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[LOGO OF NUMERIC INVESTORS]
Micro Cap Fund
Growth Fund
Growth & Value Fund
Larger Cap Value Fund
Small Cap Value Fund
Adviser's Report
October 25, 1999
Dear Fellow Shareholder:
As your Funds' adviser, we are pleased to report the annual results for the n/i
numeric investors family of funds (the "Funds") for the fiscal year ended
August 31, 1999.
In addition to discussing our Funds' returns and recent market conditions, we
have chosen to begin this report with a special section describing how we at
Numeric Investors L.P.(R) ("Numeric") are attempting to better align the
relationship between the fund family and its shareholders. Related to this, you
will have already received a proxy asking you to vote on a proposed change to
the Investment Advisory Agreement. If this change is approved, the contractual
Investment Advisory Fee paid to Numeric will be lower than the current advisory
fee if we fail to beat each of our benchmarks by at least 3% per year, but will
be higher if we succeed. This shift to a "Fulcrum Fee" arrangement is one step
of several (described below) that we are undertaking to better align the
interests of our shareholders and the management of the n/i numeric investors
family of funds.
A MORE THOUGHTFUL RELATIONSHIP BETWEEN YOUR FUND AND ITS SHAREHOLDERS
Numeric has been giving careful thought to the relationship that should exist
between the n/i numeric investors family of funds and its shareholders. We have
decided to formalize this shareholder-friendly relationship with the expectation
that thoughtful investors will appreciate the advantages of such a relationship.
It is precisely these thoughtful investors who we hope will become loyal and
long-lasting shareholders of the Funds. For Numeric, this relationship is less
an initiative for change than an endorsement of our existing business practices,
but with a few enhancements added.
. First, we at Numeric believe that a mutual fund should consistently pursue
its stated investment objectives and remain true to its "style". Numeric's
quantitative processes lend themselves to such discipline because the
models and the investment process are consistent through time, because we
select stocks narrowly from the appropriate universe for each Fund, and
because we are always fully invested. This means that the Funds always will
provide exposure to the target market segment you are seeking. It also
means that your Fund's returns should not be compared to the return of the
S&P 500 Index, because that is not the market segment within which any of
the Funds invest.
. Second, Numeric believes that actively managed funds must do everything
within their power and authority to generate excess returns above the
average return of the universe in which you are investing. We are well
aware that passive or index-fund alternatives exist and that such
alternatives always have lower management fees and often generate returns
superior to many actively managed funds. Whereas Numeric is committed to
doing everything that we can to generate excess returns for our
shareholders, we want you to recognize that we cannot add value in all
markets and at all times. Thus, there will be periods of time when the
Funds fail to add value.
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. Third, Numeric must identify the appropriate benchmark index for each
strategy, and attempt to control portfolio risk relative to this benchmark.
Each Fund's benchmark is identified later in this report and you can see
how each Fund's portfolio structure hews closely to the benchmark's
structure. Again, this reemphasizes that the S&P 500 Index will not be the
appropriate comparison for your Fund's returns.
. Fourth, Numeric must focus its resources on the investment process through
quantitative research, disciplined portfolio management, and cost-effective
trading. Of the forty people employed at Numeric, twenty-two are directly
involved in the investment process.
. Fifth, Numeric intends to limit the assets under management in each Fund to
a level that permits us to trade the strategies without incurring such
large transaction costs that they consume the value of the investment
insight. A growing body of research indicates that successful mutual funds
often take on so many assets that they can no longer remain true to their
investment style, nor can they trade their positions cost effectively. The
result is their ability to add value is diminished or eliminated, precisely
because they have been so successful previously that they have attracted
more assets than they can manage. Numeric remains committed to closing your
Funds at modest asset levels to preserve our ability to add value for
shareholders.
. Sixth, we do not believe that the cost structure of the Funds should
contain any distribution fees or loads. Such fees or loads are permitted by
the SEC to help a fund grow its assets to a critical mass, but based on our
current asset- level objectives being so modest such fees seem
inappropriate. The n/i numeric investors family of funds offers only pure
no-load funds to its investors, thus assuring that shareholder returns are
not diminished for the cost of growing the Funds, especially given that
such growth is not in the shareholders long-term interest.
. Seventh, Numeric will actively discourage short-term investors from
investing in the Funds because their trading in and out of the Funds adds
to transaction costs and diminishing returns for all of us. In addition,
the Funds have such limited capacity that we do not want investors who are
not committed for the long term. Because the Funds have no loads and
provide disciplined exposures to certain market segments, the Funds may be
attractive as a short-term investment to the market-timer who believes that
a particular market segment is poised to outperform the broad market.
However, we endeavor to add value over the long- term by remaining true to
our quantitative investment process. This process does not pay off in all
markets but we believe that our objective of adding value over longer
market cycles is reasonable. We want to attract investors who will remain
with us through these cycles. Accordingly, effective December 1, 1999, we
are implementing a redemption fee of 1%, payable into the Fund (to you, the
remaining shareholder, and not to Numeric) for any shareholder who redeems
their investment in the Fund within six months of first investing.
