- -------------
ANNUAL REPORT
- -------------
1996
1996
1996
1996
1996
Smith Barney
Growth and
Income Fund
-----------------------------
January 31, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- -----------------------------------
Smith Barney Growth and Income Fund
- -----------------------------------
Dear Shareholder:
We are pleased to provide the annual report for the year ended January 31, 1996
for the Smith Barney Growth and Income Fund. In this report, we summarize the
period's prevailing economic and market conditions and outline our portfolio
strategy. A detailed summary of performance and current holdings can be found in
the appropriate sections that follow in the annual report.
Fund Performance Update
For the twelve-months ended January 31, 1996, the Class A shares of the Smith
Barney Growth and Income Fund had an annual total return of 30.97%. The
principal reason for this performance was the stock market's rise, as generally
85% to 90% of the Fund's assets were invested in common stocks. For example,
during this period, the Standard & Poor's 500 Index, an unmanaged
capitalization-weighted measure of 500 widely held stocks, produced a total
return of 37.59% including dividends.
We invested smaller portions of the portfolio in preferred stocks, corporate
bonds and cash equivalents. These investment categories also generated excellent
returns for the Fund due to the positive market environment of the past twelve
months.
Overview of the Markets
Stocks and bonds have been spectacular performers over the past year. Indeed,
one might say that the last twelve months were a vintage year for the capital
markets.
The reasons for these outstanding returns are many. But probably the single most
important reason has been low inflation. As reported by measures such as the
Consumer Price Index (CPI), inflation is now below 3%. Recent studies have
suggested that even a 3% number overstates the actual inflation rate -- which
may approach zero today.
There were other fundamental factors besides low inflation that drove stock and
bond prices higher during the period covered by this report. Last summer, the
Federal Reserve Board began the process of lowering short-term interest rates by
reducing the Fed Funds rate on these separate occasions by 0.25%. Such a series
of relatively small moves seems to be the preferred course of action by the
Federal Reserve under Chairman Alan Greenspan's leadership. We anticipate these
Federal Reserve interest rate reductions to continue for the next several
quarters, providing a favorable backdrop for the financial markets. In addition,
the stock market has enjoyed the benefits of robust corporate earnings. Company
earnings reports have pleasantly surprised most analysts, causing stock prices
1
<PAGE>
to move higher. We believe these stronger-than-expected earnings are the payoff
for corporate America's much-publicized restructurings. It now appears that a
combination of restructuring, higher capital investment and the more intelligent
application of technology has made many corporations more efficient and
productive. And the investment community is only now beginning to appreciate the
earnings power of many of these newly restructured "lean and mean" companies.
A final support to the markets, particularly the stock market, is what might be
described as investor sentiment or psychology. On the whole, investors have
remained cautious even as the stock market continues to reach new highs.
Investors have not gotten wildly bullish or even overly enthusiastic. All of
this suggests to us that the markets have further room to move upwards.
Fund's Strategy...
We have previously written about the Smith Barney Growth and Income Fund's
investment strategy, and we think it's important enough to restate it here. The
Smith Barney Growth and Income Fund invests primarily in common stocks and
securities convertible into common stocks such as certain preferred stocks or
bonds. Our process in selecting stocks involves two touchstones or guiding
principles.
One, we concentrate on buying those companies that have increased their
dividends on a consistent basis. Simply paying a dividend is not enough. We seek
out companies that have regularly raised their dividends, and raised them in
"real" terms, that is at a rate greater than inflation. We base our search on
both historical evidence and common sense. Financial history tells us that
companies that have increased their dividends most rapidly have amply rewarded
investors over time. And common sense tells us that the Board of Directors of
corporations who set dividend policies only increase dividends when they believe
a company's long-term prospects are bright.
Two, we invest in what we think are quality companies. Our primary definition of
quality is a financial one and includes factors such as a strong balance sheet,
an investment-grade bond rating or a history of dependable earnings growth. But
we also pay close attention to less quantifiable issues such as the quality of
company managements, products and processes. This focus on quality reflects our
conservative approach to selecting stocks and our belief that, over the long
term, quality companies are usually the most successful ones.
...and Tactics
There was no dramatic overhaul of the Fund's portfolio over the past year. But,
then again, that is not our investment style. We generally do not make major
annual changes to the portfolio. Instead, we try to buy securities and position
the Smith Barney Growth and Income Fund based on a longer-term perspective.
2
<PAGE>
Over the last twelve months, the allocation of the Fund's assets has remained
relatively stable. During the period covered by this report, we typically had
85% to 90% of the Fund in common stocks. Approximately 5% of the Fund's assets
was in convertible securities, with an equivalent amount in corporate bonds and
notes and the remainder in cash equivalents. This asset mix is a typical one for
the Fund and reflects the fact that it is an equity-oriented mutual fund.
Over the past year, buy and sell transactions in the Smith Barney Growth and
Income Fund were concentrated in common stocks. However, we did not
significantly change our weightings in the major sectors of the stock market.
The Fund remains slightly overweighted in industrial companies and somewhat
underweighted in consumer brand-name companies. These weightings reflect our
view that capital goods production will grow more rapidly in the U.S. Consumers
are still going to spend, but at lower rates than in the past. Many of the
successful corporate restructurings referred to previously in this letter have
taken place in the economy's manufacturing sector. Today, many of these
industrial companies have transformed themselves into formidable world-class
competitors.
Inflation: Lower than Previously Thought?
At the beginning of this letter, we stated that low inflation was an
underpinning to the strong performance of the capital markets. And reported
inflation has been quite low (as previously stated, 3% as measured by the CPI).
But even this number may be above the actual rate of inflation.
Analysts have identified two major problems with using the CPI as a measure of
"true" inflation. The first is the "substitution effect," which is that the CPI
index is based on a fixed market basket of goods. The CPI makes no allowance for
consumers purchasing more inexpensive goods or going to cheaper outlets for
purchasing the same goods. A second problem with using the CPI to measure
inflation is the underestimation of the economy's productivity. According to
official statistics, there has been no productivity growth in the economy since
1977, a period of revolutionary change in data processing and factory floor
automation.
Such an underestimation of productivity leads to an overestimation of inflation.
Combining these two effects, one analyst estimates that inflation was overstated
by 1% fifteen years ago, and by about 2 1/4% today. And if the CPI overstates
inflation by 2 1/4%, the "true" inflation rate is just about zero.
Overestimating inflation has huge implications for the financial markets.
Investor recognition of an overstatement of inflation would benefit the capital
markets. Both stock and bond prices would rise as investors re-value interest
payments and earnings in a lower inflation world, which is a tantalizing
possibility.
3
<PAGE>
Market Outlook
We continue to have a positive outlook for the financial markets. Most of the
favorable factors outlined in the beginning of this letter are still in place.
Inflation is low, and may be even lower than generally perceived. In our view,
the Federal Reserve Board is likely to continue to lower interest rates.
Corporate earnings have been stronger than expected. And investor psychology is
certainly not wildly optimistic.
The net result? We do not expect a repeat of last year's spectacular market
results. We do believe, however, the markets can, and will, move modestly higher
in the coming months. Therefore, we also believe that the next twelve months
should be rewarding for investors.
In closing, we appreciate your confidence in our investment management approach.
We look forward to continuing to serve your investment needs in the years ahead.
Sincerely,
/s/Heath B. McLendon /s/R. Jay Gerken, CFA /s/George V. Novello
Heath B. McLendon R. Jay Gerken, CFA George V. Novello
Chairman and Investment Officer Investment Officer
Chief Executive Officer
February 15, 1996
4
<PAGE>
Smith Barney Growth and Income Fund
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- ---------------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=======================================================================================
<S> <C> <C> <C> <C> <C>
1/31/96 $ 9.62 $ 12.16 $ 0.20 $ 0.20 30.97%
- ---------------------------------------------------------------------------------------
1/31/95 10.36 9.62 0.19 0.14 (3.93)
- ---------------------------------------------------------------------------------------
1/31/94 9.58 10.36 0.23 0.00 10.70
- ---------------------------------------------------------------------------------------
Inception* - 1/31/93 9.50 9.58 0.00 0.00 0.84+
=======================================================================================
Total $ 0.62 $ 0.34
=======================================================================================
- ---------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- ---------------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=======================================================================================
<S> <C> <C> <C> <C> <C>
1/31/96 $ 9.65 $12.19 $0.15 $0.20 30.23%
- ---------------------------------------------------------------------------------------
1/31/95 10.38 9.65 0.14 0.14 (4.33)
- ---------------------------------------------------------------------------------------
1/31/94 9.58 10.38 0.15 0.00 10.01
- ---------------------------------------------------------------------------------------
Inception* - 1/31/93 9.50 9.58 0.00 0.00 0.84+
=======================================================================================
Total $0.44 $0.34
=======================================================================================
- ---------------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- ---------------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=======================================================================================
<S> <C> <C> <C> <C> <C>
1/31/96 $ 9.65 $12.19 $0.15 $0.20 30.23%
- ---------------------------------------------------------------------------------------
Inception* - 1/31/95 9.91 9.65 0.06 0.14 (0.58)+
=======================================================================================
Total $0.21 $0.34
=======================================================================================
</TABLE>
It is the Funds' policy to distribute dividends quarterly and capital gains, if
any, annually.
5
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------------------
Class A Class B Class C
================================================================================
Year Ended 1/31/96 30.97% 30.23% 30.23%
- --------------------------------------------------------------------------------
Inception* - 1/31/96 11.07 10.52 19.31
================================================================================
Without Sales Charge(2)
----------------------------------------
Class A Class B Class C
================================================================================
Year Ended 1/31/96 24.38% 25.23% 29.23%
- --------------------------------------------------------------------------------
Inception* - 1/31/96 9.32 10.03 19.31
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/96) 40.46%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/96) 38.22
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/96) 29.47
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charge with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed less than
one year from initial purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception dates for Class A, B and C shares are November 6, 1992, November
6, 1992, and August 15, 1994 respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Growth and Income Fund vs.
Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
November 1992 -- January 1996
[The following table is represented as a line graph in the printed material.]
Smith Barney
Growth and S&P 500
Income Fund Index
----------- -----
11/06/92 9,500 10,000
1/31/93 9,580 10,716
7/31/93 9,816 11,100
1/31/94 10,605 12,096
7/31/94 10,161 11,673
1/31/95 10,188 12,159
7/31/95 11,996 14,720
1/31/96 13,339 16,860
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on November 6, 1992, assuming deduction of the maximum 5.00%
sales charge at the time of investment and reinvestment of dividends and
capital gains, if any, at net asset value through January 31, 1996. The
Standard & Poor's 500 Index is an index composed of widely held common
stocks listed on the New York Stock Exchange, American Stock Exchange and
the over-the-counter market. Figures for the index include reinvestment of
dividends. The index is unmanaged and is not subject to the same management
and trading expenses as a mutual fund. The performance of the Fund's other
classes may be greater or less than the Class A shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
7
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) January 31, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following table is represented as a Pie Graph in the printed material.]
