Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Financial Statements for the Year Ended
December 31, 1997
[STANDISH LOGO]
<PAGE>
Standish, Ayer & Wood Investment Trust
February 23, 1998
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am writing to provide you with a review of developments at Standish, Ayer &
Wood as they relate to the activities of the Investment Trust.
Investment returns were generally quite favorable during 1997. U.S. large
capitalization stocks as measured by the Standard & Poor's 500 Index registered
a return in 1997 of more than 33%, bringing the five-year annual average returns
for that Index to over 20%. During the last year, both U.S. bonds as reflected
in the Lehman Aggregate Index and hedged international bonds as reported by the
J.P. Morgan Non-U.S.Hedged Index recorded returns in the vicinity of 10-11%. It
has generally been an exceedingly favorable period for investors.
Standish, Ayer & Wood has also had a successful year. Our assets under
management grew from $30.6 billion at the beginning of the year to about $39.3
billion at the end of 1997. This growth reflected new assets under management,
market appreciation, and the absence of any significant turnover of existing
clients. The Standish Funds grew from $4.2 billion to $5.7 billion during the
year. We were particularly pleased that 75% of the mutual fund purchases during
the year represented additions from our existing clients.
We have also grown significantly as an enterprise. At the end of 1997, our
organization had 232 employees versus 213 at the beginning of the year. Our 82
investment officers have average experience of 16 years. Of the 82 officers, 46
hold advanced degrees (typically an MBA) and 55 have some advanced professional
accreditation (virtually all Chartered Financial Analysts).
While the corporate structure remains unchanged, a number of important
developments among new directors took place during the year. In March 1997, Jim
Sweeney elected to take early retirement. In November, Tom Sorbo joined Standish
as a shareholder/director in order to head up our marketing and sales
activities. Tom had previously served with distinction at Travelers and Stein,
Roe & Farnham.
Four other changes in our shareholders and directors were effective at the end
of 1997. Walter Cabot reached the age at which he must step down as a
shareholder, but we are pleased that he will continue as our Senior Advisor. We
elected three new shareholder/directors, namely Chuck Cook of our international
fixed income team, Joe Corrado as director of equity research, and Mike
Thompson, one of the senior members of our insurance company investment
management effort. We also elected six new associate directors, eighteen new
vice presidents, and twelve new assistant vice presidents.
During 1997 we introduced a number of new products including "diversified
income" portfolios that combine higher yielding domestic bonds, emerging market
bonds, and higher grade international bonds. By the end of the year, we managed
a number of separate accounts as well as the Standish Diversified Income Fund
with assets of about $27 million. We have also developed a growth equity
strategy and a global small cap discipline to complement the highly successful
start up on our international small cap style. Some of the disciplines we
introduced in 1996, such as duration neutral bonds and Small Cap Equity Fund II,
continue to be successful.
1
<PAGE>
As we look ahead, there are ample numbers of challenges for investors and
investment managers. We believe that we have a good understanding of what has
produced our past business and investment success and a clear vision of our
future. We consider that we have a set of competitive advantages that includes:
o A long history of stability of ownership, personnel, investment philosophy,
and clientele.
o Critical mass to enable us to provide risk control, compliance, technology,
and deep investment research.
o An exclusive focus on investment management and a dedication to serving our
existing clients.
o A team effort which ensures our clients are receiving not just the work of
one individual but the benefits of Standish as an organization.
o Well-defined and disciplined investment philosophies which have
historically added reasonably consistent increments of return.
o A dedication to in-depth communication with our clients.
We remain confident that we have the people, resources, investment technology,
and organizational stability to succeed. We are working hard to fulfill your
expectations in the years ahead, and we are optimistic that we can achieve our
mutual objectives.
Sincerely yours,
/s/ Ted Ladd
Edward H. Ladd
Chairman
Standish, Ayer & Wood, Inc.
2
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Management Discussion
For 1997, the Fund's 8.59% total return trailed the 9.68% return posted by the
Lehman Aggregate Index and the 9.75% return of the Lehman Government/Corporate
Index.
The bond market offered investors a number of challenging investment
environments during 1997 - a rate hike by the Federal Reserve in March,
progressively lower interest rates during the second and third quarters as well
as narrower corporate bond spreads, and a strong Treasury rally during the
fourth quarter where corporate spreads widened significantly. All in, the
economy grew at a 3.8% pace, inflation proved virtually non-existent and long
bond yields declined from 6.64% to 5.92%.
In the first quarter, strong economic growth prompted the Federal Reserve to
increase rates. During the second and third quarters, bond yields fell and a
record pace of corporate issuance was met with strong investor demand. In fact,
investor demand for yield more than offset issuer supply and corporate spreads
narrowed. We began to reduce the Fund's corporate exposure in August focusing
our sales in ten-year and longer maturities. The Fund reduced its exposure to
mortgages throughout the year as the sector outperformed.
