<PAGE>
RUSSELL INSURANCE FUNDS
- ----------------
INSURANCE FUNDS
- ----------------
1998 Annual Report
MULTI-STYLE EQUITY FUND
AGGRESSIVE EQUITY FUND
NON-US FUND
CORE BOND FUND
DECEMBER 31, 1998
[RUSSELL LOGO]
<PAGE>
RUSSELL INSURANCE FUNDS
Russell Insurance Funds is a
"series mutual fund" with four
different investment portfolios.
These financial statements report
on four Funds, each of which has
distinct investment objectives and
strategies.
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
Responsible for overall management
and administration of the Funds.
FRANK RUSSELL COMPANY
Consultant to Frank Russell
Investment Management Company.
<PAGE>
RUSSELL INSURANCE FUNDS
ANNUAL REPORT
DECEMBER 31, 1998
TABLE OF CONTENTS
Page
Multi-Style Equity Fund ...................................... 2
Aggressive Equity Fund ....................................... 12
Non-US Fund .................................................. 24
Core Bond Fund ............................................... 36
Notes to Financial Statements ................................ 47
Report of Independent Accountants ............................ 54
Tax Information .............................................. 55
Matter Submitted to a Vote of Shareholders ................... 56
Manager, Money Managers and Service Providers ................ 58
RUSSELL INSURANCE FUNDS
Copyright (C) Frank Russell Company 1999. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. This material must be accompanied or preceded by
a current Russell Insurance Funds' Prospectus containing complete information
concerning the investment objectives and operations of the Funds, charges, and
expenses. The Prospectus should be read carefully before an investment is made.
The performance quoted represents past performance and the investment return and
principal value of an investment will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost. Investments in securities of
non-US issuers and foreign currencies involve investment risks different than
those of US issuers; the Prospectus contains further information and details
regarding these risks. Russell Fund Distributors, Inc., is the distributor of
Russell Insurance Funds.
<PAGE>
MULTI-STYLE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide income and capital growth by investing principally in
equity securities.
INVESTS IN: Primarily U.S. equity securities.
STRATEGY: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk. The Fund employed the investment
management services of three managers with three separate and distinct
investment styles.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Multi-Style Equity Fund Russell 1000(R) Index** Lipper(R) Growth & Income++
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1997 $12,853 $13,285 $12,709
1998 $16,543 $16,875 $14,657
- ----------------------------------------------------------------------------------------------
Total $39,396 $40,160 $37,366
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
MULTI-STYLE EQUITY FUND RUSSELL 1000(R) INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 Year $ 12,871 28.71% 1 Year $ 12,702 27.02%
Inception $ 16,543 28.73%(S) Inception $ 16,875 29.91%(S)
<CAPTION>
LIPPER(R) GROWTH & INCOME FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
-------------- ------------- -------------
<S> <C> <C>
1 Year $ 11,533 15.33%
Inception $ 14,657 21.07%(S)
</TABLE>
2 Multi-Style Equity Fund
<PAGE>
MULTI-STYLE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Multi-Style Equity Fund shares
reflected a total return of 28.7%, as compared to the Russell 1000(R) Index
results of 27%. The Fund exceeded the Index primarily due to effective security
selection. Performance also compared very favorably with the 15.3% average
return of mutual funds tracked in the Lipper(R) Growth and Income Funds
Benchmark.
PORTFOLIO HIGHLIGHTS
The performance of stocks in 1998 was characterized by unprecedented differences
in returns between various sectors of the market. Stocks provided investors with
returns in excess of 20% -- the first time the market has ever produced four
consecutive years of gains in excess of 20% per annum. Despite the market's
strength, volatility was extreme, with a deep swoon in prices during the third
quarter. The market's advance favored large cap growth issues. Valuation
sensitivity proved a liability for investors, as value stocks in the Russell
1000 Index trailed their growth counterparts by more than 20 percentage points -
the largest differential since the inception of the indices. Technology stocks
led the market advance, as anything and everything associated with the Internet
attracted investors. As a result, the technology sector gained 75% for the year.
The laggards were led by energy and raw materials, as commodity prices trended
lower throughout the year. Large cap issues dominated once again with the
largest 50 stocks of the Russell 1000 Index up 40%, while small cap stocks in
the Russell 2000(R) Index fell 2.5% during the year-another unprecedented
margin.
The Multi-Style Equity Fund fared better than the majority of its peers in the
Lipper(R) Growth and Income Funds Benchmark in 1998. Its multi-manager mix
afforded it some opportunities not shared by funds with more focused approaches
to the growth and income style. The Fund's growth manager, Alliance, produced
very strong results, aided by exposure to many of the market's strongest
performers. However, even with their aggressive style, they found valuations on
many other stocks unacceptably high. The value-oriented manager, Equinox, had a
more difficult time as their valuation sensitivity focused their investments
away from some of the better performing sectors of the market. They were
underweighted in many of the more aggressively-priced growth stocks,
particularly Internet-related issues. Overall, good security selection,
particularly in the Technology sector, helped the Fund outperform its
benchmarks.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Nokia Corp. - ADR 3.2%
Home Depot, Inc. (The) 3.1
Airtouch Communications, Inc. 2.8
MCI WorldCom, Inc. 2.7
Dell Computer Corp. 2.5
Bristol-Myers Squibb Co. 2.4
Cisco Systems, Inc. 2.2
Tyco International, Ltd. 2.0
Pfizer, Inc. 1.9
Philip Morris Cos., Inc. 1.8
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 32.3x
Portfolio Price/Book Ratio 4.41x
Market Capitalization - $-Weighted Average 68.59 Bil
Number of Holdings 99
MONEY MANAGERS STYLES
Alliance Capital Management L.P. Growth
Equinox Capital Management, Inc. Value
Westpeak Investment Advisors, L.P. Market-Oriented
* The Fund commenced operations on January 2, 1997. Index comparison began
January 1, 1997.
** Russell 1000(R) Index includes the 1,000 largest companies in the Russell
3000(R) Index, the smallest of which is valued at about $158.3 million. The
Russell 1000 Index represents the universe of stocks from which most active
money managers typically select. The Russell 1000 Index return reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates.
++ Lipper(R) Growth & Income Funds Benchmark is the average total return for
the universe of funds within the Growth and Income Funds investment
objective. The total return for the funds reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
(S) Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Multi-Style Equity Fund 3
<PAGE>
MULTI-STYLE EQUITY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
COMMON STOCKS - 87.9%
AUTO AND TRANSPORTATION - 3.8%
AMR Corp. (a) 7,400 439
Delta Air Lines, Inc. 12,200 634
Ford Motor Co. 12,500 734
General Motors Corp. 6,700 479
Northwest Airlines Corp. Class A (a) 8,800 224
UAL Corp. (a) 4,700 281
----------
2,791
----------
CONSUMER DISCRETIONARY - 11.2%
America Online, Inc. 1,900 304
Dayton Hudson Corp. 14,800 803
Eastman Kodak Co. 8,598 619
Hasbro, Inc. 8,800 318
Home Depot, Inc. (The) 37,300 2,282
JC Penney & Co., Inc. 9,500 445
Kohl's Corp. (a) 7,900 485
Lowe's Cos., Inc. 6,300 322
Sears Roebuck & Co. 9,400 400
Time Warner, Inc. 6,600 410
Tribune Co. 6,200 409
Wal-Mart Stores, Inc. 12,100 985
Whirlpool Corp. 9,100 504
----------
8,286
----------
CONSUMER STAPLES - 4.2%
Colgate-Palmolive Co. 2,500 232
ConAgra, Inc. 15,600 491
Kroger Co. (a) 5,700 345
PepsiCo, Inc. 9,700 398
Philip Morris Cos., Inc. 24,700 1,321
Rite Aid Corp. 6,100 302
----------
3,089
----------
FINANCIAL SERVICES - 17.6%
Allstate Corp. 15,400 595
American International Group, Inc. 1,200 116
Associates First Capital Corp. Class A 24,754 1,049
BankAmerica Corp. 21,650 1,301
Chase Manhattan Corp. 13,700 932
Citigroup, Inc. 4,700 233
Conseco, Inc. 12,500 382
Federal Home Loan Mortgage Corp. 6,700 432
Federal National Mortgage Association 17,500 1,295
Fifth Third Bancorp 2,000 143
Fleet Financial Group, Inc. 21,000 938
Hartford Financial Services
Group, Inc. (The) 10,600 582
MBNA Corp. 35,400 883
Morgan Stanley Dean Witter & Co. 18,400 1,306
Progressive Corp. 1,800 305
SunAmerica, Inc. 1,500 122
Transamerica Financial Corp. 2,600 300
U.S. Bancorp 11,100 394
Washington Mutual, Inc. 26,428 1,009
Wells Fargo Co. (a) 16,900 675
----------
12,992
----------
HEALTH CARE - 9.8%
Aetna, Inc. 7,700 605
Baxter International, Inc. 8,900 572
Bristol-Myers Squibb Co. 13,100 1,753
Columbia/HCA Healthcare Corp. 29,000 718
HBO & Co. 24,200 694
Merck & Co., Inc. 2,100 311
Pfizer, Inc. 11,000 1,380
Schering-Plough Corp. 17,600 972
Warner-Lambert Co. 2,900 218
----------
7,223
----------
INTEGRATED OILS - 3.7%
Amerada Hess Corp. NPV 11,700 582
Atlantic Richfield Co. 4,100 268
Coastal Corp. 9,400 328
Exxon Corp. 8,900 651
Mobil Corp. 4,600 401
Texaco, Inc. 10,200 539
----------
2,769
----------
MATERIALS AND PROCESSING - 4.1%
FMC Corp. (a) 3,400 190
Fort James Corp. 8,100 325
International Paper Co. 11,300 506
Reynolds Metals Co. 9,700 511
Tyco International, Ltd. 19,700 1,486
----------
3,018
----------
OTHER ENERGY - 0.7%
Conoco, Inc. Class A (a) 23,500 491
----------
PRODUCER DURABLES - 3.9%
AMP, Inc. 8,000 417
Foster Wheeler Corp. 11,200 148
General Electric Co. 2,100 213
4 Multi-Style Equity Fund
<PAGE>
MULTI-STYLE EQUITY FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
Ingersoll-Rand Co. 2,600 122
Lockheed Martin Corp. 7,100 602
United Technologies Corp. 4,200 457
Xerox Corp. 7,900 932
----------
2,891
----------
TECHNOLOGY - 14.4%
Cisco Systems, Inc. (a) 17,400 1,615
COMPAQ Computer Corp. 14,900 625
Dell Computer Corp. (a) 25,100 1,837
Electronic Data Systems Corp. 16,610 835
EMC Corp. (a) 14,800 1,258
IMS Health, Inc. 6,800 513
Intel Corp. 8,700 1,031
International Business
Machines Corp. 6,700 1,238
Lucent Technologies, Inc. 4,500 495
Microsoft Corp. (a) 6,700 928
Sun Microsystems, Inc. (a) 3,600 308
----------
10,683
----------
UTILITIES - 14.5%
Airtouch Communications, Inc. (a) 28,200 2,034
AT&T Corp. 14,400 1,084
Bell Atlantic Corp. 16,580 879
Consolidated Edison, Inc. 8,900 471
FPL Group, Inc. 5,000 308
GTE Corp. 5,404 351
MCI WorldCom, Inc. (a) 27,900 2,002
PacifiCorp. 24,000 506
Peco Energy Co. 8,800 366
PG&E Corp. 20,330 640
SBC Communications, Inc. 13,800 740
Tele-Communications, Inc.
Class A (a) 1,600 89
Tele-Communications, Inc.
Series A (a) 17,200 792
Unicom Corp. 12,800 494
----------
10,756
----------
TOTAL COMMON STOCKS
(cost $55,033) 64,989
----------
PREFERRED STOCK - 3.2%
Nokia Corp. - ADR 19,900 2,396
----------
TOTAL PREFERRED STOCK
(cost $1,529) 2,396
----------
SHORT-TERM INVESTMENTS - 8.8%
Federated Prime Cash
Obligation Fund (b) 6,220 6,220
United States Treasury Notes
6.250% due 03/31/99 (c) 300 301
----------
TOTAL SHORT-TERM INVESTMENTS
(cost $6,520) 6,521
----------
TOTAL INVESTMENTS - 99.9%
(identified cost $63,082)(d) 73,906
----------
OTHER ASSETS AND LIABILITIES,
NET - 0.1% 92
----------
NET ASSETS - 100.0% 73,998
==========
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures contracts purchased by the
Fund.
(d) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
NPV - No Par Value
The accompanying notes are an integral part of the financial statements.
Multi-Style Equity Fund 5
<PAGE>
MULTI-STYLE EQUITY FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
----------- ---------------
FUTURES CONTRACTS
(Notes 2 and 3)
S&P 500 Index
expiration date 03/99 20 $ 216
----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 216
==========
((S)) At December 31, 1998, United States Treasury Notes valued at $301 were
held as collateral in connection with futures contracts purchased by the
Fund.
The accompanying notes are an integral part of the financial statements.
