STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999
[LOGO]
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
January 27, 2000
Dear Standish, Ayer & Wood Investment Trust Shareholder:
We are writing to provide you with a review of developments at Standish, Ayer &
Wood as they relate to the activities of the Investment Trust.
THE 1999 MARKETS
The past year has been as tumultuous as 1998, although in different ways. World
stock markets have been euphoric. The S&P 500 advanced about 21% but the
technology-driven Nasdaq composite soared 86%. For the second year in a row,
larger capitalization growth stocks have performed brilliantly, and small or
middle capitalization value stocks have been left far behind. In striking
contrast to some of the equity markets, the bond market suffered one of its
worst years in history, with prices of ten-year Treasuries dropping 13%. Yield
spreads, which had widened sharply during the crisis in the fall of 1998,
narrowed during the early months of 1999 but then widened again as the year
progressed, with distressingly poor liquidity in the secondary bond market.
Securities that suffered even a slight short-term tarnishing in their attributes
often dropped dramatically in price - investors displayed very little appetite
for any bond or stock that had evidenced any degree of adversity.
STANDISH INVESTMENT DISCIPLINES
Many of Standish's investment disciplines are directed to applying fundamental
research to uncover relatively cheap securities where the fundamentals are
improving. This methodology has generally been quite successful over long
periods of time in the past. However, the investment environment of the last two
years has produced significant headwinds for some of our disciplines. While
there has been enormous pressure on Standish and other value investors to
capitulate and to become momentum investors, we have not wavered in our focus on
fundamentals and value. Of course, we and other investors make misjudgments
along the way, and we are doing our best to learn the correct lessons from the
inevitable mistakes. We have applied new investment tools and made modest
alterations to the investment process. We have added investment talent and
quantitative resources. We believe that our approach is correct, that our
portfolios are attractively priced relative to the benchmarks, and that it is
our obligation to adhere to the philosophy we have consistently represented to
you.
MAJOR DEVELOPMENTS AT STANDISH DURING 1999
We are pleased that Standish is able to report continued stability of both our
clients and our professional team. Assets under management for our clients are
approximately $45 billion, a slight decline during 1999 but up from $39 billion
at the beginning of 1998. These statistics include $3.3 billion of assets
managed through Standish International Management Company, LLC, or SIMCO. The
Standish Funds returned to 1997's level of $5.8 billion of assets from $6.5
billion in 1998. While we had some client turnover, a substantial portion of the
assets lost related to corporate events or restructuring as opposed to
terminations because of investment performance. We have also added a substantial
number of distinguished new clients.
We continue to build our professional resources both by adding new people and
through our long-term commitment to education and professional training. The
Standish team has grown to 292 members from 232 at the beginning of 1998. Our
109 investment officers average experience of 16 years. Sixty-seven of those
officers have advanced degrees (typically an MBA) and 72 have some advanced
professional accreditation.
1
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At the end of the year, the Standish board of directors elected two new
directors: Lavinia Chase and Cathy Powers. During the last year, we were sorry
to lose the services of Mark Flaherty, Director, who accepted a position of
great responsibility at a very large investment management organization. In
addition, we anticipate the retirement of both Arthur Parker and Barr Clayson
from their positions as stockholders and directors of Standish in June 2000. In
line with other professional service firms, Standish is attempting to maintain
the best balance between retaining the wisdom of senior investment managers and
assuring generational change.
STANDISH'S STRATEGIES FOR THE FUTURE
Standish's top priorities include:
o meeting the needs of our clients and working closely with them to
assure that their investment expectations are realistic;
o developing new investment products that add value in today's
environment; and
o investigating strategic business alliances to augment our research
and penetrate foreign markets as well as expand our domestic
distribution channels.
We believe that all investors and investment management firms are facing very
challenging times. However, the characteristics that have served Standish and
our clients well for sixty-seven years are still intact. We remain dedicated to
fulfilling your needs.
Sincerely,
/s/ Ted Ladd /s/ George Noyes
Edward H. Ladd, Chairman George W. Noyes, President
2
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
MANAGEMENT DISCUSSION AND ANALYSIS
1999 was a difficult year for foreign bonds, but foreign currency weakness
versus the U.S. dollar helped mitigate some of the poor performance. In the six
months since inception, the Standish International Fixed Income Fund II returned
2.84% versus the 3.48% return for the J.P. Morgan Non-U.S. Government Bond
Index. The Fund's negative performance relative to the Index was primarily due
to the underweight position in Japan. Japanese bonds far and away outperformed
other markets, with a currency-hedged total return of 10.59%, and was the only
market to outperform the Index.