. Eighth, Numeric has proposed a change in our advisory agreement whereby
Numeric's advisory fee will vary as a function of how much added value we
generate for our shareholders. If we fail to at least match the return of
the benchmark, our advisory fee will be 0.35% per year, or less than half
of its present level of 0.75% per year. If we match the return of the
benchmark or exceed it by up to 0.99%, our fee increases to 0.45%. Our fees
will increase by 0.10% for every 1% return we generate for our shareholders
above the return of the benchmark. This means that our advisory fee will be
equal to the current flat fee of 0.75% if the Funds beat the return of
their benchmarks by at least 3% but less than 4%. If we exceed the return
of a Fund's benchmark by 9% or more over any year, the advisory fee is
capped at a maximum of 1.35%. We have proposed such a performance-sharing
arrangement because we believe it aligns the interests of the shareholders
and our firm. The more dollars of excess return we can generate for our
shareholders, the more we are paid. And if we fail to generate positive
excess returns over a period (as we almost certainly will at times), then
our fees could possibly decline to the minimum level of 0.35%. In addition,
as discussed in the proxy statement, if the proposal is approved, Numeric
will undertake to limit other normal fund operating expenses (other than
the advisory fee) to no more than 0.50% per year. If necessary, Numeric
will waive our advisory fee and/or reimburse fund operating expenses to
ensure such expenses do not exceed the voluntary limitation. By now, you
should have received a proxy asking you to vote on this matter prior to a
special meeting of shareholders scheduled for November 22, 1999. We urge
you to return your proxy card promptly.
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FUNDS' RETURNS FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
All four of the Funds that have been in existence for at least one year
generated strong positive absolute returns during the fiscal year ended August
31, 1999. These returns are displayed in Table 1 below. Detailed performance
data for each Fund can be found in the "Financial Highlights" and the line graph
sections of this report.
TABLE 1: 12-MONTH FUND RETURNS THROUGH AUGUST 31, 1999
Fund Return
------------------- --------
Micro Cap Fund +56.09%
Growth Fund +52.80%
Growth & Value Fund +41.61%
Larger Cap Value Fund +26.01%
Small Cap Value Fund +7.17%**
** Nine months from November 30, 1998 through August 31, 1999
The n/i numeric investors family of funds are managed to provide exposure to
distinct domains of the stock market, delineated by capitalization and growth /
value exposures. Each Fund buys stocks from within these domains and remains
near fully invested under normal market conditions in such stocks. Thus, the
Funds do not allow cash to build up to `time the market', and they contain
stocks that are consistent with each Fund's stated investment style.
For the most part, the domains of the Funds are distinct from the S&P 500 Index,
thus making the S&P 500 Index an inappropriate benchmark for the Funds. As of
August 31, 1999 the fifty largest companies in the S&P 500 comprised 57.4% of
the Index's capitalization weight. Thus more than half of the returns of the S&P
500 Index are now determined by the returns of fifty very large companies that
are predominantly "growth stocks". These very large growth stocks are not
appropriate investments for most of the Funds, so comparing the Funds' returns
to the S&P 500 Index is "comparing apples and oranges".
TABLE 2: 12-MONTH BENCHMARK RETURNS THROUGH AUGUST 31, 1999
Fund Benchmark Index Benchmark Return
---------------------- ------------------- ----------------
Micro Cap Fund Russell 2000 Growth +43.31%
Growth Fund Russell 2500 Growth +51.03%
Growth & Value Fund S&P MidCap 400 +41.58%
Larger Cap Value Fund Russell 1000 Value +30.08%
Small Cap Value Fund Russell 2000 Value + 1.65%**
** Nine months from November 30, 1998 through August 31, 1999
In lieu of the S&P 500 Index, we compare the performance of each of the Funds
with industry-standard benchmarks that we believe best represent the return of
each of our investable market domains. In this way, we can determine if we have
been successful in adding value within the domain in which we are investing. The
benchmark for each of the five Funds, and the 12-month return of each benchmark,
is shown in Table 2 above.
As active managers, it is our mission to strive to generate returns that are
above the returns available from the appropriate domain of the market. Of course
there can be no guarantee that we will be successful in our effort to `beat the
market' and there have been periods in the past when we have lagged these
benchmark indices. For the twelve months ended August 31, 1999, three of the
four Funds that had been in existence for a full year were able to generate
returns in excess of their respective benchmarks. In addition, the Small Cap
Value Fund beat its benchmark during the nine months since its inception. Table
3 compares the Funds' twelve-month returns with the returns of their benchmarks.
