STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999
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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 DIVERSIFIED INCOME FUND
MANAGEMENT DISCUSSION AND ANALYSIS
Although 1999 was a rough year for world bond markets, it was a good year for
the Standish Diversified Income Fund, which outperformed the high quality
benchmarks. The key variable for the year was higher than expected economic
growth in most parts of the world, especially in the US. This higher growth
drove government yield curves higher in line with rising inflation fears.
Conversely, higher growth allowed spreads of corporate and emerging market bonds
to tighten. Thus, while the total return of the high quality benchmarks was flat
or negative for the year, the Fund produced a relatively attractive total return
of 2.20% vs. (.83%) for the Lehman Aggregate Index.
After a tumultuous 1998 in which global financial liquidity essentially dried up
during the third quarter, 1999 was a year of recovery. The stage for recovery
was set in the throes of the 1998 crisis by three separate 25 basis point rate
cuts in that year by the US Federal Reserve Bank. These cuts, along with the
bailout of hedge fund Long Term Capital Management had the desired near-term
effects of adding liquidity and confidence to a global financial system which
had little of either at the time. They also had the intermediate-term effect of
fueling the already-stoked fires of growth in the otherwise healthy US economy.
With cyclical recoveries developing in Europe and non-Japan Asia, the
predictable results in 1999 were rising stock markets, rising commodity prices,
rising bond yields and falling credit spreads for riskier fixed income assets.
Through most of 1999, the Fund held the maximum allowed by the prospectus in
below-investment grade securities. This included larger-than-normal positions in
each of the three major high yield sectors: US high yield debt, emerging markets
debt and European high yield debt. It was not until December that the conscious
decision to take profits was made and the allocation, to below-investment grade
securities fell meaningfully below the maximum allowed.
The Fund's allocation to emerging markets began the year slightly above normal.
Concern for the impending devaluation in Brazil clouded our otherwise positive
view on the sector. Following the Brazil devaluation in mid-January, the Fund
added emerging market assets and maintained a healthy overweight until late
December, when exposure was reduced. The Fund's emerging bonds produced a return
of about 24% for the year, led by positions in Indonesia, Brazil, Mexico and
Peru.
Our U.S. high yield allocation began the year higher than normal and ended the
year slightly below normal. During the year, our major sector bets included
media, telecommunications, health care, financials and gaming. Although high
yield bonds in general outperformed, certain securities in the portfolio
experienced severe underperformance, especially in the third quarter, dragging
down overall performance. Many of these bonds staged a comeback in the fourth
quarter, and we expect performance going forward to be enhanced by further
recovery.
Our European high yield allocation began the year at the top end of our range.
It was reduced throughout the year as profits were taken. This sector produced
outstanding returns, much higher than US high yield; however, as the year
progressed, valuations became extended. As this market matures and more issues
become available, we would look again to increase our exposure here.
Our outlook for 2000 is cautious. The Fed has taken back the liquidity it
provided in late 1998 and renewed the tightening cycle. In conjunction with the
extended state of world equity markets, high and rising commodity prices and
signs of modestly higher US inflation, the Fed's stance leads us to conclude
that 2000 may be less hospitable to financial markets than 1999. Government bond
yields may recover, but riskier bonds are unlikely to match their 1999
performance relative to government benchmarks. With less to gain, we have taken
some risk off the table and moved a larger portion of fund assets into high
grade corporate bonds which are historically cheaper and less susceptible to a
reduction in liquidity. We expect to reverse this position opportunistically.
We appreciate your interest and investment in the Fund and look forward to
serving you in 2000.
Best Regards,
/s/ Dolores S. Driscoll
Dolores S. Driscoll
3
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN
STANDISH DIVERSIFIED INCOME FUND AND THE LEHMAN AGGREATE INDEX
[The following table was originally depicted as a line graph in the printed
material.]
