{Front Cover]
[State Street Research Logo]
STATE STREET RESEARCH
GOVERNMENT INCOME FUND
ANNUAL REPORT
October 31, 1996
[Graphic - Figure carrying umbrella and briefcase
bounding over globe of the world]
WHAT'S INSIDE
From the Chairman
The markets
reward investors
Portfolio Manager's Review
Positive returns for
this conservative fund
Fund Information
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
[Dalbar Quality Tested Service Logo]
DALBAR
Honors Commitment To:
Investors
For Excellence
in
Shareholder Service
<PAGE>
FROM THE CHAIRMAN
To Our Shareholders:
[Photo of Ralph F. Verni
So far, this year has proven to be another good one for many investors in
both the stock and bond markets. The Dow Jones Industrial Average broke the
6000 point barrier, and the Standard & Poor's 500 Composite Index is up
+24.10 for the 12 months ended October 31, 1996. Government bond investors
saw the Salomon Brothers Non-U.S. Dollar World Government Bond Index gain
+5.45% and the Merrill Lynch Government Master Index gain +5.05% for the same
time period.(1)
For much of the past year, there were strong corporate profits, low inflation
and steady but slow economic growth. The stock and bond markets were unduly
influenced over the past few months by news on the economy, employment and
what the Federal Reserve might do. Contradictions as to which direction the
economy was headed, caused rallies on some days and declines on others. But
both markets continued to show a trend of advancement into the autumn season.
The economy has definitely slowed in recent months, but this looks more like
a temporary pause than the beginning of a protracted slowdown.
The bond market is expected to remain in the trading range where it has been
for the past several months, even though some of the recent news has been
more favorable. We are keeping an eye on the risk of higher inflation driven
by the tightening labor market and the loss of momentum on reducing the
deficit. We continue to carry a duration in our portfolios that is modestly
shorter than the market.
In closing, I'd like to say as an overseer of this Fund that we have a great
team at work here: Jack Kallis's many years of experience and investment
disciplines combined with State Street Research's research capabilities give
Government Income Fund investors the needed advantage in today's markets.
Thank you for investing in Government Income Fund.
Sincerely,
/s/ Ralph F. Verni
Ralph F. Verni
Chairman
November 30, 1996
(1)The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded common stocks and is a commonly used measure of U.S. stock market
performance. The Salomon Brothers Non-U.S. Dollar World Government Bond Index
is a commonly used measure of international bond performance. The Merrill
Lynch Government Master Index is a commonly used measure of bond market
performance. The indices are unmanaged and do not take sales charges into
consideration. Direct investment in the indices is not possible; results are
for illustrative purposes only.
(2)+4.51% for Class B shares; +5.55% for Class C shares; +4.51% for Class D
shares.
(3)All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Investments in the Fund are not insured
or guaranteed by the U.S. government or any other entity. Performance for a
class includes periods prior to the adoption of class designations. "C"
shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions. Performance for "B" and "D"
shares prior to class designations in 1993 reflects annual 12b-1 fees of
.25%, and performance thereafter reflects annual 12b-1 fees of 1%, which will
reduce subsequent performance.
(4)Performance reflects maximum 4.5% "A" share front-end sales charge or 5%
"B" share or 1% "D" share contingent deferred sales charges, where
applicable.
Please note that the discussion throughout this shareholder report is dated
as indicated and, because of possible changes in viewpoint, data and
transactions, should not be relied upon as being current thereafter.
FUND INFORMATION (all data are for periods ended October 31, 1996, except
where otherwise noted)
Total value of $10,000 invested on March 23, 1987(3)
(Class A shares, at maximum applicable sales charge)
[Mountain Chart]
[Data for Mountain Chart]
3/87 9550
10/87 9408
10/88 10328
10/89 11321
10/90 11948
10/91 13890
10/92 15259
10/93 17034
10/94 16424
10/95 18899
10/96 19896
SEC Yield
<TABLE>
<CAPTION>
<S> <C>
Class A 5.62%
- ---------- --------
Class B 5.16%
- ---------- --------
Class C 6.15%
- ---------- --------
Class D 5.16%
</TABLE>
SEC yield is based on the net investment income produced for the 30 days
ended October 31, 1996.
SEC Average Annual Compound Rates of Return for periods ended 9/30/96
(at maximum applicable sales charge)(3),(4)
<TABLE>
<CAPTION>
Life of Fund
(since 3/23/87) 5 years 1 year
- ---------- ---------------- --------- ---------
<S> <C> <C> <C>
Class A +7.28% +6.28% +0.12%
- ---------- ---------------- --------- ---------
Class B +7.49% +6.38% -0.93%
- ---------- ---------------- --------- ---------
Class C +7.88% +7.42% +5.02%
- ---------- ---------------- --------- ---------
Class D +7.50% +6.70% +3.08%
</TABLE>
Average Annual Compound Rates of Return
(at maximum applicable sales charge)3,4
<TABLE>
<CAPTION>
Life of Fund
(since 3/23/87) 5 years 1 year
- ---------- ---------------- --------- ---------
<S> <C> <C> <C>
Class A +7.41% +6.47% +0.54%
- ---------- ---------------- --------- ---------
Class B +7.62% +6.56% -0.43%
- ---------- ---------------- --------- ---------
Class C +8.02% +7.62% +5.55%
- ---------- ---------------- --------- ---------
Class D +7.63% +6.88% +3.52%
</TABLE>
<PAGE>
PORTFOLIO MANAGER'S REVIEW
[Photo of John H. Kallis
Portfolio Manager]
The following is a discussion with Government Income Fund portfolio manager
John H. Kallis. Jack has 34 years of investment experience.
Q: What is your philosophy in managing the Fund?
A: We look for steady performance without exposing the portfolio to a high
level of risk. To accomplish this, we diversify among higher-quality bond
sectors. We research the U.S. government securities and other sectors to find
attractive investments. We also believe in active bond management, including
adjustments to average maturity and sector weightings.
Q: How would you describe the Fund's performance over the past 12 months?
A: We had a pretty good year. For the twelve months ended October 31, 1996,
Government Income Fund's Class A shares provided a total return of +5.28%
(does not reflect sales charge).2 The Fund outperformed Lipper Analytical
Services' General U.S. Government Funds Category, which had an average return
of +4.04% for 169 funds. Our conservative positioning helped the Fund
outperform when interest rates were on the rise during much of 1996.
Q: How have you structured the portfolio over the past 12 months?
A: In this challenging investment environment we've been very active with the
portfolio. Last year at this time, interest rates were declining, so we were
emphasizing Treasuries, at 41% of the portfolio. When interest rates began to
creep back up in 1996, we took a more defensive stance with a shorter average
maturity--duration--for the portfolio. Many competing funds had longer
durations than we did, which hurt them and helped us during this time. We
reduced our position in Treasuries and increased our holdings in mortgage
securities, which offer better performance when interest rates are on the
rise. As of April 30, 1996, we had 45% of the portfolio invested in
mortgages.
More recently, as interest rates have started to come down again, we've
scaled back our mortgage holdings, lowered the percentage of cash in the
portfolio, and moved back into Treasuries, which make up 33% of the portfolio
as of October 31, 1996.
We've also pared our position in non-dollar foreign government bonds, as
we've been taking profits in this sector. The foreign government bonds have
performed well and added quite a bit of value during this time, even though
their position in the portfolio is relatively small.
Q: What has happened with the Fund's yield over the past 12 months?
A: The fluctuations in interest rates also caused movements in the Fund's
yield. Looking back over the past year, the yield was at its lowest at the
end of November at 5.36%, and at its highest at the end of May at 6.25%.
Q: What is your outlook for the economy and the fund?
A: The economy is healthy. Inflation wasn't a problem this year, and that may
continue. People are working, and consumer confidence is high. Wages have
been rising, so they have money to spend as well. The Fed hasn't made any
changes to interest rates since January. I wouldn't be surprised to see that
trend continue.
Our strategy will depend on the direction interest rates move. If rates
decline further, we will probably add to our position in Treasuries and look
to add duration to the portfolio. If rates come back up, we'll add to our
holdings in mortgage securities and take some duration out of the Fund.
October 31, 1996
Asset Allocation
(by percentage of net assets)
[Pie Chart]
U.S. Treasury securities 33%
U.S. Agency mortgage securities 42%
Trust certificates/other 16%
Foreign government bonds 4%
Cash 5%
Bond Yields
(October 31, 1995 to October 31, 1996)
[Line Chart]
[Data for Line Chart]
30-year 30-year 90-day
Mortgage U.S.Treasury U.S.Treasury
Securities Securities Securities
10/95 7240 6332 5494
11/95 7030 6134 5482
12/95 6810 5959 5072
1/96 6760 6024 5044
2/96 7260 6467 5012
3/96 7570 6669 5135
4/96 7800 6904 5149
5/96 8000 6994 5177
6/96 7870 6894 5152
7/96 7910 6973 5301
8/96 8050 7155 5277
9/96 7820 6921 5027
10/96 7480 6641 5144
2
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
October 31, 1996
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
-------------------------------- ------------------------------- ---------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES 75.3%
U.S. Treasury 33.2%
U.S. Treasury Bond, 13.75% $10,000,000 8/15/2004 $ 14,523,400
U.S. Treasury Bond, 10.75% 14,100,000 8/15/2005 18,213,252
U.S. Treasury Bond, 12.00% 4,000,000 8/15/2013 5,758,760
U.S. Treasury Bond, 9.25% 29,500,000 2/15/2016 37,575,625
U.S. Treasury Bond, 8.13% 26,300,000 8/15/2021 30,594,264
U.S. Treasury Bond, 7.50% 20,000,000 11/15/2024 21,937,400
U.S. Treasury Note, 9.00% 52,000,000 5/15/1998 54,518,880
U.S. Treasury Note, 5.13% 5,525,000 6/30/1998 5,476,656
U.S. Treasury Note, 6.63% 7,075,000 7/31/2001 7,224,212
U.S. Treasury Note, 5.75% 38,500,000 8/15/2003 37,495,535
---------------
233,317,984
---------------
U.S. Agency 5.4%
Federal Home Loan Mortgage Corp.
Deb., 7.24% 10,020,000 5/15/2002 10,106,072
Federal National Mortgage
Association STRIPS, 0.00% 15,000,000 11/22/2001 14,974,200
Guaranteed Export Trust Notes
Series 95-A, 6.28% 8,470,588 6/15/2004 8,430,692
Guaranteed Export Trust Notes
Series 96-A, 6.55% 4,282,353 6/15/2004 4,316,783
---------------
37,827,747
---------------
U.S. Agency Mortgage 36.7%
Federal Home Loan Mortgage Corp.
FHA-VA, 9.00% 6,380,465 12/01/2009 6,761,315
Federal Home Loan Mortgage Corp.
Gold, 7.00% 19,442,488 12/01/2024 19,223,760
Federal Home Loan Mortgage Corp.
Gold, 7.50% 15,539,494 1/01/2025 15,663,188
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 5,525,000 3/25/2023 5,381,682
Federal Housing Administration
Court Yard Project, 10.75% 6,493,547 8/01/2032 7,150,005
Federal Housing Administration
East Bay Manor Project, 10.00% 6,767,250 3/01/2033 7,324,491
Federal Housing Administration
Charles River Project, 9.63% 9,483,615 12/01/2033 10,217,113
Federal National Mortgage
Association, 7.50% 13,251,633 6/01/2010 13,496,788
Federal National Mortgage
Association, 7.00% 43,897 2/01/2024 43,294
Federal National Mortgage
Association FHA-VA, 8.00% 4,931,289 4/01/2008 5,134,853
U.S. Agency Mortgage (cont'd)
Federal National Mortgage
Association FHA-VA, 8.00% $ 6,275,948 6/01/2008 $ 6,527,362
Federal National Mortgage
Association FHA-VA, 8.50% 9,144,145 2/01/2009 9,706,784
Federal National Mortgage
Association FHA-VA, 9.00% 15,347,081 5/01/2009 16,258,237
Federal National Mortgage
Association FHA-VA, 9.00% 540,084 4/01/2016 572,149
Government National Mortgage
Association, 6.50% 12,022,695 5/15/2009 11,911,845
Government National Mortgage
Association, 9.50% 3,352,791 9/15/2009 3,641,937
Government National Mortgage
Association, 9.50% 6,113,777 10/15/2009 6,641,028
Government National Mortgage
Association, 9.50% 2,755,827 11/15/2009 2,993,490
Government National Mortgage
Association, 9.00% 2,053,186 4/15/2017 2,201,385
Government National Mortgage
Association, 8.00% 1,981,223 10/15/2017 2,063,068
Government National Mortgage
Association, 8.00% 3,879,519 11/15/2017 4,039,782
Government National Mortgage
Association, 9.50% 1,269,806 11/15/2017 1,378,730
Government National Mortgage
Association, 9.50% 251,838 9/15/2019 273,203
Government National Mortgage
Association, 7.50% 3,063,323 9/15/2021 3,098,153
Government National Mortgage
Association, 8.00% 423,236 5/15/2022 434,871
Government National Mortgage
Association, 8.00% 2,712,413 6/15/2022 2,783,587
Government National Mortgage
Association, 8.00% 2,891,233 7/15/2022 2,968,079
Government National Mortgage
Association, 8.00% 60,743 8/15/2022 62,337
Government National Mortgage
Association, 8.00% 7,890,136 12/15/2022 8,104,604
Government National Mortgage
Association, 7.50% 1,425,293 1/15/2023 1,436,866
Government National Mortgage
Association, 7.50% 12,910,593 6/15/2023 13,003,291
Government National Mortgage
Association, 10.00% 17,010,077 6/15/2023 18,232,591
Government National Mortgage
Association, 7.50% 835,717 8/15/2023 841,717
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
-------------------------------- ------------------------------- ---------------
U.S. Agency Mortgage (cont'd)
Government National Mortgage
Association, 7.50% $ 850,107 10/15/2023 $ 857,010
Government National Mortgage
Association, 7.50% 601,181 12/15/2023 605,497
Government National Mortgage
Association, 7.50% 817,217 1/15/2024 823,085
Government National Mortgage
Association, 7.50% 10,092,908 4/15/2024 10,169,870
Government National Mortgage
Association, 8.00% 19,482,380 9/15/2026 19,920,733
Government National Mortgage
Association TBA, 7.50% 12,375,000 11/29/2008 12,626,367
Government National Mortgage
Association TBA, 8.00% 2,625,000 12/18/2026 2,688,985
---------------
257,263,132
---------------
Total U.S. Government Securities (Cost $515,301,325) 528,408,863
---------------
OTHER INVESTMENTS 19.8%
Foreign Government 3.7%
Australian Dollar
Government of Australia, 7.50% 7,850,000 7/15/2005 6,294,436
Canadian Dollar
Government of Canada, 7.50% 7,250,000 12/01/2003 5,839,544
Danish Krone
Kingdom of Denmark, 8.00% 25,475,000 11/15/2001 4,799,326
Kingdom of Denmark, 8.00% 25,700,000 3/15/2006 4,758,588
European Currency Unit
Government of France, 8.00% 3,225,000 4/25/2003 4,546,964
---------------
26,238,858
---------------
Trust Certificates 13.3%
Cooperative Utility Trust
Certificates, 9.50% $25,499,000 2/15/2017 27,659,275
Cooperative Utility Trust
Certificates, 9.52% 24,525,000 3/15/2019 26,652,789
Government Backed Trust Class
T-2, 9.40% 107,919 11/15/1996 108,004
Government Backed Trust Class
T-3, 9.63% 10,000,000 5/15/2002 10,729,500
Trust Certificates (cont'd)
Government Trust Certificates
Class 2-D, 9.25% $ 2,086,373 11/15/1996 $ 2,087,959
Government Trust Certificates
Class 2-E, 9.40% 24,000,000 5/15/2002 25,820,400
---------------
93,057,927
---------------
Finance/Mortgage 2.8%
Prudential Home Mortgage
Securities Co. Series 93-29 A-6
PAC, 6.75% 10,118,504 8/25/2008 10,178,507
Residential Funding Corp. Series
93-S25 A-1, 6.50% 9,364,517 7/25/2008 9,379,126
---------------
19,557,633
---------------
Total Other Investments (Cost $136,334,969) 138,854,418
---------------
SHORT-TERM OBLIGATIONS 5.3%
Federal Home Loan Bank, 5.22% 12,000,000 11/29/1996 11,951,467
Federal Home Loan Mortgage
Corp., 5.18% 9,795,000 11/01/1996 9,795,000
Federal Home Loan Mortgage
Corp., 5.50% 15,493,000 11/01/1996 15,493,000
---------------
Total Short-Term Obligations (Cost $37,239,467) 37,239,467
---------------
Total Investments (Cost $688,875,761)--100.4% 704,502,748
Cash and Other Assets, Less Liabilities--(0.4)% (2,730,819)
---------------
Net Assets--100.0% $701,771,929
===============
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$688,875,761 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 20,181,429
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (4,554,442)
---------------
$ 15,626,987
===============
</TABLE>
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Total Value Contract Price (Depreciation) Delivery Date
- -------------------------------------------- ----------------------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Buy Australian dollars, Sell U.S. dollars 3,590,000 AUD .79004 AUD $ 1,923 1/24/97
Buy Australian dollars, Sell U.S. dollars 570,000 AUD .79055 AUD 15 1/24/97
Sell Australian dollars, Buy U.S. dollars 1,025,000 AUD .77425 AUD (18,400) 11/14/96
Sell Australian dollars, Buy U.S. dollars 6,075,000 AUD .77450 AUD (107,533) 11/14/96
Sell Australian dollars, Buy U.S. dollars 570,000 AUD .79340 AUD 1,610 1/24/97
Sell Australian dollars, Buy U.S. dollars 3,590,900 AUD .79360 AUD 10,857 1/24/97
Sell Canadian dollars, Buy U.S. dollars 2,470,000 CAD .73099 CAD (38,979) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 4,050,000 CAD .74702 CAD (12,436) 1/24/97
Sell Danish krone, Buy U.S. dollars 49,514,000 DKK .17584 DKK 181,977 11/14/96
Sell Danish krone, Buy U.S. dollars 2,030,000 DKK .17111 DKK (2,141) 11/14/96
Sell Danish krone, Buy U.S. dollars 833,000 DKK .17110 DKK (1,407) 1/24/97
Sell European currency units,
Buy U.S. dollars 3,311,000 ECU 1.27480 ECU 25,231 11/14/96
---------------
$ 40,717
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (Cost $688,875,761) (Note 1) $704,502,748
Cash 3,184
Interest receivable 11,281,362
Receivable for securities sold 5,340,072
Receivable for fund shares sold 1,533,994
Receivable for open forward contracts 221,613
Other assets 23,161
---------------
722,906,134
Liabilities
Payable for securities purchased 15,334,878
Payable for fund shares redeemed 2,390,682
Dividends payable 2,277,552
Accrued management fee (Note 2) 384,992
Accrued distribution and service fees (Note 3) 215,047
Accrued transfer agent and shareholder services (Note 2) 213,526
Payable for open forward contracts 180,896
Accrued trustees' fees (Note 2) 10,352
Other accrued expenses 126,280
---------------
21,134,205
---------------
Net Assets $701,771,929
===============
Net Assets consist of:
Undistributed net investment income $ 3,771,439
Unrealized appreciation of investments 15,626,987
Unrealized appreciation of forward contracts and foreign
currency 45,123
Accumulated net realized loss (86,648,683)
Shares of beneficial interest 768,977,063
---------------
$701,771,929
===============
Net Asset Value and redemption price per share of Class A
shares ($584,313,469 / 46,990,520 shares of beneficial
interest) $12.43
===============
Maximum Offering Price per share of Class A shares ($12.43
/ .955) $13.02
===============
Net Asset Value and offering price per share of Class B
shares ($95,218,110 / 7,679,256 shares of beneficial
interest)* $12.40
===============
Net Asset Value, offering price and redemption price per
share of Class C shares ($7,767,449 / 625,275 shares of
beneficial interest) $12.42
===============
Net Asset Value and offering price per share of Class D
shares ($14,472,901 / 1,166,285 shares of beneficial
interest)* $12.41
===============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investment Income
Interest $55,174,545
Expenses
Management fee (Note 2) 4,723,842
Transfer agent and shareholder services (Note 2) 786,300
Custodian fee 250,860
Reports to shareholders 160,433
Service fee--Class A (Note 3) 1,536,412
Distribution and service fees--Class B (Note 3) 923,020
Distribution and service fees--Class D (Note 3) 137,675
Audit fee 56,273
Registration fees 53,807
Trustees' fees (Note 2) 33,363
Miscellaneous 29,917
--------------
8,691,902
--------------
Net investment income 46,482,643
--------------
Realized and Unrealized Gain (Loss) on Investments,
Forward Contracts and Foreign Currency
Net realized loss on investments (Notes 1 and 4) (3,528,385)
Net realized loss on forward contracts and foreign
currency (Note 1) (23,619)
--------------
Total net realized loss (3,552,004)
--------------
Net unrealized depreciation of investments (Note 5) (7,443,474)
Net unrealized appreciation of forward contracts and
foreign currency 1,038,389
--------------
Total net unrealized depreciation (6,405,085)
--------------
Net loss on investments, forward contracts and foreign
currency (9,957,089)
--------------
Net increase in net assets resulting from operations $36,525,554
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended October 31
-------------------------------
1996 1995
------------------------------- --------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 46,482,643 $ 48,226,230
Net realized gain (loss) on
investments, forward contracts
and foreign currency* (3,552,004) 2,583,992
Net unrealized appreciation
(depreciation) of investments,
forward contracts and foreign
currency (6,405,085) 48,001,271
--------------- ---------------
Net increase resulting from
operations 36,525,554 98,811,493
--------------- ---------------
Dividends from net investment
income:
Class A (39,055,243) (42,302,801)
Class B (5,188,785) (3,875,565)
Class C (404,930) (166,657)
Class D (773,463) (735,022)
--------------- ---------------
(45,422,421) (47,080,045)
--------------- ---------------
Net increase (decrease) from
fund share transactions
(Note 6) (50,352,743) 4,925,189
--------------- ---------------
Total increase (decrease) in
net assets (59,249,610) 56,656,637
Net Assets
Beginning of year 761,021,539 704,364,902
--------------- ---------------
End of year (including
undistributed net investment
income of $3,771,439 and
$2,696,356, respectively) $701,771,929 $761,021,539
=============== ===============
*Net realized gain (loss) for
Federal income tax purposes
(Note 1) $ (4,139,815) $ 2,398,429
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Government Income Fund (the "Fund") is a series of
State Street Research Financial Trust (the "Trust"), which was organized as a
Massachusetts business trust in November, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in March, 1987. The Trust
consists presently of four separate funds: State Street Research Government
Income Fund, State Street Research Strategic Portfolios: Moderate, State
Street Research Strategic Portfolios: Conservative and State Street Research
Strategic Portfolios: Aggressive.
