.1
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2. UNITED KINGDOM 10.9
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3. JAPAN 7.1
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4. FRANCE 5.5
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5. GERMANY 5.3
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6. NETHERLANDS 4.7
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7. SWITZERLAND 3.3
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8. FINLAND 3.2
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9. ITALY 3.2
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10. SPAIN 1.9
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Portfolio holdings and asset allocations will vary.
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NEW ENGLAND STAR WORLDWIDE FUND
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FOUNDERS ASSET MANAGEMENT LLC -- MICHAEL GERDING
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Stock markets around the world experienced dramatic swings in the second half of
1998, as economic troubles in Asia, Japan, Latin America and Russia continued. A
worldwide drop in stocks affected nearly all markets, regardless of the
soundness of their fundamentals. European markets, which had been strong
performers for the first half of 1998, were particularly hard-hit by the global
sell-off in stocks and did not recover fully by year-end.
We continue to believe that economic fundamentals in Europe are solid and have
emphasized investment in Europe in the segment. Even though European economies
are grappling with relatively high unemployment, we believe they have the
potential to grow faster than the U.S. economy. We continue to uncover
attractive European companies. A positive outcome of recent market volatility in
the region is that stocks of many high quality European companies with strong
economic fundamentals and earnings are more reasonably valued. For the year,
most European stock markets outperformed the U.S. market.
At year-end, about 24.6% of the segment was invested in U.S. companies. Our main
objection to U.S. stocks over the past year and a half was that their prices
were too high, especially in comparison to European companies. Recent market
volatility, however, lowered prices on U.S. stocks. As a result, more
top-quality U.S. companies fit our investment criteria for strong earnings
growth potential at reasonable stock valuation. Toward the end of the period,
for the first time in a long while, our weighting in U.S. stocks increased.
LARGEST HOLDINGS IN FOUNDERS SEGMENT
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% OF % OF
SEGMENT ASSETS FUND ASSETS
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1. ELAN CORP. PLC (ADR) 4.2 0.9
2. MCI WORLDCOM, INC. 3.7 0.8
3. BRISA-AUTO ESTRADAS DE PORTUGAL, S.A. 2.8 0.6
4. NTT MOBILE COMMUNICATION NETWORK, INC. 2.7 0.6
5. MARSCHOLLEK LAUTEN, PREFERRED 2.7 0.6
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We believe the Japanese economy continues to be in a depression. While the
Japanese Central Bank discussed significant reforms, there is no indication that
the new Japanese government is taking the necessary steps to ease the economic
problems in the country. One saving grace is that Japan's economic crisis
evolved slowly, and the rest of the world had ample time to adjust to it.
Finally, while some Asian companies are beginning to institute economic reforms,
we believe the Asian road to recovery will be measured in years, not weeks or
months. We think there is a strong possibility that 1999 will be no better than
1998 for many countries in Asia, and therefore expect few companies to show
growing revenues and earnings. We remain very selective in Asia and as a result,
our segment is underweighted in the region.
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NEW ENGLAND STAR WORLDWIDE FUND
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OAKMARK/HARRIS ASSOCIATES L.P. (INTERNATIONAL SEGMENT) --
DAVID G. HERRO AND MICHAEL J. WELSH
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We continued to manage our segment of the Fund using a bottom-up, value approach
and avoiding top-down macroeconomic allocations. The geographic allocation is
the result of individual stock selection. The more high quality companies we
found that met our investment criteria in a specific country, the more assets we
invested in that country.
The biggest change in the segment during the final six months of 1998 came from
appreciation or new money allocation in Asia. At the end of 1998, Asian stocks
accounted for more than 40% of the segment's assets, up from 31% at the end of
June. For the first time, the percentage of Asian stocks in the segment exceeded
the allocation to European investments. Selected Asian companies were attractive
because of their potential for price appreciation, and Asian companies were some
of the segment's strongest performers.
In Asia, market and currency appreciation boosted assets in individual
countries. South Korean assets rose from 2% to 6% of the segment. Two large
positions, Keumkang, a dominant glass and building products provider, and
Taeyoung, a construction conglomerate, both rose more than 150% in U.S. dollar
terms. Singapore became a more meaningful part of the segment, growing from 3%
to 6% of assets through appreciation and additional investment. Singapore Press
Holdings and United Overseas Bank rose roughly 50% and 90%, respectively. As a
percentage of assets, Japanese investments also increased from 11% to 15%,
mainly because of price appreciation and a strong rise in the value of the yen.
New Zealand accounted for 6% of assets. One of the segment's largest holdings,
Fernz, a New Zealand chemical company, was a strong contributor to performance.
LARGEST HOLDINGS IN OAKMARK/HARRIS
(INTERNATIONAL SEGMENT)
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% OF % OF
SEGMENT ASSETS FUND ASSETS
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1. TOMKINS PLC 5.3 0.9
2. SAATCHI & SAATCHI PLC 5.0 0.8
3. QUILMES INDUSTRIAL S.A., PREFERRED (ADR) 4.8 0.8
4. CORDIANT COMMUNICATIONS GROUP PLC 4.6 0.8
5. ENIX CORP. 4.2 0.7
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The European position of the segment declined to 37% from 46% of the segment's
assets. We sold Volvo, our only Swedish stock, after it reached our price
target. The United Kingdom (UK) allocation declined from 25% to 20% of assets.
We sold Sedgwick, plc., a significant contributor to performance. Sedgwick rose
over 70% when Marsh & McLennen made a successful bid to acquire the company. The
rest of the UK portion declined in price. European stocks that held back
performance were Chargeurs in France, European Vinyls Corp. in the Netherlands
and Fila in Italy. Share prices of each declined between 40% and 50%.
At the end of the fiscal year, Latin American investments accounted for 12% of
the segment. Brazilian stocks, which composed 8% of assets, suffered from
turbulence in emerging markets generally and specific political worries in
Brazil. Latin American stocks had some of the biggest price declines. For
example, Unibanco and Banco Latinamericano de Exportaciones declined more than
40%.
We continue to be optimistic about the value that exists in international
markets. Historically, value and price have converged, and we believe it will
happen again.
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OAKMARK/HARRIS ASSOCIATES L.P. (DOMESTIC SEGMENT) -- ROBERT J. SANBORN
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During calendar year 1998, long-term value investors faced a difficult and
unusual investment environment. Mega-cap stocks and growth stocks performed very
well. However, smaller company stocks and value stocks were relatively poor
performers. While the Standard & Poor's Composite of 500 Stocks appreciated more
than 28%, other indices lagged.
In hindsight, the place to invest in 1998 was clearly large-cap, growth stocks.
However, we found such stocks to be overpriced. In our view, over the course of
the year these stocks went from being substantially overpriced to being
extremely overpriced.
We follow a rigorous investment discipline that refrains from paying more than
60 cents for every $1 of value we see in a stock. We do not try to anticipate
the psychology of the market nor do we buy "hot" stocks in the hope that they
will continue to rise in value. No matter what the environment, we adhere to our
value strategy.