Standish Diversified Income
Fund Lehman Aggregate Index
--------------------------- ----------------------
100000 100000
101500 101190
104400 103922
103950 103039
106049 104564
103919 106080
105238 106568
106200 107644
107546 109022
108271 108935
110189 109305
110346 109874
109978 110912
109770 111855
110782 112090
100285 113914
102526 116580
101877 115962
107831 116623
107115 116973
107566 117803
105876 115742
108476 116379
111966 116751
109105 115724
109633 115353
107773 114869
106436 114811
106781 116143
109472 116002
---------------------------
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED 12/31/99)
ANNUALIZED SINCE
INCEPTION
1 Year 6/2/1997
------ ---------------
2.20% 3.57%
-----------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
4
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
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<TABLE>
<S> <C> <C>
ASSETS
Investment in Diversified Income Portfolio
("Portfolio"), at value (Note 1A) $31,143,666
Deferred organization costs (Note 1D) 8,751
Prepaid expenses 987
-----------
Total assets 31,153,404
LIABILITIES
Accrued accounting, custody and transfer agent fees $2,406
Accrued trustees' fees and expenses (Note 2) 1,000
Accrued expenses and other liabilities 12,007
------
Total liabilities 15,413
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NET ASSETS $31,137,991
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NET ASSETS CONSIST OF:
Paid-in capital $38,187,868
Accumulated net realized loss (4,121,681)
Distributions in excess of net investment income (158,425)
Net unrealized depreciation (2,769,771)
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TOTAL NET ASSETS $31,137,991
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,790,097
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE
(Net Assets/Shares outstanding) $ 17.39
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
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<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1B)
Interest income allocated from Portfolio $3,284,262
Dividend income allocated from Portfolio (net of
foreign withholding taxes of $76) 62,803
Expenses allocated from Portfolio 0
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Net investment income allocated from Portfolio 3,347,065
EXPENSES
Accounting, custody, and transfer agent fees $ 27,491
Registration fees 16,522
Legal and audit services 15,274
Trustees' fees and expenses (Note 2) 3,710
Amortization of organization expenses (Note 1D) 3,610
Insurance expense 576
Miscellaneous 6,670
----------
Total expenses 73,853
Deduct:
Reimbursement of Fund operating expenses (Note 2) (73,853)
----------
Net expenses 0
----------
Net investment income 3,347,065
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) allocated from Portfolio on:
Investment security transactions (2,887,221)
Financial futures contracts 5,900
Written options transactions 492,648
Foreign currency transactions and forward foreign
currency exchange contracts 471,762
----------
Net realized loss (1,916,911)
Change in unrealized appreciation (depreciation)
allocated from Portfolio on:
Investment securities (265,464)
Written options (559,915)
Foreign currency and forward foreign currency
exchange contracts 74,293
----------
Change in net unrealized appreciation
(depreciation) (751,086)
----------
Net realized and unrealized loss on investments (2,667,997)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 679,068
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 3,347,065 $ 3,596,738
Net realized loss (1,916,911) (2,216,708)
Change in net unrealized appreciation (depreciation) (751,086) (1,640,761)
----------- ------------
Net increase (decrease) in net assets from investment
operations 679,068 (260,731)
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DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F)
From net investment income (3,347,065) (3,585,033)
In excess of net investment income (227,812) --
Return of capital (44,546) --
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Total distributions to shareholders (3,619,423) (3,585,033)
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FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 261,396 26,356,500
Value of shares issued to shareholders in payment of
distributions declared 527,973 1,262,115
Cost of shares redeemed (7,168,363) (10,713,175)
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Net increase (decrease) in net assets from Fund share
transactions (6,378,994) 16,905,440
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TOTAL INCREASE (DECREASE) IN NET ASSETS (9,319,349) 13,059,676
NET ASSETS
At beginning of year 40,457,340 27,397,664
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At end of year (including distributions in excess of
net investment income of $158,425 and $81,654,
respectively) $31,137,991 $ 40,457,340
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
YEAR ENDED FOR THE PERIOD
DECEMBER 31, JUNE 2, 1997
------------------------ (COMMENCEMENT OF OPERATIONS)
1999(1) 1998(1) TO DECEMBER 31, 1997(1)
----------- ----------- ----------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 19.02 $ 20.51 $ 20.00
------- ------- -------
FROM INVESTMENT OPERATIONS:
Net investment income* 1.84 1.70 0.98
Net realized and unrealized gain (loss) on
investments (1.45) (1.52) 0.26
------- ------- -------
Total from investment operations 0.39 0.18 1.24
------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1.87) (1.67) (0.63)
In excess of net investment income (0.13) -- --
From net realized gain on investments -- -- (0.10)
From tax return of capital (0.02) -- --
------- ------- -------
Total distributions to shareholders (2.02) (1.67) (0.73)
------- ------- -------
Net Asset Value, End of Year $ 17.39 $ 19.02 $ 20.51
======= ======= =======
Total Return++ 2.20% 0.86% 6.20%
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)*(2) 0.00% 0.00% 0.00%+
Net Investment Income (to average daily net
assets)* 9.87% 8.40% 8.07%+
Net Assets, End of Year (000's omitted) $31,138 $40,457 $27,398
</TABLE>
- -----------------
* For the periods indicated, the investment adviser did not impose any of its
advisory fee and/or reimbursed all of the Fund's operating expenses. If
this voluntary reduction had not been taken, the investment income per
share and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income per share $ 1.64 $ 1.51 $ 0.74
Ratios (to average daily net assets):
Expenses(2) 1.08% 0.91% 1.96%+
Net investment income 8.79% 7.49% 6.11%+
</TABLE>
(1) Calculated based on average shares outstanding.
(2) Includes the Fund's share of Standish Diversified Income Portfolio's
allocated expenses.
+ Computed on an annualized basis.
++ Total return would have been lower in the absence of expense waivers.
The accompanying notes are an integral part of the financial statements.
8
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
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(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 Diversified Income Fund (the "Fund") is a separate
diversified investment series of the Trust.
The Fund invests all of its investable assets in an interest of the
Standish Diversified Income Portfolio (the "Portfolio"), a subtrust of
Standish, Ayer & Wood Master Portfolio ( the "Portfolio Trust"), which is
organized as a New York trust, and has the same investment objective as
the Fund. The value of the Fund's investment in the Portfolio reflects the
Fund's proportionate interest in the net assets of the Portfolio
(approximately 100% at December 31, 1999). The performance of the Fund is
directly affected by the performance of the Portfolio. The financial
statements of the Portfolio are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements.
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
The Fund records its investment in the Portfolio at value. The method by
which the Portfolio values its securities is discussed in Note 1A of the
Portfolio's Notes to Financial Statements, which are included elsewhere in
this report.
B. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Currently, the
Fund's net investment income consists of the Fund's pro rata share of the
net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted
accounting principles.
C. 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 necessary
to relieve the Fund of any liability for federal income tax. Such capital
loss carryovers are $1,365,591 and $1,721,238 which expire on
December 31, 2006 and 2007, respectively. The Fund elected to defer to its
fiscal year ending December 31, 2000 losses of $959,194 recognized during
the period from November 1, 1999 to December 31, 1999.
D. DEFERRED ORGANIZATION EXPENSE
Costs incurred by the Fund in connection with its organization and initial
registration are being amortized on a straight-line basis through
May 2002.
E. OTHER
All net investment income and realized and unrealized gains and losses of
the Portfolio are allocated pro rata among the investors in the Portfolio.
9
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STANDISH, AYER & WOOD INVESTMENT TRUST
STANDISH DIVERSIFIED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
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F. DISTRIBUTIONS TO SHAREHOLDERS:
The Fund's dividends from short-term and long-term capital gains, if any,
after reduction of capital losses will be declared and distributed at
least annually, as will dividends from net investment income. In
determining the amounts of its dividends, the Fund will take into account
its share of the income, gains or losses, expenses, and any other tax
items of the Portfolio. Dividends from net investment income and capital
gains distributions, if any, are reinvested in additional shares of the
Fund unless a shareholder elects to receive them in cash. 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 Fund does not directly pay any investment advisory fees, but
indirectly bears its pro rata share of the compensation paid by the
Portfolio to Standish International Management Company, L.L.C. ("SIMCO")
for investment advisory services. See Note 2 of the Portfolio's Notes to
Financial Statements which are included elsewhere in this report. For the
year ended December 31, 1999, SIMCO voluntarily agreed to limit the
operating expenses of the Fund and its pro rata share of expenses
allocated from the Portfolio (excluding brokerage commissions, taxes and
extraordinary expenses) to 0.00% of the Fund's average daily net assets.
Pursuant to this agreement, SIMCO voluntarily reimbursed the Fund for
$73,853 of operating expenses for the year ended December 31, 1999. The
Trust pays no compensation directly to its trustees who are affiliated
with the investment adviser 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 Standish,
Ayer & Wood, Inc., the parent company of SIMCO.
(3) INVESTMENT TRANSACTIONS:
Increases and decreases in the Fund's investment in the Portfolio for the
year ended December 31, 1999 aggregated $260,000 and $11,435,882,
respectively.
(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, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Shares sold 13,893 1,277,800
Shares issued to shareholders in payment of
distributions declared 29,761 63,709
Shares redeemed (380,241) (550,939)
------------- -------------
Net increase (decrease) (336,587) 790,570
============= =============
</TABLE>
At December 31, 1999, two shareholders held of record approximately 57%
and 20%, of the total outstanding shares of the Fund, respectively.
Investment activity of these shareholders could have a material impact on
the fund.
10
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Standish, Ayer & Wood Investment Trust and the
Shareholders of Standish Diversified Income Fund:
In our opinion, the accompanying statement of assets and liabilities 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 Diversified
Income Fund (the "Fund") at December 31, 1999, and the results of its
operations, the changes in its net assets and the financial highlights for
the periods 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 audits. We conducted
our audits 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 audits, which included
confirmation of securities at December 31, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 18, 2000
11
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STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SECURITY RATE MATURITY VALUE{.} (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BONDS AND NOTES -- 93.3%
ASSET BACKED -- 5.5%
GE Capital Mortgage 1996 HE3 8.250% 09/25/2026 $ 348,954 $ 339,794
Green Tree Financial Corp. 1997-6 B2 Non-ERISA 7.750% 01/15/2029 875,000 663,154
Vanderbilt Mortgage Financial 1996-C B2 8.000% 11/07/2026 400,000 351,375
Vanderbilt Mortgage Financial 1997-D 1B2 7.550% 12/07/2027 425,000 345,445