6 Multi-Style Equity Fund
<PAGE>
MULTI-STYLE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
-----------------
<S> <C>
ASSETS
Investments at market (identified cost $63,082)(Note 2) ........................ $73,906
Receivables:
Dividends and interest ......................................................... 101
Investments sold ............................................................... 127
Fund shares sold ............................................................... 416
Daily variation margin on futures contracts (Notes 2 and 3) ................... 17
Deferred organization expenses (Note 2) ........................................ 4
-------
Total Assets ................................................................. 74,571
LIABILITIES
Payables:
Investments purchased ............................................... $438
Accrued fees to affiliates (Note 4) ................................ 36
Other accrued expenses .............................................. 99
Total Liabilities ............................................................ 573
-------
NET ASSETS ...................................................................... $73,998
=======
NET ASSETS CONSIST OF:
Undistributed net investment income ............................................. $ 119
Accumulated net realized gain (loss) ........................................... 4,473
Unrealized appreciation (depreciation) on:
Investments .................................................................... 10,824
Futures contracts .............................................................. 216
Shares of beneficial interest ................................................... 46
Additional paid-in capital ...................................................... 58,320
-------
NET ASSETS ...................................................................... $73,998
=======
NET ASSET VALUE, offering and redemption price per share:
($73,998,179 divided by 4,619,352 shares of $.01 par value
shares of beneficial interest outstanding) .................................. $ 16.02
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
Multi-Style Equity Fund 7
<PAGE>
MULTI-STYLE EQUITY FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
----------------------------
<S> <C>
INVESTMENT INCOME:
$ 741
Interest ..................................................................... 11
-------
Total Investment Income .................................................... 752
EXPENSES (Notes 2 and 4):
Advisory fees ..................................................... $ 361
Custodian fees .................................................... 114
Transfer agent fees ............................................... 9
Professional fees ................................................. 28
Registration fees ................................................. 13
Trustees' fees .................................................... 11
Amortization of deferred organization expenses .................... 1
Miscellaneous ..................................................... 21
------
Expenses before reductions ........................................ 558
Expense reductions (Note 4) ...................................... (132)
------
Expenses, net .............................................................. 426
-------
Net investment income ......................................................... 326
-------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ....................................................... 3,961
Futures contracts ................................................. 540 4,501
------
Net change in unrealized appreciation or depreciation of:
Investments ....................................................... 6,870
Futures contracts ................................................. 219 7,089
------ -------
Net gain (loss) on investments ................................................ 11,590
-------
Net increase (decrease) in net assets resulting from operations ............... $11,916
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
8 Multi-Style Equity Fund
<PAGE>
MULTI-STYLE EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands December 31, 1998
----------------------
1998 1997*
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income .......................................................... $ 326 $ 146
Net realized gain (loss) ...................................................... 4,501 582
Net change in unrealized appreciation or depreciation .......................... 7,089 3,951
------- -------
Net increase (decrease) in net assets resulting from operations .............. 11,916 4,679
------- -------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income .......................................................... (248) (105)
Net realized gain on investments ............................................... (610) --
------- -------
Total Distributions to Shareholders .......................................... (858) (105)
------- -------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund share transactions (Note 5) ... 39,301 19,040
------- -------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ..................................... 50,359 23,614
NET ASSETS
Beginning of period ............................................................ 23,639 25(a)
------- -------
End of period (including undistributed net investment income
of $119 and $41, respectively) .............................................. $73,998 $23,639
======= =======
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Original capital.
The accompanying notes are an integral part of the financial statements.
Multi-Style Equity Fund 9
<PAGE>
MULTI-STYLE EQUITY FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997*
---------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ...................... $ 12.78 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (c) ............................... .10 .09
Net realized and unrealized gain (loss) on investments ... 3.49 2.75
------- -------
Total Income From Investment Operations ................ 3.59 2.84
------- -------
DISTRIBUTIONS:
Net investment income .................................... (.08) (.06)
Net realized gain on investments ......................... (.27) --
------- -------
Total Distributions .................................... (.35) (.06)
------- -------
NET ASSET VALUE, END OF PERIOD ............................ $ 16.02 $ 12.78
======= =======
TOTAL RETURN (%)(a) ...................................... 28.71 28.53
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ................ 73,998 23,639
Ratios to average net assets (%)(b):
Operating expenses, net ................................ .92 .92
Operating expenses, gross .............................. 1.21 1.61
Net investment income .................................. .70 .76
Portfolio turnover rate (%)(b) .......................... 78.89 64.95
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1997 are annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
10 Multi-Style Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To seek to provide capital appreciation by assuming a higher level of
volatility than is ordinarily expected from Multi-Style Equity Fund by investing
in equity securities.
INVESTS IN: Primarily small capitalization and "emerging growth-type" U.S.
equity securities.
STRATEGY: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk. The Fund employed the investment
management services of two small capitalization stock fund managers with
distinct investment styles.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Aggressive Equity Fund Russell 2500/TM/ Index** Lipper(R) Small Co. Growth++
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1997 $13,507 $12,436 $12,074
1998 $13,644 $12,484 $11,997
- --------------------------------------------------------------------------------------------------
Total $37,151 $34,920 $34,071
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY FUND RUSSELL 2500(TM) INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,102 1.02% 1 Year $ 10,038 0.38%
Inception $ 13,664 16.87%(S) Inception $ 12,484 11.73%(S)
<CAPTION>
LIPPER(R) SMALL CO. GROWTH FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
-----------------------------------------------
<S> <C> <C>
1 Year $ 9,936 (0.64)%
Inception $ 11,997 9.53%(S)
</TABLE>
12 Aggressive Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Aggressive Equity Fund reflected a
total return of 1% as compared to the Russell 2500(TM) Index, which gained only
0.4%. The Fund's performance was also better than the average small cap fund
tracked by Lipper(R) Analytical Services which lost 0.6%. Good security
selection was the primary factor in achieving positive returns.
PORTFOLIO HIGHLIGHTS
Small capitalization stocks lagged large cap issues throughout 1998. The
market's defense against weakening trends in the global economy was to focus on
stocks believed to have better financial strength and growth. The Russell
2000(R) Index lost 2.5% for the year while the largest stocks in the Russell
1000(R) Index gained more than 40% - an unprecedented spread. Despite the
relative outperformance of growth-oriented funds in the fourth quarter, the
Aggressive Equity Fund produced good index-relative results for the year,
finishing slightly ahead of the Russell 2500 Index and well ahead of the average
small cap fund tracked by Lipper. The managers' security selection accounted for
the superior performance. Results were particularly good in the Consumer
Discretionary sector, led by retail holdings.
Investment style also had a strong influence on performance in the small cap
market. While small growth stocks were up slightly for the year, small value
stocks finished in negative territory. The Russell 2000(R) Growth Index rose
1.2% during the year, while the Russell 2000(R) Value Index fell 6.5%. The
Aggressive Equity Fund's performance was reflective of the good security
selection of its underlying managers. Particularly good results were produced by
the Fund's Consumer Discretionary holdings, specifically specialty retailers Ann
Taylor and Talbot's. The managers' stock picking was also effective in avoiding
some of the weakness in the Materials and Processing and the Financial Services
sectors.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Symbol Technologies, Inc. 1.6%
Bindley Western Industries, Inc. 1.3
Centex Corp. 1.0
IBP, Inc. 1.0
Arvin Industries, Inc. 1.0
Bergen Brunswig Corp. Class A 0.9
GATX Corp. 0.8
First American Financial Corp. 0.8
USG Corp. 0.8
PacifiCare Health Systems, Inc. Class B 0.8
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 17.6x
Portfolio Price/Book Ratio 2.59x
Market Capitalization - $-Weighted Average 1.38 Bil
Number of Holdings 301
MONEY MANAGERS STYLES
Rothchild Asset Management, Inc. Small Cap - Value
Westpeak Investment Advisors, L.P. Small Cap - Value
* The Fund commenced operations on January 2, 1997. Index comparison began
January 1, 1997.
** Russell 2500(TM) Index is composed of the bottom 500 stocks in the Russell
1000(R) Index and all the stocks in the Russell 2000(R) Index. The largest
security in this index has a market capitalization of about $1.4 billion.
The Russell 2500(TM) Index return reflects adjustments for income dividends
and capital gains distributions reinvested as of the ex-dividend dates.
++ Lipper(R) Small Co. Growth Funds Benchmark is the average total return for
the universe of funds within the Small Company Growth Funds investment
objective. The total return for the funds reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
(S) Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Aggressive Equity Fund 13
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- --------
COMMON STOCKS - 91.6%
AUTO AND TRANSPORTATION - 7.4%
Alaska Air Group, Inc. (a) 3,200 142
Arvin Industries, Inc. 6,000 250
Avis Rent A Car, Inc. (a) 4,800 115
Avondale Industries, Inc. (a) 600 17
Barnes Group, Inc. 3,600 105
CNF Transportation, Inc. 700 26
Coachmen Industries, Inc. 1,100 29
Covenant Transport, Inc. Class A (a) 800 14
Fleetwood Enterprises, Inc. 2,800 97
Hertz Corp. Class A 1,500 68
Hunt (JB) Transportation Services, Inc. 1,289 30
Landstar Systems, Inc. (a) 3,700 151
M.S. Carriers, Inc. (a) 3,200 103
Midwest Express Holdings, Inc. (a) 900 24
Modine Manufacturing Co. 3,100 112
MotivePower Industries, Inc. (a) 1,500 48
Myers Industries, Inc. 3,400 98
National R.V. Holdings, Inc. (a) 1,050 27
Navistar International Corp. (a) 4,700 134
Tower Automotive, Inc. (a) 3,000 75
Varlen Corp. 2,000 46
Winnebago Industries, Inc. 2,500 38
XTRA Corp. 1,900 79
----------
1,828
----------
CONSUMER DISCRETIONARY - 16.4%
Abacus Direct Corp. (a) 700 32
Acclaim Entertainment, Inc. (a) 6,100 75
Ames Department Stores, Inc. (a) 4,000 108
AnnTaylor Stores Corp. (a) 3,400 134
Authentic Fitness Corp. 2,600 47
Blair Corp. 1,000 22
Bob Evans Farms, Inc. 5,200 135
Bowne & Co., Inc. 5,200 93
Brinker International, Inc. (a) 5,200 150
Buckle, Inc. (The) (a) 1,200 29
Buffets, Inc. (a) 7,100 84
CEC Entertainment, Inc. (a) 600 17
Central Garden & Pet Co. (a) 900 13
Chris Craft Industries, Inc. (a) 618 30
CKE Restaurants, Inc. 1,331 39
Copart, Inc. (a) 2,600 85
Cox Radio, Inc. Class A (a) 1,500 63
Day Runner, Inc. (a) 2,000 29
Department 56, Inc. (a) 3,800 143
Discount Auto Parts, Inc. (a) 2,400 53
Eagle Hardware and Garden, Inc. (a) 3,400 110
Education Management Corp. (a) 1,400 33
Fingerhut Cos., Inc. 2,400 37
Foodmaker, Inc. (a) 6,600 146
Footstar, Inc. (a) 700 18
Furniture Brands International, Inc. (a) 3,800 104
Grey Advertising, Inc. 300 106
GTECH Holdings Corp. (a) 1,700 44
Haverty Furniture Co., Inc. 1,100 23
ITT Educational Services, Inc. (a) 1,200 41
La-Z-Boy Chair Co. 5,200 93
Level One Communications, Inc. (a) 800 28
Linens 'n Things, Inc. (a) 1,700 67
Media General, Inc. Class A 2,100 110
Merrill Corp. 2,400 46
Michaels Stores, Inc. (a) 5,800 105
Musicland Stores Corp. (a) 10,700 160
Ogden Corp. 3,800 95
Oshkosh B' Gosh, Inc. Class A 4,200 85
Outback Steakhouse, Inc. (a) 2,900 115
Plantronics, Inc. (a) 1,300 112
Playtex Products, Inc. (a) 2,800 45
Pulitzer Publishing Co. 1,300 113
Quicksilver, Inc. (a) 1,500 45
Recoton Corp. (a) 1,800 32
Regis Corp. 2,800 112
Ross Stores, Inc. 2,300 90
Ryan's Family Steak Houses, Inc. (a) 4,800 59
Scholastic Corp. (a) 700 37
Snyder Communications, Inc. (a) 500 17
Sonic Corp. (a) 2,250 54
StaffMark, Inc. (a) 2,000 45
Talbots, Inc. 4,000 126
Thomas Nelson, Inc. 2,100 28
Tractor Supply Co. (a) 1,600 38
United Stationers, Inc. (a) 2,600 70
WestPoint Stevens, Inc. (a) 500 16
Wet Seal, Inc. Class A (The) (a) 1,300 39
----------
4,025
----------
CONSUMER STAPLES - 4.5%
Canandaigua Brands Co., Inc.
Class A (a) 900 52
Coors (Adolph) Co. Class B 800 45
Dean Foods Co. 300 12
Dole Food Co., Inc. 1,000 30
Genovese Drug Stores, Inc. Class A 1,210 34
Hormel Foods Corp. 1,900 62
IBP, Inc. 8,600 250
Interstate Bakeries Corp. 800 21
J & J Snack Foods Corp. (a) 900 20
Michael Foods, Inc. 3,200 96
14 Agressive Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- ----------
Pilgrim's Pride Corp. 3,400 68
Robert Mondavi Corp. Class A (a) 700 30
Seaboard Corp. 80 34
SuperValu, Inc. 2,600 73
Tootsie Roll Industries, Inc. 800 31
Universal Corp. 3,700 130
Universal Foods Corp. 4,000 110
----------
1,098
----------
FINANCIAL SERVICES - 16.0%
Acceptance Insurance
Companies, Inc. (a) 2,300 46
Advanta Corp. Class A 1,600 21
Affiliated Computer Services, Inc.