LARGEST HOLDINGS IN OAKMARK/HARRIS (DOMESTIC SEGMENT)
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% OF % OF
SEGMENT ASSETS FUND ASSETS
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1. PHILIP MORRIS COS. 7.8 1.8
2. FIRST DATA CORP. 6.7 1.6
3. BLACK & DECKER CORP. 6.5 1.5
4. H & R BLOCK, INC. 5.4 1.2
5. BANC ONE CORP. 5.3 1.2
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Our analysis of the market environment at the end of 1998 indicated that
investors were willing to assume large amounts of stock price risk but not
willing to take on much business or fundamental risk. In other words, investors
seemed to be overpaying for growth. As a result, when a company had any negative
news, it was quickly sold by investors, even if the company's economic
fundamentals remained intact. Because investors observed this trend, they
avoided stocks with any fundamental controversies. We have several holdings that
reported various business problems in 1998. These include Mattel, Lockheed
Martin, Boeing, and Nike. We believe prices on these stocks have declined to a
point where future appreciation could be significant.
Several holdings made strong gains during the period. The segment's largest
position, Philip Morris rose more than 20% as many of the threats to the tobacco
industry's prosperity disappeared. We believe Philip Morris continues to be
undervalued. Black & Decker recovered from very depressed price levels and rose
almost 50%. We continue to hold Black & Decker in the portfolio and believe it
has more room to appreciate.
While we have been surprised at the continued strong performance of mega-cap and
growth stocks, we are not changing a strategy that has been successful over the
long term. The significant run-up in prices on big company growth stocks has
created favorable conditions for value stocks to perform well.
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MONTGOMERY ASSET MANAGEMENT, LLC --
OSCAR A. CASTRO AND JOHN D. BOICH
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In the third quarter of 1998, the Montgomery Asset Management segment of the
Fund broadened its investment policy. The segment shifted its focus from
investing solely in emerging markets to investing in global markets. In
diversifying investments beyond emerging markets, we have reduced some of the
risk that had been inherent in the segment. This broader investment strategy was
particularly beneficial to the Fund during the global market slide that occurred
in the second half of 1998. We believe the segment's strong fourth quarter
performance supports our decision to take a more diversified and global approach
to managing the segment.
In the third quarter of 1998, investors around the world faced difficult
problems. Questions about the severity of Asia's economic troubles, concerns
about Japan's ability to recover from recession, a near collapse of the Russian
economy and instability in Brazil cast a long shadow over the world's financial
markets. These uncertainties led to a period in which investors sold significant
amounts of stock, triggering steep corrections in most world markets.
By the fourth quarter, however, global economic concerns eased slightly as
governments, the International Monetary Fund (IMF) and central banks took steps
to alleviate these problems. As investors became more confident, they returned
to the markets and bid up stock prices. At the end of calendar year 1998, many
major stock markets had produced double-digit gains.
The segment's strategy has always been to remain fully invested, and this
approach benefited the segment during the period. We viewed market weakness in
the third quarter as an opportunity to invest in fundamentally strong companies
with good earnings prospects at low prices. The segment reaped the rewards of
this strategy when the market rebounded strongly in the fourth quarter.
Two sectors were particularly strong contributors to our performance: technology
and telecommunications services. While technology stocks lost ground in the
third quarter of 1998, they rebounded nicely in the fourth quarter. At year-end,
we began to reduce some of the technology holdings that we believed had become
overvalued. Telecommunication stocks were hit hard during the market correction.
However, strong underlying fundamentals catapulted these stocks into positive
territory when the market advanced in the fourth quarter. Investments that
performed well included Global Crossing, Swiss Com and Nokia.
LARGEST HOLDINGS IN MONTGOMERY SEGMENT
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% OF % OF
SEGMENT ASSETS FUND ASSETS
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1. GLOBAL TELESYSTEMS GROUP, INC. 3.4 0.4
2. SWISSCOM AG 3.1 0.4
3. MCI WORLDCOM, INC. 3.0 0.4
4. MANNESMANN AG 2.7 0.3
5. METRONET COMMUNICATIONS CORP., CLASS B 2.7 0.3
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There were some disappointments during the year. Even though the segment had
relatively little exposure to the Brazilian telecommunications sector, this area
held back performance, as investor sentiment turned negative. In the United
Kingdom (UK), exposure to merchandising companies detracted from overall
performance because of a severe downturn in the UK retail sector.
Looking ahead, we are cautiously optimistic about the prospects. We recognize
that there is still a degree of uncertainty in the global economy that may
complicate the investment picture. While the outlook remains uncertain, we are
hoping for sustained recovery in Japan and Asia and a mild deceleration of
growth in Europe.
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JANUS CAPITAL CORPORATION -- HELEN YOUNG HAYES AND LAURENCE CHANG
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While the segment's strong performance came from a number of different areas,
many U.S. investments were the biggest contributors to performance. Three large
holdings -- Cisco Systems, Time Warner and Microsoft -- had a particularly
memorable year, and we continue to be optimistic about their prospects. All
three play an integral part in our vision of the future. For example, Cisco is
the pre-eminent hardware supplier to the Internet. Moreover, the world of
telecommunications is currently changing from using inefficient dedicated voice
circuits to using circuits that rely on Cisco's voice/data network. Cisco has
not yet achieved significant penetration into the voice market, but we believe
it will in the future. In the cable industry, Time Warner is completing an
infrastructure upgrade that will enable it to expand its range of services --
including Internet access. In our vision of the information superhighway, Time
Warner's cable will serve as the highway, and Cisco's routers and other
networking products will serve as the road signs and traffic lights. We believe
Microsoft could be one of the leading sources of information and will eventually
emerge as one of the dominant providers of content on the Internet.
Stellar performance was not restricted to the United States. We held several
European telecommunications companies whose performance was notable, including
Nokia, the Finish cellular phone company. Nokia had an excellent year, one in
which it surpassed Ericsson as the global digital handset leader. While this is
impressive, we are equally excited about Nokia's growing cellular infrastructure
business. The company has continued to make strong inroads to both mature and
developing markets. Even along the Pacific Rim, where local economies have
slowed, Nokia's business is growing. Another company that bolstered performance
was Colt Telecom in the United Kingdom. Colt is an alternative telephone service
provider that has exploited the deregulatory environment. It has undercut the
pricing of some of the larger providers. Because Colt is more efficient than its
rivals, it has boosted corporate business, the most profitable in the customer
pricing spectrum.
Not all of our telecommunications companies performed well. For example,
Alcatel, a French company, is upgrading its network and undergoing corporate
restructuring, and many of its changes have not been assimilated as quickly as
investors had hoped. As a result, many investors sold their Alcatel holdings,
and the company's stock price declined dramatically. Electrolux, which is based
in Sweden, is another restructuring story. Investors have not embraced the
company's efforts despite better-than-expected earnings. In the Netherlands,
Philips Electronics was also disappointing, as its restructuring changes were
not realized as quickly as expected. Several financial holdings, such as Swiss
bank UBS, performed poorly after they suffered severe losses from loans made to
hedge funds with highly leveraged Russian exposure.