Corporate Debentures 6.9%
Electronic Technology 10.8%
Convertible Preferred Stocks 3.4%
Finance 8.8%
Other Common Stocks 20.7%
Consumer Non-Durables 8.6%
Energy 4.7%
Producer Manufacturer 8.0%
Transportation 5.0%
Health Technology 7.9%
Process Industries 7.4%
Utilities 7.8%
Top Ten Holdings
Percentage of
Company Total Investments
================================================================================
Hewlett Packard Co. 3.9%
General Electric Co. 3.5
Johnson & Johnson 2.9
Coca-Cola Co. 2.8
Monsanto Co. 2.7
Merck & Co. 2.6
NationsBank Corp. 2.6
Ameritech Corp. 2.5
Automatic Data Processing Inc. 2.4
Eli Lilly & Co. 2.4
================================================================================
8
<PAGE>
Smith Barney Growth and Income Fund
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Schedule of Investments January 31, 1996
- ----------------------------------------------------------------------------------
SHARES SECURITY VALUE
==================================================================================
<S> <C>
COMMON STOCKS -- 87.3%
Commercial Services -- 3.4%
65,000 Reuters Holdings PLC ADR $ 3,648,125
55,000 W.W. Grainger Inc. 3,705,625
- ----------------------------------------------------------------------------------
7,353,750
- ----------------------------------------------------------------------------------
Consumer Services -- 3.2%
79,000 McDonald's Corp. 3,969,750
95,000 TCA Cable Television Inc. 2,933,125
- ----------------------------------------------------------------------------------
6,902,875
- ----------------------------------------------------------------------------------
Consumer Durables -- 3.2%
95,000 Genuine Parts Co. 4,227,500
110,000 Leggett & Platt Inc. 2,640,000
- ----------------------------------------------------------------------------------
6,867,500
- ----------------------------------------------------------------------------------
Consumer Non-Durables -- 8.6%
80,000 Coca-Cola Co. 6,030,000
85,000 International Flavors & Fragrances Inc. 4,260,625
50,000 Kimberly Clark Corp. 4,031,250
50,000 Procter & Gamble Co. 4,193,750
5,000 Schweitzer-Mauduit International Inc.+ 124,375
- ----------------------------------------------------------------------------------
18,640,000
- ----------------------------------------------------------------------------------
Electronics Technology -- 10.8%
110,000 AMP Inc. 4,290,000
19,800 Harris Corp. 1,803,600
100,000 Hewlett-Packard Co. 8,475,000
90,000 Motorola Inc. 4,837,500
80,000 Raytheon Co. 3,930,000
- ----------------------------------------------------------------------------------
23,336,100
- ----------------------------------------------------------------------------------
Energy -- 4.7%
30,000 Exxon Corp. 2,407,500
40,000 Mobil Corp. 4,430,000
100,000 Phillips Petroleum Co. 3,262,500
- ----------------------------------------------------------------------------------
10,100,000
- ----------------------------------------------------------------------------------
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Growth and Income Fund
- ----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- ----------------------------------------------------------------------------------
SHARES SECURITY VALUE
==================================================================================
Finance -- 8.8%
57,000 Firstar Corp. $ 2,458,125
85,000 Greenpoint Financial Corp. 2,194,061
130,000 Keycorp 4,777,500
50,000 J.P. Morgan & Company, Inc. 4,062,500
80,000 NationsBank Corp. 5,590,000
- ----------------------------------------------------------------------------------
19,082,186
- ----------------------------------------------------------------------------------
Health Technology -- 7.9%
65,000 Johnson & Johnson 6,240,000
90,000 Eli Lilly & Co. 5,175,000
80,000 Merck & Co. 5,620,000
- ----------------------------------------------------------------------------------
17,035,000
- ----------------------------------------------------------------------------------
Industrial Services -- 2.2%
70,000 Fluor Corp. 4,690,000
- ----------------------------------------------------------------------------------
Minerals -- 1.4%
150,000 Worthington Industries 3,150,000
- ----------------------------------------------------------------------------------
Process Industries -- 7.4%
80,000 A. Schulman, Inc. 1,820,000
100,000 Bemis, Inc. 2,825,000
80,000 M.A. Hanna Co. 2,210,000
45,000 Monsanto Co. 5,861,250
75,000 Temple-Inland Inc. 3,290,625
- ----------------------------------------------------------------------------------
16,006,875
- ----------------------------------------------------------------------------------
Producer Manufacturer -- 8.0%
100,000 Belden Inc. 2,750,000
100,000 General Electric Co. 7,675,000
31,500 Hubbell Inc., Class B Shares 2,118,375
75,000 Minnesota Mining & Manufacturing Co. 4,837,500
- ----------------------------------------------------------------------------------
17,380,875
- ----------------------------------------------------------------------------------
Retail -- 2.5%
120,000 Circuit City Stores, Inc. 3,090,000
55,000 May Department Stores Co. 2,447,500
- ----------------------------------------------------------------------------------
5,537,500
- ----------------------------------------------------------------------------------
Technology Services -- 2.4%
130,000 Automatic Data Processing Inc. 5,183,750
- ----------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Growth and Income Fund
- ----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- ----------------------------------------------------------------------------------
SHARES SECURITY VALUE
==================================================================================
Transportation -- 5.0%
40,000 CSX Corp. $ 3,710,000
30,000 Conrail Inc. 3,537,500
55,000 Union Pacific Corp. 3,664,375
- ----------------------------------------------------------------------------------
10,911,875
- ----------------------------------------------------------------------------------
Utilities -- 7.8%
90,000 Ameritech Corp. 5,411,250
100,000 Bellsouth Corp. 4,287,500
110,000 GTE Corp. 5,060,000
40,000 Northern States Power Co. 2,055,000
- ----------------------------------------------------------------------------------
16,813,750
- ----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $137,729,931) 188,992,036
- ----------------------------------------------------------------------------------
FOREIGN COMMON STOCKS -- 2.4%
Australia -- 2.4%
362,147 Broken Hill Proprietary Co.
(Cost-- $4,550,185) 5,111,337
- ----------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 3.4%
Energy -- 1.6%
65,000 Unocal Corp. 3,566,875
- ----------------------------------------------------------------------------------
Technology Services -- 1.8%
50,000 General Motors Corp., Series E 3,881,250
- ----------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost-- $6,352,555) 7,448,125
==================================================================================
FACE
AMOUNT SECURITY VALUE
==================================================================================
CORPORATE DEBENTURES -- 6.9%
Financial Services -- 3.9%
$4,000,000 Dean Witter, Discover & Co., 6.875% due 3/1/03 4,180,000
4,000,000 General Motors Acceptance Corp., 7.000% due 9/15/02 4,200,000
- ----------------------------------------------------------------------------------
8,380,000
- ----------------------------------------------------------------------------------
Industrial Services -- 1.9%
4,000,000 Limited Inc., 7.800% due 5/15/02 4,235,000
- ----------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Growth and Income Fund
- ----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- ----------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
==================================================================================
Producer Manufacturer -- 1.1%
$ 950,000 Thermo Electron Corp., Convertible, 4.625% due 8/1/97$ 2,427,250
- ----------------------------------------------------------------------------------
TOTAL CORPORATE DEBENTURES
(Cost-- $13,174,626) 15,042,250
==================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $161,807,297*) $216,593,748
==================================================================================
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities January 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $161,807,297) $216,593,748
Cash 8,487,149
Receivable for Fund shares sold 402,245
Dividends and interest receivable 489,053
Deferred organization cost 67,320
- --------------------------------------------------------------------------------
Total Assets 226,039,515
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 1,633,752
Payable for Fund shares purchased 131,105
Distribution fees payable 92,888
Investment advisory fees payable 83,081
Administration fees payable 36,925
Accrued expenses 115,339
- --------------------------------------------------------------------------------
Total Liabilities 2,093,090
- --------------------------------------------------------------------------------
Total Net Assets $223,946,425
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 18,394
Capital paid in excess of par value 168,825,818
Undistributed net investment income 33,910
Accumulated net realized gain on security transactions 281,852
Net unrealized appreciation of investments 54,786,451
- --------------------------------------------------------------------------------
Total Net Assets $223,946,425
================================================================================
Shares Outstanding:
Class A 9,053,395
-----------------------------------------------------------------------------
Class B 9,261,004
-----------------------------------------------------------------------------
Class C 78,803
-----------------------------------------------------------------------------
Class Y 414
-----------------------------------------------------------------------------
Net Asset Value:
Class A $ 12.16
-----------------------------------------------------------------------------
Class B $ 12.19
-----------------------------------------------------------------------------
Class C $ 12.19
-----------------------------------------------------------------------------
Class Y $ 12.16
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $ 12.80
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (Net of foreign witholding tax of $27,705) $ 4,772,452
Interest 1,130,671
- --------------------------------------------------------------------------------
Total Investment Income 5,903,123
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,017,957
Investment advisory fees (Note 2) 918,110
Administration fees (Note 2) 408,049
Shareholder and system servicing fees 305,000
Audit and legal 58,000
Amortization of deferred organization costs 38,471
Registration fees 33,000
Trustees' fees 27,000
Shareholder communications 24,500
Custody 12,100
Other 288
- --------------------------------------------------------------------------------
Total Expenses 2,842,475
- --------------------------------------------------------------------------------
Net Investment Income 3,060,648
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 48,676,856
Cost of securities sold 45,229,840
- --------------------------------------------------------------------------------
Net Realized Gain 3,447,016
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 7,425,224
End of year 54,786,451
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 47,361,227
- --------------------------------------------------------------------------------
Net Gain on Investments 50,808,243
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $53,868,891
================================================================================
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Growth and Income Fund
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended January 31,
- ------------------------------------------------------------------------------------------------
1996 1995
================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 3,060,648 $ 2,777,762
Net realized gain 3,447,016 3,961,502
Increase in net unrealized appreciation (depreciation) 47,361,227 (14,098,390)
- ------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 53,868,891 (7,359,126)
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,195,880) (2,611,145)
Net realized gains (3,659,283) (2,742,287)
- ------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (6,855,163) (5,353,432)
- ------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sales 21,941,512 112,325,430
Net asset value of shares issued in connection with the
transfer of the Smith Barney Shearson Directions Value Fund's
net assets (Note 6) -- 147,547,146
Net asset value of shares issued for reinvestment of dividends 6,321,441 4,977,132
Cost of shares reacquired (38,622,469) (137,457,229)
- ------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (10,359,516) 127,392,479
- ------------------------------------------------------------------------------------------------
Increase in Net Assets 36,654,212 114,679,921
NET ASSETS:
Beginning of year 187,292,213 72,612,292
- ------------------------------------------------------------------------------------------------
End of year* $ 223,946,425 $ 187,292,213
================================================================================================
* Includes undistributed net investment income of: $ 33,910 $ 169,142
================================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Growth and Income Fund ("Fund"), a separate investment
fund of the Smith Barney Equity Funds ("Trust"), a Massachusetts business trust,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of this
Fund and one other separate investment fund, the Smith Barney Strategic
Investors Fund. The financial statements and financial highlights for the other
fund are presented in a separate annual report.