-----------
Total Asset Backed (Cost $2,012,536) 1,699,768
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.3%
GE Capital Mortgage Services Inc.1994-1 B3
144A Non-ERISA 6.500% 01/25/2024 239,646 193,776
GE Capital Mortgage Services Inc.1996-11 B3
Non-ERISA 7.500% 07/25/2026 237,688 215,701
-----------
Total Collateralized Mortgage Obligations (Cost $420,418) 409,477
-----------
CONVERTIBLE CORPORATE BONDS -- 2.0%
Exide Corp. 144A+ 2.900% 12/15/2005 460,000 234,600
Integrated Health{*} 5.750% 01/01/2001 500,000 500
Tenet Healthcare Corp.+ 6.000% 12/01/2005 450,000 369,000
-----------
Total Convertible Corporate Bonds (Cost $1,163,587) 604,100
-----------
CORPORATE -- 49.0%
BANK BONDS -- 3.3%
Bank United Corp. Notes+ 8.875% 05/01/2007 200,000 183,500
First Palm Beach Notes 10.350% 06/30/2002 100,000 98,500
GS Escrow Corp. 144A Notes 7.125% 08/01/2005 400,000 357,390
Matrix Capital Corp. Notes+ 11.500% 09/30/2004 300,000 283,512
Webster Financial Capital 144A Notes+ 9.360% 01/29/2027 100,000 94,131
-----------
1,017,033
-----------
FINANCIAL -- 11.3%
Amresco Inc. Corp. Senior Sub Notes+ 9.875% 03/15/2005 175,000 112,000
Cabot Industrial Property LP 7.125% 05/01/2004 300,000 288,987
Conseco Finance Trust Cap. Notes+ 8.796% 04/01/2027 700,000 634,004
Conseco Finance Trust II+ 8.700% 11/15/2026 75,000 67,275
Ford Motor Credit Corp.+ 6.700% 07/16/2004 300,000 293,625
Franchise Fin Corp. REIT Notes+ 8.250% 10/30/2003 350,000 339,482
Fresenius Medical Capital Trust Notes 7.875% 02/01/2008 30,000 277,500
Lehman Bros Holding Inc. 6.625% 04/01/2004 775,000 750,231
Meditrust, REIT 7.820% 09/10/2026 200,000 150,000
Phoenix Re-Insurance Corp. Capital Notes+ 8.850% 02/01/2027 175,000 122,748
Prologis Trust 6.700% 04/15/2004 300,000 286,128
Tanger REIT Senior Notes+ 7.875% 10/24/2004 200,000 183,768
-----------
3,505,748
-----------
INDUSTRIAL BONDS -- 34.4%
Adelphia Communications+ 8.125% 07/15/2003 175,000 168,000
Adelphia Communications 8.375% 02/01/2008 150,000 139,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SECURITY RATE MATURITY VALUE{.} (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL BONDS (continued)
Adelphia Communications Senior Notes+ 9.250% 10/01/2002 $ 150,000 $ 150,000
Allied Waste Industries 144A Notes 7.375% 01/01/2004 125,000 115,000
Allied Waste Industries 144A Notes 7.625% 01/01/2006 150,000 134,625
CSC Holdings Inc. 8.125% 08/15/2009 300,000 294,744
Charter Communications Holdings LLC+ 8.250% 04/01/2007 475,000 439,375
Coastal Corp. Notes NCL 6.200% 05/15/2004 275,000 260,950
Conmed Corp. Notes 9.000% 03/15/2008 175,000 161,875
Enron Corp. 6.450% 11/15/2001 75,000 73,924
Exodus Communications Inc. 10.750% 12/15/2009 125,000 127,656
Extendicare Health Sevices Senior Notes+ 9.350% 12/15/2007 484,000 324,280
Fort James Corp. Senior Notes+ 6.875% 09/15/2007 400,000 379,736
Fox Sports Networks LLC(a) 0.000% 08/15/2007 275,000 220,000
Fox/Liberty Network+ 8.875% 08/15/2007 275,000 279,812
Genesis Multicare Senior Sub Notes+ 9.000% 08/01/2007 175,000 35,000
Global Crossing Holding Ltd. Notes+ 9.625% 05/15/2008 400,000 399,000
Grove Worldwide Senior Notes(a) 0.000% 05/01/2009 175,000 14,000
Grove Worldwide Senior Sub Notes+ 9.250% 05/01/2008 125,000 37,500
Horseshoe Gaming Holdings+ 8.625% 05/15/2009 400,000 382,000
Horseshoe Gaming LLC Notes 9.375% 06/15/2007 250,000 252,500
Huntsman ICI Chemicals LLC 144A+ 10.125% 07/01/2009 600,000 615,000
Isle of Capri Casinos+ 8.750% 04/15/2009 335,000 309,037
Lear Corp. 8.110% 05/15/2009 300,000 282,860
Level 3 Communications+ 9.125% 05/01/2008 300,000 283,500
Lilly Industries Inc. Notes+ 7.750% 12/01/2007 180,000 164,852
Mohegan Tribal Gaming 8.125% 01/01/2006 250,000 243,750
Mohegan Tribal Gaming 8.750% 01/01/2009 50,000 49,375
Nextlink Communications(a) 12.250% 06/01/2009 225,000 137,250
Nextlink Communications 144A Notes 10.750% 11/15/2008 500,000 515,000
Owens Illinois Inc. Deb Notes NCL 7.500% 05/15/2010 150,000 134,275
Owens-Illinois Inc. 7.150% 05/15/2005 175,000 161,803
Panavision Inc. Step Up Sub Notes(a) 0.000% 02/01/2006 450,000 216,000
Park Place Entertainment 7.950% 08/01/2003 350,000 344,664
Premier Parks Inc 9.750% 06/15/2007 150,000 150,750
Premier Parks Inc. Senior Notes+ 9.250% 04/01/2006 50,000 49,250
Premier Parks Inc. Step Up Senior Notes(a) 0.000% 04/01/2008 150,000 102,750
RSL Communications PLC Notes(a) 0.000% 03/01/2008 325,000 201,500
RSL Communications PLC Notes 12.000% 11/01/2008 175,000 175,875
Republic Service 7.125% 05/15/2009 625,000 561,635
Revlon Consumer Prods+ 8.625% 02/01/2008 300,000 147,000
Revlon Worldwide Senior Notes+ 0.000% 03/15/2001 150,000 29,250
Rose Hills Co. Senior Sub Notes 9.500% 11/15/2004 125,000 77,500
Salem Communications Corp. Senior Sub Notes 9.500% 10/01/2007 175,000 175,000
Sequa Corp. 144A 9.000% 08/01/2009 300,000 289,500