Class A (a) 1,200 54
Alfa Corp. 1,800 43
Ambac Financial Group, Inc. 2,400 143
American Annuity Group, Inc. 900 21
Amplicon, Inc. 100 2
Area Bancshares Corp. 1,400 36
Banknorth Group, Inc. 1,100 41
Capital Re Corp. 3,900 78
Centura Banks, Inc. 200 15
CMAC Investment Corp. 400 18
CNB Bancshares, Inc. 2,415 113
Comdisco, Inc. 4,300 73
Commerce Bancshares, Inc. 1,050 44
CORT Business Services Corp. (a) 2,100 51
Cullen Frost Bankers, Inc. 900 49
Delphi Financial Group, Inc. (a) 1,291 68
Dime Bancorp, Inc. 4,800 127
DST Systems, Inc. (a) 2,500 143
E.W. Blanch Holdings, Inc. 2,000 95
Eaton Vance Corp. 700 15
Enhance Financial Services
Group, Inc. 4,000 120
Envoy Corp. (a) 600 35
FBL Financial Group, Inc. Class A 1,300 32
First American Financial Corp. 6,200 199
First Citizens BancShares, Inc. 300 27
First Republic Bank (a) 800 20
FirstFed Financial Corp. (a) 3,200 57
Foremost Corp. of America 2,000 42
Fremont General Corp. 2,800 69
Fund American Cos., Inc. 600 84
Gallagher (Arthur J.) & Co. 1,900 84
GATX Corp. 5,300 201
GBC Bancorp 3,000 77
Hamilton Bancorp, Inc. (a) 1,000 26
HSB Group, Inc. 2,250 92
Imperial Bancorp (a) 1,155 19
JSB Financial, Inc. 600 33
McGrath RentCorp 4,000 86
Mercantile Bankshares Corp. 3,000 115
Mississippi Valley Bancshares, Inc. 400 13
NAC Reinsurance Corp. 2,100 99
National Bancorp of Alaska, Inc. 2,400 81
National City Bancorporation (a) 2,600 66
National Western Life Insurance Co.
Class A (a) 300 35
Orion Capital Corp. 1,200 48
Pinnacle Banc Group, Inc. 600 17
Poe & Brown, Inc. 2,000 70
Riggs National Corp. 3,000 61
RLI Corp. 850 28
Rollins Truck Leasing Corp. 7,800 115
SEI Corp. 500 50
Silicon Valley Bancshares (a) 3,400 58
Simmons First National Corp. Class A 600 22
Stewart Information Services Corp. 1,700 99
TR Financial Corp. 2,400 94
USBANCORP, Inc. 2,400 47
Valley National Bancorp 3,275 92
Webster Financial Corp. 800 22
20th Century Industries 4,300 100
----------
3,931
----------
HEALTH CARE - 7.9%
Alpharma, Inc. Class A 3,100 108
AmeriSource Health Corp. Class A (a) 1,700 111
Bausch & Lomb, Inc. 1,000 60
Bergen Brunswig Corp. Class A 6,200 216
Bindley Western Industries, Inc. 6,533 321
Datascope Corp. (a) 2,700 62
Diagnostic Products Corp. 1,900 59
IDEC Pharmaceuticals Corp. (a) 500 24
Integrated Health Services, Inc. (a) 3,800 54
Medco Research, Inc. (a) 1,600 42
Mylan Laboratories, Inc. 3,900 123
PacifiCare Health Systems, Inc.
Class B (a) 2,500 199
PSS World Medical, Inc. (a) 4,900 111
Roberts Pharmaceutical Corp. (a) 5,500 120
United Payors & United
Providers, Inc. (a) 3,400 98
Universal Health Services, Inc.
Class B (a) 3,500 182
Veterinary Centers of
America, Inc. (a) 800 16
VISX, Inc. (a) 400 35
----------
1,941
----------
15 Agressive Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- ----------
INTEGRATED OILS - 0.3%
Tesoro Petroleum Corp. (a) 3,100 37
TransMontaigne, Inc. (a) 1,700 26
----------
63
----------
MATERIALS AND PROCESSING - 12.5%
ACX Technologies, Inc. (a) 3,000 40
Amcast Industrial Corp. 200 4
Ball Corp. 2,400 110
Boise Cascade Corp. 5,000 154
Bowater, Inc. 1,100 46
Centex Corp. 5,700 257
Cleveland-Cliffs, Inc. 1,400 56
Elcor Chemical Corp. 1,500 48
Geon Co. 600 14
Granite Construction, Inc. 3,350 112
Hughes Supply, Inc. 3,000 88
International Specialty
Products, Inc. (a) 5,400 73
Juno Lighting, Inc. 2,200 51
Lafarge Corp. 3,900 158
Louisiana Pacific Corp. 2,100 38
Martin Marietta Materials, Inc. 1,500 93
MAXXAM, Inc. (a) 2,100 120
Millennium Chemicals, Inc. 8,900 176
Mohawk Industries, Inc. (a) 3,650 153
NL Industries, Inc. 900 13
Nortek, Inc. (a) 1,300 36
Oneida, Ltd. 1,900 28
Precision Castparts Corp. 900 40
Quanex Corp. 1,700 38
Schulman (A.), Inc. 3,000 68
Scotts Co. (The) Class A (a) 2,200 85
Simpson Manufacturing Co., Inc. (a) 1,400 52
Spartech Corp. 2,300 51
SPS Technologies, Inc. (a) 400 23
Teleflex, Inc. 2,800 128
Texas Industries, Inc. 4,600 124
Tredegar Industries, Inc. 3,000 68
USG Corp. 3,900 199
Vulcan Materials Co. 1,000 132
Waters Corp. (a) 1,200 105
Webb (Del E.) Corp. 2,200 61
Wellman, Inc. 5,000 51
----------
3,093
----------
OTHER ENERGY - 1.7%
Barrett Resources Corp. (a) 2,200 53
BEC Energy 3,700 153
Penn Virginia Corp. 1,200 22
Seacor Holdings, Inc. (a) 2,900 143
Seitel, Inc. (a) 2,000 25
Tidewater, Inc. 1,300 30
----------
426
----------
PRODUCER DURABLES - 6.0%
AFC Cable Systems, Inc. (a) 1,375 46
Astec Industries, Inc. (a) 2,600 144
Cordant Technologies, Inc. 2,200 83
CTS Corp. 2,400 104
Detroit Diesel Corp. (a) 300 6
Ducommun, Inc. (a) 3,450 48
Esterline Corp. (a) 3,800 83
GenCorp, Inc. 1,900 47
Gleason Corp. 2,100 38
Kaufman & Broad Home Corp. 4,200 121
M.D.C. Holdings, Inc. 700 15
Miller (Herman), Inc. 1,800 48
Mine Safety Appliances Co. 1,600 106
Oak Industries, Inc. (a) 2,400 84
Optical Coating Laboratory, Inc. 1,500 38
Plexus Corp. (a) 600 20
Ryland Group, Inc. 2,100 61
Smith (A.O.) Corp. 900 22
Superior TeleCom, Inc. 1,100 52
Terex Corp. (a) 2,600 74
U.S. Home Corp. (a) 2,800 93
York International Corp. 3,500 143
----------
1,476
----------
TECHNOLOGY - 11.5%
Actel Corp. (a) 2,400 48
American Management
Systems, Inc. (a) 900 36
Arrow Electronics, Inc. (a) 3,700 99
Aspect Development, Inc. (a) 1,200 54
Autodesk, Inc. 3,200 135
Avant! Corp. (a) 1,900 30
Checkpoint Systems, Inc. (a) 1,200 15
CHS Electronics, Inc. (a) 6,700 113
Ciber, Inc. (a) 600 17
Comverse Technology, Inc. (a) 1,000 71
Digi International, Inc. (a) 6,500 71
Electro Rent Corp. (a) 3,400 54
Gerber Scientific, Inc. 1,500 36
Harmon Industries, Inc. 1,500 35
Inso Corp. (a) 2,700 68
Leasing Solutions, Inc. (a) 1,100 4
MAPICS, Inc. (a) 3,400 56
Marshall Industries (a) 800 20
16 Agressive Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
-------- ----------
Mercury Interactive Corp. (a) 800 51
Micron Electronics, Inc. (a) 2,800 48
National Computer Systems, Inc. 3,000 109
NeoMagic Corp. (a) 3,600 79
PMC - Sierra, Inc. (a) 400 25
Policy Management Systems Corp. (a) 2,800 141
Progress Software Corp. (a) 2,000 68
QLogic Corp. (a) 900 117
Safeguard Scientifics, Inc. (a) 1,100 30
Sanmina Corp. (a) 700 44
SDL, Inc. (a) 1,900 75
Semtech Corp. (a) 2,100 75
Siebel Systems, Inc. (a) 2,700 91
Sterling Software, Inc. (a) 5,500 149
Structural Dynamics
Research Corp. (a) 1,000 20
Symbol Technologies, Inc. 6,100 390
Synopsys, Inc. (a) 2,400 130
Telxon Corp. 300 4
Whittman-Hart, Inc. (a) 2,000 55
Xircom, Inc. (a) 2,700 92
Zebra Technologies Corp. Class A (a) 3,100 89
----------
2,844
----------
UTILITIES - 7.4%
Cellular Communications
International, Inc. (a) 750 51
Eastern Utilities Associates 1,100 31
Energen Corp. 7,900 154
Energy East Corp. 2,400 136
Minnesota Power & Light Co. 3,000 132
National Fuel & Gas Co. 2,100 95
NIPSCO Industries, Inc. 4,300 131
NUI Corp. 1,800 48
OGE Energy Corp. 4,700 136
Rochester Gas & Electric Corp. 2,800 88
Southwest Gas Corp. 2,000 54
TNP Enterprises, Inc. 3,200 121
UGI Corp. 3,400 81
United Illuminating Co. 1,400 72
United States Cellular Corp. (a) 3,600 137
UtiliCorp United, Inc. 4,700 172
Western Resources, Inc. 2,500 83
WICOR, Inc. 4,400 96
----------
1,818
----------
TOTAL COMMON STOCKS
(cost $19,775) 22,543
----------
SHORT-TERM INVESTMENTS - 8.5%
Federated Prime Cash
Obligation Fund (b) 1,939 1,939
United States Treasury Notes (c)
5.875% due 03/31/99 50 50
United States Treasury Notes (c)
6.250% due 03/31/99 100
100 ----------
TOTAL SHORT-TERM INVESTMENTS
(cost $2,090) 2,089
----------
TOTAL INVESTMENTS - 100.1%
(identified cost $21,865)(d) 24,632
OTHER ASSETS AND LIABILITIES,
NET - (0.1%) (25)
----------
NET ASSETS - 100.0% 24,607
==========
(a) Nonincome-producing security
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures contracts purchased by the
Fund.
(d) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements
17 Aggressive Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
CONTRACTS (000)
----------- ----------------
FUTURES CONTRACTS
(Notes 2 and 3)
S&P 500 Index
expiration date 03/99 4 $ 62
S&P 400 Midcap Index
expiration date 03/99 3 60
----------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 122
==========
((S)) At December 31, 1998, United States Treasury Notes valued at $150 were
held as collateral in connection with futures contracts purchased by the
Fund.
The accompanying notes are an integral part of the financial statements.
18 Aggressive Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands (except per-share amounts) December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost $21,865)(Note 2) ................................. $ 24,632
Receivables:
Dividends and interest ................................................................. 31
Investments sold ....................................................................... 1
Fund shares sold ....................................................................... 13
Daily variation margin on futures contracts (Notes 2 and 3) ............................ 20
Deferred organization expenses (Note 2) ................................................. 4
-----------
Total Assets ......................................................................... 24,701
LIABILITIES
Payables:
Accrued fees to affiliates (Note 4) ...................................... $ 27
Other accrued expenses ................................................... 67
-----------
Total Liabilities .................................................................... 94
-----------
NET ASSETS .............................................................................. $ 24,607
===========
NET ASSETS CONSIST OF:
Undistributed net investment income ..................................................... $ 14
Accumulated distributions in excess of net realized gain ................................ (189)
Unrealized appreciation (depreciation) on:
Investments ............................................................................ 2,767
Futures contracts ...................................................................... 122
Shares of beneficial interest ........................................................... 19
Additional paid-in capital .............................................................. 21,874
-----------
NET ASSETS .............................................................................. $ 24,607
===========
NET ASSET VALUE, offering and redemption price per share:
($24,606,713 divided by 1,937,602 shares of $.01 par value
shares of beneficial interest outstanding) ........................................... $ 12.70
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Aggressive Equity Fund 19
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31, 1998
INVESTMENT INCOME:
<S> <C> <C>
Dividends .............................................................................. $ 280
Interest ............................................................................... 3
-----------
Total Investment Income .............................................................. 283
EXPENSES (Notes 2 and 4):
Advisory fees ............................................................ $ 187
Custodian fees ........................................................... 89
Transfer agent fees ...................................................... 13
Professional fees ........................................................ 9
Registration fees ........................................................ 4
Trustees' fees ........................................................... 10
Amortization of deferred organization expenses ........................... 1
Miscellaneous ............................................................ 15
-----------
Expenses before reductions ............................................... 328
Expense reductions (Note 4) ............................................. (82)
-----------
Expenses, net ....................................................................... 246
-----------
Net investment income .................................................................. 37
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments .............................................................. (258)
Futures contracts ........................................................ 78 (180)
-----------
Net change in unrealized appreciation or depreciation of:
Investments .............................................................. 251
Futures contracts ........................................................ 116 367
----------- -----------
Net gain (loss) on investments ......................................................... 187
-----------
Net increase (decrease) in net assets resulting from operations ....................... $ 224
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
20 Aggressive Equity Fund
<PAGE>
AGGRESSIVE EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands Year Ended December 31,
1998 1997*
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ......................................................... $ 37 $ 48
Net realized gain (loss) ..................................................... (180) 1,099
Net change in unrealized appreciation or depreciation ......................... 367 2,522
-------- --------
Net increase (decrease) in net assets resulting from operations ............. 224 3,669
-------- --------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ......................................................... (26) (45)
Net realized gain on investments .............................................. (918) --
In excess of net realized gain on investments ................................. (189) --
-------- --------
Total Distributions to Shareholders ......................................... (1,133) (45)
-------- --------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund share transactions (Note 5) .. 10,144 11,723
-------- --------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .................................... 9,235 15,347
NET ASSETS
Beginning of period ........................................................... 15,372 25(a)
-------- --------
End of period (including undistributed net investment income
of $14 and $3, respectively) ............................................... $ 24,607 $ 15,372
======== ========
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Original capital.
