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ANNUAL REPORT
PENNSYLVANIA
MUTUAL
FUND
DECEMBER 31, 1995
THE ROYCE FUNDS
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<PAGE>
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268
Dear Shareholder:
Harold Geneen, former CEO of the giant conglomerate ITT Corp., once offered
the following advice: 'In the business world, everyone is paid in two coins:
cash and experience. Take the experience first; the cash will come later.' In
1995, however, the formula seemed to be reversed as investors were paid with
'cash' in the form of high stock market returns. One can only wonder when
investors will be paid with 'experience.'
'ABLE TO LEAP TALL BUILDINGS
IN A SINGLE BOUND'
[ART] This familiar phrase describes popular superhero Superman,
but it could also reflect 1995's stock market performance.
1995, like Superman, was extraordinary by any standard of
measurement. The large-cap oriented S&P 500, which was up 37.5%, had its best
calendar year return since 1958. Propelled by strong performance in 1995's first
two quarters, the S&P 500 took a breather in the third quarter only to resume a
leadership role in the final quarter of the year. Small-cap securities emerged
as performance leaders in the middle of the year, but were unable to keep up
with the 'faster than a speeding bullet' S&P 500. For the year, the Russell 2000
index of small-cap companies was up 28.4%.
PENNSYLVANIA MUTUAL FUND'S ('PMF') small-cap value orientation, which has
served its shareholders well over the long-term, was no match for the
performance of the raging bull market of 1995. Just as 'small-cap' under-
performed large-cap, 'value' under-performed growth within the small-cap
category. Also, a low exposure to the market's best performing sector,
technology, and an above-average exposure to the consumer and service sectors
acted like kryptonite in holding back the Fund's relative short-term
performance. Nevertheless, PMF's risk-averse style produced an 18.7% return in
1995, quite reasonable on an absolute basis. WE ARE RATHER PROUD THAT PMF'S
20-YEAR AVERAGE ANNUAL RETURN OF 17.8% IS IN LINE WITH A GOAL ESTABLISHED BY THE
FUND AND FIRST PUBLISHED IN THE 1976 ANNUAL REPORT, 'A WELL MANAGED FUND SHOULD
PROVIDE, OVER THE LONG-TERM, AN AVERAGE RETURN OF APPROXIMATELY WHAT ONE WOULD
HOPE FOR IN A WELL-MANAGED INDUSTRIAL COMPANY.'
THE RELEVANCE OF RELATIVE PERFORMANCE
At some point in every modern bull market, generally at the later
stages, the concept of relative performance becomes dominant in any [ART]
discussion of investment results. As prospects of financial loss become distant
memories, investors shift their focus from absolute gains to relative rewards.
Investment strategies are changed, portfolio managers are replaced and solid
results are ignored in the quest for better relative performance. The problem
is . . . you can't eat relative performance! The whole concept dies quickly in a
period of negative returns. When markets turn south, new car purchases are
deferred and vacation plans are canceled, relative performance soon becomes
irrelevant. While relative performance may make a great conversation
2
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topic at the cocktail party, it is positive absolute returns, compounded at
reasonable rates, which put dinner on the table.
THE VALUE IN VALUE INVESTING
A basic premise of value investing is that stocks, like other goods and
services, should be purchased at the most attractive prices possible, preferably
at a discount to their 'intrinsic worth.' The reality for most investors is just
the opposite. In other words, investor comfort levels and, therefore, demand
increase when prices rise, and diminish as prices decline. The higher a stock
rises, the greater the perceived opportunity.
Value investing, on the other hand, takes a contrary view to this highly
emotional process. By systematically reducing risk when others ignore it and
taking risk when it is feared, one can capitalize on valuation discrepancies
(opportunities) which develop from time to time. The greatest risk that the
value investor confronts is the loss of either patience or discipline when faced
with the prospect of being out-of-sync with the market. THE VALUE IN 'VALUE
INVESTING' IS TO PROVIDE A COHERENT SYSTEM FOR RATIONAL DECISION
MAKING . . . THE PURPOSE OF WHICH IS TO COMPOUND WEALTH WHILE MINIMIZING RISK.
ITS BASIC PREMISE IS THAT THE PRICE ONE PAYS FOR AN INVESTMENT MAKES A
SIGNIFICANT DIFFERENCE IN THE RETURN ONE RECEIVES.
WHAT WE DO
[ART] Pennsylvania Mutual Fund uses a risk-averse approach to invest
in the securities of small-cap companies. Experience tells us that
paying attention to risk does not diminish long-term results,
although individual market phases may not necessarily confirm the assumption's
validity.
Our approach attempts to understand and value a company's 'private worth.'
Private worth is what we believe the company would bring if the entire
enterprise were sold in a private transaction to a rational buyer. The price we
will pay for a security must be significantly under our appraisal of its private
worth. The consistent use of this discipline, applied to less well-known
securities, is the source of our performance.
NO OTHER PLACE WE WOULD RATHER BE
While the Fund focuses on companies with market caps below $750 million, our
weighted average and median market caps are actually much lower; $411 million
and $216 million, respectively, at December 31, 1995. Although our orientation
is small-cap stocks, the capitalization of our picking universe is by no means
small. The small-cap segment is huge in numbers, with over 10,000 companies
valued at more than $700 billion in total market capitalization. It is both
robust and perpetuating; IPO's, spin-offs and reorganizations create hundreds of
new prospects each year. The small-cap sector is rich in opportunity and easily
accommodates our strategy given the size of the investable universe.
HOW IT WORKS
Our approach to investing in individual small-cap companies has [ART]
proven long-term benefits, but can be both unpredictable and frustrating in the
near-term. We believe that the stock market in the short-term is a polling
place, and in the long-term, a highly efficient weighing device. While our
ultimate success will continue to be driven by the process of 'weighing the
true value' of the small companies in which we have invested, the following
3
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provides a brief glimpse of some of last year's 'election results.'
IDEAS THAT WORKED
[ART] During calendar 1995, the usual but somewhat arbitrary
measurement period of choice, each of these companies made
meaningful positive contributions to our overall performance.
More importantly, they represent specific examples of our discipline at work.
Pennsylvania Mutual Fund's BEST PERFORMERS, as measured by dollar impact to
the portfolio, were:
<TABLE>
<CAPTION>
SECURITY % GAIN $ GAIN
- -------------------------------- ------ ----------
<S> <C> <C>
Penn Eng. & Manufact. Corp. 130% $3,925,106
Comdisco, Inc 47% $2,759,847
Ag-Chem Equipment Co., Inc. 168% $2,653,350
W.H. Brady Co. 67% $2,434,375
Claire's Stores, Inc. 47% $2,302,271
</TABLE>
Comdisco and Claire's Stores were relatively large, high confidence
investments we knew well and regarded as 'premier' companies in their respective
industries. In both cases, we built our positions when business conditions were
difficult and the investment community had voted negatively on future prospects.
Penn Engineering and Manufacturing and Ag-Chem Equipment were successful
investments for different reasons. Both of these companies have been long-term
'micro-cap' investments of the Fund's portfolio that finally caught the
attention of others. Finally, in the case of W.H. Brady, a new management team,
committed to enhancing corporate performance and shareholder value, began to
produce eye-opening results.
GOOD IDEAS AT THE TIME
Our greatest opportunities often occur when we identify good
[ART] businesses which have fallen from favor due to some sort of short-term,
but correctable, problem. Even the best small-cap companies are not
immune to the flu. Usually, if their balance sheets are strong and they have a
solid history of high internal returns, these companies will rebound. Although
recoveries can take longer than we anticipate, we are generally rewarded for our
persistence. Unfortunately, a few of our investments never recover. The five
WORST PERFORMERS in 1995, as measured by dollar impact, were:
<TABLE>
<CAPTION>
SECURITY % LOSS $ LOSS
- -------------------------------- ------ ----------
<S> <C> <C>
Charming Shoppes, Inc. 57% $1,539,935
Delta Woodside Industries, Inc. 42% $1,148,767
Anacomp Inc. Preferred 88% $1,034,000
Quaker Chemical Corporation 28% $1,027,761
Exar Corporation 40% $ 881,983
</TABLE>
Of these five losers, Exar Corporation and Quaker Chemical appear to have
good prospects for quick and full recoveries. In the case of Charming Shoppes
and Delta Woodside, difficulties in retailing and apparel manufacturing have
put these two companies in the intensive care ward. While we hope for some
improvement in each case, it will take more patience and full recovery seems
unlikely. The only hopeless position among our losers is Anacomp. As noted in
our June 30, 1995 Report to Shareholders, we were aware of the risks of
investing in high yield securities, particularly those of technology
companies, but Anacomp was a mistake, hopefully not to be repeated any time
soon. The best news of all -- our five worst performers combined had less than
a 1% negative impact on the Fund's performance in 1995.