TRW Inc. 7.125% 06/01/2009 300,000 284,358
Williams Communications Group Notes 10.700% 10/01/2007 225,000 236,250
Williams Communications Group Notes 10.875% 10/01/2009 150,000 156,937
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SECURITY RATE MATURITY VALUE{.} (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL BONDS (continued)
Winstar Communications Senior Sub Step Up
Notes(a),+ 0.000% 10/15/2005 $ 250,000 $ 242,500
-----------
10,726,898
-----------
Total Corporate (Cost $16,783,967) 15,249,679
-----------
GOVERNMENT/OTHER -- 32.9%
EURODOLLAR -- 7.2%
Bulgaria FLIRB Series A(b) 6.500% 07/28/2012 260,000 186,550
Bulgaria IAB 5.875% 07/28/2011 225,000 177,750
Metromedia Fiber Network 10.000% 12/15/2009 300,000 313,709
Psinet Inc. 11.000% 08/01/2009 175,000 179,469
Remy Cointreau 144A 10.000% 07/30/2005 150,000 165,548
Republic of Argentina 0.000% 10/15/2002 325,000 243,750
Republic of Argentina 11.375% 01/30/2017 995,000 988,781
-----------
2,255,557
-----------
GERMANY -- 1.9%
Colt Telecom Group PLC 144A Notes 7.625% 07/31/2008 725,000 373,615
Exide Holding Europe 144A Notes 9.125% 04/15/2004 200,000 99,974
Texon International PLC Senior Notes 10.000% 02/01/2008 240,000 107,601
-----------
581,190
-----------
IRELAND -- 0.6%
Esat Telecom Group PLC 11.875% 11/01/2009 150,000 175,375
-----------
NETHERLANDS -- 1.5%
PTC International Finance II SA 144A 11.250% 12/01/2009 300,000 312,953
Versatel Telecom 4.000% 12/17/2004 150,000 150,429
-----------
463,382
-----------
NEW ZEALAND -- 0.2%
Fletcher Challenge CVT 10.000% 04/30/2005 110,000 58,687
-----------
TURKEY -- 1.0%
Turkish Treasury Bill 0.000% 08/23/2000 124,500 122,919
Turkish Treasury Bill 0.000% 03/15/2000 200,000 203,200
-----------
326,119
-----------
UNITED KINGDOM -- 1.2%
IPC Magazines 144A(a),+ 0.000% 03/15/2008 200,000 103,373
William Hill Finance 10.625% 04/30/2008 175,000 291,140
-----------
394,513
-----------
YANKEE BONDS -- 19.3%
Alestra SA 12.125% 05/15/2006 175,000 175,875
Asia Pulp and Paper Global Financial 144A
CVT+ 2.000% 07/25/2000 125,000 135,000
Asia Pulp and Paper Global Financial Notes 9.060% 10/04/2001 400,000 332,000
Asia Pulp and Paper International Finance
144A 0.000% 07/07/2000 100,000 91,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SECURITY RATE MATURITY VALUE{.} (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL BONDS (continued)
Colt Telecom Group PLC Senior Step Up Notes(a) 0.000% 12/15/2006 $ 350,000 $ 308,000
Grupo Televisa S.A.(a) 0.000% 05/15/2008 250,000 228,125
Guangdong Enterprises 144A Senior Notes NCL{*} 8.875% 05/22/2007 825,000 255,272
Merita Bank FLIRB 144A Notes 7.150% 12/29/2049 300,000 289,908
Mexico Global Bond 11.375% 09/15/2016 535,000 604,550
Panama PDI FRN Capitalize(b) 6.500% 07/17/2016 174,711 137,367
Peru FLIRB(b) 3.750% 03/07/2017 490,000 303,188
Republic of Brazil FLIRB 5.000% 04/15/2009 850,000 637,500
Republic of Brazil PIK 5.000% 04/15/2014 1,562,614 1,172,945
Republic of Korea 8.875% 04/15/2008 130,000 136,347
Republic of Panama Notes 8.875% 09/30/2027 325,000 272,188
SE Banken 144A FLIRB 6.500% 12/29/2049 325,000 303,599
Tyco International Ltd. 144A 6.875% 09/05/2002 325,000 319,358
UPM-Kymmene Corp. 144A Notes 7.450% 11/26/2027 350,000 316,429
-----------
6,018,651
-----------
Total Government/Other (Cost $10,498,067) 10,273,474
-----------
NON-AGENCY -- 1.0%
PASS THRU SECURITIES -- 1.0%
Franchise Mortgage Corp. 1997-A D 144A 8.140% 04/15/2019 350,000 302,422
-----------
Total Non-Agency (Cost $363,891) 302,422
-----------
U.S. TREASURY OBLIGATIONS -- 1.6%
TREASURY BONDS -- 0.6%
U.S. Treasury Bond+ 8.125% 05/15/2021 175,000 200,594
-----------
TREASURY NOTES -- 1.0%
U.S. Treasury Note+ 6.000% 08/15/2009 325,000 314,844
-----------
Total U.S. Treasury Obligations (Cost $525,142) 515,438
-----------
TOTAL BONDS AND NOTES (COST $31,767,608) 29,054,358
-----------
<CAPTION>
SHARES
-------------
PREFERRED STOCKS -- 3.9%
<S> <C> <C>
Equity Office Properties Trust 144A CVT 8,000 308,000
Global Crossing PIK Pfd 144A 4,000 400,000
IBJ Preferred Capital Co. LLC 144A 175,000 165,375
Paxson Communications 12.5% PIK Pfd 346 354,650
-----------
TOTAL PREFERRED STOCKS (COST $1,262,110) 1,228,025
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTRACT VALUE
SECURITY SIZE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------
PURCHASED OPTIONS -- 1.2%
<S> <C> <C>
BTPS 6.75% Put, Strike Price 107.69, 02/07/2000 1,325,000,000 $ 7,950
EUR Put/JPY Call, Strike Price 146.70, 04/13/2000 731,145 316,876
EUR Put/USD Call, Strike Price 0.95, 08/16/2000 330,000 3,135
SSB Put Emerging Index Strike Price 85.213, 03/24/2000 9,330 28,410
UST 6.00% Call, Strike Price 99.16, 04/17/2000 4,500 2,376
-----------
TOTAL PURCHASED OPTIONS (COST $199,704) 358,747
-----------
SHORT-TERM INVESTMENTS -- 0.4%
REPURCHASE AGREEMENTS -- 0.4%