The investment objective of the Fund is to seek high current income. In
seeking to achieve its investment objective, the Fund invests primarily in
U.S. Government securities.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Securities for which there is no such
valuation, if any, are valued at their fair value as determined in accordance
with established methods consistently applied. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported
7
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
on the basis of identified cost of securities delivered. Gains and losses
that arise from changes in exchange rates are not segregated from gains and
losses that arise from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less the estimated daily expenses of the Fund. Interest
income is accrued daily as earned. Accretion of discount is computed under
the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends are declared daily based upon projected net investment income and
are paid or reinvested monthly. Net realized capital gains, if any, are
distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, if any, within the prescribed time periods. At October 31,
1996, the Fund had a capital loss carryforward of $86,648,683 available, to
the extent provided in regulations, to offset future capital gains, if any,
of which $46,959,196, $18,353,379, $17,196,293 and $4,139,815 expires on
October 31, 1997, 1998, 2002 and 2004, respectively. The Fund had a capital
loss carryforward of $29,348,263 expire on October 31, 1996. In addition, as
part of a merger that occurred on May 12, 1995, the Fund acquired from
MetLife-State Street Research Government Securities Fund a capital loss
carryforward of $5,100,777, of which $3,074,207 and $2,026,570 expires on
October 31, 2001 and 2002, respectively. The Fund's use of such capital loss
carryforward may be limited under current tax laws.
F. Forward Contracts and Foreign Currencies The Fund enters into forward
foreign currency exchange contracts in order to hedge its exposure to changes
in foreign currency exchange rates on its foreign portfolio holdings and to
hedge certain purchase and sale commitments denominated in foreign
currencies. A forward foreign currency exchange contract is an obligation by
the Fund to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the origination date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. Risks may arise from the potential inability of a
counterparty to meet the terms of a contract and from unanticipated movements
in the value of foreign currencies relative to the U.S. dollar. The aggregate
principal amount of forward currency exchange contracts is recorded in the
Fund's accounts. All commitments are marked-to-market at the applicable
transaction rates resulting in unrealized gains or losses. The Fund records
realized gains or losses at the time the forward contracts are extinguished
by entry into a closing contract or by delivery of the currency. Neither spot
transactions nor forward currency exchange contracts eliminate fluctuations
in the prices of the Fund's portfolio securities or in foreign exchange
rates, or prevent loss if the price of these securities should decline.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.65% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended October 31, 1996, the fees pursuant to
such agreement amounted to $4,723,842.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended October 31, 1996, the amount of
such expenses was $259,577.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $33,363 during the year ended October 31, 1996.
Note 3
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
service and/or the maintenance or servicing of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1996,
fees pursuant to such plan amounted to $1,536,412, $923,020 and $137,675 for
Class A, Class B and Class D shares, respectively.
8
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
NOTES (cont'd)
Note 3 (cont'd)
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $89,615 and $495,180, respectively, on sales of Class A shares of
the Fund during the year ended October 31, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $536,913 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$372,729 and $1,828 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $609,470,532 and $688,024,321
(including $503,419,486 and $551,059,425 of U.S. Government obligations),
respectively.
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1996, the
Distributor owned 12,241 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Class A Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 2,386,852 $ 29,601,645 8,692,870 $ 106,770,703
Issued upon reinvestment of dividends 1,707,616 21,188,423 1,902,247 23,135,012
Shares repurchased (9,183,464) (113,908,052) (13,184,315) (159,163,704)
-------------- ---------------- --------------- ----------------
Net decrease (5,088,996) $ (63,117,984) (2,589,198) $ (29,257,989)
============== ================ =============== ================
Class B Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 2,341,362 $ 29,026,329 3,527,941 $ 42,934,470
Issued upon reinvestment of dividends 275,775 3,412,679 209,008 2,591,060
Shares repurchased (1,940,555) (24,024,991) (1,222,045) (14,751,417)
-------------- ---------------- --------------- ----------------
Net increase 676,582 $ 8,414,017 2,514,904 $ 30,774,113
============== ================ =============== ================
Class C Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 518,980 $ 6,381,030 435,479 $ 5,346,473
Issued upon reinvestment of dividends 30,667 379,365 12,362 153,460
Shares repurchased (324,941) (4,001,721) (64,617) (809,530)
-------------- ---------------- --------------- ----------------
Net increase 224,706 $ 2,758,674 383,224 $ 4,690,403
============== ================ =============== ================
Class D Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 520,289 $ 6,453,505 433,690 $ 5,281,361
Issued upon reinvestment of dividends 43,660 539,841 43,377 526,125
Shares repurchased (435,567) (5,400,796) (590,308) (7,088,824)
-------------- ---------------- --------------- ----------------
Net increase (decrease) 128,382 $ 1,592,550 (113,241) $ (1,281,338)
============== ================ =============== ================
</TABLE>
9
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------ -----------------------------------------
Year ended October 31 Year ended October 31
------------------------------------------------ -----------------------------------------
1996* 1995* 1994* 1993 1992 1996* 1995* 1994* 1993**
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.58 $11.68 $12.92 $12.38 $12.14 $12.55 $11.66 $12.91 $12.67
Net investment income 0.81 0.83 0.81 0.84 0.90 0.71 0.73 0.72 0.30
Net realized and unrealized gain
(loss) on investments, forward
contracts and foreign currency (0.17) 0.88 (1.26) 0.56 0.26 (0.16) 0.87 (1.27) 0.24
Dividends from net investment
income (0.79) (0.81) (0.79) (0.84) (0.91) (0.70) (0.71) (0.70) (0.30)
Distributions from net realized
gains -- -- -- (0.02) (0.01) -- -- -- --
-------- -------- -------- -------- --------- -------- -------- --------- -----------
Net asset value, end of year $12.43 $12.58 $11.68 $12.92 $12.38 $12.40 $12.55 $11.6 $12.91
======== ======== ======== ======== ========= ======== ======== ========= ==========
Total return 5.28%+ 15.07%+ (3.58)%+ 11.63%+ 9.86%+ 4.51%+ 14.15%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $584,313 $655,045 $638,418 $868,556 $798,705 $95,218 $87,908 $52,319 $26,578
Ratio of operating expenses to
average net assets 1.09% 1.10% 1.07% 1.05% 1.05% .84% 1.85% 1.82% 1.81%++
Ratio of net investment income to
average net assets 6.50% 6.83% 6.54% 6.59% 7.25% 5.75% 6.01% 5.86% 5.67%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49% 97.33% 88.79% 105.57% 134.41% 103.49%
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------ -------------------------------------------
Year ended October 31 Year ended October 31
------------------------------------------ -------------------------------------------
1996* 1995* 1994* 1993** 1996* 1995* 1994* 1993**
----------------------------------- -------- --------- ----------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.57 $ 11.67 $ 12.92 $ 12.67 $ 12.56 $ 11.66 $ 12.91 $ 12.67
Net investment income 0.84 0.90 0.84 0.19 0.71 0.74 0.72 0.30
Net realized and unrealized gain
(loss) on
investments, forward contracts
and foreign currency (0.17) 0.84 (1.27) 0.42 (0.16) 0.87 (1.27) 0.24
Dividends from net investment
income (0.82) (0.84) (0.82) (0.36) (0.70) (0.71) (0.70) (0.30)
-------- --------- ----------- --------- --------- --------- ----------- ----------
Net asset value, end of year $12.42 $ 12.57 $ 11.67 $ 12.92 $ 12.41 $ 12.56 $ 11.66 $ 12.91
======== ========= =========== ========= ========= ========= =========== ==========
Total return 5.55%+ 15.37%+ (3.42)%+ 4.82%+++ 4.51%+ 14.24%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $7,767 $ 5,036 $ 203 $ 36 $14,473 $13,033 $13,425 $12,101
Ratio of operating expenses to
average net assets 0.84% 0.85% 0.82% 0.80%++ 1.84% 1.85% 1.82% 1.88%++
Ratio of net investment income to
average net assets 6.78% 6.79% 8.01% 6.59%++ 5.76% 6.08% 5.84% 5.59%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49% 88.79% 105.57% 134.41% 103.49%
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
* Per-share figures have been calculated using the average shares method.
** June 1, 1993 (commencement of share class designations) to October 31,
1993.
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Government Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, 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 State Street Research
Government Income Fund (a series of State Street Research Financial Trust,
hereafter referred to as the "Trust") at October 31, 1996, and the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust'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 generally accepted auditing standards which
require that we plan and perform the audit to obtain reason- able 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 October 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
11
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Government Income Fund outperformed Lipper Analytical Service's General U.S.
Government Funds Category for the 12 months ended October 31, 1996. The
Fund's conservative positioning helped its performance when interest rates
were on the rise during much of 1996.
Government Income Fund's management was very active with the portfolio. Last
year at this time, when interest rates were declining, the Fund emphasized
Treasuries, at 41% of the portfolio. When interest rates rose in 1996, Fund
management reduced the Fund's position in Treasuries and increased its
holdings in mortgage securities. As of April 30, 1996, the Fund had 45% of
the portfolio invested in mortgages.
More recently, as interest rates have started to come down again, Fund
management reduced mortgage holdings and moved back into Treasuries, which
make up 33% of the portfolio as of October 31, 1996.
The non-dollar portions of the portfolio performed well and added value
during this time, even though their position in the portfolio was and is
relatively small.
The fluctuations in interest rates also caused movements in the Fund's yield.
The yield was at its lowest at the end of November at 5.36%, and at its
highest at the end of May at 6.25%.
October 31, 1996
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Investments in the Fund are not insured
or guaranteed by the U.S. government or any other entity. Performance for a
class includes periods prior to the adoption of class designations. "C"
shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions. Performance for "B" and "D"
shares prior to class designations in 1993 reflects annual 12b-1 fees of
.25%, and performance thereafter reflects annual 12b-1 fees of 1%, which will
reduce subsequent performance. Performance reflects maximum 4.5% "A" share
front-end sales charge or 5% "B" share or 1% "D" share contingent deferred
sales charges, where applicable. The Merrill Lynch Government Master and
Blended Indices are commonly used measures of bond market performance. The
indices are unmanaged and do not take sales charges into consideration.
Direct investment in the indices is not possible; results are for
illustrative purposes only.
Change In Value Of $10,000 Based On
The Merrill Lynch Blended Index And
The Merrill Lynch Government Master Index
Compared To Change In Value Of $10,000 Invested
In Government Income Fund
[Data for Line Charts]
Class A Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+0.54% +6.47% +7.41%
- --------------------------------
$25,000 20,000 15,000 10,000
$19,896 $21,831 $21,263
3/87 9550 10000 10000
10/87 9408 9935 9849
10/88 10328 11045 10807
10/89 11321 12316 12106
10/90 11948 13154 12825
10/91 13890 15171 14703
10/92 15259 16660 16223
10/93 17034 18553 18333
10/94 16424 17933 17539
10/95 18899 20669 20242
10/96 19896 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class B Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
- -0.43% +6.56% +7.62%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,272 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17770 18553 18333
10/94 16992 17933 17539
10/95 19397 20669 20242
10/96 20272 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class C Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+5.55% +7.62% +8.02%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,997 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17855 18553 18333
10/94 17244 17933 17539
10/95 19894 20669 20242
10/96 20997 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class D Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+3.52% +6.88% +7.63%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,286 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17769 18553 18333
10/94 16991 17933 17539
10/95 19411 20669 20242
10/96 20286 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
12
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of the State Street Research Government
Income Fund ("Fund"), along with shareholders of other series of State Street
Research Financial Trust ("Meeting"), was convened on February 14, 1996, and
continued thereafter. The results of the Meeting are set forth below.
<TABLE>
<CAPTION>
Votes (millions of Shares)
--------------------------
For Withheld
-----------------
<S> <C> <C>
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
</TABLE>
<TABLE>
<CAPTION>
Votes (millions of Shares)
--------------------------
For Against Abstain
---- ---------------
<S> <C> <C> <C>
2. The Fund's following investment policies were reclassified from fundamental to
nonfundamental:
a. The policy regarding investments in securities of companies with less than three (3)
years' continuous operation 26.5 3.8 2.9
b. The policy regarding investments in illiquid securities 26.1 4.0 3.1
3. The Fund's fundamental policy regarding investments in commodities and commodity
contracts was amended 25.7 4.5 3.1
4. The Fund's fundamental policy on lending was amended to clarify the permissibility of
securities lending 26.0 4.2 3.0
5. The Fund's fundamental policies regarding diversification of investments were amended 27.3 3.0 2.9
6. The Master Trust Agreement was amended to permit the Trustees to reorganize, merge or
liquidate a fund without prior shareholder approval 33.1 7.3 4.2
7. The Master Trust Agreement was amended to eliminate specified time permitted between the
record date and any shareholders meeting 34.4 5.7 4.4
</TABLE>
13
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL
TRUST
Fund Information
State Street Research
Government Income Fund
One Financial Center
Boston, MA 02111
Investment Adviser
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
Shareholder Services
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
Officers
Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Amy L. Simmons
Assistant Secretary
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Edward M. Lamont
Formerly in banking
(Morgan Guaranty Trust
Company of New York);
presently engaged in private
investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel,
Choate, Hall & Stewart
14
<PAGE>
[Back Cover]
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 600
State Street Research Government Income Fund
One Financial Center
Boston, MA 02111
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[State Street Research Logo]
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was
not industry-wide.
CONTROL NUMBER: 3549-961224(0198)SSR-LD
Cover Illustration by Dorothy Cullinan
GI-109E-1296
<PAGE>
[Front Cover]
[STATE STREET RESEARCH LOGO]
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: MODERATE
ANNUAL REPORT
October 31, 1996
WHAT'S INSIDE
From the Chairman
The markets reward
investors
Portfolio Manager's Review
Solid performance from
stocks and bonds
Fund Information
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
[DALBAR LOGO]
For Excellence
in
Shareholder Service
<PAGE>
FROM THE CHAIRMAN
[Ralph Verni photo]
To Our Shareholders:
So far, this has proven to be another good year for many investors in both
the stock and bond markets. The Dow Jones Industrial Average broke the 6000
point barrier, and the Standard & Poor's 500 Composite Index was up 24.10 for
the 12 months ended October 31, 1996. Bond investors saw the Lehman Brothers
Government/Corporate Bond Index gain 5.39%.(1)
For much of the past year, there were strong corporate profits, low inflation
and steady-but-slow economic growth. The stock and bond markets were unduly
influenced over the past few months by news of the economy, employment and
what the Federal Reserve might do. Contradictions as to which direction the
economy was headed caused rallies on some days and declines on others. But
both markets continued to show a trend of advancement into the autumn season.
The economy has definitely slowed recently, but this looks more like a
temporary pause than the beginning of a protracted slowdown.
The bond market is expected to remain in the trading range where it has been
for the past several months, even though some of the recent news has been
more favorable. The outlook for the stock market continues to be positive on
balance with operating earnings for the S&P 500 expected to be up in 1996 and
in 1997. We remain fully invested in most of our portfolios, and we are
continuing to find good values in selected stocks.
Effective in December 1996, Peter Bennett will assume management
responsibilities for the Fund. He takes the reins from Michael Yogg who
leaves State Street Research after 19 years for a new opportunity in the
investment community. We thank Michael for his service and wish him all the
best in the future.
As many of you may know, Peter Bennett has had a long career with State
Street Research and has served in many capacities. In his primary role as
Chief Investment Officer-Equities, Peter oversees the day-to-day activities
of our Equity Group. As portfolio manager of this Fund, his management style
will translate seamlessly with the Fund's team approach.