4
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ANYTHING BUT TYPICAL
What do you get when interest rates fall precipitously, inflation is low,
demand for equities is strong and corporate earnings outpace analysts'
estimates? Answer: the LAST FIVE YEARS (actually the last 5 1/4 years)! The last
five years have been an exceptional period for equity investing, one in which
all the 'right stuff' was in place. Consider the following:
There has not been a correction of 10% or more for the S&P 500 or 15% or more
for the Russell 2000 since October of 1990, the longest stretch ever for both
indices.
The last five years were an anomaly in that a full market cycle did not take
place, but rather a trough (bottom) to peak (top) experience only.
It was the best (in terms of return and duration) trough to peak period in the
17 year history of the Russell 2000.
It was only the 8th time out of 49 quarterly trailing five year return periods
that the Russell 2000 generated a 20%+ average annual return.
Within this market cycle, short-term interest rates had one of their most
significant declines -- three month T-bills went from 8.2% in September 1989
to 2.7% in September 1992.
It was one of the least volatile periods on record, and especially so in the
years 1993, 1994 and 1995.
Very simply, the last five years was a period in which risk and reward were
synonymous and one in which risk management provided virtually no benefit. It's
highly likely that we have completed the best five year performance period for
this decade.
CAUSE OR EFFECT
An interesting aspect of this five year rise in both stocks
[ART] and bonds is the ever increasing participation of individual
investors. Demand for liquid securities has grown to
proportions that now cloud our understanding as to whether it is the cause or
the effect of this bull market. While it seemed clear several years ago that
repeated and uninterrupted gains in stocks and bonds would heighten mass appeal,
few predicted the growing appetite we have today. Now, armed with demographic
studies and a healthy dose of 20-20 hindsight, it is the consensus belief that
our population has become a nation of savers and that demand for stocks will
remain steady, if not grow. In fact, it is that very same demand which is
believed to ensure future success and prevent any major reversal in market
fortunes.
We are a bit uncomfortable with this widely held assumption of continuous
prosperity. Just as rising markets initially created greater demand for
equities, corrections could dampen enthusiasm. We think there may be limits as
to how long individuals will forgo consumption in pursuit of savings.
Furthermore, we know there are alternative investments, like real estate or
natural resources, at times more attractive, for individuals to pursue. Finally,
we are certain, particularly in a global economy, that an ample supply of
securities can be created to meet and even exceed investors' demands. The
suggestion that continued success is nearly guaranteed by demand is a scary
proposition. WE REMAIN MOST ASTONISHED, NOT WITH THE MAGNITUDE OF INVESTOR
APPETITE FOR STOCKS, BUT THE NEARLY UNIVERSAL ASSUMPTION OF ITS PERMANENCE. THE
REAL WORLD IS CYCLICAL AND SO ARE ITS MARKETS.
5
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A NEW ERA ?
As the bull market enters its sixth year [ART]
uninterrupted by normal corrections, we find
ourselves asking (and more to the point, others asking us) is this a new era in
investing? Have changes in national demographics and attitudes and, therefore,
investing patterns evolved to the point where traditional assumptions are
obsolete? By sticking to our own time tested and cycle proven discipline, have
we become the 'Clark Kent' of the investment world, permanently nerdy within the
new order?
We believe fundamental economic principles and human nature remain unchanged
in the '90s. Our national economy has not entered a new era of accelerated
growth. In fact, we would argue the opposite. American corporations, despite
restructuring and down-sizing, are not measurably more profitable if cumulative
retained earnings are any gauge. We still believe that individual investors are
motivated by fear and greed. In the current environment, greed has driven fear
from the investment dictionary.
Before long, we expect some normal balance in people's spending habits to
resume. Appetites for mutual fund investing may moderate in favor of consumption
or debt repayments. Weak sectors of our economy like apparel retailing and
infrastructure construction will recover. Basic commodity prices could rise and
equities would once again represent long-term interests in business, as opposed
to trading vehicles. Absolute return goals, previously forgotten, will regain
the spotlight.
THE NEXT FIVE YEARS WILL BE DIFFERENT
'It is not the going out of port, but the coming in, that determines the
success of a journey.' Henry Ward Beecher
It's not likely that the next five years will rival the previous five in
terms of 'ideal wind conditions' or 'spectacular performance.' History tells us
that periods of high valuation and high return are usually followed by periods
of lower, less dynamic returns. Historical performance returns are built with
periods of over-performance and periods of under-performance and, over the
long-term, small-cap stocks have averaged approximately 12.5% per annum, not the
20% provided by the last five years. (1926 - 1995; source: Ibbotson and
Associates). We see no reason why performance should not revert to the mean and,
thus, a period of lower five year returns is likely.
The primary driver behind the most recent rally (and almost 15 years of a
strong market) has been interest rates. Although short-term rates remain at the
lower end of their trading range, it's the change in interest rates and not the
absolute level, which drives price earnings multiples and stock prices. The
magnitude of the decline in interest rates is virtually not repeatable.
Consequently, a further decline in interest rates will not have the same
favorable impact on stock prices, no matter how bullish one is on rates.
6
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IMPACT OF INTEREST RATES ON STOCK MARKET PERFORMANCE
[PERFORMANCE GRAPH]
LONG-TERM GOVERNMENT BOND YIELDS AND DOW JONES INDUSTRIAL AVERAGE
The last five years were also unique in that never in our nation's history
have so many traditional bank savers become stock market investors. The primary
reason for the massive level of CD conversions has been the high returns
afforded stock market investors compared to the declining returns available in
traditional bank products. A strong contributing factor has been the stock
market's lack of volatility. Volatility has been so low that new investors have
been lulled by the apparent 'safety' of equity investing. Volatility, which has
always been a part of the investment equation, is likely to resurface and resume
a more normal course as background conditions change.
TIME FOR CHANGE . . . WE THINK NOT
We have been discussing what has happened. Now it's time to [ART]
talk about what has not happened.
First, we have not changed our investment time horizon even though it seems
the rest of the world has. We view companies and investment performance with the
same long-term horizon because attractive valuations and returns, like the
planting and harvesting seasons, are never one and the same. Although our
risk-averse approach has worked against us in the most recent performance
period, it has provided very decent returns in the context of history.
Second, we have not changed our underlying investment premise, that a
disciplined approach to investing in high quality, small-cap companies using
absolute valuation standards can provide attractive long-term returns.
Experience tells us that failure to 'stay the course' results in failure.
Third, the natural laws of gravity and market cycles have not been rescinded.
And finally, our confidence in the outcome of our approach has not changed.
We expect our approach to small-cap investing, developed over the last twenty
years, to have both an absolute and relative pay-off as it has in the past. Your
continued confidence is appreciated.
Yours faithfully,
<TABLE>
<S> <C>
Charles M. Royce Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George
President Vice Presidents
</TABLE>
February 15, 1996
------------------
NOTE: S&P 500 and Russell 2000 are unmanaged indices and include the
reinvestment of dividends.
7
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FINANCIAL REVIEW
<TABLE>
<CAPTION>
ANNUAL RETURNS
- ----------------------------------
<S> <C>
1995..................... 18.7%
1994..................... (0.7%)
1993..................... 11.3%
1992..................... 16.2%
1991..................... 31.8%
1990..................... (11.5%)
1989..................... 16.7%
1988..................... 24.6%
1987..................... 1.4%
1986..................... 11.2%
1985..................... 26.8%
1984..................... 3.1%
1983..................... 40.5%
1982..................... 33.5%
1981..................... 0.7%
1980..................... 25.7%
1979..................... 35.5%
1978..................... 16.6%
1977..................... 23.8%
1976..................... 49.0%
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- ---------------------------------
(AS OF 12/31/95)
<S> <C>
20-year.................. 17.8%
15-year.................. 14.1%
10-year.................. 11.3%
5-year................... 15.0%
</TABLE>
POSITIVE RETURNS IN 19 OF THE LAST
21 CALENDAR YEARS (1975 - 1995).
TWENTY YEARS OF BUILDING WEALTH
VALUE OF $10,000 INVESTED ON 12/31/75
[PERFORMANCE GRAPH]
The total returns and risk measurements presented in this report should not
be considered representative of total return or risk of an investment in the
Fund today. They are provided only to give an historical perspective of the
Fund. Total return and principal value of Fund shares will fluctuate, so that
shares may be worth more or less than their original cost when redeemed.