In the fourth quarter, Southeast Asian countries experienced an unprecedented
environment of currency weakness - weakness which put financial pressure on
corporations and banks that had borrowed in dollars and were obligated to repay
with a much weaker currency. In light of this turmoil, the U.S. bond market
rallied strongly, and the long bond yield declined from 6.33% to 5.92% during
the quarter - a classic flight to quality. While Treasuries rallied, liquidity
in the corporate market evaporated and spreads widened sharply - adversely
impacting the Fund's return for the quarter and the year
As we enter 1998, we are maintaining lighter exposures than normal in mortgages
but remain poised to add on weakness. We continue to reduce our corporate
exposure and, for the near term, expect to be a better seller of corporates in
favor of U.S. Treasuries - a move intended to increase investment flexibility
should corporate bond spreads widen. We have re-examined our Asian Yankee
investments, and believe that their credit fundamentals remain sound. In tandem
with our belief that bond yields should continue to decline modestly, we have
positioned the Fund roughly 0.5 years longer than the Lehman Aggregate. We
believe that the threat of inflationary pressures has receded and we see a
slowdown in economic activity as a more serious possibility.
In closing, we hope that this information is helpful to you in reviewing your
overall investment strategies. As always, we appreciate and thank you for your
continued confidence as shareholders.
Sincerely,
/s/ David C. Stuehr /s/ Caleb F. Aldrich
David C. Stuehr Caleb F. Aldrich
3
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Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Comparison of Change in Value of $100,000 Investment in Standish Fixed Income
Fund II, Lehman Gov't/Corp Index and Lehman Aggregate Index
[The following table was originally a mountain graph in the printed materials.]
Standish Fixed Lehman Lehman
Income Fund II Gov't/Corp. Index Aggregate Index
-------------- ----------------- ---------------
Inception 7/3/95 100000 100000 100000
7/31/95 99550 99780 99615
8/31/95 100500 100984 100889
9/30/95 101350 101964 101914
10/31/95 102757 103289 103412
11/30/95 104315 104838 105118
12/31/95 105785 106306 106663
1/31/96 106611 107008 107325
2/29/96 104701 105146 105050
3/31/96 103773 104410 104168
4/30/96 103039 103825 103449
5/31/96 102777 103618 103273
6/30/96 104176 105006 104657
7/31/96 104631 105289 104898
8/31/96 104460 105111 104646
9/30/96 106449 106939 106509
10/31/96 108818 109313 108990
11/30/96 110839 111183 110999
12/31/96 109771 110149 109767
1/31/97 110122 109899 110490
2/28/97 110591 110129 110766
3/31/97 109232 108819 109537
4/30/97 110598 110408 111180
5/31/97 111727 111434 112230
6/30/97 113217 113572 112772
7/31/97 116350 116638 116222
8/31/97 115206 115647 114921
9/30/97 116951 117358 116725
10/31/97 117867 119060 118593
11/30/97 118233 119608 119221
12/31/97 119196 120816 120473
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Fixed Income Fund II
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments at value (Note 1A) (identified cost, $74,290,782) $75,298,626
Cash 66,125
Interest and dividends receivable 898,843
Receivable for investments sold 255,215
Receivable from investment adviser (Note 2) 6,583
Receivable for variation margin on open financial futures contracts (Note 6) 5,984
Prepaid expenses 1,358
Deferred organization costs (Note 1E) 6,213
-----------
Total assets 76,538,947
Liabilities
Payable for delayed delivery transactions (Note 7) $ 761,378
Payable for investments purchased 731,276
Distribution payable 371,758
Options written, at value (premiums received, $68,726) (Note 6) 40,016
Accrued accounting, custody and transfer agent fees 13,935
Accrued trustees fees (Note 2) 1,839
Accrued expenses and other liabilities 38,510
----------
Total liabilities 1,958,712
-----------
Net Assets $74,580,235
-----------
Net Assets consist of
Paid-in capital $73,455,327
Undistributed net investment income 4,599
Accumulated net realized gain 68,177
Net unrealized appreciation 1,052,132
===========
Total Net Assets $74,580,235
===========
Shares of beneficial interest outstanding 3,890,376
===========