Bond yields followed a one way trend higher in 1999. The year began with the
10-year U.S. Treasury yield at 4.65% but finished at a yield of 6.43%. The view
at the start of the year was that developing Asia was facing years of sluggish
growth or a "U" shaped recovery and the Japanese economy was confronting another
year of recession. Europe was challenged with the prospect of outright deflation
as consumer prices increased only 0.5% and it seemed like the U.S. economy would
be dragged down with the rest of the world.
The dramatic turnaround in yields was a direct result of concerted central bank
interest rate cuts of 1998 that were directed at avoiding the risk of a global
recession. The power of monetary policy can not be denied now that there is talk
of a "long boom" for the world economy.
The swing in sentiment from doom to boom helped produce poor returns for all
bond markets in the Index, except Japan. The surge in Japanese yields in
December 1998 from less than 1% to over 2.2% had the potential to crush any hope
for a recovery just as fiscal policy was starting to bear fruit. The Japanese
"administrators" reacted in early 1999 and fought the rise in yields by
effectively cutting overnight interest rates to 0%, flooding the money market
with excess liquidity and announcing that the Trust Fund Bureau would resume its
outright purchases of bonds for the rest of 1999. Ten-year bond yields dropped
and stayed in a 1.6% to 1.9% range throughout the year.
The bear market phenomenon of Japanese outperformance took over when Japanese
Government Bond ("JGB") yields stayed in a tight 30 basis point range during the
year while most other markets saw yields rise by over 150 basis points. JGB
outperformance was also helped by the yen, which appreciated 10% during 1999.
Currency markets were dominated in 1999 by Japanese yen strength and euro
weakness with the U.S. dollar in the middle. The yen was strong as the economy
surprised to the upside by mid-1999 and capital flowed into Japan to chase
undervalued equities. Japanese banks also repatriated billions of dollars in
foreign capital to comply with new bank regulations. The strength of the yen and
the growing weight of Japan in the International Index was the main reason for
positive returns since the inception of the Fund.
The euro dropped steadily throughout the year as European capital flowed into
U.S. equities and high-yielding corporate bonds. The euro depreciated by 14.64%
versus the U.S. dollar in 1999 which dragged down relative performance. During
the year the Fund managed to reduce duration which was prudent in a rising
interest rate environment.
U.S. credit spreads started 1999 at historically cheap levels, rallied into the
summer, but then widened as a result of substantial corporate bond issuance
ahead of Y2K, and liquidity conditions deteriorated going into year-end. For the
year, credit spreads basically collected the yield premium over Treasuries.
European credit spreads performed better but became relatively rich by the end
of 1999. The Fund is now neutral on Euroland credit because of valuations and
increased supply.
The Fund is well positioned to outperform in 2000. The U.S. credit spread market
and European bonds should outperform because they offer high yields on an
absolute and currency-hedged basis. Bond yields are relatively cheap, especially
compared to early 1999. Global growth should moderate and inflation will stay
low because central banks are now hiking interest rates. In addition, corporate
credit spreads are cheap and offer a higher yield advantage over government
bonds which gives the portfolio a distinct yield advantage. We believe that the
yield advantage and potential for spread contraction will add to relative value
in the next few years.
We appreciate your support during the year and we look forward to working on
your behalf towards superior, risk-adjusted returns in 2000.
/s/ William C. Cook II /s/ Richard S. Wood
W. Charles Cook Richard S. Wood
3
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COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN
STANDISH INTERNATIONAL FIXED INCOME FUND II,
THE J.P. MORGAN HEDGED NON-U.S. GOVERNMENT BOND INDEX, AND THE LEHMAN
AGGREGATE INDEX
[The following table was depicted as a line graph in the printed materials.]
Standish Lehman J.P. Morgan
International Aggregate Non-U.S.
Fixed Index Gov't
Income Bond
Fund II Index
100,000 100,000 100000
July 102,900 99,580 103340
August 103,050 99,530 103743
September 104,605 100,685 105548
October 104,757 101,057 105316
November 102,986 101,047 103610
December 102,838 100,562 103475
-----------------------------
Average Annual Total Return
(for periods ended 12/31/1999
Since
Inception
06/30/1999
-----------------------------
2.84%
-----------------------------
Past performance is not predictive of future performance.