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TABLE 3: FUND VERSUS BENCHMARK RETURNS
TWELVE OR NINE MONTHS ENDED AUGUST 31, 1999
Fund Fund Return Benchmark Return Difference
--------------------- ----------- ---------------- ----------
Micro Cap Fund +56.09% +43.31% +12.78%
Growth Fund +52.80% +51.03% +1.77%
Growth & Value Fund +41.61% +41.58% +0.03%
Larger Cap Value Fund +26.01% +30.08% -4.07%
Small Cap Value Fund +7.17% ** +1.65%** +5.52%
** Nine-month returns ended August 31, 1999
FUNDS' RETURNS FOR THE SIX MONTHS ENDED AUGUST 31, 1999
The Funds' returns for the most recent six months compare especially favorably
with their benchmarks. We believe that the rebound in relative returns since
last February demonstrates the strength and durability of our systematic and
disciplined investment process.
TABLE 4: FUND VERSUS BENCHMARK RETURNS
SIX MONTHS ENDED AUGUST 31, 1999
Fund Fund Return Benchmark Return Difference
-------------------- ----------- ---------------- ----------
Micro Cap Fund +18.31% +10.85% +7.46%
Growth Fund +22.35% +17.16% +5.19%
Growth & Value Fund +14.82% +10.92% +3.90%
Larger Cap Value Fund +6.42% +6.16% +0.26%
Small Cap Value Fund +14.21% +8.73% +5.48%
FUNDS' RETURNS SINCE INCEPTION
Four of the five Funds have been in existence for more than a year and three of
these four have generated average annualized returns greater than their
benchmarks' annualized returns. We are proud of these returns but again caution
that past returns are not necessarily predictive of future results.
TABLE 5: AVERAGE ANNUALIZED RETURNS SINCE INCEPTION
Fund Benchmark Inception
Fund Return Return Difference Date
--------------------- --------- --------- ---------- ---------
Micro Cap Fund +21.97% +3.50% +18.47% 6/03/96
Growth Fund +12.66% +7.73% +4.93% 6/03/96
Growth & Value Fund +20.90% +17.96% +2.94% 6/03/96
Larger Cap Value Fund +7.79% +12.07% -4.28% 12/09/97
Small Cap Value Fund +7.17%** +1.65%** +5.52%** 11/30/98
** Nine-month rates of return and difference
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Because the Small Cap Value Fund has not been in existence for a full year yet,
it is inappropriate to compare annualized rates of return between the Fund and
its benchmark. For the first nine months of the Small Cap Value Fund's
existence, its return has exceeded the return of its benchmark by more than 5%.
THREE ORIGINAL n/i FUNDS RECEIVE MORNINGSTAR RATINGS*
The three original n/i funds that were launched on June 3, 1996 reached their
third anniversary this year. Morningstar, the mutual fund evaluation service,
follows these Funds. We were pleased that at September 30, 1999, Morningstar
awarded the Micro Cap Fund five stars (their highest ranking) within its peer
group category, while the Growth & Value Fund was awarded four stars within its
peer group category and the Growth Fund was awarded three stars within its peer
group category. Morningstar is placing increasing emphasis on ranking funds
within their appropriate peer groups so investors can better compare funds with
like investment objectives. (Morningstar, Inc. is an independent fund
performance monitor and its ratings may change monthly).
*The Morningstar Risk-Adjusted Rating brings both performance and risk together
into one evaluation. To determine a fund's star rating for a given period
(three, five, or 10 years), the fund's Morningstar Risk score is subtracted from
its Morningstar Return score. The resulting number is plotted along a bell curve
to determine the fund's rating for each time period. If the fund scores in the
top 10% of its investment category (small cap growth, mid cap blend, large cap
value, etc.), it receives 5 stars (Highest); if it falls in the next 22.5%, it
receives 4 stars (Above Average); a place in the middle 35% earns it 3 stars
(Neutral or Average); those in the next 22.5% receive 2 stars (Below Average);
and the bottom 10% get 1 star (Lowest). The Category (peer group) Rating does
not reflect any front-end or deferred loads. Other expenses are included. The
star ratings are recalculated monthly. Past performance is not predictive of
future performance.
MARKET AND ECONOMIC COMMENTARY
In our March 12, 1999 letter accompanying the Semi-Annual Report to
Shareholders, we commented that the recent market environment through February
1999 had been highly unusual because large-cap growth stocks had so thoroughly
dominated the market. This pattern had begun more than five years prior and
reached a crescendo through 1998 and into the first quarter of 1999. In our
prior report, we presented a chart similar to the one below that plotted returns
by capitalization in 1998 and the first two months of 1999 for the 3000 stocks
comprising the Russell 3000 Index.