Sincerely,
/s/ Ralph F. Verni
Ralph F. Verni
Chairman
November 30, 1996
(1)The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded common stocks and is a commonly used measure of U.S. stock market
performance. The Lehman Brothers Government/Corporate Bond Index is a
commonly used index of bond market performance. The indices are unmanaged and
do not take sales charges into consideration. Direct investment in the
indices is not possible; results are for illustrative purposes only.
(2)All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends.
(3)"C" shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions.
Please note that the discussion throughout this shareholder report is dated
as indicated and, because of possible changes in viewpoint, data and
transactions, should not be relied upon as being current thereafter.
FUND INFORMATION (all data are for periods ended October 31, 1996, except
where noted)
SEC Average Annual Compound Rates
of Return for periods ended 9/30/96
(at maximum applicable sales charge)(2,3)
Life of Fund
(since 9/28/93) 1 Year
- ---------- ---------------- ---------------
Class C +8.51%/+7.93% +11.46%/+11.02%
Average Annual Compound
Rates of Return
(at maximum applicable sales charge)(2,3)
Life of Fund
(since 9/28/93) 1 Year
- ---------- ---------------- ---------------
Class C +8.67%/+8.10% +14.08%/+13.65%
Cumulative Total Returns
(do not reflect sales charge)(2)
Life of Fund
(since 9/28/93) 1 Year
- ---------- ---------------- ---------------
Class C +29.36%/+27.26% +14.08%/+13.65%
Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses. In the above charts, the first figure reflects
expense reduction, the second shows what results would have been without
subsidization.
<PAGE>
PORTFOLIO MANAGER'S REVIEW
State Street Research Strategic Portfolios: Moderate had a positive year,
benefiting from a strong stock market and rallies in the bond market. For the
12 months ended October 31, 1996, Class C shares of the Fund provided a total
return of +14.08%. Lipper Analytical Services' Balanced Funds category
provided an average total return of +14.84% over the same time period.
When considering the Fund's returns, remember that the investment objective
of the Fund is slightly more conservative than its peer group. We strive to
achieve capital appreciation, current income, and preservation of capital,
all with moderate investment risk. We remain widely diversified in stocks and
bonds to achieve this objective, and this can sometimes moderate returns.
Stock Holdings
Overall, the year has been a great one for the stock market which fueled the
Fund's overall performance. The largest parts of our equity holdings included
value stocks, large-cap growth stocks, and international stocks. All three
areas performed well for us with value stocks leading the way, followed by
large-cap growth stocks, then international stocks. Our small-cap growth
stocks, which are the smallest component of our equity holdings, provided
very strong performance as well.
Our top five equity industries have shifted somewhat (see chart below) with
chemical, retail, and electronic equipment dropping off the list. Bank,
hospital supply and drug have moved up to take their places mainly because we
see these three industries continuing to have good profit growth as the
economy slows. In addition, bank stocks tend to perform better in favorable
interest rate environments, which we are seeing currently.
Bond Holdings
Bond performance was mixed over the past year. At the end of 1995, the high
quality bond market was rallying, but flattened out in 1996. This held back
our overall bond performance since high-quality bonds were a large percentage
of holdings. Conversely, our high-yield bond sector has brought in strong
performance all year due to the strengthening economy. International bonds
brought in solid performance as well.
Current Strategy
As of October 31, 1996, we held 52% of the Fund's assets in equities, 39% in
fixed-income securities and 9% in cash. This allocation hasn't changed
significantly over the year. On the equity side, the large-cap growth and
value stocks remain our largest holdings, with small-cap growth closely
following. We continue to maintain a smaller position in international
stocks. High-grade bonds make up the largest percentage of our fixed-income
holdings, with smaller portions committed to high-yield and international
bonds. We like the good values currently available in the high-grade bond
sector. We believe the investment environment is generally positive, with
economic growth continuing to slow somewhat.
October 31, 1996
[pie chart]
Asset Allocation
(by percentage of net assets)
Equities 52%
Cash 9%
Bonds 39%
[bar chart]
Top 5 Equity Industries
(by percentage of net assets)
Computer software and service 3.9%
Oil 3.7%
Bank 3.7%
Hospital supply 3.7%
Drug 2.9%
Total: 17.9%
[bar chart]
Top 5 Bond Sectors
(by percentage of net assets)
U.S. Treasury 13.2%
U.S. Agency 11.5%
Corporate 5.6%
Finance/Mortgage 5.0%
Foreign Government 3.0%
Total: 38.3%
2
<PAGE>
STATE STREET RESEARCH PORTFOLIO: MODERATE
INVESTMENT PORTFOLIO
October 31, 1996
Value
Shares (Note 1)
- --------------------------------------------------- -------- --------------
EQUITY SECURITIES 51.7%
Basic Industries 7.5%
Chemical 2.3%
Cambrex Corp. 2,550 $ 79,688
General Chemical Group Inc. 2,300 43,700
Hoechst AG* 11,500 432,465
IMC Global Inc. 4,410 165,375
Monsanto Co. 7,700 305,112
--------------
1,026,340
--------------
Diversified 0.7%
Cardo AB* 5,100 124,869
Tenma Corp.* 12,000 212,902
--------------
337,771
--------------
Forest Product 0.2%
Aracruz Celulose SA ADR 8,500 68,000
--------------
Machinery 1.6%
Case Corp. 4,600 213,900
Linde AG* 255 157,860
Sundstrand Corp. 5,800 233,450
Terex Corp. Rts.*++ 150 37
Triumph Group, Inc.* 700 15,750
US Filter Corp.* 2,600 89,700
--------------
710,697
--------------
Metal & Mining 1.9%
Alumax Inc.* 5,700 183,113
Aluminum Company of America 3,400 199,325
Bohler Uddeholm AG* 1,400 104,726
Carbide/Graphite Group Inc.* 2,400 39,150
RTZ Corp.* 8,574 137,178
SGL Carbon AG* 1,300 146,362
Wyman-Gordon Co.* 2,700 59,400
--------------
869,254
--------------
Railroad 0.8%
Canadian National Railway Co. 13,200 363,000
--------------
Total Basic Industries 3,375,062
--------------
Consumer Cyclical 6.7%
Airline 0.2%
Atlas Air Inc.* 2,400 88,500
--------------
Automotive 1.5%
Honda Motor Co.* 8,000 191,120
Suzuki Motor Co. Ltd.* 7,000 71,319
Automotive (cont'd)
Exide Corp. 8,600 $ 223,600
Ford Motor Co. 5,300 165,625
Lear Corp.* 1,100 40,700
--------------
692,364
--------------
Building 0.5%
Lafarge Corp. 11,600 216,050
--------------
Hotel & Restaurant 1.1%
Harrah's Entertainment Inc.* 7,900 132,325
Mirage Resorts Inc.* 11,700 257,400
Motels of America Inc.*+ 75 4,500
Primadonna Resorts Inc.* 2,700 43,537
Station Casinos Inc.* 3,500 38,938
U.S. Franchise Systems, Inc. CI. A* 1,000 14,500
--------------
491,200
--------------
Recreation 0.8%
Amer Group, Ltd. Cl. A* 8,700 198,556
American Radio Systems Corp. CI. A* 1,900 57,950
Anchor Gaming* 700 35,000
Cox Radio Inc. Cl. A* 1,700 30,812
Silver King Communications Inc.* 1,500 33,375
--------------
355,693
--------------
Retail Trade 2.6%
CUC International Inc.* 2,021 49,502
Dominick's Supermarkets Inc.* 1,700 33,788
Global DirectMail Corp.* 2,200 108,350
Home Depot Inc. 7,400 405,150
Kroger Co.* 4,900 218,662
Loehmann's, Inc.* 1,500 40,313
MSC Industrial Direct, Inc. Cl. A* 1,100 40,700
Renters Choice Inc.* 1,600 30,400
Sunglass Hut International Inc.* 4,900 43,488
Wal-Mart Stores, Inc. 8,000 213,000
--------------
1,183,353
--------------
Total Consumer Cyclical 3,027,160
--------------
Consumer Staple 12.7%
Business Service 1.5%
ADT Ltd.* 11,900 235,025
ATC Communications Group Inc.* 2,900 55,100
Carriage Services, Inc. Cl. A* 2,900 65,613
HA-LO Industries, Inc.* 3,150 97,650
HBO & Co. 1,200 72,150
National Media Corp.* 900 10,800
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Value
Shares (Note 1)
- --------------------------------------------------- -------- --------------
Business Service (cont'd)
Personnel Group of America Inc.* 2,900 $ 80,112
Technology Solutions Co.* 1,250 48,594
--------------
665,044
--------------
Drug 2.9%
Amgen Inc.* 1,800 110,362
BioVail Corp. International* 3,100 90,675
Pfizer Inc. 4,500 372,375
Roussel-Uclaf* 1,400 370,504
Sandoz AG* 300 346,756
--------------
1,290,672
--------------
Food & Beverage 2.7%
Anheuser-Busch Companies, Inc. 5,700 219,450
Coca-Cola Co. 5,900 297,950
Coca-Cola Enterprises Inc. 8,700 370,837
Whitman Corp. 12,600 305,550
--------------
1,193,787
--------------
Hospital Supply 3.7%
American Medical Response, Inc.* 1,800 54,000
Baxter International Inc. 9,300 387,112
Genesis Health Ventures Inc. 2,200 50,325
Healthdyne Technologies Inc.* 6,800 60,350
Imagyn Medical, Inc.* 5,100 41,438
Johnson & Johnson 6,000 295,500
Karrington Health Inc.* 3,100 48,825
Lincare Holdings Inc.* 1,200 45,000
Mariner Health Group Inc. 4,100 34,850
Medtronic Inc. 3,500 225,313
Physio-Control International Corp.* 1,200 23,400
Respironics Inc.* 1,700 25,500
Roche Holdings AG* 35 264,715
Rural/Metro Corp.* 1,600 58,400
Ultra-Fem Inc.* 1,500 33,750
--------------
1,648,478
--------------
Personal Care 0.0%
U.S.A. Detergents Inc.* 650 21,450
--------------
Printing & Publishing 0.9%
Heritage Media Corp. Cl. A* 2,200 33,550
Hollinger International Inc. CI. A* 24,200 302,500
Providence Journal Co. Cl. A* 2,100 67,725
--------------
403,775
--------------
Tobacco 1.0%
Imperial Tobacco Group PLC* 23,900 $ 140,039
Philip Morris Companies, Inc. 3,300 305,663
Schweitzer-Mauduit International, Inc. 800 24,600
--------------
470,302
--------------
Total Consumer Staple 5,693,508
--------------
Energy 3.8%
Oil 3.7%
Abacan Resources Corp.* 9,500 72,438
ENI SPA ADR 3,300 156,750
Imperial Oil Ltd. 2,700 118,800
KCS Energy Inc. 1,100 47,438
Nuevo Energy Co.* 1,300 64,838
Oryx Energy Co.* 12,900 248,325
Plains Resources Inc.* 1,500 21,000
Ranger Oil Ltd.* 4,600 34,500
Seagull Energy Corp. 13,012 281,384
Tosco Corp. 5,500 308,687
Total SA* 2,049 160,273
Woodside Petroleum Ltd. ADR* 25,000 176,363
--------------
1,690,796
--------------
Oil Service 0.1%
Dreco Energy Services Ltd. Cl. A* 1,400 36,750
--------------
Total Energy 1,727,546
--------------
Finance 7.8%
Bank 3.7%
Bank of New York Inc. 9,800 324,625
BankAmerica Corp. 2,500 228,750
Citicorp 4,400 435,600
Fleet Financial Group Inc. 6,300 314,212
Sparbanken Sverige AB* 24,100 381,161
--------------
1,684,348
--------------
Financial Service 1.7%
Alex Brown Inc. 600 34,050
CMAC Investment Corp. 1,000 69,125
Federal Home Loan Mortgage Corp. 2,300 232,300
Federal National Mortgage Association 10,600 414,725
--------------
750,200
--------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Value
Shares (Note 1)
- --------------------------------------------------- -------- --------------
Insurance 2.4%
ACE Ltd. 4,500 $ 246,375
AMBAC Inc. 2,700 168,750
Delphi Financial Group Inc.* 960 27,000
Mid Ocean Ltd. 5,900 277,300
Mutual Risk Management Ltd. 2,066 66,112
NAC Re Corp. 1,600 56,200
Travelers/Aetna Property Casualty Corp. CI. A* 7,400 222,000
--------------
1,063,737
--------------
Total Finance 3,498,285
--------------
Science & Technology 11.1%
Aerospace 1.8%
Boeing Co. 3,600 343,350
General Dynamics Corp. 3,400 233,325
Rockwell International Corp. 3,800 209,000
--------------
785,675
--------------
Computer Software & Service 3.9%
Anacomp Inc.* 5,594 48,948
Applied Graphics Technologies, Inc. 1,900 29,925
Cisco Systems Inc.* 5,600 346,500
Desktop Data Inc.* 1,000 23,750
Electronic Data Systems Corp. 3,300 148,500
Manugistics Group Inc.* 700 30,100
Microsoft Corp.* 2,600 356,850
National Processing, Inc.* 4,300 81,700
Oracle Systems Corp.* 3,400 143,862
Planning Sciences International PLC ADR* 1,700 21,675
SystemSoft Corp.* 1,200 33,900
Ultratech Stepper Inc.* 2,700 45,900
Vantive Corp.* 700 23,100
Videoserver Inc.* 1,200 56,850
Wang Laboratories Inc.* 3,600 84,150
Western Digital Corp. Rts.* 5,800 281,300
--------------
1,757,010
--------------
Electronic Components 2.1%
ABB AG* 65 80,324
AMP Inc. 5,700 193,087
Augat Inc. 2,400 66,000
Encad Inc.* 800 32,800
Intel Corp.* 4,000 439,500
VLSI Technology Inc.* 1,400 24,150
Xicor Inc. 3,700 42,088
Zebra Technologies Corp. Cl. A* 2,700 77,963
--------------
955,912
--------------
Electronic Equipment 2.8%
Berg Electronics Corp.* 2,500 $ 70,625
Chicago Miniature Lamp, Inc.* 1,400 41,650
L.M. Ericsson Telephone Co. ADR Cl. B* 7,570 209,121
L.M. Ericsson Telephone Co. Cl. B* 8,769 237,371
Lucent Technologies Inc.* 2,800 131,600
Network Equipment Technologies, Inc. Rts.* 2,400 32,100
Nokia AB Cl. A Pfd.* 1,960 90,502
Nokia AB Cl. K Pfd. 5,500 259,537
Toolex Alpha NV* 20,500 196,941
--------------
1,269,447
--------------
Office Equipment 0.5%
FileNet Corp.* 2,600 73,775
International Business Machines Corp. 1,100 141,900
--------------
215,675
--------------
Total Science & Technology 4,983,719
--------------
Utility 2.1%
Electric 0.7%
Allegheny Power Systems Inc. 5,600 167,300
American Electric Power Inc. 3,300 136,950
--------------
304,250
--------------
Natural Gas 0.4%
ENSERCH Corp. 6,000 129,000
TransTexas Gas Corp.* 4,500 63,000
--------------
192,000
--------------
Telephone 1.0%
Allen Group Inc. 2,900 46,037
Clearnet Communications Inc. Wts.* 495 4,455
Geotek Communications Inc.* 5,500 40,563
NetCom Systems AB* 17,700 223,413
Tel-Save Holdings Inc.* 2,900 72,500
Trescom International Inc.* 4,900 62,475
--------------
449,443
--------------
Total Utility 945,693
--------------
Total Equity Securities (Cost $19,668,040) 23,250,973
--------------
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------- ------------------------------- --------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 39.5%
U.S. Treasury 13.2%
U.S. Treasury Bond, 12.00% $ 400,000 8/15/2013 $ 575,876
U.S. Treasury Bond, 8.125% 850,000 8/15/2021 988,788
U.S. Treasury Bond, 6.25% 750,000 8/15/2023 704,527
U.S. Treasury Note, 8.50% 550,000 5/15/1997 558,849
U.S. Treasury Note, 5.125% 125,000 6/30/1998 123,906
U.S. Treasury Note, 6.75% 650,000 5/31/1999 663,611
U.S. Treasury Note, 7.125% 175,000 9/30/1999 180,605
U.S. Treasury Note, 6.875% 550,000 3/31/2000 565,037
U.S. Treasury Note, 6.625% 625,000 7/31/2001 638,181
U.S. Treasury Note, 7.50% 275,000 11/15/2001 291,242
U.S. Treasury Note, 5.75% 225,000 8/15/2003 219,130
U.S. Treasury Note, 7.875% 375,000 11/15/2004 411,563
--------------
5,921,315
--------------
U.S. Agency Mortgage 11.5%
Federal Home Loan Mortgage Corp.,
6.50% 175,376 2/01/2009 173,895
Federal Home Loan Mortgage Corp.,
6.50% 120,946 7/01/2009 119,925
Federal Home Loan Mortgage Corp.,
9.50% 109,415 7/25/2022 117,689
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 100,000 3/25/2023 97,406
Federal Home Loan Mortgage Corp.,
7.00% 328,889 12/01/2024 325,189
Federal Home Loan Mortgage Corp.
Gold, 7.50% 147,956 1/01/2025 149,133
Federal Home Loan Mortgage Corp.,
8.00% 56,192 6/01/2025 57,491
Federal Home Loan Mortgage Corp.,
7.50% 82,815 7/01/2025 83,268
Federal Home Loan Mortgage Corp.,
7.50% 473,837 6/01/2026 475,462
Federal National Mortgage
Association, 9.50% 218,279 10/01/2003 229,463
Federal National Mortgage
Association, 7.00% 183,193 12/01/2007 185,018
Federal National Mortgage
Association, 8.00% 216,381 4/01/2008 225,314
Federal National Mortgage
Association TBA, 7.00% 225,000 11/13/2025 220,781
Government National Mortgage
Association, 6.50% 114,945 2/15/2009 113,867
Government National Mortgage
Association, 6.50% 255,308 5/15/2009 252,954
Government National Mortgage
Association, 9.00% 131,853 2/15/2022 140,340
U.S. Agency Mortgage (cont'd)
Government National Mortgage
Association, 8.00% $ 682,250 7/15/2022 $ 700,152
Government National Mortgage
Association, 6.50% 88,276 12/15/2023 85,020
Government National Mortgage
Association, 6.50% 298,168 7/15/2024 287,172
Government National Mortgage
Association, 7.00% 148,234 1/15/2025 146,244
Government National Mortgage
Association, 7.00% 68,472 10/15/2025 67,188
Government National Mortgage
Association, 7.50% 316,866 11/15/2025 318,054
Government National Mortgage
Association TBA, 7.00% 150,000 11/19/2025 147,141
Government National Mortgage
Association, 7.50% 148,923 4/15/2026 149,388
Government National Mortgage
Association, 8.00% 299,586 9/15/2026 306,326
--------------
5,173,880
--------------
Canadian-Yankee 0.9%
Hydro-Quebec Deb. Series HS, 9.40% 225,000 2/01/2021 270,391
Talisman Energy Inc. Deb., 7.125% 125,000 6/01/2007 124,630
--------------
395,021
--------------
Trust Certificates 0.3%
Cooperative Utility Trust
Certificates, 10.70% 125,000 9/15/2017 136,154
--------------
Foreign Government 3.0% Australian Dollar
Government of Australia, 7.50% 400,000 7/15/2005 320,736
Canadian Dollar
Government of Canada, 7.50% 515,000 12/01/2003 414,809
Danish Krone
Kingdom of Denmark, 8.00% 1,200,000 11/15/2001 226,072
Kingdom of Denmark, 8.00% 1,200,000 3/15/2006 222,191
European Currency Unit
Government of France, 8.00% 125,000 4/25/2003 176,239
--------------
1,360,047
--------------
Finance/Mortgage 5.0%
Allmerica Financial Corp. Sr. Note,
7.625% $ 150,000 10/15/2025 149,816
Associates Corp. of North America
Note, 6.375% 150,000 10/15/2002 148,320
Capital One Bank Note, 7.08% 250,000 10/30/2001 252,067
CIT Group Holdings Inc. Note, 6.75% 250,000 5/14/2001 253,580
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------- ------------------------------- --------------
Finance/Mortgage (cont'd)
Countrywide Mortgage Inc. Series
1994-2 Class A-7, 6.50% $ 150,000 4/25/2008 $ 150,280
Discover Credit Card Trust Series
1993 A, 6.25% 125,000 8/16/2000 125,273
First Chicago Master Trust Series
91-D, 8.40% 16,667 6/15/1998 16,661
Ford Credit Auto Loan Master Trust
Series 95-1, 6.50% 200,000 8/15/2002 200,000
GE Global Insurance Holding Corp.