The significant accounting policies consistently followed by the Fund are:
(a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales price were reported and U.S. Government
and Agency Obligations are valued at current quoted bid prices; (c) short-term
investments that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity; (d)
short-term investments and securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium which approximates market
value; (e) dividend income is recorded on ex-dividend date and interest income
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are recorded on the identified cost basis; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records
are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (i) direct expenses
are charged to each class; management fees and general fund expenses are
allocated on the basis of relative net assets; (j) the Fund intends to comply
with the applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; and (k) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ from these amounts.
16
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
The Fund also has a compensating balance arrangement with its custodian,
PNC Bank. This arrangement does not result in any offset to the Fund's custody
fee.
In addition, organization costs have been deferred and are being amortized
on a straight line basis over a five-year period, beginning with the
commencement of the Fund's operations in January 1993.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as an investment adviser to the Trust. The
Fund pays SBMFM an advisory fee calculated at an annual rate of 0.45% of the
average daily net assets. This fee is calculated daily and paid monthly.
SBMFM also acts as the Fund's administrator of the Fund for which it
receives a fee calculated at an annual rate of 0.20% of the average daily net
assets. This fee is calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, had entered into a
sub-administration agreement with the Fund and SBMFM. SBMFM paid Boston Advisors
a portion of its administration fee at rate agreed upon from time to time
between SBMFM and Boston Advisors. As of February 13, 1995 this relationship was
terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
year ended January 31, 1996, SB received brokerage commissions of $3,690 and
sales charges of approximately $69,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and thereafter declines by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the year ended January 31, 1996, CDSCs paid to SB
for Class B shares were approximately $216,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to Class A, B and C shares calculated at the annual rate of 0.25% of the average
daily net assets for each respective class. In addition, the Fund pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.50% of the average daily net assets for each class. For the year ended
17
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
January 31, 1996, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $256,112 $758,545 $3,300
================================================================================
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the year ended January 31, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $30,656,272
- --------------------------------------------------------------------------------
Sales 48,676,856
================================================================================
At January 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $55,555,440
Gross unrealized depreciation (768,989)
- --------------------------------------------------------------------------------
Net unrealized appreciation $54,786,451
================================================================================
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian take possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At January 31, 1996, the Trust had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund
has the ability to issue multiple classes of shares. Each share of a class
represents an identical interest and has the same rights, except that each class
bears certain expenses specifically related to the distribution of its shares.
18
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At January 31, 1996, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $87,912,574 $80,052,283 $874,355 $5,000
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
January 31, 1996 January 31, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
========================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 398,594 $ 4,510,317 9,788,268 $ 95,614,375
Net asset value of shares issued in
connection with the transfer of the
Smith Barney Shearson Directions
Value Fund's net assets (Note 6) -- -- 284,460 2,890,114
Shares issued on reinvestment 309,676 3,512,515 230,496 2,188,948
Shares redeemed (1,532,561) (16,678,833) (856,835) (7,948,427)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (824,291) $ (8,656,001) 9,446,389 $ 92,745,010
========================================================================================================
Class B
Shares sold 1,475,451 $ 16,587,023 1,646,391 $ 16,627,414
Net asset value of shares issued in
connection with the transfer of the
Smith Barney Shearson Directions
Value Fund's net assets (Note 6) -- -- 14,209,924 144,657,023
Shares issued on reinvestment 244,263 2,793,248 290,715 2,787,008
Shares redeemed (2,011,887) (21,878,315) (13,158,120) (129,508,802)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (292,173) $ (2,498,044) 2,988,910 $ 34,562,643
========================================================================================================
Class C
Shares sold 74,320 $ 839,172 8,730 $ 83,641
Net asset value of shares issued in
connection with the transfer of the
Smith Barney Shearson Directions
Value Fund's net assets (Note 6) -- -- 1 9
Shares issued on reinvestment 1,352 15,678 125 1,176
Shares redeemed (5,726) (65,321) -- --
- --------------------------------------------------------------------------------------------------------
Net Increase 69,946 $ 789,529 8,856 $ 84,826
========================================================================================================
19
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1996 January 31, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
========================================================================================================
Class Y*
Shares sold 414 $ 5,000 -- --
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- -- --
- --------------------------------------------------------------------------------------------------------
Net Increase 414 $ 5,000 -- --
========================================================================================================
</TABLE>
* Inception date is January 31, 1996.
6. TRANSFER OF NET ASSETS
On March 4, 1994, the Fund acquired the assets and certain liabilities of
Smith Barney Shearson Directions Value Fund ("Directions Value Fund") pursuant
to a plan of reorganization approved by the Directions Value Fund's shareholders
on November 3, 1993. Total shares issued by the Fund and the total net assets of
Directions Value Fund on the date of transfer were:
Total Net
Shares Assets of Total Net
Issued by Directions Assets of
Acquired Fund the Fund Value Fund the Fund
================================================================================
Directions Value Fund 14,494,385 $147,547,146 $72,917,644
================================================================================
The total net assets of the Directions Value Fund before acquisition
included unrealized appreciation of $15,800,091. The transaction was structured
for tax purposes to qualify as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended.
20
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994(1) 1993(2)
===========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.62 $ 10.36 $ 9.58 $ 9.50
- -------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.20 0.20 0.20 0.01
Net realized and unrealized gain (loss) 2.74 (0.61) 0.81 0.07
- -------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.94 (0.41) 1.01 0.08
- -------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.20) (0.19) (0.23) --
Net realized gains (0.20) (0.14) -- --
- -------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.33) (0.23) --
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.16 $ 9.62 $ 10.36 $ 9.58
- -------------------------------------------------------------------------------------------
Total Return 30.97% (3.93)% 10.70% 0.84%++
- -------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $110,089 $95,054 $ 4,468 $ 3,520
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.16% 1.41% 1.54% 1.41%+
Net investment income 1.77 1.86 2.00 0.28+
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 15% 127% 79% 1%
===========================================================================================
Average commissions paid on
equity security transactions(3) $ 0.06 -- -- --
===========================================================================================
Class B Shares 1996(1) 1995 1994(1) 1993(2)
===========================================================================================
Net Asset Value, Beginning of Year $ 9.65 $ 10.38 $ 9.58 $ 9.50
- -------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.14 0.17 0.15 (0.01)
Net realized and unrealized gain (loss) 2.75 (0.62) 0.80 0.09
- -------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.89 (0.45) 0.95 0.08
- -------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.14) (0.15) --
Net realized gains (0.20) (0.14) -- --
- -------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.28) (0.15) --
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.19 $ 9.65 $ 10.38 $ 9.58
- -------------------------------------------------------------------------------------------
Total Return 30.23% (4.33)% 10.01% 0.84%++
- -------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $112,891 $92,153 $68,144 $35,173
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.65% 1.90% 1.99% 1.91%+
Net investment income 1.27 1.38 1.55 (0.22)+
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 15% 127% 79% 1%
===========================================================================================
Average commissions paid on
equity security transactions(3) $ 0.06 -- -- --
===========================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year,
since use of the undistributed net investment income method did not accord
with results of operations.
(2) For the period from November 6, 1992 (inception date) to January 31, 1993.
(3) New SEC disclosure guidelines require that average commissions per share be
calculated and presented for the current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
Class C Shares Class Y Shares
------------------ --------------
1996(1) 1995(2) 1996(1)(3)
================================================================================
Net Asset Value, Beginning of Year $ 9.65 $ 9.91 $ 12.08
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.13 0.07 --
Net realized and unrealized gain (loss) 2.76 (0.13) 0.08
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.89 (0.06) 0.08
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.06) --
Net realized gains (0.20) (0.14) --
- --------------------------------------------------------------------------------
Total Distributions (0.35) (0.20) --
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.19 $ 9.65 $ 12.16
- --------------------------------------------------------------------------------
Total Return 30.23% (0.58)%++ N/A
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 961 $ 85 $ 5
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.62% 1.83%+ N/A*
Net investment income 1.11 1.44+ N/A*
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 15% 127% 15%
================================================================================
Average commission paid on
equity security transactions(4) $ 0.06 -- $ 0.06
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year,
since use of the undistributed net investment income method did not accord
with results of operations.
(2) For the period from August 15, 1994 (inception date) to January 31, 1995.
(3) Inception date is January 31, 1996.
(4) New SEC disclosure guidelines require that average commissions per share be
calculated and presented for the current year only.
* Information is not meaningful since the class was only open for 1 day.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gain paid by the Fund to its shareholders
for the fiscal year ended January 31, 1996, was $2,640,721.
22
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Equity Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Growth and Income Fund of
Smith Barney Equity Funds as of January 31, 1996, and the related statements of
operations, changes in net assets, and financial highlights for the year 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
audit. The statement of changes in net assets for the year ended January 31,
1995 and the financial highlights for each of the years in the three-year period
then ended were audited by other auditors whose report thereon, dated March 22,
1995 expressed an unqualified opinion on that statement of changes in net assets
and those financial highlights.
We conducted our audit 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
January 31, 1996, by correspondence with the custodian. As to securities
purchased but not received, we performed other appropriate auditing procedures.
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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Barney Growth and
Income Fund of Smith Barney Equity Funds as of January 31, 1996, and the results
of its operations, changes in its net assets and financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick
New York, New York
March 21, 1996
23
<PAGE>
Smith Barney Growth and Income Fund
- --------------------------------------------------------------------------------
Additional Information:
- --------------------------------------------------------------------------------
Changes in Independent Auditor: On February 8, 1995, based upon the
recommendations of the Audit Committee of the Fund, the Board of Trustees
determined not to retain Coopers & Lybrand L.L.P ("Coopers &Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities &Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at (212)
723-9218.