8
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RISK AND VOLATILITY ANALYSIS
To focus solely on the return component of the investment equation is the
equivalent of evaluating one's time (return) in a road race without knowing
anything about the course (risk). For example, was the course hilly or flat, did
weather hinder or help performance, were thousands participating or merely a
handful? By knowing the answers to these and related matters, you then can
properly evaluate the quality of the performance. The same is true in the
investment world. Although PMF has had one of the lowest risk profiles among
small-cap funds, that in and of itself is not particularly helpful. Somehow, one
must link the concepts of risk and return together because one without the other
may be incomplete.
Fund risk (volatility) versus relevant indices and peers can be evaluated
by using the generally accepted measures of standard deviation and beta, as well
as the Morningstar Risk Ratio.
<TABLE>
<CAPTION>
STANDARD WORST TWO MONTHS MORNINGSTAR
DEVIATION* BETA* PERFORMANCE(#) RISK RATIO*
----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
PENNSYLVANIA MUTUAL FUND 6.48 0.61 - 7.7% 0.61
Indices
- -----------
S&P 500 7.96 1.00 - 7.9 0.69`D'
Russell 2000 8.98 0.89 - 11.1 0.89`D'
Peer Group**
- ------------
Group Average 10.25 0.85 - 10.3 0.95
</TABLE>
OVER THE PAST THREE YEARS, PMF HAD LOWER VOLATILITY THAN THE ABOVE MARKET
INDICES AND WAS AMONG THE LOWEST IN ITS PEER GROUP.
STANDARD DEVIATION is a statistical measure of fund volatility over time.
The lower the standard deviation, the less volatile and more consistent a fund's
historical monthly returns. BETA measures a fund's sensitivity to market
movements. The beta of the S&P 500 index, chosen to represent the market, is
1.00. A fund with a 1.10 beta is expected to perform 10% better in up markets
and 10% worse in down markets. MORNINGSTAR RISK RATIO is a proprietary
measurement of a fund's downside volatility relative to other funds in its
investment category. The average score for the 3 years ended December 31, 1995
for all equity funds was 1.00. These measures of risk are historical, may change
monthly, and are not necessarily predictive of future volatility.
* Source: Morningstar Mutual Funds. Data reported for the 3-year period ended
December 31, 1995. The indices listed above are unmanaged.
`D' Note: Vanguard Index Trust 500 and Small Cap Stock Portfolios are used as
proxies for measuring the Morningstar Risk Ratio of the S&P 500 and Russell
2000.
** In constructing our peer group, we used the following method. We isolated all
small company mutual funds as identified by Morningstar. We began this
process by first screening the domestic equity mutual fund universe (1,931
funds) for funds with a small company investment style. Of the 368 funds with
a small company investment style, only 294 fell within the small company
style box, which Morningstar has categorized as funds with median market
capitalizations below $1 billion. In other words, we only included funds
whose actual investment practice matched their investment style. We further
narrowed the universe by identifying funds which were in existence at the
last general market peak (6/30/90) so, at a minimum, at least one full market
cycle of comparison would be available. And finally, of the 73 funds which
passed these screens, only 20 funds (managed by other investment advisers)
had $100 million in assets or greater at the last general market peak. We
believe that these 20 funds constitute a relevant peer group. This group's
$12 billion in assets represents approximately 16% of all small-cap category
assets.
# Average of the two worst monthly performances since the last small-cap market
peak (9/30/89).
9
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RETURN PER UNIT OF RISK
The Return Per Unit of Risk calculation shows the relationship between a
fund's historical return and the amount of risk associated with the production
of that total return. It is calculated by dividing a fund's average annual total
return by its average annualized standard deviation over a designated period.
PMF's return per unit of risk calculations versus relevant indices and peers
over the past three general market cycles are depicted below.
[PERFORMANCE GRAPH]
Market peaks and troughs were derived by taking the daily S&P 500 cycle
highs and lows, defined as a change of 10% or greater from the previous peak or
trough, and rounding to the nearest quarter. (Viz. peaks: 11/26/80; 8/25/87;
7/16/90; troughs: 8/12/82; 12/4/87; 10/11/90.)
RETURN PER UNIT OF RISK
(PEAK TO PEAK COMPARISON)
<TABLE>
<CAPTION>
1ST PEAK 2ND PEAK 3RD PEAK 1ST PEAK
TO 2ND PEAK TO 3RD PEAK TO CURRENT TO CURRENT
12/31/80- 9/30/87- 6/30/90- 12/31/80-
9/30/87 6/30/90 12/31/95 12/31/95
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PENNSYLVANIA MUTUAL FUND 1.34 0.55 1.03 1.06
Indices
- --------
S&P 500 1.28 0.39 1.22 1.01
Russell 2000 0.91 0.07 0.90 0.69
Peer Group*
- -----------
Group Average 0.92 0.28 0.93 0.76
(# of Funds) (9) (19) (20) (9)
PMF Rank 1 out of 9 3 out of 19 7 out of 20 1 out of 9
</TABLE>
PMF'S RISK ADJUSTED RETURNS HAVE BEEN CONSISTENTLY AMONG THE HIGHEST IN ITS PEER
GROUP.
* See page 9 for a discussion of how the peer group was constructed. The number
of peer group funds in existence during each cycle is shown above.
10
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PENNSYLVANIA MUTUAL FUND ('PMF')
PORTFOLIO OR PORTFOLIOS?
Pennsylvania Mutual Fund has always represented a multi-dimensional value
approach to investing in small-cap companies. And while PMF remains true to its
historical approach, two core portfolios have evolved. These core portfolios,
'premier' and 'micro-cap,' can be differentiated by capitalization and
concentration considerations.
Both core portfolios have emerged in response to the changing nature of the
small-cap universe as the number of small company funds and their respective
assets have increased tenfold in the last ten years. In the upper end of the
small-cap range, $300 million to $1 billion in market capitalization, PMF has
developed a focused strategy which emphasizes companies with superior financial
characteristics and/or unusually attractive business prospects, companies we
classify as 'premier.' We believe that holding slightly higher concentrations of
these securities are appropriate to offset the increasing market efficiencies
found in the upper range of the small-cap sector.
The second core portfolio, the sector known as 'micro-cap,' is at the other
end of the capitalization range (below $300 million). Micro-cap companies are
the antithesis of what most professional investors look for, in that they are
not well known, are not well researched and their securities are not easy to buy
and sell, precisely the conditions that we believe breed good investment
opportunities. In our view, the micro-cap sector presents today the same
opportunities that small-cap did 20 years ago.
CORE PORTFOLIOS [PIE CHART]
Within each of the core portfolios are a variety of tactical strategies,
two of which involve 'equity income' and 'low-priced' securities. Both are long
standing strategies and have central roles in PMF. Equity income focuses on
above average dividend paying companies, a sector not generally associated with
small-cap investing. Low-priced, on the other hand, invests in an area that is
often associated with small-cap investing, stocks trading below $15 per share.
Both portfolio segments remain virtually undiscovered by most professional
small-cap investors.
CORE and tactical strategies, the
AND [PIE CHART] total would exceed 100% as
TACTICAL many issues meet several
PORTFOLIOS criteria.
We believe that PMF's two tier strategy, combining core and tactical
portfolios, is an effective, all weather approach to capturing the opportunities
within the small-cap sector.
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PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the PMF
portfolio. For a more complete picture, the full portfolio and accompanying
financial statements should be read in their entirety.