Note, 7.00% 175,000 2/15/2026 169,094
General Motors Acceptance Corp.
Note, 8.375% 200,000 5/01/1997 202,502
General Motors Acceptance Corp.
Note, 7.85% 50,000 11/17/1997 51,016
Household Finance Co. Sr. Note,
6.75% 100,000 6/01/2000 101,183
NationsBank Credit Card Master
Trust Series 1995-1A, 6.45% 150,000 4/15/2003 150,843
Prudential Home Mortgage Securities
Co. Series 93-57 A-1 PAC, 6.50% 108,307 12/26/2023 107,968
Prudential Home Mortgage Securities
Co.Series 93-29 A-6 PAC, 6.75% 70,980 8/25/2008 71,401
Sears Credit Account Master Trust
Series 1995-2A, 8.10% 100,000 6/15/2004 105,000
--------------
2,255,004
--------------
Corporate 5.6%
Anacomp Inc. Sr. Sub. Note, 13.00% 71,000 6/04/2002 73,307
Chevron Corp. Profit Sharing Note,
8.11% 100,000 12/01/2004 106,906
Clearnet Communications Inc. Sr.
Disc. Note, 0.00% to 12/14/2000,
14.75% from 12/15/2000 to
maturity 150,000 12/15/2005 87,422
Columbia/HCA Healthcare Corp.
Master Trust Note, 6.87% 125,000 9/15/2003 126,584
Crown Packaging Ltd. Sr. Sec. Note,
10.75% 75,000 11/01/2000 69,750
Dade International Inc. Sr. Sub.
Note, 11.125%+ 250,000 5/01/2006 267,500
Envirosource Inc. Note, 9.75% 125,000 6/15/2003 116,875
Grand Union Co. Sr. Sub. Note,
12.00% 75,000 9/01/2004 75,750
Corporate (cont'd)
K & F Industries Inc. Sr. Sec.
Note, 11.875% $ 175,000 12/01/2003 $ 189,000
K & F Industries Inc. Sr. Sub.
Deb., 10.375% 100,000 9/01/2004 103,000
K-III Communications Corp. Sr.
Note, 8.50% 100,000 2/01/2006 93,250
Norcal Waste Systems Inc. Sr. Note,
12.75% to 11/14/96, 13.00% from
11/15/96 to 5/14/97, 13.25% from
5/15/97 to 11/14/97, 13.50% from
11/15/97 to maturity 200,000 11/15/1996 216,500
Presidio Oil Co. Sr. Sec. Note,
11.50% (ballot box) 100,000 9/15/2000 98,750
Ralphs Grocery Co. Sr. Note, 10.45% 170,000 6/15/2004 171,700
Sears Roebuck Acceptance Corp.
Note, 6.86% 225,000 8/06/2001 227,610
Spanish Broadcasting Systems Inc.
Sr. Note, 7.50% 100,000 6/15/2002 104,500
Talley Manufacturing & Technology
Inc. Sr. Note, 10.75% 250,000 10/15/2003 258,750
United Meridian Corp. Sr. Sub.
Note, 10.375% 120,000 10/15/2005 129,600
--------------
2,516,754
--------------
Total Fixed Income Securities (Cost $17,534,083) 17,758,175
--------------
SHORT-TERM OBLIGATIONS 10.2%
American Express Credit Corp.,
5.22% 1,566,000 11/06/1996 1,566,000
Associates Corp. of North America,
5.15% 333,000 11/01/1996 333,000
Beneficial Corp., 5.22% 1,000,000 11/04/1996 1,000,000
Federal Home Loan Mortgage Corp.,
5.17% 957,000 11/01/1996 957,000
Ford Motor Credit Co., 5.25% 739,000 11/04/1996 739,000
--------------
Total Short-Term Obligations (Cost $4,595,000) 4,595,000
--------------
Total Investments (Cost $41,797,123)--101.4% 45,604,148
Cash and Other Assets, Less Liabilities--(1.4)% (615,297)
--------------
Net Assets--100.0% $44,988,851
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$41,942,980 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $4,594,225
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (933,057)
-------------
$3,661,168
=============
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 1996 were $258,625 and $272,000 (0.60% of net assets),
respectively.
(ballot box) Security is in default.
++ Security restricted as to public resale. At October 31, 1996, there were
no outstanding unrestricted securities of the same class as those held.
The total cost and market value of restricted securities at October 31,
1996 were $0 and $37 (0.00% of net assets), respectively.
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
- -------------------------------------------------- ---------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 157,000 AUD .79475 AUD $ 655 1/24/97
Sell Australian dollars, Buy U.S. dollars 40,000 AUD .77425 AUD (718) 11/14/96
Sell Australian dollars, Buy U.S. dollars 175,000 AUD .77450 AUD (3,098) 11/14/96
Buy Australian dollars, Sell U.S. dollars 10,000 AUD .79147 AUD 7 11/14/96
Buy Australian dollars, Sell U.S. dollars 83,000 AUD .79055 AUD 2 1/24/97
Sell Australian dollars, Buy U.S. dollars 83,000 AUD .79340 AUD 234 1/24/97
Sell Canadian dollars, Buy U.S. dollars 76,000 CAD .73153 CAD (1,159) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 15,000 CAD .74683 CAD (49) 1/24/97
Sell Canadian dollars, Buy U.S. dollars 270,000 CAD .73099 CAD (4,261) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 103,000 CAD .74703 CAD (316) 1/24/97
Sell Danish krone, Buy U.S. dollars 1,438,100 DKK .17110 DKK (2,429) 1/24/97
Sell Danish krone, Buy U.S. dollars 1,012,000 DKK .17578 DKK 3,657 11/14/96
Sell European currency units, Buy U.S. dollars 130,000 ECU 1.27480 ECU 991 11/14/96
---------------
$(6,484)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $41,797,123) (Note 1) $45,604,148
Cash 5,486
Interest and dividends receivable 325,468
Receivable for securities sold 181,290
Receivable for fund shares sold 53,471
Receivable from Distributor (Note 3) 30,879
Receivable for open forward contracts 5,546
Deferred organization costs and other assets (Note 1) 47,567
--------------
46,253,855
Liabilities
Payable for securities purchased 1,081,019
Payable for fund shares redeemed 50,520
Accrued management fee (Note 2) 24,618
Accrued transfer agent and shareholder services (Note 2) 17,375
Payable for open forward contracts 12,030
Accrued trustees' fees (Note 2) 5,214
Other accrued expenses 74,228
--------------
1,265,004
--------------
Net Assets $44,988,851
==============
Net Assets consist of:
Undistributed net investment income $ 541,601
Unrealized appreciation of investments 3,807,025
Unrealized depreciation of forward contracts and foreign
currency (6,167)
Accumulated net realized gain 2,644,453
Shares of beneficial interest 38,001,939
--------------
$44,988,851
==============
Net Asset Value, offering price and redemption price per
share of Class C shares ($44,988,851 / 3,986,663 shares of
beneficial interest) $ 11.28
==============
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest $1,620,422
Dividends, net of foreign taxes of $11,151 348,800
--------------
1,969,222
Expenses
Management fee (Note 2) 302,408
Custodian fee 155,325
Transfer agent and shareholder services (Note 2) 113,217
Reports to shareholders 32,861
Audit fee 32,158
Amortization of organization costs (Note 1) 16,682
Trustees' fees (Note 2) 16,133
Registration fees 13,053
Legal fees 6,774
Miscellaneous 10,908
--------------
699,519
Expenses borne by the Distributor (Note 3) (234,376)
--------------
465,143
--------------
Net investment income 1,504,079
--------------
Realized and Unrealized Gain on Investments, Foreign
Currency and Forward Contracts
Net realized gain on investments (Notes 1 and 4) 3,068,164
Net realized gain on forward contracts and foreign currency
(Note 1) 82,986
--------------
Total net realized gain 3,151,150
--------------
Net unrealized appreciation of investments 1,058,351
Net unrealized appreciation of forward contracts and
foreign currency 43,163
--------------
Total net unrealized appreciation 1,101,514
--------------
Net gain on investments, foreign currency and forward
contracts 4,252,664
--------------
Net increase in net assets resulting from operations $5,756,743
==============
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
------------------------------
1996 1995
-------------------------------- --------------- --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,504,079 $ 1,224,242
Net realized gain on
investments, foreign currency
and forward contracts* 3,151,150 579,909
Net unrealized appreciation of
investments, foreign currency
and forward contracts 1,101,514 2,954,377
--------------- --------------
Net increase resulting from
operations 5,756,743 4,758,528
--------------- --------------
Dividends from net investment
income--Class C (1,633,976) (996,013)
--------------- --------------
Class C share transactions (Note
6):
Proceeds from sale of shares 14,756,256 10,791,980
Net asset value of shares
issued in payment of
dividends 510,768 236,847
Cost of shares repurchased (14,221,849) (3,464,385)
--------------- --------------
Net increase from fund share
transactions 1,045,175 7,564,442
--------------- --------------
Total increase in net assets 5,167,942 11,326,957
Net Assets
Beginning of year 39,820,909 28,493,952
--------------- --------------
End of year (including
undistributed net investment
income of $541,601 and
$551,744, respectively) $ 44,988,851 $39,820,909
=============== ==============
Number of Class C shares:
Sold 1,373,024 1,120,799
Issued upon reinvestment of
dividends 47,952 24,757
Repurchased (1,314,427) (371,031)
--------------- --------------
Net increase in fund shares 106,549 774,525
=============== ==============
*Net realized gain for Federal
income tax purposes (Note 1) $ 2,790,310 $ 522,329
=============== ==============
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Strategic Portfolios: Moderate (the "Fund"), is a
series of State Street Research Financial Trust, (the "Trust"), which was
organized as a Massachusetts business trust in November, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in
September, 1993. The Trust consists presently of four separate funds: State
Street Research Strategic Portfolios: Moderate, State Street Research
Government Income Fund, State Street Research Strategic Portfolios:
Conservative and State Street Research Strategic Portfolios: Aggressive.
The investment objective of the fund is to provide both current income and
capital appreciation, consistent with the preservation of capital and
reasonable investment risk.
The Fund is authorized to issue four classes of shares. Only Class C shares
are presently available for purchase. Class A, Class B and Class D shares are
not being offered at this time. Class A shares will be subject to an initial
sales charge of up to 4.50% and annual service fees of 0.25% of average daily
net assets. Class B shares will be subject to a contingent deferred sales
charge on certain redemptions made within five years of purchase and pay
annual distribution and service fees of 1.00%. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after the issuance of the Class B shares. Class C shares are only
offered to certain employee benefit plans and large institutions. No sales
charge is imposed at the time of purchase or redemption of Class C shares.
Class C shares do not pay any distribution or service fees. Class D shares
are subject to a contingent deferred sales charge of 1.00% on any shares
redeemed within one year of their purchase. Class D shares also pay annual
distribution and service fees of 1.00%. The Fund's expenses are borne
pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of
Distribution, related specifically to that class. The Trustees declare
separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Values for listed equity securities reflect final sales on national
securities exchanges quoted prior to the close of the New York Stock
Exchange. Over-the-counter securities quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system are valued at
closing prices supplied through such system. If not quoted on the NASDAQ
system, such securities are valued at prices obtained from brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
10
<PAGE>
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
G. Forward Contracts and Foreign Currencies
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currency. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the origination date
of the contract. Forward foreign currency exchange contracts establish an
exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Risks may arise from the potential
inability of a counterparty to meet the terms of a contract and from
unanticipated movements in the value of foreign currencies relative to the
U.S. dollar. The aggregate principal amount of forward currency exchange
contracts is recorded in the Fund's accounts. All commitments are
marked-to-market at the applicable transaction rates resulting in unrealized
gains or losses. The Fund records realized gains or losses at the time the
forward contracts are extinguished by entry into a closing contract or by
delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's
portfolio securities or in foreign exchange rates, or prevent loss if the
price of these securities should decline.
H. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.65% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended October 31, 1996, the fees pursuant to
such agreement amounted to $302,408.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
October 31, 1996, the amount of such expenses was $100,775.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $16,133 during the year ended October 31, 1996.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $234,376.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $55,044,548 and $52,997,716
(including $15,452,703 and $13,761,143 of U.S. Government securities),
respectively.
11
<PAGE>
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
will pay annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund will pay annual distribution fees of 0.75% of average daily net assets
for Class B and Class D shares. The Distributor uses such payments for
personal service and/or the maintenance or servicing of shareholder accounts,
to reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At October 31, 1996, Metropolitan owned 1,695,308 Class C shares of the Fund
and the Adviser owned one Class C share of the Fund.
FINANCIAL HIGHLIGHTS
For a Class C share outstanding throughout each year:
<TABLE>
<CAPTION>
September 28, 1993
Year ended October 31 (Commencement of
--------------------------------- Operations) to
1996** 1995** 1994 October 31, 1993
- ------------------------------------------------------- ----------- ----------- -------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.26 $ 9.18 $ 9.57 $ 9.55
Net investment income* 0.35 0.36 0.28 0.02
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts 1.07 1.01 (0.45) --
Dividends from net investment income (0.40) (0.29) (0.22) --
----------- ----------- ----------- ------------------
Net asset value, end of year $ 11.28 $ 10.26 $ 9.18 $ 9.57
=========== =========== =========== ==================
Total return 14.08%+ 15.24%+ (1.81)%+ 0.21%+++
Net assets at end of year (000s) $44,989 $39,821 $28,494 $25,040
Ratio of expenses to average net assets* 1.00% 1.00% 1.00% 1.00%++
Ratio of net investment income to average net assets* 3.23% 3.68% 3.05% 2.32%++
Portfolio turnover rate 127.59% 120.62% 142.86% 0.00%
Average commission rate@ $0.0258 -- -- --
*Reflects voluntary assumption of fees or expenses per
share in each year (Note 3) $ 0.05 $ 0.07 $ 0.05 $ 0.00
</TABLE>
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ For fiscal years beginning on or after November 1, 1995, the Fund is
required to disclose its average commission rate per share paid for security
trades.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Strategic Portfolios: Moderate
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, 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 State Street Research
Strategic Portfolios: Moderate (a series of State Street Research Financial
Trust, hereafter referred to as the "Trust") at October 31, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Trust'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 generally accepted auditing standards
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 October 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
13
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
As of October 31, 1996, State Street Research Strategic Portfolios: Moderate
held 52% of its assets in equities, 39% in fixed income securities and 9% in
cash. For the 12 months ended October 31, 1996, Class C shares of the Fund
provided a total return of +14.08%.
We strive to achieve capital appreciation, current income, and preservation
of capital, all with moderate investment risk. We remain widely diversified
in stocks and bonds to achieve this objective.
Stocks
Positive stock returns helped the portfolio's performance. Large-cap and
value stocks made up the largest equity holdings. Value stocks performed
strongly, large-cap growth stocks less so. International equities, which were
also a large component performed well. Small-cap growth stocks, which only
comprised a small portion of the portfolio, brought in strong performance.
Bonds
The Fund's fixed-income component performed well, but did not keep pace with
its stock holdings. This was due in large part to our high-grade bond
holdings, which comprised our largest fixed-income position and provided flat
performance. High-yield and international bonds brought in strong
performance.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and large
institutions. The Standard & Poor's 500 Composite Index (S&P 500) includes
500 widely traded common stocks and is a commonly used measure of U.S. stock
market performance. The Lehman Brothers Government/ Corporate Bond Index is a
commonly used index of bond market performance. The indices are unmanaged and
do not take sales charges into consideration. Direct investment in the
indices is not possible; results are for illustrative purposes only.
Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses. In the box in the chart at the right, the first
figure reflects expense reduction; the second shows what results would have
been without subsidization.
Change In Value Of $10,000 Based On The S&P 500
And The Lehman Brothers Government/Corporate Bond
Index Compared To Change In Value Of $10,000
Invested In Strategic Portfolios: Moderate
[line chart]
Average Annual Total Return
1 Year Life of Fund
+14.08%/+13.65% +8.67%/+8.10%
Class C Shares
Strategic Portfolios: LB Gov't/Corp
Moderate Bond Index S&P 500
9/28/93 10000 10000 10000
10/31/93 10021 10041 10207
10/31/94 9840 9575 10600
10/31/95 11340 11123 13400
10/31/96 12936 11722 16627
14
<PAGE>
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of State Street Research Strategic
Portfolios: Moderate ("Fund"), along with shareholders of other series of
State Street Research Financial Trust ("Meeting"), was convened on February
14, 1996, and continued thereafter. The results of the Meeting are set forth
below.
Votes (millions of
shares)
------------------
For Withheld
------ -----------
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
Votes (millions of
shares)
----------------------
For Against Abstain
---- ------- --------
2. The Fund's fundamental policy on diversification
of investments was amended 3.1 0.1 0.2
3. The Master Trust Agreement was amended to permit
the Trustees to reorganize, merge or liquidate a
fund without prior shareholder approval 33.1 7.3 4.2
4. The Master Trust Agreement was amended to
eliminate specified time permitted between the
record date and any shareholders meeting. 34.4 5.7 4.4
15
<PAGE>
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
Fund Information
State Street Research
Strategic Portfolios: Moderate
One Financial Center
Boston, MA 02111
Investment Adviser
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
Shareholder Services
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
Officers
Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Amy L. Simmons
Assistant Secretary
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Edward M. Lamont
Formerly in banking
(Morgan Guaranty Trust
Company of New York);
presently engaged in private
investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of the
Board and Chief Executive
Officer, Raytheon Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel,
Choate, Hall & Stewart
16
<PAGE>
State Street Research Strategic Portfolios: Moderate
One Financial Center
Boston, MA 02111
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[STATE STREET RESEARCH LOGO]
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was
not industry-wide.