Prudential-Bache Repurchase Agreement, dated 12/31/99, due 01/03/00, with a
maturity value of $118,174 and an effective yield of 2.00%, collateralized by a
U.S. Government Agency Obligation with a rate of 6.50%, a maturity date of
01/01/14 and a market value of $121,140. 118,154
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $118,154) 118,154
-----------
TOTAL INVESTMENTS -- 98.8% (COST
$33,347,576) $ 30,759,284
OTHER ASSETS, LESS LIABILITIES -- 1.2% 384,489
-------------
NET ASSETS -- 100.0% $ 31,143,773
=============
</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.
CVT - Convertible
DEB - Debenture
FLIRB - Front Loaded Interest Reduction Bond
FRN - Floating Rate Note
NCL - Non-callable
PIK - Payment-in-kind
REIT - Real Estate Investment Trust
UST - United States Treasury
EUR - Euro
JPY - Japanese Yen
USD - United States Dollar
{.} 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 a margin deposit (Note 5).
{*} Defaulted security.
(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.
(b) Variable Rate Security; rate indicated is as of 12/31/99.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Note 1A) (identified cost,
$33,347,576) $30,759,284
Interest receivable 567,976
Unrealized appreciation on forward foreign currency
exchange contracts (Note 5) 116,625
Receivable for investments sold 177,712
Deferred organization costs (Note 1E) 2,866
Prepaid expenses 1,168
-----------
Total assets 31,625,631
LIABILITIES
Unrealized depreciation on forward foreign currency
exchange contracts (Note 5) $ 20,188
Options written, at value (Note 5) (premiums
received, $150,954) 428,630
Accrued accounting and custody fees 6,573
Accrued trustees' fees and expenses (Note 2) 2,477
Accrued expenses and other liabilities 23,990
-------
Total liabilities 481,858
-----------
NET ASSETS (APPLICABLE TO INVESTORS' BENEFICIAL
INTERESTS) $31,143,773
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1C)
Interest income $ 3,284,269
Dividend income (net of foreign withholding taxes of $76) 62,803
-----------
Total income 3,347,072
EXPENSES
Investment advisory fee (Note 2) $ 170,359
Accounting and custody fees 75,581
Legal and audit services 31,677
Trustees' fees and expenses (Note 2) 6,134
Insurance expense 5,490
Amortization of organization expenses (Note 1E) 1,193
Miscellaneous 719
----------
Total expenses 291,153
Deduct:
Waiver of investment advisory fee (Note 2) (170,359)
Reimbursement of Fund operating expenses (Note 2) (120,794)
----------
Total expense deductions (291,153)
----------
Net expenses 0
-----------
Net investment income 3,347,072
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions (2,887,231)
Financial futures contracts 5,901
Written options transactions 492,650
Foreign currency transactions and forward foreign
currency exchange contracts 471,763
----------
Net realized loss (1,916,917)
Change in unrealized appreciation (depreciation)
Investment securities (265,465)
Written options (559,916)
Foreign currency and forward foreign currency
exchange contracts 74,294
----------
Change in net unrealized appreciation
(depreciation) (751,087)
-----------
Net realized and unrealized loss (2,668,004)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 679,068
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 3,347,072 $ 3,596,746
Net realized loss (1,916,917) (2,216,713)
Change in net unrealized appreciation (depreciation) (751,087) (1,640,762)
------------ ------------
Net increase (decrease) in net assets from
investment operations 679,068 (260,729)
------------ ------------
CAPITAL TRANSACTIONS
Contributions 260,000 26,399,305
Withdrawals (11,435,882) (12,282,331)
------------ ------------
Net increase (decrease) in net assets from
capital transactions (11,175,882) 14,116,974
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (10,496,814) 13,856,245
NET ASSETS
At beginning of year 41,640,587 27,784,342
------------ ------------
At end of year $ 31,143,773 $ 41,640,587
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FOR THE PERIOD
DECEMBER 31, JUNE 2, 1997
--------------------- (COMMENCEMENT OF OPERATIONS)
1999 1998 TO DECEMBER 31, 1997
---------- --------- ----------------------------
<S> <C> <C> <C>
RATIOS:
Expenses (to average daily net assets)* 0.00% 0.00% 0.00%+
Net Investment Income (to average daily net
assets)* 9.83% 8.40% 8.07%+
Portfolio Turnover 137% 145% 25%
Net Assets, End of Year (000's omitted) $ 31,144 $ 41,641 $ 27,784
</TABLE>
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not
to impose any of its investment advisory fee and/or reimbursed the
Portfolio for all of its operating expenses. If this voluntary action had
not been taken, the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Ratios (to average daily net assets):
Expenses 0.86% 0.75% 1.50%+
Net investment income 8.97% 7.65% 6.57%+
</TABLE>
+ Computed on an annualized basis.