Net asset value, offering price and redemption price per share
(Net assets/Shares outstanding) $ 19.17
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Standish, Ayer & Wood Investment Trust
Fixed Income Fund II
Statement of Operations
Year Ended December 31, 1997
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income
Interest income $3,478,395
Dividend income 25,552
----------
Total investment income 3,503,947
Expenses
Investment advisory fee (Note 2) $ 200,481
Accounting, custody and transfer agent fees 99,709
Audit services 23,555
Registration fees 21,205
Legal fees 12,298
Trustees fees (Note 2) 4,931
Insurance expense 4,599
Amortization of organization costs (Note 1E) 2,478
Miscellaneous 3,208
---------
Total expenses 372,464
Deduct --
Waiver of investment advisory fee (Note 2) (172,825)
---------
Net expenses 199,639
----------
Net investment income 3,304,308
----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss)
Investment security transactions $ 170,074
Financial futures contracts (100,124)
Written option transactions 6,672
---------
Net realized gain 76,622
Change in unrealized appreciation (depreciation)
Investment securities 1,016,717
Financial futures contracts 14,978
Written options 28,710
---------
Net change in unrealized appreciation (depreciation) 1,060,405
----------
Net realized and unrealized gain 1,137,027
----------
Net increase in net assets from operations $4,441,335
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
1997 1996
---------------------------------
<S> <C> <C>
Increase (decrease) in Net Assets
From operations
Net investment income $ 3,304,308 $ 994,242
Net realized gain 76,622 58,954
Change in unrealized appreciation (depreciation) 1,060,405 (236,747)
------------ ------------
Net increase in net assets from operations 4,441,335 816,449
------------ ------------
Distributions to Shareholders
From net investment income (3,318,681) (975,274)
From net realized gains on investments (57,788) (642,185)
------------ ------------
Total distributions to shareholders (3,376,469) (1,617,459)
------------ ------------
Fund Share (principal) Transactions (Note 4)
Net proceeds from sale of shares 38,654,192 28,147,072
Net asset value of shares issued to shareholders in
payment of distributions declared 2,705,708 1,584,262
Cost of shares redeemed (3,329,835) (1,491,504)
------------ ------------
Net increase in net assets from Fund share transactions 38,030,065 28,239,830
------------ ------------
Net increase in net assets 39,094,931 27,438,820
Net Assets
At beginning of period 35,485,304 8,046,484
------------ ------------
At end of period (including undistributed net investment
income of $4,599 and $11,552, respectively) $ 74,580,235 $ 35,485,304
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Financial Highlights
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Period
July 3, 1995
(start of
Year Ended Year Ended business)
December 31, December 31, to December 31,
1997 1996 1995
----------------- ----------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning
of period $18.73 $20.52 $20.00
------ ------ ------
Income from investment operations
Net investment income * 1.11 1.16 0.53
Net realized and
unrealized gain (loss)
on investments 0.46 (0.52) 0.64
------- ------- ------
Total from investment
operations 1.57 0.64 1.17
------- ------- ------
Less distributions to shareholders
From net investment
income (1.11) (1.15) (0.53)
In excess of net
investment income -- -- (0.12)
From net realized gains
on investments (0.02) (1.28) --
------- ------- ------
Total distributions to
shareholders (1.13) (2.43) (0.65)
------- ------- ------
Net asset value, end of
period $19.17 $18.73 $20.52
======= ======= ======
Total return 8.59% 3.77% 5.79%
Ratios (to average daily net assets)
/Supplemental Data
Expenses * 0.40% 0.40% 0.40%+
Net investment income * 6.58% 6.57% 6.64%+
Portfolio Turnover 103% 124% 389%
Net assets, end of period
(000's omitted) $74,580 $35,485 $8,046
<CAPTION>
- -------------------
* The investment adviser voluntarily agreed not to impose a portion of its
investment advisory fee and reimbursed the Fund for a portion of its
operating expenses. In the absence of this agreement, the net investment