In the fourth quarter of 1998, central banks around the world lowered interest
rates. There were more than 30 interest rate cuts by central banks within a
two-week period. We believe this trend will continue as global growth slows. We
do not believe we are entering a recessionary environment, simply a slower
growth environment. As a result, we will restrict our investments to companies
with pricing power in dynamic growing industries. We believe companies with
these qualities can thrive in a slower growth environment.
LARGEST HOLDINGS IN JANUS SEGMENT
- -------------------------------------------------------------------------------
% OF % OF
SEGMENT ASSETS FUND ASSETS
- -------------------------------------------------------------------------------
1. CISCO SYSTEMS 5.6 1.6
2. MICROSOFT CORP. 4.0 1.1
3. TYCO INTERNATIONAL, LTD. 3.9 1.1
4. MANNESMANN AG 3.2 0.9
5. NOKIA CORP. AB 2.9 0.8
- -------------------------------------------------------------------------------
The opinions expressed are those of the portfolio managers and advisers and are
subject to change. The occurrence of forecasted events and predictions is not
certain and cannot be assured. The Fund is actively managed and holdings are
subject to change.
The Fund invests in foreign and emerging market securities which involves
special risks. Foreign and emerging market securities may be affected by
currency fluctuations, high volatility and limited liability. Political,
economic and information risks are also associated with foreign securities.
Investments in small-cap companies involves greater risk than is customarily
associated with more established companies. The Fund invests in high yielding,
lower rated bonds which may involve greater credit risk. The Fund invests in
REITS, which are subject to changes in underlying real estate values, rising
interest rates, limited diversification of holdings, higher costs and prepayment
risk associated with related mortgages. This Fund invests in derivative
securities for hedging purposes. See the Fund's prospectus for more complete
information.
<PAGE>
- ------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------
Investments as of December 31, 1998
ARGENTINA--1.3%
208,000 Quilmes Industrial S.A., preferred (c) (ADR) ........ $ 1,937,000
3,865 Telecom Argentina S.A. (ADR) ........................ 106,288
6,530 Telefonica de Argentina S.A. (ADR) .................. 182,432
35,400 YPF Sociedad Anonima (ADR) .......................... 988,987
------------
3,214,707
------------
AUSTRIA--0.3%
6,500 Austria Tabak ....................................... 498,401
2,539 Bank Austria AG ..................................... 129,110
------------
627,511
------------
BRAZIL--1.6%
16,900,000 Embratel Participacoes S.A. (c) ..................... 146,859
400 Petroleo Brasileiro, Preferred ...................... 45
26,900,000 Tele Centro Sul Participacoes S.A. (c) 178,102
51,900,000 Tele Sudeste Celular Participacoes S.A. (c) 146,040
4,655 Telecomunicacoes Brasileiras (ADR) .................. 338,360
5,305,000 Telecomunicacoes de Minas Gerais --
Telemig, Preferred B .............................. 154,984
750,432 Telecomunicacoes do Sao Paulo S.A. --
TELESP, Preferred ................................. 102,289
68,700,000 Telemig Celular Participacoes S.A. (c) 48,328
5,305,000 Telemig Celular S.A., Preferred (c) ................. 104,054
51,900,000 Telesp Celular Participacoes S.A. (c) 223,355
3,516,747 Telesp Celular S.A., Preferred (c) .................. 154,547
22,900,000 Telesp Participacoes S.A. (c) ....................... 293,760
67,400 Uniao de Bancos Brasileiros S.A. (GDR) (c) .......... 973,088
12,400,000 Unibanco -- Uniao de Bancos Brasileiros S.A. (c) .... 431,019
289,800 USIMINAS, Preferred (c) 640,376
------------
3,935,206
------------
CANADA--0.2%
15,215 Newcourt Credit Group, Inc. ......................... 531,574
------------
DENMARK--0.0%
505 Kapital Holding ..................................... 24,995
1,672 SAS Danmark AS ...................................... 18,915
------------
43,910
------------
FINLAND--3.2%
160,000 Merita, Ltd. ........................................ 1,010,394
12,980 Nokia Corp. (ADR) ................................... 1,563,279
22,414 Nokia Corp. AB ...................................... 2,725,374
60,000 Outokumpu OYJ ....................................... 550,696
75,400 Sponda Oyj (c) ...................................... 439,180
60,000 The Rauma Group ..................................... 870,759
16,954 Tieto Corp. Oyj ..................................... 754,767
------------
7,914,449
------------
FRANCE--5.5%
183 Alcatel ............................................. 22,388
1,732 Atos S.A. ........................................... 413,871
5,000 Business Objects (ADR) (c) .......................... 162,500
13,868 Capital Gemini S.A. ................................. 2,224,932
27,245 Chargeurs S.A. ...................................... 1,505,760
3,800 Europe One Communication ............................ 886,961
6,679 Groupe Danone ....................................... 1,911,358
10,250 Groupe Legris Industries S.A. ....................... 502,142
7,200 ISIS (c) ............................................ 513,826
6,054 Lagardere Groupe .................................... 257,168
2,692 Lyonnaise des Eaux S.A. ............................. 552,748
5,000 Pernod Ricard ....................................... 324,629
16,694 Renault S.A. ........................................ 749,453
12,101 Rhone Poulenc ....................................... 622,473
2,153 Sanofi SA ........................................... 354,277
7,735 Valeo ............................................... 609,282
7,638 Vivendi ............................................. 1,980,880
------------
13,594,648
------------
GERMANY--5.3%
6,898 Bayerisch Hypo-Und Vereinsbank AG ................... 540,135
9,000 Continental AG ...................................... 248,410
4,165 DaimlerChrysler AG (c) .............................. 411,102
10,378 Depfa Bank .......................................... 909,149
35,625 Deutsche Lufthansa AG ............................... 786,631
13,475 Dresdner Bank AG .................................... 565,973
6,921 Hoechst AG .......................................... 286,956
6,200 Hornbach Holdings AG, Preferred ..................... 368,295
34,182 Mannesmann AG ....................................... 3,917,414
2,435 Marschollek Lauten, Preferred ....................... 1,388,006
3,449 Merck KGaA .......................................... 155,211
1,170 Muenchener Rueckversicherungs AG .................... 566,537
22 Muenchener Rueckversicherungs, Warrant .............. 1,023
168 Porsche AG, Preferred ............................... 383,055
13,800 Prosieben Media AG, Preferred ....................... 637,585
760 SAP-Vorzug AG, Preferred ............................ 362,626
10,250 Schwarz Pharma AG ................................... 590,485
1,739 Veba ................................................ 104,031
15,500 Volkswagen AG, Preferred ............................ 771,931
------------
12,994,555
------------
GREECE--0.7%
23,183 Hellenic Telecommunication Organization
S.A.- OTE (GDR) ................................... 617,098
2,130 National Bank of Greece 479,455
24,558 Panafon S.A. ........................................ 658,086
------------
1,754,639
------------
HONG KONG--1.1%
6,500 China Telecom Hong Kong, Ltd. (ADR) (c) ............. 225,875
176,000 China Telecom, Ltd. (ADR)(c) ........................ 304,404
950,000 First Pacific Company, Ltd. ......................... 453,689
