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3RD QUARTER REPORT -- September 30, 1999
SKYLINE SMALL CAP
VALUE PLUS
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
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LETTER from Kenneth S. Kailin, Portfolio Manager:(1) September 30, 1999
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Dear Shareholder:
The Fund experienced a challenging operating environment during the third
quarter, as deteriorating investor confidence led to negative stock market
returns. While small company stock returns were similar to large company stock
returns, growth stocks significantly outperformed value stocks in the quarter.
Specifically, the Fund fell 8.97% in the third quarter while the Russell 2000
Index declined 6.32%.
The performance difference stems mainly from our value-oriented
investment approach. The stock market struggled in the third quarter with both
the Russell 2000 Index and S&P 500 Index showing losses in excess of 6%.
Market breadth was particularly poor with the vast majority of stocks posting
declines. Market weakness in the third quarter can be largely attributed to
the Federal Reserve Board raising interest rates. Also, many cyclical stocks
that rallied in the June quarter failed to hold their gains when company
fundamentals proved to be less robust than expected.
In terms of investment styles, growth stock investing performed much
better than value-oriented investing. Growth stock managers benefited from
strong performance in the technology sector, one of only two sectors in the
Russell 2000 Index to post a gain for the quarter. At the same time,
value-oriented managers were hurt by the decline in cyclical and financial
stocks, sectors in which they tend to invest.
Small company stocks with inexpensive valuation characteristics performed
poorly during the third quarter. The market became increasingly focused on
companies with rapid growth characteristics, with little regard for the prices
being paid. The negative bias toward value-oriented stocks is the primary
culprit behind the Fund's recent weak results.
A number of stocks were impacted by fears that future profit growth
expectations might not be as strong as originally thought. These concerns
typically related to company comments that the business environment was still
healthy but not as robust as earlier in the year. This caused some stock
prices to fall significantly more than logic would seem to suggest. Typically,
stocks that carry low valuations, like those owned by the Fund, tend to hold
up well on slight disappointments. However, recently this has not been true
due to the intense focus by investors on rapid stock price momentum and not on
valuation levels.
While large company stocks have enjoyed a period of healthy returns over
the last several years, small company stocks, particularly those with a
value-orientation, have been in a severe bear market. Virtually no
disappointment seems to be tolerated by investors focused so intently on
short-term gains. Despite a good economic outlook, and most companies in the
Fund reporting record profit levels, returns have been disappointing.
We continue to find exciting new investment opportunities by seeking out
companies with attractive valuation levels and strong profit growth outlooks.
This is our investment style both for the long- and short-term. Presently, the
environment is fertile for finding such companies. Therefore, we continue to
improve the Fund by selling stocks when weak fundamentals develop and
replacing them with companies demonstrating good growth trends. The Fund is
well diversified by industry, with healthy exposure to almost every major
sector.
Small company value stocks are extremely attractive by almost all
measures, however, their performance continues to lag. Most investors are
convinced, as are we, that there will be a tremendously positive cycle for
small company value stocks in the reasonable future. We believe the Fund is
very well structured for such a change and that common sense will once again
prevail.
[KENNETH S. KAILIN SIGNATURE]
PORTFOLIO Characteristics(1)
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<TABLE>
<CAPTION>
SMALL CAP
VALUE PLUS RUSSELL 2000 S&P 500
<S> <C> <C> <C>
P/E RATIO (MEDIAN) 16.6 20.8 23.8
PRICE/BOOK 2.59 2.31 4.88
PRICE/SALES 0.74 1.16 2.08
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EPS GROWTH--5 YRS 15.7% 13.8% 14.8%
(HISTORICAL)
EPS GROWTH--1 YR 20.1% 21.9% 19.7%
(FORECASTED)
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MARKET CAP $ WGHTD. $740 million $710 million $65 billion
MED.
PORTFOLIO VALUE $73 million $833 billion $10,547 billion
NUMBER OF HOLDINGS 54 1,938 500
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TICKER SYMBOL: SPEQX INITIAL INVESTMENT: $1,000
CUSIP #: 830833406 SUBSEQUENT $100
INVESTMENT:
NET ASSET VALUE (PER $11.16
SHARE):
</TABLE>
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- - PERFORMANCE (%)(1)