A VERY NARROW MARKET IN 1998 & AGAIN IN EARLY 19999
CAP-WEIGHTED AVERAGE RETURNS OF EACH CAPITALIZATION STRATUM
[CHART]
1998 Jan & Feb 1999
---- --------------
Mega 50 40% 1.3%
Larger 150 24% 2.6%
Mid-Large 300 13.0% -3.4%
Mid-Cap 500 2.0% -5.9%
Smaller 2000 .003% -8.1%
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In the chart above, note that the largest 50 stocks (the "Mega 50") produced
more than a 40% return in 1998, whereas the smaller 2000 stocks (ranked 1001
through 3000 in capitalization) produced essentially no return at all. Extending
the time period through the difficult first two months of 1999, the chart shows
that the smaller 2500 companies in the Russell 3000 produced negative returns
over the fourteen months ending February 1999. This weak performance by smaller
and midcap stocks stands in stark contrast to the excellent returns of widely
followed large cap indices like the S&P 500, whose total return was almost 30%
over this period. Given that internet stocks were also superb performers over
this period and most internet stocks were found (at least initially) among the
smaller 2000 companies of the Russell 3000 Index, the weakness in smaller
companies would have been even more noticeable if the internet stocks had not
been present.
Much of the market's remarkable large cap bias in 1998 and early 1999 was
understandable, after the fact, given market and economic conditions. During
1998 and through March 1999, analysts lowered their earnings expectations for
smaller and midcap companies far more severely than they cut estimates for the
largest companies.
Compared to expectations at the beginning of 1998, actual earnings realized by
the end of 1998 were 31% more disappointing among the smallest 2000 stocks than
among the largest 50. Thus three-quarters of the 40% differential in 1998
returns between the largest 50 and the smaller 2000 stocks was economically
justified by the more severe earnings disappointments of smaller stocks. We
believe that the additional 10% spread in returns between the megacap 50 stocks
and the broad market in 1998 was caused by a flight to quality in response to
the scary market conditions during the summer and early fall of 1998. The
falling market and the near gridlock of the financial markets in the summer and
fall of 1998 caused investors to flee into the safest, most liquid (i.e.
largest) companies and the highest quality debt instruments.
Once the crisis had passed however, this quality premium should have dissipated,
thus allowing the smaller, slower growing stocks to partially catch up with the
largest, safest companies. The quality premium did not begin to dissipate as
soon as the crisis was over however. Instead, we believe momentum investors
chased the hot-performing internet stocks and jumped into S&P 500 Index funds
through the first quarter of 1999. We believe the shift of retail and
institutional assets into index funds caused buying pressure in the index
constituents and selling pressure elsewhere in the market as other portfolios
and mutual funds were liquidated.
Comparison of Forecast P/E Ratios
Russell Top 200 Index Vs Russell MidCap Index (Through August 1999)
[GRAPH]
Top 200 MidCap
Dec-78 8.1 6.8
Jan-79 8.1 6.9
Feb-79 8.1 7.1
Mar-79 8.1 7.2
Apr-79 7.9 7.2
May-79 7.8 7.1
Jun-79 7.6 7.1
Jul-79 7.7 7.2
Aug-79 7.7 7.3
Sep-79 7.8 7.4
Oct-79 7.7 7.4
Nov-79 7.7 7.3
Dec-79 7.6 7.3
Jan-80 7.4 6.9
Feb-80 7.2 6.6
Mar-80 7 6.2
Apr-80 7.1 6.6
May-80 7.3 7
Jun-80 7.4 7.4
Jul-80 7.6 7.6
Aug-80 7.8 7.8
Sep-80 8 8
Oct-80 8.3 8
Nov-80 8.5 8
Dec-80 8.8 8
Jan-81 8.5 8.1
Feb-81 8.2 8.3
Mar-81 7.9 8.4
Apr-81 7.9 8.4
May-81 7.8 8.4
Jun-81 7.8 8.4
Jul-81 7.3 7.8
Aug-81 6.9 7.3
Sep-81 6.4 6.7
Oct-81 6.6 7
Nov-81 6.9 7.2
Dec-81 7.1 7.5
Jan-82 6.9 7.2