24
<PAGE>
Smith Barney Smith Barney
Growth and ------------
Income Fund A Member of TravelersGroup[Logo}
Trustees
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Madelon DeVoe Talley
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
R. Jay Gerken
Investment Officer
George V. Novello
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
First Data Investors Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Growth and Income Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney Growth
and Income Fund
388 Greenwich Street
New York, New York 10013
FD01089 3/96
- -------------
ANNUAL REPORT
- -------------
1996
1996
1996
1996
1996
Smith Barney
Strategic
Investors
Fund
----------------------------------------
January 31, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- -------------------------------------
Smith Barney Strategic Investors Fund
- -------------------------------------
Dear Shareholder:
We are pleased to provide the annual report for the year ended January 31, 1996
for the Smith Barney Strategic Investors Fund. In this report, we summarize the
period's prevailing economic and market conditions and outline our portfolio
strategy. A detailed summary of performance and current holdings can be found in
the appropriate sections that follow in the annual report. In addition, a
special interview with Portfolio Managers Robert Brady and Ellen Cammer follows
this letter.
Fund Performance Update
At the end of the Fund's fiscal year, Smith Barney's Investment Policy Group
recommended a model portfolio made up of 60% stocks, 30% long-term bonds and 10%
cash. The following table shows the Investment Policy Group's asset allocation
recommendations during the period covered by this report:
Date Stocks Bonds Cash Gold
- --------------------------------------------------------------------------------
1/17/95 50% 35% 15% 0%
5/15/95 55 30 15 0
7/20/95 60 25 15 0
10/17/95 60 30 10 0
For the one-year period ended January 31, 1996, the Standard & Poor's 500 Stock
Index ("S&P 500") had a total return of 37.59%. The Lehman Brothers Government
Corporate Bond Index posted a total return of 17.72%. As a balanced fund that
invests in both stocks and bonds, the Smith Barney Strategic Investors Fund
participated fully in the returns from each of these markets. For the fiscal
year ended January 31, 1996, the Fund's Class A shares generated a return of
26.47%.
Market Commentary
Stock Market Commentary
The year 1995 brought impressive gains for the U.S. stock market. The widely
followed S&P 500 provided an annual total return for the year of 36.94%. This
was the S&P 500's largest single-year gain since 1958. During this time, growth
stocks generally outperformed value stocks and the stocks of many large
companies outperformed the stocks of many small- to medium-sized companies.
It is difficult to imagine a better environment for the stock market than what
has taken place over the last five quarters. In our view, three factors --
supply and demand, quality, and, finally, relative attractiveness -- have been
extremely positive for the stock market and have propelled it to new highs.
1
<PAGE>
Demand for stocks has soared as more and more people focus on saving and
investing. With the U.S. population aging and living longer and with concerns
about the future of Social Security on the rise, investors have poured nearly
half a trillion dollars into stock mutual funds over the last four years. And
this higher investor demand for stocks is happening at the same time the supply
of stocks is shrinking in the marketplace primarily because of corporate
buybacks and acquisitions. In recent months, the supply of stocks in the market
has gone down by billions of dollars and this trend, if it continues, should
help to support stock prices over the long term.
At the same time of high investor demand for stocks, strong corporate profits,
healthy cash flows and stronger balance sheets have acted to boost the quality
of many stocks. In addition, declining interest rates have made the returns from
stocks more attractive to investors relative to other investments.
Bond Market Commentary
At the end of 1994, most bond investors would never have thought they would
recoup the year's losses as quickly as they did in 1995. During this time, one
of the worst bond markets on record was followed by one of the bond market's
best years. What does this mean for bond investors in 1996? While we expect
another good year for the market, we do not anticipate a decline in long-term
interest rates of the same magnitude as was experienced in 1995. However,
because of slow economic growth, low interest rates and moderate inflation, we
believe the bond market will perform well over the longer term.
Portfolio Strategies
Equity Portfolio
The equity portion of the Fund's portfolio is made up primarily of the stocks of
recognizable companies such as Eastman Kodak, AT&T and IBM that have competed
effectively and captured additional market share on a global basis. Overall, the
U.S. economy is growing slower and, from the standpoint of consumption, is
certainly a mature economy. However, we would argue that many U.S. companies
have reinvented themselves primarily through technology. Not too long ago, many
large U.S. companies were losing market share all around the world. Today, many
large-sized established U.S. companies have become reborn and are now formidable
global competitors.
Fixed-Income Portfolio
Early in the second half of the year, we sold some of the Fund's higher coupon
mortgage-backed securities and replaced them with Treasury securities of longer
durations. This extended the Fund's duration to just under six years, close to
the high end of its targeted duration. (Duration is a rough measure of how a
bond fund may react to a one percentage point change in interest rates. For
example, if a bond fund has a duration of 4 years, it should lose roughly 4%
2
<PAGE>
of its value if interest rates rise by 1 percentage point and gain 4% in value
if interest rates fall by 1 percentage point.)
While we use duration as a tool for boosting the Fund's total return potential,
one of the main ways we try to add value is by increasing or decreasing our
weighting in the various bond sectors (e.g., mortgage-backed securities,
Treasury securities and corporate bonds) based on where we are in the economic
cycle and the historical spread relationships between these different types of
bonds. The Fund also tries to determine the relative attractiveness of
maturities to achieve its objective of providing higher returns with lower
volatility.
Market Outlook
We expect Federal Reserve Board policy to be neutral over the coming months. In
our view, the economy will grow moderately with little or no chance of a
recession. We are comfortable with the Fund's current exposure in high-quality
corporate bonds. While mortgage-backed securities provided investors with only
marginal returns over the second half of 1995, we believe these bonds will
provide higher yields than Treasuries and will perform well in the coming
months.
With respect to our outlook for the stock market, a potential correction is
certainly not a thing of the past. Veteran market observers know that what goes
up can also go down. However, as long as the three factors we have outlined on
page two stay positive, we remain bullish on the long-term prospects for the
stock market.
In closing, we would like to thank you for your investment in the Smith Barney
Strategic Investors Fund. We look forward to continuing to serve your investment
needs.
Sincerely,
/s/Heath B. McLendon /s/Ellen S. Cammer /s/Robert J. Brady, CFA
Heath B. McLendon Ellen S. Cammer Robert J. Brady, CFA
Chairman and Vice President and Vice President and
Investment Officer Investment Officer Investment Officer
February 20, 1996
3
<PAGE>
- --------------------------------------------------------------------------------
An Interview With Ellen Cammer and Robert Brady
- --------------------------------------------------------------------------------
Ellen S. Cammer is a Managing Director of Smith Barney Asset Management and has
been with Smith Barney and its predecessor firms since 1982. In addition to
managing the fixed income portfolios of many private accounts, Ms. Cammer is a
Portfolio Manager of the Smith Barney Strategic Investors Fund. She is
responsible for the fixed income portion of the Fund's portfolio. Ms. Cammer
earned her B.F.A. from Windham College and her M.B.A. in finance from Fordham
University.
Robert J. Brady, CFA, is a Managing Director of Smith Barney Asset Management
and is a Chartered Financial Analyst with over 35 years of investment
experience. Mr. Brady has spent the last twenty years with Smith Barney and its
predecessor firms. Mr. Brady's previous experience includes Director of
Investment Strategy at EF Hutton, Special Situations Analyst for Forbes Inc.,
and Director of Research at both Daniels & Bell and Baxter Economics Research
Investment. He is responsible for the equity portion of the Fund's portfolio.
On August 10, 1995, shareholders of the Smith Barney Strategic Investors Fund
approved a new investment advisory agreement between the Fund and Smith Barney
Strategic Advisors Inc. ("SBSA"). Under this agreement, SBSA became the Fund's
sole investment advisor. Ellen Cammer and Bob Brady, the Fund's Portfolio
Managers, recently spoke about their investment philosophies and how they manage
the Fund. In addition, Ellen and Bob also provided their outlook for the
financial markets for the rest of 1996 and the types of investors they think
should consider investing in the Smith Barney Strategic Investors Fund.
Q: Why were you chosen to manage the Smith Barney Strategic Investors Fund?
RB: We were chosen to manage the Fund primarily because we followed a set of
investment disciplines with a proven track record of providing competitive
risk-adjusted returns. Our disciplines were similar to how the Fund was
previously managed. In addition, maintaining a continuity of investment styles
was in the best interests of the Fund's shareholders.
EC: Another important reason why we were chosen to manage the Fund is that we
were both experienced Smith Barney portfolio managers, not an outside management
team who ran the Fund from a distance as was the case before we came aboard.
Since the Fund's investment strategy gets its direction from Smith Barney's
recommended asset allocation mix, internalizing the entire investment process
has improved teamwork, efficiency and overall communications.
4
<PAGE>
Q: Can you give us some additional information about the Smith Barney Strategic
Investors Fund's investment objective and how you both currently manage the
Fund?
EC: The Smith Barney Strategic Investors Fund is a balanced fund that invests
primarily in stocks, bonds and cash reserves based on the asset allocation
recommendations made by Smith Barney's Investment Policy Group. It seeks to
provide investors with high total return made up of current income and capital
appreciation. Bob and I work closely as a team on a day-to-day basis to
implement the firm's recommendations.
RB: I think it's important to point out that the Investment Policy Group's
guidelines function more like a compass which points us in the right direction
over time rather than as a road map with a specific route as to what stocks and
bonds to own. As active investment managers, we have the latitude by prospectus
to adopt the timely implementation of the firm's asset allocation
recommendations. In practice, Ellen and I have generally been within one or two
percentage points of the firm's asset allocation recommendations.
Q: How is the equity portion of the Fund managed?
RB: We are conservative investors. We follow a multi-faceted and highly
disciplined investment approach that involves a top-down view of the world. We
usually begin by asking ourselves, "What will be the driving economic factors
going forward?" Before we do any specific research on a company, we want to know
if it stands to benefit from a global trend or whether it will be fighting
against it. Our top-down analysis then gives us guidance as to where the most
attractive investment opportunities are likely to be found. Then, we begin our
bottom-up analysis where we employ quantitative, risk-adjusted measurements of a
company's balance sheet and income statements as well as its stock price. And,
lastly, we apply our own qualitative research by assessing all available sources
as well as information from Wall Street and from the company itself.
There are times when we will favor a strong industry or sector emphasis in the
stock market. Currently, this is not the case. Rather, we are concentrating on
more company-specific traits. At the present time, we are focusing on high
quality, established companies that have restructured themselves and become
formidable global competitors. We tend to focus on the stocks of companies with
new managements, restructured product lines, or a very strong brand identity.