4
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$23,272,150) $22,870,535
Cash 523,879
Receivable for investments sold 1,760
Interest receivable 537,238
Unrealized appreciation on forward foreign currency
exchange contracts (Note 6) 380,699
Prepaid expenses 1,072
-----------
Total assets 24,315,183
LIABILITIES
Unrealized depreciation on forward foreign currency
exchange contracts $232,233
Options written, at value (Note 6) (premiums
received, $40,870) 53,365
Accrued accounting, custody and transfer agent fees 8,564
Accrued trustees' fees and expenses (Note 2) 1,791
Accrued expenses and other liabilities 19,988
--------
Total liabilities 315,941
-----------
NET ASSETS $23,999,242
===========
NET ASSETS CONSIST OF:
Paid-in capital $24,487,486
Accumulated net realized loss (183,126)
Distributions in excess of net investment income (44,068)
Net unrealized depreciation (261,050)
-----------
TOTAL NET ASSETS $23,999,242
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,232,794
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE
(Net Assets/Shares outstanding) $ 19.47
===========
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 30, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $ 837,544
---------
Total investment income 837,544
EXPENSES
Investment advisory fee (Note 2) $ 56,258
Accounting, custody and transfer agent fees 53,260
Legal and audit services 25,530
Trustees' fees and expenses (Note 2) 2,825
Registration fees 3,590
Miscellaneous 2,195
---------
Total expenses 143,658
Deduct:
Reimbursement of Fund operating expenses (Note 2) (87,400)
Waiver of investment advisory fee (Note 2) (56,258)
---------
Total expense deductions (143,658)
---------
Net expenses 0
---------
Net investment income 837,544
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss)
Investment security transactions 125,956
Written options transactions (3,369)
Foreign currency transactions and forward foreign
currency exchange contracts 196,212
---------
Net realized gain 318,799
Change in unrealized appreciation (depreciation)
Investment securities (401,615)
Written options (12,495)
Foreign currency and forward foreign currency
exchange contracts 153,060
---------
Net change in unrealized appreciation
(depreciation) (261,050)
---------
Net realized and unrealized gain 57,749
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 895,293
=========
The accompanying notes are an integral part of the financial statements.
6
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE PERIOD
JUNE 30, 1999
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31, 1999
-----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 837,544
Net realized gain 318,799
Change in unrealized appreciation (depreciation) (261,050)
-----------
Net increase in net assets from investment operations 895,293
-----------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F)
From net investment income (837,544)
In excess of net investment income (545,993)
-----------
Total distributions to shareholders (1,383,537)
-----------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 30,574,577
Value of shares issued to shareholders in payment of
distributions declared 1,383,537
Cost of shares redeemed (7,470,628)
-----------
Net increase in net assets from Fund share transactions 24,487,486
-----------
TOTAL INCREASE IN NET ASSETS 23,999,242
NET ASSETS
At beginning of year --
-----------
At end of year (including distributions in excess of net
investment income of $44,068) $23,999,242
===========
The accompanying notes are an integral part of the financial statements.
7
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 30, 1999
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1999(1)
----------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.00
-------------
FROM INVESTMENT OPERATIONS:
Net investment income 0.61
Net realized and unrealized loss on investments (0.04)
-------------
Total from investment operations 0.57
-------------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.67)
In excess of net investment income (0.43)
-------------
Total distributions to shareholders (1.10)
-------------
NET ASSET VALUE, END OF PERIOD $ 19.47
=============
TOTAL RETURN++ 2.84%+++
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets) 0.00%+
Net Investment Income (to average daily net assets) 5.93%+
Portfolio Turnover 91%+++
Net Assets, End of Period (000's omitted) $ 23,999
- -----------------
<FN>
* For the period indicated, the investment adviser voluntarily agreed not to
impose all of its investment advisory fee and/or reimbursed the Fund for
all of its operating expenses. If this voluntary action had not been taken,
the investment income per share and the ratios would have been:
</FN>
Net investment income per share $ 0.51
Ratios (to average daily net assets):
Expenses 1.02%+
Net investment income 4.91%+
</TABLE>
+ Computed on an annualized basis.