The accompanying notes are an integral part of the financial statements.
Aggressive Equity Fund 21
<PAGE>
AGGRESSIVE EQUITY FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997*
---------- ----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................................... $ 13.45 $ 10.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (c) ............................................. .02 .04
Net realized and unrealized gain (loss) on investments ................. .13 3.45
---------- ----------
Total Income From Investment Operations .............................. .15 3.49
---------- ----------
DISTRIBUTIONS:
Net investment income .................................................. (.02) (.04)
Net realized gain on investments ....................................... (.73) --
In excess of net realized gain on investments .......................... (.15) --
---------- ----------
Total Distributions .................................................. (.90) (.04)
---------- ----------
NET ASSET VALUE, END OF PERIOD .......................................... $ 12.70 $ 13.45
========== ==========
TOTAL RETURN (%)(a) .................................................... 1.02 35.07
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) .............................. 24,607 15,372
Ratios to average net assets (%)(b):
Operating expenses, net .............................................. 1.25 1.25
Operating expenses, gross ............................................ 1.67 2.22
Net investment income ................................................ .19 .39
Portfolio turnover rate (%)(b) ........................................ 79.88 91.56
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1997 are annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
22 Aggressive Equity Fund
<PAGE>
NON-US FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To provide favorable total return and additional diversification for
US investors by investing primarily in equity and fixed-income securities of
non-US companies, and securities issued by non-US governments.
INVESTS IN: Primarily the equity securities of non-US companies in developed
foreign markets.
STRATEGY: The Fund uses a multi-manager strategy intended to achieve higher
returns than its benchmark index with moderate risk by employing the investment
management services of three managers with separate and distinct investment
approaches. The Fund's primary source of added value is intended to be stock
selection with only moderate country allocations relative to the index to
capture the diversification benefits of international investment in an asset
allocation context.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dates Non-US Fund Salomon Smith Barney BMI World ex-US++++ Lipper(R) International++
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1997 $10,030 $10,261 $10,513
1998 $11,330 $12,030 $11,870
- ----------------------------------------------------------------------------------------------------------
Total $31,360 $32,291 $32,383
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NON-US FUND LIPPER(R) INTERNATIONAL FUNDS BENCHMARK
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ----------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 11,296 12.96% 1 Year $ 11,291 12.91%
Inception $ 11,330 6.47%(S) Inception $ 11,870 8.95%(S)
<CAPTION>
SALOMON SMITH BARNEY BROAD MARKET INDEX (BMI)
EX-US++++
PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN
--------------------------------------------------
<S> <C> <C>
1 Year $ 11,724 17.24%
Inception $ 12,030 9.68%(S)
</TABLE>
24 Non-US Fund
<PAGE>
NON-US FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Non-US Fund had a total return of 13%
as compared to the Salomon Smith Barney Broad Market Index ex-US, which gained
17.2% for the year. The Fund's shortfall to the benchmark was primarily due to
its underweighting in large capitalization stocks during a year in which large
caps outperformed globally.
PORTFOLIO HIGHLIGHTS
Dominant trends in the non-US developed markets were similar to those evident in
the US market. Investors showed a strong preference for larger cap issues as a
defensive investment amid fears of deteriorating global economic fundamentals.
For this reason, growth-oriented investments fared better. On the surface,
international market performance looked quite similar to 1997, with continental
European markets the strongest performers. The European Monetary Union continued
to foster optimism in the stock market. The United Kingdom performed well, but
lagged the majority of its European Union neighbors. Asian markets posted strong
fourth quarter gains due to strong currency appreciation, but were generally
poor performers during the year.
Underweightings in large cap issues and growth stocks resulted in the Fund
trailing the benchmark. The Fund's managers struggled for much of the year with
security selection, with weak results from Japanese stocks plaguing the Fund
through the first three quarters. Lack of exposure to large cap, growth stock in
continental European markets had the greatest impact late in the year.
Performance also reflected the Fund's limited exposure to high valuation, growth
stocks over the course of the year, as J.P. Morgan's valuation disciplines
discouraged their purchase. Despite these setbacks, the Fund finished the year
ahead of the average international fund tracked by Lipper, which gained 12.9%.
TOP TEN EQUITY HOLDINGS
(as a percent of Total Investments) December 31, 1998
Telecom Italia SPA (Italy) 1.9%
Lloyds TSB Group PLC (United Kingdom) 1.8
Nestle SA (Regd) (Switzerland) 1.7
Vivendi (France) 1.4
Roche Holdings Genusscheine AG NPV (Switzerland) 1.4
Glaxo Wellcome PLC (United Kingdom) 1.3
British Petroleum Co. PLC (United Kingdom) 1.3
Zurich Allied AG (Switzerland) 1.2
Takeda Chemical Industries (Japan) 1.1
Nippon Telegraph & Telephone Corp. (Japan) 1.1
PORTFOLIO CHARACTERISTICS
December 31, 1998
Current P/E Ratio 25.92
Portfolio Price/Book Ratio 2.69
Market Capitalization - $-Weighted Average 34.3 Bil
Number of Holdings 199
MONEY MANAGERS STYLES
J.P. Morgan Investment Management, Inc. Growth
Oechsle International Advisors Value
The Boston Company Asset Management, Inc. Market-Oriented
* The Fund commenced operations on January 2, 1997. Index comparison began
January 1, 1997.
** Lipper(R) International Funds Benchmark is the average total return for the
universe of funds within the International Funds investment objective. The
total return for the funds reflects adjustments for income dividends and
capital gains distributions reinvested as of the ex-dividend dates.
++++ Salomon Smith Barney BMI Index ex-US is a comprehensive float-weighted
equity index consisting of every company with an investable market
capitalization of over $100 million in 22 countries. This Index has broader
representation than the MSCI EAFE Index. However, 10 years of historical
performance information is not available because it was constructed on June
30, 1989.
(S) Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Non-US Fund 25
<PAGE>
NON-US FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
--------- ----------
COMMON STOCKS - 91.0%
AUSTRALIA - 1.9%
AMP, Ltd. (a) 3,980 50
Australia & New Zealand Bank
Group, Ltd. 5,400 35
Brambles Industries, Ltd. 2,517 61
Broken Hill Proprietary Co. 3,800 28
Lend Lease Corp. 3,600 49
National Australia Bank, Ltd. 4,100 62
Pioneer International, Ltd. 13,128 28
Telstra Corp., Ltd. NPV (a) 14,400 67
Western Mining Corp., Ltd. 9,800 30
----------
410
----------
AUSTRIA - 0.6%
Bank Austria AG 2,500 127
----------
BELGIUM - 0.9%
Delhaize-Le Lion NPV 1,410 124
PetroFina SA NPV 135 62
----------
186
----------
DENMARK - 1.2%
Danisco 3,000 163
Great Nordic Store Nord A/S 2,400 84
----------
247
----------
FINLAND - 1.0%
Merita, Ltd. Series A 11,800 75
Rautaruukki OY 8,800 57
Stora Enso Oyj Class A (a) 8,300 90
----------
222
----------
FRANCE - 11.3%
AXA - UAP 1,132 164
Canal Plus 225 61
Carrefour SA 248 187
Castorama Dubois 320 73
Cie de St. Gobain 536 76
Elf Aquitaine SA 1,130 131
France Telecom SA 1,100 87
Groupe Danone 300 86
Lagardere Groupe (Regd) 2,252 96
Paribas (a) 1,855 161
Rhodia SA (a) 3,792 58
Rhone-Poulenc SA Class A - ADR 1,500 77
Sanofi SA 793 130
SGS Thomson Microelectronics (a) 2,700 212
Societe Generale 700 113
Suez Lyonnaise Des Eaux 400 82
Thomson-CSF 2,200 94
Total Co. SA Class B 2,050 208
Union des Assurances Federales 200 27
Vivendi 1,132 294
----------
2,417
----------
GERMANY - 8.1%
Allianz AG (Regd) 510 187
BASF AG 1,200 46
Bayerische Vereinsbank AG 1,700 133
Bilfinger & Berger BAU AG 310 8
Continental AG 1,494 41
Deutsche Lufthansa AG 1,873 41
Dresdner Bank AG 2,910 122
Karstadt AG 200 104
Merck KGAA 500 23
Muenchener Rueckversicherungs-Gesellschaft AG(a) 426 206
ProSieben Media AG - ADR (a) 40 1
RWE AG 3,100 170
SAP AG 200 86
Schering AG 790 99
SGL Carbon AG 500 30
Siemens AG 1,640 106
SKW Trostberg AG 940 24
Veba AG 2,792 168
Volkswagen AG 1,866 149
----------
1,744
----------
HONG KONG - 2.0%
CLP Holdings, Ltd. 24,500 122
Hutchison Whampoa, Ltd. 14,000 99
New World Development Co., Ltd. 21,000 53
Sun Hung Kai Properties, Ltd. 22,000 160
----------
434
----------
IRELAND - 0.2%
Greencore Group PLC 5,100 24
Irish Life PLC 2,000 18
----------
42
----------
ITALY - 4.9%
Assicurazioni Generali SPA 5,200 217
Banco Fideuram SPA 17,900 128
Ente Nazionale Idrocarburi SPA
(Regd) 27,600 180
Istituto Mobiliare Italiano SPA (a) 4,300 76
Mediolanum SPA (a) 7,500 56
26 Non-US fund
<PAGE>
NON-US FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
---------- ----------
Telecom Italia SPA 64,200 403
----------
1,060
----------
JAPAN - 19.3%
Acom Co., Ltd. 1,600 103
Asahi Bank, Ltd. 37,000 135
Bridgestone Tire Corp. 3,000 68
Canon, Inc. 2,000 43
Chichibu Onoda Cement Corp. 13,000 33
Dainippon Ink and Chemical, Inc. 16,000 44
DDI Corp. 30 111
Ebara Corp. 7,000 60
Fanuc Co. 2,400 82
Fujitsu, Ltd. 10,000 133
Honda Motor Co., Ltd. 5,000 164
Ito-Yokado Co., Ltd. 2,000 140
Japan Tobacco, Inc. 12 120
Kawasaki Steel Corp. 47,000 70
Kyocera Corp. 1,300 69
Minebea Co., Ltd. 6,000 69
Mitsubishi Chemical 43,000 91
Mitsubishi Corp. 12,000 69
Mitsubishi Estate Co., Ltd. 6,000 54
Mitsubishi Trust & Banking 2,000 13
Mitsui Trust & Banking Co., Ltd. 10,000 11
Nichiei Co., Ltd. 1,200 96
Nippon Telegraph & Telephone Corp. 29 224
Nippon Yusen 23,000 73
Nishimatsu Construction 16,000 93
Nomura Securities Co., Ltd. 5,000 44
Osaka Gas Co. 13,000 45
Pioneer Electronics Corp. 2,000 34
Ricoh Co., Ltd. 7,000 65
Rohm Co. 2,000 182
Sanwa Bank 1,000 8
Sekisui Chemical Co., Ltd. 9,000 61
Sony Corp. 2,100 153
Sony Music Entertainment, Inc. 3,300 152
Sumitomo Trust & Banking 10,000 27
Suzuki Motor Corp. 5,000 59
Takashimaya Co. 6,000 50
Takeda Chemical Industries 6,000 231
Takefuji Corp. 1,400 102
Tokyo Electric Power 3,400 84
Tokyo Steel Manufacturing 8,000 40
Tostem Corp. 6,000 118
Toyota Motor Corp. 8,000 216
West Japan Railway Co. 29 127
Yamanouchi Pharmaceutical 5,000 160
----------
4,126
----------
MALAYSIA - 0.3% (e)
Genting Berhad 16,000 24
IOI Corporated Berhad 81,000 33
----------
57
----------
NETHERLANDS - 5.0%
ING Groep NV 1,783 109
Koninklijke KPN NV 2,834 142
Koninklijke Numico NV 2,257 108
Laurus NV (a) 923 23
Philips Electronics NV 2,090 140
Royal Dutch Petroleum Co. 2,600 129
TNT Post Group NV 3,220 104
Unilever NV 1,680 144
Vedior 2,401 47
Vendex NV (a) 1,319 32
Wolters Kluwer CVA 404 86
----------
1,064
----------
NEW ZEALAND - 0.1%
Telecom Corp. of New Zealand, Ltd. 6,300 27
NPV ----------
NORWAY - 0.3%
Nycomed Amersham PLC 8,000 56
----------
PORTUGAL - 0.3%
Bco Pinto & Sotto Mayor SA 3,616 69
----------
SINGAPORE - 0.7%
City Developments 15,000 65
Singapore Press Holdings, Ltd. (a) 5,400 59
Singapore Press Holdings, Ltd. (Alien Market) 2,000 22
----------
146
----------
SPAIN - 2.1%
ACS, Actividades de Construccion y Servicios SA 1,600 63
Banco Bilbao Vizcaya SA 6,600 103
Iberdrola SA 7,300 136
Telefonica SA 3,200 142
Telefonica SA 1999 Rights (a) 3,200 4
----------
448
----------
Non-US Fund 27
<PAGE>
NON-US FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
MARKET
NUMBER VALUE
OF (000)
SHARES $
---------- ----------
SWEDEN - 3.2%
ABB AB Series A 10,700 114
Astra AB Series A 3,800 77
Autoliv, Inc. 4,320 155
Gambro AB Series B (a) 6,050 66
SKF AB Series A 1,300 15
Svenska Handelsbank Series B 2,200 84
Telefonaktiebolaget Ericsson (LM) Series B 7,800 185
----------
696
----------
SWITZERLAND - 7.8%
Holderbank Financiere Glarus AG (BR) 72 85
Nestle SA (Regd) 170 370
Novartis AG (Regd) 110 216
Roche Holdings Genusscheine AG NPV 24 293
Schweiz Ruckversicher (Regd) 44 115
Swisscom AG (Regd)(a) 400 167
UBS AG (a) 600 184
Zurich Allied AG (a) 330 245
----------
1,675
----------
UNITED KINGDOM - 19.8%
Allied Zurich AG (a) 4,750 71
Barclays Bank PLC 3,000 65
Bass PLC 3,485 50
Billiton PLC (a) 35,200 70
British Airways PLC 5,500 38
British American Tobacco PLC 2,950 26
British Petroleum Co. PLC 18,363 273
British Sky Broadcasting Group PLC 6,000 45
British Telecom PLC 14,600 221
Burmah Castrol PLC 700 10
Cable & Wireless PLC 15,200 186
Cadbury Schweppes PLC 4,100 70
Compass Group PLC 6,800 78
Diageo PLC 8,842 98
Glaxo Wellcome PLC 8,300 286
Glynwed International PLC 14,800 41
Great University Stores PLC 7,000 74
Hays 2,000 18
HSBC Holdings PLC 4,600 127
Kingfisher PLC 13,400 145
Lloyds TSB Group PLC 27,400 390
LucasVarity PLC 21,400 71
MEPC PLC 4,543 30
MFI Furniture Group PLC 21,684 13
National Power PLC 10,339 89
Northern Rock PLC 6,000 56
Nycomed Amersham PLC 3,619 25
Ocean Group PLC (a) 2,700 34
Pearson PLC 3,500 70
Pilkington Brothers PLC 29,200 29
PowerGen PLC (a) 4,000 53
Prudential Corp. PLC 11,400 174
Racal Electronics PLC 11,300 65
Reed International 3,500 28
RMC Group PLC 3,200 44
Royal & Sun Alliance Insurance Group PLC 14,000 114
Royal Bank of Scotland Group PLC 4,700 77
Sainsbury (J.) PLC 12,100 98
Shell Transportation & Trading PLC (Regd) 5,300 33
Siebe PLC 8,000 31
Smith & Nephew PLC 7,000 21
SmithKline Beecham PLC 13,500 187
Tomkins PLC 16,500 78
Unilever PLC 7,800 88
Vickers PLC 5,333 16
Vodafone Group PLC 9,000 146
Zeneca Group PLC 4,300 188
----------
4,240
----------
TOTAL COMMON STOCKS
(cost $17,649) 19,493
----------
PREFERRED STOCKS - 0.7%
AUSTRALIA - 0.3%
News Corp., Ltd. 11,200 68
----------
GERMANY - 0.1%
ProSieben Media AG NV 226 10
Volkswagen AG 331 17
----------
27
----------
JAPAN - 0.2%
Sanwa International Financial
Bermuda Trust (conv.) 6,000,000 41
----------
LUXEMBOURG - 0.1%
AB International Cayman Trust Units
(conv.) 2,000,000 15
----------
TOTAL PREFERRED STOCKS
(cost $157) 151
----------
28 Non-US Fund
<PAGE>
NON-US FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
--------- ---------
SHORT-TERM INVESTMENTS - 7.1%
UNITED STATES - 7.1%
Federated Prime Cash Obligation Fund (b) 1,327 1,327
United States Treasury Notes
6.250% due 03/31/99 (c) 200 201
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,528) 1,528
---------
TOTAL INVESTMENTS - 98.8%
(identified cost $19,334)(d) 21,172
---------
OTHER ASSETS AND LIABILITIES,
NET - 1.2% 248
---------
21,420
=========
NET ASSETS - 100.0%
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral in connection with futures contracts purchased by the
Fund.