4,184,000 Giordano International, Ltd. ........................ 783,055
404,100 Hong Kong Aircraft Engineering Co., Ltd.............. 552,876
140,000 Varitronix International, Ltd. ...................... 262,017
------------
2,581,916
------------
INDIA--0.0%
350 EIH, Ltd (GDR) ...................................... 1,935
------------
IRELAND--1.5%
21,600 Bank of Ireland ..................................... 480,250
45,505 Elan Corp. plc (ADR) (c) 3,165,441
------------
3,645,691
------------
ISRAEL--0.1%
3,000 Teva Pharmaceutical Industries, Ltd. (ADR) .......... 122,064
------------
ITALY--3.2%
21,000 Arnoldo Mondadori Editore S.p.A. .................... 277,511
64,476 Banca Commerciale Italiana .......................... 444,541
722,046 Banca di Roma ....................................... 1,222,734
49,000 Credito Agrario Bresciano ........................... 622,335
131,400 Fila Holdings S.p.A. (ADR) .......................... 1,018,350
8,900 Industrie Natuzzi S.p.A. (ADR) ...................... 221,387
53,000 Telecom Italia Mobile S.p.A. ........................ 249,382
89,214 Telecom Italia Mobile S.p.A. ........................ 658,266
17,600 Telecom Italia S.p.A. ............................... 110,702
263,551 Telecom Italia S.p.A. ............................... 2,247,464
119,582 Unicredito Italiano S.p.A. (c) ...................... 708,401
------------
7,781,073
------------
JAPAN--7.1%
85,200 Amway Japan, Ltd. ................................... 972,207
64,000 Canon, Inc. ......................................... 1,367,183
207,000 Citizen Watch Co. ................................... 1,245,113
3,000 Doutor Coffee ....................................... 99,513
51,900 Enix Corp. .......................................... 1,694,038
23,100 Fujitsu ............................................. 307,523
9,000 Honda Motor Co. ..................................... 295,356
5,000 Ito-Yokado Co., Ltd. ................................ 349,403
53,000 Kao Corp. ........................................... 1,195,489
64,325 Kirin Brewery Co. ................................... 819,354
27,500 Konami Co., Ltd. .................................... 795,444
42,000 Nagase & Co. ........................................ 143,777
10 Nippon Telegraph & Telephone ........................ 77,134
110 NTT Data Corp ....................................... 545,865
88 NTT Mobile Communication Network, Inc. (c) .......... 3,619,637
500 Rohm Co. ............................................ 45,511
46,200 Sankyo Co., Ltd. .................................... 772,384
12,400 Sony Corp. .......................................... 902,716
29,000 Takeda Chemical ..................................... 1,115,878
15,200 Takefuji Corp. ...................................... 1,109,244
------------
17,472,769
------------
KOREA--0.9%
10,500 Dongah Tire Industry Co. (c) ........................ 419,825
28,040 Keumkang, Ltd. ...................................... 652,635
5,000 Lotte Chilsung
Beverage Co. ...................................... 220,283
669 SK Telecom Co., Ltd. ................................ 374,262
26,610 Tae Young Corp. ..................................... 630,411
------------
2,297,416
------------
MALAYSIA--0.0%
163,000 Technology Resources Industries BHD ................. 84,932
------------
MEXICO--0.1%
5,755 Coca Cola Femsa S.A. (ADR) .......................... 76,254
9,420 Grupo Televisa S.A. (ADR) ........................... 232,556
------------
308,810
------------
NETHERLANDS--4.7%
1,648 Aegon NV ............................................ 202,283
13,925 Benckiser NV,
Class B (c) ....................................... 911,681
2,300 Equant NV (c) ....................................... 159,984
46,150 European Vinyls Corporation International NV ........ 366,016
16,240 Getronics NV ........................................ 803,918
25,800 ING Groep NV ........................................ 1,572,417
12,271 Koninklijke Ahold NV ................................ 453,296
14,900 Koninklijke KPN NV .................................. 745,515
30,400 Oce NV .............................................. 1,092,245
16,500 Ordina Beheer NV (c) ................................ 440,012
9,191 Philips Electronics ................................. 616,419
6,856 Philips Electronics NV, New York shares ............. 464,065
19,000 TNT Post Group NV (c) 611,859
3,938 Unilever NV ......................................... 336,429
32,875 VNU NV .............................................. 1,238,915
7,563 Wolters Kluwer NV ................................... 1,617,509
------------
11,632,563
------------
NEW ZEALAND--0.9%
550,000 Fernz Corp., Ltd. ................................... 1,693,064
302,950 Sanford, Ltd. ....................................... 573,890
------------
2,266,954
------------
NORWAY--0.3%
104,000 Christiania Bank .................................... 361,334
12,957 Den Norske Bank ..................................... 44,847
27,900 Schibsted ASA ....................................... 352,491
------------
758,672
------------
PORTUGAL--1.0%
23,850 Brisa-Auto Estradas de Portugal, S.A. ............... 1,404,544
24,087 Telecom Portugal S.A. ............................... 1,104,879
------------
2,509,423
------------
SINGAPORE--0.9%
102,000 Singapore Press Holdings, Ltd. ...................... 1,112,053
188,000 United Overseas Bank -- Foreign Shares .............. 1,207,026
------------
2,319,079
------------
SOUTH AFRICA--0.0%
369 JCI Gold ............................................ 307
39 Randfontein Estates Gold Mining Co. ................. 86
------------
393
------------
SPAIN--1.9%
37,900 Argentaria S.A. -- Corp. Bancaria de Espana 980,034
8,910 Banco Bilbao Vizcaya S.A. ........................... $ 139,493
20,697 Banco Central Hispanoamericano S.A. ................. 245,387
12,800 Baron de Ley, S.A. (c) .............................. 418,351
18,800 Superdiplo S.A. (c) ................................. 528,469
16,304 Telefonica S.A. ..................................... 723,883
1,556 Telefonica S.A. (ADR) ............................... 210,576
16,304 Telefonica S.A., Rights 14,455
73,449 Telepizza ........................................... 697,693
45,000 Union Electrica Fenosa S.A. ......................... 777,336
------------
4,735,677
------------
SWEDEN--1.1%
23,309 Assa-Abloy AB, Series B 889,350
6,341 Ericsson LM Telephone Co. (ADR) (c) ................. 151,788
14,307 Ericsson Telefoniaktiebolag B Free .................. 339,855
2,125 Ortivus AB .......................................... 15,431
994 Pharmacia & Upjohn, Inc. ............................ 55,543
69,268 Securitas AB ........................................ 1,074,213
3,145 Volvo AB, Series B .................................. 71,998
3,190 WM Data AB, Series B 135,848
------------
2,734,026
------------
SWITZERLAND--3.3%
325 Adecco S.A. ......................................... 148,340
558 Baloise Holding, Ltd. (c) 578,838
195 Julius Baer Holdings ................................ 648,013
63 Kuoni Reisen Holdings, Series B ..................... 249,945
947 Novartis AG ......................................... 1,861,324
57 Roche Holdings AG (c) ............................... 695,436
95 Schweizerische Lebens-versicherungs--
und Rentenanstalt .................................. 70,539
6,936 Swisscom AG (c) ..................................... 2,903,254
1,112 UBS AG .............................................. 341,606
666 Zurich Allied AG .................................... 493,064
------------
7,990,359
------------
TAIWAN--0.1%
14,000 Taiwan Semiconductor Manufacturing Company, Ltd.