Feb-82 6.7 6.9
Mar-82 6.5 6.6
Apr-82 6.6 6.7
May-82 6.8 6.7
Jun-82 6.9 6.8
Jul-82 7.1 7.1
Aug-82 7.3 7.4
Sep-82 7.5 7.7
Oct-82 8 8.3
Nov-82 8.6 9
Dec-82 9.1 9.6
Jan-83 9.2 9.8
Feb-83 9.3 9.9
Mar-83 9.4 10.1
Apr-83 9.8 10.6
May-83 10.2 11.2
Jun-83 10.6 11.7
Jul-83 10.3 11.4
Aug-83 10 11.2
Sep-83 9.7 10.9
Oct-83 9.7 10.8
Nov-83 9.6 10.6
Dec-83 9.6 10.5
Jan-84 9.3 10
Feb-84 8.9 9.5
Mar-84 8.6 9
Apr-84 8.5 8.9
May-84 8.4 8.9
Jun-84 8.3 8.8
Jul-84 8.3 8.9
Aug-84 8.4 8.9
Sep-84 8.4 9
Oct-84 8.5 9.1
Nov-84 8.7 9.3
Dec-84 8.8 9.4
Jan-85 9 9.5
Feb-85 9.1 9.6
Mar-85 9.3 9.7
Apr-85 9.6 10.1
May-85 10 10.6
Jun-85 10.3 11
Jul-85 10 10.7
Aug-85 9.8 10.3
Sep-85 9.5 10
Oct-85 10 10.6
Nov-85 10.5 11.2
Dec-85 11 11.8
Jan-86 11.4 12.2
Feb-86 11.7 12.6
Mar-86 12.1 13
Apr-86 12.5 13.3
May-86 12.8 13.6
Jun-86 13.2 13.9
Jul-86 12.7 13.4
Aug-86 12.2 13
Sep-86 11.7 12.5
Oct-86 12 12.6
Nov-86 12.3 12.6
Dec-86 12.6 12.7
Jan-87 13.3 13.1
Feb-87 13.8 14
Mar-87 14.2 14.2
Apr-87 13.9 13.6
May-87 13.5 13.5
Jun-87 14.8 13.7
Jul-87 14.6 13.8
Aug-87 15 14.3
Sep-87 14.6 14
Oct-87 11.6 10.4
Nov-87 10.7 9.8
Dec-87 11.4 10.7
Jan-88 11.1 10.2
Feb-88 11.5 10.9
Mar-88 11 10.9
Apr-88 11 10.8
May-88 10.6 10.5
Jun-88 11.2 11
Jul-88 10.7 10.3
Aug-88 10.1 9.9
Sep-88 10.6 10.2
Oct-88 10.8 10.3
Nov-88 10.5 9.9
Dec-88 10.7 10.3
Jan-89 10.8 10.3
Feb-89 10.4 10.2
Mar-89 10.6 10.4
Apr-89 11.1 10.9
May-89 11.5 11.4
Jun-89 11.3 11.4
Jul-89 12.1 11.7
Aug-89 12.2 12.1
Sep-89 12.3 12.1
Oct-89 12.3 11.8
Nov-89 12.6 12.1
Dec-89 13.1 12.4
Jan-90 11.6 10.8
Feb-90 11.9 11.1
Mar-90 12.2 11.5
Apr-90 12 11.2
May-90 13.1 12.3
Jun-90 13.1 12.1
Jul-90 12.4 11.2
Aug-90 11.4 10.1
Sep-90 11 9.6
Oct-90 11.2 9.5
Nov-90 12.1 10.7
Dec-90 12.5 11.3
Jan-91 12.6 11.5
Feb-91 13.8 12.8
Mar-91 14.3 13.4
Apr-91 14.6 13.6
May-91 15.2 14.4
Jun-91 15 13.7
Jul-91 14.6 13.5
Aug-91 15 14
Sep-91 14.9 14.1
Oct-91 15.3 14.5
Nov-91 14.9 14.1
Dec-91 16.6 15.7
Jan-92 15.4 14.5
Feb-92 15.7 15.1
Mar-92 15.4 14.6
Apr-92 15.8 14.7
May-92 15.1 14.8
Jun-92 15.5 14.8
Jul-92 15 14.3
Aug-92 14.7 14.1
Sep-92 14.9 14.4
Oct-92 15.1 14.9
Nov-92 15.9 15.6
Dec-92 16.2 16
Jan-93 15 15.2
Feb-93 15.2 15.3
Mar-93 15.7 15.7
Apr-93 15.5 15.4
May-93 15.5 15.8
Jun-93 15.6 15.9
Jul-93 14.7 15
Aug-93 15.2 15.7
Sep-93 15.2 15.7
Oct-93 15.5 15.7
Nov-93 15.3 15.3
Dec-93 15.4 15.8
Jan-94 14.8 15.3
Feb-94 14.4 15
Mar-94 13.7 14.3
Apr-94 13.8 14.5
May-94 14 14.4
Jun-94 13.6 14.2
Jul-94 13.2 13.6
Aug-94 13.5 14.3
Sep-94 13.2 14
Oct-94 13.3 14
Nov-94 12.8 13.2
Dec-94 12.9 13.3
Jan-95 12.5 12.5
Feb-95 12.9 13
Mar-95 13.2 13.3
Apr-95 13.4 13.4
May-95 13.7 13.6
Jun-95 13.8 14.3
Jul-95 13.6 14.1
Aug-95 13.6 14.1
Sep-95 14.3 14.4
Oct-95 14.3 14.1
Nov-95 14.9 14.8
Dec-95 15.1 15
Jan-96 15 14.5
Feb-96 15.1 14.9
Mar-96 15.3 15.2
Apr-96 15.6 15.8
May-96 15.6 16.1
Jun-96 16.2 16.2
Jul-96 14.6 14.4
Aug-96 14.8 15.1
Sep-96 15.7 16
Oct-96 16.1 16.1
Nov-96 17.2 16.9
Dec-96 16.9 16.8
Jan-97 17 16.4
Feb-97 16.9 16.3
Mar-97 16.4 15.5
Apr-97 17.4 15.8
May-97 17.9 16.9
Jun-97 19.1 17.5
Jul-97 19.4 17.9
Aug-97 18.4 17.4
Sep-97 19.1 18.2
Oct-97 18.9 17.6
Nov-97 19.8 18.1
Dec-97 20.3 18.5
Jan-98 19.3 17.3
Feb-98 21 18.7
Mar-98 22.4 19.8
Apr-98 22.8 20
May-98 22.5 19.3
Jun-98 23.7 20
Jul-98 22.7 18
Aug-98 19.4 15.1
Sep-98 20.9 16.4
Oct-98 22.9 17.9
Nov-98 24.7 19
Dec-98 26 20.3
Jan-99 25.8 19
Feb-99 24.7 18.6
Mar-99 25.6 19.1
Apr-99 26.3 20.6
May-99 25.1 20.7
Jun-99 27.7 21.1
Jul-99 25.3 19.2
Aug-99 25.1 18.9
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By the end of March 1999, the largest stocks in the market were selling at
historically high multiples of earnings. In addition, the valuation multiples of
the largest stocks were at record spreads above the valuation multiples of
smaller and midcap stocks. This can be seen in the chart above, which compares