5
<PAGE>
Q: How is the fixed income portion of the Fund managed?
EC: We are conservative fixed income investors who utilize quantitative
investment tools based on fundamental investment principles. The Fund generally
looks for high-quality issues that are extremely liquid. In addition, we
carefully analyze the risks and rewards of each type of bond on an ongoing basis
and focus on issues that, in our view, offer high return potential with low
volatility. Potential investments include U.S. Treasury bonds, mortgage-backed
securities and high-quality corporate bonds.
Q: What changes have you made to the Fund since you assumed management?
RB: On the equities side, when we began to manage the Fund, there were roughly
125 stock holdings in the portfolio. We thought an 85-95 range was more
appropriate, so we have consolidated wherever possible. A number of these stock
holdings represented less than one percent of the Fund's assets. We therefore
determined that consolidation would give us the same exposure to investment
opportunities from a particular industry or sector while at the same time
improving our ability to monitor the Fund's portfolio and perform better due
diligence of individual stocks.
EC: With respect to specific portfolio changes on the fixed income side, we sold
some mortgage-backed securities because of a recommended shift into cash by
Smith Barney's Investment Policy Group. In addition, we sold some of the Fund's
collateralized mortgage obligations and some Citibank foreign exchange bonds,
both of which we thought had limited liquidity on the sell side. The portfolio
we inherited for the most part was high quality and not all that different from
one we would create.
Q: What is your outlook for 1996?
EC: We anticipate the Federal Reserve Board may become more cautious because of
its ongoing concerns about the re-emergence of inflation amidst signs of
economic growth. In short, the beginning of the year should be generally
favorable for the bond market, but the second half of the year should prove to
be more challenging as the bond market begins to trade in a narrow range.
Since the end of January, we increased our weighting in discount mortgage-backed
securities because of their attractive yield potential and to provide us with a
solid anchor in a volatile market. If interest rates go back down, we may not
get the same appreciation as we would from Treasuries, but we will get some
growth and earn relatively attractive levels of income. We continue to look for
opportunities in the corporate bond market, with an emphasis on identifying
bonds with improving credit situations.
6
<PAGE>
RB: In our view, future success in the domestic economy will only come to those
companies adept at gaining market share in a fiercely competitive and mature
economy. Simply put, the pie is not growing as rapidly as it used to. In recent
years, a lot of corporate profitability has been derived from restructuring and
aggressive cost-cutting measures. However, these business strategies can only
carry you so far. Companies that have cut costs without a clear strategic plan
or a strong branded franchise will become increasingly vulnerable to the
competition and their stock prices will ultimately suffer. Therefore, we believe
careful stock selection will become increasingly important in the months ahead.
Q: In your view, what types of investors should consider the Smith Barney
Strategic Investors Fund?
EC: We believe the Fund is suitable for a broad range of investors, from
first-time investors who want to participate in the financial markets
conservatively with less risk to more sophisticated investors seeking a strong
foundation for their portfolios. Depending on their risk tolerance, investors
using the Fund as a core can then either build a conservative, moderate or
aggressive portfolio by adding other types of mutual funds as they see fit.
RB: Ellen, I think we should also mention another type of investor who may on
the surface not appear to be right for this Fund, but who should still seriously
consider it. I'm referring to those sophisticated, successful equity investors
in their late 50s or early 60s. Investors who, as they approach retirement, may
be thinking about lowering the level of risk in their portfolio, yet still
realize they will probably be living in retirement for 20 years or more and
therefore need additional capital growth potential. These types of investors may
want to take a closer look at a conservatively-managed growth vehicle like the
Smith Barney Strategic Investors Fund.
7
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
1/31/96 $15.91 $19.00 $0.52 $0.52 26.47%
- --------------------------------------------------------------------------------
1/31/95 17.72 15.91 0.47 0.66 (3.82)
- --------------------------------------------------------------------------------
1/31/94 16.85 17.72 0.56 1.46 17.80
- --------------------------------------------------------------------------------
Inception* - 1/31/93 16.80 16.85 0.11 0.85 6.12+
================================================================================
Total $1.66 $3.49
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
1/31/96 $15.97 $19.05 $0.42 $0.52 25.58%
- --------------------------------------------------------------------------------
1/31/95 17.79 15.97 0.35 0.66 (4.54)
- --------------------------------------------------------------------------------
1/31/94 16.84 17.79 0.34 1.46 16.88
- --------------------------------------------------------------------------------
1/31/93 17.26 16.84 0.50 1.49 9.68
- --------------------------------------------------------------------------------
1/31/92 15.61 17.26 0.55 0.88 19.96
- --------------------------------------------------------------------------------
1/31/91 15.57 15.61 0.51 0.46 6.80
- --------------------------------------------------------------------------------
1/31/90 15.03 15.57 0.71 0.38 10.76
- --------------------------------------------------------------------------------
1/31/89 13.62 15.03 0.48 0.11 15.10
- --------------------------------------------------------------------------------
Inception* - 1/31/88 14.00 13.62 0.23 0.07 (0.57)+
================================================================================
Total $4.09 $6.03
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
1/31/96 $15.97 $19.08 $0.42 $0.52 25.77%
- --------------------------------------------------------------------------------
1/31/95 17.79 15.97 0.35 0.66 (4.54)
- --------------------------------------------------------------------------------
Inception* - 1/31/94 17.54 17.79 0.28 1.46 11.83+
================================================================================
Total $1.05 $2.64
================================================================================
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
8
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------------
Class A Class B Class C
================================================================================
Year Ended 1/31/96 26.47% 25.58% 25.77%
- --------------------------------------------------------------------------------
Five Years Ended 1/31/96 N/A 13.01 N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/96 13.83 10.70 11.34
================================================================================
With Sales Charge(2)
----------------------------------
Class A Class B Class C
================================================================================
Year Ended 1/31/96 20.14% 20.58% 24.77%
- --------------------------------------------------------------------------------
Five Years Ended 1/31/96 N/A 12.89 N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/96 12.05 10.70 11.34
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/96) 52.05%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/96) 149.55
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/96) 34.26
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed less than
one year from initial purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception dates for Class A, B and C shares are November 6, 1992, February
2, 1987 and May 5, 1993, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
9
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of
the Smith Barney Strategic Investors Fund vs.
Lehman Gov't./Corporate Bond Index, Lehman Gov't./Corporate
Long-Term Bond Index and the Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
February 1987 -- January 1996
Lehman Brothers Lehman Brothers
SB Strategic Government Corporate Corporate Long-Term
Investors Fund Bond Index Bond Index S&P 500 Index
-------------- ---------- ---------- -------------
2/87 10000 10000 10000 10000
1/88 9943.5 10437 10248.31 9666.2
1/89 11445.2 11001.33 10859.34 11607.96
1/90 12676.8 12231.86 12152.02 13287.52
1/91 13538.5 13580.77 13506.14 14403.34
1/92 16240.4 15363.52 15492.85 17671.56
1/93 17811.8 17142.06 17752.33 19542.26
1/94 20817.7 18907.7 20563.63 22059.69
1/95 19871.7 18319.56 19131.42 22175.3
1/96 24954.9 21567.2 24249.2 30746.1
+ Hypothetical illustration of $10,000 invested in Class B shares at
inception on February 2, 1987, assuming reinvestment of dividends and
capital gains, if any, at net asset value through January 31, 1996. The
Lehman Government/Corporate Bond Index is a combination of the Government
and Corporate Bond indexes, including U.S. Treasury and Agency securities
and Yankee Bonds. The Lehman Government/Corporate Long-Term Bond Index is a
combination of Government and Corporate bonds with maturities of 10 years
or more. The Standard & Poor's 500 Index is composed of widely held common
stocks listed on the New York Stock Exchange, American Stock Exchange and
the over-the-counter market. Figures for the index include reinvestment of
dividends. The indexes are unmanaged and are not subject to the same
management and trading expenses as a mutual fund. The performance of the
Fund's other classes may be greater or less than the Class B shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
10
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) January 31, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following table was represented as a pie graph in the printed material.]