(ADR) (c) ......................................... 198,625
------------
TURKEY--0.1%
13,534,567 Yapi Ve Kredi Bankasi ............................... 156,618
------------
UNITED KINGDOM--10.9%
34,000 Allied Irish Banks plc (c) .......................... 604,419
85,068 Amvescap plc ........................................ 657,196
138,000 Avis Europe plc ..................................... 578,917
40,000 British Telecom ..................................... 602,426
109,146 Capita Group plc .................................... 1,007,320
153,717 Charter plc ......................................... 832,559
10,912 COLT Telecom Group (c) .............................. 159,537
151,655 Compass Group ....................................... 1,733,488
1,048,000 Cordiant Communications Group plc ................... 1,863,034
59,775 Dixons Group ........................................ 835,698
2,043 Electrocomponents plc ............................... 13,611
40,269 Energis plc (c) ..................................... 899,847
30,824 Glaxo Wellcome plc .................................. 1,058,535
40,000 Great University Stores ............................. 418,342
100,946 Hays plc ............................................ 863,718
5,049 JBA Holdings plc .................................... 15,519
229,275 Ladbroke Group plc .................................. 914,205
54,595 Lloyds TSB Group .................................... 773,709
99,348 Logica plc .......................................... 862,424
32,100 National Express Group (c) .......................... 595,175
61,343 Orange plc .......................................... 707,294
53,500 Pearson ............................................. 1,064,845
24,600 Railtrack Group ..................................... 642,485
184,760 Rentokil Initial plc ................................ 1,384,395
295,000 Rolls-Royce ......................................... 1,217,935
71,500 Royal & Sun Alliance Insurance Group plc ............ 577,916
888,000 Saatchi & Saatchi plc (c) ........................... 2,028,576
55,500 Sainsbury plc ....................................... 431,303
15,094 Sema Group plc ...................................... 148,081
30,340 Siebe plc ........................................... 118,961
455,967 Tomkins plc ......................................... 2,143,855
14,216 Vodafone Group plc .................................. 230,045
136,051 WPP Group plc ....................................... 822,771
------------
26,808,141
------------
UNITED STATES--38.3%
100,366 ACNielson Corp. ..................................... 2,835,339
17,460 AirTouch Communications,
Inc. (c) .......................................... 1,259,303
335 America Online ...................................... 53,600
59,052 Banc One Corp. ...................................... 3,015,343
88,700 Banco Latinoamericano de Exportaciones S.A.,
Class E (GDR) ..................................... 1,474,637
2,300 Biogen, Inc. (c) .................................... 190,900
66,300 Black & Decker Corp. ................................ 3,716,944
62,000 Brunswick Corp. ..................................... 1,534,500
2,500 Carnival Corp. ...................................... 120,000
16,000 CheckFree Holdings Corp. (c) ........................ 374,000
49,790 Cisco Systems (c) ................................... 4,621,134
10,000 Citigroup, Inc. ..................................... 495,000
8,100 Clear Channel Communications (c) .................... 441,450
86,000 Columbia/HCA Healthcare ............................. 2,128,500
20,490 Comcast ............................................. 1,202,507
8,261 DaimlerChrysler AG (c) .............................. 793,572
2,300 Dell Computer Corp. (c) ............................. 168,331
1,430 Delta and Pine Land ................................. 52,910
59,100 Dun & Bradstreet Corp. 1,865,344
985 EMC Corp. (c) ....................................... 83,725
13,200 Emerson Electric Co. ................................ 798,600
4,530 Equant NV (c) ....................................... 307,191
17,635 Estee Lauder Companies, Inc. ........................ 1,507,792
2,500 Federal Express Corp. ............................... 222,500
120,000 First Data Corp. .................................... 3,802,500
80,200 Fortune Brands, Inc. ................................ 2,536,325
29,495 Fox Entertainment Group, Inc. (c) ................... 741,062
8,100 Galileo International, Inc........................... 352,350
12,900 Global Crossing, Ltd. (c) ........................... 582,113
17,300 Global TeleSystems Group, Inc. (c) .................. 964,475
32,750 Guitar Center, Inc. (c) ............................. 806,469
68,000 H & R Block, Inc. ................................... 3,060,000
27,300 H.J. Heinz Co. ...................................... 1,545,862
18,000 HEALTHSOUTH Corp. (c) ............................... 277,875
1,500 Intel Corp. ......................................... 177,844
335 International Business Machines ..................... 61,891
6,280 Intuit, Inc. (c) .................................... 455,300
8,300 J.D. Edwards & Co. (c) .............................. 235,513
17,500 Jacor Communications (c) ............................ 1,126,563
20,800 Jones Apparel Group (c) ............................. 458,900
50,400 Knight-Ridder, Inc. ................................. 2,576,700
20,000 Lockheed Martin Corp. ............................... 1,695,000
1,510,000 Mandarin Oriental International, Ltd. ............... 951,300
27,975 Manpower, Inc. ...................................... 704,620
70,000 Mattel, Inc. ........................................ 1,596,875
52,290 MCI Worldcom, Inc. (c) .............................. 3,751,807
4,295 MediaOne Group, Inc. (c)............................. 201,865