<TABLE>
<CAPTION>
% OF COMMON
PORTFOLIO COMPOSITION STOCKS VALUE % OF NET ASSETS
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Top 200 Stocks 88.2% $ 524,961,079 83.3%
Other Stocks 11.8 70,311,502 11.2
----------- --------------- -------
Common Stocks 100.0% 595,272,581 94.5
-----------
-----------
Preferred Stocks 591,300 0.1
Cash & Other Net Assets 34,254,730 5.4
--------------- -------
Total Net Assets $ 630,118,611 100.0%
--------------- -------
--------------- -------
PORTFOLIO DIAGNOSTICS (unaudited)
- ---------------------------------------------------------------------------------------------------
Weighted Average Market Capitalization (Total Portfolio) $411 illio
Median Market Capitalization (Total Portfolio) $216 illio
Weighted Average P/E Ratio (200 Largest Positions) 14.5x
Weighted Average P/B Ratio (200 Largest Positions) 1.6x
Weighted Average Portfolio Yield (200 Largest Positions) 1.9%
COMMON STOCK SECTORS % OF NET ASSETS
- ---------------------------------------------------------------------------------------------------
Industrial Cyclicals 25.6%
Financial 23.4
Services 16.4
Consumer Durables 9.4
Retail 6.6
Consumer Staples 4.5
Energy 4.0
Technology 3.3
Health 1.1
Utilities 0.2
TOP TWENTY POSITIONS VALUE % OF NET ASSETS
- ---------------------------------------------------------------------------------------------------
1 Comdisco, Inc. $7,805,783 1.2%
2 Alleghany Corporation 7,691,112 1.2
3 Penn Engineering and Manufacturing Corp. 6,882,150 1.1
4 Farmer Bros. Co. 6,470,100 1.0
5 Camco International Inc. 6,350,400 1.0
6 The Pioneer Group, Inc. 6,297,475 1.0
7 Orion Capital Corporation 5,938,298 0.9
8 Fab Industries, Inc. 5,464,395 0.9
9 Kimball International, Inc. Cl. B 5,378,250 0.9
10 ALLIED Group, Inc. 5,353,200 0.8
11 Baldwin & Lyons, Inc. Cl. B 5,315,018 0.8
12 Wesco Financial Corporation 5,259,800 0.8
13 The Standard Register Company 5,258,864 0.8
14 Marshall Industries 5,191,400 0.8
15 W.H. Brady Co. Cl. A 5,167,800 0.8
16 Mine Safety Appliances Company 4,896,000 0.8
17 W.R. Berkley Corp. 4,887,219 0.8
18 Stanhome Inc. 4,837,663 0.8
19 NCH Corporation 4,758,600 0.8
20 Florida Rock Industries, Inc. 4,747,275 0.8
</TABLE>
12
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PENNSYLVANIA
MUTUAL FUND
FINANCIAL STATEMENTS
13
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<PAGE>
PENNSYLVANIA MUTUAL FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995
- --------------------------------------------------------------------------------
COMMON STOCKS - 94.5%
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- -------- ---------
<C> <S> <C>
CONSUMER DURABLES - 9.4%
58,011 Allen Organ Company Cl.
B....................... $ 2,443,678
104,002 *Athey Products Corp...... 448,509
39,100 *Baldwin Piano & Organ
Company................. 488,750
49,375 Bassett Furniture
Industries,
Incorporated............ 1,147,969
75,002 *Bell Industries, Inc..... 1,687,545
210,848 Delta Woodside Industries,
Inc..................... 1,396,868
138,900 *Ethan Allen Interiors
Inc..................... 2,830,088
182,600 Flexsteel Industries,
Inc..................... 1,871,650
9,900 Forest City Enterprises,
Inc. Cl. A.............. 320,513
63,300 Garan Incorporated........ 1,068,188
21,800 Haggar Corp. ............. 392,400
135,300 *Johnson Worldwide
Associates, Inc. Cl.
A....................... 3,044,250
265,200 Juno Lighting, Inc. ...... 4,243,200
119,100 K-Swiss Inc. Cl. A........ 1,295,213
71,000 La-Z-Boy Chair Company.... 2,192,125
115,400 *Lazare Kaplan
International, Inc. .... 915,988
186,450 **Liberty Homes, Inc. Cl.
A....................... 2,260,706
194,579 *Lifetime Hoan
Corporation............. 1,799,856
16,100 Matthews International
Corporation Cl. A....... 313,950
85,150 National Presto
Industries, Inc. ....... 3,384,713
61,000 Reebok International
Ltd. ................... 1,723,250
195,200 The Rival Company......... 4,318,800
43,000 *River Oaks Furniture..... 268,750
101,600 Russ Berrie and Company,
Inc. ................... 1,282,700
25,300 The Singer Company
N.V. ................... 705,238
143,500 Skyline Corporation....... 2,977,625
245,500 The Stride Rite
Corporation............. 1,841,250
124,000 Sturm, Ruger & Company,
Inc. ................... 3,394,500
127,400 Thomaston Mills, Inc. Cl.
A....................... 1,608,425
176,100 Thor Industries, Inc. .... 3,411,938
32,900 Tiffany & Co. ............ 1,657,338
<PAGE>
<CAPTION>
Value
Shares (Note 1)
- --------- -----------
<C> <S> <C>
207,100 *The Topps Company,
Inc. ................... $ 1,061,388
38,500 Weyco Group, Inc. ........ 1,511,125
------------
59,308,486
------------
CONSUMER STAPLES - 4.5%
131,988 Alico, Inc. .............. 3,464,685
92,497 Block Drug Company, Inc.
Cl. A................... 3,214,298
47,400 Farmer Bros. Co. ......... 6,470,100
5,300 *Fuqua Enterprises,
Inc. ................... 98,713
251,800 Midwest Grain Products,
Inc. ................... 3,525,200
91,300 Savannah Foods &
Industries, Inc. ....... 1,038,538
166,100 Stanhome Inc. ............ 4,837,663
63,600 Velcro Industries N.V. ... 3,895,500
107,900 WLR Foods, Inc. .......... 1,780,350
------------
28,325,047
------------
ENERGY - 4.0%
149,300 *American Oilfield Divers,
Inc. ................... 1,063,763
40,270 *Barrett Resources........ 1,182,931
20,100 *Belden & Blake
Corporation............. 351,750
34,500 *Tom Brown, Inc. ......... 504,563
226,800 Camco International
Inc. ................... 6,350,400
5,172 The Coal Creek Mining and
Manufacturing Company... 496,512
53,600 Devon Energy
Corporation............. 1,366,800
78,050 *Equity Oil Company....... 458,544
36,900 *Gulfmark International
Inc. ................... 913,275
94,044 Lufkin Industries,
Inc. ................... 2,127,746
112,740 *Nabors Industries,
Inc. ................... 1,254,233
132,000 *Oceaneering
International, Inc. .... 1,699,500
101,343 Penn Virginia
Corporation............. 3,268,312
77,600 *Pool Energy Services
Co. .................... 737,200
103,280 *Santa Fe Energy
Resources, Inc. ........ 994,070
12,200 *Tide West Oil Company.... 163,175
67,800 Western Gas Resources,
Inc. ................... 1,093,275
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- --------- ----------
<C> <S> <C>
ENERGY - (continued)
76,500 The Wiser Oil Company..... $ 918,000
------------
24,944,049
------------
FINANCIAL - 23.4%
38,844 Alleghany Corporation..... 7,691,112
148,700 ALLIED Group, Inc. ....... 5,353,200
111,750 Argonaut Group, Inc. ..... 3,631,875
72,569 *Avatar Holdings Inc. .... 2,539,915
75,300 AVEMCO Corporation........ 1,204,800
26,020 Baker Boyer Bancorp....... 832,640
327,078 Baldwin & Lyons, Inc. Cl.