income per share and the ratios would have been:
<S> <C> <C> <C>
Net investment income per share $1.06 $1.04 $0.29
Ratios (to average daily net assets):
Expenses 0.74% 1.06% 1.29%+
Net investment income 6.24% 5.91% 5.75%+
</TABLE>
+ Computed on an annualized basis.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Standish, Ayer & Wood Investment Trust
Fixed Income Fund II
Schedule of Investments - December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Par Value
Security Rate Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 94.9%
<S> <C> <C> <C> <C>
Asset Backed -- 6.3%
Advanta Mortgage Loan Trust 97-3 A7 6.920% 10/25/2028 550,000 $ 559,818
AFC Home Equity Loan Trust 1994-31A 8.000% 10/25/2024 412,512 421,987
Chase Credit Card Master Trust 6.777% 05/15/2007 550,000 551,029
Continental Mortgage Home Equity 1996-4 A9 6.880% 01/15/2028 600,000 609,188
Equacredit Home Equity 1996-1 6.190% 12/15/2010 75,000 74,625
Franchise Mortgage Accpt Corp. 1997-1A 7.350% 04/15/2019 487,268 509,043
Green Tree Financial Corp. 7.750% 01/15/2029 250,000 252,549
Greentree Acceptance Corp. 1997-5 M1 6.950% 05/15/2029 500,000 499,844
Preferred Credit Corp. 1997-1 A6 7.590% 07/25/2026 300,000 308,672
Residential Funding 97-hs5 M1 7.010% 05/25/2027 550,000 551,203
The Money Store Home Equity 1996-A5 6.850% 06/15/2019 100,000 100,766
UCFC Home Equity Loan 1996 7.700% 01/15/2004 150,000 146,484
UCFC Home Equity Loan Trust 1994-D A4 8.775% 02/10/2016 100,000 102,688
------------
Total Asset Backed (Cost $4,656,324) 4,687,896
------------
Corporate -- 34.5%
Basic Industry -- 2.6%
Georgia Pacific 9.950% 06/15/2002 350,000 396,113
ICI Wilmington Notes 6.950% 09/15/2004 325,000 334,331
Toro Co. 7.800% 06/15/2027 500,000 538,375
USA Waste Services 6.500% 12/15/2002 700,000 699,090
-----------
1,967,909
-----------
Consumer Stable -- 1.3%
Great Atlantic & Pacific Tea Co. 7.750% 04/15/2007 925,000 975,236
-----------
Financial -- 20.4%
Advanta National Bank 6.450% 10/30/2000 75,000 73,211
Amerus Capital I 8.850% 02/01/2027 375,000 394,481
Bank United Corp. 8.875% 05/01/2007 525,000 563,063
BankBoston 97 C1 7.218% 04/25/2000 500,000 500,762
Bear Stearns Cos., Inc. 7.000% 01/15/2027 150,000 152,562
Centura Capital Trust 8.845% 06/01/2027 350,000 384,518
Chase Commercial Mortgage 7.600% 06/18/2006 725,000 730,664
Conseco Finance Trust 8.700% 11/15/2026 250,000 277,500
Conseco Finance Trust 8.796% 04/01/2027 550,000 616,776
Conseco, Inc. 8.125% 02/15/2003 200,000 213,128
Contifinancial Corp. 144A 7.500% 03/15/2002 750,000 741,150
Florida Property & Casualty 7.250% 07/01/2002 250,000 257,758
Florida Windstorm 144A Notes 6.700% 08/25/2004 225,000 226,882
H.F. Ahmanson & Co. 144A 8.360% 12/01/2026 175,000 187,861
Homeside Corp. 6.875% 06/30/2002 550,000 560,109
Hubco Capital Trust 8.980% 02/01/2027 500,000 550,674
Keystone 7.300% 05/15/2004 875,000 912,731
Markel Capital Trust I 8.710% 01/01/2046 600,000 646,502
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
Standish, Ayer & Wood Investment Trust
Fixed Income Fund II
Schedule of Investments - December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Par Value
Security Rate Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial (continued)
Midatlantic Bank 9.875% 12/01/1999 193,000 $ 205,414
MMI Capital Trust Notes 144A 7.625% 12/15/2027 725,000 726,265
Orion Capital Trust I 8.730% 01/01/2037 75,000 79,913
Phoenix Re-Insurance Capital Trust 8.850% 02/01/2027 550,000 590,865
Salomon Brothers, Inc. 7.250% 05/01/2001 100,000 102,632
Salomon Brothers, Inc. 7.000% 05/15/1999 100,000 100,991
Salomon Brothers, Inc. 7.300% 05/15/2002 675,000 697,195
Salomon Brothers, Inc. 6.625% 11/30/2000 250,000 252,333
Se Banken 144A Euro Step Up 8.125% 09/06/2049 250,000 266,170
Security Connecticut Corp. 7.125% 03/01/2003 100,000 102,820
Societe Generale 7.850% 04/29/2049 750,000 785,666
Summit Bancorp Capital Trust I 8.400% 03/15/2027 375,000 409,943
Svenska Handelsbanken Step Up 7.125% 03/29/2049 400,000 400,876
The Money Store 8.375% 04/15/2004 775,000 800,498
Tig Holdings Capital 144A 8.597% 01/15/2027 600,000 646,266
Union Planters Corp. 6.250% 11/01/2003 240,000 238,111
United Companies Financial Corp. 9.350% 11/01/1999 400,000 414,588