CONTROL NUMBER: 3550-961226(0198)SSR-LD Cover Illustration by Dorothy Cullinan
SP-124E-1296
<PAGE>
[STATE STREET RESEARCH LOGO]
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: AGGRESSIVE
ANNUAL REPORT
October 31, 1996
WHAT'S INSIDE
From the Chairman
The markets reward
investors
Portfolio Manager's Review
Favorable performance from
stocks and bonds
Fund Information
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
[DALBAR LOGO]
For Excellence
in
Shareholder Service
<PAGE>
FROM THE CHAIRMAN
[Ralph Verni photo]
To Our Shareholders:
So far, this has proven to be another good year for many investors in both
the stock and bond markets. The Dow Jones Industrial Average broke the 6000
point barrier, and the Standard & Poor's 500 Composite Index was up 24.10 for
the 12 months ended October 31, 1996. Bond investors saw the Lehman Brothers
Government/Corporate Bond Index gain 5.39%.(1)
For much of the past year, there were strong corporate profits, low inflation
and steady-but-slow economic growth. The stock and bond markets were unduly
influenced over the past few months by news of the economy, employment and
what the Federal Reserve might do. Contradictions as to which direction the
economy was headed caused rallies on some days and declines on others. But
both markets continued to show a trend of advancement into the autumn season.
The economy has definitely slowed recently, but this looks more like a
temporary pause than the beginning of a protracted slowdown.
The bond market is expected to remain in the trading range where it has been
for the past several months, even though some of the recent news has been
more favorable. The outlook for the stock market continues to be positive on
balance with operating earnings for the S&P 500 expected to be up in 1996 and
in 1997. We remain fully invested in most of our portfolios, and we are
continuing to find good values in selected stocks.
Effective in December 1996, Peter Bennett will assume management
responsibilities for the Fund. He takes the reins from Michael Yogg who
leaves State Street Research after 19 years for a new opportunity in the
investment community. We thank Michael for his service and wish him all the
best in the future.
As many of you may know, Peter Bennett has had a long career with State
Street Research and has served in many capacities. In his primary role as
Chief Investment Officer--Equities, Peter oversees the day-to-day activities
of our Equity Group. As portfolio manager of this Fund, his management style
will translate seamlessly with the Fund's team approach.
Sincerely,
/s/ Ralph F. Verni
Ralph F. Verni
Chairman
November 30, 1996
(1)The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded common stocks and is a commonly used measure of U.S. stock market
performance. The Lehman Brothers Government/Corporate Bond Index is a
commonly used index of bond market performance. The indices are unmanaged and
do not take sales charges into consideration. Direct investment in the
indices is not possible; results are for illustrative purposes only.
(2)+18.37% for Class C shares.
(3)All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends.
(4)"A" share returns reflect the maximum 4.5% front-end sales charge. "C"
shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions.
Please note that the discussion throughout this shareholder report is dated
as indicated and, because of possible changes in viewpoint, data and
transactions, should not be relied upon as being current thereafter.
FUND INFORMATION (all data are for periods ended October 31, 1996, except
where noted)
SEC Average Annual Compound Rates of
Return for periods ended 9/30/96
(at maximum applicable sales charge)(3,4)
Life of Fund
(since 5/16/94) 1 Year
- ---------- ---------------- ---------------
Class A +12.17%/+11.96% +9.11%/+8.92%
- ---------- ---------------- ---------------
Class C +14.68%/+14.46% +14.56%/+14.37%
Average Annual Compound
Rates of Return
(at maximum applicable sales charge)(3,4)
Life of Fund
(since 5/16/94) 1 Year
- ---------- ---------------- ----------------
Class A +11.98%/+11.77% +12.74%/+12.55%
- ---------- ---------------- ----------------
Class C +14.40%/+14.19% +18.37%/+18.17%
Cumulative Total Returns
(do not reflect sales charge)(3)
Life of Fund
(since 5/16/94) 1 Year
- ---------- ---------------- ----------------
Class A +38.42%/+37.77% +18.05%/+17.85%
- ---------- ---------------- ----------------
Class C +39.35%/+38.70% +18.37%/+18.17%
Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses. In the above charts, the first figure reflects
expense reduction; the second shows what results would have been without
subsidization.
<PAGE>
PORTFOLIO MANAGER'S REVIEW
State Street Research Strategic Portfolios: Aggressive had a positive year,
benefiting from a strong stock market and rallies in the bond market. The
Fund consistently outperformed its peer group. For the 12 months ended
October 31, 1996, Class A shares of the Fund provided a total return of
+18.05% (does not reflect sales charge).(2) Lipper Analytical Services'
Flexible Portfolio Funds category provided an average total return of +14.76%
over the same time period (does not reflect sales charge).
Stock Holdings
Overall the past year has been a great one for the stock market which fueled
the Fund's overall performance. The largest parts of our equity holdings
included value stocks, large-cap growth stocks, and small-cap growth stocks.
All three areas performed well for us with value stocks leading the way,
followed by large-cap growth stocks, then small-cap growth stocks. Our
international stocks, which are the smallest component of our equity
holdings, provided positive performance, but on a lesser scale.
Our top five equity industries have shifted somewhat (see chart below) with
retail and chemical dropping off the list. Bank and hospital supply have
moved up to take their places mainly because we see these two industries
continuing to have good profit growth as the economy slows. In addition, bank
stocks tend to perform better in favorable interest rate environments, which
we are currently seeing.
Bond Holdings
Bond performance was mixed over the past year. At the end of 1995, the high
quality bond market was rallying, but flattened out in 1996. This held back
our overall bond performance since high-quality bonds were a large percentage
of holdings. Conversely, our high-yield bond sector has brought in strong
performance all year due to the strengthening economy. International bonds
brought in solid performance as well.
Current Strategy
As of October 31, 1996, we held 69% of the Fund's assets in equities, 21% in
fixed-income securities and 10% in cash. Our higher percentage in cash is
temporary, as we shift some of our equity holdings into high-grade bonds. We
like the good values currently available in the high-grade bond sector.
High-grade bonds make up the largest percentage of our fixed-income holdings,
with smaller portions committed to high-yield and international bonds. On the
equity side, the large-cap growth and value stocks remain our largest
holdings, with small-cap growth closely following. We continue to maintain a
smaller position in international stocks. We believe the investment
environment is generally positive, with economic growth continuing to slow
somewhat.
October 31, 1996
Top 5 Equity Industries
(by percentage of net assets)
[bar chart]
Computer software and service 5.4%
Oil 5.4%
Hospital supply 4.7%
Electronic equipment 4.3%
Bank 4.2%
Total: 24.0%
Asset Allocation
(by percentage of net assets)
[pie chart]
Equities 69%
Cash 10%
Bonds 21%
Top 5 Equity Holdings
(by percentage of net assets)
[bar chart]
Intel 1.2%
FNMA 1.1%
Home Depot 1.1%
Baxter International 1.0%
Canadian National Railway 1.0%
Total: 5.4%
2
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
INVESTMENT PORTFOLIO
October 31, 1996
Value
Shares (Note 1)
- -------------------------------------------------- -------- --------------
EQUITY SECURITIES 68.5%
Basic Industries 9.6%
Chemical 2.5%
Cambrex Corp. 6,850 $ 214,063
General Chemical Group Inc. 7,300 138,700
Hoechst AG* 12,250 460,669
IMC Global Inc. 7,900 296,250
Monsanto Co. 13,000 515,125
--------------
1,624,807
--------------
Diversified 0.9%
Cardo AB* 10,000 244,841
Tenma Corp.* 17,000 301,612
--------------
546,453
--------------
Forest Product 0.3%
Aracruz Celulose SA ADR 20,000 160,000
--------------
Machinery 2.1%
Case Corp. 7,500 348,750
Linde AG* 546 338,005
Sundstrand Corp. 9,700 390,425
Terex Corp. Rts.*++ 300 75
Triumph Group, Inc.* 2,000 45,000
US Filter Corp.* 6,700 231,150
--------------
1,353,405
--------------
Metal & Mining 2.8%
Alumax Inc.* 10,000 321,250
Aluminum Company of America 6,500 381,062
Bohler Uddeholm AG* 3,100 231,893
Carbide/Graphite Group Inc.* 4,400 71,775
RTZ Corp.* 17,653 282,436
SGL Carbon AG* 3,000 337,758
Wyman-Gordon Co.* 8,000 176,000
--------------
1,802,174
--------------
Railroad 1.0%
Canadian National Railway Co. 23,500 646,250
--------------
Total Basic Industries 6,133,089
--------------
Consumer Cyclical 9.0%
Airline 0.4%
Atlas Air Inc.* 7,500 276,562
--------------
Automotive 1.3%
Exide Corp. 15,200 $ 395,200
Ford Motor Co. 9,000 281,250
Lear Corp.* 3,300 122,100
--------------
798,550
--------------
Building 0.6%
Lafarge Corp. 19,800 368,775
--------------
Hotel & Restaurant 1.5%
Harrah's Entertainment Inc.* 13,900 232,825
Mirage Resorts Inc.* 21,600 475,200
Motels of America Inc.*+ 175 10,500
Primadonna Resorts Inc.* 8,000 129,000
Station Casinos Inc.* 6,600 73,425
U.S. Franchise Systems, Inc. Cl. A* 2,800 40,600
--------------
961,550
--------------
Recreation 1.4%
Amer Group, Ltd. Cl. A* 17,700 403,958
American Radio Systems Corp. Cl. A* 5,600 170,800
Anchor Gaming* 2,000 100,000
Cox Radio Inc. Cl. A* 5,100 92,438
Silver King Communications Inc.* 4,500 100,125
--------------
867,321
--------------
Retail Trade 3.8%
CUC International Inc.* 5,850 143,325
Dominick's Supermarkets Inc.* 4,800 95,400
Global DirectMail Corp.* 6,400 315,200
Home Depot Inc. 12,600 689,850
Kroger Co.* 8,600 383,775
Loehmann's, Inc.* 4,500 120,938
MSC Industrial Direct, Inc. Cl. A* 3,300 122,100
Renters Choice Inc.* 4,900 93,100
Sunglass Hut International Inc.* 14,300 126,913
Wal-Mart Stores, Inc. 13,400 356,775
--------------
2,447,376
--------------
Total Consumer Cyclical 5,720,134
--------------
Consumer Staple 15.7%
Business Service 2.3%
ADT Ltd.* 20,400 402,900
ATC Communications Group Inc.* 8,600 163,400
Carriage Services, Inc. Cl. A* 8,400 190,050
HA-LO Industries, Inc.* 8,300 257,300
HBO & Co. 2,000 120,250
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Value
Shares (Note 1)
- -------------------------------------------------- -------- --------------
Business Service (cont'd)
Personnel Group of America Inc.* 8,200 $ 226,525
Technology Solutions Co.* 3,300 128,287
--------------
1,488,712
--------------
Drug 2.9%
Amgen Inc.* 3,400 208,463
BioVail Corp. International* 9,100 266,175
Pfizer Inc. 7,600 628,900
Roussel-Uclaf* 1,500 396,968
Sandoz AG* 300 346,756
--------------
1,847,262
--------------
Food & Beverage 3.1%
Anheuser-Busch Companies, Inc. 9,400 361,900
Coca-Cola Co. 10,000 505,000
Coca-Cola Enterprises Inc. 14,800 630,850
Whitman Corp. 21,400 518,950
--------------
2,016,700
--------------
Hospital Supply 4.7%
American Medical Response, Inc.* 5,300 159,000
Baxter International Inc. 16,100 670,162
Genesis Health Ventures Inc. 6,400 146,400
Healthdyne Technologies Inc.* 20,000 177,500
Imagyn Medical, Inc.* 15,400 125,125
Johnson & Johnson 10,200 502,350
Karrington Health Inc.* 9,600 151,200
Lincare Holdings Inc.* 4,100 153,750
Mariner Health Group Inc. 11,900 101,150
Medtronic Inc. 5,900 379,813
Physio-Control International Corp.* 3,400 66,300
Respironics Inc.* 5,400 81,000
Rural/Metro Corp.* 4,800 175,200
Ultra-Fem Inc.* 4,500 101,250
--------------
2,990,200
--------------
Personal Care 0.1%
U.S.A. Detergents Inc.* 1,950 64,350
--------------
Printing & Publishing 1.3%
Heritage Media Corp. Cl. A* 6,300 96,075
Hollinger International Inc. Cl. A* 42,500 531,250
Providence Journal Co. Cl. A* 6,300 203,175
--------------
830,500
--------------
Tobacco 1.3%
Imperial Tobacco Group PLC* 40,900 239,648
Philip Morris Companies, Inc. 5,500 509,438
Tobacco (cont'd)
Schweitzer-Mauduit International, Inc. 2,400 $ 73,800
--------------
822,886
--------------
Total Consumer Staple 10,060,610
--------------
Energy 5.6%
Oil 5.4%
Abacan Resources Corp.* 27,900 212,738
ENI SPA ADR 5,300 251,750
Imperial Oil Ltd. 5,700 250,800
KCS Energy Inc. 3,700 159,563
Nuevo Energy Co.* 3,800 189,525
Oryx Energy Co.* 22,100 425,425
Plains Resources Inc.* 4,300 60,200
Ranger Oil Ltd.* 13,600 102,000
Seagull Energy Corp.* 25,124 543,306
Tosco Corp. 9,500 533,187
Woodside Petroleum Ltd. ADR* 51,300 361,898
Total SA CI. B* 4,610 360,594
--------------
3,450,986
--------------
Oil Service 0.2%
Dreco Energy Services Ltd. Cl. A* 4,300 112,875
--------------
Total Energy 3,563,861
--------------
Finance 9.7%
Bank 4.2%
BankAmerica Corp. 4,200 384,300
Bank of New York Inc. 16,700 553,188
Citicorp 6,300 623,700
Fleet Financial Group Inc. 11,100 553,612
Sparbanken Sverige AB* 38,000 601,001
--------------
2,715,801
--------------
Financial Service 2.3%
Alex Brown Inc. 2,200 124,850
CMAC Investment Corp.* 3,100 214,288
Federal Home Loan Mortgage Corp. 4,000 404,000
Federal National Mortgage Association 17,900 700,337
--------------
1,443,475
--------------
Insurance 3.2%
ACE Ltd. 7,900 432,525
AMBAC Inc. 4,600 287,500
Delphi Financial Group Inc.* 3,480 97,875
Mid Ocean Ltd. 10,100 474,700
Mutual Risk Management Ltd. 6,166 197,312
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Value
Shares (Note 1)
- -------------------------------------------------- -------- --------------
Insurance (cont'd)
NAC Re Corp. 4,600 $ 161,575
Travelers/Aetna Property Casualty Corp. Cl. A 12,900 387,000
--------------
2,038,487
--------------
Total Finance 6,197,763
--------------
Science & Technology 15.8%
Aerospace 2.2%
Boeing Co. 6,500 619,937
General Dynamics Corp. 5,800 398,025
Rockwell International Corp. 6,600 363,000
--------------
1,380,962
--------------
Computer Software & Service 5.4%
Anacomp Inc.* 5,594 48,948
Applied Graphics Technologies, Inc. 5,900 92,925
Cisco Systems Inc.* 9,500 587,812
Desktop Data Inc.* 3,200 76,000
Electronic Data Systems Corp. 5,500 247,500
Manugistics Group Inc.* 2,200 94,600
Microsoft Corp.* 4,500 617,625
National Processing, Inc.* 12,700 241,300
Oracle Systems Corp.* 5,800 245,412
Planning Sciences International PLC ADR* 4,900 62,475
SystemSoft Corp.* 3,200 90,400
Ultratech Stepper Inc.* 6,400 108,800
Vantive Corp.* 1,900 62,700
Videoserver Inc.* 3,600 170,550
Wang Laboratories Inc.* 10,400 243,100
Western Digital Corp. Rts.* 10,200 494,700
--------------
3,484,847
--------------
Electronic Components 3.1%
ABB AG* 165 203,900
AMP Inc. 10,000 338,750
Augat Inc. 7,100 195,250
Encad Inc.* 2,400 98,400
Intel Corp.* 6,700 736,162
VLSI Technology Inc.* 4,200 72,450
Xicor Inc.* 10,900 123,988
Zebra Technologies Corp. Cl. A* 7,800 225,225
--------------
1,994,125
--------------
Electronic Equipment 4.3%
Berg Electronics Corp.* 7,500 211,875
Chicago Miniature Lamp, Inc.* 4,100 121,975
L.M. Ericsson Telephone Co. Cl. B* 21,920 593,360
Electronic Equipment (cont'd)
L.M. Ericsson Telephone Co. ADR Cl. B* 13,130 $ 362,716
Lucent Technologies Inc.* 5,200 244,400
Network Equipment Technologies, Inc. Rts.* 6,900 92,288
Nokia AB Cl. A Pfd.* 4,600 212,401
Nokia AB Cl. K Pfd.* 11,000 519,074
Toolex Alpha NV* 40,600 390,040
--------------
2,748,129
--------------
Office Equipment 0.8%
FileNet Corp.* 7,700 218,488
International Business Machines Corp. 2,100 270,900
--------------
489,388
--------------
Total Science & Technology 10,097,451
--------------
Utility 3.1%
Electric 0.8%
Allegheny Power Systems Inc. 10,000 298,750
American Electric Power Inc. 5,800 240,700
--------------
539,450
--------------
Natural Gas 0.5%
ENSERCH Corp. 10,500 225,750
TransTexas Gas Corp.* 7,900 110,600
--------------
336,350
--------------
Telephone 1.8%
Allen Group Inc. 8,600 136,525
Clearnet Communications Inc. Wts.* 990 8,910
Geotek Communications Inc.* 17,400 128,325
NetCom Systems AB* 36,200 456,925
Tel-Save Holdings Inc.* 8,700 217,500
Trescom International Inc.* 14,300 182,325
--------------
1,130,510
--------------
Total Utility 2,006,310
--------------
Total Equity Securities (Cost $36,371,173) 43,779,218
--------------
Principal Maturity
Amount Date
----------------------------------------- ------------- -------------
FIXED INCOME SECURITIES 21.5%
U.S. Treasury 4.3%
U.S. Treasury Bond, 12.00% $ 225,000 8/15/2013 323,930
U.S. Treasury Bond, 8.125% 1,075,000 8/15/2021 1,250,526
U.S. Treasury Bond, 6.25% 25,000 8/15/2023 23,484
U.S. Treasury Note, 9.00% 575,000 5/15/1998 602,853
U.S. Treasury Note, 6.625% 300,000 7/31/2001 306,327
U.S. Treasury Note, 7.875% 250,000 11/15/2004 274,375
-------------
2,781,495
-------------
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------ ------------ ------------- --------------
U.S. Agency Mortgage 5.8%
Federal Home Loan Mortgage Corp.
Gold, 6.50% $ 115,445 7/01/2008 $ 114,471
Federal Home Loan Mortgage Corp.
Gold, 9.50% 46,144 7/25/2022 49,634
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 50,000 3/25/2023 48,703
Federal Home Loan Mortgage Corp.
Gold, 7.00% 180,520 12/01/2024 178,489
Federal Home Loan Mortgage Corp.
Gold, 7.50% 151,323 1/01/2025 152,528
Federal Home Loan Mortgage Corp.
Gold, 7.50% 31,321 11/01/2025 31,492
Federal Home Loan Mortgage Corp.