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Standish, Ayer & Wood Master Portfolio (the "Portfolio Trust") was
organized as a master trust fund under the laws of the State of New York
on January 18, 1996 and is registered under the Investment Company Act of
1940, as amended, as an open-end, management investment company. Standish
Diversified Income Portfolio (the "Portfolio") is a separate diversified
investment series of the Portfolio Trust.
At December 31, 1999, there was one fund, Standish Diversified Income Fund
(the "Fund"), invested in the Portfolio. The value of the Fund's
investment in the Portfolio reflects the Fund's proportionate interest in
the net assets of the Portfolio. The Fund's proportionate interest
December 31, 1999 was approximately 100%.
The following is a summary of significant accounting policies followed by
the Portfolio 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 normally 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 Portfolio are valued at amortized cost, which
approximates market value. If the Portfolio 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 Portfolio 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
Portfolio to monitor on a daily basis, the market value and accrued
interest of the repurchase agreements 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. Interest income
is determined on the basis of interest accrued. Dividend income is
recorded on the ex-dividend date. Realized gains and losses from
securities sold are recorded on the identified cost basis.
D. INCOME TAXES
The Portfolio is treated as a partnership for federal tax purposes. No
provision is made by the Portfolio for federal or state taxes on any
taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since at least one of
the Portfolio's investors is a regulated investment company that invests
all or substantially all of its assets in the Portfolio, the Portfolio
normally must satisfy the source of income and diversification
requirements applicable to regulated investment companies (under the
Internal Revenue Code) in order for its investors
21
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to satisfy them. The Portfolio allocates at least annually among its
investors each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items of
income, gain, loss deduction or credit.
E. DEFERRED ORGANIZATIONAL EXPENSES
Costs incurred by the Portfolio in connection with its organization and
initial registration are being amortized on a straight-line basis through
May 2002.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Investment Management
Company, L.L.C. ("SIMCO") for overall investment advisory services is paid
monthly at the annual rate of 0.50% of the Portfolio's average daily net
assets. For the year ended December 31, 1999, SIMCO voluntarily agreed to
limit the Portfolio's operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses) to 0.00% of the Portfolio's average
daily net assets. Pursuant to this agreement, SIMCO voluntarily did not
impose $170,359 of its investment advisory fee and reimbursed the
Portfolio for its operating expenses of $120,794. The Portfolio 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 Portfolio Trust from SIMCO. Certain of the trustees and officers of
the Portfolio Trust are directors or officers of Standish, Ayer & Wood,
Inc., the parent company of SIMCO.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
U.S. Government Securities $ 12,107,204 $ 13,741,454
============ ============
Investments (non-U.S.Government Securities) $ 32,187,246 $ 36,574,344
============ ============
</TABLE>
(4) 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:
<TABLE>
<S> <C>
Aggregate Cost $33,423,234
===========
Gross unrealized appreciation 793,843
Gross unrealized depreciation (3,457,793)
-----------
Net unrealized depreciation $(2,663,950)
===========
</TABLE>
(5) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek 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 Parts A and B of the Portfolio Trust's registration statement.
The Portfolio trades the following financial instruments with off-balance
sheet risk:
22
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 Portfolio 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 Portfolio's exposure to the underlying instrument. Buying
puts and writing calls tend to decrease the Portfolio's exposure to the
underlying instrument, or hedge other Portfolio investments. Options, both
held and written by the Portfolio, are reflected in the accompanying
Statement of Assets and Liabilities at market value. The underlying face
amount at value 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
contract's 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 Portfolio is exercised, the
premium reduces the cost basis of the securities purchased by the
Portfolio. The Portfolio, as a 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, 1999 is as
follows:
WRITTEN PUT OPTION TRANSACTIONS
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF CONTRACTS PREMIUMS
------------------- -------------
<S> <C> <C>
Outstanding, beginning of period 7 $ 58,685
Options written 9 103,366
Options expired (6) (54,550)
Options closed (7) (88,759)
---- -----------
Outstanding, end of period 3 $ 18,742
==== ===========
</TABLE>
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
<TABLE>
<CAPTION>
NUMBER OF CONTRACTS PREMIUMS
------------------- -------------
<S> <C> <C>
Outstanding, beginning of period 7 $ 59,908
Options written 8 53,277
Options exercised (1) (18,594)
Options expired (4) (28,409)
Options closed (9) (63,510)
---- ----------
Outstanding, end of period 1 $ 2,672
==== ==========
</TABLE>
WRITTEN CROSS CURRENCY OPTION TRANSACTIONS
---------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF CONTRACTS PREMIUMS
------------------- -------------
<S> <C> <C>
Outstanding, beginning of period 6 $ 612,500
Options written 8 290,920
Options exercised (2) (575,120)
Options closed (10) (198,760)
----------- -----------
Outstanding, end of period 2 $ 129,540
=========== ===========
</TABLE>
23
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------
FUTURES CONTRACTS
The Portfolio 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 margin requirements the
Portfolio 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 Portfolio 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 Portfolio. 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 Portfolio's exposure to the
underlying instrument, while selling futures tends to decrease the
Portfolio's exposure to the underlying instrument or hedge other
investments. In addition, there is the risk that the Portfolio 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 counterparty does not perform under the contract's terms. The
Portfolio enters into financial futures transactions primarily to seek 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.