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<TABLE>
<CAPTION>
3Q
1999 YTD 1 yr. 3 yrs. 5 yrs.
<S> <C> <C> <C> <C> <C>
SMALL CAP VALUE PLUS -8.97 -5.26 2.50 7.14 10.42
RUSSELL 2000 -6.32 2.37 19.07 8.70 12.38
S&P 500 -6.17 5.29 27.73 25.17 25.11
</TABLE>
- - SECTOR Weightings (as of September 30, 1999)
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer
Discretionary 20.5%
Consumer
Staples 4.8%
Energy 3.5%
Financial
Services 16.4%
Health
Care 11.7%
Materials
&
Processing 3.6%
Producer
Durables 12.3%
Technology 18.1%
Cash 3.5%
Autos
&
Transportation 5.6%
</TABLE>
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<TABLE>
<CAPTION>
Calendar Years
Since -------------------------------------------------------------------------------
Inception(2) 1998 1997 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C> <C> <C>
SMALL CAP VALUE PLUS 9.73 -6.7 26.2 26.6 21.0 -1.5 10.1
RUSSELL 2000 11.33 -2.6 22.4 16.5 28.4 -1.8 13.8
S&P 500 19.87 28.8 33.4 23.3 37.5 1.3 10.0
</TABLE>
- - SECTOR Performance(1) (as of September 30, 1999)
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<TABLE>
<CAPTION>
3Q 1999 YTD 1999
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SMALL CAP RUSSELL SMALL CAP RUSSELL
VALUE PLUS 2000 VALUE PLUS 2000
<S> <C> <C> <C> <C> <C>
ENERGY 8.7% 4.2% ENERGY 46.7% 39.8%
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TECHNOLOGY -1.1 3.6 TECHNOLOGY 13.6 22.2
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CONSUMER DISCRETIONARY -6.1 -10.8 CONSUMER DISCRETIONARY 3.7 -1.4
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HEALTH CARE -6.1 -4.7 CONSUMER STAPLES -5.5 -15.9
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CONSUMER STAPLES -11.1 -6.8 HEALTH CARE -10.5 -5.5
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FINANCIAL SERVICES -13.0 -9.5 FINANCIAL SERVICES -18.7 -5.3
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PRODUCER DURABLES -13.7 -3.3 MATERIALS & PROCESSING -20.5 -7.0
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AUTOS & TRANSPORTATION -13.8 -14.3 PRODUCER DURABLES -20.7 7.0
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MATERIALS & PROCESSING -35.8 -12.2 AUTOS & TRANSPORTATION -25.7 -6.3
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UTILITIES N/A* -0.1 UTILITIES N/A* 20.8
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OTHER N/A* -11.9 OTHER N/A* -13.6
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* Not Applicable
</TABLE>
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- - STOCK Highlights(3)
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AMERISOURCE HEALTH CORPORATION (AAS)
AmeriSource is one of the nation's leading wholesale distributors of
pharmaceutical products, serving health care facilities as well as independent
and chain drugstores. AAS benefits from a growing pharmaceutical industry that
is driven by the aging of America, increasing pharmaceutical usage, and drug
price inflation. AAS should be able to grow faster than the industry by gaining
market share as the company enters new geographic territories. Moreover, AAS
generates one of the best financial returns in the industry, as management is
highly focused on profitability. Despite all of these positive factors that we
believe will continue to drive strong earnings growth for at least the next
several years, AAS trades at a significant discount to the market and its growth
rate.
C&D TECHNOLOGIES, INC. (CHP)
C&D Technologies is an 80 year-old manufacturer of specialty batteries that has
been invigorated by the increasing importance of technology in our lives
combined with the decreasing reliability of our electric service. Today,
infrastructure for cellular, cable television, telephone and computer systems
all require significant back-up power supplies which are powered by CHP's
batteries. CHP is increasing its manufacturing capacity to meet the surging
demand from its customers. In addition, CHP has two small underperforming
businesses: forklift batteries and power supply manufacturing which management
appears to be improving. CHP is a classic overlooked stock with limited Wall
Street coverage. CHP should enjoy robust earnings per share growth over the next
few years and is trading at a discount to the market.
- - TOP Ten Holdings(3)
<TABLE>
<CAPTION>
% OF NET
ASSETS
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<S> <C>
SYMANTEC CORP.
Personal computer software 3.0%
HEIDRICK & STRUGGLES INT'L, INC.
Executive recruiting 2.9%
UNITED STATIONERS INC.
Office products distributor 2.6%
DEL MONTE FOODS CO.
Canned foods 2.6%
COVENANT TRANSPORT, INC.
Specialty truckload carrier 2.5%
APPLIED POWER INC.
Industrial products manufacturer 2.5%
GILDAN ACTIVEWEAR INC.
Shirt manufacturer 2.4%
BELDEN INC.
Wire & cable manufacturer 2.4%
CACI INTERNATIONAL INC.
Technology services provider 2.3%
PENTAIR, INC.
Diversified manufacturer 2.2%
TOP TEN HOLDINGS 25.4%
</TABLE>
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(1) The performance for the one, three, and five years ended September 30, 1999,
and for the period February 9, 1993 (inception) through September 30, 1999,
is an average annual total return calculation which is described in the
Fund's prospectus. Of course, past performance is no guarantee of future
results. The principal value and return on your investment will fluctuate
and on redemption may be worth more or less than your original cost.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted stock
market index, includes 500 of the largest companies publicly traded in
America. All figures take into account reinvested dividends. All indexes and
portfolio characteristics are compiled by Frank Russell Company.
Source: Frank Russell Company.
(2) Return is calculated from the Fund's inception on February 9, 1993.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
For 24-hour account information CALL: 1.800.828.2SKY
(1.800.828.2759)
To speak with a Skyline Funds Representative during
normal business hours CALL: 1.800.828.2SKY and press 0 when prompted.
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