Gold, 8.00% 79,539 1/01/2026 81,278
Federal National Mortgage
Association, 7.50% 375,933 6/01/2010 382,887
Federal National Mortgage
Association TBA, 6.50% 150,000 11/14/2010 147,469
Federal National Mortgage
Association TBA, 7.50% 325,000 11/14/2010 330,078
Federal National Mortgage
Association TBA, 7.00% 175,000 11/13/2025 171,719
Federal National Mortgage
Association TBA, 7.50% 400,000 11/13/2025 400,750
Government National Mortgage
Association, 8.00% 105,120 5/15/2008 110,113
Government National Mortgage
Association, 6.50% 45,978 2/15/2009 45,547
Government National Mortgage
Association, 6.50% 111,619 7/15/2009 110,589
Government National Mortgage
Association TBA, 6.50% 125,000 11/14/2010 123,320
Government National Mortgage
Association, 8.00% 229,158 12/15/2022 235,458
Government National Mortgage
Association, 6.50% 227,543 7/15/2024 219,152
Government National Mortgage
Association, 7.00% 25,634 1/15/2025 25,290
Government National Mortgage
Association, 7.50% 121,872 11/15/2025 122,329
Government National Mortgage
Association, 7.50% 74,462 4/15/2026 74,694
Government National Mortgage
Association, 8.00% 124,827 9/15/2026 127,636
Government National Mortgage
Association TBA, 7.00% 225,000 11/19/2025 220,711
U.S. Agency Mortgage (cont'd)
Government National Mortgage
Association TBA, 8.00% $ 175,000 11/19/2025 $ 178,938
--------------
3,683,275
--------------
Canadian-Yankee 0.7%
Hydro-Quebec Deb. Series HS, 9.40% 75,000 2/01/2021 90,130
Usinor Sacilor Note 7.25% 350,000 8/01/2006 350,812
--------------
440,942
--------------
Foreign Government 2.7% Australian Dollar
Government of Australia, 7.50% 600,000 7/15/2005 481,104
Canadian Dollar
Government of Canada, 7.50% 465,000 12/01/2003 374,536
Danish Krone
Kingdom of Denmark, 8.00% 1,100,000 11/15/2001 207,233
Kingdom of Denmark, 8.00% 1,850,000 3/15/2006 342,544
European Currency Unit
Government of France, 8.00% 225,000 4/25/2003 317,230
--------------
1,722,647
--------------
Trust Certificates 0.3%
Cooperative Utility Trust
Certificates, 10.70% $ 75,000 9/15/2017 81,692
Rural Electric Cooperative Grantor
Trust Certificates, 10.11% 75,000 12/15/2017 81,677
--------------
163,369
--------------
Finance/Mortgage 1.8%
Associates Corp. of North America
Note, 6.375% 50,000 10/15/2002 49,440
Capital One Bank Sr. Note, 7.08% 325,000 10/30/2001 327,688
Discover Credit Card Trust Series
1993 A, 6.25% 75,000 8/16/2000 75,163
First Chicago Credit Trust Series
91-D, 8.40% 8,333 6/15/1998 8,331
Ford Credit Auto Loan Master Trust
Series 95-1, 6.50% 125,000 8/15/2002 125,000
GE Global Insurance Holding Corp.
Note, 7.00% 75,000 2/15/2026 72,469
General Motors Acceptance Corp.
Deb., 8.625% 75,000 6/15/1999 79,193
General Motors Acceptance Corp.
Note, 7.85% 100,000 11/17/1997 102,032
Household Affinity Credit Card
Master Trust Series 1994-1A,
5.525% 50,000 5/15/2010 50,047
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------ ------------ ------------- --------------
Finance/Mortgage (cont'd)
Household Finance Co. Note, 6.75% $ 75,000 6/01/2000 $ 75,887
Sears Credit Trust Series 1995-2A,
8.10% 200,000 6/15/2004 210,000
--------------
1,175,250
--------------
Corporate 5.9%
Anacomp Inc. Sr. Sub. Note, 13.00% 71,000 6/04/2002 73,307
Chevron Corp. Note, 8.11% 75,000 12/01/2004 80,179
Clearnet Communications Inc. Sr.
Disc. Note, 0.00% to 12/14/2000,
14.75% from 12/15/2000 to maturity 300,000 12/15/2005 174,844
Columbia / HCA Healthcare Corp.
Note, 6.87% 50,000 9/15/2003 50,634
Crown Packaging Inc. Sr. Note Series
B, 10.75% 175,000 11/01/2000 162,750
Dade International Inc. Sr. Sub.
Note, 11.125%+ 250,000 5/01/2006 267,500
Envirosource Inc. Sr. Note, 9.75% 250,000 6/15/2003 233,750
Grand Union Co. Sr. Sub. Note,
12.00% 175,000 9/01/2004 176,750
K & F Industries Inc. Sr. Sec. Note,
11.875% 30,000 12/01/2003 32,400
K & F Industries Inc. Sr. Sub. Deb.,
10.375% 200,000 9/01/2004 206,000
K-III Communications Corp. Sr. Note,
8.50% 150,000 2/01/2006 139,875
Norcal Waste Systems Inc. Sr. Note,
12.75% to 11/14/96, 13.00% from
11/15/96 to 5/14/97, 13.25% from
5/15/97 to 11/14/97, 13.50% from
11/15/97 to maturity 250,000 11/15/2005 270,625
Park Newspapers Inc. Sr. Note,
11.875% 250,000 5/15/2004 288,125
Presidio Oil Co. Sr. Sec. Note,
11.50% (ballot box) 200,000 9/15/2000 197,500
Corporate (cont'd)
Ralphs Grocery Co. Sr. Note, 10.45% $ 150,000 6/15/2004 $ 151,500
Sears Roebuck Acceptance Corp. Note,
6.86% 325,000 8/06/2001 328,770
Spanish Broadcasting Systems Inc.
Sr. Note, 7.50% 250,000 6/15/2002 261,250
Talley Manufacturing & Technology
Inc. Sr. Note, 10.75% 150,000 10/15/2003 155,250
Tele-Communications Inc. Note, 8.25% 375,000 1/15/2003 370,815
United Meridian Corp. Sr. Sub. Note,
10.375% 130,000 10/15/2005 140,400
--------------
3,762,224
--------------
Total Fixed Income Securities (Cost $13,476,253) 13,729,202
--------------
SHORT-TERM OBLIGATIONS 13.0%
American Express Credit Corp., 5.25% 2,690,000 11/04/1996 2,690,000
Beneficial Corp., 5.28% 593,000 11/06/1996 593,000
Beneficial Corp., 5.25% 1,177,000 11/13/1996 1,177,000
Ford Motor Credit Co., 5.20% 2,405,000 11/01/1996 2,405,000
General Electric Capital Corp.,
5.25% 1,427,000 11/13/1996 1,427,000
--------------
Total Short-Term Obligations (Cost $8,292,000) 8,292,000
--------------
Total Investments (Cost $58,139,426)--103.0% 65,800,420
Cash and Other Assets, Less Liabilities--(3.0)% (1,905,721)
--------------
Net Assets--100.0% $63,894,699
==============
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$58,256,949 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 9,150,470
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (1,606,999)
--------------
$ 7,543,471
==============
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
++ Security restricted as to public resale. The total cost and market value
of restricted securities owned at October 31, 1996 were $0 and $75 (0.00%
of net assets), respectively.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 1996 were $264,500 and $278,000 (0.44% of net assets),
respectively.
(ballot box) Security is in default.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
- -------------------------------------------------- ---------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 516,600 AUD .79475 AUD $ 2,156 1/24/97
Sell Australian dollars, Buy U.S. dollars 100,000 AUD .77425 AUD (1,795) 11/14/96
Sell Australian dollars, Buy U.S. dollars 316,000 AUD .77450 AUD (5,594) 11/14/96
Sell Australian dollars, Buy U.S. dollars 205,000 AUD .79340 AUD 579 1/24/97
Buy Australian dollars, Sell U.S. dollars 220,000 AUD .78910 AUD 682 11/14/96
Buy Australian dollars, Sell U.S. dollars 205,000 AUD .79055 AUD 5 1/24/97
Buy Australian dollars, Sell U.S. dollars 100,000 AUD .79147 AUD 121 11/14/96
Sell Canadian dollars, Buy U.S. dollars 155,000 CAD .73153 CAD (2,363) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 100,000 CAD .73099 CAD (1,578) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 252,000 CAD .74703 CAD (774) 1/24/97
Buy Canadian dollars, Sell U.S. dollars 100,000 CAD .73265 CAD 1,412 11/14/96
Sell Danish krone, Buy U.S. dollars 1,497,000 DKK .17110 DKK (2,529) 1/24/97
Sell Danish krone, Buy U.S. dollars 926,000 DKK .17578 DKK 3,346 11/14/96
Sell Danish krone, Buy U.S. dollars 1,305,800 DKK .17107 DKK (2,244) 1/24/97
Buy Danish krone, Sell U.S. dollars 719,000 DKK .17555 DKK (2,436) 11/14/96
Sell European currency units, Buy U.S. dollars 234,000 ECU 1.27480 ECU 1,784 11/14/96
---------------
$(9,228)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $58,139,426) (Note 1) $65,800,420
Cash 25,468
Receivable for securities sold 689,548
Interest and dividends receivable 305,083
Receivable for fund shares sold 42,160
Receivable from Distributor (Note 3) 20,736
Receivable for open forward contracts 10,085
Deferred organization costs and other assets (Note 1) 69,400
--------------
66,962,900
Liabilities
Payable for securities purchased 2,891,434
Accrued management fee (Note 2) 40,524
Accrued transfer agent and shareholder services (Note 2) 25,647
Payable for open forward contracts 19,313
Accrued trustees' fees (Note 2) 5,403
Payable for fund shares redeemed 4,248
Accrued service fee (Note 5) 132
Other accrued expenses 81,500
--------------
3,068,201
--------------
Net Assets $63,894,699
==============
Net Assets consist of:
Undistributed net investment income $ 606,033
Unrealized appreciation of investments 7,660,994
Unrealized depreciation of forward contracts and foreign
currency (8,744)
Accumulated net realized gain 7,672,002
Shares of beneficial interest 47,964,414
--------------
$63,894,699
==============
Net Asset Value and redemption price per share of Class A
shares ($622,709 / 50,022 shares of beneficial interest) $ 12.45
==============
Maximum Offering Price per share of Class A shares ($12.45
/ .955) $ 13.04
==============
Net Asset Value, offering price and redemption price per
share of Class C shares ($63,271,990 / 5,089,802 shares of
beneficial interest) $ 12.43
==============
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest $ 1,300,681
Dividends, net of foreign taxes of $25,332 699,378
--------------
2,000,059
Expenses
Management fee (Note 2) 526,134
Custodian fee 196,585
Transfer agent and shareholder services (Note 2) 84,101
Service fee--Class A (Note 5) 36,384
Audit fee 34,233
Reports to shareholders 22,342
Trustees' fees (Note 2) 16,277
Legal fees 10,648
Registration fees 4,016
Amortization of organization costs (Note 1) 7,503
Miscellaneous 12,672
--------------
950,895
Expenses borne by the Distributor (Note 3) (142,848)
--------------
808,047
--------------
Net investment income 1,192,012
--------------
Realized and Unrealized Gain on Investments,
Foreign Currency and Forward Contracts
Net realized gain on investments (Notes 1 and 4) 7,818,652
Net realized gain on forward contracts and foreign currency
(Note 1) 180,049
--------------
Total net realized gain 7,998,701
--------------
Net unrealized appreciation of investments 1,622,625
Net unrealized appreciation of forward contracts and
foreign currency 95,527
--------------
Total net unrealized appreciation 1,718,152
--------------
Net gain on investments, foreign currency and forward
contracts 9,716,853
--------------
Net increase in net assets resulting from operations $10,908,865
==============
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
-----------------------------
1996 1995
- --------------------------------------- -------------- --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,192,012 $ 1,118,939
Net realized gain on investments,
foreign currency and forward
contracts 7,998,701 1,877,149
Net unrealized appreciation of
investments, foreign currency and
forward contracts 1,718,152 4,697,296
-------------- --------------
Net increase resulting from operations 10,908,865 7,693,384
-------------- --------------
Dividends from net investment
income:
Class A (365,226) (853,158)
Class C (910,584) (262,218)
-------------- --------------
(1,275,810) (1,115,376)
-------------- --------------
Distribution from net realized
gains:
Class A (850,522) --
Class C (463,669) --
-------------- --------------
(1,314,191) --
-------------- --------------
Net increase (decrease) from fund share
transactions (Note 6) (4,788,166) 2,684,658
-------------- --------------
Total increase in net assets 3,530,698 9,262,666
Net Assets
Beginning of year 60,364,001 51,101,335
-------------- --------------
End of year (including undistributed
net investment income of $606,033 and
$464,967, respectively) $63,894,699 $60,364,001
============== ==============
* Net realized gain for Federal income
tax purposes (Note 1) $ 7,791,106 $ 1,314,496
============== ==============
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Strategic Portfolios: Aggressive (the "Fund"), is a
series of State Street Research Financial Trust (the "Trust"), which was
organized as a Massachusetts business trust in November, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in May,
1994. The Trust consists presently of four separate funds: State Street
Research Strategic Portfolios: Aggressive, State Street Research Government
Income Fund, State Street Research Strategic Portfolios: Moderate and State
Street Research Strategic Portfolios: Conservative.
The investment objective of the fund is to provide high total return from,
primarily, growth of capital and secondarily, current income, consistent with
reasonable investment risk.
The Fund is authorized to issue four classes of shares. Only Class A and
Class C shares are presently available for purchase. Class B and Class D
shares are not being offered at this time. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares will be subject to a contingent
deferred sales charge on certain redemptions made within five years of
purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Values for listed equity securities reflect final sales on national
securities exchanges quoted prior to the close of the New York Stock
Exchange. Over-the-counter securities quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system are valued at
closing prices supplied through such system. If not quoted on the NASDAQ
system, such securities are valued at prices obtained from brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
10
<PAGE>
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
G. Forward Contracts and Foreign Currencies
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange
contract is an obligation by the Fund to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the origination
date of the contract. Forward foreign currency exchange contracts establish
an exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Risks may arise from the potential
inability of a counterparty to meet the terms of a contract and from
unanticipated movements in the value of foreign currencies relative to the
U.S. dollar. The aggregate principal amount of forward currency exchange
contracts is recorded in the Fund's accounts. All commitments are
marked-to-market at the applicable transaction rates resulting in unrealized
gains or losses. The Fund records realized gains or losses at the time the
forward contracts are extinguished by entry into a closing contract or by
delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's
portfolio securities or in foreign exchange rates, or prevent loss if the
price of these securities should decline.
H. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life
Insurance Company ("Metropolitan"), have entered into an agreement under
which the Adviser earns monthly fees at an annual rate of 0.75% of the Fund's
average daily net assets. In consideration of these fees, the Adviser
furnishes the Fund with management, investment advisory, statistical and
research facilities and services. The Adviser also pays all salaries, rent
and certain other expenses of management. During the year ended October 31,
1996, the fees pursuant to such agreement amounted to $526,134.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
October 31, 1996, the amount of such expenses was $59,885.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $16,277 during the year ended October 31, 1996.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $142,848.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $92,070,967 and $102,352,972
(including $12,057,697 and $9,507,188 of U.S. Government securities),
respectively.
11
<PAGE>
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
will pay annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund will pay annual distribution fees of 0.75% of average daily net assets
for Class B and Class D shares. The Distributor uses such payments for
personal service and/or the maintenance or servicing of shareholder accounts,
to reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1996,
fees pursuant to such plan amounted to $36,384 for Class A shares.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1996,
Metropolitan owned 50,000 Class A shares and 3,613,659 Class C shares of the
Fund and the Adviser owned one Class A share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
Class A Shares Amount Shares Amount
--------------------------------------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold -- $ -- 21 $ 191
Issued upon reinvestment of distribution from
net realized gains 78,245 850,522 -- --
Shares repurchased (3,647,468) (42,310,619) (1,616,379) (15,000,000)
-------------- ---------------- -------------- ----------------
Net decrease (3,569,223) $(41,460,097) (1,616,358) $(14,999,809)
============== ================ ============== ================
Class C Shares Amount Shares Amount
--------------------------------------------- -------------- ---------------- -------------- ----------------
Shares sold 5,031,860 $ 58,556,573 1,924,849 $ 18,026,952
Issued upon reinvestment of:
Dividends from net investment income 14,250 168,031 3,000 31,088
Distribution from net realized gains 42,616 463,669 -- --
Shares repurchased (1,901,217) (22,516,342) (36,027) (373,573)
-------------- ---------------- -------------- ----------------
Net increase 3,187,509 $ 36,671,931 1,891,822 $ 17,684,467
============== ================ ============== ================
</TABLE>
12
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class C
---------------------------------------- -----------------------------------------
May 16, 1994 May 16, 1994
Year ended October 31 (Commencement Year ended October 31 (Commencement
--------------------- of Operations) to ---------------------- of Operations) to
1996** 1995** October 31, 1994 1996** 1995** October 31, 1994
- -------------------------- --------- ----------- ----------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 10.93 $ 9.74 $ 9.55 $ 10.94 $ 9.74 $ 9.55
Net investment income* 0.14 0.20 0.09 0.22 0.22 0.10
Net realized and
unrealized gain on
investments, foreign
currency and forward
contracts 1.79 1.19 0.14 1.74 1.20 0.14
Dividends from net
investment income (0.17) (0.20) (0.04) (0.23) (0.22) (0.05)
Distribution from net
realized gains (0.24) -- -- (0.24) -- --
--------- ----------- ----------------- ----------- ----------- -----------------
Net asset value, end of
year $ 12.45 $ 10.93 $ 9.74 $ 12.43 $ 10.94 $ 9.74
========= =========== ================= =========== =========== =================
Total return 18.05%+ 14.49%+ 2.41%+++ 18.37%+ 14.85%+ 2.50%+++
Net assets at end of year
(000s) $ 623 $39,555 $50,999 $63,272 $20,809 $ 102
Ratio of operating
expenses to average net
assets* 1.35% 1.35% 1.35%++ 1.10% 1.10% 1.10%++
Ratio of net investment
income to average net
assets* 1.43% 1.98% 2.01%++ 1.78% 2.13% 2.26%++
Portfolio turnover rate 145.59% 127.44% 37.75% 145.59% 127.44% 37.75%
Average commission rate@ $ .0251 -- -- $ .0251 -- --
*Reflects voluntary
assumption of fees or
expenses per share in
each year
(Note 3) $ 0.01 $ 0.02 $ 0.01 $ 0.03 $ 0.02 $ 0.01
</TABLE>
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ For fiscal years beginning on or after November 1, 1995, the Fund is
required to disclose its average commission rate per share paid for security
trades.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Strategic Portfolios: Aggressive
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, 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 State Street Research
Strategic Portfolios: Aggressive (a series of State Street Research Financial
Trust, hereafter referred to as the "Trust") at October 31, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Trust'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 generally accepted auditing standards
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 October 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
14
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
As of October 31, 1996, State Street Research Strategic Portfolios:
Aggressive held 69% of its assets in equities, 21% in fixed income securities
and 10% in cash. For the 12 months ended October 31, 1996, Class A shares of
the Fund provided a total return of 18.05% (does not include sales charge).
Stocks
Positive stock returns helped the portfolio's performance. Large-cap and
value stocks made up the largest equity holdings. Value stocks performed
strongly, large-cap growth stocks less so. Small-cap growth stocks, which
were also a large component, performed well. International stocks, which only
comprised a small portion of the portfolio, brought in strong performance.