There were no outstanding future contracts at December 31, 1999.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Portfolio 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 Portfolio primarily to protect the value of the Portfolio'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.
At December 31, 1999, the Portfolio held the following forward foreign
currency and 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 1,649,873 01/19-03/09/2000 $ 1,643,077 $ 1,642,111 $ 966
British Pound Sterling 105,000 01/24/2000 169,527 169,084 443
Euro 670,016 01/18-01/27/2000 675,975 684,323 (8,348)
Hong Kong Dollar 1,277,575 01/14/2000 164,330 163,733 597
Hungarian Forint 16,829,192 02/07/2000 66,647 65,775 872
Indonesian Rupiah 699,150,500 02/14/2000 99,373 99,100 273
Japanese Yen 19,000,000 01/19/2000 186,438 184,735 1,703
Polish Zloty 550,811 01/27/2000 131,814 131,710 104
------------- ------------- ------------
TOTAL $ 3,137,181 $ 3,140,571 $ (3,390)
============= ============= ============
</TABLE>
24
<PAGE>
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<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 296,347 01/24/2000 $ 478,464 $ 476,377 $ (2,087)
Danish Krone 180,000 01/25/2000 24,409 25,295 886
Euro 2,304,204 01/14-08/24/2000 2,325,907 2,435,037 109,130
Hong Kong Dollar 6,510,554 01/14/2000-08/13/2001 831,351 822,383 (8,968)
New Zealand Dollar 120,000 01/18/2000 62,711 61,926 (785)
-------------- --------------- ------------
TOTAL $ 3,722,842 $ 3,821,018 $ 98,176
============== =============== ============
<CAPTION>
</TABLE>
FORWARD FOREIGN CROSS CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
MARKET MARKET CONTRACT UNREALIZED
CONTRACTS TO DELIVER VALUE IN EXCHANGE FOR VALUE VALUE DATE GAIN
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
Czech Republic Koruna $ 132,182 Slovakia Koruna $ 133,833 02/07/2000 $ 1,651
--------- --------- -------
TOTAL $ 132,182 $ 133,833 $ 1,651
========= ========= =======
</TABLE>
(6) DELAYED DELIVERY TRANSACTIONS:
The Portfolio may purchase securities on a when-issued, delayed delivery
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 Portfolio
instructs its custodian to segregate securities having a value at least
equal to the amount of the purchase commitment.
At December 31, 1999, the Portfolio did not have any delayed delivery
transactions.
(7) CONCENTRATION OF RISK:
The Portfolio invests in low rated (non-investment grade) and comparable
quality unrated high yield securities. Investments in high yield
securities are accompanied by a greater degree of credit risk and the risk
tends to be more sensitive to economic conditions than higher rated
securities. The risk of loss due to default of an issuer may be
significantly greater for holders of high yield securities, because such
securities are generally unsecured and are often subordinated to other
creditors of the issuer.
There are certain additional considerations and risks associated with
investing in foreign securities and currency transactions that are not
inherent with investments of domestic origin. The Portfolio's investment
in emerging market countries may involve greater risks than investments in
more developed markets and the price of such investments may be volatile.
These risks of investing in foreign and emerging markets may include
foreign currency exchange rate fluctuations, perceived credit risk,
adverse political and economic developments and possible adverse foreign
government intervention.
(8) LINE OF CREDIT:
The Portfolio, and other subtrusts in the Portfolio Trust and funds in the
Standish, Ayer & Wood Investment Trust (the "Trust") are parties to a
committed line of credit facility, which enables each portfolio/fund to
borrow, in the aggregate, up to $25 million. Interest is charged to each
participating portfolio/fund based on its borrowings at a rate equal to
the Federal Funds effective rate plus 1/2 of 1%. In addition, a commitment
fee, computed at an annual rate of .065 of 1% on the daily unused portion
of the facility, is allocated ratably among the participating
portfolios/funds at the end of each quarter. For the year ended
December 31, 1999, the expense related to the commitment fee was $691 for
the Portfolio. During the year ended December 31, 1999, the Portfolio had
no borrowings under the credit facility.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Standish, Ayer & Wood Master Portfolio and Investors of
Standish Diversified Income Portfolio:
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 supplemental data present
fairly, in all material respects, the financial position of Standish
Diversified Income Portfolio (the "Portfolio") at December 31, 1999, the
results of its operations, the changes in its net assets and the supplemental
data for the periods indicated therein, in conformity with accounting
principles generally accepted in the United States. These financial
statements and supplemental data (hereafter referred to as "financial
statements") are the responsibility of the Portfolio's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with 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 audits, 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
26
<PAGE>
[LOGO] Standish Funds(R)
One Financial Center
Boston, MA 02111-2662
(800) 729-0066
www.standishfunds.com