United Companies Financial Corp. 7.000% 07/15/1998 375,000 376,238
-----------
15,187,116
-----------
Health Care -- 0.9%
Quantum Health 4.750% 10/01/2000 725,000 689,765
-----------
Real Estate -- 7.3%
American Health Properties 7.500% 01/15/2007 175,000 184,242
Avalon Property, REIT 7.375% 09/15/2002 100,000 103,593
Colonial Realty 7.160% 01/17/2003 150,000 154,421
Colonial Realty 6.960% 07/26/2004 500,000 507,074
Duke Realty REIT Investments 7.375% 09/22/2005 600,000 622,404
Highwoods Properties, REIT 6.750% 12/01/2003 525,000 527,200
IRT Prop Sr Notes, REIT 7.250% 08/15/2007 325,000 336,700
Meditrust, REIT 7.375% 07/15/2000 275,000 279,153
Realty Income Corp. 7.750% 05/06/2007 375,000 398,205
Security Capital Notes 7.625% 07/01/2017 500,000 520,995
Simon Debartolo Group LP 6.875% 10/27/2005 350,000 351,943
Spieker Properties, REIT 6.650% 12/15/2000 100,000 100,406
Summit Properties Notes 7.200% 08/15/2007 250,000 257,235
Sun Communities, REIT 7.375% 05/01/2001 175,000 179,426
Susa Partnership 7.125% 11/01/2003 200,000 203,612
Trinet Corp. Realty Trust 7.300% 05/15/2001 400,000 408,944
Wharf International Finance 7.625% 03/13/2007 375,000 327,484
-----------
5,463,037
-----------
Services -- 2.0%
ITT Corp. 6.250% 11/15/2000 350,000 344,155
La Quinta Inns, Inc. 7.110% 10/17/2001 300,000 305,072
Royal Caribbean Cruise Sr Notes 7.500% 10/15/2027 550,000 560,087
Tele-communications Inc. 7.875% 08/01/2013 225,000 242,003
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Standish, Ayer & Wood Investment Trust
Fixed Income Fund II
Schedule of Investments - December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Par Value
Security Rate Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Services (continued)
-----------
1,451,317
-----------
Total Corporate (Cost $24,997,795) 25,734,380
-----------
Government/Other -- 7.5%
Mexico -- 0.7%
Gruma SA 144A Notes 7.625% 10/15/2007 525,000 $ 514,484
-----------
United Kingdom -- 0.7%
CE Electric UK Funding Sr Notes 144A 6.853% 12/30/2004 500,000 502,500
-----------
Yankee Bonds -- 6.1%
Brascan Ltd. 7.375% 10/01/2002 1,100,000 1,136,673
Cominco Ltd. 6.875% 02/15/2006 449,000 452,596
Guandong Enterprises 8.875% 05/22/2007 700,000 605,374
Hutchison Whampoa Finance 7.450% 08/01/2017 500,000 462,800
Lite-On Tech 144A 0.000% 12/15/2002 700,000 706,188
Merita Bank 7.500% 12/29/2049 200,000 208,659
Societe Generale Step Up 7.850% 04/29/2049 555,000 555,444
Tata Engineering & Locomotive 144A Notes 7.875% 07/15/2007 525,000 446,318
-----------
4,574,052
-----------
Total Government/Other (Cost $5,746,602) 5,591,036
-----------
Non-Agency -- 6.7%
Collateralized Mortgage Obligations -- 2.5%
Citicorp Mtg Sec Inc 97-5 6.500% 11/25/2027 550,000 551,719
GE Capital Mortgage 97-13 6.750% 12/25/2013 550,000 553,094
Norwest Asset Sec Corp. 1998-37%# 7.000% 02/15/2013 750,000 755,156
-----------
1,859,969
-----------
Pass Thru Securities -- 4.2%
Housing Securities, Inc. 1994-2A1 6.500% 07/25/2009 351,529 351,356
Merrill Lynch Mortgage Investments 1996-C2 E 6.960% 11/21/2028 400,000 389,125
Merrill Lynch Mortgage Investment 1997-C1 D 7.120% 06/18/2029 500,000 501,094
Morgan Stanley Capital I 7.490% 05/15/2009 500,000 505,938
Mortgage Capital Funding 1996 7.800% 04/15/2006 100,000 106,313
Resolution Trust Corp. 7.100% 12/25/2024 490,054 488,829
Resolution Trust Corp. 1994-C1 C 8.000% 06/25/2026 525,000 539,602
Resolution Trust Corp. 1994-C2 C 8.000% 04/25/2025 75,000 76,230
Resolution Trust Corp. 1995-2 CA1 7.450% 05/25/2029 170,040 171,528
-----------
3,130,015
-----------
Total Non-Agency (Cost $4,942,246) 4,989,984
-----------
U.S. Government Agency -- 10.9%
Pass Thru Securities -- 10.9%
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
Standish, Ayer & Wood Investment Trust
Fixed Income Fund II
Schedule of Investments - December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Par Value
Security Rate Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pass Thru Securities (continued)
FHLMC 6.500% 06/01/2012 944,883 $ 946,356
FHLMC+ 7.500% 11/01/2026 601,691 616,727
FHLMC 6.000% 03/01/2012 494,712 487,910
FHLMC++ 03/10/1998 100,000 98,986
FNMA 8.000% 07/25/2023 175,000 189,882
FNMA+ 7.000% 11/01/2023 -
09/01/2025 1,402,275 1,418,759
FNMA 6.000% 08/01/2011 950,282 935,134