B....................... 5,315,018
90,925 W. R. Berkley Corp. ...... 4,887,219
140,000 E.W. Blanch Holdings,
Inc. ................... 3,272,500
30,000 The Boston Bancorp........ 1,207,500
19,200 CMAC Investment
Corporation............. 844,800
345,007 Comdisco, Inc. ........... 7,805,783
47,542 The Commerce Group,
Inc. ................... 980,554
48,363 Community Banks, Inc. .... 1,317,892
59,800 Consolidated-Tomoka Land
Co. .................... 1,016,600
54,150 Cousins Properties
Incorporated............ 1,096,538
44,650 Dauphin Deposit Corp. .... 1,283,688
87,100 Phoenix Duff & Phelps
Corporation............. 598,813
53,000 Eaton Vance Corp. ........ 1,497,250
13,200 Equitable of Iowa
Companies............... 424,050
5,536 Exchange Bank............. 373,680
13,800 F & M Bancorporation...... 524,400
1,842 Farmers & Merchants Bank
of Long Beach........... 3,398,490
54,800 The First American
Financial Corporation... 1,465,900
715 The First National Bank of
Anchorage............... 1,093,950
118,000 Fremont General
Corporation............. 4,336,500
93,800 Arthur J. Gallagher &
Co. .................... 3,494,050
143,200 *Gryphon Holdings Inc. ... 2,756,600
149,100 Guaranty National
Corporation............. 2,292,413
114,562 *Hanmi Bank............... 945,137
<PAGE>
<CAPTION>
Value
Shares (Note 1)
- --------- -----------
<C> <S> <C>
20,977 Harleysville Group,
Inc. ................... $ 679,130
143,725 Hilb, Rogal & Hamilton
Company................. 1,922,322
56,700 Intercargo Corporation.... 567,000
14,834 *Investors Financial
Services Corp. ......... 307,806
2,851 *Investors Financial
Services Cl. A.......... 59,167
64,800 The John Nuveen Company... 1,603,800
69,412 Keystone Heritage Group,
Inc. ................... 2,117,066
87,472 Leucadia National
Corporation............. 2,186,800
49,443 *MAIC Holdings, Inc. ..... 1,681,062
404 MidCity Financial Corp. .. 1,010,000
48,200 NYMAGIC, INC. ............ 819,400
32,171 National Bancorp of
Alaska, Inc. ........... 2,091,115
25,700 *The Navigators Group,
Inc. ................... 452,963
49,700 New England Investment
Companies, L.P. ........ 1,049,913
180,500 The Newhall Land and
Farming Company......... 3,068,500
136,906 Orion Capital
Corporation............. 5,938,298
40,075 Paine Webber Group
Inc. ................... 801,500
55,000 PartnerRe Holdings Ltd. .. 1,512,500
136,900 Pennsylvania Manufacturers
Corporation............. 2,498,425
231,100 The Pioneer Group, Inc. .. 6,297,475
148,200 Piper Jaffray Companies
Inc. ................... 2,037,750
21,700 Poe & Brown, Inc. ........ 539,788
46,661 Portsmouth Bank Shares,
Inc. ................... 717,413
18,100 T. Rowe Price Associates,
Inc. ................... 891,425
120,725 RLI Corp. ................ 3,018,125
19,591 *Reliance Group Holdings,
Inc. ................... 39,182
17,400 SEI Corporation........... 378,450
92,000 Security-Connecticut Life
Insurance Company....... 2,495,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- --------- -----------
<C> <S> <C>
FINANCIAL - (continued)
68,400 Student Loan Corporation.. $ 2,325,600
95,639 *Sunrise Bancorp.......... 239,098
44,500 Susquehanna Bancshares,
Inc. ................... 1,179,250
38,700 Transatlantic Holdings,
Inc. ................... 2,839,613
68,200 Transnational Re
Corporation Cl. A....... 1,670,900
65,300 `D'Trenwick Group Inc. ... 3,673,125
27,257 TriCo Bancshares.......... 436,112
31,400 U. S. Trust Corp. ........ 1,562,150
19,650 Vornado Realty Trust...... 736,875
50,630 Webster Financial
Corporation............. 1,493,585
28,900 Wesco Financial
Corporation............. 5,259,800
220,600 `D'`D'Willis Corroon Group
plc..................... 2,564,475
75,500 Zenith National Insurance
Corp. .................. 1,613,813
58,300 Zurich Reinsurance Centre,
Inc. ................... 1,770,863
------------
147,630,001
------------
HEALTH - 1.1%
32,000 C. R. Bard, Inc. ......... 1,032,000
40,100 Diagnostic Products
Corporation............. 1,518,788
75,200 *HAEMONETICS
CORPORATION............. 1,334,800
107,500 Life Technologies,
Inc. ................... 2,929,375
10,891 Medex, Inc. .............. 122,524
------------
6,937,487
------------
INDUSTRIAL CYCLICALS - 25.6%
64,134 Aceto Corporation......... 1,026,150
159,600 Ag-Chem Equipment Co.,
Inc. ................... 4,309,200
71,400 American Filtrona
Corporation............. 2,463,300
55,500 Ameron, Inc. ............. 2,088,188
15,509 Ash Grove Cement
Company................. 1,783,535
54,900 Ashland Coal, Inc. ....... 1,173,488
124,800 Guy F. Atkinson Company of
California.............. 1,248,000
73,725 BHA Group, Inc. Cl. A..... 976,856
1,800 BW/IP, Inc. Cl. A......... 29,700
<PAGE>
<CAPTION>
Value
Shares (Note 1)
- --------- ----------
<C> <S> <C>
57,900 *Banister Foundation
Inc. ................... $ 354,638
106,500 *Bird Corp. .............. 492,563
81,300 Blessings Corporation..... 843,488
191,400 W. H. Brady Co. Cl. A..... 5,167,800
17,600 Brenco, Incorporated...... 180,400
37,506 Burnham Corporation Cl.
A....................... 918,897
204,600 CalMat Co. ............... 3,733,950
126,000 Cascade Corp. ............ 1,764,000
1,874 Central Steel & Wire
Company................. 1,100,038
14,300 Chicago Rivet & Machine
Co. .................... 414,700
75,250 CLARCOR Inc. ............. 1,533,219
6,930 ConBraCo Industries,
Inc. ................... 3,811,500
27,000 Core Industries Inc. ..... 347,625
78,800 Curtiss-Wright
Corporation............. 4,235,500
23,600 *Detrex Corporation....... 123,900
137,500 *Devcon International
Corp. .................. 1,100,000
85,000 *DeVlieg-Bullard, Inc. ... 191,250
63,600 Donaldson Company,
Inc. ................... 1,597,950
17,600 Eastern Co. .............. 215,600
171,432 Fab Industries, Inc. ..... 5,464,395
96,700 Fansteel Inc. ............ 664,813
73,433 Federal Signal
Corporation............. 1,900,079
162,300 Florida Rock Industries,
Inc. ................... 4,747,275
52,700 *Fruit of The Loom, Inc.
Cl. A................... 1,284,563
23,900 Giddings & Lewis, Inc. ... 394,350
130,487 Gilbert Associates, Inc.
Cl. A................... 1,631,088
155,000 P. H. Glatfelter Company.. 2,654,375
85,812 Gorman-Rupp Company....... 1,330,086
10,375 Guardsman Products,
Inc. ................... 138,766
89,125 Guilford Mills, Inc. ..... 1,815,922
59,400 *C. H. Heist Corp. ....... 415,800
35,400 Hunt Manufacturing Co. ... 615,075
146,800 *Insituform Technologies,
Inc. ................... 1,706,550
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- --------- ---------
<S> <C> <C>
INDUSTRIAL CYCLICALS - (continued)
129,500 International Aluminum
Corporation............. $ 3,723,125
53,300 Kaydon Corporation........ 1,618,988
213,000 Kimball International,
Inc. Cl. B.............. 5,378,250
23,300 Knape & Vogt Manufacturing
Company................. 404,838
22,800 *Laclede Steel Company.... 171,000
27,550 Lancer Corporation........ 385,700
94,920 Lawter International,
Inc. ................... 1,103,445
135,960 LeaRonal, Inc. ........... 3,127,080
285,012 Lilly Industries, Inc. Cl.