++ Total return would have been lower in the absence of expense waivers.
+++ Not annualized.
(1) Calculated based on average shares outstanding.
The accompanying notes are an integral part of the financial statements.
8
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SECURITY RATE MATURITY VALUE# (NOTE 1A)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BONDS AND NOTES -- 95.1%
CORPORATE -- 1.8%
BANK BONDS -- 1.0%
Firstar Bank+ 7.125% 12/01/2009 $ 250,000 $ 241,990
-----------
INDUSTRIAL BONDS -- 0.8%
Cox Communications Inc.+ 7.750% 08/15/2006 200,000 201,944
-----------
Total Corporate (Cost $447,129) 443,934
-----------
GOVERNMENT/OTHER -- 93.3%
AUSTRALIA -- 1.3%
St. Georges Bank 5.750% 10/15/2002 500,000 315,863
-----------
DENMARK -- 11.4%
Denmark Realkredit Notes NCL 6.000% 10/01/2029 7,573,000 952,969
Kingdom of Denmark 6.000% 11/15/2002 4,375,000 607,933
Kingdom of Denmark 8.000% 03/15/2006 7,700,000 1,178,481
-----------
2,739,383
-----------
EURODOLLAR -- 19.7%
American Standard Global 7.125% 06/01/2006 275,000 277,173
Enron Corp. 4.375% 04/08/2005 260,000 245,199
Ford Motor Credit Co. 3.750% 07/12/2004 270,000 255,242
Fort James Corp. Notes 4.750% 06/29/2004 275,000 264,809
Italian Government BTPS Notes NCL 3.250% 02/01/2004 290,000 273,351
Italian Government BTPS Notes NCL+ 4.000% 10/01/2003 1,525,000 1,494,010
Italian Government BTPS Notes NCL+ 5.000% 02/15/2003 1,575,000 1,598,237
Lafarge Corp. 5.125% 06/26/2006 125,000 122,714
UPM-Kymmene Corp. Notes 6.350% 10/01/2009 200,000 199,328
-----------
4,730,063
-----------
GERMANY -- 16.6%
Bundes Obligation Ser 127 Notes+ 4.500% 05/19/2003 300,000 300,798
Bundesrepub. Deutschland+ 4.125% 07/04/2008 600,000 556,179
Colt Telecom Group PLC 144A Notes 7.625% 07/31/2008 500,000 257,666
Depfa Pfandbriefbank Notes NCL+ 5.500% 01/15/2010 600,000 595,738
Deutschland Republic+ 4.750% 07/04/2008 150,000 145,183
Deutschland Republic+ 6.000% 01/05/2006 25,000 26,377
Deutschland Republic+ 6.500% 07/04/2027 1,375,000 1,478,161
Deutschland Republic 7.375% 01/03/2005 300,000 333,665
Exide Holding Europe 144A Notes 9.125% 04/15/2004 275,000 137,465
Fresenius Med Global 7.375% 02/01/2008 75,000 38,843
RSL Communications PLC Reg(a) 0.000% 03/15/2008 275,000 89,281
-----------
3,959,356
-----------
IRELAND -- 0.1%
Esat Telecom Group PLC 11.875% 11/01/2009 25,000 29,229
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SECURITY RATE MATURITY VALUE# (NOTE 1A)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JAPAN -- 16.6%
Austria Republic+ 4.500% 09/28/2005 $30,000,000 $ 349,256
Italy Euroyen Notes NCL+ 3.750% 06/08/2005 40,000,000 446,957
Kingdom of Spain+ 3.109% 09/20/2006 50,000,000 547,780
Mexican Notes NCL+ 3.100% 04/24/2002 35,000,000 346,215
Republic of Finland+ 6.000% 01/29/2002 125,000,000 1,367,488
Spanish Government+ 4.750% 03/14/2005 80,000,000 931,983
-----------
3,989,679
-----------
MEXICO -- 1.2%
Mexico Global 144A Notes 6.542% 04/07/2004 275,000 282,716
-----------
NETHERLANDS -- 2.6%
KPN-Qwest B.V. 144A Private Placement 7.125% 06/01/2009 275,000 270,243
Netherlands Government Notes 5.750% 09/15/2002 350,000 363,101
-----------
633,344
-----------
NEW ZEALAND -- 1.8%
New Zealand Government 8.000% 04/15/2004 795,000 429,839
-----------