FNMA+ 7.000% 09/01/2025 -
06/01/2026 1,774,697 1,792,060
FNMA 6.000% 01/01/2012 605,316 595,667
GNMA+ 7.000% 10/15/2025 -
01/15/2026 1,060,515 1,069,164
-----------
Total U.S. Government Agency (Cost $7,900,705) 8,150,645
-----------
Treasury Obligations -- 29.0%
Treasury Notes -- 22.5%
Canadian Treasury Bills 03/09/1998 500,000 493,600
U.S. Treasury Note+ 5.625% 11/30/1998 7,100,000 7,099,999
U.S. Treasury Note 5.750% 12/31/1998 2,300,000 2,303,242
U.S. Treasury Note+ 5.750% 08/15/2003 2,250,000 2,251,394
U.S. Treasury Note 6.500% 08/15/2005 100,000 104,344
U.S. Treasury Note+ 5.750% 10/31/2000 175,000 175,219
U.S. Treasury Note 6.250% 10/31/2001 4,300,000 4,373,228
-----------
16,801,026
-----------
Treasury Bonds -- 6.5%
U.S. Treasury Bond 8.125% 08/15/2019 3,875,000 4,848,593
-----------
Total Treasury Obligations (Cost $21,536,832) 21,649,619
-----------
TOTAL BONDS AND NOTES(COST $69,780,504) 70,803,560
-----------
<CAPTION>
Shares
------
PREFERRED STOCKS -- 0.3%
<S> <C> <C>
Capital Preferred Trust 8,000 213,000
-----------
TOTAL PREFERRED STOCKS (COST $199,999) 213,000
-----------
<CAPTION>
Contract
Size
------------
PURCHASED OPTIONS -- 0.1%
<S> <C> <C>
UST Put 6.125%, Strike Price 100.7187, 2/19/98 13,000 12,797
UST Call 6.125%, Strike Price 104.2187, 3/19/98 17,000 11,156
UST Call 5.75%, Strike Price 100.1562, 3/23/98 19,000 11,875
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
Standish, Ayer & Wood Investment Trust
Fixed Income Fund II
Schedule of Investments - December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Par Value
Security Value (Note 1A)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL PURCHASED OPTIONS (COST $60,976) 35,828
-----------
SHORT-TERM INVESTMENTS -- 5.7%
Commercial Paper -- 2.0%
Associated Corp. Discount, 1/14/98 500,000 $ 498,410
Daimler Benz, 2/5/98 1,000,000 992,660
-----------
1,491,070
-----------
U.S. Government -- 2.3%
FHLMC Discount Note, 1/23/98 700,000 696,114
FNMA Discount Note, 1/29/98 250,000 248,430
FHLMC Discount Note, 1/30/98 750,000 745,575
-----------
1,690,119
-----------
Repurchase Agreements -- 1.4%
Prudential-Bache Repurchase Agreement, dated 12/31/97, due 1/2/98, with a
maturity value of $1,065,408 and an effective yield of 6.07%, collateralized by
a U.S. Treasury Bond with a rate of 11.25%, with a maturity date of 2/15/15 and
with an aggregate market value of$1,086,353. 1,065,049
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $4,249,303) 4,246,238
-----------
TOTAL INVESTMENTS -- 101.0% (COST $74,290,782) $75,298,626
Other Assets, Less Liabilities -- (1.0)% (718,391)
-----------
NET ASSETS -- 100% $74,580,235
===========
</TABLE>
Notes to the Schedule of Investments:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration.
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
ICI - Imperial Chemical Industries
GNMA - Government National Mortgage Association
REIT - Real Estate Investment Trust
# Delayed delivery contract (Note 7).
+ Denotes all or part of security pledged as a margin deposit (Note 6).
++ Denotes all or part of security pledged as collateral to cover margin
requirements on open financial futures contracts (Note 6).
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Fixed Income Fund II (the "Fund") is a separate
diversified investment series of the Trust.
The following is a summary of significant accounting policies followed
by the Fund in the preparation of the financial statements. The
preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. Investment security valuations
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are primarily traded.
Securities (including restricted securities) for which quotations are
not readily available are valued at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees.
Short-term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued at amortized cost basis.
If the Fund acquires a short-term instrument with more than sixty days
remaining to its maturity, it is valued at current market value until
the sixtieth day prior to maturity and will then be valued at amortized
cost based upon the value on such date unless the Board of Trustees
determine during such sixty-day period that amortized cost does not
represent fair value.