Other Common Stocks, Preferred Stocks and Corporate Bonds 29.6%
Oil & Oil Production Domestic 2.0%
Retail 4.2%
Banking 5.3%
Insurance 6.8%
Mortgage-Backed Securities 6.6%
Financial Services 4.0%
Pharmaceuticals 4.7%
Computers 2.4%
Asset-Backed Securities 0.8%
Telecommunications 4.0%
Electronics 2.7%
Repurchase Agreement 11.7%
Short-Term Investments 1.2%
U.S. Government Obligations 11.9%
Aerospace 2.1%
Percentage of
Total Investments
================================================================================
Top Five Holdings in Common Stock
Philips NV 1.6%
International Business Machines Corp. 1.4
Lockheed Martin Corp. 1.3
MCI Communications Corp. 1.3
American Telephone & Telegraph Corp. 1.2
Top Five Holdings in Corporate Bonds & Notes
Massachusetts Mutual Life Insurance Co. 0.8%
First Union 0.7
USX Corp. 0.7
Chemical Banking Corp. 0.6
TKR Cable One Inc. 0.6
================================================================================
11
<PAGE>
Smith Barney Strategic Investors Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Schedule of Investments January 31, 1996
- -----------------------------------------------------------------------------------
SHARES SECURITY VALUE
===================================================================================
<C> <S> <C>
COMMON STOCKS -- 58.5%
Aerospace -- 2.1%
70,000 Lockheed Martin Corp. $ 5,276,250
50,900 Rockwell International Corp. 2,984,013
- -----------------------------------------------------------------------------------
8,260,263
- -----------------------------------------------------------------------------------
Auto Parts-Replacement -- 0.6%
70,000 Echlin Inc. 2,581,250
- -----------------------------------------------------------------------------------
Banking -- 4.4%
35,000 Bank of Boston Corp. 1,601,250
40,311 BankAmerica Corp. 2,715,954
59,700 Chase Manhattan Corp. 4,119,300
101,798 Fleet Financial Group, Inc. 4,071,920
30,900 J.P. Morgan & Co. 2,510,625
49,000 Republic New York Corp. 2,854,250
- -----------------------------------------------------------------------------------
17,873,299
- -----------------------------------------------------------------------------------
Broadcasting -- 0.0%
4,689 Cox Communications, Inc.* 97,883
- -----------------------------------------------------------------------------------
Chemicals -- 2.4%
45,000 Olin Corp. 3,706,875
80,000 Praxair, Inc. 2,720,000
50,000 W.R. Grace & Co. 3,081,250
- -----------------------------------------------------------------------------------
9,508,125
- -----------------------------------------------------------------------------------
Computers -- 2.4%
38,800 Digital Equipment Corp.* 2,808,150
55,000 EMC Corp.* 1,051,875
52,400 International Business Machine Corp. 5,698,500
- -----------------------------------------------------------------------------------
9,558,525
- -----------------------------------------------------------------------------------
Consumer Products -- 0.4%
49,100 Black & Decker Corp. 1,663,263
- -----------------------------------------------------------------------------------
Consumer Services -- 1.1%
62,100 Rite Aid Corp. 1,994,963
64,700 Varity Corp.* 2,393,900
- -----------------------------------------------------------------------------------
4,388,863
- -----------------------------------------------------------------------------------
Cosmetics/Personal Care -- 0.8%
65,500 Tambrands, Inc. 3,217,688
- -----------------------------------------------------------------------------------
Diversified/Conglomerate Service -- 0.3%
25,000 ITT Corp.* 1,387,500
- -----------------------------------------------------------------------------------
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Strategic Investors Fund
- -----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- -----------------------------------------------------------------------------------
SHARES SECURITY VALUE
===================================================================================
Diversified-Holding Companies -- 1.9%
46,300 General Electric Co. $ 3,553,525
53,900 Textron, Inc. 4,237,888
- -----------------------------------------------------------------------------------
7,791,413
- -----------------------------------------------------------------------------------
Electronics -- 2.7%
30,000 Intel Corp. 1,657,031
60,000 Litton Industries, Inc.* 2,955,000
156,800 Philips NV 6,291,600
- -----------------------------------------------------------------------------------
10,903,631
- -----------------------------------------------------------------------------------
Environmental Control -- 0.5%
69,200 Browning Ferris Industries, Inc. 2,041,400
- -----------------------------------------------------------------------------------
Financial Services -- 1.9%
55,300 American Express Co. 2,543,800
53,200 Dean Witter Discover & Co. 2,879,450
94,800 H.F. Ahmanson & Co. 2,275,200
- -----------------------------------------------------------------------------------
7,698,450
- -----------------------------------------------------------------------------------
Food Processing -- 0.3%
40,000 Nabisco Holdings Corp., Class A Shares 1,390,000
- -----------------------------------------------------------------------------------
Food Services -- 0.3%
50,000 Wendy's International, Inc. 1,031,250
- -----------------------------------------------------------------------------------
Grocery/Convenience Stores -- 1.0%
72,000 American Stores Co. 1,872,000
63,700 Kroger Co.* 2,213,575
- -----------------------------------------------------------------------------------
4,085,575
- -----------------------------------------------------------------------------------
Healthcare -- 2.0%
39,900 Beckman Instruments, Inc. 1,396,500
46,464 Columbia Healthcare Corp. 2,584,560
190,500 Tenet Healthcare Corp.* 4,071,937
- -----------------------------------------------------------------------------------
8,052,997
- -----------------------------------------------------------------------------------
Homebuilders -- 0.6%
143,400 Kaufman & Broad Home Corp. 2,294,400
- -----------------------------------------------------------------------------------
Insurance -- 5.2%
70,000 Ace Ltd. 3,088,750
63,400 Aetna Life & Casualty Co. 4,723,300
70,547 Allstate Corp. 3,077,613
25,000 ITT Hartford Group, Inc.* 1,253,125
11,200 Lincoln National Corp. 592,200
54,600 Loews Corp. 4,511,325
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Strategic Investors Fund
- -----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- -----------------------------------------------------------------------------------
SHARES SECURITY VALUE
===================================================================================
Insurance -- 5.2% (continued)
43,100 Mid Ocean Ltd. $ 1,680,900
35,400 St. Paul Co., Inc. 2,017,800
- -----------------------------------------------------------------------------------
20,945,013
- -----------------------------------------------------------------------------------
Leisure -- 0.2%
34,400 Fleetwood Enterprises, Inc. 877,200
- -----------------------------------------------------------------------------------
Manufacturing -- 0.2%
25,000 ITT Industries, Inc. 650,000
- -----------------------------------------------------------------------------------
Medical Biotechnology -- 1.0%
91,102 Guidant Corp. 4,179,304
- -----------------------------------------------------------------------------------
Metals -- 1.0%
75,000 Aluminum Company of America 4,162,500
- -----------------------------------------------------------------------------------
Natural Gas -- 0.5%
36,000 Mapco, Inc. 2,029,500
- -----------------------------------------------------------------------------------
Oil-Domestic -- 0.3%
19,000 Kerr McGee Corp. 1,201,750
- -----------------------------------------------------------------------------------
Oil-Gas-International -- 1.1%
85,000 Chevron Corp. 4,409,375
- -----------------------------------------------------------------------------------
Oil Production-Domestic -- 1.7%
35,600 Exxon Corp. 2,856,900
36,300 Mobil Corp. 4,020,225
- -----------------------------------------------------------------------------------
6,877,125
- -----------------------------------------------------------------------------------
Oil Well Equipment & Service -- 0.2%
13,500 Schlumberger Ltd. 946,688
- -----------------------------------------------------------------------------------
Paper Products -- 1.0%
71,800 Abitibi Price, Inc. 1,184,700
31,800 Bowater, Inc. 1,307,775
35,500 Temple - Inland, Inc. 1,557,562
- -----------------------------------------------------------------------------------
4,050,037
- -----------------------------------------------------------------------------------
Petroleum -- 0.5%
8,400 Royal Dutch Petroleum Co. ADR 1,167,600
44,100 YPF Sociedad Anonima ADR 997,763
- -----------------------------------------------------------------------------------
2,165,363
- -----------------------------------------------------------------------------------
Pharmaceuticals -- 4.7%
28,300 American Home Products Corp. 2,886,600
69,100 Astra AB, Class A Shares* 2,807,187
47,444 Eli Lilly & Co. 2,728,030
83,375 Pharmacia & Upjohn 3,491,328
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Strategic Investors Fund
- -----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- -----------------------------------------------------------------------------------
SHARES SECURITY VALUE
===================================================================================
Pharmaceuticals -- 4.7% (continued)
64,000 Schering-Plough $ 3,464,000
60,000 Smithkline Beecham Units 3,375,000
- -----------------------------------------------------------------------------------
18,752,145
- -----------------------------------------------------------------------------------
Photography -- 1.2%
64,200 Eastman Kodak Co. 4,710,675
- -----------------------------------------------------------------------------------
Publishing -- 0.4%
48,067 Times Mirror Co., Class A Shares 1,490,077
- -----------------------------------------------------------------------------------
Railroads -- 0.7%
11,900 Burlington Northern, Inc. 974,312
100,500 Canadian Pacific Ltd. 1,959,750
- -----------------------------------------------------------------------------------
2,934,062
- -----------------------------------------------------------------------------------
Real Estate Investment Trust -- 0.6%
49,000 Bay Apartment Communities, Inc. 1,169,875
53,500 Summit Properties, Inc. 1,049,938
- -----------------------------------------------------------------------------------
2,219,813
- -----------------------------------------------------------------------------------
Retail -- 4.2%
84,100 Dillard Department Stores, Inc. 2,417,875
174,700 Liz Clairborne, Inc. 4,869,763
57,200 May Department Stores Co. 2,545,400
76,100 Sears Roebuck & Co. 3,158,150
48,500 Tandy Corp. 1,855,125
100,100 Toys `R' Us* 2,214,712
- -----------------------------------------------------------------------------------
17,061,025
- -----------------------------------------------------------------------------------
Shoes/Leather -- 0.5%
54,000 Nine West Group, Inc. 1,869,750
- -----------------------------------------------------------------------------------
Telecommunications -- 4.0%
75,000 American Telephone & Telegraph Corp. 5,015,625
87,000 GTE Corp. 4,002,000
183,200 MCI Communications Corp. 5,244,100
31,100 NYNEX Corp. 1,667,737
- -----------------------------------------------------------------------------------
15,929,462
- -----------------------------------------------------------------------------------
Textiles -- 0.2%
18,500 VF Corp. 934,250
- -----------------------------------------------------------------------------------
Tobacco -- 1.1%
46,400 Philip Morris Cos., Inc. 4,315,200
- -----------------------------------------------------------------------------------
See Notes to Financial Statements.
15
<PAGE>
Smith Barney Strategic Investors Fund
- -----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- -----------------------------------------------------------------------------------
SHARES SECURITY VALUE
===================================================================================
Transportation -- 0.8%
44,300 Pittston Burlington Group $ 880,462
88,600 Pittston Services Group 2,215,000
- -----------------------------------------------------------------------------------
3,095,462
- -----------------------------------------------------------------------------------
Utilities-Electric -- 1.5%
75,700 CMS Energy Corp. 2,356,163
16,500 Illinova Corp. 492,937
83,700 Public Service Company of New Mexico* 1,496,137
48,200 Western Resources, Inc. 1,626,750
- -----------------------------------------------------------------------------------
5,971,987
- -----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $180,441,446) 235,603,538
===================================================================================
PREFERRED STOCKS -- 0.1 %
Publishing -- 0.1%
20,533 Times Mirror Co., Series B (Cost-- $460,659) 513,325
===================================================================================
FACE
AMOUNT SECURITY VALUE
===================================================================================
CORPORATE BONDS AND NOTES -- 9.2%
Banking -- 0.9%
$2,500,000 First Union, Sub. Notes, 7.500% due 4/15/35 2,743,750
950,000 First USA Bank, Medium Term Notes, 8.100% due 2/21/97 974,937
- -----------------------------------------------------------------------------------
3,718,687
- -----------------------------------------------------------------------------------
Financial Services -- 2.1%
2,500,000 Associates Corp. North American, Notes, 7.250% due 9/1/99 2,634,375
1,550,000 Ford Motor Credit Co., Notes, 5.625% due 3/3/97 1,556,076
2,000,000 General Motors Acceptance Corp., Medium Term Notes,
7.250% due 5/5/99 2,092,500
2,000,000 John Deere Capital Corp., Medium Term Notes,
5.784% due 4/15/98 1,997,500
- -----------------------------------------------------------------------------------
8,280,451
- -----------------------------------------------------------------------------------
Industrial -- 2.3%
1,500,000 Eli Lilly & Co., Notes, 8.375% due 12/1/06 1,777,500
Sears Roebuck & Co., Medium Term Notes:
1,000,000 8.080% due 1/16/02 1,097,500
1,000,000 8.620% due 4/2/02 1,126,250
350,000 Southwest Airlines Co., Series 1994-A3, 8.700% due 7/1/11 395,500
2,000,000 TKR Cable One Inc., Debentures, 10.500% due 10/30/07 2,292,500
2,500,000 USX Corp., Debentures, 8.500% due 3/1/23 2,725,000
- -----------------------------------------------------------------------------------
9,414,250
- -----------------------------------------------------------------------------------
See Notes to Financial Statements.