the ratio of price to forecast earnings (the p/e ratio) of the Russell Top 200
Index (comprised of the 200 largest U.S. companies) with the p/e ratio of the
Russell Midcap Index. The Russell Midcap Index contains the next largest eight
hundred stocks in the U.S. Note how the two indices had similar p/e ratios for
most of their history, from the end of 1978 through 1996, indicating that the
largest stocks had never sold at premium multiples of earnings compared to
midcap stocks over that period. Since early 1997 however, the Top 200's p/e
ratio began to climb above the p/e ratio of the Midcap Index. The chart shows
that the average p/e ratio of the Russell Top 200 Index (25.1 times earnings)
was 33% higher than the average p/e ratio of the Russell Midcap Index (18.9) at
the end of August. The p/e ratio of the Russell Top 200 Index was at a 34%
premium above the p/e ratio of the Midcap Index at the end of March.
The market's preference for the largest growth stocks and internet stocks
continued into the middle of April, whereupon it reversed sharply. From mid-
April through the end of May, smaller cap and value stocks produced a potent
rally as larger cap and growth stocks languished. We perceive that this shift
occurred for three reasons. First, the powerful economic and market forces that
had favored larger, safer growth stocks had carried the relative valuation of
these glamour growth stocks to extraordinarily rich valuations compared to the
rest of the market. Second, the stimulus of better earnings reports across the
broad market indicated that the gloom that had prompted the prior flight to
quality had now dissipated, making the rich valuations of the largest, safest
companies appear excessive in a more benign economic environment. Third, with
smaller companies experiencing the same favorable earnings announcements as
their larger brethren, the returns of smaller companies were no longer
disadvantaged as their earnings forecasts were revised downward.
Returns Have Broadened Over the Past Six Months
Cap-weighted Average Returns of Each Capitalization Stratum
[CHART]
1998 Jan & Feb Mar & Aug
Mega 50 40% 1.3% 5.9%
Larger 150 24% 2.6% 4.6%
Mid-Large 300 13.0% -3.4% 10.6%
Mid-Cap 500 2.0% -5.9% 12.2%
Smaller 2000 .003% -8.1% 12.8%
In the chart above, we have added a third set of bars to the first chart on page
5. The third (green) set of bars plots the average return of each capitalization
range over the six months from March through August 1999. Note how the green
bars slope upward to the right, indicating that smaller stocks generated better
returns than larger over this most recent six-month period.
7
<PAGE>
A broadening market is helpful to your Fund's absolute and benchmark-relative
returns. For much of the last several years, investors have looked with envy at
the S&P 500 Index and the index funds that mimic it, because so much of the rest
of the market was unable to generate positive returns. Over the six months ended
August 1999, the S&P 500 Index was not the "fastest rabbit" in the market
because the largest 50 companies, which make up more than half of the
capitalization of the S&P 500 Index, produced lower returns than the broad
market. Small cap investors and managers who buy stocks on their investment
merits (rather than their capitalization weighting in the index) produced better
returns than the S&P 500 Index. Finally, active managers looked smart after
years of lagging the index.
SUCCESS OF THE NUMERIC STOCK SELECTION MODELS
A broader market also helps benchmark-relative returns because it spreads
returns more evenly throughout the market, allowing the stock selection models a
more level opportunity set from which to identify superior performing stocks.