B. Repurchase agreements
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income
Securities transactions are recorded as of the trade date. Realized
gains and losses from securities sold are recorded on the identified
cost basis. Interest income is determined on the basis of interest
accrued, adjusted for accretion of discount on debt securities when
required for federal income tax purposes.
D. Federal taxes
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
E. Deferred organization cost
Costs incurred by the Fund in connection with its organization and
initial registration are being amortized, on a straight-line basis,
through June, 2000.
14
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
F. Distributions to shareholders
Dividends from net investment income and capital gains distributions, if
any, are reinvested in additional shares of the Fund unless the
shareholder elects to receive them in cash. Distributions to
shareholders are recorded on the ex-dividend date. Income and capital
gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments
for financial futures contracts and option transactions. Permanent book
and tax basis differences relating to shareholder distributions will
result in reclassifications between paid-in-capital, undistributed net
investment income and accumulated net realized gains (losses).
(2) Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and general
office facilities, is paid monthly at the annual rate of 0.40% of the
Fund's average daily net assets. SA&W voluntarily agreed to limit the
Fund's total operating expense to 0.40% of the Fund's average daily net
assets for the Fund's fiscal year ended December 31, 1997. Pursuant to
this agreement, SA&W voluntarily did not impose $172,825 of its
investment advisory fee. The Trust pays no compensation directly to its
trustees who are affiliated with SA&W or to its officers, all of whom
receive remuneration for their services to the Trust from SA&W. Certain
of the trustees and officers of the Trust are directors or officers of
SA&W.
(3) Purchases and Sales of Investments:
Purchases and proceeds from sales of investments, other than short-term
obligations were as follows:
Purchases Sales
---------- ----------
U.S. Government Securities..................... $38,168,690 $18,505,215
========== ==========
Investments (non-U.S. Government Securities)... $59,882,624 $37,689,176
========== ==========
(4) Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a par
value of one cent per share. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Shares sold.................................... 2,028,481 1,494,596
Shares issued to shareholders in payment of
distributions declared...................... 142,698 85,215
Shares redeemed................................ (175,022) (77,808)
---------- ----------
Net increase................................... 1,996,157 1,502,003
========== ==========
</TABLE>
At December 31, 1997, three shareholders were record owners of
approximately 46%, 12%, and 11%, respectively, of the total outstanding
shares of the Fund.
15
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
(5) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1997, as computed on a
federal income tax basis, were as follows:
Aggregate Cost............................................ $74,290,782
===========
Gross unrealized appreciation............................. 1,330,587
Gross unrealized depreciation............................. (322,743)
Net unrealized appreciation............................... -----------
$ 1,007,844
===========
(6) Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks, and objectives of these instruments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
Options
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before a
certain date. The Fund may use options to seek to hedge against risks of
market exposure and changes in security prices and foreign currencies,
as well as to seek to enhance returns. Writing puts and buying calls
tend to increase the Fund's exposure to the underlying instrument.
Buying puts and writing calls tend to decrease the Fund's exposure to
the underlying instrument, or hedge other Fund investments. Options,
both held and written by the Fund, are reflected in the accompanying
Statement of Assets and Liabilities at market value. The underlying face
amount at value of any open purchased option is shown in the Schedule of
Investments. This amount reflects each contract's exposure to the
underlying instrument at period end. Losses may arise from changes in
the value of the underlying instrument, if there is an illiquid
secondary market for the contracts, or if the counterparties do not
perform under the contracts' terms.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the realized gain or loss.