18,000 Mellon Bank Corp. ................................... 1,237,500
37,775 MetroNet Communications Corp., Class B .............. 1,265,463
20,105 Microsoft Corp. (c) ................................. 2,788,312
6,235 Monsanto Co. ........................................ 296,163
49,600 Nabisco Holdings Corp. .............................. 2,058,400
65,000 NIKE, Inc., Class B ................................. 2,636,562
104,625 Old Republic International Co. ...................... 2,354,062
49,500 Parametric Technology Corp. (c) ..................... 804,375
23,175 PepsiCo, Inc. ....................................... 948,727
5,710 Pfizer, Inc. ........................................ 716,248
18,765 Pharmacia & Upjohn, Inc. ............................ 1,062,568
83,000 Philip Morris Cos. .................................. 4,440,500
44,000 Polaroid Corp. ...................................... 822,250
40,000 Quaker Oats Co. ..................................... 2,380,000
11,820 R. H. Donnelley Corp. ............................... 172,129
295 Solutia, Inc. ....................................... 6,601
3,480 Sun Microsystems, Inc. (c) .......................... 297,975
23,790 Tele-Communications-, Inc. (c) ...................... 1,315,884
72,000 The Boeing Co. ...................................... 2,349,000
34,470 Time Warner, Inc. ................................... 2,139,294
36,063 TYCO International, Ltd. ............................ 2,720,503
15,350 Warner-Lambert Co. .................................. 1,154,128
65,000 Washington Mutual, Inc. ............................. 2,482,187
------------
94,375,162
------------
Total Common Stock (Identified Cost $204,231,266) ... 235,393,497
------------
<PAGE>
FACE
AMOUNT DESCRIPTION VALUE(b)
- ------------------------------------------------------------------------------
$ 700,000 CIT Group Holdings, 5.300%, 1/04/1999 ............... $ 699,691
747,000 Repurchase Agreement with State Street Bank &
Trust Co. dated, 12/31/1998 at 4.00% to be
repurchased at $747,332 on 1/04/1999,
collateralized by $560,000 U.S. Treasury Bond
8.125% due 8/15/2019 with a value of $765,328 ..... 747,000
5,337,000 Repurchase Agreement with State Street Bank &
Trust Co. dated, 12/31/1998 at 4.50% to be
repurchased at $5,339,669 on 1/04/1999,
collateralized by $4,000,000 U.S. Treasury Bond
8.125% due 8/15/2019 with a value of $5,466,626 ... 5,337,000
------------
Total Short Term Investments
(Identified Cost $6,783,691) ...................... 6,783,691
------------
Total Investments -- 98.4%
(Identified Cost $211,014,957)(d) ................. 242,177,188
Other assets less liabilities ....................... 3,905,732
------------
Total Net Assets--100% .............................. $246,082,920
============
<TABLE>
<CAPTION>
LOCAL AGGREGATE UNREALIZED
DELIVERY CURRENCY FACE TOTAL APPRECIATION/
DATE AMOUNT VALUE VALUE (DEPRECIATION)
------------ ---------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Brazilian Real (sold) 4/28/99 2,992,500 $2,100,000 $2,284,836 $(184,836)
British Pounds (sold) 4/6/99 3,500,000 5,906,600 5,799,705 106,895
British Pounds (sold) 4/7/99 1,075,000 1,805,600 1,781,321 24,279
British Pounds (sold) 5/6/99 1,825,000 3,000,190 3,023,230 (23,040)
British Pounds (sold) 5/13/99 300,000 496,200 496,935 (735)
Deutsch Mark (sold) 1/22/99 1,000,000 601,388 600,660 728
Deutsch Mark (sold) 1/25/99 800,000 486,973 480,597 6,376
Deutsch Mark (sold) 1/26/99 400,000 235,700 240,310 (4,610)
Deutsch Mark (sold) 1/27/99 2,200,000 1,292,304 1,321,770 (29,466)
Japanese Yen (sold) 1/13/99 173,010,000 1,500,000 1,533,029 (33,029)
Japanese Yen (sold) 2/12/99 220,000,000 1,899,719 1,957,171 (57,452)
Japanese Yen (sold) 3/25/99 17,000,000 143,702 152,081 (8,379)
Japanese Yen (bought) 4/7/99 30,000,000 261,643 268,847 7,204
Japanese Yen (sold) 4/7/99 30,000,000 228,311 268,847 (40,536)
Japanese Yen (sold) 4/8/99 13,000,000 114,236 116,516 (2,280)
Japanese Yen (sold) 4/21/99 135,000,000 1,208,053 1,212,033 (3,980)
Japanese Yen (sold) 5/20/99 95,000,000 804,403 856,169 (51,766)
Japanese Yen (sold) 7/6/99 187,714,000 1,700,000 1,702,187 (2,187)
Netherlands Guilder (sold) 1/21/99 900,000 470,834 479,538 (8,704)
Netherlands Guilder (sold) 1/22/99 700,000 370,370 372,992 (2,622)
Netherlands Guilder (sold) 1/26/99 2,000,000 1,069,027 1,065,896 3,131
Netherlands Guilder (sold) 1/27/99 700,000 364,583 373,081 (8,498)
Swedish Krona (sold) 3/25/99 750,000 94,280 92,660 1,620
Swedish Krona (sold) 4/7/99 2,950,000 369,027 364,674 4,353
Swedish Krona (sold) 4/8/99 2,300,000 298,701 284,334 14,367
Swiss Franc (sold) 3/25/99 140,000 103,321 102,798 523
Swiss Franc (sold) 4/7/99 150,000 107,987 110,273 (2,286)
Swiss Franc (sold) 4/8/99 220,000 165,788 161,749 4,039
---------
$(290,891)
=========
</TABLE>
<PAGE>
TEN LARGEST INDUSTRY HOLDINGS AT DECEMBER 31, 1998 -- (UNAUDITED)
Banks 8.1% Conglomerates 5.6%
Business Services 7.6% Food & Beverages 5.2%
Communication Services 6.4% Miscellaneous 4.7%
Drugs & Health Care 6.3% Publishing 2.8%
Telecommunications 6.0% Consumer Goods & Services 2.6%
(a) Ordinary shares unless otherwise noted.
(b) See Note 1a of Notes to Financial Statements.
(c) Non-income producing security.
(d) Federal Tax Information: At December 31, 1998 the
net unrealized appreciation on investments based on cos
of $212,495,119 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. ....... $ 49,530,903
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value. ....... (19,848,834)
------------
Net unrealized appreciation ................................. $ 29,682,069
============
At December 31, 1998, the Fund had a capital loss carryover
of approximately $256,037 which expires on December 31, 2006.
This may be available to offset future realized capital gains,
if any, to the extent provided by regulations.