Nonetheless, the twelve months ended August 31, 1999 proved to be a difficult
market environment for our stock selection models. The market's strong
preference for large cap growth stocks and stocks with positive price momentum
through mid-April 1999 gave our models below-average stock selection power
during the first seven months of our fiscal year. During the second half of the
fiscal year, the aforementioned shift in favor of value favored the Fair Value
model but impaired the Estrend(TM) model. Through the summer, as the Federal
Reserve began a tightening sequence, the Estrend(TM) model returned to power.
The uncertainty surrounding further Fed tightening continues to feed the manic
tendencies of the market, causing swings in market preferences from month to
month.
Other commentators have observed that the recent market has been one of the
narrowest, large cap market environments, with the most perverse returns to
undervalued (low p/e) stocks, since World War II. We concur that the recent
environment has been unusually difficult and believe that it is unlikely to
persist over the long term. Nonetheless, we are continuing our research to
improve our stock selection processes and are confident that this research will
continue to bear fruit with more powerful and consistent stock selection
techniques.
Y2K READINESS
Numeric has been working on this issue since December of 1997. We believe we
have prepared a solid contingency plan should anything occur for which we have
not already taken corrective steps.
Our Y2K plan has been a firm-wide effort with all department heads and senior
management actively involved in the process, from plan approval to plan
implementation. Our transfer agent, PFPC, informs us it has remediated, tested
and moved into its internal interface programs and has successfully completed
testing with its critical outside vendors. PFPC has developed and continues to
refine its contingency plans to address any unexpected problems that might
arise. Both PFPC and Numeric will have staff available during the critical
moments when computer systems are making the switch from 1999 to 2000.
8
<PAGE>
PORTFOLIO RETURNS
MICRO CAP FUND
The Micro Cap Fund returned 56.09% for the fiscal year ended August 31, 1999.
This robust return is gratifying on an absolute basis and compares very
favorable to the pre-established benchmark, the Russell 2000 Growth Index. The
benchmark is an unmanaged index of smaller capitalization growth stocks, which
returned 43.31% over the same period. Since the Fund's inception on June 3,
1996, the Fund has returned a compound average of 21.97% per year, far outpacing
the benchmark's annualized return of 3.50%.
Since technology stocks dominate the smaller cap growth stock universe, the
Fund's largest sector exposure, 35% is in the technology area. Consumer non-
cyclical stocks also show above average growth rates and as of August 31, 1999
account for almost 17% of the fund.
Economic Sector Diversification
n/i numeric investors Micro Cap Fund
[CHART]
Percent of Portfolio
Basic Industries (2%)
Consumer Cyclicals (16%)
Consumer Non-Cyclicals (16%)
Energy (3%)
Financial (7%)
Industrial (14%)
Technology (35%)
Utilities (2%)
Gas (5%)
Sector Deviation of n/i numeric investors Micro Cap Fund
Difference between Fund and Russell 2000 Growth Index
[CHART]
Basic Industries -0.53%
Consumer Cyclicals 1.31%
Consumer Non-Cyclicals -2.64%
Energy 0.78%
Financial -2.30%
Industrial 1.13%
Technology -0.02%
Utilities -2.43%
9
<PAGE>
GROWTH FUND
The Growth Fund returned 52.80% for the fiscal year ended August 31, 1999. This
return was very pleasing both on an absolute basis and when compared to its
benchmark, the Russell 2500 Growth Index (an unmanaged index of smaller and
medium capitalization growth stocks), which returned 51.03%. This positive
return further enhances the long-term relative performance of the Growth Fund.
Since inception on June 3, 1996, the Fund has returned an average of 12.66% per
year, compared with the Russell 2500 Growth Index annualized return of 7.73%
over the same period.
The portfolio continues to carry a substantial weighting in the growth-oriented
sectors of the economy, including the technology and consumer non-cyclical
areas. Our main stock selection model, Estrend(TM) has demonstrated very good
predictive power in these areas as positive earnings revisions tend to drive
stock prices. The sector distribution of the portfolio tracks the benchmark
fairly closely, with the largest deviation being the technology sector, which is
just 2.31% overweighted versus the benchmark.
Economic Sector Diversification
n/i numeric investors Growth Fund
[CHART]
Percent of Portfolio
Basic Industries (2%)
Consumer Cyclicals (16%)
Consumer Non-Cyclicals (18%)
Energy (3%)
Financial (5%)
Industrial (11%)
Technology (41%)
Utilities (3%)
Cash (1%)
Sector Deviation of n/i numeric investors Growth Fund
Difference between Fund and Russell 2000 Growth Index
[CHART]
Basic Industries 0.37%
Consumer Cyclicals 0.26%
Consumer Non-Cyclicals -1.28%
Energy 0.53%
Financial -1.16%
Industrial -0.05%
Technology 2.31%
Utilities -1.87%
10
<PAGE>
GROWTH & VALUE FUND
The Growth & Value Fund returned 41.61% for the fiscal year ended August 31,
1999. In addition to the strong absolute return, this Fund slightly outpaced its
benchmark, the S&P MidCap 400 Index (an unmanaged index of medium capitalization
stocks), which returned 41.58% over the same period. Longer term returns also
continue to look strong. Since inception on June 3, 1996, the Fund returned an
average of 20.90% per year, compared with the S&P MidCap 400 Index annualized
return of 17.96% over the same period.