SWEDEN -- 5.2%
Sweden Government Bond #1038 6.500% 10/25/2006 3,900,000 481,581
Sweden Government Bond #1039 5.500% 04/12/2002 2,000,000 237,434
Sweden Government Bond #1044 NCL 3.500% 04/20/2006 5,000,000 524,426
-----------
1,243,441
-----------
UNITED KINGDOM -- 16.8%
Abbey National Treasury 7.750% 12/31/2003 150,000 247,980
FHLB 6.875% 06/07/2002 400,000 645,651
FNMA Global Bond 6.875% 06/07/2002 700,000 1,130,677
IPC Magazines 144A(a) 0.000% 03/15/2008 175,000 90,451
Inco Ltd. 15.750% 07/15/2006 200,000 441,801
Lehman Brothers Holdings PLC 6.950% 06/22/2004 230,000 354,881
UK Treasury Gilt+ 7.750% 09/08/2006 145,000 256,500
UK Treasury Gilt 9.000% 10/13/2008 380,000 747,334
UK Treasury Gilt Stock 6.000% 12/07/2028 55,000 108,664
-----------
4,023,939
-----------
Total Government/Other (Cost $22,723,217) 22,376,852
-----------
TOTAL BONDS AND NOTES (COST $23,170,346) 22,820,786
-----------
<CAPTION>
CONTRACT
SIZE
-----------
<S> <C> <C>
PURCHASED OPTIONS -- 0.2%
DEM 3.75% Call, Strike Price 90.20,
09/13/2000 550,000 5,155
DEM 3.75% Call, Strike Price 91.05,
09/29/2000 320,000 2,606
DEM 4% Call, Strike Price 93.99, 07/07/2000 850,000 2,930
DEM 4% Call, Strike Price 95.43, 07/21/2000 275,000 416
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTRACT VALUE
SECURITY SIZE (NOTE 1A)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
DEM 4% Call, Strike Price 99.01, 08/03/2000 275,000 $ 524
DEM 4.5% Call, Strike Price 101.20, 08/14/2000 300,000 275
DEM 4.5% Call, Strike Price 94.76, 10/06/2000 225,000 2,585
DEM 4.5% Call, Strike Price 95.42, 11/02/2000 225,000 2,018
DEM 4.5% Call, Strike Price 95.54, 10/13/2000 285,000 2,643
DEM 4.75% Call, Strike Price 85.93, 09/11/2000 275,500 4,415
EUR Put/USD Call, Strike Price 0.89, 07/10/2001 575,000 4,313
JPY Put/EUR Call, Strike Price 110.25, 12/06/2001 225,000 6,236
JPY Put/EUR Call, Strike Price 125.00, 08/29/2000 550,000 1,386
JPY Put/USD Call, Strike Price 115.00, 09/01/2000 300,000 1,260
JPY Put/USD Call, Strike Price 115.80, 08/14/2000 300,000 1,110
JPY Put/USD Call, Strike Price 120.00, 11/07/2001 225,000 2,340
USD Put/CAD Call, Strike Price 1.42, 10/19/2000 300,000 3,510
UST 6.00% Call, Strike Price 100.75, 09/29/2000 3,080 1,889
UST 6.00% Call, Strike Price 99.88, 10/27/2000 4,750 4,138
-------------
TOTAL PURCHASED OPTIONS (COST $101,804) 49,749
-------------
TOTAL INVESTMENTS -- 95.3% (COST $23,272,150) $ 22,870,535
OTHER ASSETS, LESS LIABILITIES -- 4.7% 1,128,707
-------------
NET ASSETS -- 100.0% $ 23,999,242
=============
</TABLE>
NOTES TO 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.
CAD - Canadian Dollar
DEM - German Deutsche Mark
EUR - Euro
FHLB - Federal Home Loan Bank
FNMA - Federal National Mortgage Association
JPY - Japanese Yen
NCL - Non-callable
USD - United States Dollar
UST - United States Treasury
# Denominated in United States dollars except for foreign country specific
bonds which are denominated in their respective local currency.
+ Denotes all or part of security pledged as collateral (Note 6).
(a) Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date. The rate shown is the rate at
period end. The maturity date shown is the ultimate maturity.
The accompanying notes are an integral part of the financial statements.