ADR / GDR -- An American Depositary Receipt (ADR) or Global Depositary Receipt
(GDR) is a certificate issued by a custodian bank representing the
right to receive securities of the foreign issuer described. The
values of ADRs and GDRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (Identified cost $211,014,957) ...... $242,177,188
Foreign cash at value (Identified cost $270,883) ......... 283,060
Receivable for:
Fund shares sold ....................................... 5,755,198
Securities sold ........................................ 276,465
Dividends and interest ................................. 349,405
Tax reclaims ........................................... 138,665
Unamortized organization expense ......................... 26,531
------------
249,006,512
LIABILITIES
Payable for:
Securities purchased ................................... $520,517
Open forward currency contracts - net .................. 290,891
Fund shares redeemed ................................... 986,406
Due to custodial bank .................................. 613,476
Foreign withholding taxes .............................. 24,427
Accrued expenses:
Management fees ........................................ 213,018
Deferred trustees' fees ................................ 8,058
Accounting & Administrative ............................ 5,083
Other .................................................. 261,716
--------
2,923,592
------------
NET ASSETS ................................................. $246,082,920
============
Net Assets consist of:
Capital paid in ........................................ $217,535,546
Accumulated net investment loss ........................ (91,225)
Accumulated net realized gains (loss) .................. (2,250,160)
Unrealized appreciation (depreciation) on investments,
forward currency contracts and foreign currency
transactions ......................................... 30,888,759
------------
NET ASSETS ................................................. $246,082,920
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($106,762,575 divided by 6,638,756 shares of beneficial
interest) .............................................. $16.08
======
Offering price per share (100/94.25 of $16.08) ............. $17.06*
======
Net asset value and offering price of Class B shares
($116,304,799 divided by 7,393,038 shares of beneficial
interest) .............................................. $15.73**
======
Net asset value and offering price of Class C shares
($23,015,546 divided by 1,461,654 shares of beneficial
interest) .............................................. $15.75**
======
* 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.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes of $387,383) ............... $4,608,076
Interest ................................................... 961,817
----------
5,569,893
Expenses
Management fees .......................................... $2,758,173
Service fees - Class A ................................... 285,578
Service and distribution fees - Class B .................. 1,235,220
Service and distribution fees - Class C .................. 249,304
Trustees' fees and expenses .............................. 17,728
Accounting and administrative ............................ 58,980
Custodian ................................................ 868,955
Transfer agent ........................................... 862,871
Audit and tax services ................................... 46,000
Legal .................................................... 10,782
Printing ................................................. 106,508
Registration ............................................. 63,043
Amortization of organization expenses .................... 12,980
Insurance ................................................ 2,000
Miscellaneous ............................................ 22,276
----------
Total expenses ............................................. 6,600,398
----------
Net investment income (loss) ............................... (1,030,505)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS,
FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments - net ........................................ (1,693,764)
Futures contracts - net .................................. (93,844)
Forward currency contracts - net ......................... (973,143)
Foreign currency transactions - net ...................... (376,210)
----------
Net realized gain (loss) on investments, futures contracts,
forward currency contracts and foreign currency
transactions ............................................. (3,136,961)
----------
Unrealized appreciation (depreciation) on:
Investments - net ........................................ 13,245,877
Forward currency contracts - net ......................... (203,907)
Foreign currency transactions - net ...................... 27,058
----------
Net unrealized appreciation (depreciation) on investments,
forward currency contracts and foreign currency
transactions ............................................. 13,069,028
---------
Net gain (loss) on investment transactions ................. 9,932,067
----------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ..... $8,901,562
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss) ............................ $ (1,230,968) $ (1,030,505)
Net realized gain (loss) on investments, futures
contracts, forward currency contracts and foreign
currency transactions ................................. 13,621,537 (3,136,961)
Unrealized appreciation (depreciation) on investments
forward currency contracts and foreign currency
transactions .......................................... 8,024,851 13,069,028
------------- -------------
Increase (decrease) in net assets from operations ....... 20,415,420 8,901,562
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net realized gain on investments
Class A ............................................... (5,347,965) 0
Class B ............................................... (5,550,098) 0
Class C ............................................... (1,229,908) 0
------------- -------------
(12,127,971) 0
------------- -------------
Paid in Capital .........................................
Class A ............................................... (260,229) 0
Class B ............................................... (270,065) 0
Class C ............................................... (59,596) 0
------------- -------------
(589,890) 0
------------- -------------
Increase (decrease) in net assets derived from capital
share transactions .................................... 108,430,995 (30,804,047)
------------- -------------
Total increase (decrease) in net assets ................. 116,128,554 (21,902,485)
NET ASSETS
Beginning of the year ................................... 151,856,851 267,985,405
------------- -------------
End of the year ......................................... $ 267,985,405 $ 246,082,920
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)
End of the year ......................................... $ 28,189 $ (91,225)
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period (a) ...... $12.50 $14.40 $15.46
------ ------ ------
Income (Loss) From Investment Operations
Net Investment Income (Loss) (b) .............. (0.03) (0.02) 0.01
Net Realized and Unrealized Gain (Loss) on
Investments ................................. 2.11 1.88 0.61
------ ------ ------
Total From Investment Operations .............. 2.08 1.86 0.62
------ ------ ------
Less Distributions
Distributions From Net Realized Capital Gains . (0.18) (0.76) 0.00
Distributions From Paid-in Capital ............ 0.00 (0.04) 0.00
------ ------ ------
Total Distributions ........................... (0.18) (0.80) 0.00
------ ------ ------
Net Asset Value, End of Period ................ $14.40 $15.46 $16.08
====== ====== ======
Total Return (%) (c) .......................... 16.7 12.7 4.0
Ratio of Operating Expenses to Average Net
Assets (%).................................. 2.58 2.07 2.09
Ratio of Net Investment Income (Loss) to
Average Net Assets (%).................... (0.21) (0.12) 0.03
Portfolio Turnover Rate (%) ................... 57 80 84
Net Assets, End of Period (000) ............... $68,509 $118,381 $106,763
(a) Fund commenced operations December 29, 1995.
(b) Per Share net investment income (loss) has been calculated using the average shares
outstanding during the year.
(c) A sales charge in the case of Class A Shares is not reflected in total return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
<TABLE>
CLASS B
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period (a) ...... $12.50 $14.30 $15.23
------ ------ ------
Income (Loss) From Investment Operations
Net Investment Income (Loss) (b) .............. (0.12) (0.14) (0.11)
Net Realized and Unrealized Gain (Loss) on
Investments ................................... 2.10 1.87 0.61
------ ------ ------
Total From Investment Operations .............. 1.98 1.73 0.50
------ ------ ------
Less Distributions
Distributions From Net Realized Capital Gains . (0.18) (0.76) 0.00
Distributions From Paid-in Capital ............ 0.00 (0.04) 0.00
------ ------ ------
Total Distributions ........................... (0.18) (0.80) 0.00
------ ------ ------
Net Asset Value, End of Period ................ $14.30 $15.23 $15.73
====== ====== ======
Total Return (%) (c) .......................... 15.9 11.9 3.3
Ratio of Operating Expenses to Average Net
Assets (%).................................. 3.33 2.82 2.84
Ratio of Net Investment Income (Loss) to
Average Net
Assets (%)................................ (0.96) (0.87) (0.72)
Portfolio Turnover Rate (%) ................... 57 80 84
Net Assets, End of Period (000) ............... $65,367 $123,467 $116,305
(a) Fund commenced operations on December 29, 1995.
(b) Per Share net investment income (loss) has been calculated using the average shares
outstanding during the year.