Bonds
The Fund's fixed-income component performed well, but did not keep pace with
its stock holdings. This was due in large part to our high-grade bond
holdings, which comprised our largest fixed-income position and provided flat
performance. High-yield and international bonds brought in strong
performance.
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "A" share returns reflect the maximum 4.5% front-end sales
charge. "C" shares, offered without a sales charge, are available only to
certain employee benefit plans and large institutions. The Standard & Poor's 500
Composite Index (S&P 500) includes 500 widely traded common stocks and is a
commonly used measure of U.S. stock market performance. The Lehman Brothers
Government/Corporate Bond Index is a commonly used index of bond market
performance. The indices are unmanaged and do not take sales charges into
consideration. Direct investment in the indices is not possible; results are for
illustrative purposes only. Performance results for the Fund are increased by
the voluntary reduction of Fund fees and expenses. In the box in the chart at
the right, the first figure reflects expense reduction; the second shows what
results would have been without subsidization.
Change In Value Of $10,000 Based On The
S&P 500 And The Lehman Brothers
Government/Corporate Bond Index Compared
To Change In Value Of $10,000 Invested In
Strategic Portfolios: Aggressive
Class A Shares
Average Annual Total Return
1 Year Life of Fund
+12.74%/+12.55% +11.98%/+11.77%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Aggressive S&P 500 Bond Index
5/16/94 9550 10000 10000
10/31/94 9780 10549 10006
10/31/95 11198 13334 11622
10/31/96 13219 16546 12250
Class C Shares
Average Annual Total Return
1 Year Life of Fund
+18.37%/+18.17% +14.40%/+14.19%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Aggressive S&P 500 Bond Index
5/16/94 10000 10000 10000
10/31/94 10250 10549 10006
10/31/95 11772 13334 11622
10/31/96 13935 16546 12250
15
<PAGE>
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of State Street Research Strategic
Portfolios: Aggressive ("Fund"), along with shareholders of other series of
State Street Research Financial Trust ("Meeting"), was convened on February
14, 1996, and continued thereafter. The results of the Meeting are set forth
below.
Votes (millions of
shares)
------------------------
For Withheld
---------- -------------
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
<TABLE>
<CAPTION>
Votes (millions of
shares)
----------------------
For Against Abstain
---- ------- --------
<S> <C> <C> <C>
2. The Fund's fundamental policy on diversification of investments was
amended 3.9 0.4 1.0
3. The Master Trust Agreement was amended to permit the Trustees to
reorganize, merge or liquidate a fund without prior shareholder
approval 33.1 7.3 4.2
4. The Master Trust Agreement was amended to eliminate specified time
permitted between the record date and any shareholders meeting 34.4 5.7 4.4
</TABLE>
16
<PAGE>
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
Fund Information
State Street Research
Strategic Portfolios: Aggressive
One Financial Center
Boston, MA 02111
Investment Adviser
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
Shareholder Services
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
Officers
Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Amy L. Simmons
Assistant Secretary
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Edward M. Lamont
Formerly in banking
(Morgan Guaranty Trust
Company of New York);
presently engaged in private
investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School
of Management, Massachusetts
Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel,
Choate, Hall & Stewart
17
<PAGE>
State Street Research Strategic Portfolios: Aggressive
One Financial Center
Boston, MA 02111
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[STATE STREET RESEARCH LOGO]
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was
not industry-wide.
CONTROL NUMBER: 3551-961226(0198)SSR-LD Cover Illustration by Dorothy Cullinan
SP-112E-1296
<PAGE>
[STATE STREET RESEARCH LOGO]
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: CONSERVATIVE
ANNUAL REPORT
October 31, 1996
WHAT'S INSIDE
From the Chairman
The markets reward
investors
Portfolio Manager's Review
Strong performance from
stocks and bonds
Fund Information
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
[DALBAR LOGO]
For Excellence
in
Shareholder Service
<PAGE>
FROM THE CHAIRMAN
[Ralph Verni photo]
To Our Shareholders:
So far, this has proven to be another good year for many investors in both
the stock and bond markets. The Dow Jones Industrial Average broke the 6000
point barrier, and the Standard & Poor's 500 Composite Index is up 24.10 for
the 12 months ended October 31, 1996. Bond investors saw the Lehman Brothers
Government/Corporate Bond Index gain 5.39%.(1)
For much of the past year, there were strong corporate profits, low inflation
and steady-but-slow economic growth. The stock and bond markets were unduly
influenced over the past few months by news of the economy, employment and what
the Federal Reserve might do. Contradictions as to which direction the economy
was headed caused rallies on some days and declines on others. But both markets
continued to show a trend of advancement into the autumn season. The economy has
definitely slowed recently, but this looks more like a temporary pause than the
beginning of a protracted slowdown.
The bond market is expected to remain in the trading range where it has been
for the past several months, even though some of the recent news has been
more favorable. The outlook for the stock market continues to be positive on
balance with operating earnings for the S&P 500 expected to be up in 1996 and
in 1997. We remain fully invested in most of our portfolios, and we are
continuing to find good values in selected stocks.
Effective in December 1996, Peter Bennett will assume management
responsibilities for the Fund. He takes the reins from Michael Yogg who
leaves State Street Research after 19 years for a new opportunity in the
investment community. We thank Michael for his service and wish him all the
best in the future.
As many of you may know, Peter Bennett has had a long career with State
Street Research and has served in many capacities. In his primary role as
Chief Investment Officer--Equities, Peter oversees the day-to-day activities
of our Equity Group. As portfolio manager of this Fund, his management style
will translate seamlessly with the Fund's team approach.
Sincerely,
/s/ Ralph F. Verni
Ralph F. Verni
Chairman
November 30, 1996
(1)The Standard & Poor's Composite Index (S&P 500) includes 500 widely traded
common stocks and is a commonly used measure of U.S. stock market
performance. The Lehman Brothers Government/Corporate Bond Index is a
commonly used index of bond market performance. The indices are unmanaged and
do not take sales charges into consideration. Direct investment in the
indices is not possible; results are for illustrative purposes only.
(2)+10.82% for Class C shares.
(3)All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends.
(4)"A" share returns reflect the maximum 4.5% front-end sales charge. "C"
shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions.
Please note that the discussion throughout this shareholder report is dated
as indicated and, because of possible changes in viewpoint, data and
transactions, should not be relied upon as being current thereafter.
FUND INFORMATION (all data are for periods ended October 31, 1996, except
where noted)
SEC Average Annual Compound Rates of
Return for periods ended 9/30/96
(at maximum applicable sales charge)(3,4)
Life of Fund
(since 5/16/94) 1 Year
- ---------- ---------------- ----------------
Class A +8.47%/+7.92% +3.76%/+3.37%
- ---------- ---------------- ----------------
Class C +10.84%/+10.30% +8.90%/+8.48%
Average Annual Compound
Rates of Return
(at maximum applicable sales charge)3,4
Life of Fund
(since 5/16/94) 1 Year
- ---------- ---------------- ----------------
Class A +9.01%/+8.47% +5.58%/+5.18%
- ---------- ---------------- ----------------
Class C +11.32%/+10.79% +10.82%/+10.40%
Cumulative Total Returns
(do not reflect sales charge)3
Life of Fund
(since 5/16/94) 1 Year
- ---------- ---------------- ----------------
Class A +29.54%/+27.95% +10.55%/+10.14%
- ---------- ---------------- ----------------
Class C +30.27%/+28.73% +10.82%/+10.40%
Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses. In the above charts, the first figure reflects
expense reduction; the second shows what results would have been without
subsidization.
<PAGE>
PORTFOLIO MANAGER'S REVIEW
State Street Research Strategic Portfolios: Conservative had a positive year,
benefiting from a strong stock market and rallies in the bond market. The
Fund consistently outperformed its peer group. For the 12 months ended
October 31, 1996, Class A shares of the Fund provided a total return of
+10.55% (does not reflect sales charge).(2) Lipper Analytical Services'
Flexible Portfolio Funds category provided an average total return of +7.38%
over the same time period (does not reflect sales charge).
Bond Holdings
Bond performance was mixed over the past year. At the end of 1995, the high
quality bond market was rallying, but flattened out in 1996. This held back
our overall bond performance somewhat since high-quality bonds made up most
of our holdings. The remainder of our fixed-income holdings are international
bonds which brought in solid performance.
Stock Holdings
The past year has been a great one for the stock market which fueled the
Fund's overall performance. The largest parts of our equity holdings included
value stocks and large-cap growth stocks. Both areas performed well for us
with value stocks leading the way, followed closely by large-cap growth
stocks. Our international stocks, which are the smallest component of our
equity holdings, provided positive performance, but on a lesser scale.
We see our top five equity industries continuing to have good profit growth
as the economy slows. In particular, bank stocks tend to perform better in
favorable interest rate environments, which we are seeing currently.
Current Strategy
As of October 31, 1996, we held 61% of the Fund's assets in fixed-income
securities, 29% in equities and 10% in cash. Our higher percentage in cash is
temporary, as we shift some of our equity holdings into high-grade bonds. We
like the good values currently available in the high-grade bond sector.
High-grade bonds make up the largest percentage of our fixed-income holdings,
with a smaller portion committed to high-yield bonds. On the equity side, the
large-cap growth and value stocks remain our largest holdings. We continue to
maintain a smaller position in international stocks. Going forward, we
believe the investment environment is generally positive, with economic
growth continuing to slow somewhat.
October 31, 1996
Asset Allocation
(by percentage of net assets)
[pie chart]
Bonds 61%
Equities 29%
Cash 10%
Top 5 Bond Sectors
(by percentage of net assets)
[bar chart]
U.S. Treasury 23.1%
U.S. Agency Mortgage 19.7%
Finance/Mortgage 8.7%
Foreign Government 3.0%
Corporate 2.8%
Total: 57.3%
Top 5 Equity Industries
(by percentage of net assets)
[bar chart]
Bank 2.4%
Oil 2.2%
Food & Beverage 2.1%
Insurance 2.0%
Computer Software & Service 1.9%
Total: 10.6%
2
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
INVESTMENT PORTFOLIO
October 31, 1996
Value
Shares (Note 1)
- ------------------------------------------------- -------- --------------
EQUITY SECURITIES 28.8%
Basic Industries 3.9%
Chemical 1.2%
Hoechst AG* 3,250 $ 122,218
IMC Global Inc. 3,250 121,875
Monsanto Co. 3,600 142,650
--------------
386,743
--------------
Diversified 0.2%
Cardo AB* 1,400 34,278
Tenma Corp.* 2,000 35,484
--------------
69,762
--------------
Forest Product 0.1%
Aracruz Celulose SA ADR 3,300 26,400
--------------
Machinery 0.9%
Case Corp. 2,000 93,000
Linde AG* 81 50,144
Sundstrand Corp. 4,100 165,025
--------------
308,169
--------------
Metal & Mining 1.0%
Alumax Inc.* 4,200 134,925
Aluminum Company of America 1,400 82,075
Bohler Uddeholm AG* 500 37,402
RTZ Corp. PLC* 2,521 40,334
SGL Carbon AG* 500 56,293
--------------
351,029
--------------
Railroad 0.5%
Canadian National Railway Co. 6,300 173,250
--------------
Total Basic Industries 1,315,353
--------------
Consumer Cyclical 3.6%
Automotive 1.1%
Exide Corp. 6,300 163,800
Ford Motor Co. 3,800 118,750
Honda Motor Co.* 2,000 47,780
Suzuki Motor Co. Ltd.* 4,000 40,754
--------------
371,084
--------------
Building 0.5%
Lafarge Corp. 8,300 154,588
--------------
Hotel & Restaurant 0.6%
Harrah's Entertainment Inc.* 5,700 95,475
Mirage Resorts Inc.* 5,700 125,400
--------------
220,875
--------------
Recreation 0.1%
Amer Group, Ltd. Cl. A* 2,200 50,209
--------------
Retail Trade 1.3%
Home Depot Inc. 3,200 $ 175,200
Kroger Co.* 3,600 160,650
Wal-Mart Stores, Inc. 3,600 95,850
--------------
431,700
--------------
Total Consumer Cyclical 1,228,456
--------------
Consumer Staple 6.5%
Business Service 0.6%
ADT Ltd.* 8,300 163,925
HBO & Co. 500 30,063
--------------
193,988
--------------
Drug 1.2%
Amgen Inc.* 900 55,181
Pfizer Inc. 1,900 157,225
Roussel-Uclaf* 400 105,858
Sandoz AG* 70 80,910
--------------
399,174
--------------
Food & Beverage 2.1%
Anheuser-Busch Companies, Inc. 2,600 100,100
Coca-Cola Co. 2,600 131,300
Coca-Cola Enterprises Inc. 6,100 260,012
Whitman Corp. 8,900 215,825
--------------
707,237
--------------
Hospital Supply 1.3%
Baxter International Inc. 5,400 224,775
Johnson & Johnson 2,600 128,050
Medtronic Inc. 1,400 90,125
--------------
442,950
--------------
Printing & Publishing 0.6%
Hollinger International Inc. Cl. A* 17,600 220,000
--------------
Tobacco 0.7%
Imperial Tobacco Group PLC* 17,100 100,195
Philip Morris Companies, Inc. 1,500 138,938
--------------
239,133
--------------
Total Consumer Staple 2,202,482
--------------
Energy 2.2%
Oil 2.2%
ENI SPA ADR 900 42,750
Imperial Oil Ltd. 850 37,400
Oryx Energy Co.* 9,000 173,250
Seagull Energy Corp.* 7,800 168,675
Tosco Corp. 3,900 218,887
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Value
Shares (Note 1)
- ------------------------------------------------- -------- --------------
Oil (cont'd)
Total SA Cl. B* 717 $ 56,084
Woodside Petroleum Ltd. ADR* 7,700 54,320
--------------
751,366
--------------
Total Energy 751,366
--------------
Finance 5.4%
Bank 2.4%
BankAmerica Corp. 1,100 100,650
Bank of New York Inc. 6,800 225,250
Citicorp 1,600 158,400
Fleet Financial Group Inc. 4,600 229,425
Sparbanken Sverige AB* 5,700 90,150
--------------
803,875
--------------
Financial Service 1.0%
Federal Home Loan Mortgage Corp. 1,700 171,700
Federal National Mortgage Association 4,600 179,975
--------------
351,675
--------------
Insurance 2.0%
ACE Ltd. 3,300 180,675
AMBAC Inc. 1,900 118,750
Mid Ocean Ltd. 4,200 197,400
Travelers/Aetna Property Casualty Corp. Cl. A 5,400 162,000
--------------
658,825
--------------
Total Finance 1,814,375
--------------
Science & Technology 6.0%
Aerospace 1.6%
Boeing Co. 2,100 200,287
General Dynamics Corp. 2,500 171,563
Rockwell International Corp. 2,700 148,500
--------------
520,350
--------------
Computer Software & Service 1.9%
Cisco Systems Inc.* 2,400 148,500
Electronic Data Systems Corp. 1,400 63,000
Microsoft Corp.* 1,300 178,425
Oracle Systems Corp.* 1,600 67,700
Western Digital Corp. Rts.* 3,900 189,150
--------------
646,775
--------------
Electronic Components 1.3%
ABB AG* 30 37,073
AMP Inc. 4,200 142,275
Intel Corp.* 1,700 186,787
Rohm Co.* 1,000 59,286
--------------
425,421
--------------
Electronic Equipment 1.0%
L.M. Ericsson Telephone Co. Cl. B* 3,568 $ 96,584
L.M. Ericsson Telephone Co. ADR Cl. B* 3,390 93,649
Lucent Technologies Inc.* 1,400 65,800
Nokia AB Cl. A Pfd.* 760 35,092
Toolex Alpha NV* 5,200 49,956
--------------
341,081
--------------
Office Equipment 0.2%
International Business Machines Corp. 600 77,400
--------------
Total Science & Technology 2,011,027
--------------
Utility 1.2%
Electric 0.7%
Allegheny Power Systems Inc. 4,200 125,475
American Electric Power Inc. 2,400 99,600
--------------
225,075
--------------
Natural Gas 0.4%
ENSERCH Corp. 4,300 92,450
TransTexas Gas Corp.* 2,200 30,800
--------------
123,250
--------------
Telephone 0.1%
NetCom Systems AB* 4,100 51,751
--------------
Total Utility 400,076
--------------
Total Equity Securities (Cost $8,240,477) 9,723,135
--------------
Principal Maturity
Amount Date
----------------------------------------- ------------- --------------
FIXED INCOME SECURITIES 60.9%
U.S. Treasury 23.1%
U.S. Treasury Bond, 12.00% $ 200,000 8/15/2013 287,938
U.S. Treasury Bond, 8.125% 1,450,000 8/15/2021 1,686,756
U.S. Treasury Bond, 6.25% 775,000 8/15/2023 728,012
U.S. Treasury Note, 8.50% 575,000 5/15/1997 584,252
U.S. Treasury Note, 5.125% 275,000 6/30/1998 272,594
U.S. Treasury Note, 6.75% 675,000 5/31/1999 689,134
U.S. Treasury Note, 7.125% 1,200,000 9/30/1999 1,238,436
U.S. Treasury Note, 6.875% 350,000 3/31/2000 359,569
U.S. Treasury Note, 6.25% 400,000 8/31/2000 403,064
U.S. Treasury Note, 6.625% 250,000 7/31/2001 255,272
U.S. Treasury Note, 7.50% 300,000 11/15/2001 317,718
U.S. Treasury Note, 7.875% 900,000 11/15/2004 987,750
--------------
7,810,495
--------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
--------------------------------- ------------------------------- --------------
<S> <C> <C> <C>
U.S. Agency Mortgage 19.7%
Federal Home Loan Mortgage Corp.
Gold, 9.50% $ 139,204 7/25/2022 $ 149,730
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 125,000 3/25/2023 121,758
Federal Home Loan Mortgage Corp.
Gold, 7.00% 867,046 6/01/2024 857,292
Federal Home Loan Mortgage Corp.
Gold, 7.50% 539,194 8/01/2024 543,486
Federal Home Loan Mortgage Corp.
Gold, 8.00% 74,600 6/01/2025 76,325
Federal Home Loan Mortgage Corp.
Gold, 7.50% 365,379 4/01/2026 367,377
Federal Home Loan Mortgage Corp.