11
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL 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 International Fixed Income Fund II (the "Fund") is a
separate non-diversified investment series of the Trust. The Fund
commenced operations on June 30, 1999.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its 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 illiquid 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, which approximates
market value. 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 value based upon the value on such date unless the 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 and accrued interest 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 trade date. Interest income is
determined on the basis of interest accrued, adjusted for amortization of
premium or accretion of discount on long-term debt securities when
required for federal income tax purposes. Realized gains and losses from
securities sold are recorded on the identified cost basis. The Fund does
not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or
loss from investments.
D. FEDERAL TAXES
As a regulated investment company qualified 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.
At December 31, 1999, the Fund, for federal income tax purposes, had
capital loss carryovers which will reduce the Fund's taxable income
arising from future net realizable gain on investments, if any, to the
extent permitted by the Internal Revenue Code and thus will reduce the
amount of distributions to shareholders which would otherwise be
12
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
necessary to relieve the Fund of any liability for federal income tax.
Such capital loss carryover is $112,440 which expires on December 31,
2007. The Fund elected to defer to its fiscal year ending December 31,
2000 losses of $20,070 recognized during the period from November 1, 1999
to December 31, 1999.
E. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
F. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Distributions in excess of net realized gain on investments, written
options, and foreign currency arise because of certain timing differences.
Dividends from net investment income and distributions from capital gains,
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, which may result in distribution reclassifications, are
primarily due to differing treatments for foreign currency transactions,
passive foreign investment companies (PFIC), litigation proceeds, market
discount, non-taxable dividends, capital loss carryforwards, losses
deferred due to wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end
is distributed in the following year.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish International Management
Company, L.L.C. ("SIMCO") 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. For the
period ended December 31, 1999, SIMCO voluntarily agreed to limit the
Fund's operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to 0.00% of the Fund's average daily net assets.
Pursuant to this agreement, SIMCO voluntarily did not impose $56,258 of
its investment advisory fee and reimbursed the Fund for its operating
expenses of $87,400. The Trust pays no compensation directly to its
trustees who are affiliated with SIMCO or to its officers, all of whom
receive remuneration for their services to the Trust from SIMCO. Certain
of the trustees and officers of the Trust are directors or officers of
SIMCO.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
investments, for the period ended December 31, 1999 were as follows:
PURCHASES SALES
----------- -----------
U.S. Government Securities $ 2,378,895 $ 603,710
=========== ===========
Investments (non-U.S.Government Securities) $44,948,788 $23,652,929
=========== ===========
13
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(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:
FOR THE PERIOD JUNE 30, 1999
(COMMENCEMENT OF
OPERATIONS)
TO DECEMBER 31, 1999
----------------------------
Shares sold 1,526,875
Shares issued to shareholders in payment
of distributions declared 70,162
Shares redeemed (364,243)
---------
Net increase 1,232,794
=========
At December 31, 1999, one shareholder, Phelps Dodge Corporation Master
Trust, was record owner of approximately 96% of the total outstanding
shares of the Fund. Investment activity of this shareholder could have a
material impact on the Fund.
On June 30, 1999, the Fund was formed with an initial contribution of
securities in kind, redeemed from the Standish International Fixed Income
Fund, having a market value of approximately $29,400,000 which includes
interest receivable of approximately $700,000.
(5) FEDERAL INCOME TAX BASIS OF INVESTMENT SECURITIES:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1999 as computed on a federal
income tax basis, were as follows:
Aggregate Cost $23,322,765
==========
Gross unrealized appreciation 483,568
Gross unrealized depreciation (935,798)
----------
Net unrealized depreciation $ (452,230)
==========
(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 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 securities 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
14
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of any open purchased options 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 instruments, if there is an illiquid secondary market for the
contract, or if the counterparty does 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 written 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 period ended December 31, 1999:
WRITTEN PUT OPTION TRANSACTIONS
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF CONTRACTS PREMIUMS
------------------- ---------------
<S> <C> <C>
Outstanding, beginning of period 0 $ --
Options written 8 50,033
Options closed (4) (33,504)
--- --------
Outstanding, end of period 4 $ 16,529
=== ========
</TABLE>
WRITTEN CALL OPTION TRANSACTIONS
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF CONTRACTS PREMIUMS
------------------- ---------------
<S> <C> <C>
Outstanding, beginning of period 0 $ --
Options written 9 21,132
Options closed (3) (5,913)
--- -------
Outstanding, end of period 6 $15,219
=== =======
</TABLE>
WRITTEN CROSS CURRENCY OPTION TRANSACTIONS
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF CONTRACTS PREMIUMS
------------------- ---------------
<S> <C> <C>
Outstanding, beginning of period 0 $ --
Options written 3 15,362
Options closed (1) (6,240)
--- -------
Outstanding, end of period 2 $ 9,122
=== =======
</TABLE>
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Fund primarily to protect the value of the Fund's foreign securities
from adverse currency movements. Unrealized appreciation and depreciation
of forward currency exchange contracts is included in the Statement of
Assets and Liabilities.