(c) A contingent deferred sales charge in the case of Class B Shares is not reflected in total
return calculations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - continued
- -------------------------------------------------------------------------------
<TABLE>
CLASS C
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period (a) ...... $12.50 $14.31 $15.24
------ ------ ------
Income (Loss) From Investment Operations
Net Investment Income (Loss) (b) .............. (0.12) (0.13) (0.11)
Net Realized and Unrealized Gain (Loss) on
Investments ................................... 2.11 1.86 0.62
------ ------ ------
Total From Investment Operations .............. 1.99 1.73 0.51
------ ------ ------
Less Distributions
Distributions From Net Realized Capital Gains . (0.18) (0.76) 0.00
Distributions From Paid-in Capital ............ 0.00 (0.04) 0.00
------ ------ ------
Total Distributions ........................... (0.18) (0.80) 0.00
------ ------ ------
Net Asset Value, End of Period ................ $14.31 $15.24 $15.75
====== ====== ======
Total Return (%) (c) .......................... 15.9 11.8 3.3
Ratio of Operating Expenses to Average Net
Assets (%).................................. 3.33 2.82 2.84
Ratio of Net Investment Income (Loss) to
Average Net Assets (%)...................... (0.96) (0.87) (0.72)
Portfolio Turnover Rate (%) ................... 57 80 84
Net Assets, End of Period (000) ............... $17,980 $26,137 $23,016
(a) Fund commenced operations on December 29, 1995.
(b) Per Share net investment income (loss) has been calculated using the average shares
outstanding during the year.
(c) A contingent deferred sales charge in the case of Class C shares is not reflected in total
return calculations.
</TABLE>
See accompanying notes to financial statements.
<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 long-term growth of capital. 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 front end sales charges and do not convert
to any other class of shares, but they do pay a higher ongoing distribution fee
than Class A shares and are 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 except for British equities which are valued
at the mean between the last bid and last ask prices on the London Stock
Exchange. 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 subadviser 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. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such fluctuations are included with the net realized and unrealized gain or loss
on investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities resulting from changes in the exchange rate.
D. FORWARD FOREIGN CURRENCY CONTRACTS. The Fund may use foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's currency exposure. Contracts to buy generally are used to acquire
exposure to foreign currencies, while contracts to sell are used to hedge the
Fund's investments against currency fluctuation. Also, a contract to buy or sell
can offset a previous contract. These contracts involve market risk in excess of
the unrealized gain or loss reflected in the Fund's Statement of Assets and
Liabilities. The U.S. dollar value of the currencies the Fund has committed to
buy or sell (if any) is shown in the portfolio composition under the caption
"Forward Currency Contracts Outstanding." These amounts represent the aggregate
exposure to each currency the Fund has acquired or hedged through currency
contracts outstanding at period end. Losses may arise from changes in the value
of the foreign currency or if the counterparties do not perform under the
contracts' terms.
All contracts are "marked-to-market" daily at the applicable translation rates
and any gains or losses are recorded for financial statement purposes as
unrealized until settlement date. Risks may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
E. 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.
F. 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 and foreign currency transactions for book and tax purposes. Permanent
book and tax basis differences will result in reclassification to capital
accounts.
G. 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. 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
portfolio's ability to dispose of the underlying securities.
H. ORGANIZATION EXPENSE. Costs incurred in connection with the Fund's
organization and initial registration, amounting to approximately $64,900 in the
aggregate, were paid by the Fund and are being amortized by the Fund over 60
months.
2. PURCHASES AND SALES OF SECURITIES. For the year ended December 31, 1998
purchase and sales of securities (excluding short-term investments) were
$204,522,070 and $229,040,552 respectively.
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.,
Founders Asset Management, Inc., Janus Capital Corporation and Montgomery Asset
Management, L.P. a subadvisory fee as follows: Harris Associates, L.P., Founders
Asset Management, Inc. and Janus Capital Corporation 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, 0.60% of the next $50 million of such assets
and 0.55% of such assets in excess of $100 million. NEFM pays Montgomery Asset
Management, L.P. at the annual rate of 0.85% of the first $25 million of the
average daily net assets of the segment of the Fund that Montgomery Asset
Management, L.P. manages, 0.65% of the next $25 million of such assets and 0.55%
of such assets in excess of $50 million.
Certain officers and directors of NEFM are also officers or trustees of the
Fund. NEFM and Harris Associates, 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. Fees earned
by NEFM and the subadvisers under the management agreement in effect during the
year ended December 31, 1998, are as follows:
FEES EARNED
$1,007,196 NEFM
698,074 Harris Associates, L.P.
345,986 Founders Asset Management, Inc.
428,211 Janus Capital Corporation
278,706 Montgomery Asset Management, L.P.
---------
$2,758,173
==========
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, and 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 $58,980 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 for 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 $641,410 as compensation for its
services in that capacity. For the year ended December 31, 1998, the Fund
received $5,499 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
the 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 $285,578 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 $308,805 and $62,326 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 $926,415
and $186,978 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 $759,607.
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 $1,338
Meeting Fee 152/meeting
Annual Committee Member Retainer 201
Annual Committee Chairman Retainer 134
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 SHARE TRANSACTIONS. 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 ...................... 7,296,933 $ 117,687,188 7,129,724 $ 106,981,131
Shares issued in connection with the reinvestment of:
Distributions from net realized
gain ......................... 335,997 5,389,391 0 0
-------------- ----------------- -------------- ----------------
7,632,930 123,076,579 7,129,724 106,981,131
Shares repurchased ............... (4,731,745) (77,669,561) (8,149,583) (123,663,965)
-------------- ----------------- -------------- ----------------
Net increase (decrease) .......... 2,901,185 $ 45,407,018 (1,019,859) $ (16,682,834)
-------------- ----------------- -------------- ----------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31,1998
----------------------------------- -----------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Shares sold ...................... 4,114,717 $ 64,706,836 1,309,851 $ 20,459,129
Shares issued in connection with the reinvestment of:
Distributions from net realized
gain ......................... 340,752 5,397,504 0 0
-------------- ----------------- -------------- ----------------
4,455,469 70,104,340 1,309,851 20,459,129
Shares repurchased ............... (918,977) (14,305,295) (2,024,121) (30,707,569)
-------------- ----------------- -------------- ----------------
Net increase (decrease) .......... 3,536,492 $ 55,799,045 (714,270) $ (10,248,440)
-------------- ----------------- -------------- ----------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31,1998
----------------------------------- -----------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- -------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Shares sold ...................... 930,980 $ 14,566,224 1,030,781 $ 15,901,710
Shares issued in connection with the reinvestment of:
Dividends from net investment
income ....................... 78,356 1,241,162 0 0
-------------- ----------------- -------------- ----------------
1,009,336 15,807,386 1,030,781 15,901,710
Shares repurchased ............... (550,851) (8,582,454) (1,284,215) (19,774,483)
-------------- ----------------- -------------- ----------------
Net increase (decrease) .......... 458,485 $ 7,224,932 (253,434) $ (3,872,773)
-------------- ----------------- -------------- ----------------
Increase (decrease) derived from
capital shares transactions .... 6,896,162 $ 108,430,995 (1,987,563) $ (30,804,047)
============== ================= ============== ================
</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 primarily 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 WORLDWIDE 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 Worldwide 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>
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>
------------------
[LOGO](R) Bulk Rate
NEW ENGLAND FUNDS(R) U.S. Postage
Where The Best Minds Meet(R) Paid
Brockton, MA
Permit No. 770
------------------
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399 Boylston Street
Boston, Massachusetts
02116
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