A....................... 3,633,903
31,690 The Lincoln Electric
Company................. 792,250
98,190 The Lincoln Electric
Company Cl. A........... 2,356,560
53,450 Lindberg Corporation...... 360,788
41,200 Liqui-Box Corporation..... 1,220,550
13,406 MacDermid, Incorporated... 797,657
102,000 Mine Safety Appliances
Company................. 4,896,000
96,100 Minuteman International,
Inc. ................... 888,925
58,300 The Monarch Machine Tool
Company................. 728,750
32,900 Paul Mueller Company...... 1,126,825
133,620 Myers Industries, Inc. ... 2,188,028
82,400 NCH Corporation........... 4,758,600
34,200 Nordson Corporation....... 1,923,750
59,050 Oil-Dri Corporation of
America................. 922,656
125,500 Oregon Steel Mills,
Inc. ................... 1,757,000
140,800 Oshkosh Truck Corporation
Cl. B................... 2,147,200
70,950 Penn Engineering and
Manufacturing Corp. .... 6,882,150
93,900 *Perini Corporation....... 774,675
94,900 Precision Castparts
Corp. .................. 3,772,275
81,193 Preformed Line Products
Company................. 2,841,755
51,800 *Proler International
Corp. .................. 388,500
122,000 Puerto Rican Cement
Company, Inc. .......... 4,041,250
<PAGE>
<CAPTION>
Value
Shares (Note 1)
- ---------- ----------
<C> <S> <C>
195,764 Quaker Chemical
Corporation............. $ 2,642,814
6,100 Regal-Beloit Corporation.. 132,675
97,310 Robroy Industries, Inc.
Cl. A................... 1,435,323
135,300 *Rollins Environmental
Services, Inc. ......... 388,988
43,700 St. Joe Paper Company..... 2,403,500
79,500 *Shiloh Industries,
Inc. ................... 988,781
83,700 *Simpson Manufacturing
Co., Inc. .............. 1,129,950
23,700 *Steel of West Virginia,
Inc. ................... 219,225
71,600 Tab Products Co. ......... 465,400
12,650 Tecumseh Products
Company................. 660,963
73,700 Tecumseh Products Company
Cl. A................... 3,813,975
88,400 *Todd Shipyards
Corporation............. 519,350
105,500 Treadco, Inc. ............ 606,625
69,300 *The Turner Corporation... 580,388
150,900 *UNC, Inc. ............... 905,400
183,200 *Vallen Corporation....... 3,595,300
90,532 Versa Technologies,
Inc. ................... 1,380,613
53,500 Watts Industries, Inc. Cl.
A....................... 1,243,875
46,318 Woodward Governor
Company................. 3,404,373
98,400 Zero Corporation.......... 1,746,600
------------
161,365,163
------------
RETAIL - 6.6%
85,000 Blair Corporation......... 2,688,125
3,800 *The Buckle, Inc. ........ 67,450
129,100 *CATHERINES STORES
CORPORATION............. 1,065,075
469,400 *Charming Shoppes, Inc. .. 1,349,525
249,100 Claire's Stores, Inc. .... 4,390,388
277,650 *The Clothestime, Inc. ... 173,531
36,900 *Crown Books
Corporation............. 452,025
28,100 Dart Group Corporation Cl.
A....................... 2,627,350
382,700 *The Dress Barn, Inc. .... 3,779,163
257,800 Family Dollar Stores,
Inc. ................... 3,544,750
37,800 `D'InterTAN Inc. ......... 274,050
10,800 *LANDS' END, INC. ........ 147,150
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- --------- -----------
<S> <C> <C>
RETAIL - (continued)
102,200 *Mikasa, Inc. ............ $ 1,379,700
115,250 Nash Finch Company........ 2,103,313
106,000 The Neiman Marcus Group,
Inc. ................... 2,491,000
57,700 *Old America Stores,
Inc. ................... 468,813
84,000 Oshkosh B'Gosh, Inc. Cl.
A....................... 1,470,000
345,030 Pier 1 Imports, Inc. ..... 3,924,716
116,156 Rykoff-Sexton, Inc. ...... 2,032,730
71,300 *Stein Mart, Inc. ........ 784,300
114,205 Strawbridge & Clothier Cl.
A....................... 2,740,920
396,677 *TBC Corporation.......... 3,421,339
------------
41,375,413
------------
SERVICES - 16.4%
135,700 ABM Industries
Incorporated............ 3,765,675
176,200 Air Express International
Corporation............. 4,052,600
37,000 AMRESCO Holdings, Inc. ... 471,750
222,400 Arnold Industries,
Inc. ................... 3,864,200
106,700 Atlantic Southeast
Airlines, Inc. ......... 2,294,050
102,300 Bowl America Incorporated
(Class A)............... 780,038
180,600 Bowne & Co., Inc. ........ 3,612,000
21,400 CPI Corp. ................ 342,400
30,900 *Jenny Craig, Inc. ....... 305,138
175,550 Crawford & Company Cl.
A....................... 2,808,800
91,900 Crawford & Company Cl.
B....................... 1,493,375
164,700 Dames & Moore............. 1,996,988
5,833 DUFF & PHELPS CREDIT
RATING CO. ............. 83,849
26,900 *Duplex Products, Inc. ... 218,563
48,700 Ennis Business Forms,
Inc. ................... 596,575
60,000 Expeditors International
of Washington, Inc. .... 1,567,500
85,900 *FRP Properties, Inc. .... 1,760,950
127,000 *FCA International
Ltd. ................... 288,670
4,768 Fisher Companies Inc. .... 357,600
50,000 FlightSafety
International, Inc. .... 2,512,500
<PAGE>
<CAPTION>
Value
Shares (Note 1)
- ---------- ---------
<S> <C> <C>
46,600 Florida East Coast
Industries, Inc. ....... $ 3,180,450
237,421 Frozen Food Express
Industries, Inc. ....... 2,077,434
46,567 G & K Services, Inc. Cl.
A....................... 1,187,459
21,297 Grey Advertising Inc. .... 4,259,400
182,537 The Harper Group.......... 3,240,032
64,800 *Hornbeck Offshore
Services, Inc. ......... 1,271,700
36,200 *IHOP Corp. .............. 941,200
67,700 *International Dairy
Queen, Inc. Cl. A....... 1,540,175
83,600 *International Dairy
Queen, Inc. Cl. B....... 1,995,950
55,800 Kenan Transport Company... 1,199,700
8,171 *Lady Baltimore Foods,
Inc. ................... 482,089
101,400 Lawson Products, Inc. .... 2,484,300
80,250 The Marcus Corporation.... 2,196,844
161,600 *Marshall Industries...... 5,191,400
174,500 Merrill Corporation....... 2,792,000
65,200 Milgray Electronics,
Inc. ................... 700,900
72,700 New England Business
Service, Inc. .......... 1,590,313
42,700 *Nichols Research
Corporation............. 1,099,525
234,000 *Offshore Logistics,
Inc. ................... 2,954,250
31,100 PCA International,
Inc. ................... 342,100
73,600 *PAYCO AMERICAN
CORPORATION............. 662,400
33,100 Petroleum Helicopters,
Inc. ................... 471,675
100,500 *Pinkerton's, Inc. ....... 1,959,750
58,150 Pioneer-Standard
Electronics, Inc. ...... 770,488
89,650 Plenum Publishing
Corporation............. 3,496,350
848 Queen City Investments,
Inc. ................... 225,568
66,862 Richardson Electronics,
Ltd. ................... 718,767
14,700 Scope Industries.......... 470,400
308,100 Sotheby's Holdings, Inc.