Realized gains and losses on purchased options are included in realized
gains and losses on investment securities, except purchased options on
foreign currency which are included in realized gains and losses on
foreign currency transactions. If a put option purchased by the Fund is
exercised, the premium reduces the cost basis of the securities
purchased by the Fund. The Fund, as writer of an option, has no control
over whether the underlying securities may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the security underlying the written option. A summary of
such transactions for the year ended December 31, 1997 is as follows:
16
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
Written Put Option Transactions
------------------------------------------------------------------------
Number
of
Contracts Premiums
---------- ---------
Outstanding, beginning of period............... - -
Options written................................ 5 $ 62,296
Options exercised.............................. - -
Options expired................................ (1) (6,281)
Options closed................................. - -
------- ---------
Outstanding, end of period..................... 4 $ 56,015
======= =========
Written Call Option Transactions
-----------------------------------------------------------------------
Number
of
Contracts Premiums
---------- ---------
Outstanding, beginning of period............... - -
Options written................................ 5 $ 22,641
Options exercised.............................. - -
Options expired................................ (1) (3,828)
Options closed................................. (1) (6,102)
------- ----------
Outstanding, end of period..................... 3 $ 12,711
======= ==========
Futures contracts
The Fund may enter into financial futures contracts for the delayed sale
or delivery of securities or contracts based on financial indices at a
fixed price on a future date. The Fund is required to deposit either in
cash or securities an amount equal to a certain percentage of the
contract amount. Subsequent payments are made or received by the Fund
each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not
correlate with changes in the value of hedged investments. Buying
futures tends to increase the Fund's exposure to the underlying
instrument, while selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund investments. In
addition, there is the risk that the Fund may not be able to enter into
a closing transaction because of an illiquid secondary market. Losses
may arise if there is an illiquid secondary market or if the
counterparties do not perform under the contracts' terms. The Fund
enters into financial futures transactions primarily to manage its
exposure to certain markets and to changes in security prices and
foreign currencies. Gains and losses are realized upon the expiration or
closing of the futures contracts. At December 31, 1997, the Fund held
the following futures contracts:
<TABLE>
<CAPTION>
Underlying
Face/amount Unrealized
Contract Position Expiration Date at value Gain/(Loss)
---------------------- -------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
US Bond (CBT) (21
contracts)............ Long 3/20/98 $ 2,529,844 $ 26,384
US 5 Yr. Note (21
contracts)............ Short 3/20/98 2,281,125 (7,100)
US 10 Yr. Bond (5
contracts)............ Short 3/20/98 560,781 (3,706)
==========
$ 15,578
</TABLE>
17
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II
Notes to Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1997, the Fund had segregated sufficient cash and/or
securities to cover margin requirements on open futures contracts.
(7) Delayed Delivery Transactions:
The Fund may purchase securities on a when-issued or forward commitment
basis. Payment and delivery may take place a month or more after the
date of the transactions. The price of the underlying securities and the
date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. The Fund segregates securities
having a value at least equal to the amount of the purchase commitment.
At December 31, 1997, the Fund had entered into the following delayed
delivery transactions:
When Issued
Settlement
Type Security Date Amount
----- --------------------------------- ----------- ----------
Buy....... Norwest Asset Sec Corp 1998-37 1/30/98 $ 761,378
=========
- --------------------------------------------------------------------------------
Supplemental Tax Information: (Unaudited)
The Fund paid distributions of $0.02 from long term capital gains during
the year ended December 31, 1997. Pursuant to section 852 of the
Internal Revenue Code the Fund designates $57,788 as capital gain
dividends for the year ended December 31, 1997. All of this amount
represents a 28% rate gain distribution.
18
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Fixed Income Fund II:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Fixed Income Fund II (the
"Fund"), including the schedule of investments as of December 31, 1997, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the periods stated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Fixed Income Fund II as of
December 31, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the periods stated therein, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 19, 1998
19
<PAGE>
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20
<PAGE>
[this page intentionally left blank]
21
<PAGE>
[this page intentionally left blank]
22
<PAGE>
[STANDISH LOGO]
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
98-055
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish, Ayer & Wood Investment Trust
form N-SAR for the period ended December 31, 1997
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 12
<NAME> Standish Fixed Income Fund Series II Fund Series
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 74,290,782
<INVESTMENTS-AT-VALUE> 75,298,626
<RECEIVABLES> 1,166,625
<ASSETS-OTHER> 73,696
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 76,538,947
<PAYABLE-FOR-SECURITIES> 1,492,654
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 466,058
<TOTAL-LIABILITIES> 1,958,712
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,455,327
<SHARES-COMMON-STOCK> 3,890,376
<SHARES-COMMON-PRIOR> 1,894,219
<ACCUMULATED-NII-CURRENT> 4,599
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 68,177
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,052,132
<NET-ASSETS> 74,580,235
<DIVIDEND-INCOME> 25,552
<INTEREST-INCOME> 3,478,395
<OTHER-INCOME> 0
<EXPENSES-NET> 199,639
<NET-INVESTMENT-INCOME> 3,304,308
<REALIZED-GAINS-CURRENT> 76,622
<APPREC-INCREASE-CURRENT> 1,060,405
<NET-CHANGE-FROM-OPS> 4,441,335
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,318,681
<DISTRIBUTIONS-OF-GAINS> 57,788
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,028,481
<NUMBER-OF-SHARES-REDEEMED> 175,022
<SHARES-REINVESTED> 142,698
<NET-CHANGE-IN-ASSETS> 39,094,931
<ACCUMULATED-NII-PRIOR> 11,552
<ACCUMULATED-GAINS-PRIOR> 56,763
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 200,481
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 372,464
<AVERAGE-NET-ASSETS> 50,228,917
<PER-SHARE-NAV-BEGIN> 18.73
<PER-SHARE-NII> 1.11
<PER-SHARE-GAIN-APPREC> 0.46
<PER-SHARE-DIVIDEND> (1.11)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.17
<EXPENSE-RATIO> 0.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