15
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1999, the Fund held following forward foreign currency or
cross currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO RECEIVE AMOUNT VALUE DATE VALUE FACE AMOUNT GAIN/(LOSS)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Argentinian Peso 697,589 01/19/2000-03/09/2000 $ 694,719 $ 692,442 $ 2,277
British Pound Sterling 200,000 01/18/2000 322,941 330,700 (7,759)
Canadian Dollar 1,000,000 01/18/2000 692,713 686,436 6,277
Euro 2,772,074 01/18/2000-03/15/2000 2,799,561 2,939,435 (139,874)
Japanese Yen 318,120,000 01/18/2000 3,121,026 2,973,084 147,942
Thai Baht 5,697,000 09/11/2000 151,382 150,000 1,382
--------------- -------------- --------------
TOTAL $ 7,782,342 $ 7,772,097 $ 10,245
=============== ============== ==============
<CAPTION>
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO DELIVER AMOUNT VALUE DATE VALUE FACE AMOUNT GAIN/(LOSS)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
British Pound Sterling 1,100,000 01/18/2000 $ 1,776,179 $ 1,796,960 $ 20,781
Euro 3,305,000 01/18/2000-03/15/2000 3,338,203 3,470,953 132,750
Hong Kong Dollar 5,424,297 08/13/2001 689,325 690,000 675
Japanese Yen 127,758,210 01/18/2000 1,253,416 1,214,399 (39,017)
Thai Baht 12,174,000 09/11/2000 323,490 300,000 (23,490)
--------------- -------------- -------------
TOTAL $ 7,380,613 $ 7,472,312 $ 91,699
=============== ============== =============
</TABLE>
FORWARD FOREIGN CROSS CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
U.S.$
MARKET MARKET CONTRACT UNREALIZED
CONTRACTS TO DELIVER VALUE IN EXCHANGE FOR VALUE VALUE DATE GAIN
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Euro 625,504 Japanese Yen $ 686,759 01/18/2000 $ 61,255
New Zealand Dollar 627,106 British Pound Sterling 605,013 01/18/2000 (22,093)
British Pound Sterling 920,383 Japanese Yen 927,743 01/18/2000 7,360
---------- ---------- --------
TOTAL $2,172,993 $2,219,515 $ 46,522
========== ========== ========
</TABLE>
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. Pursuant to the margin requirements, the
Fund deposits either cash or securities in 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
contract's
16
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
terms. The Fund enters into financial futures transactions primarily to
manage its exposure to certain markets and to changes in securities prices
and foreign currencies. Gains and losses are realized upon the expiration
or closing of the futures contracts.
At December 31, 1999, the Fund held no open futures contracts.
INTEREST RATE SWAP CONTRACTS
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a
notional amount of principal. Credit and market risk exist with respect to
these instruments. If forecasts of interest rates and other market factors
are incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were not used.
Even if the forecasts are correct, there are risks that the positions may
correlate imperfectly with the asset or liability being hedged, a liquid
secondary market may not always exist, or a counterparty to a transaction
may not perform. The Fund expects to enter into these transactions
primarily for hedging purposes including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management
technique or protecting against an increase in the price of securities the
Fund anticipates purchasing at a later date. Gains and losses are realized
upon the expiration or closing of the swap contracts.
At December 31, 1999 the Fund held no open interest rate swap contracts.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish International Fixed Income Fund II:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Standish, Ayer & Wood Investment
Trust: Standish International Fixed Income Fund II (the "Fund") at December 31,
1999, the results of its operations, the changes in its net assets and the
financial highlights for the period indicated therein, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at December
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 18, 2000
18
<PAGE>
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