(d) See Note 2 for federal income tax information.
(e) The securities have been determined to be illiquid because they are
restricted or because there is an exceptionally low trading volume in their
primary trading market at December 31, 1998.
Abbreviations:
ADR - American Depositary Receipt
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
UNREALIZED
NUMBER APPRECIATION
OF (DEPRECIATION)
SHARES (000)
---------- --------------
FUTURES CONTRACTS
(Notes 2 and 3)
FTSE - 100 Index (UK)
expiration date 03/99 5 $ 29
TOPIX Index (Japan)
expiration date 03/99 6 (25)
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 4
==============
(S) At December 31, 1998, United States Treasury Notes valued at $201 were
held as collateral in connection with futures contracts purchased by the
Fund.
The accompanying notes are an integral part of the financial statements.
Non-US Fund 29
<PAGE>
NON-US FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
Market
% of Value
Net (000)
Industry Diversification Assets $
- ----------------------------------- -------- --------
Auto & Transportation 6.0% 1,287
Consumer Discretionary 15.4 3,307
Consumer Staples 7.1 1,517
Financial Services 21.0 4,487
Health Care 9.6 2,058
Integrated Oils 3.1 667
Materials & Processing 9.0 1,922
Miscellaneous 0.5 116
Other Energy 2.6 556
Producer Durables 3.0 640
Technology 4.6 980
Utilities 9.8 2,107
Short-Term Investments 7.1 1,528
-------- -------
Total Investments 98.8 21,172
Other Assets and Liabilities, Net 1.2 248
-------- -------
NET ASSETS 100.0% 21,420
======== =======
Market
% of Value
Net (000)
Geographic Diversification Assets $
- ----------------------------------- --------- --------
Europe 47.1% 10,095
Japan 19.5 4,167
United Kingdom 19.8 4,240
Pacific Basin 5.3 1,142
United States (Short-Term
Investments) 7.1 1,528
-------- -------
Total Investments 98.8 21,172
Other Assets and Liabilities, Net 1.2 248
-------- -------
NET ASSETS 100.0% 21,420
======== =======
30 Non-US Fund
<PAGE>
NON-US FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
<S> <C>
ASSETS
Investments at market (identified cost $19,334)(Note 2) ....................... $ 21,172
Foreign currency holdings (identified cost $218) .............................. 217
Receivables:
Dividends and interest ........................................................ 22
Investments sold .............................................................. 1
Fund shares sold .............................................................. 41
Foreign taxes recoverable ..................................................... 21
From Manager .................................................................. 16
Deferred organization expenses (Note 2) ....................................... 4
-------
Total Assets ................................................................ 21,494
LIABILITIES
Payables:
Investments purchased ............................................. $ 1
Accrued fees to affiliates (Note 4) .............................. 7
Other accrued expenses ............................................ 65
Daily variation margin on futures contracts
(Notes 2 and 3) .................................................. 1
----
Total Liabilities ........................................................... 74
-------
NET ASSETS ..................................................................... $21,420
=======
NET ASSETS CONSIST OF:
Undistributed net investment income ............................................ $ 133
Accumulated net realized gain (loss) .......................................... (709)
Unrealized appreciation (depreciation) on:
Investments ................................................................... 1,838
Futures contracts ............................................................. 4
Shares of beneficial interest .................................................. 19
Additional paid-in capital ..................................................... 20,135
-------
NET ASSETS ..................................................................... $21,420
=======
NET ASSET VALUE, offering and redemption price per share:
($21,419,831 divided by 1,931,901 shares of $.01 par value
shares of beneficial interest outstanding) ................................. $ 11.09
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
Non-US Fund 31
<PAGE>
NON-US FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividends ................................................................... $ 298
Interest .................................................................... 12
Less foreign taxes withheld ................................................. (25)
------
Total Investment Income ................................................... 285
EXPENSES (Notes 2 and 4):
Advisory fees .................................................... $ 131
Custodian fees ................................................... 151
Transfer agent fees .............................................. 6
Professional fees ................................................ 11
Registration fees ................................................ 4
Trustees' fees ................................................... 10
Amortization of deferred organization expenses ................... 1
Miscellaneous .................................................... 12
------
Expenses before reductions ....................................... 326
Expense reductions (Note 4) ..................................... (147)
------
Expenses, net ............................................................. 179
------
Net investment income ........................................................ 106
------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from:
Investments ...................................................... (390)
Futures contracts ................................................ (50)
Foreign currency-related transactions ............................ (6) (446)
------
Net change in unrealized appreciation or depreciation of:
Investments ...................................................... 1,832
Futures contracts ................................................ 4
Foreign currency-related transactions ............................ 4 1,840
------ ------
Net gain (loss) on investments ............................................... 1,394
------
Net increase (decrease) in net assets resulting from operations .............. $1,500
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
32 Non-US Fund
<PAGE>
NON-US FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31,
----------------------------
1998 1997*
----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ......................................................... $ 106 $ 63
Net realized gain (loss) ..................................................... (446) (112)
Net change in unrealized appreciation or depreciation ......................... 1,840 2
------- ------
Net increase (decrease) in net assets resulting from operations ............. 1,500 (47)
------- ------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ......................................................... (146) --
In excess of net realized gain on investments ................................. (41) --
------- ------
Total Distributions to Shareholders ......................................... (187) --
------- ------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund share transactions (Note 5) .. 13,231 6,898
------- ------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS .................................... 14,544 6,851
NET ASSETS
Beginning of period ........................................................... 6,876 25(a)
------- ------
End of period (including undistributed net investment income
of $133 and $84, respectively) ............................................. $21,420 $6,876
======= ======
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Original capital.
The accompanying notes are an integral part of the financial statements.
Non-US Fund 33
<PAGE>
NON-US FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997*
----------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....................... $ 10.03 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (c) ................................ .08 .09
Net realized and unrealized gain (loss) on investments .... 1.21 (.06)
------- ------
Total Income From Investment Operations ................. 1.29 .03
------- ------
DISTRIBUTIONS:
Net investment income ..................................... (.18) --
In excess of net realized gain on investments ............. (.05) --
------- ------
Total Distributions ..................................... (.23) --
------- ------
NET ASSET VALUE, END OF PERIOD ............................. $ 11.09 $10.03
======= ======
TOTAL RETURN (%)(a) ....................................... 12.96 .30
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) ................. 21,420 6,876
Ratios to average net assets (%)(b):
Operating expenses, net ................................. 1.30 1.30
Operating expenses, gross ............................... 2.37 3.60
Net investment income ................................... .77 .98
Portfolio turnover rate (%)(b) ........................... 50.36 68.54
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1997 are annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
34 Non-US Fund
<PAGE>
CORE BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
OBJECTIVE: To maximize total return, through capital appreciation and income by
assuming a level of volatility consistent with the broad fixed-income market, by
investing in fixed-income securities.
INVESTS IN: Fixed-income securities.
STRATEGY: The Fund uses a multi-style, multi-manager strategy and employed two
managers with distinct approaches to managing portfolios of intermediate-
maturity, investment-grade fixed income securities.
[LINE GRAPH APPEARS HERE]
Dates Core Bond Fund LB Aggregate**
Inception* $10,000 $10,000
1997 $10,973 $10,966
1998 $11,784 $11,918
- --------------------------------------------------------
Total $32,757 $32,884
========================================================
<TABLE>
<CAPTION>
CORE BOND FUND LEHMAN BROTHERS AGGREGATE BOND INDEX
PERIODS ENDED GROWTH OF TOTAL PERIODS ENDED GROWTH OF TOTAL
12/31/98 $10,000 RETURN 12/31/98 $10,000 RETURN
- ------------- ----------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,738 7.38% 1 Year $ 10,869 8.69%
Inception $ 11,784 8.58%(S) Inception $ 11,918 9.17%(S)
</TABLE>
36 Core Bond Fund
<PAGE>
CORE BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1998 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1998, the Core Bond Fund shares reflected a
total return of 7.4%, as compared to the Lehman Brothers Aggregate Bond Index,
which gained 8.7%. The Index outperformed primarily due to the Fund's emphasis
on yield sectors, which lagged treasuries in virtually all categories after
severe credit spread widening during the third quarter.
PORTFOLIO HIGHLIGHTS
Bonds produced returns slightly above long-term expectations in 1998. Falling
yields and a flight to quality resulted in the outperformance of US treasuries
relative to other sectors of the US bond market during the year. Spread sectors,
including corporate bonds and mortgage- and asset-backed securities lagged due
to severe credit spread widening during the third quarter. After trending toward
historic lows over the past few years, credit spreads widened to their largest
level in two decades, driven by increasing fears of a global recession. The
Federal Reserve Board intervened during the third and fourth quarters, applying
three separate interest rate cuts, which added a degree of liquidity to the
market. Although this helped restore confidence, the subsequent narrowing of
spreads failed to fully offset third quarter widening.
Given their emphasis on spread sectors to add value, the unexpectedly sudden and
dramatic widening of credit spreads during the third quarter eroded the
performance of most bond funds. The Core Bond Fund, which was overweighted in
lower quality corporates and mortgage-backed securities relative to the Lehman
Aggregate Bond Index, also found this to be true. Effective security selection
and yield curve strategies helped offset some of the impact on the fund's
performance since the fund also held longer duration securities than the Index
for much of the year.
TOP TEN ISSUERS
(as a percent of Total Investments) December 31, 1998
United States Treasury 20.4%
Government National Mortgage Association 15.4
Federal Home Loan Mortgage Corp. 9.9
Federal National Mortgage Association 7.9
Republic of New York Corp. 1.9
Philip Morris Cos., Inc. 1.7
Salomon Smith Barney Holdings, Inc. 1.6
DDTE Capital Corp. 1.3
Columbia HCA Healthcare Corp. 1.3
Philippines, Republic of 1.1
PORTFOLIO CHARACTERISTICS
December 31, 1998
Weighted Average Quality Diversification AA2
Weighted Average Years-to-Maturity 9.7 Years
Weighted Average Duration 4.9 Years
Current Yield (SEC 30-day standardized) 5.3%
Number of Issues 187
Number of Issuers 152
MONEY MANAGERS STYLES
Pacific Investment Management Co. Broad Market-Sector
Rotation
Standish, Ayer & Wood, Inc. Broad Market-Sector
Rotation
* The Fund commenced operations on January 2, 1997. Index comparison began
January 1, 1997.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
(S) Annualized.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Core Bond Fund 37
<PAGE>
CORE BOND FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
LONG-TERM INVESTMENTS - 99.1%
ASSET-BACKED SECURITIES - 2.3%
Delta Funding Home Equity Loan Trust
Series 1998-4 Class A4F
6.190% due 02/15/31 125 123
Discover Card Master Trust I
Series 1998-7 Class A
5.600% due 05/16/06 125 125
FMAC Loan Receivables Trust
Series 1998-DA Class A2
6.404% due 12/15/19 125 127
Green Tree Financial Corp.