Cl. A................... 4,390,425
261,310 The Standard Register
Company................. 5,258,864
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1995 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- --------- ----------
<S> <C> <C>
SERVICES - (continued)
110,200 Stone & Webster, Inc. .... $ 3,953,425
181,250 Super Food Services,
Inc. ................... 2,356,250
68,900 True North Communications
Inc. ................... 1,274,650
127,200 *The Union Corporation.... 2,353,200
22,625 Wyle Laboratories......... 794,703
------------
103,057,357
------------
TECHNOLOGY - 3.3%
17,450 Astro-Med, Inc. .......... 161,413
99,600 *Astrosystems, Inc. ...... 560,250
2,400 Augat Inc. ............... 41,100
13,000 BGS Systems, Inc. ........ 481,000
25,300 *CEM Corporation.......... 335,225
38,900 *Comptek Research, Inc. .. 328,219
53,887 DH Technology, Inc. ...... 1,320,232
38,419 *Dionex Corporation....... 2,180,278
178,500 *Exar Corporation......... 2,632,875
49,205 Hach Company.............. 848,786
95,200 Kaman Corporation Cl. A... 1,059,100
3,400 Landauer Inc.............. 73,950
116,200 *MDL Information Systems,
Inc. ................... 2,672,600
19,300 MacNeal-Schwendler
Corporation............. 308,800
46,400 Modern Controls, Inc. .... 504,600
69,700 *Moore Products Co. ...... 1,245,888
69,403 National Computer Systems,
Inc. ................... 1,309,982
135,900 Newport Corporation....... 1,104,188
37,500 The Oilgear Company....... 637,500
151,100 Scitex Corporation
Limited................. 2,058,738
62,850 Woodhead Industries,
Inc. ................... 895,613
------------
20,760,337
------------
<PAGE>
<CAPTION>
Value
Shares (Note 1)
- --------- ---------
<C> <S> <C>
UTILITIES - .2%
47,379 Southern Union Company.... $ 1,196,320
38,745 Southwest Water Company... 372,921
------------
1,569,241
------------
Total Common Stocks
(Cost $397,221,600)..... 595,272,581
------------
PREFERRED STOCKS - .1%
47,000 **Anacomp, Inc. $4.125
Cum. Conv. Rd. Ex. ..... 141,000
23,700 Bird Corp. $1.85 Conv. ... 450,300
------------
Total Preferred Stocks
(Cost $1,757,593)....... 591,300
------------
<CAPTION>
Principal
Amount
- -----------
U.S. TREASURY OBLIGATION - 1.6%
$10,000,000 U.S. Treasury Notes 7% due
4/15/99 (Cost
$10,175,000)............ 10,506,200
------------
REPURCHASE AGREEMENT - 2.6%
State Street Bank and Trust Company,
5.25% due 1/02/96, collateralized by
U.S. Treasury Bond, 7.25% due 5/15/16,
valued at $16,725,013 (Cost
$16,395,000).......................... 16,395,000
------------
TOTAL INVESTMENTS - 98.8% (COST
$425,549,193)......................... 622,765,081
CASH AND OTHER ASSETS LESS
LIABILITIES - 1.2%.................... 7,353,530
------------
NET ASSETS - 100.0%..................... $630,118,611
------------
------------
</TABLE>
* Non-income producing.
** At December 31, 1995, the Fund owned 5% or more the Company's outstanding
shares thereby making the Company an affiliated person as defined in the
Investment Company Act of 1940.
`D' A portion of these securities are on loan at December 31, 1995. Total
market value of all securities on loan is $487,800, for which the Fund
received $519,000 as collateral.
`D'`D' American Depository Receipt.
INCOME TAX INFORMATION -- The cost of total investments for federal income tax
purposes was $428,127,162. At December 31, 1995, net unrealized appreciation for
all securities amounted to $194,637,919, consisting of aggregate gross
unrealized appreciation of $217,742,943 and aggregate gross unrealized
depreciation of $23,105,024. The Fund designates $64,095,409 as a capital gain
dividend for the purpose of the dividend paid deduction.
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $425,549,193) (Note 1).................................. $622,765,081
Receivable for investments sold............................................................... 15,285,867
Receivable for shares of beneficial interest sold............................................. 439,250
Receivable for dividends and interest......................................................... 1,292,073
Prepaid expenses and other assets............................................................. 27,860
------------
TOTAL ASSETS........................................................................... 639,810,131
------------
LIABILITIES:
Payable for investments purchased............................................................. 1,753,615
Payable for shares of beneficial interest redeemed............................................ 7,243,072
Investment advisory fee payable (Note 2)...................................................... 427,336
Accrued expenses.............................................................................. 267,497
------------
TOTAL LIABILITIES...................................................................... 9,691,520
------------
NET ASSETS............................................................................. $630,118,611
------------
------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income........................................................... $ 2,681
Accumulated net realized gain on investments.................................................. 20,276,503
Net unrealized appreciation on investments.................................................... 197,215,888
Shares of beneficial interest (Note 3)........................................................ 81,702
Additional paid-in capital.................................................................... 412,541,837
------------
NET ASSETS............................................................................. $630,118,611
------------
------------
PRICING OF SHARES:
Net asset value, offering and redemption price per share
($630,118,611[div]81,701,995 shares outstanding) (Note 3)................................... $7.71
-----
-----
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994
----------------------- -----------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income...................................................... $ 8,281,365 $ 11,804,371
Net realized gain on investments........................................... 95,221,780 70,357,152
Net unrealized appreciation (depreciation) on investments.................. 17,417,882 (88,633,065)
----------------------- -----------------------
Increase (decrease) in net assets resulting from operations................ 120,921,027 (6,471,542)
Dividends paid from net investment income.................................. (8,285,016) (10,380,594)
Distributions paid from net realized gains................................. (73,143,226) (68,889,610)
FROM CAPITAL SHARE TRANSACTIONS:
Decrease in net assets from capital share transactions (Note 3)............ (180,790,798) (165,002,473)
----------------------- -----------------------
DECREASE IN NET ASSETS....................................................... (141,298,013) (250,744,219)
NET ASSETS:
Beginning of year.......................................................... 771,416,624 1,022,160,843
----------------------- -----------------------
End of year (including undistributed net investment income of $2,681 and
$91,343, respectively)................................................... $ 630,118,611 $ 771,416,624
----------------------- -----------------------
----------------------- -----------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends..................................................................................... $ 13,344,746
Interest...................................................................................... 1,789,770
------------
Total income........................................................................... 15,134,516
------------
Expenses:
Investment advisory fee (Note 2).............................................................. 5,449,527
Custodian and transfer agent fees............................................................. 429,580
Administrative and clerical services.......................................................... 294,597
Supplies and postage.......................................................................... 178,020
Shareholder reports and notices............................................................... 125,994
Insurance..................................................................................... 118,612
Legal and auditing fees....................................................................... 108,059
Trustees' fees................................................................................ 92,345
Facilities and office space................................................................... 84,917
Miscellaneous................................................................................. 59,673
Fees waived by investment adviser (Note 2).................................................... (88,173)
------------
Total expenses......................................................................... 6,853,151
------------
Net investment income.................................................................. 8,281,365
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments................................................................ 95,221,780
Net unrealized appreciation on investments...................................................... 17,417,882
------------
Net realized and unrealized gain on investments................................................. 112,639,662
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................ $120,921,027
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in evaluating the Fund's
performance over the last five years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........... $7.41 $8.31 $8.00 $7.29 $5.78
INCOME FROM INVESTMENT ACTIVITIES:
Net investment income...................... 0.11 0.12 0.11 0.11 0.12
Net realized and unrealized gain (loss) on
investments............................. 1.27 (0.18) 0.79 1.07 1.72
Total from investment activities........... 1.38 (0.06) 0.90 1.18 1.84
LESS DISTRIBUTIONS:
Dividends paid from net investment
income.................................. (0.11) (0.11) (0.11) (0.10) (0.12)
Distributions paid from net realized
gain.................................... (0.97) (0.73) (0.48) (0.37) (0.21)
Total distributions........................ (1.08) (0.84) (0.59) (0.47) (0.33)
NET ASSET VALUE, END OF YEAR................. $7.71 $7.41 $8.31 $8.00 $7.29
TOTAL RETURN................................. 18.7% (0.7%) 11.3% 16.2% 31.8%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (in thousands)....... $630,119 $771,417 $1,022,161 $1,102,224 $789,141
Ratio of Expenses to Average Net Assets...... 0.98%(a) 0.98% 0.98% 0.91% 0.95%
Ratio of Net Investment Income to Average Net
Assets..................................... 1.18% 1.33% 1.23% 1.48% 1.73%
Portfolio Turnover Rate...................... 10% 17% 24% 22% 29%
</TABLE>
(a) Expense ratio before waiver of fees by the investment adviser would have
been .99% for the year ended December 31, 1995.
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Pennsylvania Mutual Fund (the 'Fund'), is a diversified open-end management
investment company established as a business trust under the laws of Delaware.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
a. Valuation of investments:
Securities listed on an exchange or on the Nasdaq National Market System
are valued on the basis of the last reported sale prior to the time the
valuation is made or, if no sale is reported for such day, at their bid price
for exchange-listed securities and at the average of their bid and asked prices
for Nasdaq securities. Quotations are taken from the market where the security
is primarily traded. Other over-the-counter securities for which market
quotations are readily available are valued at their bid price. Securities for
which market quotations are not readily available are valued at their fair value
under procedures established and supervised by the Board of Trustees. Bonds and
other fixed income securities may be valued by reference to other securities
with comparable ratings, interest rates and maturities, using established
independent pricing services.
b. Investment transactions and related investment income:
Investment transactions are accounted for on the trade date and dividend
income is recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. Realized gains and losses from investment transactions and
unrealized appreciation and depreciation of investments are determined on the
basis of identified cost for book and tax purposes.
c. Taxes:
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its fiscal year.