16
<PAGE>
Smith Barney Strategic Investors Fund
- -----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- -----------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
===================================================================================
Insurance -- 1.6%
$1,225,000 Kemper Corp., Notes, 6.875% due 9/15/03 $ 1,261,750
3,000,000 Massachusetts Mutual Life Insurance Co., Surplus Notes,
7.625% due 11/15/23 3,116,250
2,220,000 Metropolitan Life Insurance, Notes, 6.300% due 11/1/03 2,211,675
- -----------------------------------------------------------------------------------
6,589,675
- -----------------------------------------------------------------------------------
Yankee -- 2.0%
2,000,000 ABN Amro Global, Sub. Notes, 7.250 due 5/31/05 2,150,000
3,000,000 Grand Metro Investments Corp., Notes, zero coupon due 1/6/04 1,856,250
1,450,000 International American Dev. Bank, 8.875% due 6/1/09 1,821,563
2,000,000 Malayan Banking, Sub. Notes, 7.125% due 9/15/05 2,102,500
- -----------------------------------------------------------------------------------
7,930,313
- -----------------------------------------------------------------------------------
Utilities -- 0.3%
1,000,000 MCI Communications Corp., Sr. Notes, 6.250% due 3/23/99 1,021,250
- -----------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $35,617,620) 36,954,626
===================================================================================
ASSET-BACKED SECURITIES -- 0.8%
912,631 Equity Credit Corp., Home Equity, 5.150% due 9/15/08 888,985
2,000,000 Sears Credit Account Master Trust, Series 95-2A,
8.100% due 6/15/04 2,190,580
- -----------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost-- $2,908,750) 3,079,565
===================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 11.9%
17,950,000 U.S. Treasury Bonds, 7.125% due 2/15/23 20,345,069
6,700,000 U.S. Treasury Notes, 7.125% due 2/29/00 7,170,474
5,978,000 U.S. Treasury Notes, 6.375% due 8/15/02 6,295,312
12,538,000 U.S. Treasury Notes, 7.500% due 2/15/05 14,209,190
- -----------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost-- $45,533,527) 48,020,045
===================================================================================
MORTGAGE-BACKED SECURITIES -- 6.6%
47,416 Federal Home Loan Mortgage Corporation, 6.250% due 7/1/02 46,779
135,193 Federal Home Loan Mortgage Corporation, 8.500% due 12/1/02 140,389
3,026,261 Federal National Mortgage Association, 5.500% due 3/25/98 3,020,572
246,969 Federal National Mortgage Association, 5.500% due 3/1/99 241,104
4,075,038 Federal National Mortgage Association, 7.500% due 10/1/09 4,199,816
3,954,650 Federal National Mortgage Association, 8.000% due 3/1/10 4,110,345
5,316,992 Federal National Mortgage Association, 7.500% due 5/1/25 5,458,211
147,224 Federal National Mortgage Association, 8.000% due 7/1/24 152,698
29,893 Government National Mortgage Association, 6.000% due 8/15/08 29,772
See Notes to Financial Statements.
17
<PAGE>
Smith Barney Strategic Investors Fund
- -----------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1996
- -----------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
===================================================================================
MORTGAGE-BACKED SECURITIES -- 6.6% (continued)
$ 916,220 Government National Mortgage Association, 6.000% due 9/15/08 $ 912,491
32,029 Government National Mortgage Association, 6.000% due 10/15/08 31,899
3,408,748 Government National Mortgage Association, 6.000% due 1/15/09 3,394,878
166,232 Government National Mortgage Association, 6.000% due 2/15/09 165,556
673,973 Government National Mortgage Association, 6.000% due 3/15/09 671,230
662,604 Government National Mortgage Association, 6.000% due 4/15/09 659,909
3,302,120 Government National Mortgage Association, 7.000% due 9/15/24 3,358,850
- -----------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost-- $25,401,642) 26,594,499
===================================================================================
SHORT-TERM INVESTMENTS -- 1.2%
1,779,000 U.S. Treasury Bills, 6.020% due 4/4/96 1,763,487
2,400,000 Chemical Banking Corp., Floating Rate Notes,
6.075% due 8/19/96 2,399,088
1,000,000 International Business Machines Credit Corp.,
Medium Term Notes, 4.550% due 2/28/96 999,380
- -----------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost-- $5,142,351) 5,161,955
===================================================================================
SUB-TOTAL INVESTMENTS -- 88.3%
(Cost-- $295,505,995) 355,927,553
===================================================================================
REPURCHASE AGREEMENT -- 11.7%
47,085,000 Chemical Banking Corp., 5.811% due 2/1/96;
Proceeds at maturity -- $47,092,600; (Fully collateralized
by U.S. Treasury Notes, 6.125% due 5/31/97; Market value --
$48,026,938) (Cost -- $47,085,000) 47,085,000
===================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $342,590,995)++ $403,012,553
===================================================================================
</TABLE>
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
18
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities January 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $295,505,995) $355,927,553
Repurchase agreement (Cost-- $47,085,000) 47,085,000
Cash 948
Receivable for Fund shares sold 323,925
Interest receivable 2,321,253
Dividends receivable 237,594
Other assets 230,569
- --------------------------------------------------------------------------------
Total Assets 406,126,842
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 545,000
Payable for Fund shares purchased 308,081
Distribution fees payable 227,332
Investment advisory fees payable 184,991
Administration fees payable 67,269
Accrued expenses 31,173
- --------------------------------------------------------------------------------
Total Liabilities 1,363,846
- --------------------------------------------------------------------------------
Total Net Assets $404,762,996
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 21,272
Paid-in capital in excess of par value 337,114,390
Undistributed net investment income 1,589,330
Accumulated net realized gain from security transactions 5,616,446
Net unrealized appreciation of investments 60,421,558
- --------------------------------------------------------------------------------
Total Net Assets $404,762,996
================================================================================
Shares Outstanding:
Class A 9,210,887
-----------------------------------------------------------------------------
Class B 11,883,207
-----------------------------------------------------------------------------
Class C 177,973
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 19.00
-----------------------------------------------------------------------------
Class B* $ 19.05
-----------------------------------------------------------------------------
Class C** $ 19.08
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $ 20.00
================================================================================
* Redemption price is NAV of Class B shares reduced by 5.00% if shares are
redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by 1.00% if shares are
redeemed within the first year of purchase.
See Notes to Financial Statements.
19
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended January 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 11,507,493
Dividends 5,258,710
Less: Foreign withholding tax (101,974)
- --------------------------------------------------------------------------------
Total Investment Income 16,664,229
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,604,176
Investment advisory fees (Note 2) 2,095,050
Administration fees (Note 2) 761,836
Shareholder and system servicing fees 400,000
Shareholder communications 200,000
Registration fees 80,000
Audit and legal 60,000
Trustees' fees 30,000
Custody 30,000
Other 7,021
- --------------------------------------------------------------------------------
Total Expenses 6,268,083
- --------------------------------------------------------------------------------
Net Investment Income 10,396,146
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 15,994,334
Foreign currency transactions (82,067)
- --------------------------------------------------------------------------------
Net Realized Gain 15,912,267
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments:
Beginning of year (3,255,752)
End of year 60,421,558
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 63,677,310
- --------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 79,589,577
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 89,985,723
================================================================================
See Notes to Financial Statements.
20
<PAGE>
Smith Barney Strategic Investors Fund
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended January 31,
- --------------------------------------------------------------------------------------------------
1996 1995
==================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,396,146 $ 8,497,235
Net realized gain 15,912,267 13,742,008
Increase in net unrealized appreciation (depreciation) 63,677,310 (37,407,775)
- --------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 89,985,723 (15,168,532)
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,078,312) (7,823,540)
Net realized gains (10,995,342) (13,515,274)
- --------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (21,073,654) (21,338,814)
- --------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 31,431,185 206,575,799
Net asset value of shares issued in connection with
the transfer of net assets of the Smith Barney Shearson
Sector Analysis Fund (Note 6) -- 93,446,234
Net asset value of shares issued for reinvestment of dividends 19,789,136 19,638,212
Cost of shares reacquired (92,622,989) (246,929,200)
- --------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (41,402,668) 72,731,045
- --------------------------------------------------------------------------------------------------
Increase in Net Assets 27,509,401 36,223,699
NET ASSETS:
Beginning of year 377,253,595 341,029,896
- --------------------------------------------------------------------------------------------------
End of year* $ 404,762,996 $ 377,253,595
==================================================================================================
* Includes undistributed net investment income of: $ 1,589,330 $ 1,367,230
==================================================================================================
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Strategic Investors Fund ("Fund"), a separate investment
fund of the Smith Barney Equity Funds ("Trust"), a Massachusetts business trust,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of the
Fund and one other separate investment fund, the Smith Barney Growth and Income
Fund. The financial statements and financial highlights for the other fund is
presented in a separate annual report.
The significant accounting policies followed by the Fund are: (a)
securities transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing prices on such markets
or, if there were no sales during the day, at current quoted bid price;
securities primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
except that when a significant occurrence subsequent to the time a value was so
established is likely to have significantly changed the value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Board of Trustees or its delegates.
Over-the-counter securities and U.S. Government and Government Agency
obligations are valued at the mean between the bid and the asked prices; (c)
short-term investments that have a maturity of 60 days or more are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (d) short-term investments and securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, as
applicable; (e) dividend income is recorded on the ex-dividend date and interest
income, adjusted for accretion of original issue discount, is recorded on the
accrual basis; (f) gains or losses on the sale of securities are calculated by
using the specific identification method; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records
are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (i) direct expenses
are charged to each class; management fees and general fund expenses are
allocated on the basis of relative net assets; (j) the Fund intends to comply
with the applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (k) the character of income and gains to be distributed are
22
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
determined in character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At January 31, 1996, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Accordingly, a
portion of accumulated net realized gains amounting to $609,732 has been
reclassified to paid-in capital. Net investment income, net realized gains and
net assets were not affected by this change; and (l) estimates and assumptions
are required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ from these
amounts.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Strategy Advisors Inc. ("SBSA"), a subsidiary of Smith Barney
Mutual Funds Management Inc. ("SBMFM"), which, in turn, is a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBSA an investment advisory fee calculated at an annual rate of 0.55% of
the average daily net assets. This fee is calculated daily and paid monthly.
In addition, The Boston Company Advisors Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, had entered into a
sub-advisory agreement with the Fund and SBMFM. SBMFM paid Boston Advisors a
portion of its advisory fee at a rate agreed upon from time to time between
SBMFM and Boston Advisors. As of August 14, 1995, this relationship was
terminated.