Series 1998-2 Class M1
6.940% due 12/01/27 100 99
Series 1998-6 Class M1
6.630% due 05/01/28 100 97
MBNA Master Credit Card Trust
Series 1994-B Class A
4.990% due 01/15/02 (d) 100 100
Vanderbilt Mortgage Finance
Series 1998-C Class 1A6
6.750% due 10/07/28 100 94
----------
765
----------
CORPORATE BONDS AND NOTES - 28.4%
Allied Waste North America
7.375% due 01/01/04 50 50
7.625% due 01/01/06 50 51
7.875% due 01/01/09 50 51
American General Finance Corp.
6.170% due 05/06/03 (MTN) 400 407
American Standard Co.
7.375% due 04/15/05 50 51
Amerus Life Holdings, Inc.
6.950% due 06/15/05 75 75
Amresco, Inc.
Series 98-A
9.875% due 03/15/05 25 18
Aramark Corp.
6.750% due 08/01/04 15 15
7.000% due 07/15/06 100 102
AT&T Capital Corp.
6.410% due 08/13/99 (MTN) 390 392
BankBoston Corp.
6.875% due 07/15/03 25 26
Bankers Trust Corp.
5.502% due 05/12/03 (d) 200 196
Citicorp
9.500% due 02/01/02 50 55
Citizens Utilities Co.
8.450% due 09/01/01 200 215
Colonial Realty LP
7.160% due 01/17/03 (MTN) 50 50
Conmed Corp.
9.000% due 03/15/08 25 24
Conseco Finance Trust III
8.796% due 04/01/27 100 96
Conseco Financing Trust II
8.700% due 11/15/26 50 46
Crescent Real Estate Equities
6.625% due 09/15/02 75 70
CSX Corp.
6.250% due 10/15/08 50 51
6.800% due 12/01/28 (MTN) 75 73
DDTE Capital Corp.
7.110% due 11/15/03 (d) 500 504
Dime Bancorp Trust I
Series A
9.330% due 05/06/27 25 27
ERAC USA Finance Co.
7.500% due 06/15/03 (MTN) 50 53
Exide Corp.
2.900% due 12/15/05 75 44
Extendicare Health Services, Inc.
9.350% due 12/15/07 25 24
First Security Corp.
5.875% due 11/01/03 50 50
Ford Motor Credit Co.
5.425% due 06/04/02 (MTN) (d) 250 249
Global Crossing Holdings, Ltd.
9.625% due 05/15/08 125 130
Great Atlantic & Pacific Tea, Inc.
7.700% due 01/15/04 25 26
Grove Worldwide, L.L.C.
9.250% due 05/01/08 25 23
GS Escrow Corp.
7.000% due 08/01/03 150 147
7.125% due 08/01/05 75 74
38 Core Bond Fund
<PAGE>
CORE BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Health Care REIT, Inc.
7.625% due 03/15/08 50 51
Homeside Lending, Inc.
6.750% due 08/01/04 (MTN) 50 52
Household Finance Corp. (MTN)(d)
5.848% due 08/20/01 150 149
5.502% due 05/07/02 150 149
Idex Corp.
6.875% due 02/15/08 50 52
IMC Global, Inc.
7.625% due 11/01/05 50 51
Imperial Capital Trust I
Series B
9.980% due 12/31/26 25 27
Integrated Health Services
5.750% due 01/01/01 75 65
Jackson National Life Insurance Co.
8.150% due 03/15/27 25 29
Kaufman and Broad Home Corp.
7.750% due 10/15/04 50 50
Lehman Brothers Holdings, Inc.
7.625% due 06/01/06 25 26
Lilly Industries, Inc.
7.750% due 12/01/07 25 26
Lite-On Technology Corp.
Zero Coupon due 12/01/02 (conv.) 50 50
Loewen Group International, Inc.
Series 7
7.600% due 06/01/08 50 40
Markel Capital Trust I
Series B
8.710% due 01/01/46 25 25
Mcleodusa, Inc.
8.375% due 03/15/08 75 75
9.500% due 11/01/08 100 106
Meditrust
7.375% due 07/15/00 25 24
MMI Capital Trust I
7.625% due 12/15/27 25 25
Morgan Stanley Dean Witter
5.429% due 3/11/03 (MTN)(d) 300 299
Natexix Ambs Co., L.L.C.
Series A
8.440% due 12/29/49 75 71
News America, Inc.
7.300% due 04/30/28 25 26
7.625% due 11/30/28 100 107
NVR, Inc.
8.000% due 06/01/05 75 74
Ocwen Financial Corp.
11.875% due 10/01/03 50 45
Orion Capital Trust II
7.700% due 04/15/28 75 68
Philip Morris Cos., Inc.
6.150% due 03/15/00 100 101
7.250% due 01/15/03 500 528
Premier Parks, Inc. Step Up Bond
Zero Coupon due 04/01/08 (d) 25 17
PX Escrow Corp. Step Up Bond
Zero Coupon due 02/01/06 (d) 75 41
Qwest Communications International, Inc.
7.250% due 11/01/08 25 26
7.500% due 11/01/08 25 26
Step Up Bond Series B
Zero Coupon due 10/15/07 (d) 25 19
Zero Coupon due 02/01/08 (d) 125 94
Republic of New York Corp.
5.279% due 10/28/02 (d) 750 736
Revlon Worldwide
Series B
Zero Coupon due 03/15/01 215 124
Rose Hills Corp.
9.500% due 11/15/04 25 24
Safeway, Inc.
6.050% due 11/15/03 50 50
Salomon Smith Barney Holdings, Inc.
6.500% due 10/15/02 500 511
6.250% due 06/15/05 100 101
Simon Debartolo Group, L.P.
6.625% due 06/15/03 75 74
6.750% due 06/15/05 50 50
Sinclair Broadcast Group, Inc.
8.750% due 12/15/07 25 25
Socgen Real Estate Co., L.L.C.
Series A
7.640% due 12/29/49 100 94
Southland Corp.
Series A
4.500% due 06/15/04 50 43
Spieker Properties, L.P.
6.750% due 01/15/08 75 74
Star Banc Corp.
5.875% due 11/01/03 50 50
39 Core Bond Fund
<PAGE>
CORE BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Summit Properties Partnership
7.200% due 08/15/07 25 24
Tanger Properties, L.P.
8.750% due 03/11/01 25 25
7.875% due 10/24/04 25 23
Tele-Communications, Inc.
7.875% due 02/15/26 120 142
Tenet Healthcare Corp.
8.625% due 12/01/03 100 105
6.000% due 12/01/05 100 85
8.125% due 12/01/08 25 26
Time Warner, Inc.
6.625% due 05/15/29 125 127
Toll Brothers Corp.
7.750% due 09/15/07 25 25
Travelers Property Casualty Corp.
6.750% due 04/15/01 25 26
Tricon Global Restaurants, Inc.
7.450% due 05/15/05 25 26
Union Planters Bank
6.500% due 03/15/18 50 51
United Companies Financial Corp.
7.700% due 01/15/04 25 19
United States Filter Corp.
6.500% due 05/15/03 (d) 100 100
Upm-Kymmene Corp.
7.450% due 11/26/27 50 50
Viacom, Inc.
7.750% due 06/01/05 25 27
Walt Disney Co.
Series E
5.125% due 12/15/03 (MTN) 50 50
Westinghouse Credit Corp.
8.875% due 06/14/14 50 58
Westinghouse Electric Corp.
8.625% due 08/01/12 25 29
Worldcom, Inc.
7.550% due 04/01/04 75 82
6.400% due 08/15/05 50 52
----------
9,187
----------
EURODOLLAR BONDS - 1.6%
Applied International Finance
11.750% due 10/01/05 10 7
Republic of Philippines
Series B
6.500% due 12/01/17 (d) 500 435
Tyco International Group SA
6.125% due 11/01/08 75 75
----------
517
----------
MORTGAGE-BACKED SECURITIES - 40.8%
Advanta Mortgage Loan Trust
Series 97-4 Class M1
7.040% due 01/25/29 50 52
Chase Commercial Mortgage Securities Corp.
Series 1997-2 Class D
6.600% due 12/19/07 25 24
Federal Home Loan Mortgage Corp.
6.000% 30 Year TBA Gold (c) 3,000 2,962
Federal Home Loan Mortgage Corp.
Participation Certificate
6.620% due 2028 112 118
7.500% due 2028 615 632
Federal National Mortgage Association
8.500% due 2025 227 238
6.000% 30 Year TBA (c) 125 132
6.500% 30 Year TBA (c) 800 805
7.000% 30 Year TBA (c) 900 918
Federal National Mortgage Association (REMIC)
Series 1992-10 Class ZD
8.000% due 11/25/21 868 926
GMAC Commercial Mortgage Securities, Inc.
Series 1997-C1 Class A2
6.850% due 09/15/06 (d) 125 132
Government National Mortgage Association
9.000% due 2017 239 257
8.000% due 2024 151 157
8.000% due 2025 194 202
7.000% due 2026 116 119
7.500% due 2026 204 210
8.000% due 2026 263 273
6.500% due 2027 (d) 674 682
7.000% due 2027 213 218
7.500% due 2027 23 24
8.000% due 2027 980 1,018
7.000% due 2028 54 55
6.500% 30 Year TBA (c) 2,000 2,019
8.000% 30 Year TBA (c) 125 130
6.000% 30 Year TBA (c) 500 496
40 Core Bond Fund
<PAGE>
CORE BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
Midland Realty Acceptance Corp.
Series 1996-C2 Class A2
7.233% due 01/25/29 125 132
Morgan Stanley Capital I
Series 1998-HF1 Class A2
6.520% due 01/15/08 125 130
Oakwood Mortgage Investors, Inc.
Series 1998-B Class B2
7.750% due 04/15/28 75 73
Residential Funding Mortgage Securities II
Series 1997-HS5 Class M1
7.010% due 05/25/27 50 51
----------
13,185
----------
UNITED STATES GOVERNMENT
AGENCIES - 0.2%
Federal Home Loan Mortgage Corp.
5.750% due 07/15/03 50 51
----------
UNITED STATES GOVERNMENT
TREASURIES - 24.0%
United States Treasury Bonds
Principal Only
Zero Coupon due 08/15/20 150 45
Zero Coupon due 02/15/19 200 66
United States Treasury Bonds
12.000% due 08/15/13 1,000 1,526
8.750% due 05/15/17 1,000 1,391
6.000% due 02/15/26 900 982
6.625% due 02/15/27 1,155 1,366
United States Treasury Notes
5.875% due 11/15/99 1,535 1,551
6.625% due 04/30/02 525 556
3.625% due 07/15/02 120 119
6.625% due 05/15/07 125 141
----------
7,743
----------
YANKEE BONDS - 1.8%
Abitibi-Consolidated, Inc.
7.500% due 04/01/28 75 68
Amvescap PLC
6.600% due 05/15/05 50 50
Call-Net Enterprises, Inc. Step Up Bond
Zero Coupon due 08/15/07 (d) 25 16
Zero Coupon due 08/15/08 (d) 75 43
Colt Telecom Group PLC Step Up Bond
Zero Coupon due 12/15/06 (d) 150 126
Edperbrascan Corp.
7.125% due 12/16/03 50 52
Flag, Ltd.
8.250% due 01/30/08 50 49
National Westminster Bank PLC
7.750% due 04/29/49 (d) 25 26
Petro-Canada
7.000% due 11/15/28 50 49
Petroleos Mexicanos
8.850% due 09/15/07 50 50
9.250% due 03/30/18 5 4
Republic of Argentina
14.250% due 11/30/02 (d) 25 24
Royal Caribbean Cruises, Ltd.
7.500% due 10/15/27 25 24
----------
581
----------
TOTAL LONG-TERM INVESTMENTS
(cost $32,014) 32,029
----------
NUMBER
OF
SHARES
-----------
PREFERRED STOCKS - 0.6%
El Paso Electric Co. Series A 242 26
Equity Office Properties Trust
Series B 1,500 61
Global Crossing Holdings, Ltd. 800 77
Primedia, Inc. 250 24
----------
TOTAL PREFERRED STOCKS
(cost $196) 188
----------
41 Core Bond Fund
<PAGE>
CORE BOND FUND
STATEMENT OF NET ASSETS, continued
DECEMBER 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
$ $
----------- --------
SHORT-TERM INVESTMENTS - 17.9%
American Express Bank
5.500% due 03/13/99 (d) 150 150
Bank of Tokyo Mitsubishi, Ltd.
5.940% due 01/19/99 (a) 400 400
Columbia HCA Healthcare Corp.
6.500% due 03/15/99 500 498
Federated Prime Cash
Obligation Fund (a) 4,634 4,634
Norfolk Southern Corp.
5.500% due 01/11/99 (a) 100 100
----------
TOTAL SHORT-TERM INVESTMENTS
(cost $5,783) 5,782
----------
TOTAL INVESTMENTS - 117.6%
(identified cost $37,993)(b) 37,999
OTHER ASSETS AND LIABILITIES,
NET - (17.6%) (5,694)
----------
NET ASSETS - 100.0% 32,305
==========
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Forward commitment. See Note 2.