The schedule of investments includes information regarding income taxes under
the caption 'Income Tax Information'.
d. Distributions:
Dividend and capital gain distributions are recorded on the ex-dividend
date and paid annually in December. These distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications to paid-in capital
and may affect net investment income per share. Undistributed net investment
income may include temporary book and tax basis differences which will reverse
in a subsequent period. Any taxable income or gain remaining at fiscal year end
is distributed in the following year.
e. Repurchase agreements:
The Fund enters into repurchase agreements with respect to its portfolio
securities solely with State Street Bank and Trust Company ('SSB&T'), the
custodian of its assets. The Fund restricts repurchase agreements to maturities
of no more than seven days. Securities pledged as collateral for repurchase
agreements are held by SSB&T until maturity of the repurchase agreements.
Repurchase agreements could
23
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
involve certain risks in the event of default or insolvency of SSB&T, including
possible delays or restrictions upon the ability of the Fund to dispose of the
underlying securities.
f. Security Lending:
The Fund loans securities to qualified institutional investors for the
purpose of realizing additional income. This income is included in interest
income. Loans of securities of the Fund are collateralized by cash and/or
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The collateral is equal to at least 100% of the current
market value of the loaned securities.
2. INVESTMENT ADVISER:
Under its investment advisory agreement with Quest Advisory Corp.
('Quest'), the Fund accrued and paid Quest fees totaling $5,361,354 (net of
$88,173 voluntarily waived by Quest) for the year ended December 31, 1995. The
agreement provides for fees equal to 1.0% per annum of the first $50 million of
the Fund's average total net assets, .875% per annum of the next $50 million of
such net assets and .75% per annum of additional amounts of average total net
assets. Such fees are computed daily and are payable monthly to Quest.
3. FUND SHARES:
The Board of Trustees has authority to issue an unlimited number of shares
of beneficial interest of the Fund, with a par value of $.001. Share
transactions were as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1995 December 31, 1994
---------------------------- ----------------------------
Shares Amount Shares Amount
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sold........................................ 4,913,877 $ 39,278,575 7,980,922 $ 65,918,424
Issued as reinvested dividends and
distributions............................. 9,739,008 74,600,820 9,687,741 71,786,160
Redeemed.................................... (37,019,497) (294,670,193) (36,575,906) (302,707,057)
</TABLE>
Shares redeemed within one year are subject to a 1% redemption fee, payable
to the Fund, which is used to offset the costs associated with redemptions.
4. PURCHASES AND SALES OF SECURITIES:
For the year ended December 31, 1995, the cost of purchases and the
proceeds from sales of portfolio securities, other than short-term securities,
amounted to $67,956,050 and $341,563,985, respectively.
5. TRANSACTIONS IN SHARES OF AFFILIATED COMPANIES:
An 'Affiliated Company' as defined in the Investment Company Act of 1940 is
a company in which the Fund owns at least 5% of the company's outstanding voting
securities. The Fund effected the following transactions in shares of these
companies for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Purchases Sales
------------------- ------------------ Realized Dividend
Shares Cost Shares Cost Gain/(Loss) Income
------- -------- ------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Anacomp, Inc........................... -- -- 82,900 $315,269 $ (146,791) $ 48,469
Liberty Homes, Inc..................... -- -- 2,500 23,775 (1,275) 52,380
</TABLE>
24
<PAGE>
<PAGE>
PENNSYLVANIA MUTUAL FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of Pennsylvania Mutual Fund:
We have audited the accompanying statement of assets and liabilities of
Pennsylvania Mutual Fund, including the schedule of investments as of December
31, 1995, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Pennsylvania Mutual Fund as of December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 7, 1996
25
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
26
<PAGE>
<PAGE>
TRUSTEES
Hubert L. Cafritz
Thomas R. Ebright
Richard M. Galkin
Stephen L. Isaacs
William L. Koke
David L. Meister
Charles M. Royce
OFFICERS
Charles M. Royce, President and Treasurer
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President and Assistant Secretary
Susan I. Grant, Secretary
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
CUSTODIAN
State Street Bank and Trust Company
27
<PAGE>
<PAGE>
POSTSCRIPT: CRUISES, DECK CHAIRS AND INVESTING
Charlie Brown and his friends frequently offer sage commentary on life. In
one Peanuts cartoon, Lucy remarks to Charlie Brown that 'life is a deck chair.'
Some people on a cruise take their chairs to the rear of the ship so they can
see where they have been. Others face their chairs forward, to see where they
are going. Charlie Brown laments that on his ship of life, he has never been
able to get his chair unfolded.
Investing is much the same way. Investors often get different views from
their deck chairs. Sometimes the view on the 'large-cap growth' side is better,
while at other times the views in the direction of 'mid-cap blend' or of 'small-
cap value' may be better. What is most important is that an investor be on the
cruise to begin with; being left standing on the pier is no fun at all. It is
equally important that an investor not get seasick by running from one side of
the ship to the other trying to get the best view. Studies have shown that the
average investor does far worse than the market in general largely because he
buys into, or sells out of, a fund or investment style at the wrong time in an
attempt to chase the best returns.
On the most recent leg of this cruise, large-cap stocks and technology
issues provided beautiful sunsets, while our investment style provided scenery
that was much less exciting. Such market swings between market capitalization
and investment style are well documented, and the most recent under-performance
by small-cap value is just as common as the over-performance in 1992 and 1993.
Remember, the sun usually sets on the other side of the ship on the way back to
port.
As to the remainder of our cruise, we are sitting not on the deck, but in
the engine room making sure the engines are in good working order. We remain
confident in our approach and the absolute results it produces over the
long-term, even though they may not be relatively dynamic at all times. We are
not concerned with how the rest of the chairs face or if they are folded or
unfolded, just whether our passengers will get to their final destination.
------------------------------------------------------
THE ROYCE FUNDS
General Information and Telephone Purchases ....... 1 (800) 221-4268
Shareholder Account Services ...................... 1 (800) 841-1180
Investment Advisor Services ......................... 1 (800) 33-ROYCE
The Royce Funds InfoLine ............................ 1 (800) 78-ROYCE
E-mail Address ............................... roycenet @interport.net
Internet Homepage ......... http: //www.galt.com/www/home/mutual/royce
1414 Avenue of the Americas, New York, New York 10019
This report must be accompanied by or preceded by a current prospectus of the
Fund
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as `D'
The double dagger symbol shall be expressed as `D'`D'
GRAPHIC APPENDIX
On page 2 of the paper format Pennsylvania Mutual Fund report:
Picture of a man in a cape flying
Picture of Albert Einstein
On page 3 of the paper format Pennsylvania Mutual Fund report:
A picture of a scale balancing a dollar sign and a factory
A picture of a man in a long white coat pointing with a pointer
On page 4 of the paper format Pennsylvania Mutual Fund report:
A bullseye
A picture of a sad face
On page 5 of the paper format Pennsylvania Mutual Fund report:
A picture of a boy daydreaming
On page 6 of the paper format Pennsylvania Mutual Fund report:
A picture of two Stone-Age men building a rocket
On page 7 of the paper format Pennsylvania Mutual Fund report:
A line graph showing the Dow Jones Industrial Average's performance from
December 1975 to December 1995
A picture of a happy alarm clock ringing
On page 8 of the paper format Pennsylvania Mutual Fund report:
A line graph showing performance of the Fund, the S&P 500 and
the 3-Month T-bill rate over the period indicated.
On page 10 of the paper format Pennsylvania Mutual Fund report:
A line graph showing general market cycles, showing peaks and troughs,
from June 1979 through June 1995
On page 11 of the paper format Pennsylvania Mutual Fund report:
A pie chart showing the percentage in the Fund of the "premier" and
"micro-cap" core portfolios.
A pie chart showing the percentage in the Fund of the "premier" and
"micro-cap" core portfolios and the "equity income" and "low-priced"
tactical strategies within the core portfolios.