Gold, 7.50% 856,876 6/01/2026 859,815
Government National Mortgage
Association, 8.00% 315,357 5/15/2008 330,337
Government National Mortgage
Association, 6.50% 137,934 2/15/2009 136,640
Government National Mortgage
Association, 6.50% 66,493 6/15/2009 65,870
Government National Mortgage
Association, 6.50% 312,530 7/15/2009 309,649
Government National Mortgage
Association, 8.00% 134,753 10/15/2017 140,319
Government National Mortgage
Association, 8.00% 838,493 5/15/2022 861,543
Government National Mortgage
Association, 6.50% 88,250 12/15/2023 84,995
Government National Mortgage
Association, 6.50% 458,720 7/15/2024 441,802
Government National Mortgage
Association, 7.00% 324,842 1/15/2025 320,480
Government National Mortgage
Association, 7.00% 48,786 10/15/2025 47,871
Government National Mortgage
Association, 7.50% 389,989 11/15/2025 391,451
Government National Mortgage
Association, 7.50% 198,566 4/15/2026 199,185
Government National Mortgage
Association, 8.00% 349,517 9/15/2026 357,381
--------------
6,663,306
--------------
Canadian-Yankee 2.2%
Hydro-Quebec Deb. Series HS,
9.40% $ 325,000 2/01/2021 $ 390,565
Usinor Sacilor Note, 7.25% 350,000 8/01/2006 350,812
--------------
741,377
--------------
Foreign Government 3.0% Australian Dollar
Government of Australia, 7.50% 350,000 7/15/2005 280,644
Canadian Dollar
Government of Canada, 7.50% 220,000 12/01/2003 177,200
Danish Krone
Kingdom of Denmark, 8.00% 850,000 11/15/2001 160,135
Kingdom of Denmark, 8.00% 700,000 3/15/2006 129,611
European Currency Unit
Government of France, 8.00% 175,000 4/25/2003 246,734
--------------
994,324
--------------
Trust Certificates 1.4%
Cooperative Utility Trust
Certificates, 10.70% $ 225,000 9/15/2017 245,077
Rural Electric Cooperative
Grantor Trust Certificates,
10.11% 200,000 12/15/2017 217,804
--------------
462,881
--------------
Finance/Mortgage 8.7%
Associates Corp. of North America
Note, 6.375% 200,000 10/15/2002 197,760
Capital One Bank Sr. Note, 7.08% 175,000 10/30/2001 176,447
Chase Manhattan Master Trust
96-3A, 7.04% 275,000 2/15/2005 282,131
CIT Group Holdings Inc. Note,
6.75% 175,000 5/14/2001 177,506
Countrywide Funding Corp. Note,
6.28% 200,000 1/15/2003 193,634
Discover Credit Card Trust Series
1993 A, 6.25% 250,000 8/16/2000 250,545
First Chicago Credit Trust Series
91-D, 8.40% 25,000 6/15/1998 24,992
Ford Credit Auto Loan Master
Trust Series 95-1, 6.50% 375,000 8/15/2002 375,000
GE Global Insurance Holding Corp.
Note, 7.00% 225,000 2/15/2026 217,406
General Motors Acceptance Corp.
Note, 7.85% 325,000 11/17/1997 331,604
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
--------------------------------- ------------------------------- --------------
Finance/Mortgage (cont'd)
Household Affinity Master Trust
Series 1994-1A, 5.525% $175,000 4/25/2003 $ 175,163
Household Finance Co. Note, 6.75% 125,000 6/01/2000 126,479
Prudential Home Mortgage Series
93-29 A-6 PAC, 6.75% 235,523 8/25/2008 236,920
Sears Roebuck Acceptance Corp.
Note, 6.86% 175,000 8/06/2001 177,030
--------------
2,942,617
--------------
Corporate 2.8%
Chevron Corp. Note, 8.11% 175,000 12/01/2004 187,085
Columbia/HCA Healthcare Corp.
Note, 6.87% 150,000 9/15/2003 151,900
Electronic Data Systems Corp.
Note, 6.85% + 250,000 5/15/2000 254,105
K-III Communications Corp. Sr.
Note, 8.50% 75,000 2/01/2006 69,938
Loews Corp. Sr. Note, 7.00% 125,000 10/15/2023 114,338
Tele-Communications Inc. Sr.
Note, 8.25% 175,000 1/15/2003 173,047
--------------
950,413
--------------
Total Fixed Income Securities (Cost $20,147,196) 20,565,413
--------------
SHORT-TERM OBLIGATIONS 9.5%
American Express Credit Corp.,
5.25% 219,000 11/04/1996 219,000
American Express Credit Corp.,
5.25% 836,000 11/12/1996 836,000
Beneficial Corp., 5.22% 691,000 11/05/1996 691,000
Ford Motor Credit Co., 5.20% 968,000 11/01/1996 968,000
General Electric Capital Corp.,
5.17% 500,000 11/01/1996 500,000
--------------
Total Short-Term Obligations (Cost $3,214,000) 3,214,000
--------------
Total Investments (Cost $31,601,673)--99.2% 33,502,548
Cash and Other Assets, Less Liabilities--0.8% 284,902
--------------
Net Assets--100.0% $33,787,450
==============
</TABLE>
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$31,664,750 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $2,120,103
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (282,305)
-------------
$1,837,798
=============
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at October 31, 1996 were $249,803 and $254,105 (0.75%
of net assets), respectively.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
- -------------------------------------------------- ---------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 265,900 AUD .79475 AUD $ 1,110 1/24/97
Sell Australian dollars, Buy U.S. dollars 60,000 AUD .77425 AUD (1,077) 11/14/96
Sell Australian dollars, Buy U.S. dollars 203,000 AUD .77450 AUD (3,592) 11/14/96
Sell Australian dollars, Buy U.S. dollars 112,000 AUD .79340 AUD 316 1/24/97
Buy Australian dollars, Sell U.S. dollars 88,000 AUD .78910 AUD 273 11/14/96
Buy Australian dollars, Sell U.S. dollars 112,000 AUD .79144 AUD (97) 1/24/97
Buy Australian dollars, Sell U.S. dollars 60,000 AUD .79147 AUD 88 11/14/96
Sell Canadian dollars, Buy U.S. dollars 177,000 CAD .73153 CAD (2,699) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 15,000 CAD .73099 CAD (237) 11/14/96
Sell Danish krone, Buy U.S. dollars 104,000 DKK .17110 DKK (177) 1/24/97
Sell Danish krone, Buy U.S. dollars 882,000 DKK .17578 DKK 3,187 11/14/96
Sell Danish krone, Buy U.S. dollars 837,500 DKK .17107 DKK (1,439) 1/24/97
Buy Danish krone, Sell U.S. dollars 225,000 DKK .17555 DKK (762) 11/14/96
Sell European currency units, Buy U.S. dollars 182,000 ECU 1.27480 ECU 1,387 11/14/96
---------------
$(3,719)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $31,601,673) (Note 1) $33,502,548
Cash 22,607
Interest and dividends receivable 312,956
Receivable for securities sold 212,947
Receivable for fund shares sold 23,939
Receivable from Distributor (Note 3) 15,792
Receivable for open forward contracts 6,361
Deferred organization costs and other assets (Note 1) 44,766
--------------
34,141,916
Liabilities
Payable for securities purchased 230,055
Accrued transfer agent and shareholder services (Note 2) 19,896
Payable for open forward contracts 10,080
Accrued management fee (Note 2) 17,053
Payable for fund shares redeemed 6,419
Accrued trustees' fees (Note 2) 4,793
Accrued service fee (Note 5) 116
Other accrued expenses 66,054
--------------
354,466
--------------
Net Assets $33,787,450
==============
Net Assets consist of:
Undistributed net investment income $ 410,962
Unrealized appreciation of investments 1,900,875
Unrealized depreciation of forward contracts and foreign
currency (3,408)
Accumulated net realized gain 1,658,025
Shares of beneficial interest 29,820,996
--------------
$33,787,450
==============
Net Asset Value and redemption price per share of Class A
shares ($551,564 / 50,023 shares of beneficial interest) $ 11.03
==============
Maximum Offering Price per share of Class A shares ($11.03
/ .955) $ 11.55
==============
Net Asset Value, offering price and redemption price per
share of Class C shares ($33,235,886 / 3,039,822 shares of
beneficial interest) $ 10.93
==============
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest, net of foreign taxes of $616 $ 1,651,704
Dividends, net of foreign taxes of $4,928 173,951
--------------
1,825,655
Expenses
Management fee (Note 2) 201,690
Custodian fee 122,038
Service fee-Class A (Note 5) 25,236
Transfer agent and shareholder services (Note 2) 66,719
Audit fee 33,559
Reports to shareholders 18,633
Trustees' fees (Note 2) 18,001
Registration fees 15,211
Amortization of organization costs (Note 1) 7,503
Legal fees 7,175
Miscellaneous 9,958
--------------
525,723
Expenses borne by the Distributor (Note 3) (197,940)
--------------
327,783
--------------
Net investment income 1,497,872
--------------
Realized and Unrealized Gain on Investments,
Foreign Currency and Forward Contracts
Net realized gain on investments (Notes 1 and 4) 1,696,404
Net realized gain on forward contracts and foreign currency
(Note 1) 14,439
--------------
Total net realized gain 1,710,843
--------------
Net unrealized appreciation of investments 46,364
Net unrealized appreciation of forward contracts and
foreign currency 43,785
--------------
Total net unrealized appreciation 90,149
--------------
Net gain on investments, foreign currency and forward
contracts 1,800,992
--------------
Net increase in net assets resulting from operations $ 3,298,864
==============
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
-----------------------------
1996 1995
--------------------------------------------------------- --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,497,872 $ 1,288,775
Net realized gain on investments, foreign
currency and forward contracts 1,710,843 791,816
Net unrealized appreciation of investments,
foreign currency and forward contracts 90,149 1,955,540
-------------- --------------
Net increase resulting from operations 3,298,864 4,036,131
-------------- --------------
Dividends from net investment income:
Class A (454,334) (1,230,373)
Class C (970,526) (51,204)
-------------- --------------
(1,424,860) (1,281,577)
-------------- --------------
Distribution from net realized gains:
Class A (651,838) --
Class C (42,210) --
-------------- --------------
(694,048) --
-------------- --------------
Net increase from fund share transactions
(Note 6) 3,537,654 1,200,860
-------------- --------------
Total increase in net assets 4,717,610 3,955,414
Net Assets
Beginning of year 29,069,840 25,114,426
-------------- --------------
End of year (including undistributed net
investment income of $410,962 and
$303,997, respectively) $33,787,450 $29,069,840
============== ==============
*Net realized gain for Federal income tax
purposes (Note 1) $ 1,717,406 $ 693,902
============== ==============
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Strategic Portfolios: Conservative (the "Fund") is a
series of State Street Research Financial Trust (the "Trust"), which was
organized as a Massachusetts business trust in November, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in May,
1994. The Trust consists presently of four separate funds: State Street
Research Strategic Portfolios: Conservative, State Street Research Government
Income Fund, State Street Research Strategic Portfolios: Moderate and State
Street Research Strategic Portfolios: Aggressive.
The investment objective of the fund is to provide, primarily, a high level
of current income and, secondarily, long term growth of capital, consistent
with the preservation of capital and reasonable investment risk.
The Fund is authorized to issue four classes of shares. Only Class A and
Class C shares are presently available for purchase. Class B and Class D
shares are not being offered at this time. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares will be subject to a contingent
deferred sales charge on certain redemptions made within five years of
purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Values for listed equity securities reflect final sales on national
securities exchanges quoted prior to the close of the New York Stock
Exchange. Over-the-counter securities quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system are valued at
closing prices supplied through such system. If not quoted on the NASDAQ
system, such securities are valued at prices obtained from brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
9
<PAGE>
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
G. Forward Contracts and Foreign Currencies
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the origination date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Risks may arise from the potential inability of a counterparty
to meet the terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The aggregate principal amount
of forward currency exchange contracts is recorded in the Fund's accounts. All
commitments are marked-to-market at the applicable transaction rates resulting
in unrealized gains or losses. The Fund records realized gains or losses at the
time the forward contracts are extinguished by entry into a closing contract or
by delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's portfolio
securities or in foreign exchange rates, or prevent loss if the price of these
securities should decline.
H. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser earns
monthly fees at an annual rate of 0.60% of the Fund's average daily net assets.
In consideration of these fees, the Adviser furnishes the Fund with management,
investment advisory, statistical and research facilities and services. The
Adviser also pays all salaries, rent and certain other expenses of management.
During the year ended October 31, 1996, the fees pursuant to such agreement
amounted to $201,690.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
October 31, 1996, the amount of such expenses was $37,814.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $18,001 during the year ended October 31, 1996.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $197,940.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $38,260,101 and $37,908,373
(including $19,136,638 and $17,807,946 of U.S. Government securities),
respectively.
10
<PAGE>
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
will pay annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund will pay annual distribution fees of 0.75% of average daily net assets
for Class B and Class D shares. The Distributor uses such payments for
personal service and/or the maintenance or servicing of shareholder accounts,
to reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1996,
fees pursuant to such plan amounted to $25,236 for Class A shares.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1996,
Metropolitan owned 50,000 Class A shares and 2,154,550 Class C shares of the
Fund and the Adviser owned one Class A share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
---------------------------------------------------------
1996 1995
------------------------------- -------------------------
Class A Shares Amount Shares Amount
- -------------------------------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold -- $ -- 21 $ 192
Issued upon reinvestment of
distribution from net realized
gains 62,677 651,777 -- --
Shares repurchased (2,630,477) (28,093,497) -- --
-------------- ---------------- ----------- -------------
Net increase (decrease) (2,567,800) $(27,441,720) 21 $ 192
============== ================ =========== =============
Class C Shares Amount Shares Amount
- -------------------------------- -------------- ---------------- ----------- -------------
Shares sold 3,511,159 $ 37,399,443 164,827 $1,608,388
Issued upon reinvestment of:
Dividends from net investment
income 21,689 229,456 3,527 35,611
Distribution from net realized
gains 4,058 42,210 -- --
Shares repurchased (632,775) (6,691,735) (43,134) (443,331)
-------------- ---------------- ----------- -------------
Net increase 2,904,131 $ 30,979,374 125,220 $1,200,668
============== ================ =========== =============
</TABLE>
11
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class C
----------------------------------------- -----------------------------------------
May 16, 1994 May 16, 1994
Year ended October 31 (Commencement of Year ended October 31 (Commencement of
----------------------- Operations) to ----------------------- Operations) to
1996** 1995** October 31, 1994 1996** 1995** October 31, 1994
------------------------------------- ----------- ---------------------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 10.56 $ 9.56 $ 9.55 $ 10.56 $ 9.56 $ 9.55
Net investment income* 0.42 0.47 0.20 0.50 0.52 0.21
Net realized and
unrealized gain (loss)
on investments, foreign
currency and forward
contracts 0.66 1.00 (0.09) 0.60 0.97 (0.09)
Dividends from net
investment income (0.36) (0.47) (0.10) (0.48) (0.49) (0.11)
Distribution from net
realized gains (0.25) -- -- (0.25) -- --
----------- ----------- ---------------------------- ----------- -----------------
Net asset value, end of
year $ 11.03 $ 10.56 $ 9.56 $ 10.93 $ 10.56 $ 9.56
=========== =========== ============================ =========== =================
Total return 10.55%+ 15.84%+ 1.15%+++ 10.82%+ 16.11%+ 1.25%+++
Net assets at end of year
(000s) $ 552 $27,637 $25,014 $33,236 $ 1,433 $ 100
Ratio of expenses to
average net assets* 1.15% 1.15% 1.15%++ 0.90% 0.90% 0.90%++
Ratio of net investment
income to average net
assets* 4.35% 4.74% 4.48%++ 4.50% 4.91% 4.73%++
Portfolio turnover rate 126.41% 132.50% 70.35% 126.41% 132.50% 70.35%
Average commission rate@ $ .0436 -- -- $ .0436 -- --
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3) $ 0.07 $ 0.05 $ 0.03 $ 0.06 $ 0.05 $ 0.03
</TABLE>
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
Total return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ For fiscal years beginning on or after November 1, 1995, the Fund is
required to disclose its average commission rate per share paid for security
trades.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Strategic Portfolios: Conservative
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, 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 State Street Research
Strategic Portfolios: Conservative (a series of State Street Research
Financial Trust, hereafter referred to as the "Trust") at October 31, 1996,
and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust'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 generally accepted
auditing standards 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 October 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
13
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
As of October 31, 1996, State Street Research Strategic Portfolios: Conservative
held 61% of its assets in fixed-income securities, 29% in equities and 10% in
cash. For the 12 months ended October 31, 1996, Class A shares of the Fund
provided a total return of +10.55% (does not reflect sales charge).
Bonds
The Fund's fixed-income component had mixed performance. The largest position
was in high-grade bonds, which delivered relatively flat performance.
International bonds performed well, but weren't heavily weighted in the
portfolio.
Stocks
Healthy stock returns also helped the portfolio's performance. Large-cap and
value stocks dominated the Fund's equity holdings. Large-cap growth stocks
performed strongly, value stocks less so. International equities demonstrated
positive performance as well.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. "A" share returns reflect the maximum
4.5% front-end sales charge. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions. The
Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely traded
common stocks and is a commonly used measure of U.S. stock market
performance. The Lehman Brothers Government/Corporate Bond Index is a
commonly used index of bond market performance. The indices are unmanaged and
do not take sales charges into consideration. Direct investment in the
indices is not possible; results are for illustrative purposes only.
Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses. In the box in the chart at the right, the first
figure reflects expense reduction; the second shows what results would have
been without subsidization.
Change In Value Of $10,000 Based On
The S&P 500 And The Lehman Brothers
Government/Corporate Bond Index Compared
To Change In Value Of $10,000 Invested
In Strategic Portfolios: Conservative
Class A Shares
Average Annual Total Return
1 Year Life of Fund
+5.58%/+5.18% +9.01%/+8.47%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Conservative S&P 500 Bond Index
5/16/94 9550 10000 10000
10/31/94 9660 10549 10006
10/31/95 11190 13334 11622
10/31/96 12371 16546 12250
Class C Shares
Average Annual Total Return
1 Year Life of Fund
+10.82%/+10.40% +11.32%/+10.79%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Conservative S&P 500 Bond Index
5/16/94 10000 10000 10000
10/31/94 10006 10549 10125
10/31/95 11622 13334 11755
10/31/96 12250 16546 13027
14
<PAGE>
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of State Street Research Strategic
Portfolios: Conservative ("Fund"), along with shareholders of other series of
State Street Research Financial Trust ("Meeting"), was convened on February
14, 1996, and continued thereafter. The results of the Meeting are set forth
below.
Votes (millions of
shares)
------------------
For Withheld
------ -----------
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
<TABLE>
<CAPTION>
Votes (millions of shares)
----------------------------
For Against Abstain
------ -------------------
<S> <C> <C> <C>
2. The Fund's fundamental policy on diversification of investments was
not amended 1.3 1.1 0.2
3. The Master Trust Agreement was amended to permit the Trustees to
reorganize, merge or liquidate a fund without prior shareholder
approval 33.1 7.3 4.2
4. The Master Trust Agreement was amended to eliminate specified time
permitted between the record date and any shareholders meeting 34.4 5.7 4.4
</TABLE>
15
<PAGE>
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
Fund Information
State Street Research
Strategic Portfolios: Conservative
One Financial Center
Boston, MA 02111
Investment Adviser
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
Shareholder Services
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
Officers
Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer
John H. Kallis
Vice President
Thomas A. Shively
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Amy L. Simmons
Assistant Secretary
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Edward M. Lamont
Formerly in banking
(Morgan Guaranty Trust
Company of New York);
presently engaged in private
investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel,
Choate, Hall & Stewart
16
<PAGE>
<PAGE>
<PAGE>
State Street Research Strategic Portfolios: Conservative
One Financial Center
Boston, MA 02111
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[STATE STREET RESEARCH LOGO]
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was
not industry-wide.
CONTROL NUMBER: 3552-961226(0198)SSR-LD Cover Illustration by Dorothy Cullinan
SP-125E-1296