(d) Adjustable or floating rate security.
Abbreviations:
MTN - Medium Term Note
PLC - Public Limited Company
REIT - Real Estate Investment Trust
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced Security
The accompanying notes are an integral part of the financial statements.
42 Core Bond Fund
<PAGE>
CORE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Amounts in thousands (except per-share amounts) December 31, 1998
-----------------
<S> <C>
ASSETS
Investments at market (identified cost $37,993)(Note 2) .......................... $37,999
Receivables:
Dividends and interest ........................................................... 349
Investments sold ................................................................. 137
Investments sold (delayed settlement)(Note 2) ................................... 2,893
Fund shares sold ................................................................. 275
Deferred organization expenses (Note 2) .......................................... 4
-------
Total Assets ................................................................... 41,657
LIABILITIES
Payables:
Investments purchased (delayed settlement)(Note 2) .................. $9,291
Fund shares redeemed ................................................. 7
Accrued fees to affiliates (Note 4) ................................. 13
Other accrued expenses ............................................... 41
------
Total Liabilities .............................................................. 9,352
-------
NET ASSETS ........................................................................ $32,305
=======
NET ASSETS CONSIST OF:
Undistributed net investment income ............................................... $ 383
Accumulated net realized gain (loss) ............................................. 482
Unrealized appreciation (depreciation) on investments ............................. 6
Shares of beneficial interest ..................................................... 30
Additional paid-in capital ........................................................ 31,404
-------
NET ASSETS ........................................................................ $32,305
=======
NET ASSET VALUE, offering and redemption price per share:
($32,305,157 divided by 3,026,018 shares of $.01 par value
shares of beneficial interest outstanding) .................................... $ 10.68
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
Core Bond Fund 43
<PAGE>
CORE BOND FUND
STATEMENT OF OPERATIONS
<TABLE>
Amounts in thousands Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Interest ........................................................................ $1,068
Dividends ....................................................................... 148
------
Total Investment Income ....................................................... 1,216
EXPENSES (Notes 2 and 4):
Advisory fees ......................................................... $119
Custodian fees ........................................................ 77
Transfer agent fees ................................................... 7
Professional fees ..................................................... 17
Registration fees ..................................................... 9
Trustees' fees ........................................................ 10
Amortization of deferred organization expenses ........................ 1
Miscellaneous ......................................................... 14
----
Expenses before reductions ............................................ 254
Expense reductions (Note 4) .......................................... (96)
----
Expenses, net ................................................................. 158
------
Net investment income ............................................................ 1,058
------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments ........................................ 493
Net change in unrealized appreciation or depreciation of investments ............. (173)
------
Net gain (loss) on investments ................................................... 320
------
Net increase (decrease) in net assets resulting from operations .................. $1,378
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
44 Core Bond Fund
<PAGE>
CORE BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands Years Ended December 31,
1998 1997*
------- ------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income .......................................................... $ 1,058 $ 461
Net realized gain (loss) ...................................................... 493 40
Net change in unrealized appreciation or depreciation .......................... (173) 179
------- ------
Net increase (decrease) in net assets resulting from operations .............. 1,378 680
------- ------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income .......................................................... (796) (338)
Net realized gain on investments ............................................... (53) --
------- ------
Total Distributions to Shareholders .......................................... (849) (338)
------- ------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from Fund share transactions (Note 5) ... 23,253 8,156
------- ------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS ..................................... 23,782 8,498
NET ASSETS
Beginning of period ............................................................ 8,523 25(a)
------- ------
End of period (including undistributed net investment income
of $383 and $119, respectively) ............................................. $32,305 $8,523
======= ======
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Original capital.
The accompanying notes are an integral part of the financial statements.
Core Bond Fund 45
<PAGE>
CORE BOND FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .......................... $ 10.45 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (c) ................................... .56 .64
Net realized and unrealized gain (loss) on investments ....... .19 .30
------- ------
Total Income From Investment Operations .................... .75 .94
------- ------
DISTRIBUTIONS:
Net investment income ........................................ (.47) (.49)
Net realized gain on investments ............................. (.05) --
------- ------
Total Distributions ........................................ (.52) (.49)
------- ------
NET ASSET VALUE, END OF PERIOD ................................ $ 10.68 $10.45
======= ======
TOTAL RETURN (%)(a) .......................................... 7.38 9.73
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period ($000 omitted) .................... 32,305 8,523
Ratios to average net assets (%)(b):
Operating expenses, net .................................... .80 .80
Operating expenses, gross .................................. 1.28 2.20
Net investment income ...................................... 5.34 6.38
Portfolio turnover rate (%)(b) .............................. 75.95 53.86
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1997 are annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
46 Core Bond Fund
<PAGE>
RUSSELL INSURANCE FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. ORGANIZATION
Russell Insurance Funds (the "Investment Company") is a series mutual fund
with four investment portfolios, referred to as "Funds." These financial
statements report on the Funds, each of which has distinct investment
objectives and strategies. These Funds are offered at net asset value to
qualified insurance company separate accounts offering variable insurance
products. The Investment Company is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. It is organized and operates as a Massachusetts business trust
under a master trust agreement dated July 11, 1996. The Investment
Company's master trust agreement permits the Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest at a
$.01 par value.
2. SIGNIFICANT ACCOUNTING POLICIES
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting
policies consistently followed by the Funds in the preparation of these
financial statements.
SECURITY VALUATION: United States equity and fixed-income securities listed
and traded principally on any national securities exchange are valued on
the basis of the last sale price or, lacking any sale, at the closing bid
price, on the primary exchange on which the security is traded. United
States over-the-counter equity and fixed-income securities and options are
valued on the basis of the closing bid price. Futures contracts are valued
on the basis of the last sale price. Many fixed-income securities do not
trade each day and, thus, last sale or bid prices are frequently not
available. Fixed income securities, therefore, may be valued using prices
provided by a pricing service when such prices are believed to reflect the
fair market value of such securities.
International equity and fixed income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair
market value of such securities.
Short-term investments maturing within 60 days of the valuation date are
valued at amortized cost unless the Board of Trustees determines that
amortized cost does not represent fair value.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of specific identified cost incurred by each money
manager within a particular fund. The Funds may lend portfolio securities
but have not done so in 1998.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All premiums and discounts, including original
issue discounts, for the Funds are amortized/ accreted for both tax and
financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company
and distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Funds. From November 1, 1998 to December 31,
1998, the Aggressive Equity and Non-US Funds incurred net realized capital
losses of $15,508 and $13,235, respectively. As permitted by tax
regulations, the Aggressive Equity and Non-US Funds intend to elect to
defer these losses and treat them as arising in the year ending December
31, 1999.
At December 31, 1998, the Non-US Fund had a net tax basis capital loss
carryforward of $570,615 which may be applied against any net realized
taxable gains in each succeeding year or until its expiration date of
December 31, 2006, whichever occurs first.
Notes to Financial Statements 47
<PAGE>
RUSSELL INSURANCE FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income tax
purposes as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Multi-Style Equity $63,881,777 $11,822,728 $(1,798,160) $10,024,568
Aggressive Equity 21,930,063 3,706,187 (1,003,860) 2,702,327
Non-US 19,555,577 2,324,322 (707,970) 1,616,352
Core Bond 38,124,870 253,626 (378,589) (124,963)
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For all Funds, income
dividends and capital gain distributions, if any, are recorded on the
ex-dividend date. Dividends are generally declared and paid quarterly,
except for the Non-U.S. Fund, which generally declares and pays dividends
annually. Capital gain distributions are generally declared and paid
annually.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from GAAP. As a result, net investment income and net
realized gain (or loss) on investment and foreign currency-related
transactions for a reporting period may differ significantly from
distributions during such period. The differences between tax regulations
and GAAP primarily relate to investments in options, futures, forward
contracts, passive foreign investment companies, foreign-denominated
investments, mortgage-backed securities, and certain securities sold at a
loss. Accordingly, a Fund may periodically make a reclassification among
certain of its capital accounts without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1998:
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED
INCOME GAIN (LOSS)
---------------- --------------
Non-US $88,390 $ (88,390)
Core Bond 1,861 (1,861)
EXPENSES: The Funds will pay their own expenses other than those expressly
assumed by Frank Russell Investment Management Company ("FRIMCo" or
"Advisor"). Most expenses can be directly attributed to the individual
Funds. Expenses which cannot be directly attributed are allocated among all
Funds principally based on their relative net assets.
DEFERRED ORGANIZATION EXPENSES: Organization costs of the Funds have been
deferred and are being amortized over 60 months on a straight-line basis.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts and transactions of
the Funds are translated into U.S. dollars on the following basis:
(a) Market value of investment securities, other assets and liabilities at
the closing rate of exchange on the valuation date.
(b) Outstanding purchases and sales of investment securities and income at
the closing rate of exchange prevailing on the respective trade dates
of such transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from: sales and maturities of short-term securities;
sales of foreign currencies; currency gains or losses realized between the
trade and settlement dates on securities transactions; the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Non-US Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized gains or losses from
foreign currency-related transactions arise from changes in the value of
assets and liabilities, other than investments in securities, at
period-end, as a result of changes in the exchange rates.
48 Notes to Financial Statements
<PAGE>
RUSSELL INSURANCE FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
It is not practical to isolate that portion of the results of operations of
the Non-US Fund that arises as a result of changes in exchange rates from
that portion that arises from changes in market prices of investments
during the year. Such fluctuations are included with the net realized and
unrealized gain or loss from investments. However, for federal income tax
purposes the Non-US Fund does isolate the effects of changes in foreign
exchange rates from the fluctuations arising from changes in market prices
for realized gain (or loss) on debt obligations.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement
of Additional Information, the Funds may participate in various
derivative-based transactions. Derivative securities are instruments or
agreements whose value is derived from an underlying security or index.
They include options, futures, swaps, forwards, structured notes and
stripped securities. These instruments offer unique characteristics and
risks that assist the Funds in meeting their investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
market-like returns with their excess and liquidity reserve cash balances.
Hedging is used by some funds to limit or control risks, such as adverse
movements in exchange rates and interest rates. Return enhancement can be
accomplished through the use of derivatives in a Fund. By purchasing
certain instruments, Funds may more effectively achieve the desired
portfolio characteristics that allow them to meet their investment
objectives. Depending on how the derivatives are structured and utilized,
the risks associated with them may vary widely. These risks are generally
categorized as market risk, liquidity risk and counterparty or credit risk.
FOREIGN CURRENCY EXCHANGE CONTRACTS: In connection with portfolio purchases
and sales of securities denominated in a foreign currency, the Non-US Fund
may enter into foreign currency exchange spot contracts and forward foreign
currency exchange contracts ("contracts"). Contracts are recorded at market
value. Certain risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts
and are generally limited to the amount of unrealized gain on the
contracts, if any, that is recognized in the Statement of Assets and
Liabilities. Realized gains or losses arising from such transactions are
included in net realized gain (or loss) from foreign currency-related
transactions.
FORWARD COMMITMENTS: The Funds may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (not to
exceed 120 days)(i.e., a "forward commitment," "delayed settlement" or
"when issued" transaction, e.g., to be announced ("TBA")) consistent with a
Fund's ability to manage its investment portfolio and meet redemption
requests. The price of the underlying securities and the date when the
securities will be delivered and paid for are fixed at the time the
transaction is negotiated. The Funds may dispose of a forward commitment
transaction prior to settlement if it is appropriate to do so and realize
short-term gains (or losses) upon such sale. When effecting such
transactions, cash or liquid high-grade debt obligations of the Fund in a
dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. A forward commitment
transaction involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date or the other party to the
transaction fails to complete the transaction.
FUTURES CONTRACTS: The domestic and international equity Funds utilize
futures to equitize liquidity reserve balances. The face or contract
amounts of these instruments reflect the extent of the Funds' exposure to
off balance sheet risk. The primary risks associated with the use of
futures contracts are an imperfect correlation between the change in market
value of the securities held by the Fund and the prices of futures
contracts, and the possibility of an illiquid market. Changes in the
initial settlement values of futures contracts are accounted for as
unrealized appreciation (depreciation) until the contracts are terminated,
at which time realized gains and losses are recognized.
The Funds may invest in interest rate futures contracts, stock index
futures contracts, and foreign currency futures contracts and options
thereon that are traded on a United States or foreign exchange or board of
trade.
Notes to Financial Statements 49
<PAGE>
RUSSELL INSURANCE FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
3. INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1998, purchases and sales of
investment securities (excluding U.S. Government and Agency obligations,
short-term investments, options, futures and repurchase agreements) were as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Multi-Style Equity $68,028,105 $34,559,160 Non-US $18,087,947 $6,396,622
Aggressive Equity 22,361,502 14,787,369 Core Bond 14,248,011 3,794,413
</TABLE>
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were as
follows:
PURCHASES SALES
------------- -------------
Core Bond $70,847,590 $55,561,560
FUTURES CONTRACTS: Fund transactions in futures contract purchases for the year
ended December 31, 1998 were as follows:
MULTI-STYLE EQUITY FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
----------- ---------------
Outstanding December 31, 1997 2 $ 492,475
Opened 116 29,820,805
Closed (98) (24,301,709)
----------- ---------------
Outstanding December 31, 1998 20 $ 6,011,571
=========== ===============
AGGRESSIVE EQUITY FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
----------- ---------------
Outstanding December 31, 1997 2 $ 329,200
Opened 35 7,115,287
Closed (30) (5,732,940)
----------- ---------------
Outstanding December 31, 1998 7 $ 1,711,547
=========== ===============
NON-US FUTURES CONTRACTS
AGGREGATE
NUMBER OF FACE VALUE OF
CONTRACTS CONTRACTS (1)
----------- ---------------
Outstanding December 31, 1997 -- $ --
Opened 84 8,018,669
Closed (73) (6,960,471)
----------- ---------------
Outstanding December 31, 1998 11 $ 1,058,198
=========== ===============
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
4. RELATED PARTIES
ADVISOR: FRIMCo operates and administers all of the Funds which comprise
the Investment Company. FRIMCo is a wholly owned subsidiary of Frank
Russell Company, a wholly owned subsidiary of The Northwestern Mutual Life
Insurance Company. Frank Russell Company researches and recommends to
FRIMCo, and to the Investment Company, one or more investment management
organizations to manage the portfolio of each Fund.