SBMFM acts as the Trust's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
In addition, Boston Advisors had entered into a sub-administration
agreement with the Fund and SBMFM. SBMFM paid Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors. As of February 13, 1995 this relationship was terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Trust shares and primary broker for its portfolio agency transactions. For the
year ended January 31, 1996, SB received brokerage commissions of $75,700 and
sales charges of $47,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and declines thereafter by 1.00% per year until no CDSC is incurred.
23
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the year ended January 31, 1996, CDSCs paid to SB
were:
Class B Class C
================================================================================
CDSCs $382,000 $1,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to Class A, B and C shares calculated at the annual rate of 0.25% of the average
daily net assets of each respective class. The Fund also pays a distribution fee
with respect to Class B and C shares calculated at the annual rate of 0.75% of
the average daily net assets for each class, respectively. For the year ended
January 31, 1996, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $401,114 $2,178,624 $24,438
================================================================================
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the year ended January 31, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term investments) were as follows:
================================================================================
Purchases $268,527,575
- --------------------------------------------------------------------------------
Sales 314,828,158
================================================================================
At January 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $63,224,519
Gross unrealized depreciation (2,802,961)
================================================================================
Net unrealized appreciation $60,421,558
================================================================================
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
24
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. SHARES OF BENEFICIAL INTEREST
At January 31, 1996, the Trust had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund
has the ability to issue multiple classes of shares. Each share of a class
represents an identical interest and has the same rights, except that each class
bears certain direct expenses, including those specifically related to the
distribution of its shares. Effective November 7, 1994, the Trust adopted a new
class structure, renaming existing Class D shares as Class C shares.
At January 31, 1996, total paid-in capital amounted to the following for
each class:
Class A Class B Class C
================================================================================
Total Paid-in Capital $150,212,590 $183,835,347 $3,087,725
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
January 31, 1996 January 31, 1995
-------------------- ----------------------
Shares Amount Shares Amount
=============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 541,718 $ 9,924,073 10,330,857 $ 166,775,894
Net asset value of shares issued
in connection with the transfer
of net assets of the Smith Barney
Shearson Sector Analysis
Fund (Note 6) -- -- 122,866 1,989,195
Shares issued on reinvestment 502,417 8,979,258 210,226 3,315,773
Shares redeemed (1,845,569) (32,325,484) (1,002,524) (16,023,027)
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) (801,434) $ (13,422,153) 9,661,425 $ 156,057,835
=============================================================================================
Class B
Shares sold 1,095,309 $ 19,529,792 2,272,852 $ 38,150,522
Net asset value of shares issued
in connection with the transfer
of net assets of the Smith Barney
Shearson Sector Analysis
Fund (Note 6) -- -- 5,621,206 91,457,025
Shares issued on reinvestment 588,732 10,665,928 1,001,613 16,250,259
Shares redeemed (3,328,074) (59,194,543) (14,163,327) (230,842,216)
- ---------------------------------------------------------------------------------------------
Net Decrease (1,644,033) $ (28,998,823) (5,267,656) $ (84,984,410)
=============================================================================================
</TABLE>
25
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
January 31, 1996 January 31, 1995
-------------------- ----------------------
Shares Amount Shares Amount
=============================================================================================
<S> <C> <C> <C> <C>
Class C*
Shares sold 111,657 $ 1,977,320 100,481 $ 1,649,383
Net asset value of shares issued
in connection with the transfer
of net assets of the Smith Barney
Shearson Sector Analysis
Fund (Note 6) -- -- 1 14
Shares issued on reinvestment 7,158 143,950 4,488 72,180
Shares redeemed (64,317) (1,102,962) (3,919) (63,957)
- ---------------------------------------------------------------------------------------------
Net Increase 54,498 $ 1,018,308 101,051 $ 1,657,620
=============================================================================================
</TABLE>
*On November 7, 1994, the former Class D shares were renamed Class C shares.
6. TRANSFER OF NET ASSETS
On July 18, 1994, the Fund acquired the assets and certain liabilities of
the Smith Barney Shearson Sector Analysis Fund ("Sector Analysis"), in a
tax-free exchange for shares of the Fund, pursuant to a plan of reorganization
approved by Sector Analysis' shareholders on July 5, 1994. Total shares issued
by the Fund for the acquisition, the total net assets of Sector Analysis and the
Fund on the date of the transfer were:
Total Net
Shares Assets of Total Net
Acquired Issued by Sector Assets of
Fund the Fund Analysis the Fund
================================================================================
Sector Analysis 5,744,073 $93,446,234 $323,993,326
================================================================================
The total net assets of Sector Analysis before acquisition included
unrealized depreciation of $48,360. The transaction was structed for tax
purposes to qualify as a tax-free reorganization under the Internal Revenue Code
of 1986, as amended.
26
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
Class A Shares 1996 1995 1994(1) 1993(2)
================================================================================
Net Asset Value, Beginning of Year $15.91 $17.72 $16.85 $16.80
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.61 0.57 0.52 0.13
Net realized and unrealized gain (loss) 3.52 (1.25) 2.37 0.88
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.13 (0.68) 2.89 1.01
- --------------------------------------------------------------------------------
Less Distribution From:
Net investment income (0.52) (0.47) (0.56) (0.11)
Net realized gains (0.52) (0.66) (1.46) (0.85)
- --------------------------------------------------------------------------------
Total Distributions (1.04) (1.13) (2.02) (0.96)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $19.00 $15.91 $17.72 $16.85
- --------------------------------------------------------------------------------
Total Return 26.47% (3.82)% 17.80% 6.12%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $175,007 $159,247 $6,216 $ 693
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.21% 1.33% 1.25% 1.25%+
Net investment income 3.10 2.89 2.85 3.61+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 81% 103% 131% 93%
================================================================================
Average commissions paid on
equity security transactions(3) $ 0.06 -- -- --
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this period
since use of the undistributed net investment income method does not accord
with results of operations.
(2) For the period from November 6, 1992 (inception date) to January 31, 1993.
(3) New SEC disclosure guidelines require that average commissions per share be
calculated and presented for the current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
27
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class B Shares 1996 1995 1994(1) 1993 1992
=============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $15.97 $17.79 $16.84 $17.26 $15.61
- ---------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.49 0.39 0.38 0.51 0.52
Net realized and unrealized gain (loss) 3.53 (1.20) 2.37 1.06 2.56
- ---------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.02 (0.81) 2.75 1.57 3.08
- ---------------------------------------------------------------------------------------------
Less Distribution From:
Net investment income (0.42) (0.35) (0.34) (0.50) (0.55)
Net realized gains (0.52) (0.66) (1.46) (1.49) (0.88)
- ---------------------------------------------------------------------------------------------
Total Distributions (0.94) (1.01) (1.80) (1.99) (1.43)
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Year $19.05 $15.97 $17.79 $16.84 $17.26
- ---------------------------------------------------------------------------------------------
Total Return 25.58% (4.54)% 16.88% 9.68% 19.96%
- ---------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $226,360 $216,035 $334,408 $287,983 $234,321
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.94% 2.00% 1.98% 2.02% 2.06%
Net investment income 2.37 2.21 2.11 2.84 3.02
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 81% 103% 131% 93% 76%
=============================================================================================
Average commissions paid on
equity security transactions(2) $0.06 -- -- -- --
=============================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this period
since use of the undistributed net investment income method does not accord
with results of operations.
(2) New SEC disclosure guidelines require that average commissions per share be
calculated and presented for the current year only.
28
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
Class C Shares(1) 1996 1995 1994(2)(3)
================================================================================
Net Asset Value, Beginning of Year $15.97 $17.79 $17.54
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.45 0.38 0.32
Net realized and unrealized gain (loss) 3.60 (1.19) 1.67
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.05 (0.81) 1.99
- --------------------------------------------------------------------------------
Less Distribution From:
Net investment income (0.42) (0.35) (0.28)
Net realized gains (0.52) (0.66) (1.46)
- --------------------------------------------------------------------------------
Total Distributions (0.94) (1.01) (1.74)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $19.08 $15.97 $17.79
- --------------------------------------------------------------------------------
Total Return 25.77% (4.54)% 11.83%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,396 $1,972 $ 399
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.94% 1.98% 1.93%+
Net investment income 2.31 2.24 2.16+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 81% 103% 131%
================================================================================
Average commissions paid on
equity security transactions(4) $ 0.06 -- --
================================================================================
(1) On November 7, 1994, the former Class D shares were renamed Class C shares.
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this period
since use of the undistributed net investment income method does not accord
with results of operations.
(3) For the period from May 5, 1993 (inception date) to January 31, 1994.
(4) New SEC disclosure guidelines require that average commissions per share be
calculated and presented for the current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
29
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Equity Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Strategic Investors Fund
of Smith Barney Equity Funds as of January 31, 1996, and the related statement
of operations, changes in net assets, and financial highlights for the year 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
audit. The statement of changes in net assets for the year ended January 31,
1995 and the financial highlights for each of the years in the four-year period
then ended, were audited by other auditors whose report thereon dated March 22,
1995, expressed an unqualified opinion on that statement of changes in net
assets and those financial highlights.
We conducted our audit 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
January 31, 1996, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Barney Strategic
Investors of Smith Barney Equity Funds as of January 31, 1996, and the results
of its operations, changes in its net assets and financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
March 21, 1996
30
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
A Special Meeting of Shareholders of the Fund was held on August 10, 1995 to
consider the approval or disapproval of a new Investment Advisory Agreement
("Agreement") between the Trust, on behalf of the Fund, and SBSA.
The results of the voting were as follows:
% of
Number of Shares
Shares Voted
================================================================================
For 9,953,406 87.52%
Against 381,394 3.35
Abstaining 1,038,058 9.13
================================================================================
- --------------------------------------------------------------------------------
Additional Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by the Fund to its shareholders
for the fiscal year ended January 31, 1996, was $7,297,567.
31
<PAGE>
Smith Barney Strategic Investors Fund
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 20, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Trustees
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities & Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at (212)
723-9218.
32
<PAGE>
Smith Barney Smith Barney
Strategic ------------
Investors A Member of TravelersGroup[Logo]
Fund
Trustees
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Madelon DeVoe Talley
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Robert J. Brady, CFA
Investment Officer
Ellen S. Cammer
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney
Strategy Advisers Inc.
Administrator
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
First Data Investors Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of the
Smith Barney Strategic Investors Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney
Strategic Investors Fund
388 Greenwich Street
New York, New York 10013
FD0912 3/96