The portfolio remained well diversified with technology representing the highest
exposure at 23.7%. As the Fund's name implies, the stock selection is almost
equally influenced by growth factors (the Estrend(TM) model) and value factors
(the Fair Value model). As the bottom graph shows, the Fund is focused on stock
selection and stays fairly close to the benchmark sector weights.
Economic Sector Diversification
n/i numeric investors Growth % Value
[CHART]
Percent of
Portfolio
Basic Industries (7%)
Consumer Cyclicals (13%)
Consumer Non-Cyclicals (15%)
Energy (7%)
Financial (13%)
Industrial (11%)
Technology (24%)
Utilities (8%)
Cash (2%)
Sector Deviation of n/i numeric investors Growth & Value Fund
Difference between Fund and S&P MidCap 400 Index
[CHART]
Basic Industries 1.97%
Consumer Cyclicals -0.86%
Consumer Non-Cyclicals -1.98%
Energy 0.98%
Financial 1.17%
Industrial 0.10%
Technology -1.02%
Utilities -2.16%
11
<PAGE>
LARGER CAP VALUE FUND
The Larger Cap Value Fund returned 26.01% for the fiscal year ended August 31,
1999. These returns are strong on an absolute basis, however lag the return of
the benchmark, the Russell 1000 Value Index, an unmanaged index of larger
capitalization stocks with value characteristics, which returned 30.08%. The
longer-term annualized return since the inception of the fund on December 9,
1997 is 7.79% per year, as value stocks performed poorly during most of 1998.
This since-inception return compares to an annualized return of 12.07% for the
benchmark.
Given the composition of the Russell 1000 Value Index, the portfolio has the
highest concentration in the financial, utility, consumer cyclical, and energy
sectors. These sectors are historically less expensive using traditional value
measures and our Fair Value model chooses the most attractive stocks while
keeping the portfolio weightings close to the benchmarks. As the bottom chart
shows, the Fund's deviations from the benchmark sectors are relatively small.
Economic Sector Diversification
n/i numeric investors Larger Cap Value Fund
[CHART]
Percent of
Portfolio
Basic Industries (7%)
Consumer Cyclicals (10%)
Consumer Non-Cyclicals (8%)
Energy (11%)
Financial (27%)
Industrial (10%)
Technology (7%)
Utilities (18%)
Cash (2%)
Sector Deviation of n/i numeric investors Larger Cap Value Fund
Difference between Fund and Russell 1000 Value Index
[CHART]
Basic Industries 0.61%
Consumer Cyclicals -1.76%
Consumer Non-Cyclicals -0.74%
Energy -0.22%
Financial -1.57%
Industrial 0.07%
Technology 2.03%
Utilities -1.81%
12
<PAGE>
SMALL CAP VALUE FUND
The Small Cap Value Fund, started on November 30, 1998, and returned 7.17%
through August 31, 1999. While these returns are solid on an absolute basis,
they are exceptionally strong when compared to the Russell 2000 Value Index, the
Fund's benchmark. This unmanaged index of smaller capitalization stocks with
value characteristics returned just 1.65% over the same period.
Given the sector weighting of the benchmark index and the value-based stock
selection criteria that drives this Fund, the largest sector weights are in
financials, consumer cyclicals and the industrial areas. There is only modest
exposure to the more growth-oriented technology and consumer non-cyclical areas.
As the bottom graph shows, the sector distribution is kept very tight to the
benchmark.
Economic Sector Diversification
n/i numeric investors Small Cap Value Fund
[CHART]
Percent of
Portfolio
Basic Industries (8%)
Consumer Cyclicals (15%)
Consumer Non-Cyclicals (9%)
Energy (5%)
Financial (25%)
Industrial (19%)
Technology (7%)
Utilities (8%)
Cash (4%)
Sector Deviation of n/i numeric investors Small Cap Value Fund
Difference between Fund and Russell 2000 Value Index
[CHART]
Basic Industries -0.98%
Consumer Cyclicals -0.93%
Consumer Non-Cyclicals -0.21%
Energy 0.19%
Financial -0.81%
Industrial 0.01%
Technology -1.13%
Utilities -0.54%
In closing, let me thank you again for your support and confidence as
demonstrated by your investment with the n/i numeric investors family of funds.
As I hope you can tell, we strive to provide truly shareholder-friendly
investment opportunities that reflect our common objectives.
Sincerely,
/S/ Langdon B. Wheeler
Langdon B. Wheeler, CFA
President
Numeric Investors L.P.(R)
13