50 Notes to Financial Statements
<PAGE>
RUSSELL INSURANCE FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
For the year ended December 31, 1998, the advisory fee paid to FRIMCo, for the
Funds listed below, in accordance with the Investment Company's Management
Agreement with that firm, amounted to $797,342 before waivers and/or
reimbursements. Such fee is payable monthly and is equal to the annual rate, by
Fund, shown in the following table, of the average daily net assets of the
applicable Fund.
ANNUAL RATE ANNUAL RATE
------------- -------------
Multi-Style Equity 0.78% Non-US 0.95%
Aggressive Equity 0.95% Core Bond 0.60%
FRIMCo has voluntarily agreed to waive a portion of its advisory fee for each
Fund, up to the full amount of its fee, to the extent the Fund's operating
expenses exceed specified limits imposed by FRIMCo on an annual basis.
Additionally, FRIMCo has voluntarily agreed to reimburse each Fund for all
remaining expenses, after fee waivers, that still exceed their respective
expense caps.
The expense caps, waivers and reimbursements as of December 31, 1998 were as
follows:
TOTAL
EXPENSE ADVISORY REIMBURSED EXPENSE
CAP FEES WAIVED BY FRIMCO REDUCTIONS
-------- ------------- ------------ ------------
Multi-Style Equity 0.92% $132,360 $ -- $ 132,360
Aggressive Equity 1.25 82,680 -- 82,680
Non-US 1.30 130,606 16,449 147,055
Core Bond 0.80 95,578 -- 95,578
ANALYTIC SERVICES: Fees for analytic services provided to the Funds are paid
or accrued to Russell/Mellon Analytical Services, an affiliate of the
Investment Company. Russell/Mellon Analytical Services provides its TruVP
System to the Funds, pursuant to a written Service Agreement. The TruVP System
provides analytics used by the investment department.
TRANSFER AGENT: The Funds have a contract with FRIMCo, for the Funds listed
above, to provide transfer agent services to the Investment Company. Total fees
for the year ended December 31, 1998 were $34,640.
DISTRIBUTOR: Russell Fund Distributors, Inc. (the "Distributor"), a wholly
owned subsidiary of FRIMCo, is the principal Distributor for Investment Company
shares. The Distributor receives no compensation from the Investment Company
for its services.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1998 WERE AS FOLLOWS:
ADVISORY ANALYTIC TRANSFER
FEES SERVICE FEES AGENT FEES TOTAL
-------- ------------ ---------- ---------
Multi-Style Equity $ 31,894 $ 1,854 $ 2,538 $ 36,286
Aggressive Equity 15,850 2,214 8,941 27,005
Non-US -- 1,688 5,172 6,860
Core Bond 5,423 1,330 6,098 12,851
-------- ------------ ---------- ---------
$ 53,167 $ 7,086 $ 22,749 $ 83,002
======== ============ ========== =========
BROKERAGE COMMISSIONS: The Funds paid brokerage commissions to non-affiliated
brokers who provided brokerage and research services to the Manager. The Funds
also paid brokerage commissions for trades executed through Frank Russell
Securities, Inc., an affiliate of FRIMCo. These commissions are net of a refund
(up to 70% of gross commissions) paid back to the Fund effecting such
transactions after reimbursement for research services provided to FRIMCo. The
amount retained by Frank Russell Securities, Inc. for the year ended December
31, 1998 for the Multi-Style Equity Fund was $21,216 and for the Non-US Fund
was $1,928.
BOARD OF TRUSTEES: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $8,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $40,309 for the year ended December 31,
1998, and were allocated to each Fund on a pro rata basis.
Notes to Financial Statements 51
<PAGE>
RUSSELL INSURANCE FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
BENEFICIAL INTEREST: As of December 31, 1998, FRIMCo and the Funds had four
client relationships that represented more than 5% of the total outstanding
shares of the respective Funds.
CLIENT RELATIONSHIP
PERCENTAGES
---------------------------------------
Multi-Style Equity 40.0% 32.7% 15.9% 7.1%
Aggressive Equity 49.6 21.7 16.1 7.1
Non-US 48.2 21.1 16.0 10.2
Core Bond 52.8 20.6 14.5 9.3
5. SHARE TRANSACTIONS
Share transactions for shares for the years ended December 31, were as
follows:
<TABLE>
<CAPTION>
SHARES DOLLARS
-------------------------- ---------------------------
1998 1997* 1998 1997*
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MULTI-STYLE EQUITY
Proceeds from shares sold 2,867,999 3,159,950 $ 40,821,643 $ 35,492,250
Proceeds from reinvestment of distributions 63,764 9,451 857,763 105,477
Payments for shares redeemed (162,445) (1,321,867) (2,378,164) (16,557,615)
------------ ------------ ------------ ------------
Total net increase (decrease) 2,769,318 1,847,534 $ 39,301,242 $ 19,040,112
============ ============ ============ ============
AGGRESSIVE EQUITY
Proceeds from shares sold 818,370 2,044,963 $ 10,356,016 $ 23,639,882
Proceeds from reinvestment of distributions 87,768 4,358 1,133,444 44,962
Payments for shares redeemed (111,078) (909,280) (1,344,902) (11,961,760)
------------ ------------ ------------ ------------
Total net increase (decrease) 795,060 1,140,041 $ 10,144,558 $ 11,723,084
============ ============ ============ ============
NON-US
Proceeds from shares sold 1,311,652 1,090,627 $ 13,933,668 $ 10,979,143
Proceeds from reinvestment of distributions 17,903 -- 188,159 --
Payments for shares redeemed (83,398) (407,383) (890,851) (4,080,902)
------------ ------------ ------------ ------------
Total net increase (decrease) 1,246,157 683,244 $ 13,230,976 $ 6,898,241
============ ============ ============ ============
CORE BOND
Proceeds from shares sold 2,300,387 1,210,165 $ 24,196,486 $ 12,264,143
Proceeds from reinvestment of distributions 80,458 33,875 848,569 338,625
Payments for shares redeemed (170,785) (430,582) (1,792,203) (4,446,701)
------------ ------------ ------------ ------------
Total net increase (decrease) 2,210,060 813,458 $ 23,252,852 $ 8,156,067
============ ============ ============ ============
</TABLE>
* For the period January 2, 1997 (commencement of operations) to December 31,
1997.
52 Notes to Financial Statements
<PAGE>
RUSSELL INSURANCE FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1998
6. DIVIDENDS
On February 11, 1999, the Board of Trustees declared the following
dividends payable on February 19,1999, to shareholders of record on
February 12, 1999:
LONG-TERM
NET INVESTMENT SHORT-TERM CAPITAL
INCOME CAPITAL GAINS GAINS
---------------- --------------- ------------
Multi-Style Equity $ 0.0249 $ 0.3069 $ 0.8424
Aggressive Equity 0.0072 -- 0.0219
Core Bond 0.1197 0.1679 0.0239
Non-US 0.1273 -- --
Notes to Financial Statements 53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Frank Russell Investment Company:
In our opinion, the accompanying statements of assets and liabilities, including
the statements of net assets, 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 each of the series of Russell
Insurance Funds (comprised of Multi-Style Equity, Aggressive Equity, Non-U.S.,
and Core Bond (the "Funds")) at December 31, 1998, and the results of their
operations, the changes in their net assets and the financial highlights for the
periods indicated therein, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
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 investments owned at December 31, 1998 by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
February 15, 1999
54 Report of Independent Accountants
<PAGE>
RUSSELL INSURANCE FUNDS
TAX INFORMATION
December 31, 1998 (Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following amounts as long-term capital gain dividends for their taxable year
ended December 31, 1998:
TOTAL LONG-TERM
CAPITAL GAINS
-----------------
Multi-Style Equity $ 18,038
Aggressive Equity 67,159
Tax Information 55
<PAGE>
RUSSELL INSURANCE FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS
December 31, 1998
There was a Special Meeting in Lieu of Annual Meeting of Shareholders of the
Russell Insurance Funds (the "Investment Company") held at 909 A Street, Tacoma,
Washington on November 19, 1998.
THE FOLLOWING MATTERS WERE VOTED UPON AT THE MEETING
THE RESULTS OF EACH VOTE ACCOMPANY THE DESCRIPTION OF EACH MATTER
- -----------------------------------------------------------------
1. To elect the members of the Board of Trustees of the Investment Company.
VOTE:
-----
FOR WITHHELD
--------------- ------------
Lynn L. Anderson 9,708,349.147 0.000
Paul E. Anderson 9,708,349.147 0.000
Paul Anton, PhD. 9,708,349.147 0.000
William E. Baxter 9,708,349.147 0.000
Lee C. Gingrich 9,708,349.147 0.000
Eleanor W. Palmer 9,708,349.147 0.000
2. To ratify the selection of PricewaterhouseCoopers LLP as the Investment
Company's independent accountants.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ------------ ----------------
Russell Insurance Funds 9,705,210,747 0.000 3,138.400
3. To approve a proposed management agreement with Frank Russell Investment
Management Company ("FRIMCo"), the current investment manager of the
Investment Company, to take effect upon the closing of the acquisition of
Frank Russell Company by The Northwestern Mutual Life Insurance Company.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ------------ ----------------
Multi-Style Equity Fund 3,958,533.914 23,014.700 3,138.400
Aggressive Equity Fund 1,724,864.104 13,087.400 0.000
Non-U.S. Fund 1,588,011.270 20,020.900 0.000
Core Bond Fund 2,375,581.459 2,097.000 0.000
56 Matter Submitted to a Vote of Shareholders
<PAGE>
RUSSELL INSURANCE FUNDS
MATTER SUBMITTED TO A VOTE OF SHAREHOLDERS, CONTINUED
December 31, 1998
4. To approve a change to the Funds' fundamental investment restrictions
limiting borrowing activities, authorizing a higher borrowing level for the
purpose of meeting shareholder redemption requests.
VOTE:
-----
ABSTAIN/BROKER
FOR AGAINST NON-VOTE
--------------- ------------ ----------------
Multi-Style Equity Fund 3,910,412.214 61,721.300 12,553.500
Aggressive Equity Fund 1,695,884.904 26,642.200 15,424.400
Non-U.S. Fund 1,550,022.970 54,929.100 3,080.100
Core Bond Fund 2,337,414.959 38,167.100 2,096.400
To act upon any other business as may legally have come before the Special
Meeting or any adjournment thereof.
VOTE:
-----
GRANT WITHHELD
-------------- ---------------
Multi-Style Equity Fund 2,223,712.936 1,760,974.206
Aggressive Equity Fund 726,408.417 1,011,543.087
Non-U.S. Fund 1,122,740.027 485,292.143
Core Bond Fund 1,874,356.984 503,321.475
Matter Submitted to a Vote of Shareholders 57
<PAGE>
RUSSELL INSURANCE FUNDS
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
<TABLE>
<S> <C>
TRUSTEES LEGAL COUNSEL
George F. Russell, Jr., Chairman Stradley, Ronon, Stevens & Young, LLP
Lynn L. Anderson 2600 One Commerce Square
Paul E. Anderson Philadelphia, PA 19103-7098
Paul Anton, PhD
William E. Baxter INDEPENDENT ACCOUNTANTS
Lee C. Gingrich PricewaterhouseCoopers LLP
Eleanor W. Palmer 1001 4th Avenue Plaza
Suite 4200
OFFICERS Seattle, WA 98154
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds DISTRIBUTOR
Mark E. Swanson, Treasurer and Chief Accounting Officer Russell Fund Distributors, Inc.
Randall P. Lert, Director of Investments 909 A Street
Karl Ege, Secretary and General Counsel Tacoma, WA 98402
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Company MONEY MANAGERS
909 A Street MULTI-STYLE EQUITY FUND
Tacoma, WA 98402 Alliance Capital Management L.P., Minneapolis, MN
Equinox Capital Management, Inc., New York, NY
CONSULTANT Westpeak Investment Advisors, L.P., Boulder, CO
Frank Russell Company
909 A Street AGGRESSIVE EQUITY FUND
Tacoma, WA 98402 Rothschild Asset Management, Inc., New York, NY
Westpeak Investment Advisors, L.P., Boulder, CO
CUSTODIAN
State Street Bank and Trust Company NON-US FUND
1776 Heritage Drive J.P. Morgan Investment Management, Inc., New York, NY
North Quincy, MA 02171 Oechsle International Advisors, Boston, MA
The Boston Company Asset Management, Inc., Boston, MA
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street CORE BOND FUND
Tacoma, WA 98402 Pacific Investment Management Company, Newport Beach, CA
(800) RUSSEL4 Standish, Ayer & Wood, Inc., Boston, MA
(800) 787-7354
</TABLE>
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Russell Insurance Funds.
Such offering is made only by Prospectus, which includes details as to offering
price and other material information.
58 Manager, Money Managers and Service Providers
<PAGE>
[RUSSELL LOGO]
Russell Insurance Funds
909 A Street
Tacoma, WA 98402-5120
253-627-7001
800-972-0700
Fax: 253-591-3495
A-5147(299) 36-08-023
